P&F INDUSTRIES, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 20172021
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 isare 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,” “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 lookingForward-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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PART I
P&F Industries, Inc. (“P&F”) is a Delaware corporation incorporated on April 19,in 1963. For all periods presented until February 11, 2016 (the “Nationwide Closing Date”),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”) are wholly-owned subsidiaries of Florida Pneumatic. Effective April 5, 2017, Florida Pneumatic, through a wholly-owned subsidiary, purchased substantially all of the operating assets, less certain payables ofand Jiffy Air Tool, Inc. (“Jiffy”). See Note 3 to our Consolidated Financial Statements for further discussion., are all wholly-owned subsidiaries of Florida Pneumatic. The business of Air Tool Service Company (“ATSCO”) operates through a wholly-owned subsidiary of Hy-Tech. In October 2019, the Company through a wholly-owned subsidiary of Hy-Tech, acquired 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 directly, and through its wholly-owned subsidiaries Exhaust Technologies Inc. (“ETI”), Universal Air Tool Company Limited (“UAT”), and Jiffy Air Tool, Inc. (“Jiffy”), imports, manufactures, and sellsmarkets pneumatic hand tools most of which are of its own design, primarily to the retail, industrial, automotive and aerospace 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 by electricity or a 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-five75 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,”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 to the automotive service and repair market (“automotive market”). Users of Florida Pneumatic’s hand tools include industrial maintenance and production staffs, do-it-yourself mechanics, professional automobile mechanics and auto body personnel. Jiffy manufactures and distributes pneumatic tools and components primarily to aerospace manufacturers. Lastly, Jiffy, a manufacturer and distributor of pneumatic tools and components acquired in April 2017, has enabled Florida Pneumatic to approach the aerospace sector with a much stronger brand.
Florida Pneumatic also markets, through its Berkley Tool division (“Berkley”), a product line that 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 also assembles and markets a line of compressor air filters.
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 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’s products are sold offdirectly to the shelf.retailers, direct to customers and through distributors. Currently, there is minimal seasonality to Florida Pneumatic’s 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 20172021, Florida Pneumatic purchasedsourced approximately36% 16% of its pneumatic tools from China,63% 19% come from Vietnam, and 62% from Taiwan and 1%with the balance from Japan, Europe and Europe.domestically. Florida Pneumatic performs final assembly on certain of its products at its factory in Jupiter, Florida.
Hy-Tech
Hy-Tech designs, manufactures, and distributesmarkets industrial pneumatic tools, industrial gears, hydrostatic test plugssystems, gearing, accessories, and a wide variety of replacement parts under thevarious brands including ATP, ATSCO, OZAT, Numatx, ThaxtonNUMATX, and Quality Gear.Thaxton. Hy-Tech produces and sells over sixty types ofheavy-duty pneumatic impact tools, which include heavy dutygrinders, air tools, industrial grinders, impact sockets,motors, hydro-pneumatic riveters, air motorshydrostatic test plugs, impact sockets and custom gears, with prices ranging from $450$300 to $42,000.
ItsHy-Tech’s “Engineered Solutions” products are sold directdirectly to major end-users, as well asOriginal Equipment Manufacturers (“OEMs”), and industrial branded products are sold through a broad network of specialized industrial and fluid power distributors. Industries served includedistributors serving the power generation, petrochemical, aerospace, construction, railroad, mining, ship building and fabricated metals.metals industries. Hy-Tech also manufacturesworks directly with its industrial customers, designing and manufacturing products from finished components assemblies, finished product andto complete turnkey systems for various Original Equipment Manufacturersto be sold under their own brand names.
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Hy-Tech’s Power Transmission Group, or PTG, is a custom gear, gearbox and power transmission system manufacturer. In addition to manufacturing a broad range of standard and custom gears for manufacturers in a wide variety of industries, PTG reverse engineers existing gears as well as designs new gears, utilizing state-of-the-art technologies, including 3D imaging and Gleason Gear modeling software.
Other than a line of sockets sold under the “OZAT” brand name that are imported from Israel, and a small number of parts,Nearly all Hy-Tech productsbrands are manufactured at its facilities 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 sold through its in-housemanaged by both direct sales force as well aspersonnel and a network of specialized manufacturer representatives. Further, its products are sold off the shelfas standard off-the-shelf and also are produced andcustomized to be sold to customer’sfor customer specific specifications.
The business is not seasonal but may be subject to periodic outage and maintenance schedules in refineries, power generation facilities and chemical plants. The primary competitive factors in their industrial markets arevalue proposition for Hy-Tech’s products is quality, value,design engineering expertise, product availability, breadth and availability of products, responsive customer service and readily available 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 Nationwide 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 Nationwide 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 Nationwide Closing Date, Countrywide sold Nationwide to an unrelated third party for approximately $22.2 million.
In November 2016, Countrywide sold the land and building that 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
The Company is not dependent on anyDuring 2021 and 2020 it had one customer. During 2017 we had two retail customers, Sears andcustomer, The Home Depot, whichthat accounted for 5.9%26.1% and 27.1%26.3%, respectively, of its revenue. Other than the Company’s revenueaforementioned, in 2021 and 13.6% and 29.8%, respectively, in 2016. The2020, the Company electeddid not to renew an agreement with Sears, which terminated on September 30, 2017.
have any customer that accounted for more than ten percent of its consolidated revenue.
Employees
The Company employed 171165 full-time employees as of December 31, 2017.2021. 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.
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:
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Business and Operational Risks
The circumstances surrounding the COVID-19 pandemic continue to evolve and it is not possible to predict the full nature and extent of the impacts of the COVID-19 pandemic. However, the Company expects the continued spread of COVID-19 and reactions by governments and others to continue the economic slowdown in a manner that may remain significant and, therefore, could extend the duration of the period of reduced demand for the Company’s products and disruption of its supply chain. Additionally, deteriorating economic conditions could result in material impairment charges in the value of certain of the Company’s assets. Moreover, circumstances surrounding the COVID-19 pandemic have negatively impacted global financial markets leading to greater volatility and decreased access to capital. If such conditions continue, the Company’s ability to finance its operations and expenditures may be negatively impacted. Any of the risks set forth in this paragraph and the preceding paragraph could have a material adverse effect on our business, results of operations and financial position.
Additional public health crises could also emerge in the future, including other pandemics or epidemics. Such public health crises could pose further risks to the Company and could also have a material adverse effect on our business, results of operations and financial position.
| ● | Risks associated with sourcing from overseas. We import finished goods and component parts. Any difficulty or inability on the part of manufacturers of our products or other participants in our supply chain in obtaining sufficient financing to purchase raw materials or to finance general working capital needs, their inability to obtain raw materials due to shortages or other factors, or their inability to be able to maintain a sufficient workforce due to a variety of potential factors, may result in delays or non-delivery of shipments of our products. Additionally, material increases in raw material commodity prices could |
| 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 |
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| 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. |
| ● | Importation issues. 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, as well as increase our costs. In addition, this could cause us to maintain higher levels of inventory, in order 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. Beginning in early 2021, but magnified during the third and fourth quarter, we encountered severe delays in receiving inventory from our Asian suppliers, in addition to materially increased costs. This has caused intermittent shortages of inventory. The major reasons for these issues include the following: increased price of fuel; shortage of shipping containers; congestion at the ports in Asia and the United States; and shortage of truck drivers in the United States. |
| ● | Customer concentration. We have several key customers, one of which accounted for approximately 26.1% of our 2021 consolidated revenue and 35.9% of our consolidated accounts receivable on December 31, 2021. Loss of key customers or a material negative change in our relationships with our key customers could have a material adverse effect on our business, results of operations or financial position. |
| ● | 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 2022. There can also be no assurance that the level of sales generated from these new products or geographic markets relative to our expectations will materialize. |
| ● | Competition. The markets in which we sell our products are highly competitive based on price, quality, availability, post-sale service and brand-name awareness. Several competing companies are well-established manufacturers that compete on a global basis. |
| ● | Price reductions. Price reductions in response to customer and competitive pressures, as well as price reductions or promotional actions taken in order to drive demand, could have a material adverse effect on our business, results of operations or financial position. |
Industry and Economic Risks
| 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 us. Prices for oil and gas are subject to large fluctuations in response to relatively minor changes in the supply of, and demand for, oil and gas, market uncertainty and a variety of other economic factors that are beyond our control. Worldwide economic, political, and military events, including war (including the military action by Russia in Ukraine), terrorist activity, events in the Middle East and initiatives by the Organization of the Petroleum Exporting Countries (OPEC), have contributed, and are likely to continue to contribute, to price and volume volatility. Such volatility could result in a material adverse effect on our business, results of operations or financial position. |
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| ● | 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. |
| Risks associated with |
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.
| Adverse changes in currency exchange |
| ● | 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. |
Financing Risks
| 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 asset-based credit facility and our other indebtedness. Also, should there be an event of default, or a need to obtain waivers following an event of default, we may be subject to higher borrowing costs and/or more restrictive covenants in future periods. Further, the amount available for borrowing under our asset-based revolving loan facility is subject to a borrowing base, which is determined by taking into account, among other things, our accounts receivable, inventory and machinery and equipment. Fluctuations in our borrowing base impact our ability to borrow funds pursuant to the revolving loan facility. |
| ● | 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. |
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Strategic Risks
| 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: |
| Loss or significant decline in the revenue of customers of the acquired businesses; |
| Inability to successfully integrate |
| 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. |
Legal, Regulatory and Compliance Risks
| 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. |
| 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 us for which we may not be adequately insured. |
| ● | The threat of terrorism, military actions 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, military action 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. On February 24, 2022, Russian forces launched significant military action against Ukraine. The impact to Ukraine as well as actions taken by other countries, including new and stricter sanctions imposed by the U.S. and other countries and companies and organizations against officials, individuals, regions, and industries in Russia, and actions taken by Russia and certain other countries in response to such sanctions, could also have a material adverse effect on our operations. |
| Business disruptions or other costs associated with information technology, cyber-attacks, system implementations, data privacy, or catastrophic losses.We rely heavily on computer systems to manage and operate our businesses, and record and process transactions. Computer systems are important to production planning, customer service and order fulfillment among other business-critical processes. Consistent and efficient operation of the computer hardware and software systems is imperative to the successful sales and earnings performance. Despite efforts to prevent such situations, and |
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| loss control and risk management practices that partially mitigate these risks, our systems may be affected by damage or interruption from, among other causes, fire, natural disasters, power outages, system failures |
Computer hardware and storage equipment that is integral to efficient operations, such as e-mail, telephone, and other functionality, is concentrated in certain physical locations in which we operate. Additionally, we rely on software applications and enterprise cloud storage systems and cloud computing services provided by third-party vendors, and our business may be adversely affected by service disruptions or security breaches in such third-party systems. Security threats and sophisticated computer crime pose a potential risk to the security of our information technology systems, cloud storage systems, networks, services, and assets, as well as the confidentiality and integrity of some of our customers' data as well as other personal identifiable information maintained by us. If we suffer a loss or disclosure of business or stakeholder information including personal identifiable information due to security breaches, including as a result of human error, technological failures or cybersecurity-related attacks, we may suffer interruptions in our ability to manage operations as well as reputational, competitive, or business harm, which may adversely impact our results of operations and financial condition. We maintain a comprehensive system of preventive and detective controls through our security programs; however, given the rapidly evolving nature and proliferation of cyber threats, our controls may not prevent or identify all such attacks in a timely manner or otherwise prevent unauthorized access to, damage to, or interruption of our systems, operations and data, and we cannot eliminate the risk of human error or employee or vendor malfeasance.
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. Furthermore, the headings under which the risk factors are arranged are not necessarily exclusive, and all of the risk factors should be read in their entirety. 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
None.
Florida Pneumatic ownsleases approximately 42,000 square feet in a 72,000 square foot plant facility located in Jupiter, Florida, from which it conductshouses its operations.corporate offices and warehouse. This lease is for a five-year period ending June 2024, which can be reduced by up to one year upon twelve months’ notice by either party. 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.
Jiffy’s operation is located in Carson City, Nevada in a 17,500 square foot facility owned by another subsidiary of Florida Pneumatic.
Hy-Tech owns and operates out of a 51,000 square foot plant facility located in Cranberry Township, Pennsylvania andPennsylvania. Hy-Tech also leases a 13,20042,000 square foot facility located in Punxsutawney, Pennsylvania, whichPennsylvania. This lease expires in 2021October 2024 and does not have a renewal clause.
In connection withhas two three-year options to renew the Jiffy acquisition a wholly-owned subsidiary of Florida Pneumatic purchased certain real property, which consisted of land and the building from which Jiffy operates in Carson City, NV. The building is approximately 17,500 square feet. See Note 3 to Consolidated Financial Statements for further discussion.
lease.
The Company’sCompany leases its executive office of approximately 5,0005,600 square feet is located in an office building in Melville, New York and is leased from a non-affiliated landlord.York. This lease expires in August 2022. Beginning December 2018,31, 2025. The Company has the Company can giveright to terminate this lease effective any time after August 31, 2023, with at least one-year advance written notice to the landlord.
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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 three 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 of Financial Condition and Results of Operations – Liquidity and Capital Resources and Notes to Consolidated Financial Statements.
In November 2016, Countrywide sold the 56,250 square foot facility located in Tampa, Florida in which Nationwide conducted its business. This property was sold to an unrelated third party in November 2016. See Note 2 to Consolidated Financial Statements for further discussion.
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
None.
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PART II
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 ranges of the high and low closing sales prices for our Common Stock during the last two years were as follows:
| 2017 | High | Low | ||||||
| First Quarter | $ | 8.74 | $ | 6.86 | ||||
| Second Quarter | 6.98 | 5.71 | ||||||
| Third Quarter | 7.70 | 5.66 | ||||||
| Fourth Quarter | 8.63 | 6.81 | ||||||
| 2016 | High | Low | ||||||
| First Quarter | $ | 11.62 | $ | 7.80 | ||||
| Second Quarter | 10.15 | 8.29 | ||||||
| Third Quarter | 9.39 | 7.70 | ||||||
| Fourth Quarter | 8.69 | 6.75 | ||||||
As of March 23, 2018,2022, there were approximately 7003,181,286 holders of record of our Common Stock and the closing sale price of our stock as reported by the Nasdaq Global Market was $7.40.Stock.
From our incorporation in 1963 through December 31, 2015, we declared no cash dividends on our Common Stock. On March 8, 2016,Prior to 2020, the 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. Additionally, the Company’s Board of Directors 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, the Company’s Board of Directors declared three quarterlya cash dividendsdividend of $0.05 per share to stockholders during 2016 and four quarterly dividends during 2017.
in February 2020. However, due primarily to the negative impacts of the ongoing COVID-19 global pandemic, the Company’s Board of Directors suspended its cash dividend commencing with the second quarter of 2020.
The Company continueshas not made any definitive determination as to maintain the dividend policy; however, the declarationwhether it will declare and pay cash dividends in 2022. The Company’s Board of dividends under this policy going forward is dependent uponDirectors will consider such factors as the Company’s financial condition, results of operations, capital requirements and other factors deemed relevant byit deems necessary in deciding whether to reinstate the Company’s Boardissuance of Directors.quarterly dividends.
The following table presents our repurchase activity of our Common stock during the three month period ended December 31, 2017:
| Total Number of | ||||||||||||||||
| Shares Purchased as | Maximum Number of | |||||||||||||||
| Part of Publicly | Shares that may yet be | |||||||||||||||
| Total Number of | Average Price | Announced Plan | Purchased Under the | |||||||||||||
| Period | Shares Purchased | Paid per Share | or Program | Plan or Program (1) | ||||||||||||
| October, 2017 | 2,631 | $ | 7.45 | 2,631 | 85,004 | |||||||||||
| November, 2017 | 3,939 | $ | 7.40 | 3,939 | 81,065 | |||||||||||
| December, 2017 | 27,943 | $ | 7.88 | 27,943 | 53,122 | |||||||||||
ITEM 6. Selected Financial Data[Reserved]
Not required.
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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT OVERVIEW
Overview
During 2017, our results of operations were impacted by a number of significant factors, such as:
KEY INDICATORS
Economic Measures
Much of our business is driven by the ebbs and flows of the general economic conditions in both the United States and, to a lesser extent, abroad. We focus on a wide array of customer types including, but not limited to large retailers, aerospace manufacturers, large and small resellers of pneumatic tools and parts, and automotive related customers, and many OEM customers. We tend to track the general economic conditions of the United States, industrial production, and general retail sales.
A key economic measure relevant to us is the cost of the raw materials in our products. Key materials include metals, especially various types of steel and aluminum. Also important is the value of the United States Dollar (“USD”) in relation to the Taiwanese dollar (“TWD”), as we purchase a significant portion of our products from Taiwan. Purchases from Chinese sources are made in USD; however, if the Chinese currency, the Renminbi (“RMB”), were to be revalued against the USD, there could be a negative impact on the cost of our products. Additionally, we closely monitor the fluctuation inof the Great British Pound (“GBP”) to the USD, and the GBP to TWD, both of which has hadcan have an impact on ourthe consolidated results in 2017. In addition, we monitor the number of operating rotary drilling rigs in the United States,results.
We consider tariffs a key economic measure, as a meanssignificant portion of gauging oil production, which is a key factor in our sales intoproducts imported by Florida Pneumatic are subject to these tariffs.
Lastly, the oil and gas exploration and extraction sector.
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 operations are:are orders; shipments; development of new products; customer retention; inventory levels and productivity. These measures are recorded and monitored at various intervals, including daily, weekly, and monthly. To the extent these measures are relevant, they are discussed in the detailed sections below.
Financial Measures
Key financial measures we use to evaluate the results of our business include:include various revenue metrics; gross margin; selling, general and administrative expenses; earnings before interest and taxes; earnings before interest, taxes, depreciation, and amortization; operating cash flows and capital expenditures; return on sales; return on assets; days sales outstanding and inventory turns. These measures are reviewed at monthly, quarterly, and annual intervals and compared to historical periods as well as to established objectives. To the extent that these measures are relevant, they are discussed in detail below.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our 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, revenuesrevenue and expenses. On an ongoing basis, we evaluate our estimates pertaining 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.
We 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.
Revenue Recognition
In accordanceOur accounting policy relating to revenue recognition reflects the impact of the adoption of Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with current accounting literature, we recognize revenue when persuasive evidence of an arrangement exists, delivery,Customers (“ASC 606”), which occurs when title has passedis discussed further in our 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, 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; fordiscounts to certain customers, typically related to customer purchase volume, 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 wouldwill provide the necessary provision against sales.
See Note 1Performance 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 other performance obligations as of December 31, 2021.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are customer obligations due under normal trade terms. We sell our products to retailers, distributors, OEMs and OEMsend-users 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.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
CRITICAL ACCOUNTING POLICIES AND ESTIMATES (CONTINUED)
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. Further, any unanticipated change in the creditworthiness of any of our 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, 20172021, and 20162020 were adequate. However, actual write-offs in future periods could exceed the recorded allowance.
Inventories
Inventories are valued at the lower of cost or market.net realizable value. Cost is determined by the first-in, first-out method, or the weighted average method. Inventory, whichmoving weight average. Its finished products inventory includes materials, labor, and manufacturing overhead costs, is recorded net of an allowance for obsolete or slow movingslow-moving inventory (“OSMI”), as well as any 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.
Goodwill and Indefinite-Lived Intangible Assets
In accordance and compliance with authoritative guidance issued byGoodwill is tested for impairment at the Financial Accounting Standards Board (“FASB”), we test goodwill for impairmentreporting unit level on an annual basis. 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 levelThe Company considered its market capitalization and the carrying value of reporting referred to as "the reporting unit." The Company's reporting units are Hy-Techits assets and Florida Pneumatic. We have the option toliabilities, including goodwill, when performing its goodwill impairment test. In evaluating goodwill for impairment, we first assessassessed qualitative factors to determine whether the existence of events or circumstances leads to a determination that it iswas more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit iswas less than its carrying amount. Qualitative factors considered included, for example, macroeconomic and industry conditions, overall financial performance, and other relevant entity-specific events. If we bypassed the qualitative assessment or concluded that it was more likely than not that the fair value of a reporting unit was less than its carrying value, we then performed a quantitative goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment to be recognized, if any. If the carrying value of the reporting unit’s goodwill exceeded the implied fair value of the goodwill, an impairment loss was recognized in the amount of that excess, not to exceed the carrying amount of goodwill. See Note 1 – Summary of Significant Accounting Policies in Notes to our Consolidated Financial Statements for further information.
Intangible assets represent trademarks, customer agreements and patents related to our brands. Finite-lived intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets. Indefinite-lived intangible assets are not amortized, but instead are subject to impairment evaluation. This test is performed as of the last day in November, or more frequently if we believe indicators of impairment might exist through the use of discounted cash flow models. Assumptions used in our discounted cash flow models include: (i) discount rates; (ii) projected annual revenue growth rates; and (iii) projected long-term growth rates. Our estimates also factor in economic conditions and expectations of management, which may change in the future based on period-specific facts and circumstances. Other intangibles with determinable lives, including certain trademarks, customer agreements and patents, are evaluated for the possibility of impairment when certain indicators are present, and are otherwise amortized on a straight-line basis over the estimated useful lives of the assets (currently ranging from 3 to 20 years).
When conducting our impairment assessment of indefinite-lived intangible assets, we initially perform a qualitative evaluation of whether it is more likely than not that the asset is impaired. If it is determined by a qualitative evaluation that it is more likely than not that the asset is impaired, we then test the asset for recoverability. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to its future discounted net cash flows. If the carrying amount of such assets are considered to be impaired, the reporting unitimpairment to be recognized is less than its fair value, no impairment exists and no further action is required. Ifmeasured by the amount by which the carrying amount of a reporting unitthe assets exceeds itsthe fair value of the entitywill record an impairment charge based onassets. Assets to be disposed of are reported at the excesslower of a reporting unit'sthe carrying amount over itsor fair value.value less costs to sell.
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The Company also tests indefinite-lived intangible assets for impairment at least annually asManagement’s Discussion and Analysis of the last dayFinancial Condition and Results 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.Operations
CRITICAL ACCOUNTING POLICIES AND ESTIMATES (CONTINUED)
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'sasset’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.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 consolidated financial statementsConsolidated Financial Statements in the period enacted. Further, we evaluate the likelihood of realizing a 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.
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-notmore 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 operations and comprehensive income (loss) 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 the Company'sour financial statements or tax returns and future profitability. The Company'sOur accounting for deferred tax consequences represents itsour best estimate of those future events. Changes in the Company's estimates, due to unanticipated events or otherwise, could have a material effect on itsour financial condition and results of operations. The CompanyWe continually evaluates itsevaluate our deferred tax assets to determine if a valuation allowance is required.
For current and deferred tax provisions, the authoritative guidance requires entities to account for the effects of new income tax legislation in the same reporting period that the tax legislation is enacted. For recent tax law changes known as the U.S. Tax Cuts and Jobs Act of 2017 (the "2017 Act") enacted on December 22, 2017, SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, permits us to calculate and recognize provisional tax estimates for our fourth quarter of fiscal 2017 for the accounting related to the enactment of the 2017 Act. Any subsequent adjustments to the provisional estimates will be reflected in our income tax provisions/benefits during one or more periods in fiscal 2018. Additional information is contained in Note 11, Income Taxes, to the consolidated financial statements.
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RESULTS OF OPERATIONS
2017 compared to 2016
Continuing operations
Unless otherwise discussed elsewhere in the Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
During 2021, significant factors that impacted our results of operations were the:
| ● | Ongoing negative impact of the COVID-19 pandemic on revenue, income, and supply chain; |
| ● | Ongoing production slow-down by Boeing of its 737 MAX aircraft, as well as significant reductions in activity at other commercial and military aerospace manufacturing facilities; and |
| ● | Benefits provided under the CARES Act (Paycheck Protection Program Loan and Employee Retention Credit). |
TRENDS AND UNCERTAINTIES
COVID-19 PANDEMIC
On March 11, 2020, the World Health Organization designated the recent novel coronavirus, or COVID-19, as a global pandemic. COVID-19 was first detected in Wuhan City, Hubei Province, China and continued to spread, significantly impacting various markets around the world, including the United States. Various policies and initiatives have been implemented to reduce the global transmission of COVID-19.
The COVID-19 virus and the resultant global economic down-turn continued to have a negative impact on our 2021 results. Additionally, we believe thatthe supply-chain crisis as discussed below, is related to the pandemic. In addition, the COVID-19 pandemic has caused many of our relationships with our key customers and suppliers remain satisfactory. potential customers to refuse on-site visits, which is critical to generating revenue. We believe that until the above issues subside, our business will likely continue to be adversely affected.
BOEING/AEROSPACE
The largest factor drivingFederal Aviation Administration (“FAA”) and the improvementEuropean Union Aviation Safety Agency (“EASA”) have lifted the grounding of the 737 MAX. China, and the grounding of the 737 MAX aircraft, which is a large customer of Boeing, has not lifted the grounding on the 737 MAX aircraft. Boeing is currently holding completed 737 MAX aircraft destined for Chinese carriers. As a result of the aforementioned, and airline companies limiting deliveries of new aircraft due to weak air travel demand, we believe production at Hy-Tech was the growthBoeing of its engineered solutions business (“OEM business”) as discussed below.
We elected not737 MAX aircraft is likely to renew our supply agreement with Sears, which expired on September 30, 2017. This decision was based on a number of factors including Sears’ continuing financial difficulties,remain below the saleProduction levels that existed prior to both the onset of the Craftsman brandCOVID-19 pandemic. Further, the Federal Aviation Administration continues to Stanley Black & Deckerimpose close monitoring and approval of Boeings 787 Dreamliner. Until these issues are fully resolved, we will likely continue to have an adverse effect on our levelrevenue for the foreseeable future. In addition, production of working capital exposuremilitary and other commercial aircraft throughout the industry has slowed as well, we believe due to the ongoing global COVID-19 pandemic. However, we believe when all other commercial and military production lines throughout the United States come back online, an increase in relationour revenue should follow.
INTERNATIONAL SUPPLY CHAIN
Beginning in early 2021, but magnified during the third and fourth quarters, we encountered severe delays in receiving inventory from our Asian suppliers, which led to intermittent shortages of inventory. Further, during this same period and continuing into 2022, ocean freight costs have greatly increased. This trend of higher costs and delayed deliveries have continued into 2022. The major reasons for these issues include the following:
| ● | Increased price of fuel |
| ● | Shortage of shipping containers |
| ● | Congestion at the ports in Asia and the United States |
| ● | Shortage of truck drivers in the United States. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
At the present time, we believe the above-mentioned supply chain disruptions, along with increased freight and general domestic transportation costs will likely continue during 2022. It is unknown at this time how much, if any of the increased costs can be passed on to our return on that investment pertainingcustomers.
INVENTORY GROWTH
Our inventory increased to Sears. There is no Sears inventory exposure$24,021,000 at December 31, 2017. Further, the final remaining accounts receivable attributable to Sears2021, from $18,362,000 at December 31, 20172020. Such increase, most of approximately $212,000which took place at Florida Pneumatic, was collectedthe result of increased purchases during the second half of the year in fullorder to increase safety stock levels. This was necessary in January 2018. order to protect against significant delays in the receipt of overseas shipments beginning in mid-2021, which in turn had resulted in “out of stock” positions on several key items. Further, we received a relatively large order in late 2021 that is scheduled to ship to a customer in the first half of 2022. Lastly, it should be noted that inventory levels at December 31, 2020, were suppressed due primarily to sales and production levels being hampered by the pandemic. As such, a portion of this year-over-year inventory increase was designed to raise our inventory at all locations to safer pre-pandemic levels, in order to provide necessary inventory for growth.
TECHNOLOGIES
We believe that over time, several newer technologies and features will have a greater impact on the market for the Company’sour traditional pneumatic tool offerings. ThisThe impact of this evolution has been felt initially by the advent of someadvanced cordless operated hand tools in the automotive aftermarket. We are currently evaluatingcontinue to analyze the developmentpracticality of developing or incorporating more advanced technologies in our tool platforms.
OTHER MATTERS
DuringIn May 2021, Florida Pneumatic detected a ransomware attack on its information technology systems that caused data to be encrypted. At the first quarter of 2016, we sold Nationwide to an unrelated third party for approximately $22.2 million. As a result of this transaction, Nationwide’s 2016 results are reported under discontinued operations,present time, all critical Florida Pneumatic information technology systems have been remediated and are therefore excluded from continuing operations foroperational. We believe that our corporate office and our other subsidiaries, all periods presented. Please see Note 2 - Discontinued Operations, to our Consolidated Financial Statements for additional information.
In December of 2017, Florida Pneumatic and Home Depot agreed to launch an improved line of pneumatic tools to replace the current offering. We expect to begin shipment ofwhich operate on separate, independent networks, were not affected by this new product line sometime in the third quarter of 2018. Gross margin for the new product line will be approximately 2% less than the current product line. In order to promote the roll out of the new products, Florida Pneumatic has agreed to participate in the 2018 marketing efforts by contributing $1,000,000.
incident.
Other than the aforementioned, or matters that may be discussed below, there are no major trends or uncertainties that had, or we could have reasonably expected to have a material impact on our revenue, nor was there any unusual or infrequent event, transaction or any significant economic change that materially affected our results of operations.
Unless otherwise discussed elsewhere in the Management’s Discussion and Analysis, we believe that our relationships with our key customers and suppliers remain satisfactory.
RESULTS OF OPERATIONS
2021 compared to 2020
REVENUE
The tables set forth below provide an analysis of our revenue for the years ended December 31, 20172021, and 2016.2020.
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ConsolidatedManagement’s Discussion and Analysis of Financial Condition and Results of Operations
| Year Ended December 31, | ||||||||||||||||||||||||
| 2017 | 2016 | Increase | ||||||||||||||||||||||
| Revenue | Percent of revenue | Revenue | Percent of revenue | $ | % | |||||||||||||||||||
| Florida Pneumatic | $ | 46,471,000 | 78.8 | % | $ | 45,282,000 | 79.1 | % | $ | 1,189,000 | 2.6 | % | ||||||||||||
| Hy-Tech | 12,503,000 | 21.2 | 11,994,000 | 20.9 | 509,000 | 4.2 | ||||||||||||||||||
| Total | $ | 58,974,000 | 100.0 | % | $ | 57,276,000 | 100.0 | % | $ | 1,698,000 | 3.0 | % | ||||||||||||
Consolidated
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| |||||||||||||
|
| 2021 | | 2020 | | Increase |
| |||||||||
| | | | Percent of |
| |
| Percent of | | | | |
| |||
|
| Revenue |
| revenue |
| Revenue |
| revenue |
| $ |
| % |
| |||
Florida Pneumatic |
| $ | 41,488,000 | | 77.5 | % | $ | 38,276,000 |
| 77.9 | % | $ | 3,212,000 | | 8.4 | % |
Hy-Tech | |
| 12,066,000 | | 22.5 | |
| 10,860,000 |
| 22.1 | |
| 1,206,000 | | 11.1 | |
Total | | $ | 53,554,000 | | 100.0 | % | $ | 49,136,000 |
| 100.0 | % | $ | 4,418,000 | | 9.0 | % |
REVENUE
Florida Pneumatic
Florida Pneumatic markets its air tool products to four primary sectors within the pneumatic tool market; Automotive, Retail, Automotive, Industrial/catalogAerospace, and the Aerospace market.Industrial. It also generates revenue from its Berkley products line, as well as a line of air filters and other OEM parts (“Other”).
| Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||||
| 2017 | 2016 | Increase (decrease) | ||||||||||||||||||||||||||||||||||||||
| Revenue | Percent of revenue | Revenue | Percent of revenue | $ | % | |||||||||||||||||||||||||||||||||||
| Retail customers | $ | 19,894,000 | 42.8 | % | $ | 24,847,000 | 54.9 | % | $ | (4,953,000 | ) | (19.9 | )% | |||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||||||||||
|
| Year Ended December 31, |
| |||||||||||||||||||||||||||||||||||||
| | 2021 | | 2020 | | Increase (decrease) |
| |||||||||||||||||||||||||||||||||
| | | | Percent of | | | | Percent of | | | | | |
| ||||||||||||||||||||||||||
|
| Revenue |
| revenue |
| Revenue |
| revenue |
| | $ |
| % |
| ||||||||||||||||||||||||||
| Automotive | 13,901,000 | 29.9 | 14,576,000 | 32.2 | (675,000 | ) | (4.6 | ) | | $ | 14,543,000 |
| 35.1 | % | $ | 13,270,000 |
| 34.7 | % | $ | 1,273,000 | | 9.6 | % | ||||||||||||||||
| Industrial/catalog | 5,303,000 | 11.4 | 4,616,000 | 10.2 | 687,000 | 14.9 | ||||||||||||||||||||||||||||||||||
Retail | |
| 13,995,000 |
| 33.7 | |
| 12,940,000 |
| 33.8 | |
| 1,055,000 | | 8.2 | | ||||||||||||||||||||||||
| Aerospace | 6,506,000 | 14.0 | 320,000 | 0.7 | 6,186,000 | 1,933.1 | |
| 7,184,000 |
| 17.3 | |
| 8,087,000 |
| 21.1 | |
| (903,000) | | (11.2) | | ||||||||||||||||||
Industrial | |
| 5,289,000 |
| 12.7 | |
| 3,481,000 |
| 9.1 | |
| 1,808,000 | | 51.9 | | ||||||||||||||||||||||||
| Other | 867,000 | 1.9 | 923,000 | 2.0 | (56,000 | ) | (6.1 | ) | |
| 477,000 |
| 1.2 | |
| 498,000 |
| 1.3 | |
| (21,000) | | (4.2) | | ||||||||||||||||
| Total | $ | 46,471,000 | 100.0 | % | $ | 45,282,000 | 100.0 | % | $ | 1,189,000 | 2.6 | % | | $ | 41,488,000 |
| 100.0 | % | $ | 38,276,000 |
| 100.0 | % | $ | 3,212,000 | | 8.4 | % | ||||||||||||
Notable key factors impactingThe increase in Florida Pneumatic’s full year 2017total 2021 revenue when compared to the prior year was driven by its full year 2016Automotive, Retail and Industrial sectors. Specifically, the 9.6% increase in its Automotive revenue include: (i) a declinewas due primarily to stronger consumer demand for its AIRCAT brand of tools and accessories during 2021, compared to the prior year. The most significant portion of the growth in shipments torevenue of its Retail customers. As previously disclosed,sector (The Home Depot), was due to the demand for specific tools and accessories, which we elected notbelieve were used by its customers to renew a sales/service agreement with Sears, which expired September 30, 2017. This decision wascombat the primary factor for a $4.3 millionCOVID-19 pandemic. The largest year over year revenue growth occurred at its Industrial tools’ product line. This 51.9% growth was the result of stronger demand for its products in 2021 from its foundry, metal fabrication, manufacturing, and assembly, partially offset by a slight decline in Sears’s revenue; (ii) an approximate $1.0 million declineaerospace customers within this sector.
Most of the Aerospace revenue is attributable to Jiffy Air Tool. The Boeing Corporation is a major customer of Jiffy. The Boeing 737 MAX aircraft had been grounded by the FAA and the EASA in annual revenueMarch 2019. In 2021, both agencies lifted the “No Fly” ruling it imposed on all Boeing 737 MAX aircraft, allowing it to begin flights in the United States, and Europe. As a result, order activity from The Home Depot, due primarilyBoeing during the latter portion of 2021 began to their decisionslowly improve. However, it is uncertain how long, if ever, it will take for the Boeing Corporation to reduceincrease its manufacturing of its 737 MAX aircraft to a volume that would be comparable to 2019 levels. Lastly, we do note that orders from other aerospace companies and military aircraft manufacturers also improved slightly during the numberlatter portion of items offered for sale at certain locations,2021, compared to earlier in the year, and lastly; (iii),to the same period in 2020. Further, we believe that the hurricanesas both domestic and international travel increase and Boeing and other factors, which impacted primarily the southern portionmajor aircraft manufacturers begin to produce and deliver new aircraft, we could see a continuation of the United States, were a contributing factor toimproved order level within this Aerospace sector. However, no assurance can be made, and it is possible that this sector will remain depressed for the decline. With respect to our Automotive revenue, we believe that during 2017 two major automotive parts distributors were attempting to adjust their inventory levelsforeseeable future.
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Management’s Discussion and Analysis of approximately $200,000 in annual revenue at our UAT subsidiary in the United Kingdom also contributed to the decline in Automotive revenue.Our 2017 Industrial/catalog revenue increased 14.9% over 2016, due primarily to increased shipments to the US militaryFinancial Condition and general industries, as well as overall market sector strengtheningResults of this product line. Lastly, the Jiffy acquisition in April of this year has enabled us to approach the aerospace sector with a much stronger brand. As a result, our full year 2017 Aerospace revenue increased almost $6.2 million, over 2016 levels.Operations
REVENUE
Hy-Tech
Hy-Tech
Hy-Tech designs, manufactures, and sells a wide range of industrial products under the brands ATP, ATSCO, OZAT and NUMATX, which are categorized as “ATP”ATP for reporting purposespurposes. In addition to Engineered Solutions, products and include heavy duty air tools, industrial grinders, impact socketscomponents manufactured for other companies under their brands are included in the OEM category in the table below. PTG revenue is comprised of products manufactured and OEMsold by Hy-Tech’s gear business. Hy-Tech’sNUMATX, Thaxton and other peripheral product lines, Thaxton and Quality Gear,such as general machining, are reported as “Hy-Tech Machine” and includeOther.
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| Year Ended December 31, | | |||||||||||||
| | 2021 | | 2020 | | Increase (decrease) | | |||||||||
| | | | Percent of | | | | Percent of | | | | |
| |||
|
| Revenue |
| revenue |
| Revenue |
| revenue |
| $ |
| % |
| |||
OEM | | $ | 5,842,000 |
| 48.4 | % | $ | 4,272,000 |
| 39.4 | % | $ | 1,570,000 | | 36.8 | % |
PTG | |
| 2,846,000 |
| 23.6 | |
| 3,326,000 |
| 30.6 | |
| (480,000) | | (14.4) | |
ATP | |
| 3,024,000 |
| 25.1 | |
| 2,796,000 |
| 25.7 | |
| 228,000 | | 8.2 | |
Other | |
| 354,000 |
| 2.9 | |
| 466,000 |
| 4.3 | |
| (112,000) | | (24.0) | |
Total | | $ | 12,066,000 |
| 100.0 | % | $ | 10,860,000 |
| 100.0 | % | $ | 1,206,000 | | 11.1 | % |
Although still somewhat hampered by the hydro-pneumatic riveters, hydrostatic test plugs, air motors and custom gears.
| Year Ended December 31, | ||||||||||||||||||||||||
| 2017 | 2016 | Increase (decrease) | ||||||||||||||||||||||
| Revenue | Percent of revenue | Revenue | Percent of revenue | $ | % | |||||||||||||||||||
| ATP | $ | 11,116,000 | 88.9 | % | $ | 10,598,000 | 88.4 | % | $ | 518,000 | 4.9 | % | ||||||||||||
| Hy-Tech Machine | 1,387,000 | 11.1 | 1,396,000 | 11.6 | (9,000 | ) | (0.6 | ) | ||||||||||||||||
| Total | $ | 12,503,000 | 100.0 | % | $ | 11,994,000 | 100.0 | % | $ | 509,000 | 4.2 | % | ||||||||||||
The major components ofill effects that the overall improvement inCOVID-19 pandemic has placed upon Hy-Tech’s full year 2017results during 2021, it was able to increase its total revenue by 11.1%, compared to full year 2016 revenue are due primarily to2020. As illustrated in the increase in revenuetable above, the growth came from its OEM and ATP products lines. Significant orders from certain major OEM customers, along with its Engineered Solutions approach, which continues to gain market momentum, provided the impetus for the growth in OEM. Its ATP revenue improvement was due in large part to a rebound in general economic activity. However, as stated in previous filings, Hy-Tech decided to focus a greater portion of its product development and marketing efforts to pursue alternate markets where it believes it could exploiton its engineering and manufacturing expertise, and develop different applications for their tools, motors and accessories.Engineered Solutions. We believe the development of the OEM business will continue to provideEngineered Solutions and PTG product offerings provides Hy-Tech an opportunity to generate new, additional sources of revenue in the future. During 2017 revenue from this initiative was $1,067,000,Additionally, in an effort to increase of $795,000 over 2016’s revenue.. Offsetting these improvements was a net decline of $277,000 in its salemarket penetration, Hy-Tech has “refreshed” and/or improved several of its ATP tools, including providing additional resourses to support the marketing of as its Magnum Force line of large impact wrenches. Hy-Tech believes that the Magnum Force line, a series of super duty industrial impact tools, that are designed specifically for use in demanding environments, such as refinery turnarounds, power generation outages, structural steel erection, mining and partsother similar bolting applications, is beginning to gain acceptance. The above increases were partially offset by a decline in its PTG and sockets, as well as lower shipmentsOther revenue. Despite on-going PTG product and internal systems improvements, this line continues to encounter delays and disruptions in its outside third-party processors, creating delays in its delivery time to its customers. Additionally, PTG continues to encounter reluctance to permit face to face visitation, which we believe is critical to completing the sale of PTG products and services to its current, and more importantly, its prospective customers. The decline in Hy-Tech’s Other revenue was due primarily to a large order for its Thaxton products shipping during the third quarter in 2020, with no similar order this year, and reduced orders for its NUMATX products in 2021, compared to the large customer acquiredprior year.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
GROSS MARGIN
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| | Year Ended December 31, | | Increase |
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| 2021 |
| 2020 |
| Amount |
| % |
| |||
Florida Pneumatic | | $ | 15,274,000 |
| $ | 14,022,000 |
| $ | 1,252,000 |
| 8.9 | % |
As percent of respective revenue | |
| 36.8 | % |
| 36.6 | % | | 0.2 | % pts |
| |
Hy-Tech | | $ | 2,073,000 | | $ | 171,000 |
| $ | 1,902,000 |
| 1112.3 | % |
As percent of respective revenue | |
| 17.2 | % |
| 1.6 | % | | 15.6 | % pts |
| |
Total Tools | | $ | 17,347,000 | | $ | 14,193,000 |
| $ | 3,154,000 |
| 22.2 | % |
As percent of respective revenue | |
| 32.4 | % |
| 28.9 | % | | 3.5 | % pts |
| |
As discussed earlier, the increase in Florida Pneumatic’s Industrial revenue, which tends to generate stronger margins, contributed to the ATSCO acquisition.higher gross margin in 2021, compared to that generated in 2020. Additionally, improved overhead absorption during 2021 at Jiffy contributed to Florida Pneumatic’s improved gross margin. However, increased freight costs, particularly inbound ocean freight, and incremental costs associated with supply chain disruptions, partially offset the improvement. Florida Pneumatic’s ocean freight costs, particularly during the second half of 2021, have increased approximately four-fold when compared to a year ago. We are attempting to pass through a portion of these increases; however, we may not be able to fully neutralize the negative effects.
Hy-Tech manufactures most of its products. Its gross margin is significantly affected by customer/product mix. Additionally, factors such as absorption of manufacturing overhead, raw material pricing third-party costs, and the supply chain issues discussed above, have affected its gross margin, all of which have been impacted by the ongoing ill effects of the pandemic. Specifically, Hy-Tech has encountered higher raw material, freight and outside third-party vendor costs, all adversely affecting its gross margin in 2021. It should be noted that salesduring 2020 Hy-Tech incurred an excess charge relating to this customer have greatly improvedobsolete, slow-moving inventory (“OSMI”). Further, primarily occurring during the last six monthsfirst half of 2017, compared to the same period a year ago. Hy-Tech Machine revenue was essentially flat for the year.
A major component of2020, Hy-Tech’s revenue is derived from the oil and gas sector. Currently, we estimate that the oil and gas sector revenue accounts for approximately 30% to 35% of Hy-Tech’s total revenue. This revenue stream is driven by a number of factors, such as the number of off-shore rigs located in the Gulf of Mexico, “turn-arounds” or plant maintenance activities and, to a lesser extent, land rigs. We believe the lag in turn-around activities, the hurricanes that severely damaged the Gulf of Mexico and many of the oil refineries in the Gulf States, along with the growing presence of lower-priced imported tools and spare parts are impacting the markets in which Hy-Tech operates.
GROSS MARGIN
| Year Ended December 31, | Increase | |||||||||||||||
| 2017 | 2016 | Amount | % | |||||||||||||
| Florida Pneumatic | $ | 17,432,000 | $ | 16,674,000 | $ | 758,000 | 4.5 | % | ||||||||
| As percent of respective revenue | 37.5 | % | 36.8 | % | 0.7 | % pts | ||||||||||
| Hy-Tech | $ | 3,652,000 | $ | 2,257,000 | $ | 1,395,000 | 61.8 | |||||||||
| As percent of respective revenue | 29.2 | % | 18.8 | % | 10.4 | % pts | ||||||||||
| Total Tools | $ | 21,084,000 | $ | 18,931,000 | $ | 2,153,000 | 11.4 | % | ||||||||
| As percent of respective revenue | 35.8 | % | 33.1 | % | 2.7 | % pts | ||||||||||
Customer and product mix were the primary factors that contributed to the increase in Florida Pneumatic’s full-year 2017 gross margin, compared to full-year 2016. Additionally, reduced shipments to Sears during 2017 were a key factor, as Sears’ related gross margin was lower than that of Florida Pneumatic’s other product lines / customers. Further, Jiffy’s gross margin approximates that of Florida Pneumatic’s non-retail product lines. As such, the gross profit associated with the increase in Aerospace revenue this year exceeded the gross profits lost due to the decline in Retail revenue. There were no significant changes to our cost structure or selling price during the year.
Hy-Tech’s full-year 2017 gross margin increased 10.4 percentage points over 2016’s full-year gross margin. Factors contributing to the positive change include, among other things: (a) the adjustment to Hy-Tech’s full-year 2017 allowance for obsolete / slow moving inventory (“OSMI”) was less than the adjustment recorded during full-year 2016, as inventory turns improved, which directly impacts the computation of Hy-Tech’s OSMI; (b) 2017’s overhead absorption significantly improved; and (c) during 2016, we were shipping a line of very low gross margin tools to a major customer. During full-year 2017, shipment of these low gross margin tools greatly declined, compared to the prior year. We have no intention to continue to manufacture these products going forward. Offsetting the improvements discussed above,impacted by lower-than-expected gross margin on the sale of PTG products, being sold under itsdue primarily to start-up issues in the then new marketing initiative are below Hy-Tech’s historical range. Management believes that gross margin onfacility. The two previous factors relating to fiscal 2020 were the new initiative products should increase ascauses for the result of manufacturing experience, and greater volume through the facility. Lastly, we also expect average margins of the new marketing initiative products category to improve as the result of anticipated additional new product offerings that we believe will generate greaterweak gross margin.
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.
Our SG&A for the full year 2017 was $21,034,000,expenses during 2021 were $19,856,000, compared to $19,610,000,$19,367,000, in 2020. There were significant factors which contributed to the net change. First, driven by an increase of $1,424,000 for the full year 2017. The most significant factor driving the increase was the addition of Jiffy. During 2017, from date of acquisition – April 5, 2017, through year-end, Jiffy’s SG&A wasmore than $4,400,000 in revenue, our variable expenses increased $333,000. Variable expenses include among other items, commissions, freight out, travel, advertising, shipping supplies and warranty costs. Additionally, we incurred approximately $1,673,000. Other significant components$376,000 in additional information systems costs during 2021, compared to the change in SG&A include reductions in: (i) non-Jiffyprior year, most of which related to the May 2021 ransomware attack at our Florida Pneumatic subsidiary. Further, compensation expensesexpense increased $430,000. Compensation expense is comprised of $56,000; (ii) variable expenses, which include costs such as: commissions, advertising travelbase salaries and warranty of $286,000, due primarily to lower Retail revenue;wages, accrued performance-based bonus incentives and (iii) depreciationassociated payroll taxes and amortization of $283,000,employee benefits. This increase is due in part to certain intangible assets at Hy-Tech written offan increase in 2016; and toCompany-wide bonuses being issued in 2021 over 2020. Partially offsetting the above increases was a lesser extent, certain assets being fully depreciated. The reductions were partially offset by an increasedecline in professional fees of $425,000,$565,000, most of which include feesrelates to expenses in 2020 incurred as the result of the relocation and set up of the two gear businesses that were acquired in late 2019, none of the relocation expenses related to the Jiffy Acquisitionrepeated in 2021. Lastly, depreciation and recruitment fees for executive positions at Hy-Tech.
amortization expenses declined $77,000, and corporate expenses and stock-based compensation declined $29,000 and $34,000, respectively.
IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS - 2016
During 2021, we reduced by $88,000, the carrying value of certain not-in-use fixed assets to their fair market value.
During the second quarter of 2016, we determined that an interim impairment analysis of the goodwill recorded in connection with Hy-Tech and ATSCO was necessary. As a result of the aforementioned, it was determined that Hy-Tech's short and long-term projections at that time had indicated an inability to generate sufficient discounted future cash flows to support the recorded amounts of goodwill, other intangible assets and other long-lived assets necessitating the impairment charge. Accordingly, in accordance with current accounting literature, during the second quarter of 20162020, we recorded angoodwill and intangible asset impairment charge of $8,311,000 relatingcharges totaling $1,612,000, with $284,000 related to goodwill and other intangible assets.
During our 2016 annual testing for impairment of our goodwill and other intangible assets, we determined that, primarily as 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. As a result, in accordance with current accounting literature, during the fourth quarter of 2016, we recorded an impairment charge of $880,000 relating to goodwill and $390,000 to other intangible assets.
GAIN ON SALE OF REAL PROPERTY - 2016
Effective November 1, 2016, we completed a transaction in which we sold real property, located in Tampa, Florida, for $3.75 million, resulting in a gain of approximately $1.7 million. This property was the headquarters of Nationwide, which we sold February 11, 2016. After deducting fees and expenses, we received approximately $3.5 million in cash, which was used to pay down bank borrowings, with the balance remaining in a cash account.
OTHER (EXPENSE) INCOME - NET
The table below provides an analysis of our Other (expense) income-net from continuing operations for the years ended December 31, 2017 and 2016:
| Year ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Lease income-net | $ | — | $ | 100,000 | ||||
| Escrow refund | 27,000 | |||||||
| Fair value adjustment to contingent consideration - JIFFY | (158,000 | ) | — | |||||
| Total | $ | (131,000 | ) | $ | 100,000 | |||
The full-year 2017 consists primarily of an adjustment to the fair value of the contingent consideration obligation to the Jiffy Seller, partially offset by the receipt of the balance of an escrow$1,328,000 related to the salecustomer relationships, patents, and trade name.
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Table of the real property that was located in Tampa, FloridaContents
Management’s Discussion and used by Nationwide. See Note 2 to our consolidated financial statements for further discussion. During 2016 we received net rentals income on the real property that was sold in NovemberAnalysis of 2016.Financial Condition and Results of Operations
INTEREST EXPENSEOTHER INCOME
| Year Ended December 31, | ||||||||
| Interest expense attributable to: | 2017 | 2016 | ||||||
| Short-term borrowings | $ | 102,000 | $ | 45,000 | ||||
| Term loans, including Capital Expenditure Term Loans | 3,000 | 8,000 | ||||||
| Amortization expense of debt issue costs | 63,000 | 128,000 | ||||||
| Total | $ | 168,000 | $ | 181,000 | ||||
Primarily due to the result of the sale of Nationwide and the real property located in Tampa, Florida, occurring in February and November 2016, respectively, our total bank borrowings have been minimal. However, asAs discussed in Note 3 - Acquisition,7 – CARES Act, the Employee Retention Credit (“ERC”) was established by the Coronavirus Aid, Relief, and Economic Security Act (“CARES, or “CARES Act”), in March 2020. Its intention was to help businesses retain employees and avoid layoffs during the coronavirus pandemic. The ERC provides a per employee credit to eligible businesses based on a percentage of qualified wages and certain benefits paid to, or on behalf of employees. There are two tests to determine if a company is eligible: a) if a business encountered a partial or total government ordered shutdown, or b) a business recorded a decline in gross receipts. (measuring quarterly gross receipts each quarter to same quarter in 2019). For 2020, the decline in gross receipts had to be greater than 50%, and for 2021 the decline in gross receipts had to greater than 20%. In December 2021 we began and completed the process of determining and verifying our consolidated financial statements,eligibility and amount of credit. This resulted in filing amended payroll tax forms for credits totaling $2,028,000. The ERC is subject to federal and local income tax.
Additionally, pursuant to the CARES Act, on April 5, 2017,20, 2020, we purchasedreceived a Paycheck Protection Program (“PPP”) loan, in the net assetsamount of $2,929,000. Under the terms of the Jiffy businessCARES Act, as amended, we were eligible to apply for forgiveness for all or a portion of the PPP loan. In February 2021, we filed an application for forgiveness with the lender, who approved this submission and real property locatedsubmitted the application for forgiveness to the SBA. On June 9, 2021, we were advised that the SBA had approved our PPP loan forgiveness application. Accordingly, the lender applied the funds it received from the SBA and paid off PPP loan principal and interest in Carson City, Nevada. The funding for this transaction was from our Revolver Loan, which is our short-term borrowing.
full. In accordance with accounting guidance this forgiveness of debt and related accrued interest is to be accounted for as Other Income and is not considered as taxable income.
In connection with the acquisition completed in late 2019, we have reportedand the seller agreed to settle a contingent liability originally recorded as $64,000 for $12,000. As such, in 2020, we reduced the contingent consideration payable by $52,000 and recorded a like amount as Other Income. Additionally, during 2020, we received Coronavirus related grants totaling $53,000 at our United Kingdom operation from Her Majesty’s Government, which were recorded as Other Income. The grant funds were not required to be repaid.
INTEREST EXPENSE – NET
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| Year Ended December 31, | | (Decrease) Increase |
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| 2021 |
| 2020 |
| Amount |
| % |
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Interest expense attributable to: |
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Short-term borrowings | | $ | 47,000 | | $ | 106,000 | | $ | (59,000) |
| (55.7) | % |
PPP loan | |
| (18,000) | |
| 18,000 | |
| 36,000 |
| 200.0 | |
Amortization expense of debt issue costs | |
| 16,000 | |
| 16,000 | |
| — |
| — | |
| | | | | | | | | | | | |
Total | | $ | 45,000 | | $ | 140,000 | | $ | (95,000) |
| (67.9) | % |
The Applicable Margin, as defined in our Credit Agreement was the same during the fiscal years ended December 31, 2021, and 2020. (See Liquidity for further discussion). The average balance of short-term borrowings during the fiscal years ended December 31. 2021, and term loan2020, were $2,686,000 and $4,042,000, respectively. The reduction in short-term borrowings interest expense incurred duringwas due primarily to lower average borrowings in 2021, compared to the period January 1, 2016 through February 11, 2016, whichaverage borrowing levels in the prior year. The increase in short-term borrowings was the effective date of sale of Nationwide,driven primarily by increased inventory and accounts receivable levels.
As discussed in Discontinued operations. Further,Note 7 – CARES Act, to our Consolidated Financial Statements, in late April 2020, we borrowed approximately $2.9 million as the resultpart of the CompanyPaycheck Protection Program (“PPP”) from BNB Bank as provided under the CARES Act. The PPP Loan, as defined in Note 7, accrued interest at a rate of 1.0% per annum. Pursuant to the Flexibility Act, as defined in Note 7, interest on any unforgiven amount is deferred until the forgiveness determination is made by the Small Business Administration (“SBA”). On June 9, 2021, we received notice that the SBA had forgiven our obligation to repay the PPP loan and Capital One, National Association (“Capital One” orrelated accrued interest. As such, we recorded a reversal of the “Bank”) agreeingaccrued interest related to significantly modifythe PPP loan.
Lastly, we and our bank amended the Credit Agreement as defined below in Liquidity and Capital Resources, we were requiredFebruary 2019. The amortization expense is related to write down and recognize as interest expense the debt issue costs associated with the then existing Credit Agreement. These costs are identified in the table above as “Amortization expense of debt issue costs.” See Note 2amendments to our consolidated financial statements for further discussion on the salebanking facility.
22
Table of Nationwide. See Liquidity and Capital Resources elsewhere in this Contents
Management’s Discussion and Analysis section for further information regarding our bank loans.
Our average balance of short-term borrowings during 2017 was $3,092,000, compared to $2,862,000, during 2016.Financial Condition and Results of Operations
INCOME TAX EXPENSE
The benefit from income taxes was $2,000 in 2021 and $1,901,000 in 2020. Significant factors impacting 2021’s net effective tax rates from continuing operations forbenefit rate of 0.1% were the years ended December 31, 2017enactment of the Coronavirus Aid, Relief, and 2016 were 255.0%Economic Security Act, non-deductible permanent differences and (34.2%), respectively. Primary factors affecting our 2017state and local taxes. The net effective tax rate were nondeductible expenses, the adoption of ASU 2016-09Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, provisional impact of changes to the tax law and state income taxes. The primary factors affecting the 2016 effective tax rate were nondeductible expenses and state income taxes.benefit for 2020 was 27.7%. See Note 11 –10– Income Taxes to our Consolidated Financial Statements for further discussion and analysis.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 was signed into law making significant changes to the Internal Revenue Code. Changes include, 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 Company calculated its best estimate of the impact of the 2017 Act in its year end income tax provision in accordance with its understanding of the 2017 Act and guidance available as of the date of this filing and, as a result, recorded $643,000 as additional income tax expense in the fourth quarter of 2017, the period in which the legislation was enacted. The provisional amount related to the remeasurement of certain deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future, was $588,000. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was $55,000 based on cumulative foreign earnings of $352,000.
discussion.
DISCONTINUED OPERATIONS - 2016
Nationwide’s results of operations in our consolidated financial statements and Note 2 present its revenue and cost of goods sold for the period January 1, 2016 through February 11, 2016. The SG&A incurred during the same period includes that of Nationwide plus $19,000 of expenses incurred at the corporate level that is specifically attributable to Nationwide. In accordance with current accounting guidance, we included, as part of discontinued operations, all interest expense incurred attributable to our Bank borrowings during the period January 1, 2016 through February 11, 2016.
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. For income tax purposes, the Company’s tax basis in Nationwide was greater than the net proceeds, resulting in a tax loss and thus a recorded 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 thus utilized the tax benefit generated from the sale of Nationwide.
LIQUIDITY AND CAPITAL RESOURCES
We monitor such metrics as days’days sales outstanding, inventory requirements, accounts payable and capital expenditures to project liquidity needs, as well as evaluate return on assets. Our primary sourcessource of funds are operating cash flows andis our Revolver Loan (“Revolver”) with our bank.
We gauge our liquidity and financial stability by various measurements, some of which are shown in the following table:
| December 31, | ||||||||||||||
| 2017 | 2016 | |||||||||||||
| | | | | | | ||||||||
| | December 31, | ||||||||||||
|
| 2021 |
| 2020 | ||||||||||
| | | | | | | ||||||||
| Working capital | $ | 24,278,000 | $ | 28,373,000 | | $ | 24,598,000 | | $ | 21,258,000 | ||||
| Current ratio | 4.08 to 1 | 5.60 to 1 | |
| 3.04 to 1 | |
| 3.57 to 1 | ||||||
| Shareholders’ equity | $ | 46,013,000 | $ | 47,590,000 | | $ | 43,840,000 | | $ | 41,538,000 | ||||
Credit facility
Our Credit Facility
In October 2010, we entered into a Loan and Security Agreement (“Credit Agreement”) with an affiliate of Capital One, National Association (“Capital One” or the “Bank”). The Credit Agreement, as amended from time to time, among other things, provides the ability to borrow funds under a Revolver arrangement. Revolver borrowings are secured by the Company’s accounts receivable, inventory, equipment and mortgages on real property. P&F and certain of its subsidiaries are borrowers under the Credit Agreement, and their obligations are cross-guaranteed by certain other subsidiaries.
At our option, Revolver borrowings bear interest at either LIBOR (“London InterBank Offered Rate”) or the Base Rate, as the term is defined in the Credit Agreement, plus an Applicable Margin, as defined in the Credit Agreement. We are subject to limitations on the number of LIBOR borrowings.
Contemporaneously with the sale of Nationwide in February 2016, we entered into the Consent and Second Amendment to the Restated Loan Agreement (the “2016 Amendment”) with Capital One. The 2016 Amendment, among other things, provided the Bank’s consent to the transactions related to the sale of Nationwide and the repurchase of certain shares and options discussed in detail in Note 26 Debt, to the consolidated financial statements, and amended the Credit Agreement by: (a) reducing the aggregate Commitment (as defined) to $11,600,000; (b) reducing the Term Loan (as defined) to $100,000; (c) reducing the Revolver Commitment (as defined) to $10,000,000 (less the new Term Loan Aour Consolidated Financial Statements.
The average balance of $100,000.); (d) reducingshort-term borrowings during the Capex Loan Commitment (as defined) to $1,600,000; (e) modifying certain financial covenants, (f) lowering interest rate margins and fee obligations; (g) extending the expiration of the Credit Agreement to February 11, 2019, and (h) releasing the mortgage on our Tampa, FL real property.
Contemporaneously with the acquisition of the Jiffy business discussed in Note 3 to the consolidated financial statements, we entered into a Second Amended and Restated Loan and Security Agreement, effective as of the April 5, 2017, the closing date of the Jiffy Acquisition (the “2017 Agreement”), with Capital One. The 2017 Agreement, among other things, amended the Credit Agreement by: (1) increasing the maximum amount we can borrow under the Revolver Commitment (as defined) from $10,000,000 to $16,000,000, subject to certain borrowing base criteria, and (2) modifying certain borrowing base criteria as well as financial and other covenants.
Atyears ended December 31, 2017 we had approximately $12,400,000 available under2021, and 2020 were $2,686,000 and $4,042,000, respectively.
Should the Credit Facility.
We believe that should a need arise whereby the current credit facility is insufficient,insufficient; we can borrowbelieve that the current facility could be expanded, and/or we could obtain additional amounts againstfunds based on the value of our real property or other assets.property.
Cash Flows
We provide Capital One monthly financial statements, monthly borrowing base certificates and monthly certificates of compliance with various financial covenants. We believe we are in compliance with all financial and non-financial covenants. As part ofFor the 2017 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.
Short–Term Borrowings
Atyear ended December 31, 2017, the Company’s short-term or Revolver borrowing2021, cash used by operating activities was $1,928,000,$4,149,000, compared to no short-term borrowing balance at December 31, 2016. Applicable Margin Rates, as defined in the Credit Agreement, at December 31, 2017 and 2016 for LIBOR and Base Rates were 1.50% and 0.50%, respectively.
We purchase vehicles for use by our UAT salesforce. The current portion of the balance due on these loans applicable to these purchased vehicles was $0 at December 31, 2017, and $13,000 at December 31, 2016.
At December 31, 2017, we had $7,138,000 of open purchase order commitments, compared to $9,836,000 at December 31, 2016.
Cash Flows
At December 31, 2017, cash provided by operating activities for the year was $4,634,000, compared to cash used in operating activities for the year ended December 31, 20162020, of $1,158,000.$3,047,000. At December 31, 2017,2021, our consolidated cash balance was $1,241,000,$539,000, compared to $3,699,000$904,000 at December 31, 2016.2020. Cash at our UAT subsidiary aton December 31, 21072021, and 20162020 was $501,000$190,000 and $305,000,$335,000, respectively. We operate under the terms and conditions of the Credit Facility.Agreement. As a result, all domestic cash receipts are remitted to Capital One lock-boxes.
lockboxes.
Our total debt to total book capitalization (total debt divided by total debt plus equity) aton December 31, 20172021, was 4.2%11.6%, compared to 0.2% at9.4% on December 31, 2016. We anticipate being able2020.
As a result of the acquisition of the Jackson Gear business (See Note 12) in January 2022, additional working capital needs due to generate cash from operations during 2018.
anticipated growth, and a roll-out of a tools program to our retail customer, our Revolver borrowings will increase significantly in the first half of 2022 and should then decline as we approach the end of 2022.
Capital spending during the year ended December 31, 20172021, was $910,000,$642,000, compared to $1,066,000$1,104,000 in 2016.2020. Capital expenditures currently planned for 20182022 are approximately $1,450,000,$1,400,000, which we expect will be financed through 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.software, and the expansion of our Punxsutawney, PA facility as a result of the acquisition of Jackson Gear (See Note 12).
23
In March 2016,Management’s Discussion and Analysis of Financial Condition and Results of Operations
LIQUIDITY AND CAPITAL RESOURCES - Continued
Cash Flows- Continued
Our liquidity and capital is primarily sourced from our Board of Directors approved the initiation of a dividend policy under which the Company intendscredit facility, described in Note 6 - Debt, to declare quarterlyour Consolidated Financial Statements, and cash dividends to its stockholders in the amount of $0.05 per quarter. During 2017, our Board of Directors voted to approve the payment of four quarterly dividends. As such, in February 2017, May 2017, August 2017, and November 2017, we paid a $0.05 per share dividend to the shareholders of record. The aggregate of such dividend payments was approximately $722,000. Our Board of Directors expects 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 factors our board may deem relevant.
On August 9, 2017, our Board of Directors authorized us to repurchase up to 100,000 shares of its common stock over a period of up to twelve months (the “Repurchase Program”). On August 24, 2017, we announced that, pursuant to the 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. As offrom operations. At December 31, 2017,2021, we repurchased 46,878 shareshad $9,578,000 available to us from the revolver portion of our Common Stock pursuant to the Repurchase Program,credit facility.
For the cost of which was $358,000.
Customer concentration
As ofyear ended December 31, 2017, our accounts receivable from Sears and The Home Depot was 2.1% and 31.0%, respectively2021, we had $16,331,000 of our total accounts receivable. In January, 2018 we collected the remaining balance of our accounts receivable from Sears. During 2016 Florida Pneumatic had two retail customers, Sears and The Home Depot, whichopen purchase order commitments, compared to $8,530,000 at December 31, 20162020.
Customer concentration
At December 31, 2021, we had one customer that accounted for 14.2% and 39.3%, respectively,26.1% of our consolidated accounts receivable. Additionally, these two customers accounted for 5.9% and 27.1%, respectively, of our 2017 consolidated revenue, compared to 13.6%26.3% of 2020’s revenue. Further, accounts receivable on December 31, 2021, and 29.8%2020 due from this customer were 35.9% and 38.0%, respectively, in 2016. There was no other customer that accounted for more than 10% of our consolidated revenue in 2017 or 2016.
total accounts receivable.
IMPACT OF INFLATION
We believe that the effects of changingIncreasing prices, and inflation on our consolidated financial position and our results of operations have been minimal.
NEW ACCOUNTING PRONOUNCEMENTS
Refer to Note 1, "Summary of Accounting Policies," to our consolidated financial statements for additional discussion of recent accounting standards and pronouncements.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,Revenue from Contracts with Customers, as a new Topic, Accounting Standards Codification (“ASC”) Topic 606, which supersedes existing accounting standards for revenue recognition and creates a single framework. Additional updates to Topic 606 were issued by the FASBmost notably in 2015freight/transportation and, 2016. We completed our assessment phaseof what impact the adoption of these new revenue standards will have on our consolidated financial statements and related disclosures. Further, we performed a review of our revenue streams including reviewing contracts and comparing current accounting policies and practices to the new standard to identify differences from the application of ASU 2014-09. The performance obligations underlying our core revenue sources will remain substantially unchanged. Our revenue is generated through the sale of finished products, and will continue to be generally recognized at the point in time when merchandise is transferred to the customer and in an amount that considers the impacts of estimated allowances. Adoption of these standards will also require additional disclosures about the nature of revenue. Further, upon adoption of these standards we will have a change in classification of certain adjustments made by customers from SG&A to a reductionlesser extent, the cost of net sales, which we believe will not be material to our consolidated financial statements, results of operations or cash flows.
We are currently evaluating the impact of the adoption of ASU 2016-02,Leases, on our consolidated financial condition, results of operations and cash flows.
In addition, in February 2018, the FASB issued No. ASU 2018-02,Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”). Under ASU 2018-02, an entity may elect to reclassify the income tax effects of the Tax Reform Act on items within accumulated other comprehensive income to retained earnings. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted in any interim period. We are currently evaluating what impact, if any, adoption of ASU 2018-02 may have on our consolidated financial statements.
Other than the aforementioned, we do not believe that any other recently issued but not yet effective accounting standard, if adopted, will haveraw materials had a material effect on our consolidated financial statements.results of operations in 2021. We believe that recent significant increases of inflation, the on-going volatility of freight/transportation costs, and recent geopolitical unrest will have an impact on our results of operations during 2022.
Recently Adopted Accounting Pronouncements
Please refer to Note 1, Summary of Significant Accounting Policies, to the Notes to Consolidated Financial Statements included elsewhere in this report for a discussion of recently adopted accounting pronouncements and new accounting pronouncements that may impact us.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Not Required
24
ITEM 8. Financial Statements and Supplementary Data
P&F INDUSTRIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
25
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of P&F Industries, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of P&F Industries, Inc. and Subsidiaries (the “Company”"Company") as of December 31, 20172021 and 2016,2020, and the related consolidated statements of operations and comprehensive (loss) income shareholders’(loss), shareholders' equity and cash flows for each of the two years in the periodthen ended, December 31, 2017, and the related consolidated notes (collectively referred to as the “consolidated financial statements)statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172021 and 2016,2020, and the results of its operations and its cash flows for each of the years in the two year periodthen ended, December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on the Company’sCompany'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)(“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.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material 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. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, 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.
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 regarding the amounts and disclosures in the consolidated financial statements. 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 statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgements. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
26
Valuation of Goodwill and Indefinite Lived Intangibles (Note 1 and Note 5 to the Consolidated Financial Statements)
Critical Audit Matter
As disclosed in the consolidated financial statements, goodwill and indefinite lived intangibles are tested for impairment annually at the reporting unit level on November 30 unless an interim test is required due to the presence of indicators that goodwill and indefinite lived intangibles may be impaired. Significant judgment is exercised by management in determining if impairment is present and at what amount. As a part of this determination, significant estimation is required to determine the fair value of each reporting unit. Fair value is estimated by management based on an income approach using a discounted cash flow model. In particular, the fair value estimates are sensitive to significant assumptions such as the operating performance projections, terminal growth rate, industry factors, and discount rates.
Given these factors, auditing management’s quantitative impairment tests for goodwill and indefinite lived intangible assets involved especially challenging, subjective, and complex auditor judgment and increased audit effort.
How Our Audit Addressed the Critical Audit Matter
Our principal audit procedures related to the Company’s annual goodwill and indefinite lived intangibles impairment test included the following, among others:
· | We gained an understanding of and evaluated the design and implementation of the Company’s controls that address the risk of material misstatement related to potential impairment, including methods, data, and significant assumptions used in developing the discounted cashflow analysis as well as the completeness and accuracy of the underlying data used by the Company in its analyses; |
· | We evaluated management’s significant accounting policies related to impairment of goodwill and indefinite-lived intangible assets for reasonableness; |
· | We evaluated significant judgments made by management, including the identification of two reporting units along with a separate unit to capture the corporate overhead; |
· | We evaluated management’s ability to estimate future cash flows, including projected revenues, by performing a retrospective review of select Company historical cash flow forecasts; |
· | We evaluated management’s projected revenues and cash flows by comparing the projections to the underlying business strategies and growth plans and performed a sensitivity analysis related to the key inputs to projected cash flows, including revenue growth rates, to evaluate the changes in the fair value of the reporting unit that would result from changes in assumptions; |
· | With the assistance of our firm’s valuation professionals with specialized skills and knowledge in valuation methods and models, we tested the Company’s discounted cash flow models, including certain assumptions including the terminal value and discount rates; and |
· | We evaluated management’s reconciliation of the fair value measurements from the individual reporting units discounted cash flows to the Company’s market capitalization. |
/s/ CohnReznick LLP
We have served as the Company’sCompany's auditor since 2008.
Jericho, New York
March 29, 201830, 2022
27
P&F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, 2017 | December 31, 2016 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | 1,241,000 | $ | 3,699,000 | ||||
| Accounts receivable — net | 10,047,000 | 7,906,000 | ||||||
| Inventories | 19,657,000 | 19,901,000 | ||||||
| Prepaid expenses and other current assets | 1,224,000 | 3,030,000 | ||||||
| TOTAL CURRENT ASSETS | 32,169,000 | 34,536,000 | ||||||
| PROPERTY AND EQUIPMENT | ||||||||
| Land | 1,281,000 | 1,150,000 | ||||||
| Buildings and improvements | 6,138,000 | 5,209,000 | ||||||
| Machinery and equipment | 20,579,000 | 19,401,000 | ||||||
| 27,998,000 | 25,760,000 | |||||||
| Less accumulated depreciation and amortization | 19,091,000 | 18,671,000 | ||||||
| NET PROPERTY AND EQUIPMENT | 8,907,000 | 7,089,000 | ||||||
| GOODWILL | 4,447,000 | 3,897,000 | ||||||
| OTHER INTANGIBLE ASSETS — net | 8,533,000 | 6,606,000 | ||||||
| DEFERRED INCOME TAXES — net | 872,000 | 1,793,000 | ||||||
| OTHER ASSETS — net | 110,000 | 130,000 | ||||||
| TOTAL ASSETS | $ | 55,038,000 | $ | 54,051,000 | ||||
| | | | | | |
|
| December 31, |
| December 31, | ||
| | 2021 | | 2020 | ||
ASSETS |
| |
|
| |
|
CURRENT ASSETS |
| |
|
| |
|
|
| |
|
| |
|
Cash | | $ | 539,000 | | $ | 904,000 |
Accounts receivable — net | | | 7,550,000 | | | 7,468,000 |
Inventories | | | 24,021,000 | | | 18,362,000 |
Prepaid expenses and other current assets | | | 4,566,000 | | | 2,806,000 |
TOTAL CURRENT ASSETS | | | 36,676,000 | | | 29,540,000 |
| | | | | | |
PROPERTY AND EQUIPMENT | | | | | | |
Land | | | 507,000 | | | 507,000 |
Buildings and improvements | | | 3,605,000 | | | 3,544,000 |
Machinery and equipment | | | 25,675,000 | | | 25,673,000 |
| | | 29,787,000 | | | 29,724,000 |
Less accumulated depreciation and amortization | | | 21,707,000 | | | 20,329,000 |
NET PROPERTY AND EQUIPMENT | | | 8,080,000 | | | 9,395,000 |
| | | | | | |
GOODWILL | | | 4,447,000 | | | 4,449,000 |
| | | | | | |
OTHER INTANGIBLE ASSETS — net | | | 5,592,000 | | | 6,226,000 |
| | | | | | |
DEFERRED INCOME TAXES — net | | | 349,000 | | | 226,000 |
| | | | | | |
RIGHT-OF-USE ASSETS – OPERATING LEASES | | | 2,969,000 | | | 3,281,000 |
| | | | | | |
OTHER ASSETS — net | | | 77,000 | | | 250,000 |
| | | | | | |
TOTAL ASSETS | | $ | 58,190,000 | | $ | 53,367,000 |
The accompanying notes are an integral part of these consolidated financial statements.
28
P&F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, 2017 | December 31, 2016 | |||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Short-term borrowings | $ | 1,928,000 | $ | — | ||||
| Accounts payable | 2,443,000 | 2,398,000 | ||||||
| Accrued compensation and benefits | 1,944,000 | 1,733,000 | ||||||
| Accrued other liabilities | 1,576,000 | 2,019,000 | ||||||
| Current maturities of long-term debt | — | 13,000 | ||||||
| TOTAL CURRENT LIABILITIES | 7,891,000 | 6,163,000 | ||||||
| Long-term debt, less current maturities | 94,000 | 88,000 | ||||||
| Other liabilities | 1,040,000 | 210,000 | ||||||
| TOTAL LIABILITIES | 9,025,000 | 6,461,000 | ||||||
| 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 – 4,203,000 at December 31, 2017 and 4,181,000 at December 31, 2016 | 4,203,000 | 4,181,000 | ||||||
| Class B - $1 par; authorized - 2,000,000 shares; no shares issued | — | — | ||||||
| Additional paid-in capital | 13,064,000 | 12,906,000 | ||||||
| Retained earnings | 34,455,000 | 36,061,000 | ||||||
| Treasury stock, at cost - 631,000 shares at December 31, 2017 and 584,000 shares at December 31, 2016 | (5,179,000 | ) | (4,821,000 | ) | ||||
| Accumulated other comprehensive loss | (530,000 | ) | (737,000 | ) | ||||
| TOTAL SHAREHOLDERS’ EQUITY | 46,013,000 | 47,590,000 | ||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 55,038,000 | $ | 54,051,000 | ||||
| | | | | | |
|
| December 31, |
| December 31, | ||
| | 2021 | | 2020 | ||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
| |
|
| |
|
CURRENT LIABILITIES |
| |
|
| |
|
|
| |
|
| |
|
Short-term borrowings | | $ | 5,765,000 | | $ | 1,374,000 |
Accounts payable | | | 2,920,000 | | | 2,199,000 |
Accrued compensation and benefits | | | 1,475,000 | | | 525,000 |
Accrued other liabilities | | | 1,078,000 | | | 1,354,000 |
Current leased obligations – operating leases | | | 840,000 | | | 847,000 |
Current maturities of long-term debt (PPP loan) | | | 0 | | | 1,983,000 |
TOTAL CURRENT LIABILITIES | | | 12,078,000 | | | 8,282,000 |
| | | | | | |
Non-current leased obligations – operating leases | | | 2,176,000 | | | 2,474,000 |
Long-term debt, less current maturities (PPP loan) | | | 0 | | | 946,000 |
Other liabilities | | | 96,000 | | | 127,000 |
| | | | | | |
TOTAL LIABILITIES | | | 14,350,000 | | | 11,829,000 |
| | | | | | |
COMMITMENTS AND CONTINGENCIES | | | | | | |
| | | | | | |
SHAREHOLDERS’ EQUITY | | | | | | |
Preferred stock - $10 par; authorized - 2,000,000 shares; 0 shares issued | | | 0 | | | 0 |
Common Stock: | | | | | | |
Class A - $1 par; authorized - 7,000,000 shares; issued – 4,453,000 on December 31, 2021 and 4,428,000 on December 31, 2020 | | | 4,453,000 | | | 4,428,000 |
Class B - $1 par; authorized - 2,000,000 shares; 0 shares issued | | | 0 | | | 0 |
Additional paid-in capital | | | 14,167,000 | | | 14,144,000 |
Retained earnings | | | 36,046,000 | | | 33,756,000 |
Treasury stock, at cost – 1,273,000 shares on December 31, 2021 and 2020 | | | (10,213,000) | | | (10,213,000) |
Accumulated other comprehensive loss | | | (613,000) | | | (577,000) |
| | | | | | |
TOTAL SHAREHOLDERS’ EQUITY | | | 43,840,000 | | | 41,538,000 |
| | | | | | |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | $ | 58,190,000 | | $ | 53,367,000 |
The accompanying notes are an integral part of these consolidated financial statements.
29
P&F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) INCOME
| Years ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Net revenue | $ | 58,974,000 | $ | 57,276,000 | ||||
| Cost of sales | 37,890,000 | 38,345,000 | ||||||
| Gross profit | 21,084,000 | 18,931,000 | ||||||
| Selling, general and administrative expenses | 21,034,000 | 19,610,000 | ||||||
| Impairment of goodwill and other intangible assets | — | 9,581,000 | ||||||
| Operating income (loss) | 50,000 | (10,260,000 | ) | |||||
| Other (expense) income - net | (131,000 | ) | 100,000 | |||||
| Gain on sale of building | — | 1,703,000 | ||||||
| Interest expense | (168,000 | ) | (181,000 | ) | ||||
| Loss before income taxes | (249,000 | ) | (8,638,000 | ) | ||||
| Income tax (expense) benefit | (635,000 | ) | 2,955,000 | |||||
| Net loss from continuing operations | (884,000 | ) | (5,683,000 | ) | ||||
| Discontinued operations (Note 2) | ||||||||
| Net income from discontinued operations, net of tax of $38,000 | — | 72,000 | ||||||
| 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 | ||||||
| Net (loss) income | $ | (884,000 | ) | $ | 6,901,000 | |||
| Basic and diluted (loss) earnings per share | ||||||||
| Continuing operations | $ | (0.25 | ) | $ | (1.58 | ) | ||
| Discontinued operations | — | 3.50 | ||||||
| Net (loss) income | $ | (0.25 | ) | $ | 1.92 | |||
| Weighted average common shares outstanding: | ||||||||
| Basic | 3,606,000 | 3,598,000 | ||||||
| Diluted | 3,606,000 | 3,598,000 | ||||||
| Net (loss) income | $ | (884,000 | ) | $ | 6,901,000 | |||
| Other comprehensive income (loss) - foreign currency translation adjustment | 207,000 | (396,000 | ) | |||||
| Total comprehensive (loss) income | $ | (677,000 | ) | $ | 6,505,000 | |||
| | | | | | |
| | Years ended December 31, | ||||
|
| 2021 |
| 2020 | ||
Net revenue | | $ | 53,554,000 | | $ | 49,136,000 |
Cost of sales | | | 36,207,000 | | | 34,943,000 |
Gross profit | | | 17,347,000 | | | 14,193,000 |
Selling, general and administrative expenses | | | 19,856,000 | | | 19,367,000 |
Impairment of assets held for sale | | | 88,000 | | | --- |
Impairment of goodwill | | | --- | | | 1,612,000 |
Operating loss | | | (2,597,000) | | | (6,786,000) |
Other income | | | 4,957,000 | | | 106,000 |
Loss on sale of fixed assets | | | (27,000) | | | (35,000) |
Interest expense | | | (45,000) | | | (140,000) |
Income (loss) before income taxes | | | 2,288,000 | | | (6,855,000) |
Income tax benefit | | | 2,000 | | | 1,901,000 |
Net income (loss) | | $ | 2,290,000 | | $ | (4,954,000) |
| | | | | | |
Basic earnings (loss) per share | | $ | 0.72 | | $ | (1.57) |
Diluted earnings (loss) per share | | $ | 0.72 | | $ | (1.57) |
| | | | | | |
Weighted average common shares outstanding: | | | | | | |
Basic | | | 3,178,000 | | | 3,149,000 |
Diluted | | | 3,192,000 | | | 3,149,000 |
| | | | | | |
Net income (loss) | | $ | 2,290,000 | | $ | (4,954,000) |
Other comprehensive (loss) income - foreign currency translation adjustment | | | (36,000) | | | 43,000 |
Total comprehensive income (loss) | | $ | 2,254,000 | | $ | (4,911,000) |
The accompanying notes are an integral part of these consolidated financial statements.
30
P&F INDUSTRIES, INC. AND SUBSIDIARIES
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, 2016 | $ | 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 | — | — | — | — | ||||||||||||||||||||||||
| Restricted common stock compensation | 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 | ) | |||||||||||||||
| Net loss | (884,000 | ) | — | — | — | (884,000 | ) | — | — | — | ||||||||||||||||||||||
| Exercise of stock options | 62,000 | 17,000 | 17,000 | 45,000 | — | — | — | — | ||||||||||||||||||||||||
| Restricted common stock compensation | 38,000 | 5,000 | 5,000 | 33,000 | — | — | — | — | ||||||||||||||||||||||||
| Stock - based compensation | 80,000 | — | — | 80,000 | — | — | — | — | ||||||||||||||||||||||||
| Purchase of Class A common stock | (358,000 | ) | — | — | — | — | (47,000 | ) | (358,000 | ) | — | |||||||||||||||||||||
| Dividends | (722,000 | ) | — | — | — | (722,000 | ) | — | — | — | ||||||||||||||||||||||
| Foreign currency translation adjustment | 207,000 | — | — | — | — | — | — | 207,000 | ||||||||||||||||||||||||
| Balance, December 31, 2017 | $ | 46,013,000 | 4,203,000 | $ | 4,203,000 | $ | 13,064,000 | $ | 34,455,000 | (631,000 | ) | $ | (5,179,000 | ) | $ | (530,000 | ) | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Accumulated | |
| | | | | Class A Common | | Additional | | | | | | | | | | other | |||||
| | | | | Stock, $1 Par | | paid-in | | Retained | | Treasury stock | | comprehensive | |||||||||
|
| Total |
| Shares |
| Amount |
| capital |
| earnings |
| Shares |
| Amount |
| (loss) | ||||||
Balance, January 1, 2021 | | $ | 41,538,000 | | 4,428,000 | | $ | 4,428,000 | | $ | 14,144,000 | | $ | 33,756,000 | | (1,273,000) | | $ | (10,213,000) | | $ | (577,000) |
| | | | | | | | | | | | | | | | | | | | | | |
Net income | | | 2,290,000 | | 0 | | | 0 | | | 0 | | | 2,290,000 | | 0 | | | 0 | | | 0 |
| | | | | | | | | | | | | | | | | | | | | | |
Restricted Common Stock compensation | | | 43,000 | | 25,000 | | | 25,000 | | | 18,000 | | | 0 | | 0 | | | 0 | | | 0 |
| | | | | | | | | | | | | | | | | | | | | | |
Stock - based compensation | | | 5,000 | | 0 | | | 0 | | | 5,000 | | | 0 | | 0 | | | 0 | | | 0 |
| | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustment | | | (36,000) | | 0 | | | 0 | | | 0 | | | 0 | | 0 | | | 0 | | | (36,000) |
| | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2021 | | $ | 43,840,000 | | 4,453,000 | | $ | 4,453,000 | | $ | 14,167,000 | | $ | 36,046,000 | | (1,273,000) | | $ | (10,213,000) | | $ | (613,000) |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Accumulated | |
| | | | | Class A Common | | Additional | | | | | | | | | | other | |||||
| | | | | Stock, $1 Par | | paid-in | | Retained | | Treasury stock | | comprehensive | |||||||||
|
| Total |
| Shares |
| Amount |
| capital |
| earnings |
| Shares |
| Amount |
| (loss) income | ||||||
Balance, January 1, 2020 | | $ | 46,506,000 | | 4,416,000 | | $ | 4,416,000 | | $ | 14,056,000 | | $ | 38,867,000 | | (1,273,000) | | $ | (10,213,000) | | $ | (620,000) |
| | | | | | | | | | | | | | | | | | | | | | |
Net loss | |
| (4,954,000) |
| 0 | |
| 0 | |
| 0 | |
| (4,954,000) |
| 0 | |
| 0 | |
| 0 |
| |
| |
| | |
| | |
| | |
| |
| | |
| | |
| |
Exercise of stock options | |
| 18,000 |
| 6,000 | |
| 6,000 | |
| 12,000 | |
| 0 |
| 0 | |
| 0 | |
| 0 |
| |
| |
| | |
| | |
| | |
| |
| | |
| | |
| |
Restricted Common Stock compensation | |
| 41,000 |
| 6,000 | |
| 6,000 | |
| 35,000 | |
| 0 |
| 0 | |
| 0 | |
| 0 |
| |
| |
| | |
| | |
| | |
| |
| | |
| | |
| |
Stock - based compensation | |
| 41,000 |
| 0 | |
| 0 | |
| 41,000 | |
| 0 |
| 0 | |
| 0 | |
| 0 |
| |
| |
|
| |
|
| |
|
| |
|
|
|
| |
|
| |
|
|
Dividends | |
| (157,000) |
| 0 | |
| 0 | |
| 0 | |
| (157,000) |
| 0 | |
| 0 | |
| 0 |
| |
| |
| | |
| | |
| | |
| |
| | |
| | |
| |
Foreign currency translation adjustment | |
| 43,000 |
| 0 | |
| 0 | |
| 0 | |
| 0 |
| 0 | |
| 0 | |
| 43,000 |
| | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2020 | | $ | 41,538,000 |
| 4,428,000 | | $ | 4,428,000 | | $ | 14,144,000 | | $ | 33,756,000 |
| (1,273,000) | | $ | (10,213,000) | | $ | (577,000) |
The accompanying notes are an integral part of these consolidated financial statements.
31
P&F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Years ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net loss from continuing operations | $ | (884,000 | ) | $ | (5,683,000 | ) | ||
| Net income from discontinued operations | — | 12,584,000 | ||||||
| Adjustments to reconcile net loss from continuing operations to net cash provided by (used in) operating activities: | ||||||||
| Non-cash charges: | ||||||||
| Depreciation and amortization | 1,309,000 | 1,620,000 | ||||||
| Amortization of other intangible assets | 800,000 | 1,016,000 | ||||||
| Amortization of debt issue costs | 64,000 | 128,000 | ||||||
| Provision for doubtful accounts | 66,000 | 4,000 | ||||||
| Stock-based compensation | 80,000 | 13,000 | ||||||
| Restricted stock-based compensation | 38,000 | 50,000 | ||||||
| Loss (gain) on sale of fixed assets | 21,000 | (1,700,000 | ) | |||||
| Deferred income taxes | 912,000 | (3,946,000 | ) | |||||
| Fair value increase in contingent consideration | 158,000 | — | ||||||
| Impairment of goodwill and other intangible assets | — | 9,581,000 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (1,384,000 | ) | 498,000 | |||||
| Inventories | 1,913,000 | (316,000 | ) | |||||
| Prepaid expenses and other current assets | 1,857,000 | (2,006,000 | ) | |||||
| Other assets | 45,000 | 58,000 | ||||||
| Accounts payable | 40,000 | (372,000 | ) | |||||
| Accrued compensation and benefits | 120,000 | 24,000 | ||||||
| Accrued other liabilities | (502,000 | ) | 390,000 | |||||
| Other liabilities | (19,000 | ) | (18,000 | ) | ||||
| Total adjustments | 5,518,000 | 5,024,000 | ||||||
| Net cash provided by (used in) operating activities – continuing operations | 4,634,000 | (659,000 | ) | |||||
| Net cash used in operating activities – discontinued operations | — | (499,000 | ) | |||||
| Net cash provided by (used in) operating activities | 4,634,000 | (1,158,000 | ) | |||||
| | | | | | |
| | Years ended December 31, | ||||
|
| 2021 |
| 2020 | ||
Cash Flows from Operating Activities |
| |
|
| |
|
Net income (loss) | | $ | 2,290,000 | | $ | (4,954,000) |
| |
| | |
| |
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | |
| | |
| |
Non-cash charges: | |
| | |
| |
Depreciation | |
| 1,788,000 | |
| 1,787,000 |
Amortization of other intangible assets | |
| 631,000 | |
| 702,000 |
Operating lease expense | | | 895,000 | | | 899,000 |
Amortization of debt issue costs | |
| 16,000 | |
| 16,000 |
Amortization of consideration payable to customer | |
| 270,000 | |
| 270,000 |
Provision for doubtful accounts | |
| 10,000 | |
| 24,000 |
Stock-based compensation | |
| 5,000 | |
| 41,000 |
Restricted stock-based compensation | |
| 43,000 | |
| 41,000 |
(Loss) gain on sale of fixed assets | |
| (27,000) | |
| 35,000 |
Deferred income taxes | |
| (120,000) | |
| (11,000) |
Fair value adjustment of assets held for sale | | | 88,000 | | | 0 |
Gain on contingent consideration settlement | | | 0 | | | (52,000) |
Gain on lease obligation settlement | | | 0 | | | (31,000) |
Gain on forgiveness of grant obligation | | | (2,929,000) | | | (53,000) |
Impairment of assets | |
| 0 | |
| 1,612,000 |
Changes in operating assets and liabilities: | |
| | |
| |
Accounts receivable | |
| (96,000) | |
| 1,835,000 |
Inventories | |
| (5,671,000) | |
| 4,538,000 |
Prepaid expenses and other current assets | |
| (1,825,000) | |
| (1,341,000) |
Accounts payable | |
| 726,000 | |
| 352,000 |
Accrued compensation and benefits | |
| 954,000 | |
| (1,498,000) |
Accrued other liabilities | |
| (264,000) | |
| (185,000) |
Operating lease liabilities | |
| (888,000) | |
| (918,000) |
Other liabilities | | | (45,000) | | | (62,000) |
Total adjustments | |
| (6,439,000) | |
| 8,001,000 |
Net cash (used in) provided by operating activities | |
| (4,149,000) | |
| 3,047,000 |
The accompanying notes are an integral part of these consolidated financial statements.
32
P&F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Years ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Cash Flows from Investing Activities: | ||||||||
| Capital expenditures | $ | (910,000 | ) | $ | (1,066,000 | ) | ||
| Proceeds from disposal of assets | 12,000 | 3,512,000 | ||||||
| Purchase of net assets of Jiffy Air Tool, Inc. | (6,845,000 | ) | — | |||||
| Purchase of patents | (200,000 | ) | — | |||||
| Net cash (used in) provided by investing activities – continuing operations | (7,943,000 | ) | 2,446,000 | |||||
| Net cash provided by investing activities – discontinued operations | — | 20,149,000 | ||||||
| Net cash (used in) provided by investing activities | (7,943,000 | ) | 22,595,000 | |||||
| Cash Flows from Financing Activities: | ||||||||
| Dividend payments | (722,000 | ) | (2,335,000 | ) | ||||
| Proceeds from exercise of stock options | 62,000 | 23,000 | ||||||
| Purchase of Class A common stock | (358,000 | ) | (255,000 | ) | ||||
| Net proceeds from short-term borrowings | 1,928,000 | 9,087,000 | ||||||
| Repayments of term loans | — | (6,343,000 | ) | |||||
| Repayments of notes payable | (14,000 | ) | (29,000 | ) | ||||
| Excess tax benefit on stock-based compensation | — | (18,000 | ) | |||||
| Payments of debt issue costs | (84,000 | ) | (30,000 | ) | ||||
| Net cash provided by financing activities – continuing operations | 812,000 | 100,000 | ||||||
| Net cash used in financing activities – discontinued operations | — | (18,716,000 | ) | |||||
| Net cash provided by (used in) financing activities | 812,000 | (18,616,000 | ) | |||||
| Effect of exchange rate changes on cash | 39,000 | (49,000 | ) | |||||
| Net (decrease) increase in cash | (2,458,000 | ) | 2,772,000 | |||||
| Cash at beginning of year | 3,699,000 | 927,000 | ||||||
| Cash at end of year | $ | 1,241,000 | $ | 3,699,000 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | 97,000 | $ | 133,000 | ||||
| Income taxes | $ | 409,000 | $ | 112,000 | ||||
| Supplemental disclosures of non-cash investing and financing activities: | ||||||||
| Contingent consideration on acquisition | $ | 692,000 | $ | — | ||||
| | | | | | |
| | Years ended December 31, | ||||
|
| 2021 |
| 2020 | ||
Cash Flows from Investing Activities: |
| |
|
| |
|
Capital expenditures | | $ | (642,000) | | $ | (1,104,000) |
Proceeds from sale or disposal of machinery and equipment | | | 58,000 | | | 1,000 |
Net cash used in investing activities | | | (584,000) | | | (1,103,000) |
| | | | | | |
Cash Flows from Financing Activities: | | | | | | |
Dividend payments | | | 0 | | | (157,000) |
Proceeds from exercise of stock options | | | 0 | | | 18,000 |
Net proceeds (payments) from short-term borrowings | | | 4,391,000 | | | (4,274,000) |
Proceeds from Grant | | | 0 | | | 53,000 |
Proceeds from PPP loan | | | 0 | | | 2,929,000 |
Net cash provided by (used in) financing activities | | | 4,391,000 | | | (1,431,000) |
Effect of exchange rate changes on cash | | | (23,000) | | | 11,000 |
Net (decrease) increase in cash | | | (365,000) | | | 524,000 |
Cash at beginning of year | | | 904,000 | | | 380,000 |
Cash at end of year | | $ | 539,000 | | $ | 904,000 |
| | | | | | |
Supplemental disclosures of cash flow information: | | | | | | |
| | | | | | |
Cash paid for: | | | | | | |
Interest | | $ | 39,000 | | $ | 120,000 |
| | | | | | |
Income taxes | | $ | 22,000 | | $ | 35,000 |
| | | | | | |
Cash paid for amounts included in the measurement of operating lease liabilities | | $ | 10,000 | | $ | 5,000 |
| | | | | | |
Supplemental disclosures of non-cash investing and financing activities: | | | | | | |
| | | | | | |
Right of Use (“ROU”) assets recognized for new operating lease liabilities | | $ | 427,000 | | $ | 140,000 |
The accompanying notes are an integral part of these consolidated financial statements.
33
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20172021 and 20162020
NOTE 1—SUMMARY OF ACCOUNTING POLICIES
Principles of Consolidation
The consolidated 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.
The Company
Prior to February 11, 2016, the effective date of the sale of its Nationwide Industries, Inc. (“Nationwide”) subsidiary, P&F operatedis a Delaware corporation incorporated 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 only operates in the Tools business. See Note 2 to Consolidated Financial Statements for further discussion.
Tools
1963. 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. Effective April 5, 2017, the Company purchased substantially all of the operating assets, less certain payables of Jiffy Air Tool, Inc., (“Jiffy”) through a wholly-owned subsidiary. See Note 3 to our consolidated financial statements for further discussion. The business of Air Tool Service Company (“ATSCO”) operates through a wholly-owned subsidiary of Hy-Tech.
During 2019, the Company through a wholly-owned subsidiary of Hy-Tech, acquired substantially all the operating assets comprising the businesses of Blaz-Man Gear, Inc. and Gear Products & Manufacturing, Inc., each a manufacturer and distributer of custom gears.
Florida Pneumatic directly, and through its wholly-owned subsidiaries Exhaust Technologies Inc. (“ETI”), Universal Air Tool Company Limited (“UAT”), and Jiffy Air Tool, Inc. (“Jiffy”) imports, manufactures, and sellsmarkets pneumatic hand tools most of which are of its own design, primarily to the retail, industrial, automotive and aerospace markets. It also markets,Its products include sanders, grinders, drills, saws, and impact wrenches. These tools are similar in appearance and function to electric hand tools, but are powered by compressed air, rather than by electricity or a battery. Air 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 its Berkley Tool divisionin-house sales personnel and manufacturers’ representatives. The AIRCAT and NITROCAT brands of pneumatic tools are sold primarily to the automotive service and repair market (“Berkley”automotive market”), a product line which includes pipe. Users of Florida Pneumatic’s hand tools include industrial maintenance and bolt dies, pipe taps, wrenches, visesproduction staffs, do-it-yourself mechanics, professional automobile mechanics and stands, pipeauto body personnel. Jiffy manufactures and tubing cutting equipment, hydrostatic test pumps,distributes pneumatic tools and replacement electrical components for a widely-used brand of pipe cutting and threading machines.
primarily to aerospace manufacturers.
Hy-Tech designs, manufactures, and distributes industrial tools, pneumatic tools, industrial gears, hydrostatic test plugssystems, gearing, accessories, and a wide variety of replacement parts under thevarious brands including ATP, ATSCO, OZAT, Numatx,NUMATX, Thaxton and Quality Gear. Power Transmission Group. These tools, etc. are sold at prices ranging from $300 to $42,000.
Industries served includeHy-Tech’s “Engineered Solutions” products are sold direct to Original Equipment Manufacturers (OEMs), and industrial branded products are sold through a broad network of specialized industrial distributors serving the power generation, petrochemical, aerospace, construction, railroad, mining, ship building and fabricated metals.metals industries, among others. Hy-Tech also manufacturesworks directly with its industrial customers, designing and manufacturing products from finished components assemblies, finished product andto complete turnkey systems for various Original Equipment Manufacturersto be sold under their own brand names.
Hy-Tech’s “Power Transmission Group”, commonly referred to as “PTG”, produces spiral bevel and straight bevel gears along with a wide variety of other gearing. These products are sold direct to OEMs, end-users and gearbox repair companies. PTG works directly with its customers engineering departments to design or redesign gears or gearboxes to optimize a solution for functionality and manufacturability.
Hardware
Prior toNearly all of Hy-Tech brands are manufactured in the saleUnited States 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 hardwareAmerica. Hy-Tech markets ATP branded impact sockets, striking wrenches and accessories including rollers, hinges, window operators, sash locks, custom zinc castingsthat are imported from Italy and door closers. See Note 2Asia.
34
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021 and 2020
NOTE 1—SUMMARY OF ACCOUNTING POLICIES – Continued
The Company – Continued
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 customized to Consolidated Financial Statementsbe sold for further discussion relating to the sale of Nationwide.customer specific specifications
.
Basis of Financial Statement Presentation
The Company prepares its consolidated financial statementsConsolidated Financial Statements in accordance with accounting principles generally accepted in the United States (“US GAAP”).
COVID-19
On March 11, 2020, the World Health Organization designated the recent novel coronavirus, or COVID-19, as a global pandemic. COVID-19 was first detected in Wuhan City, Hubei Province, China and continued to spread, significantly impacting various markets around the world, including the United States. Various policies and initiatives have been implemented to reduce the global transmission of COVID-19.
The COVID-19 virus and the resultant global economic down-turn had a negative impact on our fiscal 2021 results. Additionally, we believe the supply-chain crisis is related to the pandemic. Beginning in early 2021, but magnifying during the third quarter of 2021, we encountered severe shipping / receiving delays of inventory / containers from our Asian suppliers, which has caused intermittent shortages of inventory. Further, the costs of international freight have greatly increased. In addition, the COVID-19 pandemic has caused many of our customers and potential customers to refuse on-site visits, which is critical to generating revenue. We believe that until the above issues subside, our business will likely continue to be adversely affected.
Going Concern Assessment
Management assesses going concern uncertainty to determine whether there is sufficient cash on hand and working capital, including available borrowings on loans, to operate for a period of at least one year from the date the consolidated financial statements are issued, which is referred to as the “look-forward period,” as defined in US GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to management, it considers various scenarios, forecasts, projections, estimates and makes certain key assumptions, including the timing and nature of projected cash expenditures, its ability to reduce, delay or curtail cash outflows and its ability to raise additional capital, if necessary, among other factors. Management has prepared estimates of operations covering the look-forward period and believes that sufficient funds will be generated from operations, working capital, and its existing credit facility to fund its operations. The Company has contingency plans in which it would further reduce or defer additional expenses and cash outlays, should operations weaken beyond current forecasts.
The impact of COVID-19 on the Company’s business has been considered in these assumptions; however, it is unclear what the full impact of COVID-19 will be in the future or when the Company believes a return to more normal operations may occur.
As part of the business incentives offered in the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Company, on April 20, 2020, received a $2.9 million Paycheck Protection Program (“PPP”) loan, which was forgiven in 2021. Additionally, in December 2021, the Company recorded an Employee Retention Credit of approximately $2.0 million. See Note 7 - CARES Act to the Company’s consolidated financial statements for further discussion.
The accompanying consolidated financial statements have been prepared on a going concern basis under which the Company is expected to be able to realize its assets and satisfy its liabilities in the normal course of business.
35
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20172021 and 20162020
NOTE 1—SUMMARY OF ACCOUNTING POLICIES -Continued– Continued
Going Concern Assessment – Continued
During 2021, the Company generated an after-tax income of $2,290,000. For fiscal years ended December 31, 2020, and 2021, the Company reported operating losses, and had negative cash flows in 2021. At December 31, 2021, the Company had working capital of $24,598,000 and availability on its bank facility of approximately $9,578,000. See Note 6 – Debt, for further discussion.
Revenue Recognition
InThe Company records revenue based on a five-step model in accordance with current accounting literature, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery, which occurs when title has passed to our customer or services have been provided, the sale price is fixed or determinable, and collectability is reasonably assured.Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”). The Company sells its goods on terms which transfer title and risk of loss at a specified location, which may be our warehouse, destination designated by our customer, port of loading or port of discharge, depending on the final destination of the goods. Other than standard product warranty provisions, our sales arrangements provide for no other post-shipment obligations. The Company offers rebates and other sales incentives, promotional allowances or discounts;discounts for certain customers that are typically related to customer purchase volume, andall of which 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, we have experienced minimal sales returns. If the Company believes there are material potential sales returns, it wouldwill provide the necessary provision against sales.
The Company’s performance obligations underlying its core revenue sources remain substantially unchanged. Its revenue is generated through the sale of finished products and is generally recognized at the point in time when merchandise is transferred to the customer with a fixed payment due generally within 30 to 90 days, and in an amount that considers the impacts of estimated allowances. Further, the Company has made a policy election to account for shipping and handling activities that occur after the customer has obtained control of the products as fulfillment costs rather than as an additional promised service. This election is consistent with the Company’s prior policy, and therefore the adoption of ASC 606 relating to shipping and handling activities did not have any impact on its financial results. There are no other performance obligations as of December 31, 2021.
Accounts receivable at December 31, 2019, was $9,313,000.
The Company analyzes its revenue as follows:
Revenue generated at Florida Pneumatic.
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| |||||||||||||
| | 2021 | | 2020 | | (Decrease) increase |
| |||||||||
|
| | |
| Percent of |
| | |
| Percent of |
| |
|
| |
|
| | Revenue | | revenue | | Revenue | | revenue | | $ | | % |
| |||
Automotive | | $ | 14,543,000 | | 35.1 | % | $ | 13,270,000 | | 34.7 | % | $ | 1,273,000 | | 9.6 | % |
Retail | | | 13,995,000 |
| 33.7 | | | 12,940,000 |
| 33.8 | | | 1,055,000 | | 8.2 | |
Aerospace | |
| 7,184,000 |
| 17.3 | |
| 8,087,000 |
| 21.1 | |
| (903,000) | | (11.2) | |
Industrial | |
| 5,289,000 |
| 12.7 | |
| 3,481,000 |
| 9.1 | |
| 1,808,000 | | 51.9 | |
Other | |
| 477,000 |
| 1.2 | |
| 498,000 |
| 1.3 | |
| (21,000) | | (4.2) | |
Total | | $ | 41,488,000 |
| 100.0 | % | $ | 38,276,000 |
| 100.0 | % | $ | 3,212,000 | | 8.4 | % |
36
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021 and 2020
NOTE 1—SUMMARY OF ACCOUNTING POLICIES – Continued
Revenue Recognition – Continued
Revenue generated at Hy-Tech.
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| |||||||||||||
| | 2021 | | 2020 | | (Decrease) increase |
| |||||||||
|
| | |
| Percent of |
| | |
| Percent of |
| |
|
| |
|
| | Revenue | | revenue | | Revenue | | revenue | | $ | | % |
| |||
OEM | | $ | 5,842,000 | | 48.4 | % | $ | 4,272,000 | | 39.4 | % | $ | 1,570,000 | | 36.8 | % |
PTG | | | 2,846,000 | | 23.6 | | | 3,326,000 | | 30.6 | | | (480,000) | | (14.4) | |
ATP | | | 3,024,000 |
| 25.1 | | | 2,796,000 |
| 25.7 | | | 228,000 | | 8.2 | |
Other | |
| 354,000 |
| 2.9 | |
| 466,000 |
| 4.3 | |
| (112,000) | | (24.0) | |
Total | | $ | 12,066,000 |
| 100.0 | % | $ | 10,860,000 |
| 100.0 | % | $ | 1,206,000 | | 11.1 | % |
Shipping and Handling Costs
Expenses for shipping and handling costs are included in selling, general and administrative expenses, and totaled approximately $2,017,000$2,038,000 and $2,013,000,$1,831,000, respectively, for the years ended December 31, 20172021 and 2016.
2020.
Cash and Cash Equivalents
Cash and cash equivalents consistconsists 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 no0 cash equivalents at December 31, 20172021, and 2016.
2020.
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, 20172021, and 20162020 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, 2017 and 2016 because, in general, the interest rates underlying the instruments fluctuate with market rates.
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, OEMs and original equipment manufacturersend-users 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, 20172021, is adequate. However, actual write-offs might exceed the recorded allowance.
37
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20172021 and 20162020
NOTE 1—SUMMARY OF ACCOUNTING POLICIES - Continued
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 timetime-to-time cash balances may exceed the FDIC limits.
At December 31, 2021, there was $27,000 in excess of the FDIC insured amount.
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of accounts receivable. We have two customersThe Company had one customer that in the aggregate, asaccounted for 35.9% and 38.0% of its consolidated accounts receivable at December 31, 20172021, and 2016,2020, respectively. Further, this customer accounted for 33.1%26.1% and 53.5%, respectively, of our consolidated accounts receivable. Sears was one26.3% of the two customers included in the percentages stated above. The Company has previously disclosed that it terminated its business relationship with Sears, effective September 30, 2017. As of December 31, 2017, there was an outstanding accounts receivable balance of $212,000 due from Sears, which was fully collected in January 2018. Additionally, these two customers accounted for 5.9% and 27.1%, respectively, of our 2017Company’s consolidated revenue compared to 13.6%in 2021 and 29.8%, respectively, in 2016.2020, respectively. There was no other customer that accounted for more than 10% of our consolidated revenue in 20172021 or 2016.
2020.
Inventories
Inventories are valued at the lower of cost or market.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.
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 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 entitya reporting unit 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.
38
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021 and 2020
NOTE 1—SUMMARY OF ACCOUNTING POLICIES - Continued
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, 2017 and 2016
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 entityreporting 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 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%)50)% that the fair value of a reporting unit is less than its carrying amount. If the carrying amount of the reporting unit is less than its fair value, no impairment exists, and no further action is required. If the carrying amount of a reporting unit exceeds its fair value, the entitywill record an impairment charge based on the excess of a reporting unit'sunit’s carrying amount over its fair value.
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 costs. The costs are estimated based on revenue and historical experience. The Company periodically assesses the adequacy of its 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 in the future.
39
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021 and 2020
NOTE 1—SUMMARY OF ACCOUNTING POLICIES - Continued
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 consolidated financial statementsConsolidated Financial Statements in the period enacted. Further, the 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.
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.
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 1—SUMMARY OF ACCOUNTING POLICIES - Continued
When tax returnsTax benefits 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 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 aremore likely than not offset or aggregated with other positions. For tax positions that meet the more-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 taxes in the consolidated statements of operations and comprehensive (loss) income.
tax expense.
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%)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 Company'sCompany’s financial statements or tax returns and future profitability. The Company'sCompany’s accounting for deferred tax consequences represents its best estimate of those future events. Changes in the Company'sCompany’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.
On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in tax years 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. In addition to the NOL changes, the CARES Act enacted the employee retention credit and modifies the limitation of business interest for tax years beginning in 2019 and 2020. The modifications to Section 163(j) of the Internal Revenue Code increase the allowable business interest deduction from 30% of adjusted taxable income to 50% of adjusted taxable income (See Note 10 – Income taxes).
40
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021 and 2020
NOTE 1—SUMMARY OF ACCOUNTING POLICIES - Continued
Lease Accounting
The Company adopted ASC 842, Leases (“ASC Topic 842”), 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 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 a lease is not readily determinable, the Company uses its incremental borrowing rate as the discount rate. The Company uses its best judgment 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, 2021.
For current and deferred tax provisions, current accounting guidance requires entities to account for the effects of new income tax legislationyear ended December 31, 2021, the Company had $895,000 in the same reporting period that the tax legislationOperating lease expense.
The following is enacted. For recent tax law changes known as the U.S. Tax Cuts and Jobs Act of 2017 (the "2017 Act") enacted on December 22, 2017, SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implicationsa maturity analysis of the Tax Cuts and Jobs Act, permits us to calculate and recognize provisional tax estimates for our fourth quarter of fiscal 2017 for the accounting relatedannual undiscounted cash flows reconciled to the enactmentcarrying value of the 2017 Act. Any subsequent adjustments to the provisional estimates will be reflected in our income tax provisions/benefits during one or more periods in fiscal 2018. Additional information is contained in Note 11, Income Taxes, to the consolidated financial statements.operating lease liabilities as of December 31, 2021:
| | | | |
|
| As of December 31, 2021 | | |
2022 |
| $ | 875,000 | |
2023 |
| | 873,000 | |
2024 |
| | 598,000 | |
2025 |
| | 309,000 | |
2026 |
| | 174,000 | |
Thereafter |
| | 693,000 | |
Total operating lease payments |
| | 3,522,000 | |
Less imputed interest |
| | (506,000) | |
Total operating lease liabilities |
| $ | 3,016,000 | |
| | | | |
Weighted average remaining lease term |
| | 5.5 | years |
Weighted average discount rate |
| | 6.7 | % |
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.
41
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021 and 2020
NOTE 1—SUMMARY OF ACCOUNTING POLICIES - Continued
Advertising
The Company typically expenses its costs of advertising in the period in which they are incurred. Advertising costs forincurred and are included in Selling, General, and Administrative expenses. For the years ended December 31, 20172021, and 20162020 advertising expenses were $1,276,000 and $1,441,000,$1,529,000, respectively.
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 1—SUMMARY OF ACCOUNTING POLICIES - Continued
Earnings (Loss) Per Common Share
Basic earnings (loss) per common share exclude any dilution. It is based upon the weighted average number of shares of common stockCommon Stock outstanding during the year. Diluted earnings (loss) 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.
Diluted earnings (loss) per common share is computed using the treasury stock method. Under this method, the aggregate number of shares of 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.
The following table sets forth the computation of basic and diluted earnings (loss) earnings per common share:
| Years Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Numerator for basic and diluted (loss) earnings per common share: | ||||||||
| Net loss from continuing operations | $ | (884,000 | ) | $ | (5,683,000 | ) | ||
| Net income from discontinued operations | — | 12,584,000 | ||||||
| Net (loss) income | $ | (884,000 | ) | $ | 6,901,000 | |||
| Denominator: | ||||||||
| Denominator for basic (loss) income per share—weighted average common shares outstanding | 3,606,000 | 3,598,000 | ||||||
| Denominator for diluted (loss) income per share—adjusted weighted average common shares and assumed conversions | 3,606,000 | 3,598,000 | ||||||
| | | | | | |
| | Years Ended December 31, | ||||
|
| 2021 |
| 2020 | ||
Numerator for basic and diluted earnings (loss) per common share: |
| |
|
| |
|
Net income (loss) | | $ | 2,290,000 | | $ | (4,954,000) |
Denominator: | |
| | |
| |
Denominator for basic income (loss) per share—weighted average common shares outstanding | |
| 3,178,000 | |
| 3,149,000 |
Dilutive securities (1) | | | 14,000 | | | — |
Denominator for diluted income (loss) per share—adjusted weighted average common shares and assumed conversions | |
| 3,192,000 | |
| 3,149,000 |
(1) | Dilutive securities consist of the “in the money” stock options. In the event of a loss, options are considered anti-dilutive and are therefore not included in the calculation of diluted loss per share. |
For the years ended December 31, 2017 and 2016, the Company experienced a net loss from continuing operations. As a result, there is no calculation of diluted earnings per share. The average anti-dilutive options outstanding for the years ended December 31, 20172021, and 20162020 were 77,000137,000 and 76,000,164,000, respectively. December 31, 2021 and 2020.
42
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021 and 2020
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 operations and comprehensive income (loss) 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 operations and comprehensive income (loss) 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 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.
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 1—SUMMARY OF ACCOUNTING POLICIES - Continued
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'sCompany’s international operations are reported as a component of "Accumulated“Accumulated other comprehensive loss"loss” in the Company'sCompany’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 operations and comprehensive income (loss) 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“Accumulated other comprehensive loss"loss” in the Company'sCompany’s consolidated balance sheets.
Recently Adopted Accounting Pronouncements
Going concern assessment
In accordance with current accounting literature, the Company assesses going concern uncertainty in its financial statements to determine if it 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 the 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, the Company will make certain assumptions around implementing curtailments or delays in the nature and timing of programs and expenditures to the extent the Company deems probable those implementations can be achieved and it will have the proper authority to execute them within the look-forward period. Our assessment determined the Company is a going concern.
New Accounting Pronouncements
Recently Issued Accounting Pronouncements
Not Yet Adopted
In May 2014, theMarch 2020, FASB issued Accounting Standards Update (“ASU”) ASU No. 2014-09,2020-04,Revenue Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This standard provides temporary optional expedients and exceptions to US GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from Contracts with Customers,London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as Secured Overnight Financing Rate (“SOFR”). This standard is effective for all entities beginning March 12, 2020, through December 31, 2022. We adopted this standard on January 1, 2021. This standard did not have a new Topic, Accounting Standards Codification (“ASC”) Topic 606, which supersedes existingsignificant effect on our accounting standards for revenue recognitionpolicies or on our consolidated financial statements and creates a single framework. Additional updates to Topic 606 issued byrelated disclosures.
In November 2021, the FASB issued ASU 2021-10, Disclosures by Business Entities about Government Assistance. The amendments in 2015 and 2016 includethis Update require the following:
annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy. The underlying principleamendments in this Update are effective for all entities within their scope for financial statements issued for annual periods beginning after December 15, 2021. Early application of the amendments 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.permitted. The Company has elected to use the modified retrospective application. The Company has performed a reviewearly adopt this Update.
43
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20172021 and 20162020
NOTE 1—SUMMARY OF ACCOUNTING POLICIES - Continued
Recently Adopted Accounting Pronouncements - Continued
In February 2016,No other new accounting pronouncement issued or effective during the FASB issued ASU No. 2016-02,Leases. This ASUfiscal year had or is expected to have a comprehensive new leases standard that amends various aspects of existing guidance for leases and requires additional disclosures about leasing arrangements. It will require companies to recognize lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. 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 ASU is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years; earlier adoption is permitted. In thematerial impact on our consolidated financial statements in which the ASU is first applied, leases shall be measured and recognized at the beginning of the earliest comparative period presented with an adjustment to equity. or disclosures.
Not Yet Adopted
The Company is currently evaluating the impact of the adoption of this guidance on its consolidated financial statements.
There are currently no other accounting standards that have beendoes not expect any recently 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.
Recently Adopted
In January 2017, the FASB issued ASU No. 2017-04,Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplified the testing of goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measured a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. ASU 2017-04 is effective for public companies for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company concluded that ASU 2017-04 is preferableaccounting pronouncements to the current guidance due to efficiency, since ASU 2017-04 eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. The Company early adopted ASU 2017-04 in conjunction with its annual impairment test of goodwill for all reporting units. The adoption of ASU 2017-04 did not have a material impact on its financial results nor its impairment analysis of its goodwill as of November 30, 2017.
In March 2016, the FASB issued ASU 2016-09,Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplified several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the consolidated statement of cash flows and forfeitures. ASU 2016-09 was effective for the Company beginning fiscal year 2017 and did not have a material impact on the Company’s consolidated results of operations or financial position. As a result of adoption, the Company now recognizes excess tax benefits or deficiencies associated with share-based compensation activity as an income tax expense or benefit in the period the awards vest or are settled. In addition, the Company now presents excess tax benefits or deficiencies from share-based compensation activity with other income tax cash flows as an operating activity on the consolidated statement of cash flows, which differs from the Company’s historical classification of excess tax benefits or deficiencies as a financing activity. The Company has elected to apply this change in cash flow presentation on a prospective basis. The standard also permits the Company to make a policy election for how it accounts for forfeitures, and the Company has elected to account for these forfeitures as they occur.
In July 2015, the FASB issued ASU No. 2015-11,Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”). The standard simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value for entities using the first-in, first-out method of valuing inventory. ASU 2015-11 eliminates other measures required by current guidance to determine net realizable value. ASU 2015-11 was effective for fiscal 2017. The impact of the adoption was not material to the Company’s consolidated financial statements.
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.
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 2—DISCONTINUED OPERATIONS - 2016
Sale of Nationwide Industries, Inc.
The Company, as part of its strategic plan to focus on expanding its position in the power-tool and accessories market, sold Nationwide in February 2016. On the Nationwide Closing Date, P&F, Countrywide, Nationwide and Argosy NWI Holdings, LLC, a Delaware limited liability company (“Buyer”), entered into a Stock Purchase and Redemption Agreement (the “Stock Purchase Agreement”), pursuant to which, among other things, after giving effect to certain contributions and redemptions of Nationwide’s common shares (“Nationwide Shares”), the Buyer acquired all of the outstanding Nationwide Shares from Countrywide (the “Acquisition”). The purchase price for the Nationwide Shares acquired in the Acquisition was approximately $22,200,000, before giving effect to an estimated working capital adjustment, as defined in the Stock Purchase Agreement, of approximately $802,000 in favor of the Buyer. Further, in accordance with the Stock Purchase Agreement, the Company placed into escrow $1,955,000 (“escrow funds”), of which $250,000 related to the final working capital adjustment. Pursuant to the terms of the Stock Purchase Agreement, the final working capital adjustment amount was determined to be approximately $75,000 in the Company’s favor. As a result, during the three-month period ended June 30, 2016, the $250,000 portion of the escrow funds was released to the Company, and the final working capital adjustment amount of $75,000 was paid to the Company by the Buyer. In connection with the Acquisition, Countrywide agreed that, should it sell the real property it owned in Tampa, Florida (the “Premises”), it will contribute an additional $400,000 into the escrow funds. In November 2016, the Premises were sold, and as a result Countrywide contributed the additional $400,000 into the aforementioned escrow funds which, at that time, aggregated to approximately $2,105,000. In accordance with the Stock Purchase Agreement, in August 2017, as no claims were made against the Escrow funds, the Company received the full amount of the escrow plus interest.
At the closing of the Acquisition, after paying closing costs, the net cash received from the Buyer was approximately $18,700,000.
As Nationwide was a substantial and unique business unit of the Company, its sale was a strategic shift. Accordingly, in accordance with ASC Topic 360, the Company, in 2016, classified Nationwide as a discontinued operation.
The net income from discontinued operations, net of taxes in 2016 presented in the accompanying Consolidated Statements of Operations and Comprehensive (Loss) Income is composed of the following:
| January 1, 2016 through the Closing Date | ||||
| Revenue | $ | 1,830,000 | ||
| Cost of goods sold | 1,177,000 | |||
| Gross profit | 653,000 | |||
| Selling and general and administrative expenses | 483,000 | |||
| Interest expense-net | 60,000 | |||
| Income before income taxes | 110,000 | |||
| Income taxes | 38,000 | |||
| Net income | $ | 72,000 | ||
The Company recognized a gain of $12,512,000 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 the Company 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.
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 3 – ACQUISITION
On April 5, 2017 (the “Jiffy Closing Date”), Bonanza Holdings Corp. (now known as Jiffy Air Tool, Inc.), a Delaware corporation and newly formed wholly-owned subsidiary (“Jiffy”) of Florida Pneumatic, Jiffy Air Tool, Inc. a Nevada corporation (“Jiffy Seller”), The Jack E. Pettit—1996 Trust, the sole shareholder of Jiffy Seller and Jack E. Pettit, entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”), pursuant to which, among other things, Jiffy acquired (the “Jiffy Acquisition”) substantially all of the operating assets of Jiffy Seller for $5,950,000, in addition to the assumption of certain payables and contractual obligations as set forth in the Asset Purchase Agreement. Jiffy manufactures and distributes pneumatic tools and components, primarily sold to aerospace manufacturers. The purchase price was $5,950,000, less a post-closing working capital adjustment of $155,000, which was paid by Jiffy Seller to the Company in June 2017.
Additionally, Jiffy Seller may be entitled to up to $1,000,000 in additional consideration, which is contingent upon Jiffy achieving certain revenue thresholds and other criteria as set forth in the Asset Purchase Agreement within two defined measurement periods occurring within approximately the first two years following the Jiffy Closing Date.
In connection with the Asset Purchase Agreement, a separate Purchase and Sale Agreement and Joint Escrow Instructions (the “Purchase and Sale Agreement” and together with the Asset Purchase Agreement, the “Agreements”) was entered into between Jiffy Seller and Bonanza Properties Corp. (“Bonanza Properties”), a Delaware corporation and newly formed wholly-owned subsidiary of Florida Pneumatic, pursuant to which Bonanza Properties purchased certain real property of Jiffy Seller. Pursuant to the Purchase and Sale Agreement, the purchase price for the real property was $1,050,000.
The initial total consideration ($5,950,000 plus $1,050,000) was paid by Jiffy to Jiffy Seller from funds available under the Revolver, as defined in Note 8, pursuant to the 2016 Amendment (defined in Note 8 below), less certain amounts escrowed pursuant to, among others, the terms of the Agreements.
| Total | ||||
| Cash paid at closing | $ | 7,000,000 | ||
| Less working capital adjustment | (155,000 | ) | ||
| Fair value of contingent consideration | 692,000 | |||
| Total estimated purchase price | $ | 7,537,000 | ||
The following table presents purchase price allocation:
| Accounts receivable | $ | 789,000 | ||
| Inventories | 1,571,000 | |||
| Other current assets | 45,000 | |||
| Land | 131,000 | |||
| Building | 919,000 | |||
| Machinery and equipment | 1,196,000 | |||
| Identifiable intangible assets: | ||||
| Customer relationships | 1,670,000 | |||
| Trademarks and trade names | 790,000 | |||
| Non-compete agreements | 17,000 | |||
| Liabilities assumed | (125,000 | ) | ||
| Goodwill | 534,000 | |||
| Total estimated purchase price | $ | 7,537,000 |
The excess of the total purchase price over the fair value of the net assets acquired, including the value of the identifiable intangible assets, has been allocated to goodwill. Goodwill will be amortized over 15 years for tax purposes, but not deductible for financial reporting purposes. The intangible assets subject to amortization will be amortized over 15 years for tax purposes. For financial reporting purposes, useful lives have been assigned as follows:
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 3 – ACQUISITION - Continued
The following unaudited pro-forma combined financial information gives effect to the Jiffy Acquisition as if the Jiffy Acquisition was consummated January 1, 2016. This unaudited pro-forma financial information is presented for information purposes only, and is not intended to present actual results that would have been attained had the Jiffy Acquisition been completed as of January 1, 2016 (the beginning of the earliest period presented) or to project potential operating results as of any future date or for any future periods.
| For the Year Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Revenue | $ | 60,451,000 | $ | 64,152,000 | ||||
| Net loss from continuing operations | $ | (779,000 | ) | $ | (4,472,000 | ) | ||
| Loss per share – basic | $ | (0.22 | ) | $ | (1.24 | ) | ||
| Loss per share – diluted | $ | (0.22 | ) | $ | (1.24 | ) | ||
NOTE 4—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 instruments valuation.
| ● | 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 instrument’s valuation. |
The guidance requires the use of observable market data if such data is available without undue cost and effort.
As of December 31, 20172021, and 2016,2020, 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, was estimated to be the same as its carrying value, based on Level 3 inputs. The escrow was released to the Company in August 2017, in accordance with the terms and conditions set forth in the Stock Purchase Agreement.
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 5—3—ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable - net consistsconsist of:
| December 31, 2017 | December 31, 2016 | |||||||||||||
| | | | | | | ||||||||
|
| December 31, |
| December 31, | ||||||||||
| | 2021 | | 2020 | ||||||||||
| Accounts receivable | $ | 10,199,000 | $ | 7,991,000 | | $ | 7,817,000 | | $ | 7,726,000 | ||||
| Allowance for doubtful accounts and sales discounts | (152,000 | ) | (85,000 | ) | ||||||||||
| $ | 10,047,000 | $ | 7,906,000 | |||||||||||
Allowance for doubtful accounts, sales discounts, and chargebacks | |
| (267,000) | |
| (258,000) | ||||||||
| | $ | 7,550,000 | | $ | 7,468,000 | ||||||||
44
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20172021 and 20162020
NOTE 6—4—INVENTORIES
Inventories consist of:
| December 31, 2017 | December 31, 2016 | |||||||||||||
| | | | | | | ||||||||
|
| December 31, |
| December 31, | ||||||||||
| | 2021 | | 2020 | ||||||||||
| Raw materials | $ | 1,871,000 | $ | 1,918,000 | | $ | 2,166,000 | | $ | 2,077,000 | ||||
| Work in process | 1,556,000 | 658,000 | |
| 1,360,000 | |
| 1,127,000 | ||||||
| Finished goods | 16,230,000 | 17,325,000 | |
| 20,495,000 | |
| 15,158,000 | ||||||
| $ | 19,657,000 | $ | 19,901,000 | |||||||||||
| | $ | 24,021,000 | | $ | 18,362,000 | ||||||||
NOTE 7—5—GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Goodwill and other intangible assets with indefinite lives are tested annually or whenever events or circumstances indicate the carrying value of these assets may not be recoverable. In accordance with authoritative guidance issued by the FASB, the Company performed an annual impairment test of goodwill and indefinite-lived intangible assets during the fourth quarter based on conditions as of November 30, 2017. In 2017,2021. For both 2021 and 2020, with respect to the Company’s two reporting units, Florida Pneumatic and Hy-Tech, the Company determined thetheir 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 next foursix fiscal years, and then applies projected minimal growth for all remaining years, based upon available statistical data and management’s estimates.
At December 31, 2021, only Florida Pneumatic had goodwill.
The result of the Company’s impairment test for Florida Pneumaticas of November 30, 2021, determined that itsFlorida Pneumatic’s fair value exceeded the carrying value and, as such, no impairment to Goodwillgoodwill assets was recorded.
During the second quarter of 2020, the Company determined that a triggering event occurred as it concluded that the impact of COVID-19 on its sales, profitability and cash flows resulted in a reduction to its operating forecasts reflecting the uncertainty of the current environment. As a result, the Company performed an interim goodwill impairment test.
After completion of the interim goodwill impairment test, the Company concluded that Hy-Tech’s goodwill was fully impaired and recorded a non-cash goodwill impairment charge of $284,000 during the second quarter of 2020. Consistent with the procedures followed in the Company’s annual impairment test, it estimated the fair values of each of its reporting units using the income approach. The income approach uses projected future cash flows that are discounted using a weighted average cost of capital analysis that reflects current market conditions.
45
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021 and 2020
NOTE 5—GOODWILL AND OTHER INTANGIBLE ASSETS - Continued
Other Intangible Assets
The result of the Company’s impairment test as of November 30, 2021, for Florida Pneumatic and Hy-Tech determined that their respective fair value exceeded the carrying value and, as such, no impairment to other intangible assets was recorded in 2017.recorded.
Changes in the carrying amount of goodwill are as follows:
| Balance, January 1, 2017 | $ | 3,897,000 | ||
| Acquisition of Jiffy Air Tool, Inc. | 534,000 | |||
| Currency translation adjustment | 16,000 | |||
| Balance, December 31, 2017 | $ | 4,447,000 |
Other intangible assets were as follows:
| December 31, 2017 | December 31, 2016 | |||||||||||||||||||||||
| Cost | Accumulated amortization | Net book value | Cost | Accumulated amortization | Net book value | |||||||||||||||||||
| Other intangible assets: | ||||||||||||||||||||||||
| Customer relationships (1) | $ | 6,836,000 | $ | 1,570,000 | $ | 5,266,000 | $ | 5,143,000 | $ | 1,022,000 | $ | 4,121,000 | ||||||||||||
| Trademarks and trade names (1) | 2,329,000 | — | 2,329,000 | 1,507,000 | — | 1,507,000 | ||||||||||||||||||
| Trademarks and trade names (2) | 200,000 | 19,000 | 181,000 | 200,000 | 5,000 | 195,000 | ||||||||||||||||||
| Engineering drawings | 330,000 | 175,000 | 155,000 | 330,000 | 148,000 | 182,000 | ||||||||||||||||||
| Non-compete agreements (1) | 239,000 | 210,000 | 29,000 | 212,000 | 150,000 | 62,000 | ||||||||||||||||||
| Patents (3) | 1,405,000 | 832,000 | 573,000 | 1,205,000 | 666,000 | 539,000 | ||||||||||||||||||
| Totals | $ | 11,339,000 | $ | 2,806,000 | $ | 8,533,000 | $ | 8,597,000 | $ | 1,991,000 | $ | 6,606,000 | ||||||||||||
| | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 | ||||||||||||||
|
| | |
| Accumulated |
| Net book |
| | |
| Accumulated |
| Net book | ||||
| | Cost | | amortization | | value | | Cost | | amortization | | value | ||||||
Other intangible assets: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Customer relationships (1) | | $ | 6,495,000 | | $ | 3,545,000 | | $ | 2,950,000 | | $ | 6,502,000 | | $ | 3,034,000 | | $ | 3,468,000 |
Trademarks and trade names (1) | |
| 2,187,000 | |
| 0 | |
| 2,187,000 | |
| 2,187,000 | |
| 0 | |
| 2,187,000 |
Trademarks and trade names | |
| 200,000 | |
| 73,000 | |
| 127,000 | |
| 200,000 | |
| 59,000 | |
| 141,000 |
Engineering drawings | |
| 330,000 | |
| 254,000 | |
| 76,000 | |
| 330,000 | |
| 239,000 | |
| 91,000 |
Non-compete agreements (1) | |
| 335,000 | |
| 290,000 | |
| 45,000 | |
| 335,000 | |
| 266,000 | |
| 69,000 |
Patents | |
| 1,286,000 | |
| 1,079,000 | |
| 207,000 | |
| 1,286,000 | |
| 1,016,000 | |
| 270,000 |
Totals | | $ | 10,833,000 | | $ | 5,241,000 | | $ | 5,592,000 | | $ | 10,840,000 | | $ | 4,614,000 | | $ | 6,226,000 |
| (1) | A portion of these intangibles are maintained in a foreign currency and are therefore subject to foreign exchange rate fluctuations. |
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017The Company, during the second quarter of 2020, estimated the fair value of the NUMATX patent, and 2016
NOTE 7—GOODWILL AND OTHER INTANGIBLE ASSETS - Continued
Changesits UAT trade name based on an income approach using the relief-from-royalty method. This approach is dependent upon a number of factors, including estimates of future growth and trends, royalty rates, discount rates and other variables. For the interim impairment test, its estimates of future revenue and profitability associated with NUMATX and UAT were significantly reduced, primarily reflecting the impact of COVID-19. The Company reduced the royalty rate used to estimate the fair value, reflecting the impact of the uncertain environment resulting from COVID-19. Additionally, the weighted average cost of capital used to discount the cash flows for the interim goodwill impairment test was slightly higher than the last annual test, also reflecting the increasing uncertainty resulting from COVID-19. Further, the Company estimated the fair value of Hy-Tech’s customer relationships based on the discounted value of future cash flows and determined that, primarily for the same reasons noted above related to impairment of the NUMATX patent and the UAT trade name, Hy-Tech’s customer relationships were fully impaired. As a result of the aforementioned, the Company adjusted the fair value of the above-mentioned intangible assets by recording a non-cash impairment charge of $1,328,000 in the carrying amountsecond quarter of other intangibles are as follows:
| Cost | Accumulated amortization | Net book value | ||||||||||
| Balance, January 1, 2017 | $ | 8,597,000 | $ | 1,991,000 | $ | 6,606,000 | ||||||
| Acquisition of Jiffy Air Tool, Inc. | 2,477,000 | — | 2,477,000 | |||||||||
| Purchase of patent | 200,000 | — | 200,000 | |||||||||
| Amortization | — | 800,000 | (800,000 | ) | ||||||||
| Currency translation adjustment | 65,000 | 15,000 | 50,000 | |||||||||
| Balance, December 31, 2017 | $ | 11,339,000 | $ | 2,806,000 | $ | 8,533,000 | ||||||
2020.
The weighted average amortization period for intangible assets was as follows:
| December 31, 2017 | December 31, 2016 | |||||||||||
| | | | | ||||||||
|
| December 31, 2021 |
| December 31, 2020 | ||||||||
| Customer relationships | 10.1 | 9.3 |
| 6.7 |
| 7.6 | ||||||
| Trademarks and trade names (2) | 13.5 | 14.5 | ||||||||||
Trademarks and trade names |
| 9.5 |
| 10.5 | ||||||||
| Engineering drawings | 8.1 | 8.8 |
| 5.1 |
| 6.1 | ||||||
| Non-compete agreements | 1.8 | 1.2 |
| 2.0 |
| 3.0 | ||||||
| Patents | 8.8 | 6.1 |
| 4.5 |
| 5.2 | ||||||
Amortization expense of intangible assets from continuing operations subject to amortization was as follows:
| Year ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| $ | 800,000 | $ | 1,016,000 | |||||
| | | | | | |
| | Years ended December 31, | ||||
|
| 2021 |
| 2020 | ||
| | $ | 631,000 | | $ | 702,000 |
46
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021 and 2020
NOTE 5—GOODWILL AND OTHER INTANGIBLE ASSETS - Continued
Other Intangible Assets - Continued
Amortization expense for each of the next five years and thereafter is estimated to be as follows:
| 2018 | $ | 702,000 | ||
| 2019 | 683,000 | |||
| 2020 | 644,000 | |||
| 2021 | 637,000 | |||
| 2022 | 636,000 | |||
| Thereafter | 2,902,000 | |||
| $ | 6,204,000 |
| | | |
2022 |
| $ | 629,000 |
2023 | |
| 625,000 |
2024 | |
| 577,000 |
2025 | |
| 548,000 |
2026 | |
| 348,000 |
Thereafter | |
| 678,000 |
| | $ | 3,405,000 |
During the second and fourth quarters of 2016, the Company recorded impairment charges against Hy-Tech’s Goodwill. The following table presents the aggregate amount of impairment charges recorded in 2016.
| Customer relationships | $ | 3,001,000 | ||
| Trademarks and trade names (1) | 237,000 | |||
| Engineering drawings | 37,000 | |||
| Non-compete agreements | 83,000 | |||
| $ | 3,358,000 |
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 8—6—DEBT
In October 2010, the Company entered into a Loan and Security Agreement (“Credit Agreement”) with an affiliate of Capital One, National Association (“Capital One” or the “Bank”). The Credit Agreement, as amended and restated in April 2017 and further amended from time to time,time-to-time, among other things, provides the ability to borrow funds under a $16,000,000 revolver line (“Revolver”), subject to certain borrowing base criteria. Additionally, there is a $2,000,000 line of credit for capital expenditures (“Capex Loan”), with $1,600,000 available for future borrowings. Revolver arrangement. Revolverand Capex Loan borrowings are secured by the Company’s accounts receivable, inventory, equipment, and mortgages on real property.property, among other things. P&F and certain of its subsidiaries are borrowers under the Credit Agreement, and their obligations are cross-guaranteedcross guaranteed by certain other subsidiaries.
The Credit Agreement expires on February 8, 2024.
At the Company’s option, Revolver borrowings 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 areThe Company is subject to limitations on the number of LIBOR borrowings.
Contemporaneously with the sale of Nationwide in February 2016, the Company entered into the Consent and Second Amendment to the Restated Loan Agreement (the “2016 Amendment”) with Capital One. The 2016 Amendment, among other things, provided the Bank’s consent to the transactions contained in the Stock Purchase Agreement related to the sale of Nationwide and the repurchase of certain shares and options discussed in Note 2 and 9 to the consolidated financial statements, and amended the Credit Agreement by: (a) reducing the aggregate Commitment (as defined in the 2016 Amendment) to $11,600,000; (b) reducing the Term Loan to $100,000; (c) reducing the Revolver Commitment (as defined in the 2016 Amendment) to $10,000,000 (less the new Term Loan A balance of $100,000. Leaving this balance will simplify potential future increases to the term loan, should the Company require and should Capital One be willing to provide such funding.); (d) reducing the Capex Loan Commitment (as defined in the 2016 amendment) to $1,600,000; (e) modifying certain financial covenants, (f) lowering interest rate margins and fee obligations; (g) extending the expiration of the Credit Agreement to February 11, 2019, and (h) releasing the mortgage on our Tampa, FL real property.
Contemporaneously with the acquisition of the Jiffy business discussed in Note 3 to the consolidated financial statements, the Company entered into a Second Amended and Restated Loan and Security Agreement, effective as of the April 5, 2017, the closing date of the Jiffy Acquisition (the “2017 Agreement”), with Capital One. The 2017 Agreement, among other things, amended the Credit Agreement by: (1) increasing the maximum amount it can borrow under the Revolver Commitment (as defined) from $10,000,000 to $16,000,000, subject to certain borrowing base criteria, and (2) modifying certain borrowing base criteria as well as financial and other covenants. In addition, the Company incurred $84,000 of debt issue costs in connection with this Amendment.
The Company provides Capital One with monthly borrowing base certificates, and in certain circumstances, it is required to deliver monthly financial statements borrowing base certificates and certificates of compliance with various financial covenants. The Company believes it is in compliance with all financial and non-financial covenants. As part of the Restated Loan Agreement, ifShould an event of default occurs,occur the interest rate would increase by two percent per annum during the period of default, in addition to other remedies provided to Capital One.
SHORT–TERM BORROWINGS
At December 31, 2017, the Company’s2021, short-term or Revolver borrowing was $1,928,000,$5,765,000 compared to no short-term borrowing balance$1,374,000, at December 31, 2016. At December 31, 2017, the Company had approximately $12,400,000 available under the Credit Agreement.2020. Applicable Margin Rates as defined in the Credit Agreement, at December 31, 20172021, and 20162020, for LIBOR and Base Rates were 1.50% and 0.50%, respectively. Additionally, at December 31, 2021 and 2020, there was approximately $9,578,000 and $11,971,000, respectively, available to the Company under its Revolver arrangement.
On December 31, 2021, the process of cessation of LIBOR as a reference rate began. Between December 31, 2021, and June 30, 2023, any borrowings under our existing credit facility within the Credit Agreement will continue to use LIBOR as the basis for interest rates. If the Credit Agreement is amended or replaced during this period, it is possible that the Bank may no longer use LIBOR as a reference rate and instead the Company could be subject to an interest rate based on either the Secured Overnight Financing Rate ("SOFR"), which is deemed a replacement benchmark for LIBOR, or an alternate index to be agreed upon. After June 30, 2023, all borrowings will be based on SOFR or the alternate index.
The average balances of short-term borrowings from our Bank for the years ended December 31, 2021, and 2020 were $2,686,000 and $4,042,000, respectively. The effect of the Paycheck Protection Program loan, (“PPP Loan”) discussed in Note 7 – CARES Act, on our average borrowings was not evidenced until the latter portion of 2020.
47
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20172021 and 20162020
NOTE 7 - CARES ACT
On April 20, 2020, the Company received a PPP loan in the amount of $2,929,000, as provided pursuant to the CARES Act and administered by the United States Small Business Administration (“SBA”). The PPP loan, which was unsecured and guaranteed by the SBA, was designed to create economic stimulus by providing additional operating capital to small businesses in the U.S., such as P&F. To facilitate the PPP loan, the Company entered into a Promissory Note dated April 17, 2020, with BNB Bank as the lender (the “Lender”).
Under the terms of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), as amended by the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”), the Company was eligible to apply for and receive forgiveness for all or a portion of the PPP loan. Such forgiveness was determined, subject to limitations, based on the use of the loan proceeds for certain permissible purposes as set forth in the PPP loan, including, but not limited to, payroll costs (as defined under the PPP) and mortgage interest, rent or utility costs (collectively, “Qualifying Expenses”) incurred during the 24 weeks subsequent to funding, and on the maintenance of employee compensation levels, as defined, following the funding of the PPP loan. In February 2021, in accordance with the Flexibility Act, the Company filed an application for forgiveness with the Lender, who approved this submission and subsequently submitted the Company’s application to the SBA. On June 9, 2021, the Company was advised that the SBA had approved the Company’s PPP loan forgiveness application and as such, the PPP loan and interest were forgiven in their entirety and recorded as Other income on the accompanying consolidated statement of operations and comprehensive income (loss).
The CARES Act provides an employee retention credit (“ERC”) that is a refundable tax credit against certain employer taxes. On December 27, 2020, Congress enacted the Taxpayer Certainty and Disaster Tax Relief Act of 2020, (“Tax Relief Act”), which amended and extended ERC availability under Section 2301 of the CARES Act. Before the enactment of the Tax Relief Act, businesses who were provided SBA PPP Loans under the CARES Act were ineligible for the ERC. Following enactment of the Tax Relief Act, such businesses became retroactively eligible for the ERC.
Under the CARES Act, a company needed a more than 50% decline in gross receipts in 2020, compared to the same quarter in 2019, in order to use the gross receipts test to be eligible for the ERC. The Company determined it did not qualify for the ERC for 2020 as it did not satisfy the gross receipts test for any quarter in 2020.
The Tax Relief Act provided for changes in the ERC for 2020 and provided an additional credit for all quarters of 2021. The Tax Relief Act revised the gross receipts test, using two scenarios to qualify: 1) a company that has had a more than 20% decline in gross receipts in 2021, compared to the same quarter in 2019, or 2) a company can elect to use the gross receipts from the immediately preceding quarter, and compare these prior quarter gross receipts to the same quarter in 2019, rather than the current quarter.
The Company evaluated its eligibility for the ERC and determined that it met all the criteria to claim a refundable tax credit against the employer share of Social Security taxes equal to seventy percent (70%) of the qualified wages that the Company paid to employees for the three-month periods ended June 30 and September 30, 2021. The Company adopted ASU 2010-10 to which Topic 832 gives guidance to account for transactions with a government by analogizing to a grant accounting model, which the Company’s policy is the International Accounting Standard 20 model. As a result, the Company recorded $2,028,000 as a receivable in Prepaid expenses and other current assets and a like amount in Other income for the ERC.
48
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021 and 2020
NOTE 8—DEBT - Continued
LONG –TERM BORROWINGS
There is a Term Loan that is secured by mortgages on the Real Property, accounts receivable, inventory and equipment. The Term Loan borrowings can be at either LIBOR, or at the Base Rate, or a combination of the two plus the Applicable Margins. LIBOR borrowings at December 31, 2017 and 2016 were 1.5%. The Applicable Margin for borrowings at the Base Rate for the same timeframes was 0.5%. At December 31, 2017 this obligation was at the Base Rate, and is included in Long-term debt, less current maturities on the Company’s Consolidated Balance Sheet at December 31, 2017.
In accordance with ASU 2015-03, the Company reduced its long-term debt by $6,000 and $12,000, respectively, relating to debt issue costs as of December 31, 2017 and 2016.
| LONG-TERM DEBT: | December 31, 2017 | December 31, 2016 | ||||||
| Term Loan - $23,000 payable monthly January 2013 through February 2016, balance due December 19, 2019. | $ | 100,000 | $ | 100,000 | ||||
| Other | — | 13,000 | ||||||
| Debt issue costs | (6,000 | ) | (12,000 | ) | ||||
| 94,000 | 101,000 | |||||||
| Less current maturities | — | 13,000 | ||||||
| $ | 94,000 | $ | 88,000 | |||||
NOTE 9—STOCK OPTIONS – STOCK COMPENSATION
TheIn 2012, the Company’s Board of Directors and stockholders approved the P&F Industries, Inc. 2012 Stock Incentive Plan (the “2012 Plan”). In 2021, the Company’s Board of Directors and stockholders approved an amendment and restatement of the 2012 plan and renamed it the 2021 Stock Incentive Plan (the “2021 Plan”). The 20122021 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 20122021 Plan. The 20122021 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”)Stock ”) that may be issued under the 20122021 Plan may not exceed 325,000500,000 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 20122021 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 20122021 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 20122021 Plan during any fiscal year will be $1,000,000.
The maximum numberaggregat value of shares of Common Stock subjectstock-based awards and cash-based compensation paid to any award which may be granted under the 2012 Plan duringnon-employee director for any fiscal year of the Company to anyin respect of his or her service as a non-employee director will be 35,000 shares.
cannot exceed $300,000, or $450,000 for non-employee directors serving in a lead role on the Board, in each case, based on the fair market value of stock awards and the aggregate value of cash compensation, in each case determined as of the date of grant.
With respect to stock options, the Committee determines the number of shares of Common Stock subject to each option, the term of each option, which may not exceed ten 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 20122021 Plan, the Committee will determine their terms and conditions, subject to the terms and conditions of the 2012 Plan.
2021 Plan
The 20122021 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, 2017 and 2016
NOTE 9—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 ten years of the effective date of the Previous Plan and are exercisable for a ten yearten-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.
49
On September 5, 2017, the Committee authorized the issuance of options to purchase 89,000 shares of the Company’s Common Stock. This grant was comprised of an aggregate of 55,000 options issued to the Company’s Chief Executive OfficerP&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021 and its Chief Operating and Financial Officer, with the balance of 34,000 options being issued to non-executive employees. All options within this grant have an exercise price of $7.09. The options granted vest as to one third on each of the anniversary dates in 2018, 2019 and 2020. All the options granted have a ten year life.2020
NOTE 8—STOCK OPTIONS – STOCK COMPENSATION - Continued
The Company estimatedgenerally estimates the fair value of its common stockCommon Stock options using the following assumptions:factors:
| ● | Risk-free interest rate |
| ● | Expected term |
| ● | Volatility |
| ● | Dividend yield |
| For the years ended | ||||
| December 31, 2017 | ||||
| Risk-free interest rate | 2.07 | % | ||
| Expected term | 10 years | |||
| Volatility | 87.16 | % | ||
| Dividend yield | 2.82 | % | ||
| Fair value of options granted | $ | 4.41 | ||
In connection with an equity restructuring event, which occurred in March 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 grantedits Common Stock during 2021 or issued during 2016.
2020.
The following table contains information on the status of the Company’s stock options:
| Number of Shares | Weighted Average Exercise Price per share | Aggregate Intrinsic Value | ||||||||||||||||||
| Outstanding, January 1, 2016 | 457,000 | $ | 6.15 | |||||||||||||||||
| Granted | 19,174 | 5.89 | ||||||||||||||||||
| Exercised | (6,000 | ) | 3.81 | |||||||||||||||||
| Forfeited and repurchased | (29,634 | ) | 5.86 | |||||||||||||||||
| Expired | (16,723 | ) | 10.72 | |||||||||||||||||
| Outstanding, December 31, 2016 | 423,817 | 5.68 | ||||||||||||||||||
| | | | | | | | | ||||||||||||
|
| |
| Weighted |
| | | |||||||||||||
| | Number | | Average | | Aggregate | ||||||||||||||
| | of | | Exercise Price | | Intrinsic | ||||||||||||||
| | Shares | | Per Share | | Value | ||||||||||||||
Outstanding, January 1, 2020 |
| 226,075 | | $ | 6.59 |
| |
| ||||||||||||
| Granted | 89,000 | 7.09 |
| — | |
| — |
| |
| ||||||||||
| Exercised | (16,722 | ) | 3.65 |
| (6,226) | |
| 2.92 |
| |
| |||||||||
| Forfeited | (6,793 | ) | 7.86 |
| (7,998) | |
| 6.38 |
| |
| |||||||||
| Expired | (71,069 | ) | 10.72 |
| (10,973) | |
| 2.92 |
| |
| |||||||||
| Outstanding, December 31, 2017 | 418,233 | $ | 5.17 | $ | 1,343,442 | |||||||||||||||
| Vested, December 31, 2017 | 329,233 | $ | 4.65 | $ | 1,228,454 | |||||||||||||||
Outstanding, December 31, 2020 |
| 200,878 | |
| 6.59 |
| | | ||||||||||||
Granted |
| — | |
| — |
| |
| ||||||||||||
Exercised |
| — | |
| — |
| |
| ||||||||||||
Forfeited |
| (6,180) | |
| 7.61 |
| |
| ||||||||||||
Expired |
| (16,199) | |
| 4.37 |
| |
| ||||||||||||
Outstanding, December 31, 2021 |
| 178,499 | | $ | 6.76 | | $ | 60,643 | ||||||||||||
| | | | | | | | | ||||||||||||
Vested, December 31, 2021 |
| 175,831 | | $ | 6.73 | | $ | 60,643 | ||||||||||||
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 2017, 68,000 options that expired and forfeited were issued under the Previous Plan and 9,862 were issued under the 2012 Plan. In 2016, 27,500 options that expired and forfeited were issued under the Previous Plan and 18,857 were issued under the 2012 Plan.
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 9—STOCK OPTIONS – STOCK COMPENSATION - Continued
The following is a summary of changes in non-vested shares, all of which are expected to vest:
| December 31, | ||||||||||||||||||||||||||
| 2017 | 2016 | |||||||||||||||||||||||||
| Option Shares | Weighted Average Grant-Date Fair Value | Option Shares | Weighted Average Grant-Date Fair Value | |||||||||||||||||||||||
| | | | | | | | | | | ||||||||||||||||
| | December 31, | ||||||||||||||||||||||||
| | 2021 | | 2020 | ||||||||||||||||||||||
|
| |
| Weighted |
| |
| Weighted | ||||||||||||||||||
| | | | Average | | | | Average | ||||||||||||||||||
| | Option | | Grant-Date | | Option | | Grant-Date | ||||||||||||||||||
| | Shares | | Fair Value | | Shares | | Fair Value | ||||||||||||||||||
| Non-vested shares, beginning of year | — | $ | — | 23,840 | $ | 6.72 |
| 5,334 |
| $ | 4.60 |
| 37,666 | | $ | 4.45 | ||||||||||
| Granted | 89,000 | 4.41 | 829 | 6.45 |
| 0 |
|
| 0 |
| 0 | |
| 0 | ||||||||||||
| Vested | — | — | (19,167 | ) | 6.71 |
| (2,666) |
|
| 4.60 |
| (31,250) | |
| 4.43 | |||||||||||
| Forfeited | — | — | (5,502 | ) | 6.72 |
| — |
|
| — |
| (1,082) | |
| 4.41 | |||||||||||
| Non-vested shares, end of year | 89,000 | $ | 4.41 | — | $ | — |
| 2,668 |
| $ | 4.60 |
| 5,334 | | $ | 4.60 | ||||||||||
50
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021 and 2020
NOTE 8—STOCK OPTIONS – STOCK COMPENSATION - Continued
Stock-based compensation expense recognized for the years ended December 31, 20172021, and 20162020 was approximately $80,000$5,000 and $13,000,$41,000, 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, 2021, the Company had approximately $1,000 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 0.2 years.
The following table summarizes information about stock options outstanding and exercisable at December 31, 2017:2021:
| 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 | |||||||||||||||||
| 177,687 | 0.5 | $ | 3.98 | 177,687 | 0.5 | $ | 3.98 | |||||||||||||||
| 17,244 | 3.0 | $ | 2.92 | 17,244 | 3.0 | $ | 2.92 | |||||||||||||||
| 41,283 | 3.4 | $ | 4.37 | 41,283 | 3.4 | $ | 4.37 | |||||||||||||||
| 2,090 | 4.4 | $ | 4.29 | 2,090 | 4.4 | $ | 4.29 | |||||||||||||||
| 41,809 | 4.5 | $ | 4.74 | 41,809 | 4.5 | $ | 4.74 | |||||||||||||||
| 49,120 | 5.3 | $ | 7.86 | 49,120 | 5.3 | $ | 7.86 | |||||||||||||||
| 89,000 | 9.7 | $ | 7.09 | — | — | $ | — | |||||||||||||||
| 418,233 | 3.8 | $ | 5.17 | 329,233 | 2.2 | $ | 4.65 | |||||||||||||||
| | | | | | | | | | | | |
| | Options Outstanding | | | | | Options Exercisable | |||||
|
| Weighted Average |
| Weighted |
| |
| Weighted Average |
| | | |
| | Remaining | | Average | | | | Remaining | | Weighted | ||
Number | | Contractual | | Exercise | | Number | | Contractual | | Average | ||
outstanding | | Life (Years) | | Price | | exercisable | | Life (Years) | | Exercise Price | ||
2,090 |
| 0.4 | | $ | 4.29 |
| 2,090 |
| 0.4 | | $ | 4.29 |
41,809 |
| 0.5 | | $ | 4.74 |
| 41,809 |
| 0.5 | | $ | 4.74 |
42,850 |
| 1.3 | | $ | 7.86 |
| 42,850 |
| 1.3 | | $ | 7.86 |
83,750 | | 5.7 | | $ | 7.09 | | 83,750 | | 5.7 | | $ | 7.09 |
8,000 |
| 7.2 | | $ | 8.55 |
| 5,332 |
| 7.2 | | $ | 8.55 |
178,499 |
| 3.4 | | $ | 6.76 |
| 175,831 |
| 3.4 | | $ | 6.73 |
Other Information
At December 31, 20172021, and 2016,2020, there were 88,812203,037 and 175,45058,658 shares available for issuance under the 2012 Plan. At December 31, 2017, there were 192,233 options outstanding issued under the 2012 Plan and 226,000 options outstanding issued under the Previous2021 Plan.
Restricted Stock
TheOn February 16, 2021, the Company in May 2017, granted 1,00025,000 restricted shares of its common stockCommon Stock to its Chief Financial Officer. The Company determined that the fair value of these shares was $6.36 per share, which was the closing price of the Company’s Common Stock on the date of the grant. This grant will vest 20% on each the first five anniversary dates following the date of grant. The Company will ratably amortize over the five-year vesting period the total non-cash compensation expense of approximately $159,000, or $32,000 per annum, to selling, general and administrative expenses.
On May 20, 2020, the Company granted 1,250 restricted shares of its Common 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 $6.17$5.14 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, the Company is ratably amortizing the total non-cash compensation expense of approximately $30,000 in its selling, general and administrative expenses through May 2018.
The Company, in May 2016, granted 1,000 restricted shares of its common stock to each non-employee member of its Board of Directors, totaling 5,000 restricted shares. The Company determined that the fair value of these shares was $8.72 per share, which was the closing price of the Company’s Common Stock on the date of the grant. These shares could not be traded earlier than the first anniversary of the grant date. As such, the Company ratably amortized the total non-cash compensation expense of approximately $44,000 in its$32,000 to selling, general and administrative expenses through May 2017.2021.
Treasury Stock
There were 0 changes to the Company’s Treasury Stock during fiscal 2021.
51
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20172021 and 20162020
NOTE 9—STOCK OPTIONS – STOCK COMPENSATION - ContinuedDIVIDENDS
Treasury Stock
The Company did not declare any dividends during fiscal 2021.
On August 9, 2017,February 11, 2020, the Company’s Board of Directors, authorized the Company to repurchase up to 100,000 shares of its common stock over a period of up to twelve months (the “Repurchase Program”). As of December 31, 2017, the Company repurchased 46,878 shares of its common stock at an aggregate cost of $358,000.
On August 24, 2017, the Company announced that, pursuant to the Repurchase Program, it had adopted a written trading plan in accordance with the guidelines specified under Rule 10b5-1 under the Securities Exchange Act of 1934. A plan under Rule 10b5-1 allows the Company to repurchase shares at times when it might otherwise be prevented from doing so by securities laws or because of self-imposed trading blackout periods. Repurchases made under the plan are subject to the Securities and Exchange Commission's regulations, as well as certain price, market, volume, and timing constraints specified in the plan. Since repurchases under the plan are subject to certain constraints, there is no guarantee as to the exact number of shares that will be repurchased under the plan.
NOTE 10—DIVIDENDS
In March 2016, our Board of Directors approved the initiation of aits dividend policy, under which the Company intends to declare quarterly cash dividends to its stockholders in the amount of $0.05 per quarter. During 2017, our Board of Directors voted to approve the payment of four quarterly dividends. As such, in February 2017, May 2017, August 2017, and November 2017, the Company paid a $0.05 per share dividend to the shareholders of record. The aggregate of such dividend payments was approximately $722,000. Our Board of Directors expects to maintain this dividend policy; however, the future declaration of dividends under this policy is dependent upon several factors, which include such things as our overall financial condition, results of operations, capital requirements and other factors our board may deem relevant.
On March 8, 2016, the Company’s Board of Directors declared a specialquarterly cash dividend of $0.50$0.05 per common share, which was paid on April 4, 2016,February 28, 2020, to shareholders of record at the close of business on March 21, 2016.February 24, 2020. The total amount of this special dividend payment was approximately $1.8 million. Further, during 2016, the Company’s Board of Directors approved the payment of quarterly cash dividends of $0.05 per share in April, July and October 2016, which aggregated approximately $540,000.$157,000.
NOTE 11—10—INCOME TAXES
Income tax expense (benefit) from continuing operationsbenefit in the consolidated statements of operations and comprehensive income (loss) income consists of:
| Years Ended December 31, | ||||||||||||||
| 2017 | 2016 | |||||||||||||
| | | | | | | ||||||||
| | Years Ended December 31, | ||||||||||||
|
| 2021 |
| 2020 | ||||||||||
| Current: | | | | | | | ||||||||
| Federal | $ | (373,000 | ) | $ | 766,000 | | $ | 63,000 | | $ | (1,821,000) | |||
| State and local | 36,000 | 208,000 | |
| 55,000 | |
| (73,000) | ||||||
| Foreign | 62,000 | 41,000 | |
| — | |
| 3,000 | ||||||
| Total current | (275,000 | ) | 1,015,000 | |
| 118,000 | |
| (1,891,000) | |||||
| Deferred: | |
| | |
| | ||||||||
| Federal | 980,000 | (3,638,000 | ) | |
| (69,000) | |
| (238,000) | |||||
| State and local | (63,000 | ) | (308,000 | ) | |
| (48,000) | |
| 263,000 | ||||
| Foreign | (7,000 | ) | (24,000 | ) | |
| (3,000) | |
| (35,000) | ||||
| Total deferred | 910,000 | (3,970,000 | ) | |
| (120,000) | |
| (10,000) | |||||
| Totals | $ | 635,000 | $ | (2,955,000 | ) | | $ | (2,000) | | $ | (1,901,000) | |||
TheAt December 31, 2021, the Company hashad state net operating loss carryforwards of $2,893,000,approximately $2,100,000, of which we have a full valuation allowance against. The state net operating losses generally expire through 2037.2041.
On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in tax years 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The NOL carryback provision of the CARES Act resulted in a $1,921,000 benefit to the Company. In addition to the NOL changes, the CARES Act enacted the employee retention credit and modifies the limitation of business interest for tax years beginning in 2019 and 2020. The modifications to Section 163(j) increase the allowable business interest deduction from 30% of adjusted taxable income to 50% of adjusted taxable income. This modification increased the allowable interest expense deduction of the Company and resulted in less taxable income for the year ended 2020, resulting in less utilization of net operating losses.
52
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20172021 and 20162020
NOTE 11—10—INCOME TAXES -– Continued
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “2017 Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, 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 Company calculated its best estimate of the impact of the 2017 Act in our year-end income tax provision in accordance with its understanding of the 2017 Act and guidance available as of the date of this filing and as a result recorded $643,000 as additional income tax expense in the fourth quarter of 2017, the period in which the legislation was enacted. The provisional amount related to the remeasurement of certain deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future, was $588,000. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was $55,000 based on cumulative foreign earnings of $352,000.
The 2017 Act also puts in place new tax laws that will apply prospectively, which include, but are not limited to, (1) implementing a base erosion and anti-abuse tax, (2) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries, (3) a new provision designed to tax currently in the U.S. global intangible low-taxed income (“GILTI”) of foreign subsidiaries, which allows for the possibility of utilizing foreign tax credits to offset the income tax liability (subject to some limitations), and (4) a lower effective U.S. tax rate on certain revenues from sources outside the U.S.
On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of US GAAP in 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 2017 Act. In accordance with SAB 118, the Company has determined that the $588,000 of the deferred tax expense recorded in connection with the remeasurement of certain deferred tax assets and liabilities and the $55,000 of current tax expense recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings was a provisional and a reasonable estimate at December 31, 2017. Additional work is necessary to do a more detailed analysis of historical foreign earnings as well as potential correlative adjustments. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete.
Deferred tax assets (liabilities) consist of:
| December 31, | ||||||||||||||
| 2017 | 2016 | |||||||||||||
| | | | | | | ||||||||
| | December 31, | ||||||||||||
|
| 2021 |
| 2020 | ||||||||||
| Deferred tax assets: |
| |
|
| |
| ||||||||
| Bad debt reserves | $ | 15,000 | $ | 28,000 | | $ | 24,000 | | $ | 25,000 | ||||
| Inventory reserves | 570,000 | 1,185,000 | |
| 789,000 | |
| 762,000 | ||||||
| Warranty and other reserves | 121,000 | 255,000 | |
| 45,000 | |
| 74,000 | ||||||
| Stock-based compensation | 240,000 | 485,000 | |
| 200,000 | |
| 205,000 | ||||||
| Goodwill | 1,066,000 | 1,962,000 | |
| 755,000 | |
| 852,000 | ||||||
| Acquisition costs | 58,000 | — | |
| 201,000 | |
| 212,000 | ||||||
| Net operating losses - state | 66,000 | — | |
| 166,000 | |
| 168,000 | ||||||
| Other | �� | 8,000 | 11,000 | |
| 98,000 | |
| 51,000 | |||||
| 2,144,000 | 3,926,000 | |||||||||||||
| Deferred tax (liabilities): | ||||||||||||||
Less valuation allowance | | | (287,000) | | | (316,000) | ||||||||
| |
| 1,991,000 | |
| 2,033,000 | ||||||||
Deferred tax liabilities: | |
| | |
| | ||||||||
| Prepaid expenses | (152,000 | ) | (177,000 | ) | |
| (238,000) | |
| (260,000) | ||||
| Depreciation | (481,000 | ) | (720,000 | ) | |
| (914,000) | |
| (1,113,000) | ||||
| Intangibles | (639,000 | ) | (1,236,000 | ) | |
| (490,000) | |
| (434,000) | ||||
| Net deferred tax assets | $ | 872,000 | $ | 1,793,000 | | $ | 349,000 | | $ | 226,000 | ||||
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017The Company maintains a valuation allowance against certain state net operating losses and 2016
NOTE 11—INCOME TAXES - Continued
state depreciation adjustments. The Company believes it is more likely than not that the remaining tax benefits associated with the state net operating losses and depreciation adjustments will not be realized in the foreseeable future based upon its ability to generate sufficient state taxable income.
The components of (loss) income from continuing operations(loss) before income taxes consisted of the following:
| | | | | | |
| | Years ended December 31, | ||||
|
| 2021 |
| 2020 | ||
United States operations | | $ | 2,320,000 | | $ | (6,663,000) |
International operations | |
| (32,000) | |
| (192,000) |
Income (loss) before income taxes | | $ | 2,288,000 | | $ | (6,855,000) |
| Years ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| United States operations | $ | (476,000 | ) | $ | (8,790,000 | ) | ||
| International operations | 227,000 | 152,000 | ||||||
| Income before tax | $ | (249,000 | ) | $ | (8,638,000 | ) | ||
A reconciliation of the Federal statutory rate to the totalnet effective (benefit) tax rate applicable to (loss) income from continuing operations is as follows:
| Years ended December 31, | |||||||||||||
| 2017 | 2016 | ||||||||||||
| Federal income tax computed at statutory rates | (34.0 | )% | (34.0 | )% | |||||||||
| | | | | | ||||||||
| | Years ended December 31, |
| ||||||||||
|
| 2021 |
| 2020 |
| ||||||||
Federal income (benefit) tax expense computed at statutory rates |
| 21.0 | % | (21.0) | % | ||||||||
| (Decrease) increase in taxes resulting from: |
| |
| | | ||||||||
| State and local taxes, net of Federal tax benefit | (7.2 | ) | (0.8 | ) |
| 3.7 |
| (2.4) | | ||||
| Permanent differences - net | 11.6 | 0.3 |
| 3.3 |
| 0.4 | | ||||||
Valuation allowance | | (1.3) | | 4.6 | | ||||||||
| Foreign rate differential | (9.2 | ) | (0.4 | ) |
| 0.1 |
| 0.1 | | ||||
| Tax Cuts and Jobs Act of 2017 | 257.6 | — | |||||||||||
| Share based compensation | 46.4 | — | |||||||||||
CARES Act |
| (26.9) |
| (9.3) | | ||||||||
| Other | (10.2 | ) | 0.7 |
| 0 |
| (0.1) | | |||||
| Income tax (benefit) expense | 255.0 | % | (34.2 | )% | |||||||||
Benefit tax rate |
| (0.1) | % | (27.7) | % | ||||||||
The Company follows the authoritative guidance issued by the FASB that pertains to the accounting for uncertain tax matters. A reconciliation
53
Table of the beginning and ending amounts of unrecognized tax benefits is as follows:Contents
| Balance January 1, 2016 | $ | 432,000 | ||
| Lapse of statute of limitations | (143,000 | ) | ||
| Interest accrual | 22,000 | |||
| Balance at January 1, 2017 | 311,000 | |||
| Lapse of statute of limitations | (311,000 | ) | ||
| Balance December 31, 2017 | $ | — |
P&F INDUSTRIES, INC. AND SUBSIDIARIES
In connection with one of the acquisitions that occurred in 2014, the Company, in accordance with the ASC 740-10, had recorded in Accrued liabilities an uncertain tax position. The parties to such transaction entered into a tax exposure-related escrow agreement, which together with the indemnity obligations of the seller, the Company believed adequately covered 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. During the current year ended NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017, the statute of limitations had lapsed2021 and the Company no longer has a liability for an uncertain tax position.2020
NOTE 10—INCOME TAXES – Continued
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, 20142018, through December 31, 2016. During the current year, the Company received notification from the Internal Revenue Service of an examination for the year ended December 31, 2015. As of December 31, 2017, no significant preliminary audit findings were received by the Company and no reserves have been recorded.
2021.
Interest and penalties, if any, related to income tax liabilities are included in income tax expense.
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2017 and 20162021, the Company does not have a liability for uncertain tax positions.
NOTE 12—11—COMMITMENTS AND CONTINGENCIES
NOTE 12—SUBSEQUENT EVENT
(d)
Effective January 15, 2022, through a wholly-owned subsidiary of Hy-Tech, the Company acquired substantially all the non-real estate assets comprising the business of Jackson Gear Company (“JGC”), a Pennsylvania-based corporation that manufactures and distributes custom gears and power transmission gear products. The purchase price consisted of an aggregate of approximately $2.3 million in cash, which was funded by Revolver borrowings and the assumption of certain payables. The Company leases certain facilitiesintends to incorporate this business into PTG and equipment through 2022. Generally,believes that the facility leases carry renewal provisions and requireacquisition will provide added market exposure into the market for larger gears.
In connection with this acquisition, the Company entered into the Consent, Joinder and Amendment No. 9 (“Amendment No. 9”) to pay maintenance costs. Rental payments maySecond Amended and Restated Loan and Security Agreement (the “Credit Agreement”), with Capital One, National Association. Amendment No. 9, among other things, provided consent to this acquisition.
| | | |
|
| Total | |
Total purchase price | | $ | 2,300,000 |
The following table presents preliminary purchase price allocation:
| | | |
Accounts receivable |
| $ | 490,000 |
Inventories | |
| 292,000 |
Machinery and equipment | |
| 851,000 |
Goodwill | |
| 805,000 |
Liabilities assumed | |
| (138,000) |
Total estimated purchase price | | $ | 2,300,000 |
The excess of the total purchase price over the fair value of the net assets acquired is currently being presented as goodwill. The Company has not yet determined the value of the identifiable intangible assets. When finalized, any goodwill will be adjustedamortized over 15 years for increases in taxes and insurance above specified amounts. Operating lease expensetax purposes, but not deductible for 2017 and 2016 was $388,000 and $371,000, respectively. Future minimum payments under non-cancelable operating leases with initial or remaining terms of more than one year as of December 31, 2017 were as follows:financial reporting purposes. Any identifiable intangible assets subject to amortization will be amortized over 15 years for tax purposes.
| 2018 | $ | 347,000 | ||
| 2019 | 296,000 | |||
| 2020 | 103,000 | |||
| 2021 | 21,000 | |||
| 2022 | 1,000 | |||
| $ | 768,000 |
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ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.
ITEM 9A. Controls and Procedures
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, 2017,2020, the effectiveness of the Company's disclosure controls and procedures, which were designed to be effective at the reasonable assurance level. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company's disclosure controls and procedures as of December 31, 2017,2021, 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.
Management’s Annual 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 consolidated financial statementsConsolidated Financial Statements for external purposes in accordance with generally accepted accounting principles.
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 consolidated 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; and
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.
| ● | 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 Consolidated 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; and |
| ● | 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, 2017.2021. 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, 2017.
2021.
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.
55
ITEM 9A. Controls and Procedures – Continued
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, 20172021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
None.
None
ITEM 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
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 2018,2022, to be filed with the Securities and Exchange Commission within 120 days following the end of the Company’s year ended December 31, 2017.2021.
ITEM 11. Executive Compensation
See Item 10.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
See Item 10.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
See Item 10.
ITEM 14. Principal Accounting Fees and Services
See Item 10.
56
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
| | | |
| | Page | |
a) | List of Financial Statements, Financial Statement Schedules, and Exhibits | | |
| (1) | List of Financial Statements | |
| | The | |
| (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 | |
The following exhibits are either included in this report or incorporated herein by reference as indicated below:
| | |
57
Exhibit |
58
59
* 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 (“ 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. 60 SIGNATURES 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.
61 |
|---|