UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-Q
---------
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1 - 5332
P & F INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 22-1657413
(State of incorporation) (I.R.S. Employer Identification Number)
300 SMITH STREET, FARMINGDALE, NEW YORK 11735
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 694-1800
---------------
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, and (2) has been subject to such filing
requirements for the past 90 days.
YES |X| NO |_|
As of November 10, 1999, there were outstanding 3,504,945 shares of the
Registrant's Class A Common Stock, par value $1.00 per share.
P & F INDUSTRIES, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
PAGE
PART I ----
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1999 and December 31, 1998 1 - 2
Consolidated Statements of Income for
the three months and nine months ended
September 30, 1999 and 1998 3
Consolidated Statement of Shareholders' Equity
for the nine months ended September 30, 1999 4
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and 1998 5 - 6
Notes to Consolidated Financial Statements 7 - 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13 - 18
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 19
PART II
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
EXHIBIT INDEX 22
i
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
P & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
=======================================
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
ASSETS
------
CURRENT:
Cash $ 593,308 $ 2,280,788
Accounts receivable, less allowance
for possible losses of $494,461
in 1999 and $498,669 in 1998 14,194,026 8,542,204
Inventories 26,454,559 17,021,475
Deferred income taxes 507,000 507,000
Prepaid expenses and other assets 883,928 586,913
------------ ------------
TOTAL CURRENT ASSETS 42,632,821 28,938,380
------------ ------------
PROPERTY AND EQUIPMENT:
Land 1,182,939 1,182,939
Buildings and improvements 5,882,280 5,773,608
Machinery and equipment 11,262,717 9,724,919
------------ ------------
18,327,936 16,681,466
Less accumulated depreciation
and amortization 7,049,293 6,052,899
------------ ------------
NET PROPERTY AND EQUIPMENT 11,278,643 10,628,567
------------ ------------
GOODWILL, net of accumulated
amortization of $1,419,922 in
1999 and $1,190,040 in 1998 8,045,037 8,274,918
OTHER ASSETS 203,902 236,614
------------ ------------
TOTAL ASSETS $ 62,160,403 $ 48,078,479
============ ============
1
P & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(CONTINUED)
=======================================
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Short-term borrowings $ 12,500,000 $ 3,500,000
Accounts payable 8,800,171 4,844,403
Accruals:
Compensation 2,017,601 1,944,960
Other 2,307,973 2,130,026
Current maturities of long-term debt 944,980 524,974
------------ ------------
TOTAL CURRENT LIABILITIES 26,570,725 12,944,363
LONG-TERM DEBT, less current maturities 7,670,228 10,193,064
DEFERRED INCOME TAXES 491,000 491,000
------------ ------------
34,731,953 23,628,427
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock:
Class A - $1 par; shares authorized
7,000,000; outstanding 3,504,945
and 3,239,345 3,504,945 3,239,345
Class B - $1 par; shares authorized
2,000,000 -- --
Additional paid-in capital 8,282,602 8,020,677
Retained earnings 16,139,403 13,190,030
Treasury stock,
at cost (49,235 shares) (498,500) --
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 27,428,450 24,450,052
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 62,160,403 $ 48,078,479
============ ============
2
P & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
=======================================
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
REVENUES:
Net sales $ 20,219,270 $ 13,915,613 $ 54,983,995 $ 38,223,141
Other 139,109 203,076 574,809 434,044
------------ ------------ ------------ ------------
20,358,379 14,118,689 55,558,804 38,657,185
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales 14,027,734 8,757,041 38,232,924 23,783,501
Selling, administrative and general 3,987,012 3,241,260 11,603,179 9,739,591
Interest - net 371,691 160,669 973,328 404,496
------------ ------------ ------------ ------------
18,386,437 12,158,970 50,809,431 33,927,588
------------ ------------ ------------ ------------
INCOME BEFORE TAXES ON INCOME 1,971,942 1,959,719 4,749,373 4,729,597
TAXES ON INCOME 738,000 739,000 1,800,000 1,778,000
------------ ------------ ------------ ------------
NET INCOME $ 1,233,942 $ 1,220,719 $ 2,949,373 $ 2,951,597
============ ============ ============ ============
Weighted average common
shares outstanding:
Basic 3,455,208 3,240,469 3,340,868 3,197,301
Diluted 3,718,914 3,723,588 3,727,195 3,688,497
Earnings per share of common stock:
Basic $ .35 $ .38 $ .88 $ .92
Diluted $ .33 $ .33 $ .79 $ .80
3
P & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
==============================================
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK
----------- ----------- ------------ ---------
Balance, January 1, 1999 $ 3,239,345 $ 8,020,677 $ 13,190,030 $ --
Net income for the nine months
ended September 30, 1999 -- -- 2,949,373 --
Exercise of stock options,
265,600 shares 265,600 261,925 -- --
Common stock received on
exercise of stock options,
49,235 shares -- -- -- (498,500)
----------- ----------- ------------ ---------
Balance, September 30, 1999 $ 3,504,945 $ 8,282,602 $ 16,139,403 ($ 498,500)
=========== =========== ============ =========
4
P & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
=======================================
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,949,373 $ 2,951,597
------------ ------------
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,236,266 648,825
Provision for losses on
accounts receivable 4,481 16,690
Decrease (increase):
Accounts receivable (5,656,303) (283,525)
Inventories (9,433,084) (4,787,856)
Prepaid expenses and other assets (297,015) (189,297)
Other assets 22,721 158
Increase (decrease):
Accounts payable 3,955,768 541,949
Accruals and other 250,588 725,158
------------ ------------
Total adjustments (9,916,578) (3,327,898)
------------ ------------
Net cash used in
operating activities (6,967,205) (376,301)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,646,470) (750,451)
Purchase of Green Manufacturing, Inc. -- (10,693,286)
------------ ------------
Net cash used in
investing activities (1,646,470) (11,443,737)
------------ ------------
5
P & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(UNAUDITED)
=======================================
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1999 1998
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings 10,500,000 16,053,023
Repayments of short-term borrowings (1,500,000) (13,703,672)
Proceeds from acquisition loan -- 10,000,000
Proceeds from mortgage refinancing 1,800,000 --
Principal payments on long-term debt (3,902,830) (156,931)
Proceeds from exercise of stock options 29,025 228 938
Redemption of subordinated debentures -- (1,369,200)
------------ ------------
Net cash provided by
financing activities 6,926,195 11,052,158
------------ ------------
NET (DECREASE) INCREASE IN CASH (1,687,480) (767,880)
CASH AT BEGINNING OF PERIOD 2,280,788 2,092,244
------------ ------------
CASH AT END OF PERIOD $ 593,308 $ 1,324,364
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Income taxes $ 1,625,300 $ 1,700,876
============ ============
Interest $ 1,010,770 $ 413,362
============ ============
The Company received 49,235 shares of common stock in connection
with the exercise of stock options by an officer of the Company. The
value of these shares was recorded at $498,500.
6
P & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
P & F Industries, Inc. (the "Company") conducts its business operations
through three wholly-owned subsidiaries. Embassy Industries, Inc. ("Embassy") is
engaged in the manufacture and sale of baseboard heating products and the
importation and sale of radiant heating systems. Embassy also imports a line of
door and window hardware items through its Franklin division. Florida Pneumatic
Manufacturing Corporation ("Florida Pneumatic") is engaged in the importation,
manufacture and sale of pneumatic hand tools, primarily for the industrial and
retail markets, and the importation and sale of compressor air filters. Florida
Pneumatic also markets, through its Berkley Tool division, a line of pipe
cutting and threading tools, wrenches and replacement electrical components for
a widely used brand of pipe cutting and threading machines. Green Manufacturing,
Inc. ("Green") is engaged primarily in the manufacture, development and sale of
heavy-duty welded custom designed hydraulic cylinders. Green also manufactures a
line of access equipment for the petro-chemical industry and a line of post hole
digging equipment for the agricultural industry.
The consolidated financial statements contained herein include the
accounts of P & F Industries, Inc. and its subsidiaries. All significant
intercompany balances and transactions have been eliminated.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the rules and regulations of the Securities and
Exchange Commission regarding interim financial reporting. Accordingly, these
interim financial statements do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of the Company, the unaudited consolidated financial
statements include all adjustments necessary for a fair statement of the results
for the interim periods presented. All such adjustments are of a normal
recurring nature. Results for interim periods are not necessarily indicative of
results to be expected for a full year, since the operations of some of the
Company's subsidiaries are seasonal in nature.
The consolidated balance sheet information for December 31, 1998 was
derived from the audited financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998. These interim
financial statements should be read in conjunction with that report.
7
P & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION (CONTINUED)
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE 2 - INVENTORIES
Major classes of inventory were as follows:
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
Finished goods $ 20,624,514 $ 13,141,218
Work in process 1,211,869 435,453
Raw materials and supplies 4,618,176 3,444,804
------------ ------------
$ 26,454,559 $ 17,021,475
============ ============
NOTE 3 - CAPITAL STOCK TRANSACTIONS
On June 1, 1999, an officer of the Company surrendered 49,235 shares of
Class A Common Stock, with a fair value of $498,500, in connection with the
exercise of stock options for 250,000 shares of Class A Common Stock.
NOTE 4 - ACQUISITION
On September 16, 1998, the Company acquired certain assets, and assumed
certain liabilities, of Green Manufacturing, Inc., an Ohio corporation and a
manufacturer of custom-engineered hydraulic cylinders, prefabricated stairways
and platforms and tractor-mounted post hole diggers. The purchase price for the
acquisition was $10,500,000 in cash, $10,000,000 of which was provided by an
acquisition loan made pursuant to a Credit Agreement, dated as of July 23, 1998,
as amended, between the Company and European American Bank (the "Credit
Agreement"). The balance of $500,000 was provided by working capital funds. The
purchase price of $10,500,000 included $50,000 in consideration of a covenant
not to compete.
8
P & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 4 - ACQUISITION (CONTINUED)
As part of the acquisition, the Company also assumed the outstanding
balance of $1,095,000 on an Economic Development Revenue Bond issued by Wood
County, Ohio.
The acquisition has been accounted for using the purchase method of
accounting and, accordingly, the accompanying consolidated financial statements
include the results of operations of the acquired company only from the date of
acquisition. The excess of acquisition costs over the fair value of net assets
acquired is included in the accompanying balance sheets as "Goodwill". Also
included in "Goodwill" are costs totalling $448,163 incurred in connection with
this acquisition.
The following table summarizes, on an unaudited pro forma basis, the
combined results of operations of the Company and Green Manufacturing, Inc., as
though the acquisition had been made January 1, 1998. The pro forma amounts give
effect to appropriate adjustments for amortization of goodwill and other
intangible assets, interest expense and income taxes. The pro forma amounts
presented are not necessarily indicative of future operating results.
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 1998
----------- -----------
Revenues $55,558,804 $52,573,656
=========== ===========
Net income $ 2,949,373 $ 3,069,380
=========== ===========
Earnings per share of common stock
from continuing operations:
Basic $ .88 $ .96
===== =====
Diluted $ .79 $ .83
===== =====
9
P & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 5 - SEGMENTS OF BUSINESS
The following tables present financial information by segment for the
periods ended September 30, 1999 and 1998. Segment profit excludes general
corporate expenses, interest expense and income taxes. There were no
intersegment revenues.
PNEUMATIC
TOOLS AND
NINE MONTHS ENDED CON- RELATED HYDRAULIC HEATING
SEPTEMBER 30, 1999 SOLIDATED EQUIPMENT CYLINDERS EQUIPMENT HARDWARE
- ------------------- --------- --------- --------- --------- --------
(In thousands)
Revenues from
external customers $ 55,559 $ 29,016 $ 15,295 $ 6,841 $ 4,407
========= ========= ========= ========= =======
Segment profit $ 7,982 $ 6,501 $ 729 $ 303 $ 449
========= ========= ========= ========= =======
PNEUMATIC
TOOLS AND
NINE MONTHS ENDED CON- RELATED HYDRAULIC HEATING
SEPTEMBER 30, 1998 SOLIDATED EQUIPMENT CYLINDERS EQUIPMENT HARDWARE
- ------------------- --------- --------- --------- --------- --------
(In thousands)
Revenues from
external customers $ 38,657 $ 27,932 $ 1,044 $ 6,511 $ 3,170
========= ========= ========= ========= =======
Segment profit $ 7,128 $ 6,461 $ 100 $ 259 $ 308
========= ========= ========= ========= =======
PNEUMATIC
TOOLS AND
THREE MONTHS ENDED CON- RELATED HYDRAULIC HEATING
SEPTEMBER 30, 1999 SOLIDATED EQUIPMENT CYLINDERS EQUIPMENT HARDWARE
- ------------------- --------- --------- --------- --------- --------
(In thousands)
Revenues from
external customers $ 20,359 $ 10,856 $ 4,980 $ 2,894 $ 1,629
========= ========= ========= ========= =======
Segment profit $ 3,155 $ 2,652 $ 126 $ 235 $ 142
========= ========= ========= ========= =======
10
P & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 5 - SEGMENTS OF BUSINESS (CONTINUED)
PNEUMATIC
TOOLS AND
THREE MONTHS ENDED CON- RELATED HYDRAULIC HEATING
SEPTEMBER 30, 1998 SOLIDATED EQUIPMENT CYLINDERS EQUIPMENT HARDWARE
- ------------------- --------- --------- --------- --------- --------
(In thousands)
Revenues from
external customers $ 14,119 $ 9,426 $ 1,044 $ 2,588 $ 1,061
========= ========= ========= ========= =======
Segment profit $ 2,672 $ 2,291 $ 100 $ 182 $ 99
========= ========= ========= ========= =======
The reconciliation of combined operating profits for reportable segments
to consolidated income before income taxes is as follows:
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1999 1998
---------- ----------
Total profit for reportable segments $7,981,890 $7,128,266
General corporate expenses (2,259,189) (1,994,173)
Interest expense (973,328) (404,496)
---------- ----------
Income before income taxes $4,749,373 $4,729,597
========== ==========
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1999 1998
---------- ----------
Total profit for reportable segments $3,154,893 $2,672,746
General corporate expenses (811,260) (552,358)
Interest expense (371,691) (160,669)
---------- ----------
Income before income taxes $1,971,942 $1,959,719
========== ==========
11
P & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 6 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per common share:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Numerator:
Numerator for basic and diluted
earnings per common share -
income available to common
shareholders $ 1,233,942 $ 1,220,719 $ 2,949,373 $ 2,951,597
=========== =========== =========== ===========
Denominator:
Denominator for basic earnings
per share - weighted average
common shares outstanding 3,455,208 3,240,469 3,340,868 3,197,301
Effect of dilutive securities:
Common stock options 263,706 483,119 386,327 491,196
----------- ----------- ----------- -----------
Denominator for diluted earnings
per share - adjusted weighted
average common shares and
assumed conversions 3,718,914 3,723,588 3,727,195 3,688,497
=========== =========== =========== ===========
Earnings per common share:
Basic $ .35 $ .38 $ .88 $ .92
===== ===== ===== =====
Diluted $ .33 $ .33 $ .79 $ .80
===== ===== ===== =====
12
P & F INDUSTRIES, INC. AND SUBSIDIARIES
=======================================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIRD QUARTER ENDED SEPTEMBER 30, 1999 COMPARED WITH THIRD QUARTER ENDED
SEPTEMBER 30, 1998
Consolidated revenues increased 44.2%, from $14,118,689 to $20,358,379,
due primarily to the acquisition of Green, which had revenues of $4,979,176 from
hydraulic cylinders and other equipment in the third quarter of 1999, compared
to $1,044,506 in 1998, for the period from September 16, 1998 to September 30,
1998.
Revenues from pneumatic tools and related equipment increased 15.2%, from
$9,425,651 to $10,856,349, due primarily to a special promotional sale totalling
approximately $1,000,000 shipped to a large customer during the third quarter of
1999. Revenues from heating equipment increased 11.8%, from $2,587,738 to
$2,894,313, due to strong sales of the standard baseboard product and
significant growth in sales of the radiant line. Revenues from hardware
increased 53.5%, from $1,061,230 to $1,628,541, due primarily to sales to a
significant customer obtained in the fourth quarter of 1998. The selling prices
of selected heating products were reduced in order to stimulate sales growth.
Selling prices of hardware products were virtually unchanged, with the exception
of one significant region where discounting was undertaken to maintain
competitiveness.
Consolidated gross profit, as a percentage of revenues, decreased from
38.0% to 31.1%, due primarily to the lower overall gross profits from hydraulic
cylinders and other equipment. Gross profit from pneumatic tools and related
equipment decreased from 42.1% to 40.4%, due to a decrease in the value of the
U.S. dollar as compared to the Japanese yen, which raised the cost of imported
product. This was partially offset by a more profitable product mix. Gross
profit from hydraulic cylinders and other equipment decreased from 20.1% to
11.5%, due to decreased productivity of direct labor and an unfavorable product
mix. The gross profit margins for hydraulic cylinders and other equipment for
1998 represent the results of operations for only the period from September 16,
1998, the date of the acquisition of Green, to September 30, 1998 and are not
indicative of the results of operations for an entire quarter. Gross profit from
heating equipment decreased from 34.5% to 34.1%, due to the reduction in selling
prices noted above. Gross profit from hardware decreased from 27.8% to 23.9%,
due to the price adjustments noted above, as well as to significant discounting
on initial orders to new stores of a large customer.
Consolidated selling, administrative and general expenses increased 23.0%,
from $3,241,260 to $3,987,012. These expenses, however, decreased as a
percentage of revenues, from 23.0% to 19.6%, due to the increased revenues and
the reversal of an accrual of $200,000 related to two lawsuits that were settled
for less than the reserved amount.
13
THIRD QUARTER ENDED SEPTEMBER 30, 1999 COMPARED WITH THIRD QUARTER ENDED
SEPTEMBER 30, 1998 (CONTINUED)
Interest expense increased 131.3%, from $160,669 to $371,691, due
primarily to an increase in borrowings to support an inventory buildup related
to the addition of a significant new customer that began shipping in the fourth
quarter of 1999 and to a slowing of sales to a significant current customer. The
increase in interest expense is also attributable to the interest on the debt
related to the acquisition of Green, which was outstanding for the entire
quarter in 1999, but for only approximately two weeks in 1998.
Effective tax rates for the quarters ended September 30, 1999 and 1998
were 37.4% and 37.7%, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1998
Consolidated revenues increased 43.7%, from $38,657,185 to $55,558,804,
due primarily to the acquisition of Green, which had revenues of $15,294,416
from hydraulic cylinders and other equipment for the nine months ended September
30, 1999, compared to $1,044,506 in 1998, for the period from September 16, 1998
to September 30, 1998.
Revenues from pneumatic tools and related equipment increased 3.9%, from
$27,931,943 to $29,016,350, due to increases in sales of most product lines.
Revenues from heating equipment increased 5.1%, from $6,510,595 to $6,841,390,
due to an overall increase in sales of the standard baseboard product. Revenues
from hardware increased 39.0%, from $3,170,141 to $4,406,648, due primarily to
the addition of a significant customer in the fourth quarter of 1998. The
selling prices of selected heating products were reduced in order to stimulate
sales growth. Selling prices of hardware products were virtually unchanged, with
the exception of one significant region where discounting was undertaken to
maintain competitiveness.
Consolidated gross profit, as a percentage of revenues, decreased from
38.5% to 31.2%, due primarily to the lower overall gross profits from hydraulic
cylinders and other equipment. Gross profit from pneumatic tools and related
equipment decreased from 41.4% to 40.3%, due to a decrease in the value of the
U.S. dollar as compared to the Japanese yen, which raised the cost of imported
product. Gross profit from hydraulic cylinders and other equipment decreased
from 20.1% to 13.7%, due to decreased productivity of direct labor and an
unfavorable product mix. The gross profit margins for hydraulic cylinders and
other equipment for 1998 represent the results of operations for only the period
from September 16, 1998, the date of the acquisition of Green, to September 30,
1998 and are not indicative of the results of operations for an entire nine
month period. Gross profit from heating equipment increased from 34.3% to 34.5%,
due to a more profitable product mix and improved efficiencies of manufacturing
operations. Gross profit from hardware decreased from 27.2% to 26.3%, due to the
price adjustments noted above, as well as to significant discounting on initial
orders to new stores of a large customer.
14
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1998 (CONTINUED)
Consolidated selling, administrative and general expenses increased 19.1%,
from $9,739,591 to $11,603,179, but decreased as a percentage of revenues, from
25.2% to 20.9%, due primarily to the increased revenues.
Interest expense increased 140.6%, from $404,496 to $973,328, due
primarily to an increase in borrowings to support an inventory buildup related
to the addition of a significant new customer that began shipping in fourth
quarter of 1999 and to a slowing of sales to a significant current customer. The
increase in interest expense is also attributable to the interest on the debt
related to the acquisition of Green, which was outstanding for the entire nine
months in 1999, but for only approximately two weeks in 1998.
Effective tax rates for the quarters ended September 30, 1999 and 1998
were 37.9% and 37.6%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company gauges its liquidity and financial stability by the
measurements shown in the following table (dollar amounts in thousands):
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1999 1998 1998
------------- ------------ -------------
Working Capital $ 16,062 $ 15,994 $ 19,566
Current Ratio 1.60 to 1 2.24 to 1 2.48 to 1
Shareholders' Equity $ 27,428 $ 24,450 $ 23,301
During the nine months ended September 30, 1999, gross accounts receivable
increased approximately $5,648,000 and inventories increased approximately
$9,433,000. The increase in accounts receivable was primarily concentrated at
Florida Pneumatic and was the result of three factors. First, unusually heavy
collections at the end of 1998 lowered the balance at December 31, 1998 by
approximately $2,000,000 from normal. Second, sales increased approximately
$945,000. Finally, sales were more concentrated at the end of the period in
1999. The increase in inventories was primarily the result of a large inventory
buildup to support sales to a significant new customer which began shipping in
the fourth quarter of 1999. An unanticipated slow-down in sales to a major
current customer and a general increase in overall sales also contributed to the
increase. Short-term borrowings and accounts payable, combined, increased
approximately $12,956,000 as a result of the increase in inventories discussed
above. Management believes that the inventory is fully saleable and that the the
increase in inventories is only temporary.
15
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
On July 26, 1999, the Company renewed its Credit Agreement, which provides
the Company with various credit facilities, including revolving credit loans,
term loans for acquisitions and a foreign exchange line. The revolving credit
loan facility provides a total of $12,000,000, with various sublimits, for
direct borrowings, letters of credit, bankers' acceptances and equipment loans.
This commitment also includes a step-up period through January 31, 2000, during
which borrowings may increase to $17,000,000 to support the inventory buildup
related to a significant new customer. At September 30, 1999, there were direct
borrowings totalling $12,500,000 outstanding against this facility. There was
also a commitment at September 30, 1999 of approximately $487,000 for open
letters of credit.
The term loan facility provides a commitment of $15,000,000 to finance
acquisitions subject to the lending bank's approval. As noted below, $10,000,000
of this facility was used to help finance the acquisition of Green and there was
$4,000,000 still outstanding against this facility at September 30, 1999. This
commitment also includes a step-up period through January 31, 2000, during which
borrowings may increase to $18,000,000 to support any potential acquisitions.
There was also a standby letter of credit totalling approximately $968,000
outstanding against this facility at September 30, 1999. This standby letter of
credit was used to secure the Economic Development Revenue Bond assumed as part
of the acquisition of Green.
The foreign exchange line provides for the availability of up to
$10,000,000 in foreign currency forward contracts. These contracts fix the
exchange rate on future purchases of Japanese yen needed for payments to foreign
suppliers. The total amount of foreign currency forward contracts outstanding at
September 30, 1999 was approximately $2,588,000.
The Credit Agreement is subject to annual review by the lending bank.
Under the Credit Agreement, the Company is required to adhere to certain
financial covenants. At September 30, 1999, and for the nine months then ended,
the Company satisfied all of these covenants.
On September 16, 1998, the Company acquired certain assets and liabilities
of Green Manufacturing, Inc. for $10,500,000, including the assumption of
$1,095,000 of an outstanding Economic Development Revenue Bond issued by Wood
County, Ohio. The acquisition was financed with $500,000 in working capital
funds and a $10,000,000 7-year term loan under the Credit Agreement. As of
September 30, 1999, $6,000,000 of the loan had been repaid. This loan bears
interest at LIBOR plus 175 basis points. Principal payments begin on October 1,
1999 and are due in 72 equal monthly installments totalling $4,000,000, the
balance outstanding on October 1, 1999. The 30 day LIBOR at September 30, 1999
was approximately 5.4%. The Economic Development Revenue Bond was issued on
November 16, 1994 and provides for annual retirement payments each November 1,
over a 10-year period. The Bond bears interest at variable rates. The interest
rate at September 30, 1999 was approximately 4.0%. At September 30, 1999, the
balance outstanding on the Bond was $955,000.
16
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company, through Florida Pneumatic, imports a significant amount of
its purchases from Japan, with payment due in Japanese yen. As a result, the
Company is subject to the effects of foreign currency exchange fluctuations. The
Company uses a variety of techniques to mitigate any adverse effects from these
fluctuations, including increasing its selling prices, obtaining price
reductions from its overseas suppliers, using alternative supplier sources and
entering into foreign currency forward contracts. See "Item 3, Quantitative and
Qualitative Disclosures About Market Risk."
Capital spending for the nine months ended September 30, 1999 was
approximately $1,646,000. The total amount was provided from working capital.
Capital expenditures for the rest of 1999 are expected to total approximately
$200,000, some of which may be financed under the Credit Agreement. Included in
the expected total for the rest of 1999 are capital expenditures relating to new
products, expansion of existing product lines and replacement of old equipment.
The Company continues to conduct an acquisition search. The funds for an
acquisition will be provided by working capital and existing credit facilities,
including the $15,000,000 credit facility for acquisitions referred to above.
The Company believes that cash on hand, cash generated by future
operations and cash available through its credit facilities will be sufficient
to allow the Company to support its capital expenditure program and to meet its
general working capital needs.
YEAR 2000
The Year 2000 (Y2K) issue is the result of computer programs being written
for, or microprocessors using, two digits (rather than four) to define the
applicable year. Company computer programs that have date-sensitive software may
recognize a date using 00 as the year 1900 rather than the year 2000, which
could result in system failures or miscalculations. The Company is currently
working to mitigate the Y2K issue and has established processes for assessing
the risks and associated costs.
The Company categorizes its Y2K efforts as follows: hardware, software,
embedded processors, vendors and customers. Progress in assessing and
remediating information technology systems (hardware and software) and
non-information technology systems (embedded processors) continues to be tracked
in phases including assessment, identification of non-compliant systems,
remediation, testing and verification. Hardware, software and embedded
processors have been assessed and remediation is in progress. The Company's Y2K
project is progressing and a large portion of its internal remediation work was
completed at September 30, 1999. The Company is using internal and external
resources to remediate and test its systems.
17
YEAR 2000 (CONTINUED)
The Company has initiated communications with significant vendors and
customers to coordinate the Y2K issue and is in the process of determining the
Company's vulnerability if these companies fail to remediate their Y2K issues.
There can be no guarantee that the systems of other companies will be timely
remediated or that other companies' failure to remediate Y2K issues would not
have a material adverse effect on the Company. The Company continues to develop
contingency plans to mitigate risks associated with the Y2K issue.
Costs incurred to date in addressing the Y2K issue have been expensed as
incurred and are not material. Based on current information, the total cost to
remediate and test the Company's systems is not expected to be material.
The Company presently believes that, with remediation, Y2K risks can be
mitigated. Although the Company is not currently aware of any material internal
operational or financial Y2K related issues, the Company cannot provide
assurances that the computer systems, products, services or other systems upon
which the Company depends will be Y2K ready on schedule, that the costs of its
Y2K program will not become material or that the Company's contingency plans
will be adequate. The Company is currently unable to evaluate accurately the
magnitude, if any, of the Y2K related issues arising from the Company s vendors
and customers. If any such risks (either with respect to the Company or its
vendors or customers) materialize, the Company could experience serious
consequences to its business which could have material adverse effects on the
Company's financial condition, results of operations and liquidity.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 is effective for transactions
entered into after January 1, 2000 and requires that all derivative instruments
be recorded on the balance sheet at fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of the hedge
transaction and the type of hedge transaction. The ineffective portion of all
hedges will be recognized in earnings. The Company is in the process of
reviewing SFAS 133 to determine what impact, if any, the adoption of SFAS 133
will have on its results of operations and its financial position. Based on
current market conditions, the Company does not believe that the impact will be
material.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks, which include changes in U.S. and
international exchange rates, the prices of certain commodities and currency
rates as measured against the U.S. dollar and each other. The Company attempts
to reduce the risks related to foreign currency fluctuation by utilizing
financial instruments.
The value of the U.S. dollar affects the Company's financial results.
Changes in exchange rates may positively or negatively affect the Company's
gross margins and operating expenses. The Company engages in hedging programs
aimed at limiting, in part, the impact of currency fluctuations. Using primarily
forward exchange contracts, the Company hedges some of those transactions that,
when remeasured according to generally accepted accounting principles, impact
the income statement. Factors that could impact the effectiveness of the
Company's programs include volatility of the currency markets and availability
of hedging instruments. All currency contracts that are entered into by the
Company are components of hedging programs and are entered into for the sole
purpose of hedging an existing or anticipated currency exposure, not for
speculation. The Company does not buy or sell financial instruments for trading
purposes. Although the Company maintains these programs to reduce the impact of
changes in currency exchange rates, when the U.S. dollar sustains a weakening
exchange rate against currencies in which the Company incurs costs, the
Company's costs are adversely affected. At September 30, 1999, the Company held
open hedge forward contracts to deliver approximately $2,588,000 of Japanese
Yen. The potential loss in value of the Company's net investment in foreign
currency forward contracts resulting from a hypothetical 10 percent adverse
change in foreign currency exchange rates at September 30, 1999 is approximately
$288,000.
19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Registrant is not a party to any litigation that is expected to
have a material adverse effect on its business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See "Exhibit Index" immediately following the signature page.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the
quarter ended September 30, 1999.
20
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 thereunto duly authorized.
P & F INDUSTRIES, INC.
(Registrant)
By /s/ Joseph A. Molino, Jr.
-------------------------------
Joseph A. Molino, Jr.
Vice President
Dated: November 10, 1999 (Principal Financial Officer)
21
EXHIBIT INDEX
EXHIBIT
NO.
- ---
3.1 Restated Certificate of Incorporation of the Registrant (Incorporated by
reference to Exhibit 3A to the Registrant's Registration Statement on Form
S-8 filed on September 20, 1989).
3.2 Amended By-laws of the Registrant.
4.1 Rights Agreement, dated as of August 23, 1994, between the Registrant and
American Stock Transfer & Trust Company, as Rights Agent (Incorporated by
reference to Exhibit 1 to the Registrant's Registration Statement on Form
8-A dated August 24, 1994).
4.2 Amendment to Rights Agreement, dated as of April 11, 1997, between the
Registrant and American Stock Transfer & Trust Company, as Rights Agent
(Incorporated by reference to Exhibit 4.1 to the Registrant's Current
Report on Form 8-K dated April 11, 1997).
4.3 Credit Agreement, dated as of July 23, 1998, by and among the Registrant,
Florida Pneumatic Manufacturing Corporation, a Florida corporation,
Embassy Industries, Inc., a New York corporation, and European American
Bank, a New York banking corporation (Incorporated by reference to Exhibit
4.3 to the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998).
4.4 Amendment No. 1 to Credit Agreement, dated as of September 16, 1998, by
and among the Registrant, Florida Pneumatic Manufacturing Corporation, a
Florida corporation, Embassy Industries, Inc., a New York corporation,
Green Manufacturing, Inc., a Delaware corporation, and European American
Bank, a New York banking corporation (Incorporated by reference to Exhibit
4.4 to the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998).
4.5 Amendment No. 2 to Credit Agreement, dated as of July 28, 1999, by and
among the Registrant, Florida Pneumatic Manufacturing Corporation, a
Florida corporation, Embassy Industries, Inc., a New York corporation,
Green Manufacturing, Inc., a Delaware corporation, and European American
Bank, a New York banking corporation. (Incorporated by reference to
Exhibit 4.5 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999).
4.6 Certain instruments defining the rights of holders of the long-term debt
securities of the Registrant are omitted pursuant to Section
(b)(4)(iii)(A) of Item 601 of Regulation S-K. The Registrant agrees to
furnish supplementally copies of these instruments to the Commission upon
request.
27 Financial Data Schedules (submitted to the Securities and Exchange
Commission in electronic format).
22