UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 20162019
or
¨ | 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 or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification Number) |
445 Broadhollow Road, Suite 100, Melville, New York | 11747 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code:(631) 694-9800
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on which registered | ||||
Class A Common Stock, $1.00 par value | NASDAQ |
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “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 x |
Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for the complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The aggregate market value of the registrant’s Class A Common Stock held by non-affiliates of the registrant, based on the last sale price on June 30, 201628, 2019 (the last business day of the registrant’s most recently completed second fiscal quarter), was approximately $21,955,000.$14,055,051. For purposes of this calculation, shares of common stockCommon Stock held by each executive officer and director have been excluded since those persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of March 24, 201720, 2020, there were 3,597,8703,144,810 shares of the registrant’s Class A Common Stock outstanding.
Documents Incorporated by Reference
Part III of this Annual Report on Form 10-K incorporates by reference information from the registrant’s definitive Proxy Statement for its 2016the Annual Meeting of Stockholders.Stockholders to be held in 2020.
P&F INDUSTRIES, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 20162019
TABLE OF CONTENTS
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FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the “Reform Act”) provides a safe harbor for forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 made by or on behalf of P&F Industries, Inc. and subsidiaries (the “Company”). The Company and its representatives may, from time to time, make written or verbal forward lookingforward-looking statements, including statements contained in the Company’s filings with the Securities and Exchange Commission, such as this Annual Report on Form 10-K (“Report”), and in its reports to stockholders. Any statements made in the Report that are not historical or current facts may be deemed to be forward looking statements. Generally, the inclusion of the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “will,” “may,” “would,” “could”“could,” “should” and their opposites and similar expressions identify statements that constitute forward looking statements within the meaning of the Reform Act. Any forward lookingforward-looking statements contained herein, including those related to the Company’s future performance, are based upon the Company’s historical performance and on current plans, estimates and expectations. Such forward looking statements are subject to various risks and uncertainties, including those risk factors described in Item 1A of Part I, “Risk Factors” of this Report, which may cause actual results to differ materially from the forward lookingforward-looking statements. You are therefore cautioned against relying on any forward lookingforward-looking statements. Forward looking statements speak only as of the date on which they are made, and the Company undertakes no obligation to update publicly or revise any forward lookingforward-looking statement, whether as a result of new information, future developments or otherwise.
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ITEM 1. | Business |
P&F Industries, Inc. (P&F), (“P&F”) is a Delaware corporation incorporated on April 19, 1963. Prior to February 11, 2016,P&F (together with its subsidiaries, the effective date of the sale of its Nationwide Industries, Inc. (“Nationwide”“Company”) subsidiary, P&F operated in two primary lines of business or segments: (i) tools and other products (“Tools”) and (ii) hardware and accessories (“Hardware”). As a result of the sale of Nationwide, which had been reported in the Hardware segment, the Company currently only operates in the Tools business. See Note 2 to Consolidated Financial Statements for further discussion.
Tools
The Company conducts its Tools business through a wholly-owned subsidiary, Continental Tool Group, Inc. (“Continental”), which in turn operates through its wholly-owned subsidiaries, Florida Pneumatic Manufacturing Corporation (“Florida Pneumatic”) and Hy-Tech Machine, Inc. (“Hy-Tech”). Exhaust Technologies Inc. (“ETI”) and, Universal Air Tool Company Limited (“UAT”) and Jiffy Air Tool, Inc. (“Jiffy”), are all wholly-owned subsidiaries of Florida Pneumatic, eachPneumatic. The business of which was acquired by Florida Pneumatic in 2014. ATSCO Holdings Corp.Air Tool Service Company (“ATSCO”) isoperates through a wholly-owned subsidiary of Hy-Tech. Effective October 25, 2019, the Company through a wholly owned subsidiary of Hy-Tech, which was also acquired in 2014.substantially all the operating assets comprising the businesses of Blaz-Man Gear, Inc. and Gear Products & Manufacturing, Inc., each an Illinois-based corporation that manufactured and distributed custom gears.
Florida Pneumatic
Florida Pneumatic imports and sells pneumatic hand tools, most of which are of its own design, primarily to the retail, industrial, automotive and automotiveaerospace markets. This line ofIts products includesinclude sanders, grinders, drills, saws and impact wrenches. These tools are similar in appearance and function to electric hand tools, but are powered by compressed air, rather than directly by electricity.electricity or battery. Air tools, as they are more commonly referred to, generally are less expensive to operate, offer better performance and weigh less than their electrical counterparts. Florida Pneumatic imports and/or manufactures approximately seventy-five types of pneumatic hand tools, most of which are sold at prices ranging from $50 to $1,000, under the names “Florida Pneumatic”Pneumatic,” “Universal Tool”, “Universal Tool,”“Jiffy Air Tool”, AIRCAT, or NITROCAT, as well as under the trade names or trademarks of several private label customers. These products are sold to retailers, distributors, manufacturers and private label customers through in-house sales personnel and manufacturers’ representatives. The AIRCAT and NITROCAT brandbrands of pneumatic tools are sold primarily to the automotive service and repair market (“automotive market”). Users of Florida Pneumatic’sPneumatics’ hand tools include industrial maintenance and production staffs, do-it-yourself mechanics, professional automobile mechanics and auto body personnel.
During 2016 Florida Pneumatic purchased approximately36% of its Jiffy manufactures and distributes pneumatic tools from China,63% from Taiwan and 1% from Japan and Europe. Florida Pneumatic performs final assembly on certain of its products at its factory in Jupiter, Florida.
Florida Pneumatic also markets, through its Berkley Tool division (“Berkley”), a product line which includes pipe and bolt dies, pipe taps, wrenches, vises and stands, pipe and tubing cutting equipment, hydrostatic test pumps, and replacement electrical components for a widely-used brand of pipe cutting and threading machines. Florida Pneumatic markets Berkley’s products through industrial distributors and contractors. Florida Pneumatic sources its Berkley product line from China and Israel, as well as domestic sources. Florida Pneumatic also assembles and markets a line of compressor air filters, for which it imports components from Mexico.primarily to aerospace manufacturers.
There are redundant supply sources for nearly all products purchased.
The primary competitive factors in the industrial and automotive pneumatic tool market are quality, breadth and availability of products, customer service, technical support, price and technical support.brand name awareness. The primary competitive factors in the retail pneumatic tool market are price, service and brand-name awareness. The primary competitive factors in Berkley’s businessthe aerospace market are pricequality, technology and service.service levels. Florida Pneumatic’sPneumatics’ products are sold offdirectly to the shelf.retailers, direct to customers and through distributors. Currently, there is minimal seasonality to Florida Pneumatic’s retail business is not seasonal.Pneumatics’ revenue.
Jiffy manufactures its own products in the United States. It sources its raw materials from various well-established suppliers throughout the United States. There are redundant sources for all materials.
During 2019, of its purchased products, Florida Pneumatic sourced approximately 25% of its pneumatic tools from China, 73% from Taiwan with the balance from Japan, Europe and domestically. Florida Pneumatic performs final assembly on certain of its products at its factory in Jupiter, Florida.
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Hy-Tech
Hy-Tech manufacturersdesigns, manufactures and distributes its own lineindustrial tools, systems, gearing, accessories and a wide variety of industrial pneumatic tools andreplacement parts under the “ATP” brand. Under thevarious brands including ATP, brand,Numatx, Thaxton and Quality Gear. Hy-Tech produces and sells over sixty types ofheavy-duty pneumatic impact tools, which includegrinders, air motors, hydro-pneumatic riveters, hydrostatic test plugs, impact wrenches, grinders, drills,sockets and motors that are sold atcustom gears, with prices ranging from $450$300 to $28,000. Users$42,000.
Hy-Tech’s ”Engineered Solutions” products are sold direct to Original Equipment Manufacturers (OEM’s), and industrial branded products are sold through a broad network of ATP parts and tools include refineries, chemical plants,specialized industrial distributors serving power generation, facilities, heavypetrochemical, aerospace, construction, enterprises,railroad, mining, ship building and oilfabricated metals. Hy-Tech works directly with their industrial customers, designing and mining companies. Further, it also manufactures toolsmanufacturing products from finished components to customer unique specifications. In addition, Hy-Tech manufactures an extensive line of pneumatic tool replacement parts that are soldcomplete turnkey systems to original equipment manufacturers (“OEMs”), as well as competitively. It also manufactures and distributes high pressure stoppers for hydrostatic testing of fabricated pipe under the “Thaxton” brand name. It also produces a line of siphons under the “Eureka” name. Other than a line of socketsbe sold under the “OZAT”their own brand name thatnames.
Nearly all of Hy-Tech brands are imported from Israel, all Hy-Tech products are mademanufactured in the United States of America. Hy-Tech does distribute ATP branded impact sockets, striking wrenches and accessories imported from Italy and Asia.
The sales of Hy-Tech products through various channel and direct customers are managed by both direct sales personnel and a network of specialized manufacturer representatives. Further, its products are sold through its in-house sales force as well as manufacturer representatives. Hy-Tech’s products are sold off the shelfstandard off-the-shelf and also are produced andto be sold to customer’sfor customer specific specifications.
The business is not seasonal but may be subject to periodic schedule changesoutage and maintenance schedules in refineries, power generation and chemical plants. The primary competitive factors in the industrial pneumatic tool marketvalue proposition for Hy-Tech’s products are quality, technical expertise, availability, breadth and availability of products, and customer service and technical support.
Hy-Tech sources its raw materials from various well-established distributorssuppliers throughout the United States. There are redundant sources for all materials.
Hardware
Nationwide
Prior to the sale of Nationwide, which was effective February 11, 2016 (the “Closing Date”), the Company conducted its Hardware business through its wholly-owned subsidiary, Countrywide Hardware, Inc. (“Countrywide”). Countrywide conducted its business operations through its wholly-owned subsidiary, Nationwide. As of the Closing Date, Nationwide was an importer and manufacturer of door, window and fencing hardware and accessories, including rollers, hinges, window operators, sash locks, custom zinc castings and door closers. On the Closing Date, Countrywide sold Nationwide to an unrelated third party for approximately $22.2 million.
In November 2016, Countrywide sold the land and building which was the sole location from which Nationwide operated for $3.5 million, after fees and expenses.
See Note 2 to Consolidated Financial Statements for further discussion.
Patents, Trademarks and Other Intellectual Property
The Company holds several patents, trademarks, and copyrights of various durations, and it believes that it holds or licenses all of the patent, trademark, copyright, and other intellectual property rights necessary to conduct ourits business. The Company relies upon patents, copyrights, trademarks, and trade secret laws to establish and maintain its proprietary rights in many of ourits products. There can be no assurance that any of its patents, trademarks or other intellectual property rights will not be challenged, invalidated, or circumvented, or that any rights granted thereunder will provide competitive advantages to it. In addition, there can be no assurance that patents will be issued from pending patent applications filed by the Company, or that claims allowed on any future patents will be sufficiently broad to protect our technology or designs. Further, the laws of some foreign countries may not permit the protection of our proprietary rights to the same extent as do the laws of the United States.
Customers
We have two retail customersThe Company is not dependent on any one customer. During 2019 and 2018 it had one customer, The Home Depot, that during 2016, accounted for 13.6%20.7% and 29.8%, respectively,26.5% of its revenue, respectively. Other than the Company’s revenue. In 2015, these two customersaforementioned, in 2019 and 2018, the Company did not have any customer that accounted for 11.7% and 28.5%more than 10% of the Company’sits consolidated revenue.
Employees
The Company employed 115195 full-time employees as of December 31, 2016.2019. At various times during the year our operating units may employ seasonal or part-time help, as necessary. None of the Company’s employees are represented by a union.
Information Available on the Company’s Website
Additional information regarding the Company and its products is available on the Company’s website atwww.pfina.com. In addition, the Company’s (i) charters for the Audit, Compensation, Corporate Governance and Nominating, and Strategic Planning and Risk Assessment Committees of the Company’s Board of Directors and of the Lead Independent Director; and (ii) Code of Business Conduct and Ethics are available on the Company’s website. P&F’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Proxy Statements on Schedule 14A and Current Reports on Form 8-K, as well as any amendments to those reports and certain other filings, are made available to the public at no charge, other than an investor’s own internet access charges, through the “SEC Filings” section of the Company’s website. The Company makes such material available on its website as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the Securities and Exchange Commission (“SEC”). Copies of any materials the Company files with the SEC can also be obtained free of charge through the SEC’s website atwww.sec.gov. The SEC’s Public Reference Room can be contacted at 100 F Street, N.E., Washington, D.C. 20549. The information on the Company’s website is not, and should not be considered, part of this Annual Report on Form 10-K and is not incorporated by reference to this report.
ITEM 1A. | Risk Factors |
A wide range of factors could materially affect our performance. In addition to the factors affecting specific business operations identified in connection with the description of these operations and the financial results elsewhere in this report, the following factors, among others, could adversely affect our business, including our results of operations or financial position:
Risks associated with public health crises, including epidemics and pandemics.Certain of our products and parts are manufactured overseas, predominantly in Asia (primarily in China and Taiwan) and to a lesser degree in Europe (in Italy). The overseas manufacturing of such products and parts may be subject to disruption by public health crises, such as pandemics and epidemics. The temporary or permanent loss of the services of any of such manufacturers could cause a significant disruption in our product supply chain and operations and lead to delays in product shipments. Most significantly, the recent spread of the novel coronavirus (COVID-19) and related quarantines and work and travel restrictions in China and Italy have disrupted, and may continue to disrupt, production of certain of our products, and could impair our ability to deliver products to some of our customers on a timely basis. Furthermore, a public health crisis could negatively impact spending in impacted regions, including our principal markets throughout the U.S. It could also negatively impact the staffing of our operations in the U.S. and the U.K., including our U.S.-based manufacturing facilities, and due to governmental mandates or other factors, we may need to temporarily suspend all operations in certain of our facilities. The duration of the potential business disruptions and related financial impact cannot be reasonably estimated at this time, but could materially adversely affect our business, financial condition, and results of operations. The extent to which the coronavirus or other potential public health crises may impact our results will depend on future developments, which are highly uncertain and cannot be predicted at this time |
· | Exposure to fluctuations in energy prices. Fluctuations in energy prices, including crude oil and gas prices, could negatively impact the activities of those of our customers involved in extracting, refining or exploring for crude oil and gas, resulting in a corresponding adverse effect on the demand for the products that they purchase from |
Debt and debt service requirements. The amount of our debt from time to time could have important consequences. For example, it could: increase our vulnerability to general adverse economic and industry conditions; limit our ability to fund future capital expenditures, working capital and other general corporate requirements and limit our flexibility in planning for, or reacting to, changes in our business. |
Borrowing and compliance with covenants under our credit facility. Our credit facility contains affirmative and negative covenants including financial covenants, and default provisions. A breach of any of these covenants could result in a default under our credit agreement. Upon the occurrence of an event of default under our current credit agreement, the lenders could elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit. If the lenders were to accelerate the repayment of borrowings, to the extent we have significant outstanding borrowings at said time, we may not have sufficient assets to repay our |
Disruption in the global capital and credit markets. If global economic and financial market conditions deteriorate, it could have a material adverse effect on our financial condition and results of operations. In particular, lower consumer spending may result in reduced demand and orders for certain of our products, order cancellations, lower revenues, increased inventories, and lower gross margins. Further, if our customers experience difficulty obtaining financing in the capital and credit markets to purchase our products, this could result in further reduced orders for our products, order cancellations, inability of customers to timely meet their payment obligations to us, extended payment terms, higher accounts receivable, reduced cash flows, greater expense associated with collection efforts and increased bad debt expense; and a severe financial difficulty experienced by our customers may cause them to become insolvent or cease business operations. |
The strength of the retail economy in the United States and abroad. Our business is subject to economic conditions in major markets in which we operate, including recession, inflation, deflation, general weakness in retail and industrial markets, as well as the exposure to liabilities under anti-corruption laws in various countries, such as the U.S. Foreign Corrupt Practices Act, currency instability, transportation delays or interruptions, sovereign debt uncertainties and difficulties in enforcement of contract and intellectual property rights, as well as natural disasters. The strength of such markets is a function of many factors beyond our control, including interest rates, employment levels, availability of credit and consumer confidence. |
· |
· | Importation delays. Our ability to import products in a timely and cost-effective manner may also be affected by conditions at ports or issues that otherwise affect transportation and warehousing providers, such as port and shipping capacity, labor disputes, severe weather or increased homeland security requirements in the U.S. and other countries. These issues could delay importation of products or require us to locate alternative ports or warehousing providers to avoid disruption to customers. These alternatives may not be available on short notice or could result in higher transit costs, which could have an adverse impact on our business and financial condition. |
· | Risks associated with Brexit. We have operations in the United Kingdom, and as a result, we face risks associated with the potential uncertainty and disruptions that may lead up to and follow the U.K.’s exit from the European Union (“Brexit”), including with respect to volatility in exchange rates and interest rates and potential material changes to the regulatory regime applicable to our operations in the U.K. Brexit could adversely affect European or worldwide political, regulatory, economic or market conditions and could contribute to instability in global political institutions, regulatory agencies and financial markets. It is possible that Brexit will result in our U.K. operations becoming subject to materially different, and potentially conflicting, laws, regulations or tariffs which could require costly new compliance initiatives or changes to legal entity structures or operating practices. Furthermore, in the event the U.K. and the EU do not reach a trade agreement during a prescribed transition period, there may be additional adverse impacts on trade between the U.K. and the EU or countries outside the EU. Such impacts could adversely affect our business. The ultimate effects of Brexit on us will depend on the specific terms of any agreement the U.K. and the EU reach to provide access to each other’s respective markets. |
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Customer concentration. We have several key customers, |
Adverse changes in currency exchange |
Impairment of long-lived assets and goodwill. The inability to generate future cash flows sufficient to support the recorded amounts of goodwill, other intangible assets and other long-lived assets could result in future impairment charges. |
Unforeseen inventory adjustments or changes in purchasing patterns. We make purchasing decisions based upon a number of factors including an assessment of market needs and preferences, manufacturing lead times and cash flow considerations. To the extent that our assumptions result in inventory levels being too high or too low, there could be a material adverse effect on our business, results of operations or financial position. |
Market acceptance of products. There can be no assurance that the market continues its acceptance of the products we introduced in recent years or will accept new products (including the introduction of products into new geographic markets) introduced or scheduled for introduction in |
Competition. The markets in which we sell our products are highly competitive on the basis of price, quality, availability, post-sale service and brand-name awareness. A number of competing companies are well-established manufacturers that compete on a global basis. |
Technology.Our business is subject to the evolution of technology over time. There can be no assurance that our current level of technology will be sufficient to satisfy our markets in the future. |
· | Price reductions. Price reductions |
Interest rates. Interest rate fluctuations and other capital market conditions could have a material adverse effect on our business, results of operations or financial position. |
Litigation and insurance. The effects of litigation and product liability exposure, as well as other risks and uncertainties described from time to time in our filings with the Securities and Exchange Commission and our public announcements could have a material adverse effect on our business, results of operations or financial position. Further, while we maintain insurance policies to protect against most potential exposures, events may arise against which we may not be adequately insured. |
Retention of key personnel. Our success depends to a significant extent upon the abilities and efforts of our key personnel. The loss of the services of any of our key personnel or our inability to attract and retain qualified personnel in the future could have a material adverse effect on our business, results of operations or financial position. |
Acquisition of businesses. Part of our business strategy is to opportunistically acquire complementary businesses, which involve risks that could have a material adverse effect on our business, financial condition and results of operations. These risks include: |
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· | Loss or significant decline in the revenue of customers of the acquired businesses; |
· | Inability to integrate successfully the acquired businesses’ operations; |
· | Inability to coordinate management and integrate and retain employees of the acquired businesses; |
· | Difficulties in implementing and maintaining consistent standards, controls, procedures, policies and information systems; |
· | Failure to realize anticipated synergies, economies of scale or other anticipated benefits, or to maintain operating margins; |
· | Strain on our personnel, systems and resources, and diversion of attention from other priorities; |
· | Incurrence of additional debt and related interest expense; |
· | Unforeseen or contingent liabilities of the acquired businesses; and |
· | Large write-offs or write-downs, or the impairment of goodwill or other intangible assets. |
Regulatory environment. We cannot anticipate the impact of changes in laws and regulations, including changes in accounting standards, taxation requirements, including tax rate changes, new tax laws and revised tax law interpretations, and environmental laws, in both domestic and foreign jurisdictions. Increased legislative and regulatory activity and burdens, and a more stringent manner in which they are applied, could significantly impact our business and the economy as a whole. |
The threat of terrorism and related political instability and economic uncertainty. The threat of potential terrorist attacks on the United States and throughout the world and political instability has created an atmosphere of economic uncertainty in the United States and in foreign markets. Our results may be impacted by the macroeconomic effects of those events. Also, a disruption in our supply chain as a result of terrorist attacks or the threat thereof may significantly affect our business and its prospects. In addition, such events may also result in heightened domestic security and higher costs for importing and exporting shipments of components and finished goods. Any of these occurrences may have a material adverse effect on our financial position, cash flow or results in any reporting period. |
Unforeseen events. We cannot anticipate the impact of unforeseen events, including but not limited to war and pandemic disease, on economic conditions and consumer confidence in our business. |
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The risk factors described above are not intended to be all-inclusive. There can be no assurance that we have correctly identified and appropriately assessed all factors affecting our business or that the publicly available and other information with respect to these matters is complete and correct. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial also may adversely impact us. Should any risks and uncertainties develop into actual events, these developments could have a material adverse effect on our business, results of operations or financial position.
ITEM 1B. Unresolved Staff Comments
ITEM 1B. | Unresolved Staff Comments |
None.
ITEM 2. | Properties |
Until June 18, 2019, Florida Pneumatic ownsowned a 72,000 square foot plant facility (the “Jupiter Facility”) located in Jupiter, Florida.Florida at which it conducted its operations. Effective June 18, 2019, Florida Pneumatic completed the sale of the entire Jupiter Facility to an unrelated third party. Effective the same day, it entered into a lease for approximately 42,000 square feet of the Jupiter Facility, with the new owner. This lease is for a five-year period. Its UAT subsidiary leases a 3,100 square foot facility from a non-affiliated lessor in High Wycombe, United Kingdom. This facility houses UAT’s warehouse / distribution, as well as its office needs. TheThis lease expireswas renewed in 2019, for a five-year period and contains a five-year renewal clause.
The Company’s Jiffy operation is located in Carson City, Nevada in a 17,500 square foot building owned by another subsidiary of Florida Pneumatic.
Hy-Tech owns a 51,000 square foot plant facility located in Cranberry Township, Pennsylvania andPennsylvania. Additionally, it leases a 13,200 square foot facility located in Punxsutawney, Pennsylvania, which expires in 2021 and does not have a renewal clause. In October 2019, Hy-Tech entered into a five-year lease for a second location in Punxsutawney. This second location is approximately 42,000 square feet The Company has two three-year options to renew the lease. See Note 2 – ACQUISITION, in the Notes to Consolidated Financial Statements for further information.
The Company leases its executive office of approximately 5,000 square feet located in an office building in Melville, New York. This lease expires in August 2022. The Company has an option to exit the lease giving 12 months’ notice.
Each facility described above either provides adequate space for the operations of the respective subsidiary for the foreseeable future or can be modified or expanded to provide some additional space.
The two owned properties described above are subject to mortgages and therefore pledged as collateral against the Company’s credit facility, which is discussed further in Management’s Discussion and Analysis – Liquidity and Capital Resources and Notes to Consolidated Financial Statements.
The Company’s executive office of approximately 5,000 square feet is located in an office building in Melville, New York and is leased from a non-affiliated landlord. This lease expires in 2018, the Company can, at its option, terminate giving twelve months written notice.
In November 2016, Countrywide sold the 56,250 square foot facility located in Tampa, Florida in which Nationwide conducted its business, until it was sold in February 2016. See Note 2 to Consolidated Financial Statements for further discussion.
ITEM 3. | Legal Proceedings |
From time to time, the Company is subject to legal proceedings and claims in the ordinary course of business. While the results of proceedings cannot be predicted with certainty, the Company believes that the final outcome of these proceedings will not have a material adverse effect on the Company’s business, financial condition, or results of operations.
ITEM 4. Mine Safety Disclosures
ITEM 4. | Mine Safety Disclosures |
None.
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ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
ITEM 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Our Class A Common Stock (“Common Stock”) trades on the Nasdaq Global Market under the symbol PFIN. The rangeranges of the high and low closing sales prices for our Class A Common Stock during the last two years were as follows:
2016 | High | Low | ||||||||||||||
2019 | High | Low | ||||||||||||||
First Quarter | $ | 11.62 | $ | 7.80 | $ | 8.66 | $ | 7.56 | ||||||||
Second Quarter | 10.15 | 8.29 | 8.62 | 8.00 | ||||||||||||
Third Quarter | 9.39 | 7.70 | 8.31 | 6.37 | ||||||||||||
Fourth Quarter | 8.69 | 6.75 | 7.50 | 6.24 |
2015 | High | Low | ||||||
First Quarter | $ | 8.09 | $ | 6.83 | ||||
Second Quarter | 8.95 | 6.35 | ||||||
Third Quarter | 11.18 | 8.45 | ||||||
Fourth Quarter | 10.50 | 8.15 |
2018 | High | Low | ||||||
First Quarter | $ | 8.47 | $ | 7.17 | ||||
Second Quarter | 8.88 | 7.75 | ||||||
Third Quarter | 8.74 | 7.66 | ||||||
Fourth Quarter | 8.34 | 7.55 |
As of March 20, 2017,2020, there were approximately 800570 holders of record of our Class A Common Stock and the closing sale price of our stock as reported by the Nasdaq Global Market was $8.28.$5.15.
From our incorporation in 1963 through December 31, 2015, we declared no cash dividends on our Class A Common Stock. On March 8, 2016, theThe Company’s Board of Directors announced that it declared a special, one-time cash dividend of $0.50 per share payable on April 4, 2016, to stockholders of record at the close of business on March 21, 2016. The total amount of this special dividend payment was approximately $1,800,000 based on the then current number of shares outstanding. Further, the Company’s Board of Directors also announced that it approved the initiation of a dividend policy under which the Company intends to declare a cash dividend to its stockholders in the amount of $0.20 per share per annum, payable in equal quarterly installments. In conjunction therewith, during 2016, the Company’s Board of Directors declared four quarterly cash dividends of $0.05 per share to stockholders of record at the close of business on March 31, 2016, July 18, 2016,during 2019 and October 28, 2016.2018.
The Company continuesintends to maintain the dividend policy; however, the declaration of dividends under this policy going forward is dependent upon the Company’s financial condition, results of operations, capital requirements and other factors deemed relevant by the Company’s Board of Directors.
On the Closing Date, the Company and the President of Nationwide, entered into a purchase agreement pursuant to which, among other things, the Company acquired 30,000 shares of the Company’s Class A Common Stock at the aggregate purchase price of $254,940 and options to acquire 6,667 shares of the Company’s Common Stock at an aggregate price of $16,597.
ITEM 6. Selected Financial Data
ITEM 6. | Selected Financial Data |
Not required.
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KEY INDICATORS Recent global events While the COVID-19 pandemic has impacted our ability to source certain of our products, particularly with respect to factories that we utilize located in China and Italy, we do not believe this alone is likely to have a material negative impact on our results for the foreseeable future. However, we believe the impact of the virus on the global economy, particularly within the U.S., is likely to have a material impact on our results for at least the next couple of fiscal quarters. Furthermore, many U.S. states and the United Kingdom have ordered certain types of businesses to stop physical operations to contend with the impact of this pandemic. While we believe that we are currently able to continue our operations at each of our operating locations, this could change at any time in the future. We are closely monitoring the situation and taking actions to protect the safety of our employees and communities. For example, among other things, we have restricted international and domestic travel, taken a variety of steps to ensure social distancing in our facilities, including working remotely where available, and have increased our cleaning and sanitizing procedures in our facilities. Economic Measures Much of our business is driven by the ebbs and flows of the general economic conditions in both the United States and, to a lesser extent, abroad. A key economic measure relevant to us is the cost of the raw materials in our products. Key materials include metals, especially various types of steel and aluminum. Also important is the value of the Lastly, the cost and availability of a quality labor pool in the countries where products and components are manufactured, both overseas as well as in the United States, could materially affect our overall results. Operating Measures Key operating measures we use to manage our Financial Measures Key financial measures we use to evaluate the results of our CRITICAL ACCOUNTING POLICIES AND ESTIMATES We prepare our Revenue Recognition Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable are customer obligations due under normal trade terms. We sell our products to retailers, distributors and OEMs involved in a variety of industries. We perform continuing credit evaluations of our customers’ financial condition, and although we generally do not require collateral, letters of credit may be required from customers in certain circumstances. Management reviews accounts receivable to determine if any receivables will potentially be uncollectible. Factors considered in the determination include, among other factors, number of days an invoice is past due, customer historical trends, available credit ratings information, other financial data and the overall economic environment. Collection agencies may also be utilized if management so determines. We record an allowance for doubtful accounts based on specifically identified amounts that are believed to be uncollectible. We also may record as an additional allowance a certain percentage of aged accounts receivable, based on historical experience and our assessment of the general financial conditions affecting our customer base. If actual collection experience changes, revisions to the allowance may be required. We have a limited number of customers with individually large amounts due at any given consolidated balance sheet date. Inventories Inventories are valued at the lower of cost or Goodwill and Indefinite-Lived Intangible Assets In accordance and compliance with authoritative guidance issued by the Financial Accounting Standards Board (“FASB”), we test goodwill for impairment on an annual We also Impairment of Long-Lived Assets We review long-lived assets, including property, plant, and equipment and identifiable intangible assets, for impairment whenever changes in circumstances or events may indicate that the carrying amounts are not recoverable. If the fair value is less than the carrying amount of the asset, a loss is recognized for the difference. Factors which may cause an impairment of long-lived assets include significant changes in the manner of use of these assets, negative industry or market trends, a significant underperformance relative to historical or projected future operating results, or a likely sale or disposal of the asset before the end of its estimated useful life. If any of these factors exist, we are required to test the long-lived asset for recoverability and may be required to recognize an impairment charge for all or a portion of the asset's carrying value. Income Taxes We account for income taxes using the asset and liability approach. This approach requires the recognition of current tax assets or liabilities for the amounts refundable or payable on tax returns for the current year, as well as the recognition of deferred tax assets or liabilities for the expected future tax consequences of temporary differences that can arise between (a) the amount of taxable income and pretax financial income for a year, such as from net operating loss carryforwards and other tax credits, and (b) the tax bases of assets or liabilities and their reported amounts in the consolidated financial statements. Deferred tax assets and liabilities are measured using enacted tax rates. The impact on deferred tax assets and liabilities of changes in tax rates and laws, if any, is reflected in the We file a consolidated Federal tax return. P&F and certain of its subsidiaries file combined tax returns in New York, California, Illinois and Texas. All subsidiaries, other than UAT, file other state and local tax returns on a stand-alone basis. UAT files an income tax return with the taxing authorities in the United Kingdom. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while other positions are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized tax benefits are classified as income taxes in the consolidated statements of income and comprehensive income. The authoritative guidance for income taxes requires a reduction of the carrying amounts of deferred tax assets by recording a valuation allowance if, based on the available evidence, it is more likely than not (defined as a likelihood of more than 50%) such assets will not be realized. The valuation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in our financial statements or tax returns and future profitability. Our accounting for deferred tax consequences represents our best estimate of those future events. Changes in estimates, due to unanticipated events or otherwise, could have a material effect on our financial condition and results of operations. We continually evaluate our deferred tax assets to determine if a valuation allowance is required. In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income (“GILTI”) provisions of the Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance allows companies to make an accounting policy election to either (i) account for GILTI as a component of tax expense in the period in which they are subject to the rules (the period cost method), or (ii) account for GILTI in the Company’s measurement of deferred taxes (the deferred method). After completing the analysis of the GILTI provisions, we elected to account for GILTI using the period cost method. In mid-2018, the Office of the United States Trade Representative (“USTR”) began imposing additional tariffs on certain Chinese-made products. These additional tariffs raised the cost of a significant number of products that we sell, primarily to The Home Depot (“THD”). We were able to mitigate the impact of these tariffs through price negotiations with our overseas manufacturer and/or our customer. During 2019, in an effort to further minimize or eliminate the Lastly, we believe that over time, several newer technologies and features will have a greater impact on the market for our Other than the aforementioned, or matters that may be discussed RESULTS OF OPERATIONS 2019 compared to REVENUE The tables set forth below provide an analysis of our revenue for the Consolidated Florida Pneumatic During the third quarter of 2018, Florida Pneumatic commenced the shipment to THD of an improved line of pneumatic tools, which replaced much of THD’s previous product offering. Gross margin for the new product line is projected to be approximately 2% less than recent historic levels. Further, in an effort to assist THD in promoting the roll out, Florida Pneumatic agreed to contribute approximately $1,088,000 to THD. This contribution is being ratably amortized over a four-year period commencing August 2018 and will be tested for impairment during said period. Florida Pneumatic markets its air tool products to Hy-Tech Hy-Tech Hy-Tech’s revenue overall increased in 2019, compared to 2018 by 7.3%. The 34.4% net increase in Hy-Tech’s OEM revenue was driven primarily The SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses (“SG&A”) include salaries and related costs, commissions, travel, administrative facilities, communications costs and promotional expenses for our direct sales and marketing staff, administrative and executive salaries and related benefits, legal, accounting and other professional fees as well as general corporate overhead and certain engineering expenses. During 2018 we adjusted the GAIN ON SALE OF REAL PROPERTY Effective The increase on short-term borrowing interest expense was due to higher average borrowings during 2019, compared to the average short-term borrowing in the prior year. Term Loan interest declined as the result of paying off the INCOME TAX EXPENSE The On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was enacted. Among other things this Act reduced the U.S. federal corporate income tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred, created new provisions related to foreign sourced earnings, eliminated the domestic manufacturing deduction and moved to a hybrid territorial system. In accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin 118, income tax effects of the Act were refined upon obtaining, preparing, and analyzing additional information during the measurement period. At December 31, 2018, the Company had completed its accounting for the tax effects of the Act. LIQUIDITY AND CAPITAL RESOURCES We gauge our liquidity and financial stability by various measurements, some of which are shown in the following table: Credit The average balance of Effective June 18, 2019 (the “Jupiter Closing Date”), Florida Pneumatic completed the sale of At December 31, Our total debt to total book capitalization (total debt divided by total debt plus equity) Capital spending during the year ended December 31, In October 2019, we completed the Gears Acquisition for approximately $3.5 million, which was funded from Revolver borrowings. See Note 2 – to our Consolidated Financial Statements, for further information relating to this transaction. During 2019 our Board of Directors approved the payment of dividends of $0.05 per common share to the shareholders of record in March 2019, May 2019, August 2019, and November 2019. During 2018, our Board of Directors voted to approve the payment of four quarterly dividends. As such, in February 2018, May 2018, August 2018, and November 2018, the Company paid a $0.05 per share dividend to the shareholders of record. The aggregate of such dividend payments was approximately $632,000 and $723,000 for the year ended December 31, 2019 and 2018, respectively. Our Board of Directors intends to maintain this dividend policy; however, the future declaration of dividends under this policy is dependent upon several factors, which includes such things as our overall financial condition, results of operations, capital requirements and other On September 12, 2018, following the expiration of a prior repurchase program, our Board of Directors authorized us to repurchase up to 100,000 additional shares of our Common Stock (the “2018 Repurchase Program”) from time to time over the next 12 months through a 10b5-1 trading plan, and potentially through open market purchases, privately-negotiated transactions, or otherwise in compliance with Rule 10b-18 under the Securities Exchange Act of 1934. On September 14, 2018, we announced that, pursuant to the 2018 Repurchase Program, we adopted a written trading plan in accordance with the guidelines specified under Rule 10b5-1 under the Securities Exchange Act of 1934. Repurchases made under the plan, that commenced on September 17, 2018, were subject to the SEC’s regulations, as well as certain price, market, volume, and timing constraints specified in the plan. Under the 2018 Repurchase Program, we repurchased 100,000 shares of our Common Stock, 66,602 during 2019 and 33,398 during 2018, at an aggregate cost of approximately $547,000 and $272,000, respectively. Included in the change in Other current liabilities was the payment of $1,000,000, the contingent consideration, payable to the seller of Jiffy. At December 31, 2019, we had $4,871,000 of open purchase order commitments, compared to $6,700,000 at December 31, 2018. Customer concentration At December 31, 2019, THD accounted for 20.7% of our consolidated revenue, compared to 26.5% of 2018’s revenue. Further, accounts receivable at December 31, 2019 and 2018 from THD were 27.2% and 32.6%, respectively. There was no other customer that accounted for more than 10% of revenue or accounts receivable in 2019 or 2018. IMPACT OF INFLATION We believe that the effects of changing prices and inflation on our consolidated financial position and our results of operations NEW ACCOUNTING PRONOUNCEMENTS Refer to Note 1, "Summary of Accounting Not Required P&F INDUSTRIES, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of P&F Industries, Inc. and Subsidiaries (the “Company”) as of December 31, Basis for These Consolidated Financial Statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on We conducted our audits in accordance with the standards of the Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence As discussed in Note 1 to the consolidated financial statements, P&F INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS The accompanying notes are an integral part of these consolidated financial statements. P&F INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS The accompanying notes are an integral part of these consolidated financial statements. P&F INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME The accompanying notes are an integral part of these consolidated financial statements. P&F INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY The accompanying notes are an integral part of these consolidated financial statements. P&F INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS The accompanying notes are an integral part of these consolidated financial statements. P&F INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF The accompanying notes are an integral part of these consolidated financial statements. P&F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, NOTE 1—SUMMARY OF ACCOUNTING POLICIES Principles of Consolidation The The Company Delaware corporation incorporated on April 19, 1963. The Company conducts its Florida Pneumatic Hy-Tech designs, manufactures and distributes Hy-Tech’s ”Engineered Solutions” products are sold direct to Original Equipment Manufacturers (“OEM’s”), and industrial Nearly all of Hy-Tech The sales of Hy-Tech products through various channel and direct customers are managed by both direct sales personnel and a network of specialized manufacturer representatives. Further, its products are sold as standard off-the-shelf and also produced to Basis of Financial Statement Presentation The Company prepares its Revenue Recognition The Company P&F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 1—SUMMARY OF ACCOUNTING POLICIES - Continued The Company's performance obligations underlying its core revenue sources remain substantially unchanged. Its revenue is generated through the sale of finished products and is generally recognized at the point in time when merchandise is transferred to the customer with a fixed payment due generally within 30 to 90 days, and in an amount that considers the impacts of estimated allowances. Further, the Company has made a policy election to account for shipping and handling activities that occur after the customer has obtained control of the products as fulfillment costs rather than as an additional promised service. This election is consistent with the Company’s prior policy, and therefore the adoption of ASC 606 relating to shipping and handling activities did not have any impact on its financial results. There are no remaining performance obligations as of December 31, 2019. The Company analyzes its revenue as follows: Revenue generated at Florida Pneumatic. Revenue generated at Hy-Tech. Shipping and Handling Costs Expenses for shipping and handling costs are included in selling, general and administrative expenses, and totaled approximately P&F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 1—SUMMARY OF ACCOUNTING POLICIES - Continued Cash and Cash Equivalents Cash and cash equivalents consist of cash held in bank demand deposits. The Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. There were no cash equivalents at December 31, Financial Instruments The carrying amounts reported in the consolidated balance sheets for cash, accounts receivable, accounts payable and short-term debt approximate fair value as of December 31, Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable are customer obligations due under normal trade terms. The Company sells its products to retailers, distributors and original equipment manufacturers involved in a variety of industries. The Company performs continuing credit evaluations of its customers’ financial condition, and although the Company generally does not require collateral, letters of credit may be required from customers in certain circumstances. Management reviews accounts receivable to determine if any receivables will potentially be uncollectible. Factors considered in the determination include, among other factors, number of days an invoice is past due, customer historical trends, available credit ratings information, other financial data and the overall economic environment. Collection agencies may also be utilized if management so determines. The Company records an allowance for doubtful accounts based on specifically identified amounts that are believed to be uncollectible. The Company also records as an additional allowance a certain percentage of aged accounts receivable, based on historical experience and the Company’s assessment of the general financial conditions affecting its customer base. If actual collection experience changes, revisions to the allowance may be required. The Company has a limited number of customers with individually large amounts due at any given balance sheet date. Any unanticipated change in the creditworthiness of any of these customers could have a material effect on the Company’s results of operations in the period in which such changes or events occur. After all reasonable attempts to collect an account receivable have failed, the amount of the receivable is written off against the allowance. Based on the information available, the Company believes that its allowance for doubtful accounts as of December 31, Concentrations of Credit Risk The Company places the majority of its cash with its primary bank, Capital One Bank, National Association (“Capital One”), which is insured by the Federal Deposit Insurance Corporation (“FDIC”). Significant concentrations of credit risk may arise from the Company’s cash maintained at Capital One, as from time to time cash balances may exceed the FDIC limits. Financial instruments that potentially subject the Company to concentration of credit risk consist principally of accounts receivable. P&F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 Inventories Inventories are valued at the lower of cost or Property and Equipment and Depreciation and Amortization Property and equipment are stated at cost less accumulated depreciation and amortization. Generally, the Company capitalizes items in excess of $1,000. Minor replacements and maintenance and repair items are charged to expense as incurred. Upon disposal or retirement of assets, the cost and related accumulated depreciation are removed from the Company’s consolidated balance sheets. Depreciation of buildings and machinery and equipment is computed by using the straight-line method over the estimated useful lives of the assets. Buildings are depreciated over periods ranging from 27.5 to 31 years, and machinery and equipment is depreciated over periods ranging from 3 to 10 years. Leasehold improvements are amortized over the life of the lease or the useful life of the related asset, whichever is shorter. Long-Lived Assets In accordance with authoritative guidance Acquisitions The Company accounts for acquired businesses using the purchase method of accounting, which requires that the assets acquired, liabilities assumed, and contingent consideration, if any, are recorded as of the date of the acquisition at their respective fair values. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred and that restructuring costs be expensed in periods subsequent to the acquisition date. Generally, the Company engages third party valuation appraisal firms to assist it in determining the fair values and useful lives of the assets acquired and liabilities assumed. The Company records a preliminary purchase price allocation for its acquisitions and finalizes purchase price allocations as additional information relative to the fair values of the assets acquired become known. P&F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 1—SUMMARY OF ACCOUNTING POLICIES - Continued Goodwill, Intangible and Long-Lived Assets Goodwill is carried at cost less any impairment charges. Goodwill and intangible assets with indefinite lives are not amortized but are subject to an annual test for impairment at the entity unit level (operating segment or one level below an operating segment) and between annual tests in certain circumstances. In accordance with authoritative guidance issued by the Intangible assets other than goodwill and intangible assets with indefinite lives, are carried at cost less accumulated amortization. Intangible assets are generally amortized on a straight-line basis over their respective useful lives, generally 3 to 20 years. Long-lived assets and certain identifiable intangible assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of any impairment loss for long-lived assets and certain identifiable intangible assets that management expects to hold, and use is based on the amount by which the carrying value exceeds the fair value of the asset. Warranty Liability The Company offers certain warranties against product defects for periods ranging from one to three years. Certain products carry limited lifetime warranties. The Company’s typical warranties require it to repair or replace the defective products during the warranty period at no cost to the customer. At the time the product revenue is recognized, the Company records a liability for estimated Income Taxes The Company accounts for income taxes using the asset and liability approach. This approach requires the recognition of current tax assets or liabilities for the amounts refundable or payable on tax returns for the current year, as well as the recognition of deferred tax assets or liabilities for the expected future tax consequences of temporary differences that can arise between (a) the amount of taxable income and pretax financial income for a year, such as from net operating loss carryforwards and other tax credits, and (b) the tax bases of assets or liabilities and their reported amounts in the consolidated financial statements. Deferred tax assets and liabilities are measured using enacted tax rates. The impact on deferred tax assets and liabilities of changes in tax rates and laws, if any, is reflected in the The Company files a consolidated Federal tax return. P&F and certain of its subsidiaries file combined tax returns in New York, California, Illinois and Texas. All subsidiaries, other than UAT, file other state and local tax returns on a stand-alone basis. UAT files an income tax return to the taxing authorities in the United Kingdom. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 1—SUMMARY OF ACCOUNTING POLICIES - Continued Income Taxes - Continued Tax benefits are The authoritative guidance for income taxes requires a reduction of the carrying amounts of deferred tax assets by recording a valuation allowance if, based on the available evidence, it is more likely than not (defined as a likelihood of more than 50%) such assets will not be realized. The valuation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in the On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was enacted. Among other things this Act reduced the U.S. federal corporate income tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred, created new provisions related to foreign sourced earnings, eliminated the domestic manufacturing deduction and In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income (“GILTI”) provisions of the Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance allows companies to make an accounting policy election to either (i) account for GILTI as a component of tax expense in the period in which they are subject to the rules (the period cost method), or (ii) account for GILTI in the Company’s measurement of deferred taxes (the deferred method). After completing the analysis of the GILTI provisions, the Company elected to account for GILTI using the period cost method. Sale of real property Effective June 18, 2019 (the “Jupiter Closing Date”), Florida Pneumatic completed the sale of real property located in Jupiter, Florida in which it conducts its principal operations (the “Jupiter Facility”). The Jupiter Facility was purchased by an unrelated third party for purchase price of $9.2 million. After broker fees and other expenses relating to the sale, the Company received approximately $8.7 million. P&F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 1—SUMMARY OF ACCOUNTING POLICIES - Continued Effective as of the Jupiter Closing Date, Florida Pneumatic, entered into a lease with respect to an approximately 42,000 square foot portion of the Jupiter Facility. The lease is for a term of five years, with either party able to terminate after four years. The initial monthly base rent under the lease is $32,345 with annual escalations of 3%. Florida Pneumatic will also be responsible for certain other payments of “additional rent” as set forth in the lease, including certain taxes, assessments and operating expenses. The Company considered the guidance in the current accounting literature relating to the recognition of the gain and determined that the full amount of $7,817,000 should be recognized as of the date of the transaction. Lease Accounting On January 1, 2019, the Company adopted Accounting Standards Codification (“ASC”) ASC 842“Leases” using the initial date of adoption method, whereby the adoption does not impact any periods prior to 2019. ASC Topic 842 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous leases’ guidance. The Company recorded an operating Right of Use (“ROU”) asset of $394,000, and an operating lease liability of $418,000 as of January 1, 2019. The difference between the initial operating ROU asset and operating lease liability of $24,000 is accrued rent previously recorded under ASC 840. The Company elected to adopt the package of practical expedients and, accordingly, did not reassess any previously expired or existing arrangements and related classifications under ASC 840. If the rate implicit in the lease is not readily determinable, the Company uses its incremental borrowing rate as the discount rate. The Company uses its best judgement when determining the incremental borrowing rate, which is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term to the lease payments in a similar currency. The Company’s operating leases include vehicles, office space and the use of real property. The Company has not identified any material finance leases as of December 31, 2019. For the year ended December 31, 2019, the Company had $582,000 in Operating lease expense. See Note 2 for information related to a new 5 year lease. The following is a maturity analysis of the annual undiscounted cash flows reconciled to the carrying value of the operating lease liabilities as of December 31, 2019: P&F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 1—SUMMARY OF ACCOUNTING POLICIES - Continued Use of Estimates The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, possible disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an on-going basis P&F evaluates its estimates, including those related to collectability of accounts receivable, valuation of inventories, recoverability of goodwill and intangible assets, consideration payable to customer and income taxes. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from those estimates under different assumptions or conditions. Advertising The Company expenses its costs of advertising in the period in which they are incurred. Advertising costs for the years ended December 31, Earnings Per Common Share Basic earnings per common share exclude any dilution. It is based upon the weighted average number of shares of Diluted earnings per common share is computed using the treasury stock method. Under this method, the aggregate number of shares of The following table sets forth the computation of basic and diluted P&F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 1—SUMMARY OF ACCOUNTING POLICIES - Continued Share-Based Compensation In accordance with US GAAP, the Company measures and recognizes compensation expense for all share-based payment awards based on estimated fair values. Share-based compensation expense is included in selling, general and administrative expense on the accompanying consolidated statements of income and comprehensive income. With respect to stock options, US GAAP requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated statements of income and comprehensive income. The Company records compensation expense ratably over the vesting periods. The Company estimates forfeitures at the time of grant and revises this estimate, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company uses the Black-Scholes option-pricing model as its method of valuation for share-based awards granted. As such, the Company’s determination of fair value of share-based payment awards is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These variables include but are not limited to the Company’s expected stock price volatility over the term of the awards, relevant interest rates, and the expected term of the awards. With respect to any issuance of its Foreign Currency Translation The assets and liabilities of international operations are translated at the exchange rates in effect at the balance sheet date. Revenue and expense accounts are translated at the monthly average exchange rates. Adjustments arising from the translation of the foreign currency financial statements of the Company's international operations are reported as a component of "Accumulated other comprehensive loss" in the Company's consolidated balance sheets. For foreign currency remeasurement from each local currency into the appropriate functional currency, monetary assets and liabilities are remeasured to functional currencies using current exchange rates in effect at the balance sheet date. Gains or losses from these remeasurements were not significant and have been included in the Company’s consolidated statements of income and comprehensive income. Non-monetary assets and liabilities are recorded at historical exchange rates, and the related remeasurement gains or losses are reported as a component of "Accumulated other comprehensive loss" in the Company's consolidated balance sheets. Going concern assessment P&F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 1—SUMMARY OF ACCOUNTING POLICIES - Continued New Accounting Pronouncements Recently In February 2016, the FASB issued ASU 2016-02,Leases. This ASU is a comprehensive new leases standard that amends various aspects of existing guidance for leases and requires additional disclosures about leasing arrangements. It will require companies to recognize lease assets and lease liabilities by lessees for those leases classified as operating leases under previous US GAAP. ASC Topic 842 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous In Other than the aforementioned, the Company does not believe that any other recently issued, but not yet effective accounting standard, if adopted, Not yet Adopted In In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to transactions affected by reference rate reform if certain criteria are met. These transactions include contract modifications, hedging relationships, and sale or transfer of debt securities classified as held-to-maturity. Entities may apply the provisions of the new standard as of the beginning of the reporting period when the election is made (i.e. as early as the first quarter 2020). Unlike other topics, the provisions of this update are only available until December 31, 2022, when the reference rate replacement activity is expected to have completed. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures and has yet to elect an adoption date. NOTE 2—ACQUISITION Effective October 25, 2019 (the “Gears Closing Date”), the Company, through a wholly owned subsidiary of Hy-Tech, acquired substantially all the assets comprising the businesses of Blaz-Man Gear, Inc. and Gear Products & Manufacturing, Inc., (the “Gears Acquisition”), each an Illinois-based corporation that manufactures and distributes custom gears. The Company believes that the acquisition of these two businesses will provide added expertise and market exposure into the customized/specialty gears market. The purchase price consisted of an aggregate of approximately $3.5 million in cash, which was funded by Revolver borrowings and the assumption of certain payables and contractual obligations. In addition, the sellers may be entitled to additional contingent consideration based upon sale of certain categories of acquired inventory during the two-year period following the Gears Closing Date. In connection with the Gears Acquisition, the Company entered into Consent, Joinder and Amendment No. 8 (“Amendment No. 8”) to Second Amended and Restated Loan and Security Agreement (the “Credit Agreement”), with Capital One, National Association. Amendment No. 8, among other things, provided consent to the Gears Acquisition. Amendment No. 8 also modified the Credit Agreement to suspend the requirement pertaining to compliance with the covenant relating to a Fixed Charge Coverage Ratio, unless a Default or Event of Default occurs, or availability is less than 17.5% of the aggregate amount of the Revolver Commitments, as each such term is defined, at any time. Further, it granted permission to the Company to continue its issuance of dividends and allow the Company to repurchase shares of its own Common Stock, provided that no Default or Event of Default has occurred, subject to Revolver availability limitations, among other things. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE Additionally, the Sellers of The following table presents purchase price allocation: The excess of the P&F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 2—ACQUISITION - Continued The NOTE 3—FAIR VALUE MEASUREMENTS Accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under this guidance, the Company is required to classify certain assets and liabilities based on the following hierarchy: Level 1:Quoted prices for identical assets or liabilities in active markets that can be assessed at the measurement date. Level 2: Inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3: Inputs reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the The guidance requires the use of observable market data if such data is available without undue cost and effort. As of December 31, Assets and liabilities measured at fair value on a non-recurring basis include goodwill and intangible assets. Such assets are reviewed quarterly for impairment indicators. If a triggering event has occurred, the assets are re-measured when the estimated fair value of the corresponding asset group is less than the carrying value. The fair value measurements, in such instances, are based on significant unobservable inputs (Level 3). NOTE 4—ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS Accounts P&F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 5—INVENTORIES Inventories consist of: NOTE 6—GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill and other intangible assets with indefinite lives are tested Other intangible assets were as follows: P&F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 6—GOODWILL AND OTHER INTANGIBLE ASSETS - Continued Changes in the carrying amount of The weighted average amortization period for intangible assets was as follows: Amortization expense of intangible assets subject to amortization was as follows: Amortization expense for each of the next five years and thereafter is estimated to be as follows: P&F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 7—DEBT In October 2010, the Company entered into a Loan and Security Agreement (“Credit Agreement”) with an affiliate of Capital One, National Association (“Capital One” At the Company’s option, Revolver borrowings The Company provides Capital One with monthly borrowing base certificates, and in The Company At December 31, The There was a $100,000 Term Loan included in Current Liabilities on the Company’s 2018 Consolidated Financial Statement. In P&F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 8—STOCK OPTIONS – STOCK COMPENSATION The Company’s stockholders approved the P&F Industries, Inc. 2012 Stock Incentive Plan (the “2012 Plan”). The 2012 Plan authorizes the issuance to employees, consultants and non-employee directors of nonqualified stock options, stock appreciation rights, restricted stock, performance shares, performance units, and other stock-based awards. In addition, employees are eligible to be granted incentive stock options under the 2012 Plan. The 2012 Plan is currently administered by the compensation committee of the Company’s Board of Directors (the “Committee”). The aggregate number of shares of the Company’s Class A Common Stock (“Common Stock”) that may be issued under the 2012 Plan may not exceed 325,000 shares; provided, however, that any shares of Common Stock that are subject to a stock option, stock appreciation right or other stock-based award that is based on the appreciation in value of a share of Common Stock in excess of an amount equal to at least the fair market value of the Common Stock on the date such other stock-based award is granted (each an “Appreciation Award”) will be counted against this limit as one share for every share granted. Any shares of restricted stock or shares of Common Stock that are subject to any other award other than Appreciation Award will be counted against this limit as 1.5 shares for every share granted. The maximum number of shares of Common Stock with respect to which any award of stock options, stock appreciation rights or other Appreciation Award that may be granted under the 2012 Plan during any fiscal year to any eligible employee or consultant will be 100,000 shares per type of award. The maximum number of shares of Common Stock subject to any award of performance shares for any performance period, other stock-based awards that are not Appreciation Awards, or shares of restricted stock for which the grant of such award or the lapse of the relevant restriction period is subject to the attainment of specified performance goals that may be granted under the 2012 Plan during any fiscal year to any eligible employee or consultant will be 65,000 shares per type of award. The maximum number of shares of Common Stock for all such types of awards to any eligible employee or consultant will be 165,000 shares during any fiscal year. There are no annual limits on the number of shares of Common Stock with respect to an award of restricted stock that is not subject to the attainment of specified performance goals to eligible employees or consultants. The maximum value at grant of performance units which may be granted under the 2012 Plan during any fiscal year will be $1,000,000. The maximum number of shares of Common Stock subject to any award which may be granted under the 2012 Plan during any fiscal year of the Company to any non-employee director will be 35,000 shares. With respect to stock options, the Committee The 2012 Plan, which terminates in May 2022, is the successor to the Company’s 2002 Stock Incentive Plan (“Previous Plan”) – see below. Stock option awards made under the Previous Plan will continue in effect and remain governed by the provisions of that plan. P&F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 8—STOCK OPTIONS – STOCK COMPENSATION - Continued The Company’s Previous Plan authorized the issuance to employees and directors of options to purchase a maximum of 1,100,000 shares of Common Stock. These options had to be issued within On February 28, 2019, the Committee authorized the issuance of options to purchase 8,000 shares of the Company’s Common Stock. This grant was issued to non-executive employees. All options within this grant have an exercise price of $8.55. The options granted vest as to one third on each of the anniversary dates in 2020, 2021 and 2022. All the options granted have a 10-year life. The volatility is determined using historical volatilities based on historical stock prices. The Company estimated the fair value of its Common Stock options using the following assumptions: The following table contains information on the status of the Company’s stock options: P&F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 8—STOCK OPTIONS – STOCK COMPENSATION - Continued The following is a summary of changes in non-vested shares, all of which are expected to vest: Stock-based compensation expense recognized for the years ended December 31, The following table summarizes information about stock options outstanding and exercisable at December 31, Other Information At December 31, P&F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 8—STOCK OPTIONS – STOCK COMPENSATION - Continued Restricted Stock The Company, in May The Company, in May Treasury Stock On September 12, 2018, subsequent to the On February 14, 2019, the Company entered into an agreement to repurchase 389,909 shares of its Common Stock from certain funds and accounts advised or sub-advised by Fidelity Management & Research Company or one of its affiliates in a privately negotiated transaction at approximately $7.62 per share for a total purchase price of $2,971,000. The agreed upon purchase price per share of $7.62 was computed as the P&F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 9—DIVIDENDS In 2016, our Board of Directors Our Board of Directors NOTE 10—INCOME TAXES Income tax On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes included, but are not limited to, a corporate tax rate decrease from 35% to 21%, effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. The Staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of US GAAP in In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income (“GILTI”) provisions of the Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance allows companies to make an accounting policy election to either (i) account for GILTI as a component of tax expense in the period in which they are subject to the rules (the period cost method), or (ii) account for GILTI in the Company’s measurement of deferred taxes (the deferred method). After completing the analysis of the GILTI provisions, the Company elected to account for GILTI using the period cost method. P&F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 10—INCOME TAXES – Continued Deferred tax assets (liabilities) consist of: The components of A reconciliation of the Federal statutory rate to the total effective tax rate applicable to The Company files a consolidated Federal tax return. The Company and certain of its subsidiaries file tax returns in various U.S. state jurisdictions. Its foreign subsidiary, UAT, files in the United Kingdom. With few exceptions, the years that remain subject to examination are the years ended December 31, Interest and penalties, if any, related to income tax liabilities are included in income tax expense. As of December 31, 2019, the Company does not have a liability for uncertain tax positions. P&F INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 and 2018 NOTE 11—COMMITMENTS AND CONTINGENCIES (a) The Company maintains a contributory defined contribution plan that covers all eligible employees. All contributions to this plan are discretionary. Amounts recognized as expense for contributions to this plan were (b) At December 31, (c) From time to time, the Company may be a defendant or co-defendant in actions brought about in the ordinary course of conducting our business. NOTE 12—SUBSEQUENT EVENT On March 11, 2020 the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. As a result, the Company expects operations at all of its locations to be affected in some capacity, as the COVID-19 virus continues to proliferate and the federal, state and local governments under which we operate continue to adopt new rules. The Company None. Evaluation of disclosure controls and procedures The Company's management, with the participation of the Company's CEO and CFO, evaluated, as of December 31, Management’s Report on Internal Control over Financial Reporting The Company’s Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act). This system is designed by, or under the supervision of, the Company’s principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of The Company’s internal control over financial reporting includes those policies and procedures that: Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the Company’s transactions and dispositions of its assets; Provide reasonable assurance that transactions are recorded as necessary to permit preparation of Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the consolidated financial statements. The Company carried out an evaluation, under the supervision and with the participation of its Management, including its CEO and CFO, of the effectiveness of the design and operation of its internal control over financial reporting, as of December 31, Because of its inherent limitations, internal controls may not prevent or detect misstatements. A control system, no matter how well designed and operated, can only provide reasonable, not absolute, assurance that the control system’s objectives will be met. Also, projections of any evaluation of effectiveness as to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies and procedures may deteriorate. This annual report on Form 10-K does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit the Company to provide only Management’s report in this annual report. Changes in Internal Control over Financial Reporting There have been no changes in our internal control over financial reporting during the most recently completed quarter ended December 31, None The information required by Part III (Items 10, 11, 12, 13 and 14) of this Annual Report on Form 10-K is incorporated by reference to the Company’s definitive proxy statement in connection with its Annual Meeting of Stockholders scheduled to be held in May See Item 10. See Item 10. See Item 10. See Item 10. The following exhibits are either included in this report or incorporated herein by reference as indicated below: * Management contract or a compensatory plan or arrangement required to be filed as an exhibit. ** Attached as Exhibit 101 to this Annual Report on Form 10-K are the following, each formatted in Extensible Business Reporting Language (“XBRL”): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income and Comprehensive Income, (iii) Consolidated Statements of Shareholders’ Equity, (iv) Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements. A copy of any of the foregoing exhibits to this Annual Report on Form 10-K may be obtained, upon payment of the Registrant’s reasonable expenses in furnishing such exhibit, by writing to P&F Industries, Inc., 445 Broadhollow Road, Suite 100, Melville New York 11747, Attention: Corporate Secretary. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. P&F INDUSTRIES, INC. (Registrant) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. ITEM 7. ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations MANAGEMENT OVERVIEWOverviewDuring 2016, our results of operations were impacted by a number of factors, some of which were:·the sale of Nationwide effective February 11, 2016, for approximately $22.2 million;·an impairment charge of $9.6 million on Hy-Tech’s goodwill and other intangible assets, resulting primarily from the on-going downturn in the oil and gas exploration and extraction sector;·the on-going slow-down in oil and gas exploration and extraction, which continues to negatively impact our Tools segment;·a decision by a Major customer of Hy-Tech to begin to manufacture internally certain air tools that were formerly manufactured by Hy-Tech contributed to the reduction in Hy-Tech’s total revenue;·a significant reduction in orders from another major customer of Hy-Tech;·a write-down of inventory at Hy-Tech of approximately $1 million due to weak demand, and;·the sale of the real property in Tampa, Florida in November 2016 for approximately $3.75 million.Additionally, we track the number of drilling rigs, particularly those located in the Gulf of Mexico. Currently, weWe focus on a wide array of customer types including, but not limited to large retailers, automotive related customers, aerospace manufacturers, large and othersmall resellers of pneumatic tools and parts.parts, and automotive related customers. We tend to track the general economic conditions of the United States, industrial production and general retail sales.(USD)United States Dollar (“USD”) in relation to the (TWD)Taiwanese dollar (“TWD”), as we purchase a significant portion of our products from Taiwan. Purchases from Chinese sources are made in USDs. However,USD; however, if the RMB,Chinese currency, the Renminbi (“RMB”), were to be revalued against the USD, there could be a significant negative impact on the cost of our products. As the result of the UAT acquisition,Additionally, we closely monitor the fluctuation in the Great British Pound (“GBP”) to the USD, and the GBP to TWD, both of which can have an impact on the consolidated results.TheAs the result of several new tariffs imposed in the second half of 2018, specifically those imposed on products imported from China, we now must consider tariffs a key economic measure, as a significant portion of products imported by Florida Pneumatic for our Retail customers are subject to these tariffs.businesses are:operations are orders; shipments; development of new products; customer retention; inventory levels and productivity. These measures are recorded and monitored at various intervals, including daily, weekly and monthly. To the extent these measures are relevant, they are discussed in the detailed sections below for each operating segment.below.businessesbusiness include: various revenue metrics; gross margin; selling, general and administrative expenses; earnings before interest and taxes; earnings before interest, taxes, depreciation and amortization (“EBITDA”);amortization; operating cash flows;flows and capital expenditures; return on sales; return on assets; days sales outstanding and inventory turns. These measures are reviewed at monthly, quarterly and annual intervals and are compared to historical periods as well as to established objectives. To the extent that these measures are relevant, they are discussed in the detailed sections below for each business.detail below. 12 consolidated financial statementsConsolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). Certain of these accounting policies require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates including those relatedpertaining to such matters as bad debts, inventory reserves, goodwill and intangible assets, warranty reserves, sales discounts and taxes. We base our estimates on historical data and experience, when available, and on various other assumptions that are believed to be reasonable under the circumstances, the combined results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. As future events and their effects cannot be determined with precision, actual results could differ significantly from those estimates and assumptions. Significant changes, if any, in those estimates resulting from continuing changes in the economic environment will be reflected in the Consolidated Financial Statements in future periods. Actual results may differ from these estimates. Our critical accounting policies are further described below.In addition to the Company’s significant accounting policies described in Note 1 to the Consolidated Financial Statements, P&F considersWe consider the following policies and estimates to be the most critical in understanding the judgments that are involved in the preparation of the Company’s consolidated financial statementsConsolidated Financial Statements and the uncertainties that could impact the Company’s financial position, results of operations and cash flows.We recognizeOur accounting policy relating to revenue when persuasive evidencerecognition reflects the impact of an arrangement exists, delivery,the adoption of Accounting Standard Codification, (“ASC”) 606Revenue from Contracts with Customers ("ASC 606"), which occurs either upon shipment by us or upon receipt by customers at the location specifiedis discussed further in the terms of sale, or title has passedour Notes to our customer or services have been provided, the sale price is fixed or determinable, and collectability is reasonably assured.Consolidated Financial Statements. As a result of our adoption of ASC 606 we record revenue based on a five-step model. We sell our goods on terms whichthat transfer title and risk of loss at a specified location, typically shipping point,which may be our warehouse, destination designated by our customer, port of loading or port of discharge, depending on the final destination of the goods. Other than standard product warranty provisions, our sales arrangements provide for no other post-shipment obligations. We do offer rebates and other sales incentives, promotional allowances or discounts from time to time and for certain customers, typically related to customer purchase volume, all of which are fixed or determinable and are classified as a reduction of revenue and recorded at the time of sale.sale, using the most likely amount approach. We periodically evaluate whether an allowance for sales returns is necessary. Historically, we have experienced minimal sales returns. If we believe there are material potential sales returns, we would provide the necessary provision against sales.See Note 1 Performance obligations underlying our core revenue sources remain substantially unchanged. Our revenue is generated through the sale of finished products and is recognized at the point in time when merchandise is transferred to the customer with a fixed payment due generally within 30 to 90 days, and in an amount that considers the impacts of estimated allowances. Further, we have made a policy election to account for shipping and handling activities that occur after the customer has obtained control of the products as fulfillment costs rather than as an additional promised service. This election is consistent with our Consolidated Financial Statements for discussionprior policy, and therefore the adoption of ASC 606 relating to shipping and handling activities did not have any impact on Topic 606 – Revenue Recognition.our financial results. There are no remaining performance obligations as of December 31, 2019.AnyFurther, any unanticipated change in the creditworthiness of any of theseour customers could have a material effect on our results of operations in the period in which such changes or events occur. After all reasonable attempts to collect an account receivable have failed, the amount of the receivable is written off against the allowance. Based on the information available, we believe that our allowance for doubtful accounts as of December 31, 20162019 and 20152018 were adequate. However, actual write-offs in future periods could exceed the recorded allowance.13 market.net realizable value. Cost is determined by the first-in, first-out method or the weighted average method.first-out. Inventory, which includes materials, labor, and manufacturing overhead costs, is recorded net of an allowance for obsolete or slow movingslow-moving inventory (“OSMI”), as well as unmarketable inventory. Such allowance is based upon historical experience and management’s understanding of market conditions and forecasts of future product demand. Specifically, at Florida Pneumatic and Jiffy we generally place a 100% reserve on inventory that has not had any sales or usage in more than two years. Hy-Tech’s methodology is primarily based on inventory turns, with inventory items that turn less frequently, receiving a greater allowance. Changes in our OSMI impact the Company’s cost of goods sold,our balance sheet, gross profit, and net earnings.13basisbasis. This test is performed as of the last day in November, or more frequently if we believe indicators of impairment might exist. Goodwill is tested at a level of reporting referred to as "the reporting unit." The Company'sOur reporting units are Hy-Tech and Florida Pneumatic. We have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. If after assessing the totality of events or circumstances, we determine it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The first step used to identify potential impairment compares the calculated fair value of a reporting unit with its carrying amount. If the carrying amount of the reporting unit is less than its fair value, no impairment exists, and the second stepno further action is not performed.required. If the carrying amount of a reporting unit exceeds its fair value, the entity is required to performwill record an impairment charge based on the second stepexcess of the goodwill impairment test to measure the amount of the impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of thea reporting unit goodwill with theunit's carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the impliedover its fair value of that goodwill, an impairment loss is recognized for the excess. The Companyvalue.teststest indefinite-lived intangible assets consisting of acquired trade names, for impairment at least annually as of the last day of November. The evaluation of goodwill and indefinite-lived intangible assets requires that management prepare estimates of future operating results for each of the operating units. These estimates are made with respect to future business conditions and estimated expected future cash flows to determine estimated fair value. However, if, in the future, key drivers in our assumptions or estimates such as (i) a material decline in general economic conditions; (ii) competitive pressures on our revenue, or our ability to maintain margins; (iii) significant price increases from our vendors that cannot be passed through to our customers; and (iv) breakdowns in supply chain, or other possible factors beyond our control occur, an impairment charge against our intangible assets may be required.14 consolidated financial statementsConsolidated Financial Statements in the period enacted. Further, we evaluate the likelihood of realizing benefit from our deferred tax assets by estimating future sources of taxable income and the impact of tax planning strategies. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. 1415 RESULTS OF OPERATIONS2016 compared to 2015MANAGEMENT OVERVIEWContinuing operationsOverviewUnless otherwise discussed elsewhereDuring 2019, significant factors that impacted our results of operations were:· In June we sold the Jupiter Facility resulting in a $7.8 million gain; · A major roll-out of a then refreshed line of pneumatic tools to The Home Depot in 2018, which did not reoccur in 2019; · The slow down and eventual suspension of production of Boeing’s “737 Max” jet in 2019; · Lower gross margin at Hy-tech, due in part to product/customer mix, under absorption, costs associated with the implementation of an enterprise-wide information technologies system conversion and increased obsolescence; · Acquisition by Hy-Tech in October 2019 of two gears businesses. Management’s Discussion and Analysis,effects of the additional tariffs, we arranged to have the manufacturing of many of the high tariff products relocated from China to other Asian nations.relationships with our key customers and suppliers, given current economic conditions, remain satisfactory.traditional pneumatic tool offerings. The impact of this evolution has been felt initially by the advent of advanced cordless operated hand tools in the automotive aftermarket. We believe economic uncertainty, both domestically and abroad, continue to impact the overall U.S. general economy. Further, we also believe that the domestic and global oil and gas exploration and extraction markets continue to be adversely impacted by these uncertainties and other factors, allperform a cost-benefit analysis of which continue to negatively affect certain markets that both Hy-Tech, and to a lesser degree, Florida Pneumatic service. Additionally, we continue to encounter weaknessdeveloping or incorporating more advanced technologies in other markets that Hy-Tech serves, such as power generation and construction. Lastly, it should be noted that Hy-Tech is encountering growing pressure from Asian–sourced pneumatic tools.our tool platforms. in more detail below, there wereare no major trends or uncertainties that had, or we could have reasonably expect couldexpected to have a material impact on our revenue, nor was there any unusual or infrequent event, transaction or any significant economic change that materially affected our results of operations.During Unless otherwise discussed elsewhere in the first quarter of 2016,Management’s Discussion and Analysis, we sold Nationwidebelieve that our relationships with our key customers and suppliers remain satisfactory.an unrelated third party for approximately $22.2 million. As a result of this transaction, Nationwide’s results are reported under discontinued operations, and are therefore excluded from continuing operations for all periods presented. Please see Note 2 - Discontinued Operations, to our Consolidated Financial Statements for additional information.2018three months and years ended December 31, 20162019 and 2015.2018. Three months ended December 31, 2016 2015 Variance Variance $ % Tools Florida Pneumatic $ 10,012,000 $ 10,090,000 $ (78,000 ) (0.8 )% Hy-Tech 2,495,000 3,681,000 (1,186,000 ) (32.2 ) Tools Total $ 12,507,000 $ 13,771,000 $ (1,264,000 ) (9.2 )% Year ended December 31, 2016 2015 Variance Variance $ % Tools Florida Pneumatic $ 45,282,000 $ 44,076,000 $ 1,206,000 2.7 % Hy-Tech 11,994,000 16,236,000 (4,242,000 ) (26.1 ) Tools Total $ 57,276,000 $ 60,312,000 $ (3,036,000 ) (5.0 )% Year Ended December 31, 2019 2018 Increase (decrease) Revenue Percent of
revenue Revenue Percent of
revenue $ % Florida Pneumatic $ 43,357,000 73.9 % $ 50,720,000 78.0 % $ (7,363,000 ) (14.5 )% Hy-Tech 15,317,000 26.1 14,275,000 22.0 1,042,000 7.3 Total $ 58,674,000 100.0 % $ 64,995,000 100.0 % $ (6,321,000 ) (9.7 )% 1516 threefour primary sectors within the pneumatic tool market; Retail, Industrial/catalogAutomotive, Industrial and the AutomotiveAerospace market. It also generates revenue from its Berkley products line, as well as a line of air filters and other OEM parts (“Other”). Three months ended December 31, 2016 2015 Increase (decrease) Revenue Percent of
revenue Revenue Percent of
revenue $ % Retail customers $ 5,435,000 54.3 % $ 4,865,000 48.2 % $ 570,000 11.7 % Automotive 3,240,000 32.4 3,682,000 36.5 (442,000 ) (12.0 ) Industrial/catalog 1,093,000 10.9 1,325,000 13.1 (232,000 ) (17.5 ) Other 244,000 2.4 218,000 2.2 26,000 11.9 Total $ 10,012,000 100.0 % $ 10,090,000 100.0 % $ (78,000 ) (0.8 )% Year Ended December 31, Year Ended December 31, 2016 2015 Increase (decrease) 2019 2018 Increase (decrease) Revenue Percent of
revenue Revenue Percent of
revenue $ % Revenue Percent of
revenue Revenue Percent of
revenue $ % Automotive $ 14,800,000 34.1 % $ 14,430,000 28.5 % $ 370,000 2.6 % Retail customers $ 24,847,000 54.9 % $ 24,217,000 54.9 % $ 630,000 2.6 % 12,467,000 28.8 18,234,000 35.9 (5,767,000 ) (31.6 ) Automotive 14,576,000 32.2 12,805,000 29.1 1,771,000 13.8 Industrial/catalog 4,936,000 10.9 6,000,000 13.6 (1,064,000 ) (17.7 ) Aerospace 10,513,000 24.2 12,244,000 24.1 (1,731,000 ) (14.1 ) Industrial 4,969,000 11.5 5,151,000 10.2 (182,000 ) (3.5 ) Other 923,000 2.0 1,054,000 2.4 (131,000 ) (12.4 ) 608,000 1.4 661,000 1.3 (53,000 ) (8.0 ) Total $ 45,282,000 100.0 % $ 44,076,000 100.0 % $ 1,206,000 2.7 % $ 43,357,000 100.0 % $ 50,720,000 100.0 % $ (7,363,000 ) (14.5 )% A primary factor forThe most significant component to the increasedecline in Florida Pneumatic’s Retailfull-year 2019 revenue, this quarter, compared to the fourth quarter of 2015,full-year 2018 was a delay in receiving certain orders from Searslower sales to THD. It should be noted that during the third quarter of 2016,2018, Florida Pneumatic shipped approximately $3.6 million of a then new, refreshed line of pneumatic tools and accessories to THD, whereas during 2019 there were no similar special or promotional orders. Additionally, we believe the reduction in our Retail revenue was partially due to THD being in an overstocked position at the end of 2018, which were received and fulfilledcaused a reduction in orders during the early part of 2019. The decline in year-over-year Aerospace revenue was due primarily to significant orders being shipped to a customer in the fourthfirst quarter of 2016. Revenue attributable2018 not repeating in 2019, and to The Home Depot improved approximately 1%, whena lesser degree, the decision by Boeing to reduce/suspend production of its 737 Max aircraft. When comparing the fourth quarter of 20162019 Industrial revenue to 2015. The cause ofthat generated in 2018, the decline was due primarily to overall sluggishness in the sector and reduced orders from certain customers that service the aircraft industry that have been negatively affected by the reduction in production by Boeing of civilian aircraft. Automotive revenue this quarter,for the year 2019 improved compared to the same periodfull year revenue in 2015, was2018 primarily due to two AIRCAT major customers/distributors during the fourth quarter putting in place an internal inventory reduction plan, and a decline in revenue at our UAT subsidiary located in the United Kingdom. A portion of UAT’s revenue is derived from the sale of pneumatic air tools to customers that are located in the North Sea region of Scotland, and whose businesses are primarily in the oil and gas sector. This region continues to feel the effects of the ongoing weakness in global oil and gas exploration. Lastly as relates to UAT, we are currently in the process of developing a marketing strategy that we believe should enable UAT to expand its presence into other Western European countries; however, no specific timetable has been established for the launch of this program. We continuea new line of tools. This new line features enhanced vibration reduction technology and longer life of the internal mechanism. The reduction in revenue from our Other product lines was due to encounter weaknesses in the Industrial/catalog market, with the decline thisquarter comparedpart to the same period a year ago, occurring most notably intheaerospaceand oil and gas exploration/production channels. Additionally, during the fourth quarter of 2015, we shipped special orders of approximately $124,000, while only shipping $43,000 during the fourth quarter of 2016.When comparing Florida Pneumatic’s full-year 2016 revenuedecision to 2015, the most significant factor contributingadjust its focus away from its smaller lines to the increase is the growth in its Automotive toolsmore profitable product line, which increased 13.8% over the prior year. This increase was primarily driven by new and improved tools, as well as an expanded customer base. The average exchange rate after Brexit was 10.9% lower than the average exchange rate before Brexit. This decline effectively increased the price of all imported products into the UK, which in turn created a slowdown in consumer spending. It is difficult to ascertain the impact on UAT’s revenue as a result of Brexit, however we believe that when UAT’s second half of 2016 revenue was converted to USD, lost revenue during 2016 was approximately $154,000. Florida Pneumatic’s Retail revenue improved when comparing full-year 2016 to 2015, due to higher sales from Sears in 2016, with 2016 revenue from The Home Depot effectively flat to that reported in 2015. The aforementioned increases were partially offset by the decline in revenue of its Industrial/catalog lines where the on-going oil and gas exploration and extraction, particularly in the Gulf of Mexico region, slowdown continues. Additionally, during 2015, we shipped approximately $767,000 of special orders, while shipping only $454,000 during 2016, which contributed to the decline in our Industrial/catalog revenue.16We have elected not to renew our supply agreement with Sears, which will expire on September 30, 2017. While Sears remains at or close to complying with its payment terms to Florida Pneumatic, this difficult decision was based on a number of factors including Sears’ continuing financial difficulties, the sale of the Craftsman brand to Stanley Black & Decker and our level of working capital exposure in relation to our return on that investment with Sears. It is anticipated that our Sears inventory exposure should be eliminated by September 30, 2017 and that all accounts receivable should be collected by December 2017. However, at the present time, there can be no assurance that events may occur that would prevent our recovery of our working capital exposure.lines.focusesdesigns, manufactures and sells a wide range of industrial products under the brands ATP and ATSCO which are categorized as “ATP” for reporting purposes. Products manufactured for other companies under their brands are included in the OEM category in the table below. NUMATX, Thaxton and other peripheral product lines, such as general machining and gears, are reported as “Other” below: Year Ended December 31, 2019 2018 Increase (decrease) Revenue Percent of
revenue Revenue Percent of
revenue $ % OEM $ 7,321,000 47.8 % $ 5,447,000 38.2 % $ 1,874,000 34.4 % ATP 6,290,000 41.1 7,253,000 50.8 (963,000 ) (13.3 ) Other 1,706,000 11.1 1,575,000 11.0 131,000 8.3 Total $ 15,317,000 100.0 % $ 14,275,000 100.0 % $ 1,042,000 7.3 % onby Hy-Tech’s Engineered Solutions products offering, which is designed to exploit Hy-Tech’s expertise in engineering and manufacturing and enable it to pursue alternate, non-traditional markets and develop different applications for its tools, motors and related accessories. We believe the industrial sectordevelopment of the Engineered Solutions offering will continue to provide Hy-Tech an opportunity to generate additional sources of revenue in the future. Hy-Tech continues to see a decline in the marketplace for pneumatic tools market. Hy-Tech manufactures and markets its own value-added linereplacement parts, the primary factor for the 13.3% decline in ATP revenue. Historically, a major component of air toolsHy-Tech’s revenue was derived from the oil and parts, including the ATSCO product line, as well as distributes a complementary line of sockets,gas sector, which weakened in the aggregate are referredsecond half of 2019. As a result, it intends to as “ATP”.emphasize its Engineered Solutions product offering, and other newer technologies. As such, it is likely that Hy-Tech Machine also manufactures non-pneumatic products primarily marketed tomay encounter reduced ATP revenue in the mining, constructionfuture. Lastly, it believes the acquisition in October 2019 of the operating assets of Blaz-Man Gear, Inc. and industrial manufacturing sectors. Hy-Tech Machine data below also includes sales of gears, and hydraulic stoppers.Gear Products & Manufacturing, Inc. (the “Gears Acquisition”) should contribute strong gross margin gear related revenue in 2020. Three months ended December 31, 2016 2015 Increase (decrease) Revenue Percent of
revenue Revenue Percent of
revenue $ % ATP $ 2,188,000 87.7 % $ 3,310,000 89.9 % $ (1,122,000 ) (33.9 )% Hy-Tech Machine 307,000 12.3 371,000 10.1 (64,000 ) (17.3 ) Total $ 2,495,000 100.0 % $ 3,681,000 100.0 % $ (1,186,000 ) (32.2 )% Year Ended December 31, 2016 2015 Increase (decrease) Revenue Percent of
revenue Revenue Percent of
revenue $ % ATP $ 10,598,000 88.4 % $ 13,990,000 86.2 % $ (3,392,000 ) (24.2 )% Hy-Tech Machine 1,396,000 11.6 2,246,000 13.8 (850,000 ) (37.8 ) Total $ 11,994,000 100.0 % $ 16,236,000 100.0 % $ (4,242,000 ) (26.1 )% There are three primary factors that contributed to the decline in this year’s ATP fourth quarter revenue, compared to the same period a year ago. These factors are:·Approximately $684,000 of the decline this quarter of ATP revenue is due to a large customer that was acquired in the ATSCO acquisition dramatically reducing its purchases. We believe this decline in orders from this customer is due primarily to excess inventory they acquired in 2015, and a slow recovery of the oil and gas exploration sector, which is its most significant sector.·The decision by a former major customer of Hy-Tech to source internally, certain impact wrenches and other products that it had formerly purchased from Hy-Tech. This action contributed to $309,000 of the decline in ATP revenue. We continue to sell to this customer; however the loss of the impact wrenches has negatively impacted gross margin as well as revenue.·Lower current pricing of domestic oil and gas compared to prior years continues to negatively impact ATP product revenue. Additionally, Hy-Tech is encountering pricing competition from Asian-sourced parts and tools. As a result, revenue from the sale of ATP parts and tools, as well as from the complimentary line of sockets, has declined approximately $130,000 this quarter, compared to the same period in 2015. We believe that should the oil and gas sector remain at or near current levels of exploration and extraction, it is likely that future periods may not reflect an increase over comparable prior periods for some time, even if trending upwards, chronologically. According to Baker Hughes Incorporated, the total United States rig count has increased to 658 as of December 30, 2016, from 522 as of September 30, 2016. However, a significant portion of Hy-Tech’s oil and gas sector revenue is driven by activity from rigs that operate off-shore, primarily in the Gulf of Mexico, where the rig count has remained relatively constant during the fourth quarter of 2016, ranging from 21 rigs to 24 rigs, whereas during the same period in 2015 the rig count in the Gulf of Mexico ranged from 23 to 34. Additionally, we believe that there has not been a meaningful increase or growth in the number of “turn-arounds” or plant maintenance activities, which tend to require the tools and parts that Hy-Tech manufactures and sells. Until such time as when major plant turn-arounds increase, and related activity levels return to recent historic levels, it is difficult to predict when this sector of the ATP category will improve. To combat this decline in revenue, in early 2016 we began to pursue alternate markets where we can exploit our manufacturing expertise, and develop different applications for our tools, motors and accessories. We believe the development of this new marketing strategy should provide Hy-Tech the ability to generate revenue from new markets in the foreseeable future that should complement its current markets such as oil and gas extraction and power generation. Revenue from new sources during the fourth quarter of 2016 was approximately $173,000, and is included in the ATP grouping. 17 When analyzing Hy-Tech’s full year 2016 revenue compared to full year 2015, the primary causes were consistent with those occurring during the fourth quarter, namely:GROSS MARGIN·The decline throughout 2016 in shipments to a large ATSCO customer accounted for more than $1,204,000 of the shortfall in ATP revenue. We believe this decline in orders from this customer is due primarily to excess inventory they acquired in 2015, and a slow recovery of the oil and gas exploration sector, which is its most significant sector.·The decision by a former major customer to replace most of the products previously manufactured by Hy-Tech with products manufactured internally. This decision resulted in a decline in 2016 ATP revenue of approximately $950,000, compared to the prior year.·Revenue from ATP parts, tools and motors, as well as from the complimentary line of sockets, declined approximately $1,239,000 this year, compared to 2015. As noted above, Hy-Tech began recognizing revenue from its initiative to market its products and to new alternate markets. Revenue from these new sources during 2016 was approximately $274,000, and is included in the ATP grouping. Year Ended December 31, Increase (decrease) 2019 2018 Amount % Florida Pneumatic $ 17,058,000 $ 18,554,000 $ (1,496,000 ) (8.1 )% As percent of respective revenue 39.3 % 36.6 % 2.7 % pts Hy-Tech $ 3,900,000 $ 4,633,000 $ (733,000 ) (15.8 )% As percent of respective revenue 25.5 % 32.5 % (7.0 )% pts Total Tools $ 20,958,000 $ 23,187,000 $ (2,229,000 ) (9.6 )% As percent of respective revenue 35.7 % 35.7 % 0.0 % pts GROSS MARGIN Three months ended December 31, Increase (decrease) 2016 2015 Amount % Florida Pneumatic $ 3,604,000 $ 3,616,000 $ (12,000 ) (0.3 )% As percent of respective revenue 36.0 % 35.8 % 0.2 % pts Hy-Tech $ 301,000 $ 1,106,000 $ (805,000 ) (72.8 ) As percent of respective revenue 12.1 % 30.0 % (17.9 )% pts Total Tools $ 3,905,000 $ 4,722,000 $ (817,000 ) (17.3 ) As percent of respective revenue 31.2 % 34.3 % (3.1 )% pts Year Ended December 31, Increase (decrease) 2016 2015 Amount % Florida Pneumatic $ 16,674,000 $ 15,675,000 $ 999,000 6.4 % As percent of respective revenue 36.8 % 35.6 % 1.2 % pts Hy-Tech $ 2,257,000 $ 6,007,000 $ (3,750,000 ) (62.4 ) As percent of respective revenue 18.8 % 37.0 % (18.2 )% pts Total Tools $ 18,931,000 $ 21,682,000 $ (2,751,000 ) (12.7 ) As percent of respective revenue 33.1 % 35.9 % (2.8 )% pts Florida Pneumatic’s Gross margin for the fourth quarter 2016 was essentially the same as the fourth quarter of 2015, improving 0.2 percentage point, or twenty basis points. We determine fair value of Hy-Tech’s inventory based on turnover ratio. Primarily the result of weak market conditions The improvement in key sectors serviced by Hy-Tech, such as oil and gas exploration and extraction and power generation, we determined that it was necessary to lower the carrying value of certain components of its inventory. This additional increase in Hy-Tech’s obsolete and slow moving inventory (“OSMI”) allowance this quarter of approximately $257,000 negatively impacted its fourth quarter of 2016’s gross profit and gross margins. Further, Hy-Tech’s gross margin this quarter is lower,at Florida Pneumatic in 2019, compared to the same period in 2015, due in part to lower overhead absorption, whichprior year, was due primarily to lowera) its decision to greatly reduce AIRCAT promotional programs in 2019 that were offered during much of 2018, b) during 2019, Jiffy was able to phase in various price increases, c) Jiffy improved its manufacturing activity, driven by the ongoing weakness in several key sectors as well asefficiencies, d) overall Florida Pneumatic strengthened its product / customer mix, and e) a large reduction in activity with key customers.sales to our low margin retail customer compared to 2018. primary factors contributing to the increase in Florida Pneumatic’s gross margin for 2016, compared to 2015, include more favorable product mix, favorable foreign currency exchange rates, improved overhead absorption and slightly lower cost of product. Hy-Tech’s gross margin during 2016 has been adversely affected by the effects of the ongoing weakness in several of the sectors in which it markets its products and services such as the oil and gas sector, power generation and manufacturing, sectors critical to Hy-Tech’s revenue. This on-going weakness has caused Hy-Tech to significantly increase its OSMI. The additional increase7.0 percentage point decline in Hy-Tech’s OSMI during 2016 was $1,001,000. Additionally, contributing to the decline of Hy-Tech’s 20162019 gross margin was due to a number of factors: a) unusually high overhead and manufacturing costs incurred during the fact thatthree-month period ended March 31, 2019, in areas such as repairs and maintenance and sample costs; b) under absorption of manufacturing overhead, a significant portion occurring in the first quarter of 2019, primarily due to an enterprise-wide information technologies system conversion during 2016 Hy-Tech manufacturedthe first quarter, which caused the facility to halt production for several days, c) increased charges in obsolete and sold an extremely lowslow-moving inventory, d) weaker gross margin product linemix of items sold in 2019, compared to a key customer it acquiredthose sold in the ATSCO acquisition. We do not intend2018; and e) increased material and labor costs. In an effort to continue to manufacture this product line; however, it is likely there will be a residual effect onimprove its gross margin in 2017, as2020, Hy-Tech sells its remaining related inventory. Lastly, until such time whenintends to increase the marketsselling price of several high-volume items, source less expensive parts imported from overseas and expand a cost reduction program that Hy-Tech services improves, and associated revenue strengthens, it is possible that Hy-Tech could encounter additional OSMI charges.was put in place in late 2019.18During the fourth quarter of 2016, ourOur SG&A during 2019 was $4,522,000,$21,869,000, compared to $4,323,000 during$21,705,000 in 2018. Significant components to the same three-month period in 2015. Significant items contributing to thisnet increase include: (i) variablea) professional fees and services increased $392,000, due primarily to costs and expenses incurred in connection with the Gears Acquisition in October 2019 (see Note 2 to our Consolidated Financial Statements); b) governance costs increased $133,000, due primarily from additional costs incurred in 2019 in connection with an expanded examination of our internal controls; c) non-cash impairment charges during 2019 of approximately $99,000 related to a reduction of our Right-of-Use asset, which include such things as commissions, warranty costs, freight out and advertising/promotional fees, increasedresulted from a decision by $118,000 during the fourth quarter of 2016, comparedHy-Tech to vacate a facility in Punxsutawney, PA prior to the same periodlease expiration and an adjustment to the fair value of certain machinery and equipment of approximately $95,000. The above increases were partially offset by a) a decrease of $221,000 in the prior year, driven primarily by the increase in our AIRCAT sales, and (ii) compensation expenses, which is comprised of base salaries and wages, accrued performance-based bonus incentives and associated payroll taxes and employee benefits increased $244,000, when comparing the fourth quarterbenefits; b) a decrease of 2016$189,000 in variable expenses, due primarily to lower Retail revenue. Variable expenses include such expenses as, commissions, freight out, advertising and promotion expenses and travel and entertainment; c) 2019 stock-based compensation declined $91,000, compared to the same periodamount in the prior year. During the fourth quarter of 2016, cash compensation paid to employees was relatively unchanged compared to the same period in the prior year. However, in connection with our reporting of the sale of Nationwide, we allocated a portion of our corporate overhead, which was attributable to Nationwide being accounted for as Discontinued operations, thus resulting in a lower expense in the fourth quarter of 2015. Partially offsetting the above increases was a reduction in amortization expense of $96,000, due primarily to the impairment of certain Hy-Tech intangible assets, lower professional fees and stock-based compensation of $21,000 and $12,000, respectively.Our SG&A incurred for the full year 2016 was $19,610,000, compared to $19,157,000 incurred during the full-year 2015. For the year ended December 31, 2016, total variable costs and expenses increased over the prior year by $503,000. Variable costs include such expenses as advertising, freight-out, commissions and warranty. This increase was driven primarily by the $1,771,000 increase in Automotive sales, and to a lesser degree the $630,000 increase in Retail revenue. Additionally, compensation costs, as defined earlier, increased $321,000. Actual total compensation paid to employees was essentially unchanged from the prior period. However, $403,000 of 2015 total compensation costs was allocated to discontinued operations related to the sale of Nationwide. In 2016, we owned Nationwide for approximately a month and a half, and did not allocate any of the same compensation items. The above increases in our SG&A were partially offset by reductions in our amortization of intangible assets of $222,000 due primarily to the impairment charges recorded during the second and fourth quarter of this year, professional fees of $96,000, and stock-based compensation of $57,000.IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETSEXPENSE - NETsecond quarter of 2016, we determined that an interim impairment analysisfair value of the goodwill recorded in connection with Hy-Tech and ATSCO was necessary based uponcontingent consideration of a number of factors, which included: i) continued weakness in oil and gas exploration and extraction; ii)obligation to the recent loss of a major portion of revenue from one of its larger customers; and iii) recent significant reductions/guidance of forecasted purchases from the largest customer acquired in the ATSCO acquisition. As a result of the aforementioned it was determined that Hy-Tech’s short and long-term projections indicated an inability to generate sufficient discounted future cash flows to support the recorded amounts of goodwill, other intangible assets and other long-lived assets necessitating the impairment charge. As a result, in accordance with current accounting literature, we recorded an impairment charge of $8,311,000 relating to goodwill and other intangible assets during the second quarter of 2016.Jiffy Seller by $150,000.18 During our annual testing for impairment of our goodwill and other intangible assets, we determined that, primarily the result of further degradation in Hy-Tech’s revenue, which in turn produced lower results of operations than had been previously re-forecast in May 2016, Hy-Tech’s goodwill and other intangibles were impaired. The unforeseen further decline in their revenue began in October 2016 and continues into 2017.As a result, we re-examined Hy-Tech’sprojections and determined that it would not have the ability to generate sufficient discounted future cash flows to support the recorded amounts of goodwill and other intangible assets, thus necessitating an impairment charge. As a result, in accordance with current accounting literature, we recorded an impairment charge of $880,000 relating to goodwill and $390,000 to other intangible assets. We believe that while we continue to make positive modifications within Hy-Tech, which includes among other actions, changes in personnel and “go-to-market” strategies, should market conditions in the sectors in which Hy-Tech operates worsen, we could incur additional impairment charges in future periods. See Note 6 to our consolidated financial statements for further discussion.November 1, 2016, weJune 18, 2019, Florida Pneumatic completed a transaction in which we soldthe sale of real property located in Tampa,Jupiter, Florida in which it conducts its principal operations. This facility was purchased by an unrelated third party for $3.75 million, resulting in a gainpurchase price of approximately $1.7$9.2 million. This property is the headquarters of Nationwide, which we sold February 11, 2016. After deductingbroker fees and other expenses relating to the sale, we received approximately $3.5$8.7 million cash, which was used to pay down bank borrowings, with the balance remaining inand recorded a cash account.19OTHER INCOME - NETThe table below provides an analysisgain as a result of our Other income-net from continuing operations for the three months and years ended December 31, 2016 and 2015: Three months ended
December 31, Year ended
December 31, 2016 2015 2016 2015 Lease income-net $ 25,000 $ 38,000 $ 100,000 $ 146,000 Fair value adjustment to contingent consideration - UAT — — — 126,000 Total $ 25,000 $ 38,000 $ 100,000 $ 272,000 Lease income-net is income net of related expenses incurred in connection with the lease discussed in Gain on Sale of Real Property, above and in Note 2 to our Consolidated Financial Statements. The fair value adjustment to contingent consideration – UAT reflects the adjustments relating to the carrying value of the additional consideration due to the sellers of UAT settled in 2015.INTEREST EXPENSE Three months ended
December 31, Increase (Decrease) Interest expense attributable to: 2016 2015 Amount % Short-term borrowings $ 4,000 $ — $ 4,000 NA % Term loans, including Capital Expenditure Term Loans 3,000 2,000 1,000 50.0 Amortization expense of debt issue costs 10,000 28,000 (18,000 ) (64.3 ) Total $ 17,000 $ 30,000 $ (13,000 ) (43.3 )% Year Ended December 31, Increase (Decrease) Interest expense attributable to: 2016 2015 Amount % Short-term borrowings $ 45,000 $ — $ 45,000 NA % Term loans, including Capital Expenditure Term Loans 8,000 5,000 3,000 60.0 Amortization expense of debt issue costs 128,000 111,000 17,000 15.3 Total $ 181,000 $ 116,000 $ 65,000 56.0 % We received approximately $18.7 million cash from thethis sale of Nationwide, which eliminated our revolving loan balance and greatly reduced our term loans. In accordance with current accounting guidance we have included the short-term interest expense incurred in connection with the bank borrowings, and term loan interest expense incurred during the three months and year ended December 31, 2015real property of $120,000 and $600,000, respectively, and for the period Januaryapproximately $7.8 million. See Note 1 2016 through the Closing Date of $60,000, which was the effective date of sale of Nationwide, in Discontinued operations. Additionally, we wrote down the debt issue costs associated with the repayment of those term loans. Further, $128,000 is included in amortization expense of debt issue costs in our interest expense for the full year ended December 31, 2016. See Notes 2 and 7 to our Consolidated Financial Statements for further discussion on the sale of Nationwide and the Amendment to our Credit Agreement. See Liquidity and Capital Resources elsewhere in this Management’s Discussion and Analysis section for further information regarding our bank loans.details.PrimarilyINTEREST EXPENSE - NET Year Ended December 31, Interest expense – net attributable to: 2019 2018 Short-term borrowings $ 167,000 $ 118,000 Term loans, including Capital Expenditure Term Loans 9,000 15,000 Amortization expense of debt issue costs 22,000 95,000 Interest income — (5,000 ) Total $ 198,000 $ 223,000 cash received fromloan in its entirety in 2019. We and our bank amended the sale of Nationwide and cash received from the sale of the real propertyCredit Agreement in Tampa, Florida, our average balance of short-term borrowings during the three-month period ended December 31, 2016 was $685,000,February 2019. The debt issue costs associated with such amendment, are significantly lower than $10,883,000, which was the averagecosts associated with the expiring Credit Agreement. As such, the amortization of debt issue costs during the three-month period ended December 31, 2015. The average balance of our short-term borrowings during the year ended December 31, 2016 was $2,862,000,2019 declined compared to $13,818,000 during the year of 2015.prior year.See Liquidity and Capital Resources elsewhere in this Management’s Discussion and Analysis section for further information regarding our bank loans.20effective tax rates from continuing operationsprovision for the years ended December 31, 2016 and 2015 were (34.2%) and 30.8%, respectively. Primaryincome taxes in 2019 was $1,797,000, compared to $253,000, in 2018. Significant factors affecting our 2016impacting 2019’s net effective tax rate of 26.8%, were nondeductible expensesnon-deductible permanent differences and state incomeand local taxes. The primary factors affecting the 2015net effective tax rate were nondeductible expenses, reversal of liability for contingent purchase price, and state income taxes.2018 was 22.8%. See Note 10 – Income Taxes to Consolidated Financial Statements for further discussion and analysis.DISCONTINUED OPERATIONSNet income from Discontinued Operations as reported on our Consolidated Financial Statements represents Nationwide’s results of operations for the period January 1, 2016 through the Closing Date, and for the twelve months ended December 31, 2015. The SG&A incurred during the period January 1, 2016 through the Closing Date, includes that of Nationwide plus $19,000 of expenses incurred at the corporate level that is specifically attributable to Nationwide. Nationwide’s SG&A for the three months and year ended December 31, 2015, includes all of Nationwide plus approximately $163,000 and $461,000, respectively, of corporate expenses directly attributable to Nationwide. Further, in accordance with current accounting guidance, we have included, as part of discontinued operations, all interest expense incurred attributable to our Bank borrowings during the year ended December 31, 2015, and for the period January 1, 2016 through the Closing Date.We recognized a gain of $12,512,000 on the sale of Nationwide which represents the difference between the adjusted net purchase price and the carrying book value of Nationwide. For income tax purposes, our tax basis in Nationwide was greater than the net proceeds resulting in a tax loss and thus recorded a tax benefit of $482,000. This tax loss can only be applied against future capital gain transactions. In November 2016, Countrywide completed the sale of the Tampa, Florida real property, which, for tax purposes is treated as a capital gain transaction and utilized the $482,000 tax benefit generated from the sale of Nationwide. See Note 2 in our Consolidated Financial Statements for further discussion.21Our cash flows from operations can be somewhat cyclical, with the greatest demand for cash typically in the first and third quarters. We monitor such metrics as days’ sales outstanding, inventory requirements, accounts payable and capital expenditures to project liquidity needs, as well as evaluate return on assets. Our primary sources of funds are operating cash flows and our Revolver Loan (“Revolver”) with our bank. December 31, December 31, 2016 2015 2019 2018 Working capital $ 28,373,000 $ 21,023,000 $ 22,115,000 $ 22,323,000 Current ratio 5.60 to 1 2.19 to 1 2.92 to 1 3.26 to 1 Shareholders’ equity $ 47,590,000 $ 43,642,000 $ 46,506,000 $ 45,535,000 19 FacilityfacilityIn October 2010, we entered into a Loan and Security Agreement (“Our Credit Agreement”) with an affiliateFacility is discussed in detail in Note 7 to our consolidated financial statements.Capital One, National Association (“Capital One”, orshort-term borrowings during the “Bank”). The Credit Agreement, among other things, provides the ability to borrow funds under the Revolver arrangement. Revolver borrowings atyears ended December 31, 2016 are secured by the Company’s accounts receivable, inventory, equipment2019 and mortgages on real property located in Cranberry, PA2018, were $4,253,000 and Jupiter, FL (“Real Property”). P&F and certain of its subsidiaries are borrowers under the Credit Agreement, and their obligations are cross-guaranteed by certain other subsidiaries.$3,113,000, respectively.At our option, Revolver borrowings bear interest at either LIBOR (“London InterBank Offered Rate”) or the Base Rate, as the term is defined in the Credit Agreement, plus an Applicable Margin, as defined in the Credit Agreement. We are subject to limitations on the number of LIBOR borrowings.In August 2014, we entered into an Amended and Restated Loan and Security Agreement (the “Restated Loan Agreement”) with Capital One. The Restated Loan Agreement, among other things, amended the Credit Agreement by: (1) increasing the total amount of the credit facility from $29,423,000 to $33,657,000, (2) increasing the Revolver from $20,000,000 to $22,000,000, (3) creating a new Term Loan, as defined in the Restated Loan Agreement (“Term Loan B”), and (4) re-designating as “Term Loan A”, the previously existing outstanding Term Loan, which relates primarily to the Company’s Real Property. In addition, the Restated Loan Agreement also reset certain financial covenants.Contemporaneously with the sale of Nationwide in February 2016, we entered into the Consent and Second Amendment to the Restated Loan Agreement (the “Amendment”) with Capital One. The Amendment, among other things; provided the Bank’s consent to the transactions contained in the Stock Purchase Agreement and the repurchase of certain shares and options discussed in Note 2 and 8 to the Consolidated Financial Statements, and amended the Restated Loan Agreement by: (a) reducing the aggregate Commitment (as defined in the Restated Loan Agreement) to $11,600,000; (b) reducing the Term Loan A to $100,000; (c) reducing the Revolver Commitment to $10,000,000 (less the new Term Loan A balance of $100,000); (d) reducing the Capex Loan Commitment to $1,600,000; (e) modifying certain financial covenants, (f) lowering interest rate margins and fee obligations; and (g) extending the expiration of the Credit Agreement to February 11, 2019. Additionally, the bank released the mortgage on our Tampa, FL Real Property. We believe that despite the reduction in the overall facility, our cash requirements to operate our business will be funded by operations and the Revolver. Further, we believe that should a need arise whereby the current credit facility is insufficient,insufficient; we can borrow additional amounts against our Real Propertyreal property or other assets.The net funds provided bySale of Real PropertyNationwidereal property located in Jupiter, Florida in which it conducts its principal operations (the “Jupiter Facility”). The Jupiter Facility was purchased by an unrelated third party for purchase price of approximately $18.7 million were used to pay down the Revolver, the Cap-Ex loans$9.2 million. After broker fees and the Term Loan A; however, the Amendment provided for $100,000 to remain outstanding under the Term Loan A. Leaving this balance will simplify potential future increasesother expenses relating to the term loan, shouldsale, the Company require and should Capital One be willingreceived approximately $8.7 million. See Note 1 to provide such funding.our Consolidated Financial Statements for further discussion.22Short–Term BorrowingsCash Flows2016, the Company did not have any borrowings against its Revolver line, whereas at December 31, 2015, it had borrowings of $9,623,000. Applicable Margin rates at December 31, 2016 for LIBOR and Base Rates were 1.50% and 0.50%, respectively, and at December 31, 2015, Applicable Margin Rates were 2.00% and 1.00%, respectively, for LIBOR and Base Rate.LIBORBase Rate%%Range of Applicable Margins added to Revolver borrowings during:20161.50 points to2.0 points0.50 points to1.00 points20152.00 points to2.50 points1.00 points to1.50 pointsWe purchase vehicles for use by our UAT salesforce. The current portion of the balance due on these loans applicable to these purchased vehicles was $13,000 at December 31, 2016 and $31,000 at December 31, 2015.We provide to Capital One among other things, monthly financial statements, monthly borrowing base certificates and quarterly certificates of compliance with various financial covenants. We believe we are in compliance with all financial and non-financial covenants. As part of the Restated Loan Agreement, if an event of default occurs, the interest rate would increase by two percent per annum during the period of default, in addition to other remedies provided to Capital One.At December 31, 2016, we had $9,836,000 of open order commitments, compared to $10,224,000 at December 31, 2015.On March 8, 2016, our Board of Directors announced that it approved the initiation of a dividend policy under which we intend to declare a cash dividend to our stockholders in the amount of $0.20 per share per annum, payable in equal quarterly installments. Based upon the current number of shares of our Class A Common Stock outstanding at December 31, 2016, each quarterly cash dividend will require approximately $180,000. The Company continues to maintain the dividend policy; however, the declaration of dividends under this policy going forward is dependent upon the Company’s financial condition, results of operations, capital requirements and other factors deemed relevant by the Company’s board of directors. Cash FlowsAt December 31, 2016,2019, cash used in operating activities for the year was $1,158,000,$2,514,000, compared to cash provided by operating activities for the year ended December 31, 20152018 of $6,573,000.$2,966,000. At December 31, 2016,2019, our net cash balance was $3,699,000,$380,000, compared to $927,000$999,000 at December 31, 2015. As discussed above, with respect to daily cash flows, we2018. Cash at our UAT subsidiary at December 31, 2019 and 2018 was $85,000 and $227,000, respectively. We operate under the terms and conditions of the Revolver.Credit Agreement. As a result, all domestic cash receipts are remitted to Capital One lock-boxes. At December 31, 2016, cash on hand consisted of a portion of the funds from the sale of the real property in Tampa, Florida, cash disbursements that have not yet cleared our operating accounts at Capital One, and funds residing in lock-boxes which have not yet been applied. As the result of the sale of Nationwide in February and the sale of the real property in Tampa, Florida and cash flows from operations, we were able to reduce our total bank debt to $100,000 at December 31, 2016 from $16,066,000 at December 31, 2015, which resulted in ourlockboxes., percentage falling to 0.2% at December 31, 2016 from 26.9%2019 was 10.8%, compared to 5.3% at December 31, 2015.2018. We anticipate being able to generate cash from operations during 2017.2020.20162019 was $1,066,000,$1,524,000, compared to $1,261,000$1,878,000 in 2015.2018. Capital expenditures currently planned for 2017 is2020 are approximately $723,000,$1,300,000, which we expect will be financed through our Restated Loan Agreement and with repayments being made through cash flows.the Credit Facility. The major portion of these planned capital expenditures will be for new metal cutting equipment, tooling and information technology hardware and software.capital requirements at Hy-Tech, with the balance for capital requirements, such as tooling, etc., required for new product development at Florida Pneumatic.factors our board may deem relevant. Customer concentrationAt Florida Pneumatic we have two retail customers thatOn February 14, 2019, the Company entered into an agreement to repurchase 389,909 shares of its Common Stock from certain funds and accounts advised or sub-advised by Fidelity Management & Research Company or one of its affiliates in a privately negotiated transaction at December 31, 2016 accountedapproximately $7.62 per share for 14.2% and 39.3%, respectively,a total purchase price of our consolidated accounts receivable compared$2,971,000. The agreed upon purchase price per share of $7.62 was computed as the value equal to 11.4% and 35.6%, at December 31, 2015. To date, these customers, with minor exceptions, are current in their payments. Further, these two customers accounted97% of the volume weighted average price of the Company’s common stock for 13.6% and 29.8%, respectively, of our 2016 consolidated revenue, compared to 11.7% and 28.5%, respectively, in 2015.the 20 trading days ended on February 7, 2019. 2320 are immaterial.ENVIRONMENTAL MATTERSAlthough it is difficult to identify precisely the portion of capital expenditures or other costs attributable to be in compliance with environmental laws and regulations, we do not expect such expenditures or other costs to have a material adverse effect on our consolidated financial position and results of operations.been minimal.Policies",Policies," to our consolidated financial statementsConsolidated Financial Statements for aadditional discussion of recent accounting standards and pronouncements.We are currently evaluating the impact of the adoption of ASU 2016-02,Leases, on its consolidated financial condition, results of operations and cash flows. Other than the aforementioned, we do not believe that any other recently issued, but not yet effective accounting standard, if adopted, will have a material effect on our consolidated financial statements.ITEM 7A. Quantitative and Qualitative Disclosures About Market RiskITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 2421 ITEM 8. Financial Statements and Supplementary DataITEM 8. Financial Statements and Supplementary Data 2522 ShareholdersStockholders of P&F Industries, Inc. and Subsidiaries20162019 and 2015,2018, and the related consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2019, and the related consolidated notes (collectively referred to as the consolidated financial statements). In our opinion, the Consolidated Financial Statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years then ended. P&F Industries, Inc. and Subsidiaries’ management is responsiblein the two-year period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.these consolidated financial statements.Opinionthese consolidated financial statementsthe Company’s Consolidated Financial Statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statementsConsolidated Financial Statements are free of material misstatement.misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included considerationAs part of our audits, we are required to obtain an understanding of internal control over financial reporting, as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’sCompany’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includessupportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.In our opinion,Adoption of New Accounting Standardreferred to above present fairly, inthe Company adopted Accounting Standards Codification ASC 842, beginning January 1, 2019 and applied the practical expedients consistently for all material respects, the financial position of P&F Industries, Inc. and Subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.its leases./s/ CohnReznick LLP We have served as the Company’s auditor since 2008. Jericho, New York March 29, 201730, 2020 2623 December 31,
2016 December 31,
2015 December 31,
2019 December 31,
2018 ASSETS CURRENT ASSETS Cash $ 3,699,000 $ 927,000 $ 380,000 $ 999,000 Accounts receivable — net 7,906,000 8,477,000 9,313,000 9,574,000 Inventories 19,901,000 19,783,000 22,882,000 20,496,000 Prepaid expenses and other current assets 3,030,000 1,032,000 1,497,000 1,137,000 Assets of discontinued operations — 8,435,000 TOTAL CURRENT ASSETS 34,536,000 38,654,000 34,072,000 32,206,000 PROPERTY AND EQUIPMENT Land 1,150,000 1,550,000 507,000 1,281,000 Buildings and improvements 5,209,000 7,677,000 3,303,000 �� 6,262,000 Machinery and equipment 19,401,000 18,736,000 25,059,000 22,612,000 25,760,000 27,963,000 28,869,000 30,155,000 Less accumulated depreciation and amortization 18,671,000 18,491,000 18,760,000 20,380,000 NET PROPERTY AND EQUIPMENT 7,089,000 9,472,000 10,109,000 9,775,000 GOODWILL 3,897,000 10,154,000 4,726,000 4,436,000 OTHER INTANGIBLE ASSETS — net 6,606,000 11,098,000 8,259,000 7,800,000 DEFERRED INCOME TAXES — net 1,793,000 — 216,000 628,000 RIGHT-OF-USE ASSETS – OPERATING LEASES 3,859,000 — OTHER ASSETS — net 130,000 234,000 502,000 741,000 TOTAL ASSETS $ 54,051,000 $ 69,612,000 $ 61,743,000 $ 55,586,000 2724 December 31,
2016 December 31,
2015 LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES Short-term borrowings $ — $ 9,623,000 Accounts payable 2,398,000 2,791,000 Accrued compensation and benefits 1,733,000 1,718,000 Accrued other liabilities 2,019,000 1,666,000 Current maturities of long-term debt 13,000 491,000 Liabilities of discontinued operations — 1,342,000 TOTAL CURRENT LIABILITIES 6,163,000 17,631,000 Long-term debt, less current maturities 88,000 5,936,000 Deferred tax liabilities – net — 2,175,000 Other liabilities 210,000 228,000 TOTAL LIABILITIES 6,461,000 25,970,000 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS’ EQUITY Preferred stock - $10 par; authorized - 2,000,000 shares; no shares issued — — Common stock: Class A - $1 par; authorized - 7,000,000 shares; issued - 4,181,000 at December 31, 2016 and 4,170,000 at December 31, 2015 4,181,000 4,170,000 Class B - $1 par; authorized - 2,000,000 shares; no shares issued — — Additional paid-in capital 12,906,000 12,884,000 Retained earnings 36,061,000 31,495,000 Treasury stock, at cost - 584,000 shares at December 31, 2016 and 554,000 shares at December 31, 2015 (4,821,000 ) (4,566,000 ) Accumulated other comprehensive loss (737,000 ) (341,000 ) TOTAL SHAREHOLDERS’ EQUITY 47,590,000 43,642,000 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 54,051,000 $ 69,612,000 December 31,
2019 December 31,
2018 LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES Short-term borrowings $ 5,648,000 $ 2,096,000 Accounts payable 1,843,000 2,755,000 Accrued compensation and benefits 2,019,000 2,336,000 Accrued other liabilities 1,568,000 1,243,000 Current maturities of long-term debt — 453,000 Current leased liabilities – operating leases 879,000 — Contingent consideration payable — 1,000,000 TOTAL CURRENT LIABILITIES 11,957,000 9,883,000 Non-current leased liabilities – operating leases 3,070,000 — Other liabilities 210,000 168,000 TOTAL LIABILITIES 15,237,000 10,051,000 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS’ EQUITY Preferred stock - $10 par; authorized - 2,000,000 shares; no shares issued — — Common Stock : Class A - $1 par; authorized - 7,000,000 shares; issued – 4,416,000 at December 31, 2019 and 4,410,000 at December 31, 2018 4,416,000 4,410,000 Class B - $1 par; authorized - 2,000,000 shares; no shares issued — — Additional paid-in capital 14,056,000 13,904,000 Retained earnings 38,867,000 34,588,000 Treasury stock, at cost – 1,273,000 shares at December 31, 2019 and 816,000 shares at December 31, 2018 (10,213,000 ) (6,695,000 ) Accumulated other comprehensive loss (620,000 ) (672,000 ) TOTAL SHAREHOLDERS’ EQUITY 46,506,000 45,535,000 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 61,743,000 $ 55,586,000 25 Years ended December 31, 2019 2018 Net revenue $ 58,674,000 $ 64,995,000 Cost of sales 37,716,000 41,808,000 Gross profit 20,958,000 23,187,000 Selling, general and administrative expenses 21,869,000 21,705,000 Operating (loss) income (911,000 ) 1,482,000 Other expense - net — (150,000 ) Gain on sale of building 7,817,000 — Interest expense - net (198,000 ) (223,000 ) Income before income taxes 6,708,000 1,109,000 Income tax expense - net (1,797,000 ) (253,000 ) Net income $ 4,911,000 $ 856,000 Basic earnings per share $ 1.53 $ 0.24 Diluted earnings per share $ 1.51 $ 0.23 Weighted average common shares outstanding: Basic 3,207,000 3,628,000 Diluted 3,262,000 3,728,000 Net income $ 4,911,000 $ 856,000 Other comprehensive income (loss) - foreign currency translation adjustment 52,000 (142,000 ) Total comprehensive income $ 4,963,000 $ 714,000 26 Class A Common
Stock, $1 Par Additional
paid-in Retained Treasury stock Accumulated
other
comprehensive Total Shares Amount capital earnings Shares Amount loss Balance, January 1, 2018 $ 46,013,000 4,203,000 $ 4,203,000 $ 13,064,000 $ 34,455,000 (631,000 ) $ (5,179,000 ) $ (530,000 ) Net income 856,000 — — — 856,000 — — — Exercise of stock options 806,000 200,000 200,000 606,000 — — — — Restricted Common Stock compensation 45,000 7,000 7,000 38,000 — — — — Stock - based compensation 196,000 — — 196,000 — — — — Purchase of Class A Common Stock (1,516,000 ) — — — — (185,000 ) (1,516,000 ) — Dividends (723,000 ) — — — (723,000 ) — — — Foreign currency translation adjustment (142,000 ) — — — — — — (142,000 ) Balance December 31, 2018 $ 45,535,000 4,410,000 $ 4,410,000 $ 13,904,000 $ 34,588,000 (816,000 ) $ (6,695,000 ) $ (672,000 ) Class A Common
Stock, $1 Par Additional
paid-in Retained Treasury stock Accumulated
other
comprehensive Total Shares Amount capital earnings Shares Amount (loss) income Balance, January 1, 2019 $ 45,535,000 4,410,000 $ 4,410,000 $ 13,904,000 $ 34,588,000 (816,000 ) $ (6,695,000 ) $ (672,000 ) Net income 4,911,000 — — — 4,911,000 — — — Restricted Common Stock compensation 52,000 6,000 6,000 46,000 — — — — Stock - based compensation 106,000 — — 106,000 — — — — Purchase of Class A Common Stock (3,518,000 ) — — — — (457,000 ) (3,518,000 ) — Dividends (632,000 ) — — — (632,000 ) — — — Foreign currency translation adjustment 52,000 — — — — — — 52,000 Balance December 31, 2019 $ 46,506,000 4,416,000 $ 4,416,000 $ 14,056,000 $ 38,867,000 (1,273,000 ) $ (10,213,000 ) $ (620,000 ) 27 Years ended December 31, 2019 2018 Cash Flows from Operating Activities Net income from operations $ 4,911,000 $ 856,000 Adjustments to reconcile net income from operations to net cash (used in) provided by operating activities: Non-cash charges: Depreciation and amortization 1,566,000 1,383,000 Amortization of other intangible assets 703,000 702,000 Amortization of operating lease assets 582,000 — Amortization of debt issue costs 23,000 95,000 Amortization of consideration payable to customer 270,000 122,000 (Recovery) provision for doubtful accounts (38,000 ) 121,000 Stock-based compensation 106,000 196,000 Restricted stock-based compensation 52,000 45,000 Gain on sale of fixed assets (7,817,000 ) (1,000 ) Deferred income taxes 409,000 253,000 Impairment of assets 194,000 — Fair value increase in contingent consideration — 150,000 Changes in operating assets and liabilities: Accounts receivable 529,000 482,000 Inventories (1,714,000 ) (901,000 ) Prepaid expenses and other current assets (339,000 ) 83,000 Other assets (1,000 ) (988,000 ) Accounts payable (1,025,000 ) 317,000 Accrued compensation and benefits (318,000 ) 395,000 Accrued other liabilities 255,000 (324,000 ) Operating lease liabilities (597,000 ) — Other liabilities (265,000 ) (20,000 ) Total adjustments (7,425,000 ) 2,110,000 Net cash (used in) provided by operating activities (2,514,000 ) 2,966,000 28 INCOME AND COMPREHENSIVE INCOMECASH FLOWS Years ended December 31, 2016 2015 Net revenue $ 57,276,000 $ 60,312,000 Cost of sales 38,345,000 38,630,000 Gross profit 18,931,000 21,682,000 Selling, general and administrative expenses 19,610,000 19,157,000 Impairment of goodwill and other intangible assets 9,581,000 — Operating (loss) income (10,260,000 ) 2,525,000 Other income - net 100,000 272,000 Gain on sale of building 1,703,000 — Interest expense (181,000 ) (116,000 ) (Loss) income before income taxes (8,638,000 ) 2,681,000 Income tax (benefit) expense (2,955,000 ) 825,000 Net (loss) income from continuing operations (5,683,000 ) 1,856,000 Discontinued operations (Note 2) Net income from discontinued operations, net of tax of $38,000 and $1,001,000 for the years ended December 31, 2016 and 2015, respectively 72,000 1,688,000 Gain on sale of discontinued operations, net of tax benefit of $482,000 12,512,000 — Net income from discontinued operations, net of tax 12,584,000 1,688,000 Net income $ 6,901,000 $ 3,544,000 Basic (loss) earnings per share Continuing operations $ (1.58 ) $ 0.51 Discontinued operations 3.50 0.47 Net income $ 1.92 $ 0.98 Diluted (loss) earnings per share Continuing operations $ (1.58 ) $ 0.49 Discontinued operations 3.50 0.45 Net income $ 1.92 $ 0.94 Weighted average common shares outstanding: Basic 3,598,000 3,607,000 Diluted 3,598,000 3,771,000 Net income $ 6,901,000 $ 3,544,000 Other comprehensive loss - foreign currency translation adjustment (396,000 ) (113,000 ) Total comprehensive income $ 6,505,000 $ 3,431,000 Years ended December 31, 2019 2018 Cash Flows from Investing Activities: Capital expenditures $ (1,524,000 ) $ (1,878,000 ) Proceeds from sale real property and other assets 8,766,000 26,000 Purchase of net assets of gear businesses (3,518,000 ) — Net cash provided by (used in) investing activities 3,724,000 (1,852,000 ) Cash Flows from Financing Activities: Dividend payments (632,000 ) (723,000 ) Proceeds from exercise of stock options — 806,000 Purchase of Class A Common Stock (3,518,000 ) (1,516,000 ) Net proceeds from short-term borrowings 3,552,000 168,000 Payment of contingent consideration (692,000 ) — Repayments of notes payable (453,000 ) (47,000 ) Payments of debt issue costs (72,000 ) (3,000 ) Net cash used in financing activities (1,815,000 ) (1,315,000 ) Effect of exchange rate changes on cash (14,000 ) (41,000 ) Net decrease in cash (619,000 ) (242,000 ) Cash at beginning of year 999,000 1,241,000 Cash at end of year $ 380,000 $ 999,000 Supplemental disclosures of cash flow information: Cash paid for: Interest $ 171,000 $ 130,000 Income taxes $ 1,809,000 $ 86,000 Amounts included in the measurement of operating lease liabilities $ 30,000 $ — Supplemental disclosures of non-cash investing and financing activities: Contingent consideration on acquisition of gear businesses $ 64,000 $ — Capital expenditures financed $ — $ 400,000 Right of Use (“ROU”) assets recognized for new operating lease liabilities 4,032,000 — Operating lease liability related to ROU assets recognized upon adoption of ASC 842 418,000 — 29 CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY Class A Common
Stock, $1 Par Additional
paid-in Retained Treasury stock Accumulated
other
comprehensive Total Shares Amount capital earnings Shares Amount loss Balance, January 1, 2015 $ 39,991,000 4,139,000 $ 4,139,000 $ 12,695,000 $ 27,951,000 (554,000 ) $ (4,566,000 ) $ (228,000 ) Net income 3,544,000 — — — 3,544,000 — — — Exercise of stock options 73,500 23,500 23,500 50,000 — — — — Issuance of restricted common stock 42,500 7,500 7,500 35,000 — — — — Stock-based compensation 86,000 — — 86,000 — — — — Tax benefit on stock-based compensation 18,000 — — 18,000 — — — — Foreign currency translation adjustment (113,000 ) — — — — — — (113,000 ) Balance, December 31, 2015 43,642,000 4,170,000 4,170,000 12,884,000 31,495,000 (554,000 ) (4,566,000 ) (341,000 ) Net income 6,901,000 — — — 6,901,000 — — — Exercise of stock options 23,000 6,000 6,000 17,000 — — — — Issuance of restricted common stock 50,000 5,000 5,000 45,000 — — — — Stock-based compensation (22,000 ) — — (22,000 ) — — — — Purchase of Class A common stock (255,000 ) — — — — (30,000 ) (255,000 ) — Tax benefit on stock-based compensation (18,000 ) — — (18,000 ) — — — — Dividends (2,335,000 ) — — — (2,335,000 ) — — — Foreign currency translation adjustment (396,000 ) — — — — — — (396,000 ) Balance, December 31, 2016 $ 47,590,000 4,181,000 $ 4,181,000 $ 12,906,000 $ 36,061,000 (584,000 ) $ (4,821,000 ) $ (737,000 ) The accompanying notes are an integral part of these consolidated financial statements.30P&F INDUSTRIES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2016 2015 Cash Flows from Operating Activities Net (loss) income from continuing operations $ (5,683,000 ) $ 1,856,000 Net income from discontinued operations 12,584,000 1,688,000 Adjustments to reconcile net (loss) income from operations to net cash (used in) provided by operating activities: Non-cash charges: Depreciation and amortization 1,620,000 1,555,000 Amortization of other intangible assets 1,016,000 1,237,000 Amortization of debt issue costs 128,000 111,000 Provision for doubtful accounts 4,000 8,000 Stock-based compensation 13,000 86,000 Restricted stock-based compensation 50,000 43,000 Gain on sale of fixed assets (1,700,000 ) (2,000 ) Deferred income taxes (3,946,000 ) 339,000 Fair value reduction in contingent consideration — (126,000 ) Impairment of goodwill and other intangible assets 9,581,000 — Changes in operating assets and liabilities: Accounts receivable 498,000 (69,000 ) Inventories (316,000 ) (435,000 ) Prepaid expenses and other current assets (2,006,000 ) 386,000 Other assets 58,000 101,000 Accounts payable (372,000 ) 89,000 Accrued compensation and benefits 24,000 (270,000 ) Accrued other liabilities 390,000 (830,000 ) Other liabilities (18,000 ) (17,000 ) Total adjustments 5,024,000 2,206,000 Net cash (used in) provided by operating activities – continuing operations (659,000 ) 4,062,000 Net cash (used in) provided by operating activities – discontinued operations (499,000 ) 2,511,000 Net cash (used in) provided by operating activities (1,158,000 ) 6,573,000 The accompanying notes are an integral part of these consolidated financial statements.31P&F INDUSTRIES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2016 2015 Cash Flows from Investing Activities: Capital expenditures $ (1,066,000 ) $ (1,261,000 ) Proceeds from disposal of assets 3,512,000 48,000 Net cash provided by (used in) investing activities – continuing operations 2,446,000 (1,213,000 ) Net cash provided by (used in) investing activities – discontinued operations 20,149,000 (161,000 ) Net cash provided by (used in) investing activities 22,595,000 (1,374,000 ) Cash Flows from Financing Activities: Dividend payments (2,335,000 ) — Proceeds from exercise of stock options 23,000 73,000 Purchase of Class A common stock (255,000 ) — Proceeds from short-term borrowings 56,446,000 72,347,000 Repayments of short-term borrowings (47,359,000 ) (74,541,000 ) Repayments of term loans (6,343,000 ) (3,127,000 ) Repayments of notes payable (29,000 ) (39,000 ) Excess tax benefit on stock-based compensation (18,000 ) 18,000 Payments of bank financing costs (30,000 ) — Net cash provided by (used in) financing activities – continuing operations 100,000 (5,269,000 ) Net cash used in financing activities – discontinued operations (18,716,000 ) — Net cash used in financing activities (18,616,000 ) (5,269,000 ) Effect of exchange rate changes on cash (49,000 ) (14,000 ) Net increase (decrease) in cash 2,772,000 (84,000 ) Cash at beginning of year 927,000 1,011,000 Cash at end of year $ 3,699,000 $ 927,000 Supplemental disclosures of cash flow information: Cash paid for: Interest $ 133,000 $ 615,000 Income taxes $ 112,000 $ 1,626,000 Supplemental disclosures of non-cash investing and financing activities: Exchange of property and equipment $ — $ 64,000 The accompanying notes are an integral part of these consolidated financial statements.32P&F INDUSTRIES, INC. AND SUBSIDIARIES20162019 and 20152018consolidated financial statementsConsolidated Financial Statements contained herein include the accounts of P&F Industries, Inc. and its subsidiaries (“P&F” or the “Company”). All significant intercompany balances and transactions have been eliminated. Certain amounts in the financial statements have been reclassified to conform to classifications used in the current year.Prior to February 11, 2016, the effective date of the sale of its Nationwide Industries, Inc. (“Nationwide”) subsidiary, P&F operated in two primary lines of business or segments: (i) tools and other products (“Tools”) and (ii) hardware and accessories (“Hardware”). Asis a result of the sale of Nationwide, which had been reported in the Hardware segment, the Company only operates in the Tools business. See Note 2 to Consolidated Financial Statements for further discussion.Tools Tools business through a wholly-owned subsidiary, Continental Tool Group, Inc. (“Continental”), which in turn currently operates through its wholly-owned subsidiaries, Florida Pneumatic Manufacturing Corporation (“Florida Pneumatic”) and Hy-Tech Machine, Inc. (“Hy-Tech”). During the third quarter of 2014, the Company acquired Exhaust Technologies Inc. (“ETI”), a developer and distributor of pneumatic tools, through a merger between a newly formed, wholly-owned subsidiary of Florida Pneumatic and ETI. Further, in July 2014, Florida Pneumatic acquired all of the outstanding shares of Universal Air Tool Company Limited (“UAT”) and Jiffy Air Tool, Inc. (“Jiffy”), a distributor of pneumatic tools located in High Wycombe, England. UAT markets pneumatic tools to the automotive market sector primarily in the United Kingdom and Ireland. This acquisition provides the Company with direct entry into the European pneumatic tool market for the Company’s entire suite of air tool products. Both ETI and UAT are all wholly-owned subsidiaries of Florida Pneumatic, and unless otherwise indicated, the operations and resultsPneumatic. The business of operations of Florida Pneumatic herein include ETI and UAT as of the respective dates such companies were acquired. Additionally, during the third quarter of 2014, theAir Tool Service Company acquired substantially all the assets of ATSCO Holdings Corp. (“ATSCO”), operates through a wholly-owned subsidiary of Hy-Tech, and unless otherwise indicated,Hy-Tech. Effective October 25, 2019, the operations and results of operationsCompany through a wholly owned subsidiary of Hy-Tech, herein include ATSCO asacquired substantially all the operating assets comprising the businesses of the date the business was acquired.Blaz-Man Gear, Inc. and Gear Products & Manufacturing, Inc., each an Illinois-based corporation that manufactures and distributes custom gears. See Note 2 – Acquisition, for further discussionis engagedimports and sells pneumatic hand tools, most of which are of its own design, primarily to the retail, industrial, automotive and aerospace markets. Its products include sanders, grinders, drills, saws and impact wrenches. These tools are similar in the importationappearance and salefunction to electric hand tools, but are powered by compressed air, rather than by electricity or battery. Air tools, as they are more commonly referred to, generally offer better performance and weigh less than their electrical counterparts. Florida Pneumatic imports and/or manufactures approximately 75 types of pneumatic hand tools, most of which are sold at prices ranging from $50 to $1,000, under the names “Florida Pneumatic,” “Universal Tool”, “Jiffy Air Tool”, AIRCAT, NITROCAT, as well as under the trade names or trademarks of several private label customers. These products are sold to retailers, distributors, manufacturers and private label customers through in-house sales personnel and manufacturers’ representatives. The AIRCAT and NITROCAT brands of pneumatic tools are sold primarily forto the retail, industrial and automotive service and repair markets,market (“automotive market”). Users of Florida Pneumatics’ hand tools include industrial maintenance and the importationproduction staffs, do-it-yourself mechanics, professional automobile mechanics and sale of compressor air filters. Florida Pneumatic also markets, through its Berkley Tool division (“Berkley”), a product line which includes pipeauto body personnel. Jiffy manufactures and bolt dies, pipe taps, wrenches, visesdistributes pneumatic tools and stands, pipe and tubing cutting equipment, hydrostatic test pumps, and replacement electrical components for a widely-used brand of pipe cutting and threading machines.primarily to aerospace manufacturers.its own lineindustrial tools, systems, gearing, accessories and a wide variety of replacement parts under various brands including ATP, Numatx, Thaxton and Quality Gear. Hy-Tech produces and sells heavy-duty pneumatic impact tools, grinders, air motors, hydro-pneumatic riveters, hydrostatic test plugs, impact sockets and custom gears, with prices ranging from $300 to $42,000.pneumatic tools, such as impact wrenches, grinders, drills, and motors. Further, it also manufactures tools to customer specifications. Its customers include refineries, chemical plants,branded products are sold through a broad network of specialized industrial distributors serving power generation, facilities, heavypetrochemical, aerospace, construction, enterprises,railroad, mining, ship building and oilfabricated metals. Hy-Tech works directly with their industrial customers, designing and mining companies. In addition,manufacturing products from finished components to complete turnkey systems to be sold under their own brand names.manufactures an extensive linebrands are manufactured in the United States of pneumatic tool replacement parts thatAmerica. Hy-Tech does distribute ATP branded impact sockets, striking wrenches and accessories imported from Italy and Asia.original equipment manufacturers (“OEMs”), and competitively. It also manufactures and distributes high pressure stoppersbe sold for hydrostatic testing fabricated pipe, gears, sprockets, splines and racks and produces a line of siphons.customer specific specifications.HardwarePrior to the sale of Nationwide, which was effective February 11, 2016 (the “Closing Date”), the Company conducted its Hardware business through its wholly-owned subsidiary, Countrywide Hardware, Inc. (“Countrywide”). Countrywide conducted its business operations through its wholly-owned subsidiary, Nationwide. As of the Closing Date, Nationwide was an importer and manufacturer of door, window and fencing hardware and accessories, including rollers, hinges, window operators, sash locks, custom zinc castings and door closers. See Note 2 to Consolidated Financial Statements for further discussion relating to the sale of Nationwide.33consolidated financial statementsConsolidated Financial Statements in accordance with accounting principles generally accepted in the United States (“US GAAP”).recognizesrecords revenue when persuasive evidence of an arrangement exists, delivery is completed,based on a five-step model in accordance with Accounting Standards Codification ("ASC") 606,Revenue from Contracts with Customers ("ASC 606"), which occurs either upon shipment by us, or upon receipt by customer at the location specified in the terms of sale, or title has passed to our customer or services have been provided, the sale price is fixed or determinable, and collectability is reasonably assured.it adopted effective January 1, 2018. The Company sells its goods on terms which transfer title and risk of loss at a specified location, typically shipping point,which may be our warehouse, destination designated by our customer, port of loading or port of discharge, depending on the final destination of the goods. Other than standard product warranty provisions, the Company’sour sales arrangements provide for no other post-shipment obligations. The Company offers rebates and other sales incentives, promotional allowances or discounts from time to time and for certain customers that are typically related to customer purchase volume, all of which are fixed or determinable and are classified as a reduction of revenue and recorded at the time of sale.sale, using the most likely amount approach. The Company periodically evaluates whether an allowance for sales returns is necessary. Historically, the Company haswe have experienced minimal sales returns. If the Company believes there are material potential sales returns, the Companyit would provide the necessary provision against sales.30 Year Ended December 31, 2019 2018 Increase (decrease) Revenue Percent of
revenue Revenue Percent of
revenue $ % Automotive $ 14,800,000 34.1 % $ 14,430,000 28.5 % $ 370,000 2.6 % Retail customers 12,467,000 28.8 18,234,000 35.9 (5,767,000 ) (31.6 ) Aerospace 10,513,000 24.2 12,244,000 24.1 (1,731,000 ) (14.1 ) Industrial 4,969,000 11.5 5,151,000 10.2 (182,000 ) (3.5 ) Other 608,000 1.4 661,000 1.3 (53,000 ) (8.0 ) Total $ 43,357,000 100.0 % $ 50,720,000 100.0 % $ (7,363,000 ) (14.5 )% Year Ended December 31, 2019 2018 Increase (decrease) Revenue Percent of
revenue Revenue Percent of
revenue $ % OEM $ 7,321,000 47.8 % $ 5,447,000 38.2 % $ 1,874,000 34.4 % ATP 6,290,000 41.1 7,253,000 50.8 (963,000 ) (13.3 ) Other 1,706,000 11.1 1,575,000 11.0 131,000 8.3 Total $ 15,317,000 100.0 % $ 14,275,000 100.0 % $ 1,042,000 7.3 % $2,013,000$1,883,000 and $1,950,000,$2,370,000, respectively, for the years ended December 31, 20162019 and 2015.2018.31 20162019 and 2015.2018.20162019 and 20152018 because of the relatively short-term maturity of these financial instruments. The carrying amounts reported for long-term debt approximate fair value as of December 31, 20162019 and 20152018 because, in general, the interest rates underlying the instruments fluctuate with market rates. 20162019 is adequate. However, actual write-offs might exceed the recorded allowance.34We have two customersThe Company had one customer that in the aggregate, asaccounted for 27.2% and 32.6% of its consolidated accounts receivable at December 31, 20162019 and 2015,December 31, 2018, respectively. Further, this customer accounted for 53.5%20.7% and 47.0%, respectively,26.5% of the Company’s consolidated revenue in 2019 and 2018, respectively. There was no other customer that accounted for more than 10% of our consolidated accounts receivable. To date, these customers remain atrevenue in 2019 or close to complying with their payment terms. 2018.32 Use of EstimatesThe preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, possible disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an on-going basis P&F evaluates its estimates, including those related to collectability of accounts receivable, valuation of inventories, recoverability of goodwill and intangible assets and income taxes. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from those estimates under different assumptions or conditions. NOTE 1—SUMMARY OF ACCOUNTING POLICIES - Continuedmarket.net realizable value. Cost is determined by the first-in, first-out method or the weighted average method. The inventory balance, which includes raw materials, labor, and manufacturing overhead costs, is recorded net of an allowance for obsolete or unmarketable inventory. Such allowance is based upon both historical experience and management’s understanding of market conditions and forecasts of future product demand. If the actual amount of obsolete or unmarketable inventory significantly exceeds the estimated allowance, the Company’s cost of sales, gross profit and net earnings would be significantly affected. issued by the Financial Accounting Standards Board (“FASB”), pertaining to the accounting for the impairment or disposal of long-lived assets, property and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company’s assessment of recoverability of property and equipment is performed on an entity level. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of such asset to its estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of such asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. 3533 FASB,Financial Accounting Standards Board, (“FASB”), the Company tests goodwill for impairment on an annual basis. This test occurs in the fourth quarter or more frequently if the Company believes indicators of impairment exist. An entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. If after assessing the totalitycarrying amount of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair value, of the Company’s reporting units with the reporting unit’s carrying amount, including goodwill. The Company generally determines the fair value of its reporting units using the income approach methodology of valuation that includes the expected present value of future cash flowsno impairment exists, and the market valuation approach.no further action is required. If the carrying amount of a reporting unit exceeds the reporting unit’sits fair value, the Company performsentitywill record an impairment charge based on the second stepexcess of the goodwill impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of thea reporting unit’s goodwill with theunit's carrying amount of that goodwill. The measurement of goodwill subsequent toover its initial recognition complies with the authoritative guidance issued by the FASB.fair value.costs under its warranties.costs. The costs are estimated based on revenue and historical experience. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the amounts as necessary. While the Company believes that its estimated liability for product warranties is adequate and that the judgment applied is appropriate, the estimated liability for the product warranties could differ materially from future actual warranty costs.in the future.consolidated financial statementsConsolidated Financial Statements in the period enacted. Further, we evaluatethe Company evaluates the likelihood of realizing benefit from our deferred tax assets by estimating future sources of taxable income and the impact of tax planning strategies. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. 3634 When tax returnsP&F INDUSTRIES, INC. AND SUBSIDIARIESfiled, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while other positions are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of arecognized for an uncertain tax position is recognizedwhen, in the financial statements in the period during which, based on all available evidence, management believesCompany’s judgment, it is more likely than not that the position will be sustained upon examination includingby a taxing authority. For a tax position that meets the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. For tax positions that meet the more-likely-than-notmore likely-than-not recognition threshold, the tax benefit is measured as the largest amount that is judged to have a greater than 50% likelihood of being realized upon ultimate settlement with the applicablea taxing authority. The portion of the benefitsliability associated with unrecognized tax positions taken that exceedsbenefits is adjusted periodically due to changing circumstances and when new information becomes available. Such adjustments are recognized entirely in the amount measured as described above, is reflected as aperiod in which they are identified. The effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits inand subsequent adjustments as considered appropriate by the consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.Company. Interest and penalties associated withrecognized on the liability for unrecognized tax benefits are classifiedrecorded as income tax expense.consolidatedCompany's financial statements or tax returns and future profitability. The Company's accounting for deferred tax consequences represents its best estimate of those future events. Changes in the Company's estimates, due to unanticipated events or otherwise, could have a material effect on its financial condition and results of operations. The Company continually evaluates its deferred tax assets to determine if a valuation allowance is required.comprehensive income.moves to a hybrid territorial system. In accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin 118 (“SAB 118”), income tax effects of the Act were refined upon obtaining, preparing, and analyzing additional information during the measurement period. At December 31, 2018, the Company had completed its accounting for the tax effects of the Act.Selling price $ 9,200,000 Selling expenses 451,000 Net proceeds 8,749,000 Land 774,000 Building and improvements 2,956,000 Accumulated depreciation (2,798,000 ) Net book value 932,000 Gain on sale of the Jupiter Facility $ 7,817,000 35 As of
December 31, 2019 2020 $ 900,000 2021 828,000 2022 739,000 2023 637,000 2024 369,000 Thereafter 1,042,000 Total operating lease payments 4,515,000 Less imputed interest (566,000 ) Total operating lease liabilities $ 3,949,000 Weighted-average remaining lease term 6.7 years Weighted-average discount rate 4.4 % 36 20162019 and 20152018 were $1,441,000$1,690,000 and $1,132,000,$1,375,000, respectively.common stockCommon Stock outstanding during the year. Diluted earnings per common share reflect the effect of shares of common stockCommon Stock issuable upon the exercise of stock options, unless the effect on earnings is anti-dilutive.common stockCommon Stock outstanding reflects the assumed use of proceeds from the hypothetical exercise of any outstanding options to purchase shares of the Company’s Class A Common Stock. The average market value for the period is used as the assumed purchase price.(loss) earnings per common share: Years Ended December 31, 2016 2015 Numerator for basic and diluted (loss) earnings per common share: Net (loss) income from continuing operations $ (5,683,000 ) $ 1,856,000 Net income from discontinued operations 12,584,000 1,688,000 Net income $ 6,901,000 $ 3,544,000 Denominator: Denominator for basic (loss) income per share—weighted average common shares outstanding 3,598,000 3,607,000 Effect of dilutive securities: Stock options — 164,000 Denominator for diluted (loss) income per share—adjusted weighted average common shares and assumed conversions 3,598,000 3,771,000 Years Ended December 31, 2019 2018 Numerator for basic and diluted earnings per common share: Net income $ 4,911,000 $ 856,000 Denominator: Denominator for basic income per share—weighted average common shares outstanding 3,207,000 3,628,000 Denominator for diluted income per share—adjusted weighted average common shares and assumed conversions 3,262,000 3,728,000 At December 31, 2016 and 2015 and during the years then ended, there were outstanding stock options whose exercise prices were higher than the average market values for the respective periods. These options are anti-dilutive and were excluded from the computation of diluted earnings per share during the year ended December 31, 2015. For the year ended December 31, 2016, we experienced a net loss from continuing operations, as such, these options were not included in the computation of diluted (loss) earnings per share. The average anti-dilutive options outstanding for the yearsyear ended December 31, 20162019 and 20152018 were 76,00055,000 and 134,000,12,000, respectively. 37 common stock,Common Stock, the Company determines fair value per share as the closing price of its common stockCommon Stock on the date of the grant of said shares.WithIn accordance with current accounting literature, the implementation of FASB's new standard on going concern, beginning with year ended December 31, 2016, and all annual and interim periods thereafter, we will assessCompany assesses going concern uncertainty in ourits financial statements to determine if weit will have sufficient cash on hand and working capital, including available borrowings on loans, to operate for a period of at least one year from the date the financial statements are issued or available to be issued, which is referred to as the “look-forward period”, as defined in the current accounting guidance. As part of this assessment, based on conditions that are known and reasonably knowable to us, wethe Company, it will consider various scenarios, forecasts, projections, estimates and will make certain key assumptions, including the timing and nature of projected cash expenditures or programs, and its ability to delay or curtail expenditures or programs, if necessary, among other factors. Based on this assessment, as necessary or applicable, wethe Company will make certain assumptions around implementing curtailments or delays in the nature and timing of programs and expenditures to the extent we deemthe Company deems probable those implementations can be achieved and weit will have the proper authority to execute them within the look-forward period. Our assessment determined the Company is a going concern. 38 Issued Accounting PronouncementsNot Yet AdoptedIn March 2016, the FASB issued Accounting Standard Update (“ASU”) ASU 2016-09,Improvements to Employee Share-Based Payment Accounting. The standard reduces complexity in several aspects of the accounting for employee share-based compensation, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. The Company believes that when adopted, this ASU will have minimal impact on its consolidated financial statements and related disclosures.leasesleases’ guidance. This ASU became effective January 1, 2019. The ASU is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years; earlier adoption is permitted. In the financial statementsoffers two transition methods: (1) a modified retrospective approach, in which the ASU is first applied, leases shall be measured and recognized at the beginning of the earliest comparative period presented with an adjustment to equity. Practical expedients are available for election asequity in the financial statements in which the ASU is first applied or (2) a package and if applied consistentlyprospective approach, in which a company is allowed to all leases.initially apply the new lease standard at the adoption date. The Company is currently evaluatingelected the impact of theprospective approach. The adoption of this guidancestandard had a minimal effect on the Company’s Consolidated Statement of Income and Comprehensive Income. However, does require the Company to include on its consolidated financial condition, results of operationsConsolidate Balance Sheet Right-of-Use assets and cash flows. related liabilities incurred in connection with certain operating leases, which at December 31, 2019, were $3,859,000 and $3,949,000, respectively.May 2014,February 2018, the FASB issued No. ASU No. 2014-09,2018-02,RevenueIncome Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Contracts with CustomersAccumulated Other Comprehensive Income, as a new Topic, Accounting Standards Codification ("ASC" (“ASU 2018-02”) Topic 606, which supersedes existing accounting standards for revenue recognition and creates a single framework. Additional updates. Under ASU 2018-02, an entity may elect to Topic 606 issued byreclassify the FASB in 2015 and 2016 include the following:·ASU No. 2015-14,Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of the new guidance such that the new provisions will now be required for fiscal years, and interim periods within those years, beginning after December 15, 2017.·ASU No. 2016-08,Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations, which clarifies the implementation guidance on principal versus agent considerations (reporting revenue gross versus net).·ASU No. 2016-10,Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarifies the implementation guidance on identifying performance obligations and classifying licensing arrangements.·ASU No. 2016-12,Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which clarifies the implementation guidance in a number of other areas.The underlying principle is to use a five-step analysis of transactions to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The standard permits the use of either a retrospective or modified retrospective application. The Company intends to use the modified retrospective approach. The Company iscurrently in the process of completing its assessment of any significant contract and assessing the impact the adoptionincome tax effects of the new revenue standard will haveTax Reform Act on its consolidated financial statements and related disclosures. Thus far the company does not believe the adoption of this standards update will have a material effect on its consolidated financial statements and related disclosures. However, the Company will continue its evaluation of the standards update through the date of adoption. The standard update, as amended, will be effective for annual periods beginning after December 15, 2017.In July 2015, the FASB issueditems within accumulated other comprehensive income to retained earnings. ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”). The standard simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value for entities using the first-in-first out method of valuing inventory. ASU 2015-11 eliminates other measures required by current guidance to determine net realizable value. ASU 2015-112018-02 is effective for fiscal years beginning after December 15, 20162018, and interim periods within those fiscal years and earlyyears. Early adoption is permitted.permitted in any interim period. The Company hasadoption of this standard did not early adopted ASU 2015-11 and does not expect the new guidance to have a material effect on its consolidated financial statements whenthe Company’s Consolidated Financial Statements.for fiscal 2017 and beyond.will have a material effect on our Consolidated Financial Statements.January 2017,December 2019, the FinancialFASB issued Accounting Standards Board (“FASB”Update ("ASU") issued ASU No. 2017-04, “Intangibles – Goodwill and Other2019-12, “Income Taxes (Topic 350)740): Simplifying the TestAccounting for Goodwill Impairment,Income Taxes.” which simplified the testing of goodwillThe ASU is intended to simplify various aspects related to accounting for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measured a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. ASU 2017-04income taxes. This guidance is effective for public companies for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. We are2020, and for interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the effects that the adoption of ASU 2017-04 willimpact this guidance may have on ourits consolidated financial statements. 39 There are currently no other accounting standards that have been issued but not yet adopted that will have a significant impact on the Company’s financial position, results of operations or cash flows upon adoption.P&F INDUSTRIES, INC. AND SUBSIDIARIESRecently AdoptedIn November 2015, the FASB issued ASU 2015-17,Balance Sheet Classification of Deferred Taxes. ASU 2015-17 is aimed at reducing complexity in accounting standards. Currently, GAAP requires the deferred taxes for each jurisdiction to be presented as a net current asset or liabilityDecember 31, 2019 and net noncurrent asset or liability. This requires a jurisdiction-by-jurisdiction analysis based on the classification of the assets and liabilities to which the underlying temporary differences relate, or, in the case of loss or credit carryforwards, based on the period in which the attribute is expected to be realized. Any valuation allowance is then required to be allocated on a pro rata basis, by jurisdiction, between current and noncurrent deferred tax assets. To simplify presentation, the new guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. As a result, each jurisdiction will now only have one net noncurrent deferred tax asset or liability. The guidance does not change the existing requirement that only permits offsetting within a jurisdiction; companies are still prohibited from offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. The new guidance is effective in fiscal years beginning after December 15, 2016, including interim periods within those years, with early adoption permitted. The Company early adopted and applied the new standard retrospectively to the prior period presented in the consolidated balance sheets.The Company reported Deferred income taxes-net in its 2015 Form 10-K as Current assets of $1,131,000. After adoption of this ASU, and giving effect to the sale of Nationwide, discussed in Note 2, the Company now presents $229,000 of deferred tax assets being included in the Current assets from discontinued operations, and the balance of $902,000 included net against the long-term deferred income tax liability.In April 2015, the FASB issued ASU 2015-03, “Interest – Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs” (ASU 2015-03). The update requires that deferred debt issuance costs be reported as a reduction to long-term debt (previously reported in other noncurrent assets). The Company adopted ASU 2015-03 in the first quarter of 2016 and for all retrospective periods, as required. The impact of the adoption was not material to our consolidated financial statements, and is discussed further in Note 7. In August 2014, the FASB issued ASU 2014-15,Presentation of Financial Statements – Going Concern, which requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued and provides guidance on determining when and how to disclose going concern uncertainties in the financial statements. Certain disclosures will be required if conditions give rise to substantial doubt about an entity’s ability to continue as a going concern. This accounting standard update applies to all entities and was effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter, with early adoption permitted. The Company adopted this standard during fiscal year 2016. The adoption of this accounting standard update did not have a material impact on its consolidated results of operations, financial position or cash flows.The Company does not believe that any recently issued accounting standards, in addition to those referenced above, would have a material effect on its consolidated financial statements.2018 2—DISCONTINUED OPERATIONS2 —ACQUISITION - ContinuedSale of Nationwide Industries, Inc.The Company, as part of its strategic plan to focusAdditionally, on expanding its position in the power-tool and accessories market, sold Nationwide on February 11, 2106, (the “Closing Date”). On theGears Closing Date, P&F, Countrywide, Nationwide and Argosy NWI Holdings, LLC, a Delaware limited liability company (“Buyer”),the Company entered into a Stock Purchase and Redemption Agreement (the “Stock Purchase Agreement”), pursuantnew five-year lease with the ultimate intention of combining all gear manufacturing operations into one location. The new leased premises, located in Punxsutawney, PA is approximately 42,000 square feet, with annual lease payments of $165,800. The Company has two three-year options to which, among other things, after giving effect to certain contributions and redemptions of Nationwide’s common shares (“Nationwide Shares”),renew the Buyer acquired alllease. As the result of the outstanding Nationwide Shares from Countrywide (the “Acquisition”). The purchase price forCompany’s decision to vacate leased space in Punxsutawney, which housed Hy-Tech’s gear operations prior to the Nationwide Shares acquiredGears Acquisition, it wrote off the fair value of the vacated old lease by a reduction in the Acquisition was approximately $22,200,000, before giving effect to an estimated working capital adjustment, as defined inRight of Use Assets and leasehold improvements on the Stock Purchase Agreement,Balance Sheet of approximately $802,000$99,000 and included a like amount in favorSelling, general and administrative expenses on its Consolidated Statement of Income and Comprehensive Income. The Company will continue to make monthly lease payments toward the Buyer. Further, in accordance with the Stock Purchase Agreement, the Company placed into escrow $1,955,000 (“escrow funds”), of which $250,000 related to the final working capital adjustment. Pursuant to the terms of the Stock Purchase Agreement, the final working capital amount was determined to be approximately $75,000 in the Company’s favor. As a result, during the three-month period ended June 30, 2016, the $250,000 portion of the escrow funds was released toold vacated lease through February 2021 unless the Company and the final working capital adjustment amountlandlord agree to other terms.$75,000 was paidthe Gear Businesses may be entitled to additional consideration (“contingent consideration”), should the Company bysell within a two-year period from the Buyer. In connection withdate of acquisition, certain portions of acquired inventories, which had no fair value at the Acquisition, Countrywide agreedtime of the acquisition. Accordingly, the Company, determined that, should it sellbased upon historical sales history provided or otherwise, the real property it ownedmost likely scenario could result in Tampa, Florida, (the “Premises”) it will contribute an additional $400,000 intoa payment of contingent consideration of approximately $64,000. Total Cash paid at closing $ 3,518,000 Fair value of contingent consideration 64,000 Total estimated purchase price $ 3,582,000 Accounts receivable $ 218,000 Inventories 630,000 Machinery, equipment and vehicle 1,437,000 Identifiable intangible assets: Customer relationships 995,000 Trademarks and trade names 54,000 Non-compete agreements 95,000 Liabilities assumed (131,000 ) Goodwill 284,000 Total estimated purchase price $ 3,582,000 escrow funds. As discussed below, in November 2016,total purchase price over the Premises were sold and as a result Countrywide contributed the additional $400,000 into the aforementioned escrow funds. After paying closing costs,fair value of the net cash received fromassets acquired, including the Buyer was approximately $18.7 million.value of the identifiable intangible assets, has been allocated to goodwill. Goodwill will be amortized over 15 years for tax purposes, but not deductible for financial reporting purposes. The intangible assets subject to amortization will be amortized over 15 years for tax purposes. For financial reporting purposes their respective useful lives have been determined as follows:Customer relationships 10 years Non-Compete agreements 4 years Trademarks and trade names indefinite 40 escrow funds are classifiedfollowing unaudited pro-forma combined financial information gives effect to the Acquisitions as Prepaid expenses and other current assets onif the Company’s Consolidated Balance Sheet,transactions were consummated January 1, 2018. This unaudited pro-forma financial information is presented for information purposes only and is not intended to be released eighteen months frompresent actual results that would have been attained had the Closing Date, which is on or about August 11, 2017, less any claims made against these escrow funds, in accordance with the Stock Purchase Agreement. The Company believes that these escrow funds are highly collectible, and that it is more likely than not that with respect to any or all such potential claims made against the Company, these claims will not exceed the minimum dollar threshold amountAcquisition been completed as of $150,000 required under the Stock Purchase Agreement. As a result, the Company has included the balanceJanuary 1, 2018 (the beginning of the original escrow fundsearliest period presented) or to project potential operating results as of $1,705,000 in its gain on sale of Nationwide. Should claims made against the Company pursuant to the Stock Purchase Agreement exceed the minimum threshold, then to the extent such claims are resolved in favor of the Buyer under the terms of the Stock Purchase Agreement, the total amount of such claims will be recorded as a loss on sale of Nationwide inany future date or for any future periods. For the Year
Ended
December 31,
2019 For the Year
Ended
December 31,
2018 Revenue $ 61,087,000 $ 68,523,000 Net income $ 5,356,000 $ 1,028,000 Earnings per share – basic $ 1.67 $ 0.28 Earnings per share – diluted $ 1.64 $ 0.28 As Nationwide was a substantial and unique business unit of the Company, its sale was a strategic shift. Accordingly, in accordance with Accounting Standard Code Topic 360, the Company has classified Nationwide as discontinued operations for all periods presented.Net income from discontinued operations, net of taxes in the accompanying Consolidated Statements of Income and Comprehensive Income, is comprised of the following: January 1, 2016
through the
Closing Date Year
ended
December 31, 2015 Revenue $ 1,830,000 $ 21,390,000 Cost of goods sold 1,177,000 13,144,000 Gross profit 653,000 8,246,000 Selling and general and administrative expenses 483,000 4,957,000 Interest expense-net 60,000 600,000 Income before income taxes 110,000 2,689,000 Income taxes 38,000 1,001,000 Net income $ 72,000 $ 1,688,000 The components of discontinued operations in the accompanying Consolidated Balance Sheet are as follows: December 31, 2015 Accounts receivable-net $ 1,245,000 Inventories 4,211,000 Prepaid expenses and other current assets 92,000 Net property and equipment 768,000 Goodwill 1,873,000 Other intangible assets-net 12,000 Other assets- net 5,000 Deferred taxes - net 229,000 Assets of discontinued operations $ 8,435,000 Accounts payable $ 765,000 Accrued compensation and benefits 247,000 Accrued other liabilities 330,000 Liabilities of discontinued operations $ 1,342,000 On the Closing Date, the Company and the president of Nationwide, entered into a purchase agreement pursuant to which, among other things the Company acquired 30,000 shares of the Company’s Class A Common Stock (“Common Stock”) at the aggregate purchase price of $254,940 and options to acquire 6,667 shares of the Company’s Common Stock at an aggregate price of $16,597.Effective as of the Closing Date, Countrywide, as landlord, and Nationwide, as tenant, entered into a new lease relating to the Premises. The lease provided for, among other things, a seven-year term commencing on the Closing Date and an annual base rent of approximately $252,000 with annual escalations. The lease also provided that the tenant will pay certain taxes and operating expenses associated with the Premises. The rental income from this new lease is included in Other income– net on the Company’s Consolidated Statement of income and comprehensive income.41 The Company recognized a gain of $12,512,000, on the sale of Nationwide which represents the difference between the adjusted net purchase price and the carrying book value of Nationwide. For income tax purposes, our tax basis in Nationwide was greater than the net proceeds resulting in a tax loss and thus recorded a tax benefit of $482,000. This tax loss can only be applied against future capital gain transactions. In November 2016, Countrywide completed the sale of the premises to an unrelated third party for $3,750,000. After fees and other expenses, the net proceeds to the Company were $3,500,000. The Company used these net proceeds to pay down its revolving credit loan and reduce its terms loans to $100,000. As a result of this transaction, the Company, during the fourth quarter of 2016, recognized a gain on sale of $1,703,000. For tax purposes this sale is treated as a capital gain transaction and the Company utilized the $482,000 tax benefit generated from the sale of Nationwide.instrumentsinstrument’s valuation.20162019, and 2015,2018, the carrying amounts reflected in the accompanying consolidated balance sheets for current assets and current liabilities approximated fair value due to the short-term nature of these accounts.The fair value of the Prepaid expenses and other current assets, which consists primarily of escrowed funds from the sale of Nationwide, which was estimated to be the same as its carrying value, based on Level 3 inputs. The escrow will be released to the Company in August 2017, in accordance with the terms and conditions set forth in the Stock Purchase Agreement.receivable—receivable - net consists of: December 31,
2016 December 31,
2015 December 31,
2019 December 31,
2018 Accounts receivable $ 7,991,000 $ 8,559,000 $ 9,547,000 $ 9,847,000 Allowance for doubtful accounts (85,000 ) (82,000 ) Allowance for doubtful accounts, sales discounts and chargebacks (234,000 ) (273,000 ) $ 7,906,000 $ 8,477,000 $ 9,313,000 $ 9,574,000 41 December 31,
2016 December 31,
2015 Raw materials $ 1,918,000 $ 2,070,000 Work in process 658,000 1,366,000 Finished goods 17,325,000 16,347,000 $ 19,901,000 $ 19,783,000 42 December 31,
2019 December 31,
2018 Raw materials $ 2,178,000 $ 1,963,000 Work in process 2,302,000 1,924,000 Finished goods 18,402,000 16,609,000 $ 22,882,000 $ 20,496,000 for impairment annually or whenever events or circumstances indicate the carrying value of these assets may not be recoverable.The impairment testing is performed in two steps: (i) The Company compares In accordance with authoritative guidance issued by the fair value of a reporting unit with its carrying value, and (ii) if there is impairment,FASB, the Company measures the amount ofperformed an annual impairment loss by comparing the implied fair valuetest of goodwill and indefinite-lived intangible assets during the fourth quarter based on conditions as of November 30, 2019. For both 2019 and 2018, with respect to Florida Pneumatic and Hy-Tech, the carrying amount of that goodwill. The Company determines thedetermined their fair value using the income approach methodology of valuation, which considers the expected present value of future cash flows. As an integral part of the valuation process the Company utilizes its latest cash flows forecasts for the remainder of the current fiscal year, if applicable, the next four fiscal years, and then applies projected minimal growth for all remaining years, based upon available statistical data and management’s estimates. DuringThe result of the second quarter of 2016, the CompanyCompany’s impairment test for Florida Pneumatic and Hy-Tech determined that an interim impairment analysis of the goodwill recorded in connection with its Hy-Tech reporting unit was necessary based on consideration of a number of factors or assumptions, which included:·Negative changes in revenue, which was driven primarily by continued weakness in the oil and gas exploration and extraction industries;·the recent loss of a major portion of revenue from one of its larger customers;·recent significant reductions/guidance of forecasted purchases from the largest customer acquired in the ATSCO acquisition; and·changes in gross margin, driven primary by product mix and customer mix.The combination of these factors was considered to be a triggering event requiring an interim impairment test.Certain of the factors considered by management in the performance of the impairment test included:·Cash flows was determined to be a key assumption primarily due to reductions in future revenue and gross margins; and·Discount rates. The discount rates applied to internally developed cash flow projections were 14.5% for the previous annual impairment test as of November 30, 2015 and 13.8% at May 31, 2016, which was the date of the interim impairment test. The discount rate represents the weighted average cost of capital consistent with our views of the rate that an expected market participant would utilize for valuation, including the risk inherent in future cash flows, taking into account the capital structure, debt ratings and current debt yields of comparable public companies as well as an estimate of return on equity that reflects historical market returns.Based on step one of the impairment analysis, it was determined that the fair value of the reporting unit was less than the carrying value. Step two of the goodwill impairment test resets the implied fair value of goodwill through a reallocation of the assets. That is, an entity shall allocate the fair value of a reporting unit, in this case, Hy-Tech to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination. Accordingly, after resetting the carrying values of its intangible assets, other than Goodwill, which resulted in a $2,968,000 impairment of intangible assets the Company adjustedexceeded the carrying value ofand, as such, no impairment to Goodwill by recording an impairment charge of $5,343,000 in the second quarter of 2016.The carrying value of Hy-Tech exceeded its estimated fair value by approximately 15.7% at November 30, 2015. The fair value of Hy-Tech was estimated using 100% value based on internally developed cash flow projections. The internally developed cash flow projections reflect annual estimates through a terminal year calculated using a terminal year EBITDA multiple approach.Trademarks and tradenames were previously considered an indefinite-lived intangible asset. However, as a result of the testing for impairment as of May 31, 2016, which determined the carrying value of Hy-Tech’s trademarks and tradenames exceeded the fair value, and an impairment charge of $229,000 was recorded at June 30, 2016. The Company commenced amortizing this intangible asset in July 2016 over a 15 year useful life. Further, future amortization is included in the estimated future amortization expense table below.Based on step one of the November 30, 2016 annual testing for impairment of our goodwill and other intangible assets it was determined that the fair value of the reporting unit was less than the carrying value. As noted above, an entity shall allocate the fair value of a reporting unit,recorded in this case, Hy-Tech to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination. Accordingly, the Company, after resetting the carrying values of its intangible assets, other than Goodwill, the result was a $390,000 impairment of intangible assets and adjusted the carrying value of Goodwill by recording an impairment charge of $880,000, effective November 30, 2016.2019.The primary factors contributing to this further impairment include:·Further erosion of Hy-Tech’s revenue, which began in October 2016 and is now expected to continue;·further decline in gross margins, driven primarily by a worsening of absorption of fixed manufacturing overhead, product mix and customer mix;·lowering of expectations with respect to orders from a large customer.43Certain factors considered by management in the performance of the impairment test include:·Cash flows was determined to be a key assumption primarily due to reductions in future revenue and gross margins; and·Discount rates. The discount rates applied to internally developed cash flow projections were 14.5% for the previous annual impairment test as of November 30, 2015, 13.8% at May 31, 2016 and 15.2% at November 30, 2016.The impairment determinations involved significant assumptions and judgments. The calculations supporting the estimates of the fair value of Hy-Tech and the fair values of its assets and liabilities utilized models that take into consideration multiple inputs other than those discussed above. Assumptions regarding each of these inputs could have a significant effect on the related valuations. In performing these calculations, we also take into consideration assumptions on how current market participants would value Hy-Tech and its operating assets and liabilities. Changes to assumptions that reflect the views of current market participants can also have a significant effect on the related valuations. The fair value measurements resulting from these models are classified as non-recurring Level 3 measurements consistent with accounting standards related to the determination of fair value. Because of the volatility of these factors, we cannot predict the likelihood of any future impairment. As of December 31, 2015, the Company has no accumulated impairment losses. The changes in the carrying amount of goodwill for 2016 are as follows: Florida
Pneumatic Hy-Tech Total Balance, January 1, 2016 $ 3,931,000 $ 6,223,000 $ 10,154,000 Impairment of goodwill — (6,223,000 ) (6,223,000 ) Currency translation adjustment (34,000 ) — (34,000 ) Balance, December 31, 2016 $ 3,897,000 $ — $ 3,897,000 As of December 31, 2015, the Company has no accumulated impairment losses. The changes in the carrying amount of other intangible assets occurring during 2016 are as follows: Cost Accumulated
Amortization Net Book
Value Balance, January 1, 2016 $ 15,277,000 $ 4,179,000 $ 11,098,000 Impairment of other intangible assets (6,541,000 ) (3,183,000 ) (3,358,000 ) Amortization — 1,016,000 (1,016,000 ) Currency translation adjustment (139,000 ) (21,000 ) (118,000 ) Balance, December 31, 2016 $ 8,597,000 $ 1,991,000 $ 6,606,000 Balance, January 1, 2019 $ 4,436,000 Currency translation adjustment 6,000 Acquisition of Hy-Tech Illinois 284,000 Balance, December 31, 2019 $ 4,726,000 December 31, 2016 December 31, 2015 Cost Accumulated
amortization Net book
value Cost Accumulated
amortization Net book
value Other intangible assets: Customer relationships (1) $ 5,143,000 $ 1,022,000 $ 4,121,000 $ 11,285,000 $ 3,486,000 $ 7,799,000 Trademarks and trade names (1) 1,507,000 — 1,507,000 1,576,000 — 1,576,000 Trademarks and trade names (2) 200,000 5,000 195,000 439,000 — 439,000 Engineering drawings 330,000 148,000 182,000 410,000 159,000 251,000 Non-compete agreements (1) 212,000 150,000 62,000 362,000 134,000 228,000 Patents 1,205,000 666,000 539,000 1,205,000 400,000 805,000 Totals $ 8,597,000 $ 1,991,000 $ 6,606,000 $ 15,277,000 $ 4,179,000 $ 11,098,000 44Included in the table above is the following impairment charge recorded during 2016:Customer relationships $ 3,001,000 Trademarks and trade names (2) 237,000 Engineering drawings 37,000 Non-compete agreements 83,000 $ 3,358,000 December 31, 2019 December 31, 2018 Cost Accumulated
amortization Net book
value Cost Accumulated
amortization Net book
value Other intangible assets: Customer relationships (1) $ 7,825,000 $ 2,724,000 $ 5,101,000 $ 6,821,000 $ 2,135,000 $ 4,686,000 Trademarks and trade names (1) 2,375,000 — 2,375,000 2,308,000 — 2,308,000 Trademarks and trade names 200,000 45,000 155,000 200,000 32,000 168,000 Engineering drawings 330,000 225,000 105,000 330,000 202,000 128,000 Non-compete agreements (1) 331,000 235,000 96,000 233,000 223,000 10,000 Patents 1,405,000 978,000 427,000 1,405,000 905,000 500,000 Totals $ 12,466,000 $ 4,207,000 $ 8,259,000 $ 11,297,000 $ 3,497,000 $ 7,800,000 (1) A portion of these intangibles are maintained in a foreign currency and are therefore subject to foreign exchange rate fluctuations. (2)These were previously considered an indefinite lived intangible asset of Hy-Tech; however as the result of the testing for impairment the Company began amortizing these intangible assets over a fifteen year useful life.Amortization expense42 intangible assets from continuing operations subject to amortization wasother intangibles are as follows: Cost Accumulated
amortization Net book value Balance, January 1, 2019 $ 11,297,000 $ 3,497,000 $ 7,800,000 Amortization — 703,000 (703,000 ) Acquisition of Hy-Tech Illinois 1,144,000 — 1,144,000 Currency translation adjustment 25,000 7,000 18,000 Balance, December 31, 2019 $ 12,466,000 $ 4,207,000 $ 8,259,000 Year ended December 31, 2016 2015 $ 1,016,000 $ 1,237,000 December 31, 2016 December 31, 2015 December 31,
2019 December 31,
2018 Customer relationships 9.3 10.0 8.7 9.3 Trademarks and trade names (2) 14.5 — 11.5 12.5 Engineering drawings 8.8 8.5 7.1 7.7 Non-compete agreements 1.2 2.7 3.7 2.3 Patents 6.1 5.8 7.1 7.9 Year ended December 31, 2019 2018 $ 703,000 $ 702,000 2017 $ 708,000 2018 570,000 2019 551,000 2020 512,000 2021 508,000 Thereafter 2,250,000 $ 5,099,000 2020 $ 767,000 2021 759,000 2022 758,000 2023 754,000 2024 706,000 Thereafter 2,140,000 $ 5,884,000 43 , or the “Bank”). The Credit Agreement, as amended and restated in April 2017 and further amended from time-to-time, among other things, provides forthe ability to borrow funds under a Revolver Loan$16,000,000 revolver line (“Revolver”), subject to certain borrowing base criteria. Additionally, there is a $2,000,000 line for capital expenditures (“Capex Loan”), with $1,600,000 available for future borrowings. Revolver and Capex Loan borrowings under which are secured by the Company’s accounts receivable, mortgages on itsinventory, equipment, and real property, located in Cranberry, PA, Tampa, FL and Jupiter, FL (“Real Property”), inventory and equipment.among other things. P&F and certain of its subsidiaries are borrowers under the Credit Agreement, and their obligations are cross-guaranteedcross guaranteed by certain other subsidiaries. The Credit Agreement was amended effective February 8, 2019, which among other things set the expiration date to February 8, 2024. Additionally, see Note 2 to the Company’s Consolidated Financial Statements for further discussion relating to Amendment No. 8. will bear interest at either LIBOR (“London InterBankinterbank Offered Rate”) or the Base Rate, as the term is defined in the Credit Agreement, plus thean Applicable Margin, as defined in the Credit Agreement. Further, the interest rate, either LIBOR or Base Rate, which is added to the Applicable Margin, is at the option of the Company. The Company is limited assubject to limitations on the number of LIBOR borrowings.August 2014, entered intocertain circumstances, it is required to deliver monthly financial statements and certificates of compliance with various financial covenants. Should an Amended and Restated Loan and Security Agreement (the “Restated Loan Agreement”) withevent of default occur the interest rate would increase by 2% per annum during the period of default, in addition to other remedies provided to Capital One. The Restated Loan Agreement, among other things, amended the Credit Agreement by: (1) increasing the total amount of the credit facility from $29,423,000 to $33,657,000, (2) increasing the Revolver from $20,000,000 to $22,000,000, (3) creating a new Term Loan, as defined in the Restated Loan Agreement (“Term Loan B”), and (4) re-designating as “Term Loan A”, the previously existing outstanding Term Loan, which relates primarily to the Company’s Real Property. In addition, the Restated Loan Agreement also reset certain financial covenants.45Contemporaneously with the sale of Nationwide, as discussed in Note 2, the Company entered into the Consent and Second Amendment to the Restated Loan Agreement (the “Amendment”) with Capital One. The Amendment, among other things; (a) provided the Bank’s consent to the transactions contained in the Stock Purchase Agreement and the repurchase of certain shares and options discussed in Note 2 and 8 to the Consolidated Financial Statements; (b) amended the Restated Loan Agreement by: (i) reducing the aggregate Commitment (as defined in the Restated Loan Agreement) to $11,600,000; (ii) reducing the Term Loan A to $100,000; (iii) reducing the Revolver Commitment to $10,000,000 (less the new Term Loan A balance of $100,000); (iv) reducing the Capex Loan Commitment to $1,600,000; (v) modifying certain financial covenants, (vi) lowering interest rate margins and fee obligations; and (vii) extending the expiration of the Credit Agreement to February 11, 2019. Additionally, the Bank released the mortgage on the Company’s Real Property located in Tampa, Florida.provides Capital One with, among other things, monthly financial statements, and monthly borrowing base certificates. The Company is required to comply with certain financial covenants. Under certain circumstances the Company would be required to submit certificates of compliance. The Company believes it is in compliance with all covenants underthat should a need arise whereby the current Credit Facility.The net proceeds provided by the sale of Nationwide of approximately $18.7 million were used to pay down the Revolver and the Capex Term Loans in their entirety and paid the Company approximately $6 millioncredit facility is insufficient it can borrow additional amounts against the Term Loan A, discussed below.SHORT–TERM BORROWINGSits real property or other assets.2016, the Company did not have any borrowings against2019, its short-term or Revolver line, whereasborrowing was $5,648,000 compared to $2,096,000 at December 31, 2015, it had borrowings of $9,623,000.2018. Applicable Margin ratesRates, at December 31, 20162019 and 2018 for LIBOR and Base Rates were 1.50% and 0.50%, respectively, andrespectively. Additionally, at December 31, 2015, Applicable Margin Rates were 2.00%2019 and 1.00%,2018, there was approximately $9,200,000 and $12,024,000, respectively, for LIBOR and Base Rate.LIBORBase Rate%%Range of Applicable Margins added to Revolver borrowings during:20161.50 points to 2.0 points0.50 points to 1.00 points20152.00 points to 2.50 points1.00 points to 1.50 pointsLONG –TERM BORROWINGSavailable to the Company under its Revolver arrangement.Restated Loan Agreement provides foraverage balance of short-term borrowings during the years ended December 31, 2019 and 2018, were $4,253,000 and $3,113,000, respectively.A, which isthat was secured by mortgages on the Real Property,real property, accounts receivable, inventory and equipment. At December 31, 2018 borrowing of this Term Loan A borrowings can bewas at either LIBOR, or at the Base Rate, or a combination of the two plus the Applicable Margins. LIBOR borrowings at December 31, 2016 and 2015 were 1.5% and 3.0%, respectively.LIBOR. The Applicable Margin for borrowings at the Base Rate for the same timeframes were 0.5% and 2.0%, respectively. A portion of the net proceeds from the sale of Nationwide repaid all but $100,000 of this Term Loan A and, accordingly, such remaining balance is being borrowed at the Base Rate, and is included in Long-term debt, less current maturities on the Company’s Consolidated Balance SheetLIBOR at December 31, 2016.2018 was 1.5%. In June 2019, the Company repaid the principal amount of $100,000.During 2012,In April 2018, the Company borrowed $380,000 and $519,000,$400,000 against the Capex line. This borrowing was to be repaid in equal principle installments of approximately $6,700, payable monthly, with the balance due at its Maturity Date as loans to purchase machinery and equipment (“Capex Term Loans”). These loans were fully repaid with funds fromdefined in the sale of Nationwide.The long-term portion ofCredit Agreement. At December 31, 2018, the balance due on the purchased vehicles used by the UAT salesforce is $0 at December 31, 2016Capex loan was $353,000 and was $16,000 at December 31, 2015.accordance with ASU 2015-03,June 2019, the Company reduced its long-term debt by $12,000 and $64,000, respectively, relating to deferred financing fees aspaid the bank the balance of December 31, 2016 and 2015.this Capex loan.LONG-TERM DEBT: December
31, 2016 December
31, 2015 Term Loan A - $23,000 payable monthly January 2013 through February 2016, balance due December 19, 2019. $ 100,000 $ 6,160,000 Capex Term Loan - $6,000 payable monthly May 2012 through February 2016. — 101,000 Capex Term Loan - $9,000 payable monthly October 2012 through February 2016. — 182,000 Other 13,000 48,000 Deferred financing fees (12,000 ) (64,000 ) 101,000 6,427,000 Less current maturities 13,000 491,000 $ 88,000 $ 5,936,000 4644 will determinedetermines the number of shares of Common Stock subject to each option, the term of each option, which may not exceed ten10 years (or five years in the case of an incentive stock option granted to a 10% stockholder), the exercise price, the vesting schedule (if any), and the other material terms of each option. No stock option may have an exercise price less than the fair market value of the Common Stock at the time of grant (or, in the case of an incentive stock option granted to a 10% stockholder, 110% of fair market value). With respect to all other permissible grants under the 2012 Plan, the Committee will determine their terms and conditions, subject to the terms and conditions of the 2012 Plan.45 ten10 years of the effective date of the Previous Plan and are exercisable for a ten year10-year period from the date of grant, at prices not less than 100% of the closing market value of the Common Stock on the date the option is granted. In the event options granted contained a vesting schedule over a period of years, the Company recognized compensation cost for these awards ratably over the service period. 47For the years ended December 31, 2019 Risk-free interest rate 2.73 % Expected term 10 years Volatility 62.08 % Dividend yield 2.34 % Fair value of options granted $4.60 In connection with an equity restructuring event, which occurred during the three-month period ended March 31, 2016 relating to a special dividend granted by the Company, the Company modified all previously issued outstanding options to purchase its Common Stock. This modification resulted in an aggregate increase of 19,174 options. The Company did not recordissue any compensation expense in connection with the issuanceoptions to purchase shares of these options, as the issuance was made as the result of an equity restructuring event. Other than the aforementioned issuance, there were no other options granted or issuedits Common Stock during 2016 or 2015.2018. Number
of
Shares Weighted
Average
Exercise Price
per share Aggregate
Intrinsic
Value Outstanding, January 1, 2015 505,000 $ 6.51 Granted — — Exercised (23,500 ) 3.11 Expired (24,500 ) 16.50 Outstanding, December 31, 2015 457,000 Granted 19,174 5.89 Exercised (6,000 ) 3.81 Forfeited and repurchased (29,634 ) 5.86 Expired (16,723 ) 10.72 Outstanding and vested, December 31, 2016 423,817 $ 5.68 $ 1,271,704 Included in the forfeited options in the table above for 2016 are 20,998 options the Company purchased from Nationwide employees for $50,000 in connection with the sale of Nationwide. In 2016, 27,500 options that expired and forfeited were issued under the Previous Plan and 18,857 were issued under the 2012 Plan. All options that expired in 2015 were issued under the Previous Plan. Number
of
Shares Weighted
Average
Exercise Price
per share Aggregate
Intrinsic
Value Outstanding, January 1, 2018 418,233 $ 5.17 Granted — --- Exercised (200,158 ) 4.02 Forfeited — — Expired — — Outstanding, December 31, 2018 218,075 6.22 Granted 8,000 8.55 Exercised — — Forfeited — — Expired — — Outstanding, December 31, 2019 226,075 $ 6.30 $ 219,983 Vested, December 31, 2019 188,409 $ 6.08 $ 219,983 4846 December 31, December 31, 2016 2015 2019 2018 Option
Shares Weighted
Average
Grant-Date
Fair Value Option
Shares Weighted
Average
Grant-Date
Fair Value Option
Shares Weighted
Average
Grant-Date
Fair Value Option
Shares Weighted
Average
Grant-Date
Fair Value Non-vested shares, beginning of year 23,840 $ 6.72 61,006 $ 6.14 59,333 $ 4.41 89,000 $ 4.41 Granted 829 6.45 — 8,000 4.60 — — Vested (19,167 ) 6.71 (37,166 ) 5.76 (29,667 ) 4.41 (29,667 ) 4.41 Forfeited (5,502 ) 6.72 — — — — — Non-vested shares, end of year — $ — 23,840 $ 6.72 37,666 $ 4.45 59,333 $ 4.41 20162019 and 20152018 was approximately $13,000$106,000 and $86,000,$196,000, respectively. The Company recognizes stock-based compensation cost over the requisite service period. However, the exercisability of the respective non-vested options, which are at predetermined dates, does not necessarily correspond to the periods in which straight-line amortization of compensation expenses is recorded. As of December 31, 2019, the Company had approximately $55,000 of total unrecognized compensation costs related to non-vested awards granted under its stock based plans, which it expects to recognize over a weighted average period of 0.8 years.2016:2019:Options Outstanding and exercisable Number
outstanding and
exercisable Weighted Average
Remaining
Contractual
Life (Years) Weighted
Average
Exercise
Price 71,069 0.5 $ 10.72 177,687 1.5 $ 3.98 25,605 4.0 $ 2.92 49,644 4.4 $ 4.37 2,090 5.4 $ 4.29 41,809 5.5 $ 4.74 55,913 6.3 $ 7.86 423,817 2.9 $ 5.68 Options Outstanding Options Exercisable Number
outstanding Weighted Average
Remaining
Contractual
Life (Years) Weighted
Average
Exercise
Price Number
exercisable Weighted Average
Remaining
Contractual
Life (Years) Weighted
Average
Exercise Price 17,244 1.0 $ 2.92 17,244 1.0 $ 2.92 18,812 1.4 $ 4.37 18,812 1.4 $ 4.37 2,090 2.4 $ 4.29 2,090 2.4 $ 4.29 41,809 2.5 $ 4.74 41,809 2.5 $ 4.74 49,120 3.3 $ 7.86 49,120 3.3 $ 7.86 89,000 7.7 $ 7.09 59,334 7.7 $ 7.09 8,000 9.2 $ 8.55 — — — 226,075 4.7 $ 6.30 188,409 4.1 $ 6.08 20162019 and 2015,2018, there were 175,45062,062 and 183,26779,437 shares available for issuance under the 2012 Plan. At December 31, 2016,2019, there were 191,575 options outstanding 113,817 options issued under the 2012 Plan and 310,00034,500 options outstanding issued under the Previous Plan.47 2016,2019, granted 1,0001,250 restricted shares of its common stockCommon Stock to each non-employee member of its Board of Directors, totaling 5,0006,250 restricted shares. The Company determined that the fair value of these shares was $8.72$8.31 per share, which was the closing price of the Company’s Common Stock on the date of the grant. These shares cannot be traded earlier than the first anniversary of the grant date. As such, theThe Company iswill ratably amortizingamortize the total non-cash compensation expense of approximately $44,000$52,000, which is included in its selling, general and administrative expenses through May 2017.2020.2015,2018, granted 1,0001,250 restricted shares of its common stockCommon Stock to each non-employee member of its Board of Directors, totaling 5,0006,250 restricted shares. The Company determined that the fair value of these shares was $8.63$8.43 per share, which was the closing price of the Company’s Common Stock on the date of the grant. These shares cannotcould not be traded earlier than the first anniversary of the grant date. As such, theThe Company ratably amortized the total non-cash compensation expense of approximately $43,000$53,000, which is included in its selling, general and administrative expenses through May 2016.49The Company issued 2,500 restricted shares of its common stock to Joseph A. Molino, Jr., the Company’s Chief Financial Officer, in accordance with an Employment Agreement dated April 2, 2015. The Company determined the fair value of these shares to be $6.86 per share, which was the closing price of the Company’s Common Stock on the date of the grant. These shares shall vest as to 833 shares on April 2, 2016, 833 shares on April 2, 2017, and 834 shares on April 2, 2018; provided, however, that 100% of the then unvested portion of the shares shall vest in the event of Mr. Molino’s death or termination due to disability or upon a Change in Control (as defined in the 2012 Plan). The Company will ratably amortize the total non-cash value of approximately $17,000 as compensation expense in its selling, general and administrative expenses through April 2018.2019.Closing Date,expiration of a previous repurchase program adopted in 2017 (the “2017 Repurchase Program”), the Company’s Board of Directors authorized the Company to repurchase up to 100,000 additional shares of its Common Stock (the “2018 Repurchase Program”) from time to time over the next 12 months through a 10b5-1 trading plan, and potentially through open market purchases, privately-negotiated transactions, or otherwise in compliance with Rule 10b-18 under the presidentSecurities Exchange Act of Nationwide, entered into a purchase agreement1934. On September 14, 2018, the Company announced that, pursuant to which, among other thingsthe 2018 Repurchase Program, it had adopted a written trading plan in accordance with the guidelines specified under Rule 10b5-1 under the Securities Exchange Act of 1934. Repurchases made under the plan, that commenced on September 17, 2018, are subject to the SEC’s regulations, as well as certain price, market, volume, and timing constraints specified in the plan. Since the inception of the 2018 Repurchase Program through December 31, 2018, the Company acquired 30,000repurchased 33,398 shares of the Company’s Class A Common Stock at the aggregate purchase price of $254,940 and options to acquire 6,667 shares of the Company’sits Common Stock at an aggregate pricecost of $16,597.approximately $272,000. The Company repurchased 66,602 shares of its Common Stock at an aggregate cost of approximately $547,000 during 2019 to complete the 2018 Repurchase Program.NOTE 9—DIVIDENDS PAYABLE – OPTIONS ADJUSTMENTS (EQUITY RESTRUCTURING EVENT)On March 8, 2016,In June 2018 and November 2018, the Company purchased 18,140 shares and 85,791 shares of its Common Stock in two separate privately negotiated transactions. These transactions were outside of the 2018 Repurchase Program and the 2017 Repurchase Program, pursuant to additional authorization of the Company’s Board of Directors declaredat a special cash dividendtotal cost of $0.50$150,000 and $698,000, respectively. The June 2018 purchase price per common share which was paidequal to 5% below the average of the closing price of its Common Stock for the three days prior to the transaction, with the November 2018 purchase price based on April 4, 2016,the average closing price over the three days prior to shareholdersthe date of recordtransaction.closevalue equal to 97% of business on March 21, 2016. The total amountthe volume weighted average price of this special dividend payment was approximately $1.8 million. Further, the Company’s common stock for the 20 trading days ended on February 7, 2019. On February 15, 2019, the Company completed this transaction. On February 14, 2019, the Company entered into Amendment No. 6 to the Second Amended and Restated Loan and Security Agreement with Capital One, which permitted the Company to complete the above transaction.48 also announced that it approved the initiation of a dividend policy under which the Company intends to declare aquarterly cash dividenddividends to the Company’s shareholdersits stockholders in the amount of $0.20$0.05 per share per annum, payable in equal quarterly installments.quarter. In conjunction therewith, the Company’smonths of February, May, August and November of 2019 and 2018, our Board of Directors declared a quarterly cash dividendapproved the payment of dividends of $0.05 per common share to the shareholders of record. Accordingly, the Company paid a $0.05 per share dividend to the shareholders of record atin each of the closeaforementioned months. The aggregate of business on Marchsuch dividend payments was approximately $632,000 and $723,000 for the years ended December 31, 2016. This dividend of approximately $180,000 was paid on April 14, 2016. Further, the Company’s2019 and 2018, respectively.declared quarterly cashexpects to maintain this dividend policy; however, the future declaration of dividends on July 18, 2016under this policy is dependent upon several factors, which include such things as our overall financial condition, results of operations, capital requirements and October 28, 2016.other factors our board may deem relevant. The Compensation Committee of the Board of Directors of the Company serves as administrator of the 2012 Plan, and the P&F Industries, Inc. 2002 Stock Incentive Plan (“2002 Plan”). The 2012 Plan requires that options granted under the 2012 Plan be equitably adjusted when an equity restructuring transaction or event occurs. Additionally, the 2002 Plan allows the Compensation Committee to equitably adjust any outstanding options granted under the 2002 Plan in the event of an equity restructuring event. The Compensation Committee determined that the special dividend met the applicable criteria under both the 2012 Plan and the 2002 Plan and authorized an equitable adjustment be made to all outstanding options under both plans. The equitable adjustment lowered the exercise price of all outstanding options, and added, in the aggregate, 19,174 options to purchase Common Stock relating to options held by all Company option holders. The reduction in the exercise price ranged from $0.13 to $0.48. The Company determined that, in accordance with ASC 718-20-20, the special dividend described above was an equity restructuring event and, as such, there was no impact on the Company’s consolidated statements of income and comprehensive income as the result of adjustments to the exercise price or the issuance of the additional stock options that resulted from the aforementioned modification.50(benefit) expense from continuing operations(benefit) in the consolidated statements of income and comprehensive income consists of: Years Ended December 31, Years Ended December 31, 2016 2015 2019 2018 Current: Federal $ 766,000 $ 559,000 $ 1,078,000 $ (39,000 ) State and local 208,000 137,000 312,000 24,000 Foreign 41,000 14,000 3,000 19,000 Total current 1,015,000 710,000 1,393,000 4,000 Deferred: Federal (3,638,000 ) 161,000 513,000 268,000 State and local (308,000 ) (33,000 ) (105,000 ) (15,000 ) Foreign (24,000 ) (13,000 ) (4,000 ) (4,000 ) Total deferred (3,970,000 ) 115,000 404,000 249,000 Totals $ (2,955,000 ) $ 825,000 $ 1,797,000 $ 253,000 TheAt December 31, 2019, the Company has ahad state net operating loss carryforwardcarryforwards of $791,000,approximately $4,112,000, which expiresexpire through 2039.2036.situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. During 2018, the Company finalized its computation of the impact of the Act which resulted in a 3.4% reduction in its effective tax rate.49 December 31, December 31, 2016 2015 2019 2018 Deferred tax assets: Bad debt reserves $ 28,000 $ 54,000 $ 17,000 $ 17,000 Inventory reserves 1,185,000 1,058,000 653,000 615,000 Warranty and other reserves 255,000 179,000 77,000 78,000 Stock-based compensation 485,000 531,000 212,000 184,000 Goodwill 1,962,000 — 866,000 940,000 Acquisition costs 223,000 170,000 Net operating losses - federal — 340,000 Net operating losses - state 77,000 91,000 Other 11,000 34,000 20,000 18,000 3,926,000 1,856,000 2,145,000 2,453,000 Deferred tax (liabilities): Prepaid expenses (177,000 ) (190,000 ) (79,000 ) (373,000 ) Depreciation (720,000 ) (987,000 ) (1,154,000 ) (732,000 ) Intangibles (1,236,000 ) (2,676,000 ) (696,000 ) (720,000 ) Goodwill — (178,000 ) Net deferred tax assets (liabilities) $ 1,793,000 $ (2,175,000 ) Net deferred tax assets $ 216,000 $ 628,000 (loss) income from continuing operations before income taxes consisted of the following: Years ended December 31, 2016 2015 United States operations $ (8,790,000 ) $ 2,531,000 International operations 152,000 150,000 Income before tax $ (8,638,000 ) $ 2,681,000 51U.S. federal income taxes have not been provided on approximately $302,000 of undistributed earnings at the Company’s foreign subsidiary at December 31, 2016, because it is the Company’s intent to keep the earnings permanently reinvested. Years ended December 31, 2019 2018 United States operations $ 6,715,000 $ 1,004,000 International operations (7,000 ) 105,000 Income before tax $ 6,708,000 $ 1,109,000 (loss) income from continuing operations is as follows: Years ended December 31, 2016 2015 Federal income tax computed at statutory rates (34.0 )% 34.0 % (Decrease) increase in taxes resulting from: State and local taxes, net of Federal tax benefit (0.8 ) 2.2 Permanent differences - net 0.3 (2.1 ) Foreign rate differential (0.4 ) (1.6 ) Other 0.7 (1.7 ) Income tax (benefit) expense (34.2 )% 30.8 The Company follows the authoritative guidance issued by the FASB that pertains to the accounting for uncertain tax matters. A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:Balance January 1, 2015 $ 880,000 Lapse of statute of limitations (469,000 ) Interest accrual 21,000 Balance at January 1, 2016 432,000 Lapse of statute of limitations (143,000 ) Interest accrual 22,000 Balance December 31, 2016 $ 311,000 In connection with one of the acquisitions that occurred in 2014, the Company, in accordance with the ASC 740-10, recorded in Accrued liabilities an uncertain tax position of $311,000 as of December 31, 2016. The parties to such transaction entered into a tax exposure-related escrow agreement, which together with the indemnity obligations of the seller, the Company believes adequately covers the entire potential exposure related to the uncertain tax position. As a result, such liability was offset by an indemnification asset recorded in Prepaid expenses and other current assets in the consolidated balance sheet. Years ended December 31, 2019 2018 Federal income tax computed at statutory rates 21.0 % 21.0 % (Decrease) increase in taxes resulting from: State and local taxes, net of Federal tax benefit 2.4 0.6 Permanent differences - net 3.1 5.2 Foreign rate differential — (0.7 ) Tax Cuts and Jobs Act of 2017 — (3.4 ) Other 0.3 0.1 Income tax expense 26.8 % 22.8 % 20132016 through December 31, 2015. During the current year, the Internal Revenue Service completed the examination of the Company’s tax return for the year ended December 31, 2013 which resulted in the tax return being accepted as filed. 2019. 5250 $298,000$438,000 and $397,000$380,000 for the years ended December 31, 20162019 and 2015,2018, respectively.20162019 and 2015,2018, the Company had open purchase order commitments totaling approximately $9,836,000$4,871,000 and $10,224,000,$6,700,000, respectively.(d)leases certainhas put in place enhanced procedures at all locations, such as restricting international and domestic travel, adopting a variety of steps designed to ensure social distancing in our facilities, including working remotely where available and equipment through 2021. Generally,modifying our shifts, and increasing our cleaning and sanitizing procedures in our facilities, in an effort to protect its employees while still striving to meet its customers’ needs. The Company cannot reasonably estimate the facility leases carry renewal provisionslength or severity of this pandemic, or the extent to which the disruption may materially impact its consolidated financial position, results of operations, and require the Company to pay maintenance costs. Rental payments may be adjusted for increasescash flows in taxes and insurance above specified amounts. Operating lease expense for 2016 and 2015 was $371,000 and $418,000, respectively. Future minimum payments under non-cancelable operating leases with initial or remaining terms of more than one year as of December 31, 2016 were as follows:fiscal 2020.2017 $ 324,000 2018 160,000 2019 116,000 2020 80,000 2021 14,000 $ 694,000 NOTE 12—RELATED PARTY TRANSACTIONSThe President of one of the Company’s subsidiaries is part owner of one of that subsidiary’s vendors. During the years ended December 31, 2016 and 2015, the Company purchased approximately $469,000 and $690,000, respectively, of product from this vendor. At December 31, 2016 and 2015, the Company had trade payables to this vendor of $0 and $63,000, respectively. Additionally, during 2016 and 2015, the Company recorded sales to this vendor of $9,000 and $7,000, respectively.Additionally, this same individual is part owner of the facility located in Punxsutawney, Pennsylvania, which one of the Company’s subsidiaries leases. This lease expires in 2021, with rent of approximately $76,000 per annum.Subsequent to year end, this President left the employment of the Company, to pursue other interests. 5351 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosuresITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures Item 9A. Controls and ProceduresITEM 9A. Controls and Procedures 2016,2019, the effectiveness of the Company's disclosure controls and procedures, which were designed to be effective at the reasonable assurance level. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company'sCompany's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company's disclosure controls and procedures as of December 31, 2016,2019, the Company’s management, including its CEO and CFO, concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level at that date.consolidated financial statementsConsolidated Financial Statements for external purposes in accordance with generally accepted accounting principles.consolidated financial statementsConsolidated Financial Statements in accordance with generally accepted accounting principles, and that the Company’s receipts and expenditures are being made only in accordance with the authorizations of its management and directors; and2016.2019. Management based this assessment on criteria for effective internal control over financial reporting described in “Internal Control—Integrated Framework 2013” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, the Company’s Management, including its CEO and CFO concluded that its internal control over financial reporting was effective at December 31, 2016.2019.52 5420162019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.ITEM 9B. Other Information 5553 Item 10. Directors, Executive Officers and Corporate GovernanceITEM 10. Directors, Executive Officers and Corporate Governance 2017,2020, to be filed with the Securities and Exchange Commission within 120 days following the end of the Company’s year ended December 31, 2016.2019.Item 11. Executive CompensationITEM 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Director IndependenceITEM 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accounting Fees and ServicesITEM 14. Principal Accounting Fees and Services 5654 ITEM 15. Exhibits and Financial Statement Schedules Item 15. Exhibits and Financial Statement Schedules Page a) List of Financial Statements, Financial Statement Schedules, and Exhibits (1) List of Financial Statements The consolidated financial statements of the Company and its subsidiaries are included in Item 8 of Part II of this report. 25 (2) All schedules for which provision is made in the applicable accounting regulations of the Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. (3) List of Exhibits 57 Page a) List of Financial Statements, Financial Statement Schedules, and Exhibits (1) List of Financial Statements The Consolidated Financial Statements of the Company and its subsidiaries are included in Item 8 of Part II of this report. 22 (2) All schedules for which provision is made in the applicable accounting regulations of the Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. (3) List of Exhibits 55 5755 Exhibit Number Description of Exhibit 10.1 Second Amended and Restated Loan and Security Agreement dated as of August 13, 2014,April 5, 2017, by and among the Registrant, Florida Pneumatic Manufacturing Corporation, Hy-Tech Machine, Inc., Nationwide Industries, Inc., ATSCO Holdings Corp., Continental Tool Group, Inc., Countrywide Hardware, Inc., Embassy Industries, Inc., Exhaust Technologies, Inc., Green Manufacturing, Inc., Pacific Stair Products, Inc., WILP Holdings, Inc., Woodmark International, L.P., and Capital One Business Credit Corporation, as lender and agent (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated August 13, 2014).10.2Second Amended and Restated Revolver Note dated as of August 13, 2014 by the Registrant, Florida Pneumatic Manufacturing Corporation, Hy-Tech Machine, Inc., Nationwide Industries, Inc. and ATSCO Holdings Corp., in favor of and Capital One Business Credit Corporation (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated August 13, 2014).10.3Tranche A Term Loan Note dated as of August 13, 2014 by the Registrant, Florida Pneumatic Manufacturing Corporation, Hy-Tech Machine, Inc., Nationwide Industries, Inc. and ATSCO Holdings Corp, in favor of and Capital One Business Credit Corporation (Incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K dated August 13, 2014).10.4Tranche B Term Loan Note datedJiffy Air Tool, Inc. (formerly known as of August 13, 2014 by the Registrant, Florida Pneumatic Manufacturing Corporation, Hy-Tech Machine, Inc.Bonanza Holdings Corp.), Nationwide Industries, Inc. and ATSCO Holdings Corp in favor of and Capital One Business Credit Corporation (Incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K dated August 13, 2014).10.5Amended and Restated Capex Loan Note dated as of August 13, 2014 by the Registrant, Florida Pneumatic Manufacturing Corporation, Hy-Tech Machine, Inc.Bonanza Properties Corp., Nationwide Industries, Inc. and ATSCO Holdings Corp in favor of and Capital One Business Credit Corporation. (Incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K dated August 13, 2014).10.6Purchase Agreement, dated as of October 14, 2014, by and between the Registrant and Timothy J. Stabosz (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated October 14, 2014). 10.7Waiver and Amendment No. 1 to the Amended and Restated Loan and Security Agreement, dated as of October 14, 2014, by and among the Registrant, Florida Pneumatic Manufacturing Corporation, Hy-Tech Machine, Inc., Nationwide Industries, Inc., ATSCO Holdings Corp, Continental Tool Group, Inc., Countrywide Hardware, Inc., Embassy Industries, Inc., Exhaust Technologies, Inc., Green Manufacturing, Inc., Pacific Stair Products, Inc., WILP Holdings, Inc., Woodmark International, L.P., and Capital One Business Credit Corporation, as lender and agent (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated October 14, 2014).58 5956 57 6058 By: /s/ Richard A. Horowitz By: /s/ Joseph A. Molino, Jr. Richard A. Horowitz Joseph A. Molino, Jr. Chairman of the Board Vice President President Principal Financial and Principal Executive Officer Accounting Officer Date: March 29, 201730, 2020 Date: March 29, 201730, 2020Name Title Date /s/ Richard A. Horowitz Director March 29, 201730, 2020Richard A. Horowitz /s/Jeffrey D. Franklin Director March 29, 201730, 2020Jeffrey D. Franklin /s/Howard Brod Brownstein Director March 29, 201730, 2020Howard Brod Brownstein /s/Kenneth M. Scheriff Director March 29, 201730, 2020Kenneth M. Scheriff /s/ Mitchell A. Solomon Director March 29, 20172020Mitchell A. Solomon /s/Richard Randall Director March 29, 201730, 2020Richard Randall 6159