UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2024
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from Not Applicable to Not Applicable
Commission file number: 000-000147
CRAWFORD UNITED CORPORATION
(Exact name of registrant as specified in its charter)
Ohio | 34-0288470 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
10514 Dupont Avenue, Suite 200, Cleveland, Ohio | 44108 |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number (216) 243-2614
Securities registered pursuant to Section 12(b) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ |
Non-accelerated filer ☒ | Smaller reporting company ☒ |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 28, 2024, 2,808,319 shares of Class A Common Stock and 731,848 shares of Class B Common Stock were outstanding.
PART I
ITEM 1. FINANCIAL STATEMENTS
CRAWFORD UNITED CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited) | ||||||||
March 31, | December 31, | |||||||
2024 | 2023 | |||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 2,747,142 | $ | 1,647,175 | ||||
Accounts receivable less allowance for doubtful accounts | 25,387,705 | 19,671,833 | ||||||
Contract assets | 5,037,487 | 4,822,347 | ||||||
Inventories less allowance for obsolete inventory | 19,123,057 | 17,672,622 | ||||||
Investments | 411,599 | 665,301 | ||||||
Prepaid expenses and other current assets | 2,062,105 | 1,303,780 | ||||||
Total Current Assets | 54,769,095 | 45,783,058 | ||||||
Property, plant and equipment, net | 16,192,666 | 14,686,190 | ||||||
Operating right of use asset, net | 8,011,139 | 8,356,903 | ||||||
OTHER ASSETS: | ||||||||
Goodwill | 17,784,036 | 16,453,049 | ||||||
Intangibles, net of accumulated amortization | 10,004,264 | 8,252,600 | ||||||
Other non-current assets | 94,798 | 107,798 | ||||||
Total Non-Current Other Assets | 27,883,098 | 24,813,447 | ||||||
Total Assets | $ | 106,855,998 | $ | 93,639,598 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Notes payable – current | $ | 837,105 | $ | 824,226 | ||||
Operating lease liabilities – current | 1,734,007 | 1,714,174 | ||||||
Accounts payable | 14,801,864 | 11,168,308 | ||||||
Unearned revenue | 5,672,493 | 5,596,706 | ||||||
Accrued income taxes | 1,689,053 | 539,876 | ||||||
Accrued expenses | 3,322,582 | 3,292,787 | ||||||
Total Current Liabilities | 28,057,104 | 23,136,077 | ||||||
LONG-TERM LIABILITIES: | ||||||||
Notes payable | 256,041 | 470,209 | ||||||
Bank debt | 10,613,372 | 5,096,672 | ||||||
Operating lease liabilities – noncurrent | 6,536,914 | 6,901,043 | ||||||
Deferred income taxes | 310,250 | 310,250 | ||||||
Total Long-Term Liabilities | 17,716,577 | 12,778,174 | ||||||
STOCKHOLDERS' EQUITY | ||||||||
Class A common shares - 10,000,000 shares authorized, 2,869,366 issued at March 31, 2024 and 2,832,966 issued at December 31, 2023 | 9,491,340 | 8,878,986 | ||||||
Class B common shares - 2,500,000 shares authorized, 914,283 shares issued at March 31, 2024 and December 31, 2023 | 1,465,522 | 1,465,522 | ||||||
Contributed capital | 1,741,901 | 1,741,901 | ||||||
Treasury shares | (2,489,295 | ) | (2,237,026 | ) | ||||
Class A common shares – 61,047 treasury shares held at March 31, 2024 and 54,074 shares held at December 31, 2023 | ||||||||
Class B common shares – 182,435 treasury shares held at March 31, 2024 and December 31, 2023 | ||||||||
Retained earnings | 50,872,849 | 47,875,964 | ||||||
Total Stockholders' Equity | 61,082,317 | 57,725,347 | ||||||
Total Liabilities and Stockholders' Equity | $ | 106,855,998 | $ | 93,639,598 |
See accompanying notes to consolidated financial statements
CRAWFORD UNITED CORPORATION
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2024 | 2023 | |||||||
Total Sales | $ | 38,439,639 | $ | 39,484,356 | ||||
Cost of Sales | 28,194,606 | 28,967,804 | ||||||
Gross Profit | 10,245,033 | 10,516,552 | ||||||
Operating Expenses: | ||||||||
Selling, general and administrative expenses | 5,670,943 | 5,397,285 | ||||||
Operating Income | 4,574,090 | 5,119,267 | ||||||
Other (Income) and Expenses: | ||||||||
Interest charges | 237,841 | 369,802 | ||||||
(Gain) loss on investments | 118,077 | 59,033 | ||||||
Other (income) expense, net | 72,263 | 997 | ||||||
Total Other (Income) and Expenses | 428,181 | 429,832 | ||||||
Income before Provision for Income Taxes | 4,145,909 | 4,689,435 | ||||||
Income tax expense | 1,149,024 | 1,297,962 | ||||||
Net Income | $ | 2,996,885 | $ | 3,391,473 | ||||
Net Income Per Common Share - Basic | $ | 0.85 | $ | 0.97 | ||||
Net Income Per Common Share - Diluted | $ | 0.85 | $ | 0.97 | ||||
Weighted Average Shares of Common Stock Outstanding | ||||||||
Basic | 3,533,012 | 3,502,824 | ||||||
Diluted | 3,538,292 | 3,502,824 |
See accompanying notes to consolidated financial statements
CRAWFORD UNITED CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
Three Months Ended March 31, 2024 and 2023
COMMON SHARES - | ||||||||||||||||||||||||
NO PAR VALUE | ||||||||||||||||||||||||
CONTRIBUTED | TREASURY | RETAINED | ||||||||||||||||||||||
CLASS A | CLASS B | CAPITAL | SHARES | EARNINGS | TOTAL | |||||||||||||||||||
Balance at December 31, 2023 | $ | 8,878,986 | $ | 1,465,522 | $ | 1,741,901 | $ | (2,237,026 | ) | $ | 47,875,964 | $ | 57,725,347 | |||||||||||
Stock awards to directors and officers | 612,354 | - | - | - | - | 612,354 | ||||||||||||||||||
Share repurchase | - | - | - | (252,269 | ) | - | (252,269 | ) | ||||||||||||||||
Net Income | - | - | - | - | 2,996,885 | 2,996,885 | ||||||||||||||||||
Balance at March 31, 2024 | $ | 9,491,340 | $ | 1,465,522 | $ | 1,741,901 | $ | (2,489,295 | ) | $ | 50,872,849 | $ | 61,082,317 |
COMMON SHARES | COMMON SHARES | |||||||||||||||||||||||
ISSUED | TREASURY SHARES | OUTSTANDING | ||||||||||||||||||||||
CLASS A | CLASS B | CLASS A | CLASS B | CLASS A | CLASS B | |||||||||||||||||||
Balance at December 31, 2023 | 2,832,966 | 914,283 | 54,074 | 182,435 | 2,778,892 | 731,848 | ||||||||||||||||||
Stock awards to directors and officers | 36,400 | 36,400 | - | |||||||||||||||||||||
Share repurchase | 6,973 | (6,973 | ) | - | ||||||||||||||||||||
Balance at March 31, 2024 | 2,869,366 | 914,283 | 61,047 | 182,435 | 2,808,319 | 731,848 |
COMMON SHARES - | ||||||||||||||||||||||||
NO PAR VALUE | ||||||||||||||||||||||||
CONTRIBUTED | TREASURY | RETAINED | ||||||||||||||||||||||
CLASS A | CLASS B | CAPITAL | SHARES | EARNINGS | TOTAL | |||||||||||||||||||
Balance at December 31, 2022 | $ | 7,351,563 | $ | 1,465,522 | $ | 1,741,901 | $ | (2,125,252 | ) | $ | 34,581,171 | $ | 43,014,905 | |||||||||||
Stock awards to directors and officers | 492,665 | - | - | - | - | 492,665 | ||||||||||||||||||
Share repurchase | - | - | - | (71,185 | ) | - | (71,185 | ) | ||||||||||||||||
Net Income | - | - | - | - | 3,391,473 | 3,391,473 | ||||||||||||||||||
Balance at March 31, 2023 | $ | 7,844,228 | $ | 1,465,522 | $ | 1,741,901 | $ | (2,196,437 | ) | $ | 37,972,643 | $ | 46,827,857 |
COMMON SHARES | COMMON SHARES | |||||||||||||||||||||||
ISSUED | TREASURY SHARES | OUTSTANDING | ||||||||||||||||||||||
CLASS A | CLASS B | CLASS A | CLASS B | CLASS A | CLASS B | |||||||||||||||||||
Balance at December 31, 2022 | 2,791,449 | 914,283 | 47,412 | 182,435 | 2,744,037 | 731,848 | ||||||||||||||||||
Stock awards to directors and officers | 34,700 | - | - | - | 34,700 | - | ||||||||||||||||||
Share repurchase | - | - | 4,862 | - | (4,862 | ) | - | |||||||||||||||||
Balance at March 31, 2023 | 2,826,149 | 914,283 | 52,274 | 182,435 | 2,773,875 | 731,848 |
CRAWFORD UNITED CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOW (Unaudited)
Three Months Ended March 31, | ||||||||
2024 | 2023 | |||||||
Cash Flows from Operating Activities | ||||||||
Net Income | $ | 2,996,885 | $ | 3,391,473 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 1,038,052 | 923,228 | ||||||
Loss on investments in equity securities | 118,077 | 59,033 | ||||||
Amortization of right of use assets | 453,669 | 397,536 | ||||||
Share-based compensation expense | 612,354 | 492,665 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (5,175,695 | ) | (1,716,552 | ) | ||||
Inventories | (670,089 | ) | 448,963 | |||||
Contract assets | (215,140 | ) | (857,308 | ) | ||||
Prepaid expenses & other assets | (679,078 | ) | 256,770 | |||||
Right of use assets | (107,907 | ) | (46,109 | ) | ||||
Other noncurrent assets | 13,000 | 87,415 | ||||||
Accounts payable | 3,573,509 | (289,046 | ) | |||||
Lease liabilities | (344,294 | ) | (347,115 | ) | ||||
Accrued Income Taxes | 1,149,177 | 1,172,171 | ||||||
Other current liabilities | (14,779 | ) | 507,582 | |||||
Unearned revenue | 75,787 | (763,842 | ) | |||||
Total adjustments | (173,357 | ) | 325,391 | |||||
Net Cash Provided by Operating Activities | 2,823,528 | 3,716,864 | ||||||
Cash Flows from Investing Activities | ||||||||
Cash paid for business acquisitions, net | (6,549,750 | ) | - | |||||
Proceeds from sale of property, plant and equipment | 72,000 | - | ||||||
Sale of investments | 135,625 | - | ||||||
Capital expenditures | (436,820 | ) | (147,661 | ) | ||||
Net Cash (Used in) Investing Activities | (6,778,945 | ) | (147,661 | ) | ||||
Cash Flows from Financing Activities | ||||||||
Payments on notes | (201,289 | ) | (743,580 | ) | ||||
Payments on bank debt | (2,351,000 | ) | (3,892,153 | ) | ||||
Borrowings on bank debt | 7,859,942 | 1,791,604 | ||||||
Share repurchase | (252,269 | ) | (71,185 | ) | ||||
Net Cash Provided by (Used in) Financing Activities | 5,055,384 | (2,915,314 | ) | |||||
Net Increase in cash and cash equivalents | 1,099,967 | 653,889 | ||||||
Cash and cash equivalents at beginning of period | 1,647,175 | 1,247,627 | ||||||
Cash and cash equivalents at end of period | $ | 2,747,142 | $ | 1,901,516 | ||||
Supplemental disclosures of cash flow information | ||||||||
Interest Paid | $ | 230,169 | $ | 348,042 | ||||
Supplemental disclosures of noncash financing and investing activity | ||||||||
Additions to ROU assets obtained from new operating lease liabilities | $ | 107,907 | $ | 46,109 |
See accompanying notes to consolidated financial statements
CRAWFORD UNITED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2024
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. The consolidated financial statements include the accounts of Crawford United Corporation and its wholly-owned subsidiaries (the “Company”). Significant intercompany transactions and balances have been eliminated in the financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain prior period financial information has been reclassified to conform to the current presentation. Operating results for the three months ended March 31, 2024 are not necessarily indicative of the results that may be expected for the year ended December 31, 2024. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
During the three-month period ended March 31, 2024 there have been no changes to the Company's significant accounting policies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company’s Summary of Significant Accounting Policies is provided with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses. The standard requires a financial asset (including trade receivables) measured at amortized cost basis to be presented at the net amount expected to be collected. Thus, the income statement will reflect the measurement of credit losses for newly-recognized financial assets as well as the expected increases or decreases of expected credit losses that have taken place during the period. This standard became effective for the Company on January 1, 2023 and did not have a material impact on the financial statements.
In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” This ASU enhances reportable segment disclosures on both an annual and interim basis primarily in regards to the disclosure of significant segment expenses that are regularly provided to the chief operating decision maker (CODM) and included within the reported measure(s) of segment profit or loss. In addition, the ASU requires disclosure, by segment, of other items included in the reported measure(s) of segment profit or loss, including qualitative information describing the composition, nature and type of each item. The ASU also expands disclosure requirements related to the CODM, including how the reported measure(s) of segment profit or loss are used to assess segment performance and allocate resources, the method used to allocate overhead for significant segment expenses and others. Lastly, all previously required annual segment reporting disclosures under Topic 280 will also be required for interim periods. The ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is evaluating the impact of adopting this ASU.
In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” This ASU enhances income tax disclosures by providing information to better assess how an entity’s operations, related tax risks, tax planning and operational opportunities affect its tax rate and prospects for future cash flows. This ASU requires additional disclosures to the annual effective tax rate reconciliation including specific categories and further disaggregated reconciling items that meet the quantitative threshold. Additionally, the ASU requires disclosures relating to income tax expense and payments made to federal, state, local and foreign jurisdictions. This ASU is effective for fiscal years and interim periods beginning after December 15, 2024. The Company is evaluating the impact of adopting this ASU.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that may affect the reported amounts of certain assets and liabilities and disclosure of contingencies at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Accounting for "Financial Instruments" requires the Company to disclose estimated fair values of financial instruments. Financial instruments held by the Company include, among others, accounts receivable, accounts payable, and notes payable. The carrying amounts reported in the consolidated balance sheet for assets and liabilities qualifying as financial instruments is a reasonable estimate of fair value.
Fair Value Measurements
As defined in FASB ASC 820, "Fair Value Measurements", fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. In determining fair value, the Company utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable firm inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the examination of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
* Level 1: Quoted market prices in active markets for identical assets or liabilities.
* Level 2: Inputs to the valuation methodology include:
* Quoted prices for similar assets or liabilities in active markets;
* Quoted prices for identical assets or similar assets or liabilities in inactive markets;
* Inputs other than quoted prices that are observable for the asset or liability;
* Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
* Level 3: Unobservable inputs that are not corroborated by market data.
A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The following is a description of the valuation methodologies used for the Company's instruments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy.
* Stock: The stock market value is based on valuation of market quotes from independent active market sources and is considered a level 1 investment.
3. ACCOUNTS RECEIVABLE
The balance of accounts receivable, net was $25,387,705, $19,671,833, and $21,884,807 at March 31, 2024, December 31, 2023 and December 31, 2022, respectively.
The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. The reserve for doubtful accounts was $91,120 and $105,223 at March 31, 2024 and December 31, 2023, respectively.
4. INVENTORY
Inventory is valued at the lower of cost (first-in, first-out) or net realizable value and consists of:
March 31, | December 31, | |||||||
2024 | 2023 | |||||||
Raw materials and component parts | $ | 3,720,613 | $ | 3,989,444 | ||||
Work-in-process | 5,199,148 | 4,514,263 | ||||||
Finished products | 11,223,973 | 9,846,694 | ||||||
Total inventory | $ | 20,143,734 | $ | 18,350,401 | ||||
Less: inventory reserves | 1,020,677 | 677,779 | ||||||
Net inventory | $ | 19,123,057 | $ | 17,672,622 |
5. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill represents the excess of cost over the fair value of identifiable assets acquired. U.S. GAAP requires that both indefinite-lived intangible assets and Goodwill are tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not (i.e., a likelihood greater than 50%) that the intangible asset or the reporting unit is impaired. During interim periods, ASC 350 requires companies to focus on those events and circumstances that affect the significant inputs used to determine the fair value of the asset group or reporting unit to determine whether an interim quantitative impairment test is required. The Company performed its annual impairment test for Goodwill and intangible assets as of the last day of the fourth quarter. The Company first assessed certain qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit or indefinite-lived intangible assets is less than its carrying amount, and whether it is therefore necessary to perform the quantitative impairment test. In 2023, for all reporting units other than CAD Enterprises the qualitative analysis indicated that a quantitative analysis was not necessary. For the identified reporting unit, impairment testing was performed as of December 31, 2023 using an income approach based on management’s determination of the prospective financial information, and no indefinite-lived intangible assets or goodwill was determined to be impaired.
There were no impairment indicators identified during the three-month periods ended March 31, 2024 or March 31, 2023.
Goodwill increased by $1.3 million from $16.5 million at December 31, 2023 to $17.8 million at March 31, 2024. The increase in Goodwill was driven by an addition of $1.3 million in the Industrial and Transportation Products segment related to the acquisitions of Heany Industries, LLC. Goodwill increased by $0.2 million from $16.2 million at December 31, 2022 to $16.5 million at December 31, 2023. The increase in Goodwill was driven by a purchase accounting adjustment to Goodwill, recorded in the second quarter of 2023, for Knitting Machinery Company of America (KMC).
Goodwill by reportable segment is as follows:
March 31, | December 31, | |||||||
2024 | 2023 | |||||||
Commercial Air Handling Equipment Segment: | ||||||||
Beginning Balance | $ | 478,256 | $ | 478,256 | ||||
Acquisitions | - | - | ||||||
Adjustments | - | - | ||||||
Ending Balance | $ | 478,256 | $ | 478,256 | ||||
Industrial and Transportation Products Segment: | ||||||||
Beginning Balance | $ | 15,974,793 | $ | 15,753,682 | ||||
Acquisitions | 1,330,987 | - | ||||||
Adjustments | - | 221,111 | ||||||
Ending Balance | $ | 17,305,780 | $ | 15,974,793 | ||||
Total Company: | ||||||||
Beginning Balance | $ | 16,453,049 | $ | 16,231,938 | ||||
Acquisitions | 1,330,987 | - | ||||||
Adjustments | - | 221,111 | ||||||
Ending Balance | $ | 17,784,036 | $ | 16,453,049 |
The Company's intangible assets have primarily been generated via acquisitions. Intangibles are being amortized on a straight-line basis over periods ranging from one to 15 years.
Intangible assets consist of the following:
March 31, | December 31, | |||||||
2024 | 2023 | |||||||
Customer list intangibles | $ | 11,367,000 | $ | 9,316,000 | ||||
Non-compete agreements | 200,000 | 200,000 | ||||||
Trademarks | 4,517,899 | 4,466,899 | ||||||
Total intangible assets | 16,084,899 | 13,982,899 | ||||||
Less: accumulated amortization | 6,080,635 | 5,730,299 | ||||||
Intangible assets, net | $ | 10,004,264 | $ | 8,252,600 |
Amortization of intangibles assets was $350,336 and $315,303 for the three months ended March 31, 2024 and 2023,
Intangible amortization for the next five years is as follows:
Amortization in future periods | ||||
Remainder of 2024 | 1,051,008 | |||
2025 | 1,401,343 | |||
2026 | 1,073,479 | |||
2027 | 957,432 | |||
2028 | 899,250 |
6. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment are recorded at cost and depreciated over their useful lives. Maintenance and repair costs are expensed as incurred. Property, plant and equipment are as follows:
March 31, | December 31, | |||||||
2024 | 2023 | |||||||
Land | $ | 423,034 | $ | 231,034 | ||||
Buildings and improvements | 4,847,586 | 3,760,203 | ||||||
Machinery & equipment | 25,632,121 | 24,851,703 | ||||||
Total property, plant & equipment | 30,902,741 | 28,842,940 | ||||||
Less: accumulated depreciation | 14,710,075 | 14,156,750 | ||||||
Property plant & equipment, net | $ | 16,192,666 | $ | 14,686,190 |
During the second quarter of 2023, the Company issued 7,317 Class A Common Shares, valued at $150,000, to Air Power Dynamics, LLC in an arms-length exchange for an aerospace tooling machine. Air Power Dynamics, LLC is controlled by Ambassador Edward Crawford, who is the chairman of the Company's board.
Depreciation expense was $679,959 and $596,322 for the three months ended March 31, 2024 and 2023, respectively.
7. INVESTMENTS IN EQUITY SECURITIES
Investments in equity securities are valued based on quoted stock prices in active markets, thus Level 1 in the fair value hierarchy.
As of March 31, 2024, the Company held common stock of a single company, publicly traded on the New York Stock Exchange, with a fair value of $411,599. All changes in fair value are recognized in net income at the end of each reporting period. At December 31, 2023, the fair value was $665,301. The decrease during the first quarter of 2024 was a result of a decline in share price as well as the Company selling shares for proceeds of $135,625.
As of March 31, 2023, the fair value was $598,938. At December 31, 2022, the fair value was $657,971. The decrease during the first quarter of 2023 was exclusively a result of a decline in share price. No shares were purchased or sold in 2023.
8. BANK DEBT
The Company is party to a Credit Agreement with JPMorgan Chase Bank, N.A. as lender (as amended, the “Credit Agreement”).
The Company entered into a sixth amendment to the Credit Agreement on June 12, 2023. The most significant change in the amended Credit Agreement was the discontinued use of LIBOR as a reference rate, with the adoption of the Federal Reserve Bank of New York's Secured Overnight Financing Rate (SOFR) as the primary reference rate. This change was anticipated and aligns with the US Dollar LIBOR panel ceasing on June 30, 2023.
The Company entered into a seventh amendment to the Credit Agreement on November 27, 2023. The Seventh Amendment to the Credit Agreement, among other things, (a) extends the maturity date of the underlying credit facility from June 1, 2024 to June 1, 2027, (b) increases the maximum annual amount that the Company and its subsidiaries may pay in dividends or other restricted payments to $2,000,000 from $1,250,000, and (c) permits the repurchase by the Company and its subsidiaries of up to $7,000,000 of Company equity prior to June 30, 2024, subject to compliance with certain financial covenants under the Credit Agreement.
The revolving facility under the Credit Agreement includes a $3 million sublimit for the issuance of letters of credit thereunder. Interest for borrowings under the revolving facility accrues at a per annum rate equal to Prime Rate or SOFR (previously LIBOR) plus applicable margins of (i) (0.25%) for Prime Rate loans and (ii) 1.75% for SOFR (previously LIBOR) loans. The Credit Agreement includes a commitment fee on the unused portion of the revolving facility of 0.25% per annum payable quarterly.
The obligations of the Company and other borrowers under the Credit Agreement are secured by a blanket lien on all the assets of the Company and its subsidiaries. The Credit Agreement also includes customary representations and warranties and applicable reporting requirements and covenants. The financial covenants under the Credit Agreement include a minimum fixed charge coverage ratio, a maximum senior funded debt to EBITDA ratio and a maximum total funded debt to EBITDA ratio.
Bank debt balances consist of the following:
March 31, | December 31, | |||||||
2024 | 2023 | |||||||
Term debt | $ | - | $ | - | ||||
Revolving debt | 10,621,130 | 5,112,187 | ||||||
Total Bank debt | 10,621,130 | 5,112,187 | ||||||
Less: current portion | - | - | ||||||
Non-current bank debt | 10,621,130 | 5,112,187 | ||||||
Less: unamortized debt costs | 7,758 | 15,515 | ||||||
Net non-current bank debt | $ | 10,613,372 | $ | 5,096,672 |
The Company had $19.4 million and $24.9 million available to borrow on the revolving credit facility at March 31, 2024 and December 31, 2023, respectively. The increase in borrowings on the revolving credit facility during the period ended March 31, 2024 is related to the acquisition of Heany Industries for $6.6 million.
9. NOTES PAYABLE
Notes Payable – Related Party
In connection with the Komtek Forge acquisition, on January 15, 2021, the Company refinanced its previously outstanding First Francis promissory notes in the aggregate amount of $2,077,384, including accrued interest payable through the refinance date and combined this amount with an existing First Francis promissory note carried by Komtek Forge in the amount of $1,702,400 into one note for a combined $3,779,784 loan due to First Francis Company, payable in quarterly installments beginning April 15, 2021. The interest rate on the refinanced loan remained at 6.25% per annum. First Francis is owned by Ambassador Edward Crawford and Matthew Crawford, both of whom serve on the Board of Directors of the Company.
Notes payable consists of the following:
March 31, | December 31, | |||||||
2024 | 2023 | |||||||
In connection with the Komtek Forge acquisition, the Company refinanced the outstanding First Francis promissory notes, accrued interest payable through the refinance date and the assumed First Francis promissory note into one note on January 15, 2021 for a $3,779,784 loan due to First Francis Company, payable in quarterly installments beginning April 15, 2021 and maturing on October 15, 2025 | $ | 1,093,146 | $ | 1,294,435 | ||||
Total notes payable | 1,093,146 | 1,294,435 | ||||||
Less current portion | 837,105 | 824,226 | ||||||
Notes payable – non-current portion | $ | 256,041 | $ | 470,209 |
10. LEASES
The Company has operating leases for facilities, vehicles and equipment. These leases have remaining terms of under one year to 11 years, some of which include options to extend the leases for up to 10 years.
Supplemental balance sheet information related to leases:
March 31, | December 31, | |||||||
2024 | 2023 | |||||||
Operating leases: | ||||||||
Operating lease right-of-use assets, net | $ | 8,011,139 | $ | 8,356,903 | ||||
Operating lease liabilities – current | 1,734,007 | 1,714,174 | ||||||
Operating lease liabilities – noncurrent | 6,536,914 | 6,901,043 | ||||||
Total operating lease liabilities | $ | 8,270,921 | $ | 8,615,217 | ||||
Weighted Average Remaining Lease Term | ||||||||
Operating Leases (in years) | 7.2 | 7.1 | ||||||
Weighted Average Discount Rate | ||||||||
Operating Leases | 5 | % | 5 | % |
11. EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per share.
Three Months Ended | ||||||||
March 31, | ||||||||
2024 | 2023 | |||||||
Earnings Per Share - Basic | ||||||||
Net Income | $ | 2,996,885 | $ | 3,391,473 | ||||
Weighted average shares of common stock outstanding - Basic | 3,533,012 | 3,502,824 | ||||||
Earnings Per Share - Basic | $ | 0.85 | $ | 0.97 | ||||
Earnings Per Share - Diluted | ||||||||
Weighted average shares of common stock outstanding - Basic | 3,533,012 | 3,502,824 | ||||||
Unvested Restricted Stock Awards | 5,280 | - | ||||||
Weighted average shares of common stock - Diluted | 3,538,292 | 3,502,824 | ||||||
Earnings Per Share - Diluted | $ | 0.85 | $ | 0.97 |
12. ACQUISITIONS
Heany Industries, LLC
Effective January 2, 2024, Heany Industries, LLC ("Heany"), a Delaware limited liability company an indirect wholly-owned subsidiary of Crawford United Corporation, completed the acquisition of all of the operating assets of Heany Industries, Inc, a New York corporation and specialist in materials engineering solutions for a variety of aerospace, industrial and bio-medical applications pursuant to an Asset Purchase Agreement. The acquired business is strategically important to the Company’s growing aerospace presence and has expanded its offerings and diversified its customer base. The purchase price, subject to customary post-closing adjustments was $6.6 million of cash and inclusive of the real estate on which Heany operates. The Company expects to finalize the purchase price allocation within the allowable measurement period.
Total Consideration | $ | 6,550,000 | ||
Cash | $ | 250 | ||
Accounts Receivable | 540,177 | |||
Inventory | 780,346 | |||
Fixed Assets | 1,821,615 | |||
Prepaid and Other Assets | 79,247 | |||
Intangible Assets: Customer List & Trademarks | 2,102,000 | |||
Goodwill | 1,330,987 | |||
Total Assets Acquired | $ | 6,654,622 | ||
Accounts Payable | $ | 60,047 | ||
Deferred Revenue | 44,575 | |||
Total Liabilities Assumed | 104,622 | |||
Total Fair Value | $ | 6,550,000 | ||
Acquisition transaction costs incurred were: | $ | 215,591 |
Goodwill has an assigned value of $1.3 million and represents the expected synergies generated by combining the operations of Heany and the Company. The Company has been a long-time customer of Heany and the acquisition allows for a strengthening of the supply chain. The acquired customer relationships have an assigned intangible asset value of $2.05 million, which was determined using an income approach. The residual intangible asset value relates to trademarks.
Sales and Net Income for the Acquired Companies
Sales and net income information for Heany since the respective acquisition date for the three months ended March 31, 2024 and 2023 are provided below.
Three Months ended | Three Months ended | |||||||||||||||
March 31, 2024 | March 31, 2023 | |||||||||||||||
Sales | Net Income | Sales | Net Income | |||||||||||||
Acquired Companies: | ||||||||||||||||
Heany Industries (acquired January 2, 2024) | $ | 1,455,531 | $ | 19,469 | $ | - | $ | - | ||||||||
Subtotal Acquired Companies | $ | 1,455,531 | $ | 19,469 | $ | - | $ | - | ||||||||
All Other Companies | 36,984,108 | 2,977,416 | 39,484,356 | 3,391,473 | ||||||||||||
Total | $ | 38,439,639 | $ | 2,996,885 | $ | 39,484,356 | $ | 3,391,473 |
13. SEGMENT AND RELATED INFORMATION
The Company reports operations for two business segments: (1) Commercial Air Handling Equipment and (2) Industrial and Transportation Products. The identification of our operating segments is based on guidance in ASC 280-10-50-1. The Company's management evaluates segment performance based primarily on segment operating profit. Intangible assets are allocated to each segment and the related amortization of these assets are recorded in selling, general and administrative expenses. The Company does not allocate corporate costs to the respective segments.
Both the Commercial Air Handling Equipment segment and the Industrial and Transportation Products segment engage in business activities from which they may recognize revenues and incur expenses, including revenue and expenses relating to transactions with other components of the Company. The operating results for both the Commercial Air Handling Equipment segment and the Industrial and Transportation Products segment are reviewed regularly by our chief operating decision maker, the chief executive officer, and is considered in making decisions about resources to be allocated to the segment in assessing its performance. Financial information for both segments is available in internal financial statements that are prepared on a monthly basis.
Commercial Air Handling Equipment:
The Commercial Air Handling Equipment segment was added June 1, 2017, when the Company purchased certain assets and assumed certain liabilities of Air Enterprises Acquisition LLC in Akron, Ohio. The acquired business, which operates under the name Air Enterprises, is an industry leader in designing, manufacturing and installing large-scale commercial, institutional, and industrial custom air handling solutions. Its customers are typically in the health care, education, pharmaceutical and industrial manufacturing markets in the United States. This segment also sells to select international markets. The custom air handling units are constructed of non-corrosive aluminum, resulting in sustainable, long-lasting, and energy efficient solutions with life expectancies of 50 years or more. These products are distributed through a network of sales representatives, based on relationships with health care networks, building contractors and engineering firms. The custom air handling equipment is designed, manufactured and installed under the brand names FactoryBilt® and SiteBilt®. FactoryBilt® air handling solutions are designed, fabricated and assembled in a vertically integrated process entirely within the Akron, Ohio facility. SiteBilt® air handling solutions are designed and fabricated in Akron, but are then crated and shipped to the field and assembled on-site.
Industrial and Transportation Products:
The Industrial and Transportation Products segment was added July 1, 2016, when the Company purchased the assets of the Federal Hose Manufacturing, LLC of Painesville, Ohio. This business segment includes the manufacture of flexible interlocking metal hoses and the distribution of silicone and hydraulic hoses. Metal hoses are sold primarily to major heavy-duty truck manufacturers and major aftermarket suppliers in North America. Metal hoses are also sold into the agricultural, industrial and petrochemical markets. Silicone hoses are distributed to a number of industries in North America, including agriculture and general industrial markets. The Company purchased all of the issued and outstanding shares of capital stock of CAD Enterprises, Inc.(“CAD”) in Phoenix, Arizona on July 1, 2018. CAD provides complete end-to-end engineering, machining, grinding, welding, brazing, heat treat and assembly solutions. Utilizing state-of-the-art machining and welding technologies, this segment is an industry leader in providing complex components produced from nickel-based superalloys and stainless steels. CAD’s quality certifications include ISO 9001:2015/AS9100D, as well as Nadcap accreditation for Fluorescent Penetrant Inspection (FPI), Heat Treating/Braze, Non-Conventional Machining EDM, and TIG/E-Beam welding. The Company added the distribution of marine hose to this segment through the acquisition of the assets of MPI Products, Inc. (“MPI”) on January 2, 2020. MPI specializes in rubber and plastic marine hose for the recreational boating industry. MPI offers certified products that meet marine industry standards and regulations. Effective April 19, 2019, the Company, completed the acquisition of substantially all of the assets of Data Genomix, Inc., an Ohio corporation (“DG”). DG is in the business of developing and commercializing marketing and data analytic technology applications. The Company purchased all of the issued and outstanding membership interests of KT Acquisition LLC (name later changed to Komtek Forge LLC), in Worcester, Massachusetts on January 15, 2021. Komtek Forge LLC is a supplier of highly engineered forgings for the aerospace, industrial gas turbine, medical prosthetics, alternative energy, petrochemical and defense industries. The Company purchased all of the membership interests of Global-Tek-Manufacturing LLC (“Global-Tek”), in Ceiba, Puerto Rico and substantially all of the assets of Machining Technology LLC (name later changed to Global-Tek Colorado LLC or “Global-Tek Colorado”) in Longmont, Colorado on March 2, 2021. Global-Tek and Global-Tek Colorado specialize in providing customers with highly engineered manufacturing solutions, including CNC machining, anodizing, electro polishing and laser marking for customers in the defense, aerospace and medical device markets. The Company purchased substantially all of the assets of Emergency Hydraulics LLC (“Emergency Hydraulics”), in Ocala, Florida on July 1, 2021. Emergency Hydraulics provides hydraulic hoses, air tank assemblies and related products to manufacturers of firefighting trucks and other emergency vehicles. The company purchased substantially all of the assets of Crawford REV Acquisition Company LLC (name later changed to Reverso Pumps LLC or “Reverso Pumps”), in Davie, Florida on January 10, 2022. Reverso Pumps develops, designs, manufactures, sells and distributes oil change systems, fuel and oil transfer pumps, fuel primers, fuel polishing systems and engine flushing systems.
The company purchased substantially all of the assets of Crawford SEP Acquisition Company LLC (name later changed to Separ America LLC or “Separ America”), in Davie, Florida on January 10, 2022. Separ America develops, designs, manufactures, sells and distributes oil change systems, fuel and oil transfer pumps, fuel primers, fuel polishing systems and engine flushing systems. The company purchased substantially all of the assets of KMC Corp. dba Knitting Machinery Corp. (“Knitting Machinery”), in Cleveland, Ohio and Greenville, Ohio on May 1, 2022. Knitting Machinery specializes in manufacturing hose reinforcement machinery for the plastic, rubber and silicone industries. The company purchased substantially all of the assets of Heany Industries, Inc. in Scottsville, New York on January 2, 2024. Heany is a specialist in materials engineering solutions for a variety of aerospace, industrial and bio-medical applications.
The factors used to determine the Company’s reportable segments follow the guidance of ASC 280-10-50-21 and 50-10-22 and include consideration of the type of products or services delivered, the customers and end markets served, the appliable revenue recognition methodology and the length of time it takes to deliver products or services to customers. The Commercial Air Handling Equipment segment was identified as a reportable segment consisting of Air Enterprises, because Air Enterprises is strategically and operationally different from our other companies in several ways. First, Air Enterprises sells equipment to end customers and our other businesses that fall into the Industrial and Transportation Products segment sell products and components to end customers, not equipment. Second, the Commercial Air Handling Equipment segment delivers custom air handling solutions to customers which is different than the Industrial and Transportation Products segment which delivers manufactured metal, silicone, hydraulic and marine hoses, complex engineered components, highly engineered forgings, highly engineered and machined parts and data analytic technology applications. Third, the Commercial Air Handling Equipment segment serves customers primarily in the health care and education end markets while the Industrial and Transportation Products segment delivers products to customers in the heavy-duty truck manufacturing, agricultural, industrial, petrochemical, aerospace, defense, industrial gas turbine, medical prosthetics, alternative energy and emergency vehicle end markets. Fourth, the Commercial Air Handling Equipment segment recognizes revenue primarily over time while the Industrial and Transportation Products segment recognizes revenue primarily at a point in time. Fifth, the Commercial Air Handling Equipment segment manufactures custom air handling solutions for customers over a period of three to eighteen months from the time the order is received to the time the air handling solution is delivered to the end customer as compared to the Industrial and Transportation Products segment which sells and delivers products to customers much more quickly, often within 30 days or less. For the reasons previously mentioned, Air Enterprises is strategically and operationally different than the other businesses owned by the Company and management finds it useful to include this business in the Commercial Air Handling Segment which is separate and distinct from all of our other businesses that reside in the Industrial and Transportation Products segment.
Corporate costs not allocated to the segments:
Corporate costs not directly attributable to a segment are aggregated here.
Information by industry segment is set forth below:
Three Months Ended | ||||||||
March 31, | ||||||||
2024 | 2023 | |||||||
Sales summary by segment | ||||||||
Commercial Air Handling | $ | 16,978,444 | $ | 16,051,193 | ||||
Industrial and Transportation Products | 21,461,195 | 23,433,163 | ||||||
Total Sales | 38,439,639 | 39,484,356 | ||||||
Gross profit summary by segment | ||||||||
Commercial Air Handling | 5,632,095 | 4,439,907 | ||||||
Industrial and Transportation Products | 4,612,938 | 6,076,645 | ||||||
Total Gross Profit | 10,245,033 | 10,516,552 | ||||||
Segment operating profit | ||||||||
Commercial Air Handling | 4,548,801 | 3,415,195 | ||||||
Industrial and Transportation Products | 1,575,114 | 3,191,102 | ||||||
Total Segment Operating Profit | 6,123,915 | 6,606,297 | ||||||
Corporate charges not allocated to segments | 1,549,825 | 1,487,030 | ||||||
Operating Income | 4,574,090 | 5,119,267 | ||||||
Interest charges | 237,841 | 369,802 | ||||||
(Gain) loss on investments | 118,077 | 59,033 | ||||||
Other (income) expense, net | 72,263 | 997 | ||||||
Income before Provision for Income Taxes | $ | 4,145,909 | $ | 4,689,435 |
14. SUBSEQUENT EVENTS
None.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion is intended to assist in the understanding of the Company's financial position at March 31, 2024 and December 31, 2023, results of operations for the three month periods ended March 31, 2024 and 2023, and cash flows for the three month periods ended March 31, 2024 and 2023, and should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and within the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
Items Affecting the Comparability of our Financial Results
The Company purchased substantially all of the operating assets of Heany Industries, Inc ("Heany") located in Scottsville, New York on January 2, 2024.
Accordingly, in light of the timing of this transaction, the Company’s results for the three months ended March 31, 2024 include the results of Heany in the Industrial and Transportation Products segment. Conversely, our results for the three months ended March 31, 2023 do not include Heany.
Results of Operations – Three Months Ended March 31, 2024 and 2023
Sales for the quarter ended March 31, 2024 (“current quarter”) decreased to $38.4 million, a modest decrease of $1.0 million or 2.6% from sales of $39.5 million during the same quarter of the prior year. The decrease in sales for the quarter ended March 31, 2024 was primarily driven by a decrease in volume in the Company's Industrial and Transportation Product Segment. The drop in volume can be attributed to the macroeconomic trend of decreased demand within the boating market. Further insights into the performance of each segment are provided in the detailed discussions that follow.
Cost of sales for the current quarter was $28.2 million compared to $29.0 million for the same quarter of the prior year, a slight decrease of $0.8 or 2.7%, which is directly attributable to the reduction in sales. Gross margin of 26.7% in the current quarter remained materially consistent with 26.6% in the same quarter of the prior year despite a smaller sales base.
Selling, general and administrative expenses (SG&A) in the current quarter were $5.7 million, compared to $5.4 million, in the same quarter of last year. The rise in SG&A expenditure reflects inflationary labor costs and increased share based compensation expense which coincides with the rise in share price.
Interest charges in the current quarter were $0.2 million compared to $0.4 million in the same quarter of the prior year. Total debt outstanding has decreased leading to a decrease in interest expense. Average total debt (including notes) and average interest rates for the current quarter were $12.3 million and 7.1%, respectively, compared to $22.4 million and 6.3%, respectively, in the same period of last year.
The loss on investment for both the current and prior year quarters amounted to $0.1 million. This loss is attributed to market price decreases impacting the Company's investment in another public company.
The Company recognized other (income) expense, net of $0.1 million in the current quarter, resulting from fees related to the purchase of Heany Industries, Inc. The Company had an immaterial amount of other income (expense), net for the same quarter of the prior year.
Income tax expense in the current quarter was $1.1 million compared to $1.3 million in the same quarter of the prior year. Tax expense is lower compared to the same quarter of the prior year primarily because of lower pre-tax income.
Net income in the current quarter was $3.0 million, or $0.85 per diluted share, as compared to net income of $3.4 million, or $0.97 per diluted share, for the same quarter of the prior year because of the factors noted above.
Commercial Air Handling Segment
Sales in the Commercial Air Handling Equipment segment for the quarter ended March 31, 2024 increased to $17.0 million, an increase of approximately $0.9 million, or 5.8%, from sales of $16.1 million during the same period of the prior year. The consistent growth in reported sales in this segment highlights our sustained momentum in meeting the rising demand for clean air solutions.
Segment operating profit in the Commercial Air Handling Equipment segment for the current quarter was $4.5 million, or 26.8%, compared to $3.4 million, or 21.3% in the same quarter of the prior year, an increase of $1.1 million or 550 basis points. This enhancement in segment operating profit and margin can be attributed to the expanded revenue base, which facilitates more efficient absorption of fixed costs. Another supporting factor of the improved margins has been the continued implementation of various efficiency and continuous improvement initiatives within our manufacturing processes. These strategic measures have effectively optimized operations and bolstered profitability. The segment's Selling, General, and Administrative (SG&A) costs have remained consistent compared to the prior year.
Industrial and Transportation Products Segment
Sales in the Industrial and Transportation Products segment for the quarter ended March 31, 2024 decreased to $21.5 million, a decrease of approximately $2.0 million, or 8.4%, from sales of $23.4 million during the same period of the prior year. The decrease in the current period was primarily the result of decreased demand in the marine products and industrial hose businesses of approximately $3.5 million, being partially offset by sales from our acquisition of Heany Industries of approximately $1.5 million. By design, this segment is diversified and operates across several industries. The decrease in marine sales volume can be attributed to the cyclical nature of recreational boating demand whereby there was a pandemic-driven surge in demand lasting through the second quarter of 2023.
Segment operating profit in the Industrial and Transportation Products segment for the current quarter was $1.6 million, or 7.3%, compared to $3.2 million, or 13.6%, in the same quarter of the prior year, a decrease of $1.6 million or 630 basis points. As sales have decreased and many of the underlying expenses are fixed in the short-term, our ability to absorb fixed cost has been negatively impacted. In response, we have implemented several strategic initiatives aimed at mitigating the effects on our gross margin. These include optimizing our production processes to enhance efficiency and reduce costs, renegotiating supplier contracts to secure more favorable terms, and intensifying our focus on inventory management to minimize excess inventory. Segment selling, general, and administrative costs have remained consistent as compared to the same period of the prior year.
Liquidity and Capital Resources
The Company’s credit agreement, by and between the Company and JPMorgan Chase Bank, N.A. as lender (as amended, the “Credit Agreement”), provides for a revolving credit facility of up to $30.0 million. At March 31, 2024, there was approximately $19.4 million of borrowing availability, which has decreased in the recent quarter as the Company used borrowed cash to fund the acquisition of Heany Industries, Inc.
Operating Activities. The dynamics of cash flows from operating activities are subject to variability, influenced by the oscillating demands of working capital and the scheduling of payment cycles. Net cash provided by operating activities was $2.8 million for the three months ended March 31, 2024, compared to $3.7 million net cash provided by operating activities for the prior year period. In both periods operating cash flows materially align with net income. Despite a lower sales base, accounts receivable increased $5.2 million during the three months ended March 31, 2024 compared to an increase of $1.7 million in the prior year period which was due to the timing of billings and collections on large projects in the commercial air handling segment. Partially offsetting the increase in accounts receivable was an increase of $3.6 million on accounts payable during the three months ended March 31, 2024 compared to a decrease of $0.3 million in the prior year period which is a result of strict oversight of disbursement timing to align with collections. Also a function of timing, the Company experienced an inventory increase in the current period increase $0.7 million compared to a decrease of $0.4 million in the prior year period.
Investing Activities. Cash used in investing activities for the three months ended March 31, 2024 was $6.8 million, compared to cash used in investing activities of $0.1 million in the prior year period. Cash used in investing activities for the period ended March 31, 2024 was primarily for the acquisitions of Heany Industries, Inc, and routine capital expenditures. Cash used in investing activities for the period ended March 31, 2023 was for capital expenditures in the normal course of business.
Financing Activities. Cash provided by financing activities was approximately $5.1 million for the three months ended March 31, 2024, compared to cash used in financing activities of $2.9 million in the same period last year. During the current period the Company borrowed on its revolving credit facility to fund the acquisition noted above. In the prior year period the Company had utilized cash flow from operations to pay down debt.
The Company is actively managing its business to generate cash flow. We believe that cash and availability on our revolving credit facility to be sufficient to fund working capital needs and service principal and interest payments due related to the bank debt and notes payable for at least the next 12 months. Based on a combination of sustained profitability and significant borrowing capacity, the Company believes it is well positioned to support ongoing operations as well as growth initiatives. Notwithstanding the Company's expectations, if the Company's operating results decrease as the result of pressures on the business due to, for example, supply chain interruptions or delays, increases in material, freight or labor costs, inflationary pressures, currency or interest rate fluctuations, lost customers, regulatory issues, a downturn in general economic conditions, or the Company's failure to execute its business plans, the Company may require additional financing, or may be unable to comply with its obligations under the credit facility, and its lenders could demand repayment of any amounts outstanding under the Company’s credit facility. See Note 8 and 9 to the consolidated financial statements for further information on the Company's total debt.
Off-Balance Sheet Arrangements
From time to time, the Company enters into performance and payment bonds in the ordinary course of business. These bonds are secured by certain assets of the Company until the Company’s completion of certain contractual requirements. At March 31, 2024, the Company had secured performance and payment bonds in the amount of $6.0 million as surety on completion of the requirements of certain commercial air handling contracts. The Company has no other off-balance sheet arrangements (as defined in Regulation S-K Item 303 paragraph (a)(4)(ii)) that have or are reasonably likely to have a material current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditure or capital resources.)
Critical Accounting Policies
Preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make certain estimates and assumptions which affect amounts reported in our consolidated financial statements. On an ongoing basis, we evaluate the accounting policies and estimates that are used to prepare financial statements. Management has made their best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We do not believe that there is great likelihood that materially different amounts would be reported under different conditions or using different assumptions related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.
Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed below. On a regular basis, critical accounting policies are reviewed with the Audit Committee of the Board of Directors.
Revenue Recognition: We recognize revenue with respect to customer orders when our obligations under the contract terms are satisfied and control of the product transfers to the customer, typically upon shipment. Revenue from certain contracts in the Commercial Air Handling Equipment segment is accounted for over time, when products are manufactured or services are performed, as control transfers under these arrangements. We follow a cost-based input method, since there is no objective output measure that would fairly depict the transfer of control over the life of the performance obligation. Progress on the performance obligation is measured by the proportion of actual costs incurred to the total costs expected to complete the contract. Costs included in the measure of progress include direct labor and third-party. This cost-based method of revenue recognition requires the Company to make estimates of costs to complete its projects on an ongoing basis. Significant judgment is required to evaluate assumptions related to these estimates. The effect of revisions to estimates related to the transaction price or costs to complete a project are recorded on a cumulative catch-up basis. Certain contracts may be terminated by the customer; however, in the event of termination, most contracts require payment for services rendered through the date of termination.
Allowance for Obsolete and Slow-Moving Inventory: Inventories are valued using the first-in, first-out (“FIFO”) method; stated at the lower of cost or net realizable value; and are reduced by an allowance for obsolete and slow-moving inventories. The allowance is estimated based on management’s review of inventories on hand with minimal sales activity, which is compared to estimated future usage and sales. Inventories identified by management as slow-moving or obsolete are reserved for based on estimated selling prices less disposal costs. Though we consider these allowances adequate and proper, changes in economic conditions in specific markets in which we operate could have a material effect on allowances required.
Business Combinations: Business combinations are accounted for using the purchase method of accounting under ASC 805, “Business Combinations.” This method requires the Company to record assets and liabilities of the businesses acquired at their estimated fair values as of the acquisition date. Any excess of the cost of the acquisition over the fair value of the net assets acquired is recorded as goodwill. Determining the fair value requires management to make estimates and assumptions including discount rates, rates of return on assets, and long-term sales growth rates.
Goodwill and Indefinite Lived Intangible Assets: As referenced by ASC 350 “Intangibles- Goodwill and other” (“ASC 350”), management performs its impairment test for goodwill and intangible assets at least annually or more frequently, if impairment indicators arise at the reporting unit level. Our reporting units have been identified at the individual company component level, with each individual subsidiary operating company constituting its own reporting unit. For 2023, management performed a qualitative assessment over all reporting units other than CAD Enterprises, which indicated there were no indicators of impairment. A quantitative impairment analysis was done for CAD Enterprises which concluded that goodwill and intangible assets were not impaired.
Our Goodwill impairment analysis utilizes a qualitative approach that compares the carrying amount of the reporting unit to its estimated fair value. To the extent that the qualitative approach indicates that it is more likely than not that the carrying amount is less than the reporting unit's fair value, we apply a quantitative approach as a secondary step. In applying the quantitative approach, we use an income approach to estimate the fair value of the reporting unit. The income approach uses a number of factors, including future business plans and actual and forecasted operating results. The significant assumptions employed under this method include discount rates; revenue growth rates, including assumed terminal growth rates; and operating margins used to project future cash flows for the operating company. The discount rates utilized reflect market-based estimates of capital costs and discount rates adjusted for management’s assessment of a market participant’s view with respect to other risks associated with the projected cash flows of the individual company. Our estimates are based upon assumptions we believe to be reasonable, but which by nature are uncertain and unpredictable. We believe we incorporate reasonable assumptions into our analysis of Goodwill impairment testing for a reporting unit, such that actual experience would need to be materially out of the range of expected assumptions in order for an impairment to remain undetected.
More specifically, in our 2022 qualitative assessment of CAD Enterprises, which has $7.3 million of goodwill, we noted a decline in revenue from $30.1 million in 2019 to $18.9 million in 2020, $18.3 million in 2021 and $15.5 million in 2022 and a decline in after-tax income margin from 5.8% in 2019 to -4.6% in 2020, -0.5% in 2021, and -3.4% in 2022 and thus determined to conduct a quantitative assessment of CAD Enterprises. The quantitative assessment of CAD Enterprises confirmed that the estimated fair value exceeded carrying value by 12 percent, and thus no impairment existed at December 31, 2022. The key assumptions used to estimate fair value included discount rates; revenue growth rates, including assumed terminal growth rates; and after-tax income margins used to project future cash flows for CAD Enterprises. The discount rate used to estimate fair value was 10% and was based on estimates of capital costs and management’s assessment of a market participant’s view with respect to other risks associated with the projected cash flows for CAD Enterprises. Our revenue growth rate for the 9-year period in the discounted cash flow model was 10.2% per year, which reflects management’s assessment of estimated future orders for CAD Enterprises based in part on a Long-Term-Agreement (“LTA”) with the company’s largest customer, a new $7.5 million incremental purchase order with this customer, our previous revenue history including actual revenues of $30.1 million in 2019 before the onset of the COVID-19 pandemic, and a continued business rebound in the aerospace industry. The assumed terminal growth rate for CAD Enterprises was 3% based on management’s assessment of long-term growth rates for the Aerospace industry. The after-tax income margins used to project future margins for the company were based on the historical margins for CAD Enterprises prior to the COVID-19 pandemic.
During 2023, revenue at CAD Enterprises increased from $15.5 million in 2022 to $20.9 million. The revenue growth was 35% and was consistent with the quantitative modeling done in 2022. However despite the strong revenue growth, CAD did not meet the profitability projections used in the prior year's goodwill analysis. Accordingly, we noted a triggering event and completed a Step 1 quantitative analysis as of December 31, 2023. The quantitative assessment of CAD Enterprises confirmed that the estimated fair value exceeded carrying value by 35 percent, and thus no impairment existed at December 31, 2023. The key assumptions used to estimate fair value included discount rates; revenue growth rates, including assumed terminal growth rates; and after-tax income margins used to project future cash flows for CAD Enterprises. The discount rate used to estimate fair value was 15% and was based on estimates of capital costs and management’s assessment of a market participant’s view with respect to other risks associated with the projected cash flows for CAD Enterprises. The increase from the prior year reflects the incremental company specific risks related to the missed profitability projections in 2023. Our revenue growth rate for the 7-year period in the discounted cash flow model was 7.7% per year, which reflects management’s assessment of estimated future orders for CAD Enterprises based in part on a Long-Term-Agreement (“LTA”) with the company’s largest customer, inclusive of an expected increase in volume, our previous revenue history including actual revenues exceeding $30 million prior to the recent inflationary environment, and growth in the aerospace industry stemming from post-pandemic travel rebound, geopolitical conflicts and private space exploration. The assumed terminal growth rate for CAD Enterprises was 3% based on management’s assessment of long-term growth rates for the Aerospace industry. The after-tax income margins used to project future margins for the company reflect that most of CAD's non-material costs are fixed, and as revenue grows, much of the growth will fall-through to the bottom line.
In conducting our 2022 annual Goodwill impairment analysis, Goodwill for Global-Tek Manufacturing and Global-Tek Colorado at December 31, 2022 was $1.9 million. In our qualitative assessment of Global-Tek Manufacturing and Global-Tek Colorado, we noted a decline in revenue from $9.2 million in 2021 to $6.5 million in 2022 and a decline in after-tax income margin from 17.3% in 2021 to -3.3% in 2022 and thus determined to conduct a quantitative assessment of Global-Tek Manufacturing and Global-Tek Colorado. The quantitative assessment of Global-Tek Manufacturing and Global-Tek Colorado confirmed that the estimated fair value exceeded carrying value by 23.3%, and thus no impairment existed at December 31, 2022. The key assumptions used to estimate fair value included discount rates; revenue growth rates, including assumed terminal growth rates; and after-tax income margins used to project future cash flows for Global-Tek Manufacturing and Global-Tek Colorado. The discount rate used to estimate fair value was 10% and was based on estimates of capital costs and management’s assessment of a market participant’s view with respect to other risks associated with the projected cash flows for Global-Tek Manufacturing and Global-Tek Colorado. Our revenue growth rate for the 9-year period in the discounted cash flow model was 6.5% per year, which reflects management’s assessment of estimated future orders for Global-Tek Manufacturing and Global-Tek Colorado based on our previous revenue history including actual revenues of $9.2 million in 10 months of operations after the acquisition in 2021 before the untimely passing of the General Manager. The assumed terminal growth rate for Global-Tek Manufacturing and Global-Tek Colorado was 3% based on management’s assessment of long-term growth rates for the Aerospace and Defense industries. The after-tax income margins used to project future margins for the company were based on the historical margins for Global-Tek Manufacturing and Global-Tek Colorado prior to the untimely passing of the General Manager. In 2021, Global-Tek Manufacturing and Global-Tek Colorado earned an debt-free after-tax income margin of 16.4%. The discounted cash flow model used to estimate fair value assumes an after-tax income margin of 6.2% in 2027, or year 5 of the forecast period and expanding margins to 7.8% in the terminal year. This was based on management’s assessment of our ability to grow SG&A expenses at a slower rate than revenues as the company achieves more scale. Our estimates were based upon assumptions we believe to be reasonable, but which by nature are uncertain and unpredictable.
During 2023, revenue at Global-Tek increased from $6.5 million in 2022 to $8.6 million. The revenue growth was 32% and exceeded the quantitative modeling done in 2022. Aspects of the Global-Tek business underlying revenue also remain favorable, which were key factors in the qualitative analysis which deemed quantitative testing not necessary.
Our estimates are based upon assumptions we believe to be reasonable, but which by nature are uncertain and unpredictable. Potential events and circumstances including global conflicts, materials shortages, inability to increase prices to keep pace with expenses, onset of a global pandemic, departure of key employees and loss of a key customer could negatively affect the key assumptions used for the recent fair value test and are similar to the risk factors noted in Item 1A, Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
Income Taxes: In accordance with ASC 740, “Income Taxes” (“ASC 740”), we account for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and the tax bases of assets and liabilities and are measured using the currently enacted tax rates. Specifically, we measure gross deferred tax assets for deductible temporary differences and carryforwards, such as operating losses and tax credits, using the applicable enacted tax rates and apply the more likely than not measurement criterion. Further, at each interim reporting period, we estimate an effective income tax rate that is expected to be applicable for the full year. Significant judgment is involved regarding the application of income tax laws and regulations and when projecting the jurisdictional mix of income. Additionally, interpretation of tax laws, court decisions or other guidance provided by taxing authorities influences our estimate of the effective income tax rates. As a result, our actual annual effective income tax rates and related income tax liabilities may differ materially from our interim estimated effective tax rates and related income tax liabilities. Any resulting differences are recorded in the period they become known.
Impact of Inflation
Inflationary economic conditions during the past few years have increased the Company’s costs (including labor) of producing its products. While many of the inflationary conditions have stabilized, inflationary economic conditions persist or worsen and may be impactful going forward. The Company’s products are manufactured using various metals and other commodity-based materials including steel, aluminum, rubber and silicone. Freight and labor costs also are significant elements of the Company’s production costs. Inflationary economic conditions have elevated these and personnel costs. If the Company is unable to continue mitigating cost increases through customer pricing actions, alternative supply arrangements or other cost reduction initiatives, the Company's profitability may be adversely affected.
Forward-Looking Statements
The foregoing discussion includes forward-looking statements within the meaning of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995, including statements made regarding the Company’s future results. Generally, these statements can be identified by the use of words such as “guidance,” “outlook,” “believes,” “estimates,” “anticipates,” “expects,” “forecasts,” “seeks,” “projects,” “intends,” “plans,” “may,” “will,” “should,” “could,” “would” and similar expressions intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements, or other statements made by the Company, are made based on management's expectations and beliefs concerning future events impacting the Company and are subject to uncertainties and factors (including, but not limited to, those specified below) which are difficult to predict and, in many instances, are beyond the control of the Company. As a result, actual results of the Company could differ materially from those expressed in or implied by any such forward-looking statements. These uncertainties and factors include (a) shortages in supply or increased costs of necessary products, components or raw materials from the Company’s suppliers; (b) availability shortages or increased costs of freight and labor for the Company and/or its suppliers; (c) actions that governments, businesses and individuals take in response to public health crises, including mandatory business closures and restrictions on onsite commercial interactions; (d) conditions in the global and regional economies and economic activity, including slow economic growth or recession, inflation, currency and credit market volatility, reduced capital expenditures and changes in government trade, fiscal, tax and monetary policies; (e) adverse effects from evolving geopolitical conditions, such as the military conflicts in Ukraine and Israel; (f) the Company's ability to effectively integrate acquisitions, and manage the larger operations of the combined businesses, (g) the Company's dependence upon a limited number of customers and the aerospace industry, (h) the highly competitive industries in which the Company operates, which includes several competitors with greater financial resources and larger sales organizations, (i) the Company's ability to capitalize on market opportunities in certain sectors, (j) the Company's ability to obtain cost effective financing and (k) the Company's ability to satisfy obligations under its financing arrangements, and the other risks described in “Item 1A. Risk Factors” in our Annual Report Form 10-K and the Company’s subsequent filings with the SEC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
This item is not applicable to the Company as a smaller reporting company.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
Under the supervision of and with the participation of our management, including our chief executive officer and chief financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. Based on that evaluation, our chief executive officer and chief financial officer have concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
At the time of filing this Quarterly Report on Form 10-Q, there were no material legal proceedings pending or threatened against the Company.
ITEM 1A. RISK FACTORS.
There have been no material changes from the risk factors disclosed in Part 1, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2023.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table discloses shares repurchased by the Company during the quarter ended March 31, 2024.
Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced program | Approximate dollar value of shares that may yet be purchased under the program (1) | ||||||||||||
January 1 to January 31, 2024 | - | - | - | 300,000 | ||||||||||||
February 1 to February 29, 2024 | - | - | - | 300,000 | ||||||||||||
March 1 to March 31, 2024 | - | - | - | 300,000 | ||||||||||||
Total | - | - | - | 300,000 |
(1) | On December 15, 2023, the Company announced a share repurchase program of up to 300,000 of the Company’s Class A and/or Class B common shares. Shares may be repurchased from time to time by the Company through open-market transactions, in privately negotiated transactions or by other means, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, in accordance with applicable securities laws and other restrictions. The timing and total amount of share repurchases will depend upon business, economic and market conditions, corporate and regulatory requirements, prevailing share prices, and other considerations. The authorization may be suspended or discontinued at any time and does not obligate the Company to acquire any amount of shares. The authorization has no expiration date. |
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
During the quarter ended March 31, 2024, no director or officer of the Company adopted or terminated any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement, each as defined in Item 408 of Regulation S-K.
ITEM 6. EXHIBITS
2.1 | Agreement, dated January 3, 2024, by and among Heany Industries, LLC, Heany Industries, Inc. and the other parties named therein (incorporated by reference from Exhibit 2.1 to the Company's Current Report on Form 8-K filed on January 8, 2024). | |
31.1 | Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive Officer. | |
31.2 | Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer. | |
32.1 | ||
32.2 | ||
101.INS* | Inline XBRL Instance | |
101.SCH* | Inline XBRL Taxonomy Extension Schema | |
101.CAL* | Inline XBRL Taxonomy Extension Calculation | |
101.DEF* | Inline XBRL Extension Definition | |
101.LAB* | Inline XBRL Taxonomy Extension Labels | |
101.PRE* | Inline XBRL Taxonomy Extension Presentation | |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101) |
*XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
SIGNATURES
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 as of April 30, 2024, thereunto duly authorized.
SIGNATURE: | TITLE |
/s/ Brian E. Powers | President and Chief Executive Officer |
Brian E. Powers | (Principal Executive Officer) |
/s/ Jeffrey J. Salay | Vice President and Chief Financial Officer |
Jeffrey J. Salay | (Principal Accounting and Financial Officer) |