UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2015March 31, 2016
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1 - 5332
P&F INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware | 22-1657413 | |
(State or other jurisdiction of | (I.R.S. Employer Identification Number) | |
incorporation or organization) | ||
445 Broadhollow Road, Suite 100, Melville, New York | 11747 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code:(631) 694-9800
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx No¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer¨ | Accelerated filer¨ | Non-accelerated filer¨ | Smaller reporting company x |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨ Nox
As of November 6, 2015May 10, 2016 there were 3,616,8703,592,870 shares of the registrant’s Class A Common Stock outstanding.
P&F INDUSTRIES, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2015MARCH 31, 2016
TABLE OF CONTENTS
i
PART I - FINANCIAL INFORMATION
P&F INDUSTRIES, INC. AND SUBSIDIARIES
September 30, 2015 | December 31, 2014 | March 31, 2016 | December 31, 2015 | |||||||||||||
(unaudited) | (See Note 1) | (unaudited) | (See Note 1) | |||||||||||||
ASSETS | ||||||||||||||||
CURRENT ASSETS | ||||||||||||||||
Cash | $ | 1,682,000 | $ | 1,011,000 | $ | 884,000 | $ | 927,000 | ||||||||
Accounts receivable — net | 11,061,000 | 9,547,000 | 9,181,000 | 8,477,000 | ||||||||||||
Inventories | 24,252,000 | 24,335,000 | 19,979,000 | 19,783,000 | ||||||||||||
Deferred income taxes — net | 1,149,000 | 1,149,000 | ||||||||||||||
Prepaid expenses and other current assets | 1,452,000 | 1,529,000 | 1,488,000 | 1,032,000 | ||||||||||||
Assets of discontinued operations | — | 8,435,000 | ||||||||||||||
TOTAL CURRENT ASSETS | 39,596,000 | 37,571,000 | 31,532,000 | 38,654,000 | ||||||||||||
PROPERTY AND EQUIPMENT | ||||||||||||||||
Land | 1,550,000 | 1,550,000 | 1,550,000 | 1,550,000 | ||||||||||||
Buildings and improvements | 7,724,000 | 7,683,000 | 7,676,000 | 7,677,000 | ||||||||||||
Machinery and equipment | �� | 21,288,000 | 20,460,000 | 18,728,000 | 18,736,000 | |||||||||||
30,562,000 | 29,693,000 | 27,954,000 | 27,963,000 | |||||||||||||
Less accumulated depreciation and amortization | 20,145,000 | 19,101,000 | 18,653,000 | 18,491,000 | ||||||||||||
NET PROPERTY AND EQUIPMENT | 10,417,000 | 10,592,000 | 9,301,000 | 9,472,000 | ||||||||||||
GOODWILL | 12,032,000 | 11,980,000 | 10,148,000 | 10,154,000 | ||||||||||||
OTHER INTANGIBLE ASSETS — net | 11,451,000 | 12,437,000 | 10,768,000 | 11,098,000 | ||||||||||||
OTHER ASSETS — net | 355,000 | 514,000 | 1,850,000 | 234,000 | ||||||||||||
TOTAL ASSETS | $ | 73,851,000 | $ | 73,094,000 | $ | 63,599,000 | $ | 69,612,000 |
See accompanying notes to consolidated financial statements (unaudited).
P&F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2015 | December 31, 2014 | March 31, 2016 | December 31, 2015 | |||||||||||||
(unaudited) | (See Note 1) | (unaudited) | (See Note 1) | |||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
CURRENT LIABILITIES | ||||||||||||||||
Short-term borrowings | $ | 11,461,000 | $ | 11,817,000 | $ | — | $ | 9,623,000 | ||||||||
Accounts payable | 4,218,000 | 3,160,000 | 2,974,000 | 2,791,000 | ||||||||||||
Accrued liabilities | 5,280,000 | 5,500,000 | ||||||||||||||
Accrued compensation and benefits | 699,000 | 1,718,000 | ||||||||||||||
Accrued other liabilities | 1,878,000 | 1,666,000 | ||||||||||||||
Dividends payable | 1,976,000 | — | ||||||||||||||
Current maturities of long-term debt | 494,000 | 3,167,000 | 29,000 | 491,000 | ||||||||||||
Liabilities of discontinued operations | — | 1,342,000 | ||||||||||||||
TOTAL CURRENT LIABILITIES | 21,453,000 | 23,644,000 | 7,556,000 | 17,631,000 | ||||||||||||
Long–term debt, less current maturities | 6,122,000 | 6,493,000 | 98,000 | 5,936,000 | ||||||||||||
Deferred tax liabilities - net | 2,788,000 | 2,720,000 | 2,044,000 | 2,175,000 | ||||||||||||
Other liabilities | 233,000 | 246,000 | 224,000 | 228,000 | ||||||||||||
TOTAL LIABILITIES | 30,596,000 | 33,103,000 | 9,922,000 | 25,970,000 | ||||||||||||
SHAREHOLDERS’ EQUITY | ||||||||||||||||
Preferred stock - $10 par; authorized - 2,000,000 shares; no shares issued | — | — | ||||||||||||||
Common stock | — | — | ||||||||||||||
Class A - $1 par; authorized - 7,000,000 shares; issued – 4,170,000 at September 30, 2015 and 4,139,000 at December 31, 2014 | 4,170,000 | 4,139,000 | ||||||||||||||
Class A - $1 par; authorized - 7,000,000 shares; issued – 4,176,000 at March 31, 2016 and 4,170,000 at December 31, 2015 | 4,176,000 | 4,170,000 | ||||||||||||||
Class B - $1 par; authorized - 2,000,000 shares; no shares issued | — | — | — | — | ||||||||||||
Additional paid-in capital | 12,840,000 | 12,695,000 | 12,891,000 | 12,884,000 | ||||||||||||
Retained earnings | 31,094,000 | 27,951,000 | 41,842,000 | 31,495,000 | ||||||||||||
Treasury stock, at cost – 554,000 shares at September 30, 2015 and December 31, 2014 | (4,566,000 | ) | (4,566,000 | ) | ||||||||||||
Treasury stock, at cost – 584,000 shares at March 31, 2016 and 554,000 shares at December 31, 2015 | (4,821,000 | ) | (4,566,000 | ) | ||||||||||||
Accumulated other comprehensive loss | (283,000 | ) | (228,000 | ) | (411,000 | ) | (341,000 | ) | ||||||||
TOTAL SHAREHOLDERS’ EQUITY | 43,255,000 | 39,991,000 | 53,677,000 | 43,642,000 | ||||||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 73,851,000 | $ | 73,094,000 | $ | 63,599,000 | $ | 69,612,000 |
See accompanying notes to consolidated financial statements (unaudited).
P&F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)
Three months | Nine months | |||||||||||||||||||||||
ended September 30, | ended September 30, | |||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | Three Months Ended March 31, | ||||||||||||||||||||
2016 | 2015 | |||||||||||||||||||||||
Net revenue | $ | 21,678,000 | $ | 22,932,000 | $ | 64,064,000 | $ | 57,132,000 | $ | 14,499,000 | $ | 14,559,000 | ||||||||||||
Cost of sales | 13,813,000 | 14,904,000 | 40,261,000 | 36,466,000 | 9,283,000 | 9,060,000 | ||||||||||||||||||
Gross profit | 7,865,000 | 8,028,000 | 23,803,000 | 20,666,000 | 5,216,000 | 5,499,000 | ||||||||||||||||||
Selling, general and administrative expenses | 5,962,000 | 6,438,000 | 18,510,000 | 17,221,000 | 5,056,000 | 4,932,000 | ||||||||||||||||||
Operating income | 1,903,000 | 1,590,000 | 5,293,000 | 3,445,000 | 160,000 | 567,000 | ||||||||||||||||||
Other expense (income) | 75,000 | --- | (126,000 | ) | --- | |||||||||||||||||||
Other income | (51,000 | ) | (50,000 | ) | ||||||||||||||||||||
Interest expense | 173,000 | 158,000 | 566,000 | 335,000 | 102,000 | 29,000 | ||||||||||||||||||
Income before income taxes | 1,655,000 | 1,432,000 | 4,853,000 | 3,110,000 | ||||||||||||||||||||
Income from continuing operations before income taxes | 109,000 | 588,000 | ||||||||||||||||||||||
Income tax expense | 605,000 | 616,000 | 1,710,000 | 1,260,000 | 43,000 | 215,000 | ||||||||||||||||||
Income from continuing operations | 66,000 | 373,000 | ||||||||||||||||||||||
Discontinued operations (Note 2) | ||||||||||||||||||||||||
Net income from discontinued operations, net of tax of $38,000 and $235,000 for the three-month periods ended March 31, 2016 and 2015, respectively | 72,000 | 408,000 | ||||||||||||||||||||||
Gain on sale of discontinued operations, net of tax benefit of $141,000 | 12,185,000 | — | ||||||||||||||||||||||
Discontinued operations, net of tax | 12,257,000 | 408,000 | ||||||||||||||||||||||
Net income | $ | 1,050,000 | $ | 816,000 | $ | 3,143,000 | $ | 1,850,000 | $ | 12,323,000 | $ | 781,000 | ||||||||||||
Basic earnings per share | $ | 0.29 | $ | 0.22 | $ | 0.87 | $ | 0.50 | ||||||||||||||||
Continuing operations | $ | 0.02 | $ | 0.11 | ||||||||||||||||||||
Discontinued operations | 3.40 | 0.11 | ||||||||||||||||||||||
Net income | $ | 3.42 | $ | 0.22 | ||||||||||||||||||||
Diluted earnings per share | $ | 0.28 | $ | 0.20 | $ | 0.84 | $ | 0.47 | ||||||||||||||||
Continuing operations | $ | 0.02 | $ | 0.10 | ||||||||||||||||||||
Discontinued operations | 3.24 | 0.11 | ||||||||||||||||||||||
Net income | $ | 3.26 | $ | 0.21 | ||||||||||||||||||||
Weighted average common shares outstanding: | ||||||||||||||||||||||||
Weighted average common shares outstanding | ||||||||||||||||||||||||
Basic | 3,616,000 | 3,792,000 | 3,604,000 | 3,737,000 | 3,601,000 | 3,589,000 | ||||||||||||||||||
Diluted | 3,792,000 | 3,968,000 | 3,764,000 | 3,917,000 | 3,778,000 | 3,746,000 | ||||||||||||||||||
Net income | $ | 1,050,000 | $ | 816,000 | $ | 3,143,000 | $ | 1,850,000 | $ | 12,323,000 | $ | 781,000 | ||||||||||||
Other comprehensive loss-foreign currency translation adjustment | (99,000 | ) | (63,000 | ) | (55,000 | ) | (63,000 | ) | ||||||||||||||||
Other comprehensive loss - foreign currency translation adjustment | (70,000 | ) | (108,000 | ) | ||||||||||||||||||||
Total comprehensive income | $ | 951,000 | $ | 753,000 | $ | 3,088,000 | $ | 1,787,000 | $ | 12,253,000 | $ | 673,000 |
See accompanying notes to consolidated financial statements (unaudited).
P&F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (unaudited)
Class A Common Stock, $1 Par | Additional Paid-in | Retained | Treasury stock | Accumulated other comprehensive | ||||||||||||||||||||||||||||
Total | Shares | Amount | capital | earnings | Shares | Amount | loss | |||||||||||||||||||||||||
Balance, January 1, 2015 | $ | 39,991,000 | 4,139,000 | $ | 4,139,000 | $ | 12,695,000 | $ | 27,951,000 | (554,000 | ) | $ | (4,566,000 | ) | $ | (228,000 | ) | |||||||||||||||
Net income | 3,143,000 | — | — | — | 3,143,000 | — | — | — | ||||||||||||||||||||||||
Exercise of stock options | 73,500 | 23,500 | 23,500 | 50,000 | — | — | — | — | ||||||||||||||||||||||||
Restricted common stock compensation | 30,500 | 7,500 | 7,500 | 23,000 | — | — | — | — | ||||||||||||||||||||||||
Stock-based compensation | 72,000 | — | — | 72,000 | — | — | — | — | ||||||||||||||||||||||||
Foreign currency translation adjustment | (55,000 | ) | — | — | — | �� | — | — | (55,000 | ) | ||||||||||||||||||||||
Balance, September 30, 2015 | $ | 43,255,000 | 4,170,000 | $ | 4,170,000 | $ | 12,840,000 | $ | 31,094,000 | (554,000 | ) | $ | (4,566,000 | ) | $ | (283,000 | ) |
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 | 12,323,000 | — | — | — | 12,323,000 | — | — | — | ||||||||||||||||||||||||
Exercise of stock options | 23,000 | 6,000 | 6,000 | 17,000 | — | — | — | — | ||||||||||||||||||||||||
Purchase of Class A common stock | (255,000 | ) | — | — | — | — | (30,000 | ) | (255,000 | ) | — | |||||||||||||||||||||
Restricted common stock compensation | 14,000 | — | — | 14,000 | — | — | — | — | ||||||||||||||||||||||||
Stock-based compensation | (24,000 | ) | — | — | (24,000 | ) | — | — | — | — | ||||||||||||||||||||||
Dividend | (1,976,000 | ) | — | — | — | (1,976,000 | ) | — | — | — | ||||||||||||||||||||||
Foreign currency translation adjustment | (70,000 | ) | — | — | — | — | — | — | (70,000 | ) | ||||||||||||||||||||||
Balance, March 31, 2016 | $ | 53,677,000 | 4,176,000 | $ | 4,176,000 | $ | 12,891,000 | $ | 41,842,000 | (584,000 | ) | $ | (4,821,000 | ) | $ | (411,000 | ) |
See accompanying notes to consolidated financial statements (unaudited).
P&F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine months | ||||||||
ended September 30, | ||||||||
2015 | 2014 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net income | $ | 3,143,000 | $ | 1,850,000 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Non-cash charges: | ||||||||
Depreciation and amortization | 1,279,000 | 1,137,000 | ||||||
Amortization of other intangible assets | 971,000 | 361,000 | ||||||
Amortization of debt issue costs | 83,000 | 67,000 | ||||||
Provision for (recovery of) losses on accounts receivable - net | 22,000 | (107,000 | ) | |||||
Stock-based compensation | 72,000 | 182,000 | ||||||
Restricted stock-based compensation | 30,000 | 21,000 | ||||||
Loss on sale of fixed assets | 5,000 | 7,000 | ||||||
Deferred income taxes | 72,000 | 1,079,000 | ||||||
Fair value reduction in contingent consideration | (126,000 | ) | — | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (1,548,000 | ) | (3,824,000 | ) | ||||
Inventories | (6,000 | ) | 1,671,000 | |||||
Prepaid expenses and other current assets | 76,000 | (376,000 | ) | |||||
Other assets | 76,000 | 54,000 | ||||||
Accounts payable | 1,064,000 | 1,212,000 | ||||||
Accrued liabilities | (86,000 | ) | (214,000 | ) | ||||
Other liabilities | (13,000 | ) | (12,000 | ) | ||||
Total adjustments | 1,971,000 | 1,258,000 | ||||||
Net cash provided by operating activities | 5,114,000 | 3,108,000 |
See accompanying notes to consolidated financial statements (unaudited).
P&F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine months | ||||||||
ended September 30, | ||||||||
2015 | 2014 | |||||||
Cash Flows from Investing Activities: | ||||||||
Capital expenditures | (1,144,000 | ) | (713,000 | ) | ||||
Proceeds from disposal of assets | 31,000 | 8,000 | ||||||
Purchase of net assets Air Tool Service Company | — | (7,559,000 | ) | |||||
Purchase of Exhaust Technologies, Inc. | — | (10,377,000 | ) | |||||
Purchase of Universal Air Tool Company Limited, net of cash acquired of $14,000 | — | (1,701,000 | ) | |||||
Net cash used in investing activities | (1,113,000 | ) | (20,342,000 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Proceeds from exercise of stock options | 73,000 | 741,000 | ||||||
Proceeds from short-term borrowings | 55,827,000 | 66,166,000 | ||||||
Repayments of short-term borrowings | (56,182,000 | ) | (52,107,000 | ) | ||||
Repayments of term loans | (3,012,000 | ) | (428,000 | ) | ||||
Proceeds from term loan | — | 3,000,000 | ||||||
Bank financing costs | — | (65,000 | ) | |||||
Repayments of notes payable | (30,000 | ) | — | |||||
Net cash (used in) provided by financing activities | (3,324,000 | ) | 17,307,000 | |||||
Effect of exchange rate changes on cash | (6,000 | ) | 18,000 | |||||
Net increase in cash | 671,000 | 91,000 | ||||||
Cash at beginning of period | 1,011,000 | 413,000 | ||||||
Cash at end of period | $ | 1,682,000 | $ | 504,000 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for: | ||||||||
Interest | $ | 492,000 | $ | 236,000 | ||||
Income taxes | $ | 1,149,000 | $ | 126,000 | ||||
Supplemental disclosures of non-cash investing and financing activities: | ||||||||
Contingent consideration on acquisition | $ | — | $ | 425,000 | ||||
Exchange of property and equipment | $ | 64,000 | $ | — |
Three months | ||||||||
ended March 31, | ||||||||
2016 | 2015 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net income from continuing operations | $ | 66,000 | $ | 373,000 | ||||
Net income from discontinued operations | 12,257,000 | 408,000 | ||||||
Adjustments to reconcile net income from operations to net cash used in operating activities: | ||||||||
Non-cash charges: | ||||||||
Depreciation and amortization | 409,000 | 375,000 | ||||||
Amortization of other intangible assets | 308,000 | 309,000 | ||||||
Amortization of debt issue costs | 98,000 | 28,000 | ||||||
Provision for losses on accounts receivable - net | 2,000 | 2,000 | ||||||
Stock-based compensation | 11,000 | 38,000 | ||||||
Restricted stock-based compensation | 14,000 | 6,000 | ||||||
Loss on sale of fixed assets | - | 4,000 | ||||||
Deferred income taxes | (127,000 | ) | (56,000 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (719,000 | ) | (433,000 | ) | ||||
Inventories | (230,000 | ) | (1,632,000 | ) | ||||
Prepaid expenses and other current assets | (456,000 | ) | (385,000 | ) | ||||
Other assets | (1,639,000 | ) | 26,000 | |||||
Accounts payable | 190,000 | 809,000 | ||||||
Accrued compensation and benefits | (1,017,000 | ) | (1,208,000 | ) | ||||
Accrued liabilities | 218,000 | 43,000 | ||||||
Other liabilities | (4,000 | ) | (4,000 | ) | ||||
Total adjustments | (2,942,000 | ) | (2,078,000 | ) | ||||
Net cash used in operating activities – continuing operations | (2,876,000 | ) | (1,705,000 | ) | ||||
Net cash used in operating activities – discontinued operations | (840,000 | ) | (1,310,000 | ) | ||||
Net cash used in operating activities | $ | (3,716,000 | ) | $ | (3,015,000 | ) |
See accompanying notes to consolidated financial statements (unaudited).
P&F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three months | ||||||||
ended March 31, | ||||||||
2016 | 2015 | |||||||
Cash Flows from Investing Activities: | ||||||||
Capital expenditures | $ | (242,000 | ) | $ | (151,000 | ) | ||
Proceeds from disposal of assets | - | 12,000 | ||||||
Net cash used in investing activities – continuing operations | (242,000 | ) | (139,000 | ) | ||||
Net cash provided by (used in) investing activities – discontinued operations | 20,163,000 | (33,000 | ) | |||||
Net cash provided by (used in) investing activities | 19,921,000 | (172,000 | ) | |||||
Cash Flows from Financing Activities: | ||||||||
Proceeds from exercise of stock options | 23,000 | 20,000 | ||||||
Purchase of Class A common stock | (255,000 | ) | — | |||||
Proceeds from short-term borrowings | 16,998,000 | 18,809,000 | ||||||
Repayments of short-term borrowings | (7,912,000 | ) | (15,604,000 | ) | ||||
Repayments of term loans | (6,343,000 | ) | (365,000 | ) | ||||
Repayments of notes payable | (9,000 | ) | (11,000 | ) | ||||
Payments of bank financing costs | (23,000 | ) | — | |||||
Net cash provided by financing activities – continuing operations | 2,479,000 | 2,849,000 | ||||||
Net cash used in financing activities – discontinued operations | (18,716,000 | ) | — | |||||
Net cash (used in) provided by financing activities | (16,237,000 | ) | 2,849,000 | |||||
Effect of exchange rate changes on cash | (11,000 | ) | (14,000 | ) | ||||
Net decrease in cash | (43,000 | ) | (352,000 | ) | ||||
Cash at beginning of period | 927,000 | 1,011,000 | ||||||
Cash at end of period | $ | 884,000 | $ | 659,000 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for: | ||||||||
Interest | $ | 86,000 | $ | 161,000 | ||||
Income taxes | $ | 8,000 | $ | 60,000 |
See accompanying notes to consolidated financial statements (unaudited).
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1 - BUSINESS AND SUMMARY OF ACCOUNTING POLICIES
Basis of Financial Statement Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, and with the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, these interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the management of the Company, as defined below, these unaudited consolidated financial statements include all adjustments necessary to present fairly the information set forth therein. All such adjustments, except for those adjustments relating to discontinued operations are of a normal recurring nature. Results for interim periods are not necessarily indicative of results to be expected for a full year.
The consolidated balance sheet information as of December 31, 20142015 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20142015 (“20142015 Form 10-K”). The interim financial statements contained herein should be read in conjunction with the 20142015 Form 10-K.
The consolidated financial statements have been reported in U.S. dollars by translating asset and liability amounts of a foreign wholly-owned subsidiary at the closing exchange rate, equity amounts at historical rates and the results of operations and cash flow at the average of the prevailing exchange rates during the periods reported. As a result, the Company is exposed to foreign currency translation gains or losses. These gains or losses are presented in the Company’s consolidated financial statements as “Other comprehensive income (loss)loss - foreign currency translation adjustments”adjustment”.
Principles of Consolidation
The unaudited consolidated financial statements contained herein include the accounts of P&F Industries, Inc. and its subsidiaries, (“P&F” or the “Company”). All significant intercompany balances and transactions have been eliminated.
Reclassification
Certain amounts in the consolidated financial statements of the Company have been reclassified to conform to classifications used in the current period.year. The reclassifications had no effect on previously reported results of operations or retained earnings.
The Company
P&F is a Delaware corporation incorporated on April 19, 1963, that operates1963. Until February 11, 2016, the effective date of the sale of its Nationwide Industries, Inc. (“Nationwide”) subsidiary, P&F operated in two primary lines of business or segments: (i) tools and other products (“Tools”) and (ii) hardware and accessories (“Hardware”). As a result of the sale of Nationwide, the Company currently only operates in the Tools segment. See Notes 2 and 8 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”). During the third quarter of 2014, the Company acquired Exhaust Technologies Inc. (“ETI”) and Universal Air Tool Company Limited (“UAT”). Both ETI and UAT, which were acquired by the Company in 2014, are wholly-owned subsidiaries of Florida Pneumatic, and unless otherwise indicated, the operations and results of operations of Florida Pneumatic herein include ETI and UAT as of the respective dates such companies were acquired. Additionally, during the third quarter of 2014, the Company acquired substantially all the assetsPneumatic. The business of Air Tool Service Company (“ATSCO”), which businesswas also acquired in 2014, operates through a wholly-owned subsidiary of Hy-Tech. Unless otherwise indicated, the results of operations of Hy-Tech herein include ATSCO from the date the business was acquired.
Florida Pneumatic is engaged in the importation and sale of pneumatic hand tools, primarily for the retail, industrial and automotive markets, and the importation and sale of compressor air filters. Florida Pneumatic also markets, through its Berkley Tool division (“Berkley”), a product line which includes pipe and bolt dies, pipe taps, wrenches, vises and stands, pipe and tubing cutting equipment, hydrostatic test pumps, and replacement electrical components for a widely-used brand of pipe cutting and threading machines.
Hy-Tech manufactures and distributes its own line of industrial pneumatic tools. Hy-Tech also produces and markets impact wrenches, grinders, drills, and motors. Further, it also manufactures tools to customer specifications. Its customers include refineries, chemical plants, power generation facilities, heavy construction enterprises, oil and gas and mining companies. In addition, Hy-Tech manufactures an extensive line of pneumatic tool replacement parts that are sold to original equipment manufacturers (“OEMs”). It also manufactures and distributes high pressure stoppers for hydrostatic testing fabricated pipe, gears, sprockets, splines and racks and produces a line of siphons.
7
Hardware
TheUntil the sale of Nationwide, which was effective February 11, 2016 (the “Closing Date”), the Company conductsconducted its Hardware business through aits wholly-owned subsidiary, Countrywide Hardware, Inc. (“Countrywide”). Countrywide conductsconducted its business operations through its wholly-owned subsidiary, Nationwide Industries, Inc. (“Nationwide”).Nationwide. Nationwide is 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. Nationwide’s products areOn the Closing Date, Countrywide sold through in-house sales personnelNationwide to an unrelated third party for approximately $22.2 million. See Notes 2 and manufacturers’ representatives8 to distributors, retailers and OEM customers. End users of Nationwide’s products include contractors, home builders, pool and patio distributors, OEM/private label customers and general consumers. Consolidated Financial Statements for further discussion.
Management Estimates
The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses in those financial statements. Certain significant accounting policies that contain subjective management estimates and assumptions include those related to revenue recognition, inventory, goodwill, intangible assets and other long-lived assets, income taxes and deferred taxes. Descriptions of these policies are discussed in the Company’s 20142015 Form 10-K. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustments when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from those estimates and assumptions. Significant changes, if any, in those estimates resulting from continuing changes in the economic environment will be reflected in the consolidated financial statements in future periods.
Recently issuedNew Accounting Pronouncements
Recently Issued Accounting Pronouncements
In September 2015,March 2016, the FinancialFASB issued ASU 2016-09,Improvements to Employee Share-Based Payment Accounting Standards Board (“FASB”). The standard reduces complexity in several aspects of the accounting for employee share-based compensation, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. The Company is still evaluating the impact this standard will have on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2015-16, “Business Combinations (Topic 805): Simplifying the AccountingASU No. 2016-02,Leases. This ASU is a comprehensive new leases standard that amends various aspects of existing guidance for Measurement-Period Adjustments” (“ASU 2015-16”). ASU 2015-16leases and requires an acquirer in a business combinationadditional disclosures about leasing arrangements. It will require companies to recognize adjustmentslease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. 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 provisional amounts identified during the measurement periodclassification criteria for distinguishing between capital leases and operating leases in the reporting period in which the adjustment amounts are determined.previous leases guidance. The acquirer is also required to either present separately on the face of the income statement or disclose in the notes to the financial statements the portion of the amounts recorded in the current-period earnings by line item that would have been recorded in previous periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. Under current U.S. GAAP, the acquirer is required to retrospectively adjust provisional amounts recognized at the acquisition date with a corresponding adjustment to goodwill. ASU 2015-16 is effective for annual periods beginning after December 31, 2015, with early application permitted, and shall apply to adjustments to provisional amounts that occur after15, 2018, including interim periods within those fiscal years; earlier adoption is permitted. In the effective date. The Company is currently assessing the impact the adoption of ASU 2015-16 will have on future financial statements and related disclosures.
In July 2015,in which the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” which applies to inventory that is measured using first-in, first-out (“FIFO”) or average cost. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost or net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory that is measured using last-in, last-out (“LIFO”). This ASU is effective for annualfirst applied, leases shall be measured and interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption permittedrecognized at the beginning of the earliest comparative period presented with an interim or annual reporting period.adjustment to equity. Practical expedients are available for election as a package and if applied consistently to all leases. The Company is currently evaluating the impact of adoptingthe adoption of this guidance.guidance on its consolidated financial condition, results of operations and cash flows.
In November 2015, the FASB issued ASU 2015-17,Balance Sheet Classification of Deferred Taxes . ASU 2015-17 is aimed at reducing complexity in accounting standards. Currently, GAAP requires the deferred taxes for each jurisdiction to be presented as a net current asset or liability and net noncurrent asset or liability. This requires a jurisdiction-by-jurisdiction analysis based on the classification of the assets and liabilities to which the underlying temporary differences relate, or, in the case of loss or credit carryforwards, based on the period in which the attribute is expected to be realized. Any valuation allowance is then required to be allocated on a pro rata basis, by jurisdiction, between current and noncurrent deferred tax assets. To simplify presentation, the new guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. As a result, each jurisdiction will now only have one net noncurrent deferred tax asset or liability.
The guidance does not change the existing requirement that only permits offsetting within a jurisdiction; companies are still prohibited from offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. The new guidance is effective in fiscal years beginning after December 15, 2016, including interim periods within those years, with early adoption permitted. The Company applied the new standard retrospectively to the prior period presented in the Consolidated Balance Sheets. The previously reported December 31, 2015 balance sheet reported Deferred income taxes-net in Current assets of $1,131,000. Current presentation reports $209,000 of deferred tax assets being included in the Current assets from discontinued operations, as detailed in Note 2, and the balance of $922,000 is presented net against the long-term deferred income tax liability.
In April 2015, the FASB issued ASU 2015-03, “Interest -– Imputation of Interest (Subtopic 835-30):Interest: Simplifying the Presentation of Debt Issuance Costs ("ASU 2015-03"), in order to simplify the presentation of debt issuance costs.” (ASU 2015-03). The ASUupdate requires debt issuance costs to be presented on the balance sheet as a direct deduction from the related debt liability rather than an asset. ASU 2015-03 is effective for public companies for annual periods beginning after December 15, 2015, and interim periods thereafter, with early adoption permitted. The guidance also requires retrospective application to all prior periods presented. The adoption of this new guidance is not expected to have a material impact on the Company’s consolidated financial statements. However, in August 2015, the FASB issued Accounting Standards Update 2015-15, Interest—Imputation of Interest (Subtopic 835-30) “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit” (“ASU 2015-15”). ASU 2015-15 clarifies that the SEC Staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably overbe reported as a reduction to long-term debt (previously reported in other noncurrent assets). We adopted ASU 2015-03 in the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.
In May 2014, the FASB issued ASU Update No. 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard was to become effective for annual and interim periods in fiscal years beginning after December 15, 2016. In April 2015, the FASB proposed deferring the effective date of ASU 2014-09 for one year, and proposed some modifications to the original provisions. On July 9, 2015, the one year deferral of the effective date was approved, and as such ASU 2014-09 is effective for our first quarter of fiscal year 2018 using either2016 and for all retrospective periods, as required. The impact of the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have onadoption was not material to our consolidated financial statements, and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.is discussed further in Note 8.
NOTE 2 – ACQUISITIONSDISCONTINUED OPERATIONS
Exhaust Technologies Inc.
The Company, as part of its strategic plan, which is to focus on expanding its position in the power tool and accessories market, sold Nationwide. On July 1, 2014, the Company acquired ETI,Closing Date, P&F, Countrywide, Nationwide and Argosy NWI Holdings, LLC, a developerDelaware limited liability company (“Buyer”), entered into a Stock Purchase and distributorRedemption Agreement (the “Stock Purchase Agreement”), pursuant to which, among other things, after giving effect to certain contributions and redemptions of pneumatic tools, through a merger between a newly formed wholly-owned subsidiary of Florida Pneumatic and ETI. ETI markets its AIRCAT and NITROCAT brand pneumatic tools primarily toNationwide’s common shares (“Nationwide Shares”), the automotive market. ETI’s business operates through Florida Pneumatic. The purchase price for this acquisition consisted of $10,377,000 in cash plus the assumption of certain payables.
Universal Air Tool Company Limited
On July 29, 2014, the CompanyBuyer acquired all of the outstanding shares of UAT, a distributor of pneumatic tools. UAT, which is located in High Wycombe, England, markets pneumatic tools to the automotive market sector primarily in the United Kingdom and Ireland.Nationwide Shares from Countrywide (the “Acquisition”). The purchase price for this acquisition consistedthe 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 $1,947,000 in$802,000, and an escrow amount of $1,955,000 (“escrow funds”). In addition, the Stock Purchase Agreement provides that, under certain circumstances, up to an additional $400,000 may be required to be contributed into the escrow fund by Countrywide. After paying closing costs, the net cash netreceived from the Buyer was approximately $18.7 million.
Pursuant to the terms of a post-closingthe Stock Purchase Agreement, the final working capital adjustment. As part of this transaction, there wasamount is to be determined post-closing within the possibility thattimeframe set forth in the Stock Purchase Agreement. Subsequent to March 31, 2016, the Company could payand Buyer agreed on the amount of the working capital as additional consideration (“contingent consideration”),of the Closing Date and the final adjustment, which was in favor of the Company. As $250,000 of the escrow funds relates to the former shareholders of UAT (the “Sellers”) upworking capital adjustment, and such $250,000 was determined to a maximum of £250,000 should UAT’s net earnings duringbe due and owing to the period from date of acquisition throughCompany, the first anniversary date, July 29, 2015, after adjusting for among other things, interest, taxes, depreciation and amortization (“adjusted net income”) exceed a minimum threshold. At the timeCompany has included this $250,000 portion of the acquisition,escrow funds in Prepaid Expenses and Other Current Assets in the Current Assets section of its Consolidated Balance Sheet. The remaining $1,705,000 of the escrow funds, which is classified as Other Assets on the Company’s Consolidated Balance Sheet, is intended to be released eighteen months from the Closing Date, less any claims made against these escrow funds, in accordance with the Stock Purchase Agreement. The Company believed, based on a range of possible outcomes,believes that these escrow funds are highly collectible, and that it wasis more likely than not that UAT would achievewith respect to any or all such potential claims made against the Company, these claims will not exceed the minimum dollar threshold amount of $150,000 required under the Stock Purchase Agreement. The Company has therefore included the full amount of the $1,705,000 portion of the escrow funds in its gain on sale of Nationwide. Should claims made against the Company pursuant to the Stock Purchase Agreement exceed the minimum threshold, then to the extent such claims are resolved in favor of the Buyer under the terms of the Stock Purchase Agreement, the total amount of such claims will be recorded as a loss on sale of Nationwide in future periods. See Note 8 to the Consolidated Financial Statements for further discussion.
As Nationwide was a substantial and unique business unit of the Company, its sale was a strategic shift. Accordingly, in accordance with Accounting Standard Code Topic 360, the Company has classified Nationwide as discontinued operations for all periods presented.
Income fromdiscontinued operations, net of taxes in the accompanying Consolidated Statements of Income and Comprehensive Income, is comprised of the following:
For the Period January 1, 2016 through February 11, 2016 | Three months ended March 31, 2015 | |||||||
Revenue | $ | 1,830,000 | $ | 5,267,000 | ||||
Cost of goods sold | 1,177,000 | 3,247,000 | ||||||
Gross margin | 653,000 | 2,020,000 | ||||||
Selling and general and administrative expenses | 483,000 | 1,214,000 | ||||||
Interest expense-net | 60,000 | 163,000 | ||||||
Income before income taxes | 110,000 | 643,000 | ||||||
Income tax | 38,000 | 235,000 | ||||||
Net income | $ | 72,000 | $ | 408,000 |
The components of discontinued operations in the accompanying consolidated balance sheet are as follows:
December 31, 2015 | ||||
Accounts receivable-net | $ | 1,245,000 | ||
Inventories | 4,211,000 | |||
Prepaid expenses and other current assets | 92,000 | |||
Net property and equipment | 768,000 | |||
Goodwill | 1,873,000 | |||
Other intangible assets-net | 12,000 | |||
Other assets- net | 5,000 | |||
Deferred taxes - net | 229,000 | |||
Assets of discontinued operations | $ | 8,435,000 | ||
Accounts payable | $ | 765,000 | ||
Accrued compensation and benefits | 247,000 | |||
Accrued other liabilities | 330,000 | |||
Liabilities of discontinued operations | $ | 1,342,000 |
The Company recognized a gain of $12,185,000, on the sale of Nationwide during the three-month period ended March 31, 2016, which represents the difference between the adjusted net purchase price and the carrying book value of Nationwide. However, for income that would entitletax purposes, the Sellers toCompany’s tax basis in Nationwide was greater than the maximum amount, and accordinglynet proceeds, thus resulting in a tax loss. At the applicable tax rate of 34%, this loss has been recorded as a $425,000 obligation as contingent consideration (£250,000 attax benefit of $141,000. This tax benefit may only be applied against future capital gain transactions.
On the then foreign exchange rate). Based upon projected results, at June 30, 2015, the Company adjusted the estimated contingent consideration payable to the Sellers to $224,000. Subsequently,Closing Date, the Company and the Sellers agreed that the contingent consideration payablepresident of Nationwide, entered into a purchase agreement pursuant to the Sellers shall be £193,435, or approximately $299,000. As a result,which, among other things the Company adjusted the contingent consideration payable to $299,000, and recognized $75,000 as Other Expense in the three-month period ended September 30, 2015. The $299,000 agreed upon amount was paid to the Sellers in October 2015.
Air Tool Service Company
On August 13, 2014, a newly formed wholly owned subsidiary of Hy-Tech, acquired substantially all of the assets comprising the business of ATSCO, an Ohio based corporation engaged in the design, manufacture and distribution of pneumatic tools and parts. The purchase price consisted of approximately $7,659,000 in cash and the assumption of certain liabilities, and is subject to a post-closing working capital adjustment. The Company is still seeking to reach agreement with the seller of the ATSCO assets on the matter of the post-closing working capital adjustment, among other things.
All three acquisitions are included as a part30,000 shares of the Company’s Tool segment. ETIClass A Common Stock (“Common Stock”) at the aggregate purchase price of $254,940 and UAT have been integrated into the business operations of Florida Pneumatic, and ATSCO has been integrated into the business operations of Hy-Tech since their respective dates of acquisition. As such, it is impracticableoptions to determine the specific revenue and earnings directly attributable to anyacquire 6,667 shares of the acquired businesses.Company’s Common Stock at an aggregate price of $16,597.
The following unaudited pro-forma combined financial information gives effectEffective as of the Closing Date, Countrywide, as landlord, and Nationwide, as tenant, entered into a new lease relating to the acquisitionTampa, Florida real property (the “Premises”). The lease provides for, among other things, a seven-year term commencing on the Closing Date and an annual base rent of ETI, UATapproximately $252,000 with annual escalations. The lease also provides that the tenant will pay certain taxes and ATSCO as if they were consummated January 1, 2014. This unaudited pro-forma financial information is presented for information purposes only,operating expenses associated with the Premises. The lease replaces the previous lease between Countrywide and is not intended to present actual results that would have been attained had the acquisitions been completedNationwide.
Lastly, effective as of January 1, 2014 (the beginningthe Closing Date, Countrywide and Nationwide entered into an Option and Right of First Refusal Agreement relating to the earliestPremises, pursuant to which Countrywide granted a purchase option to Nationwide relating to the Premises if such option is initiated within 60 days following the Closing Date, which has since lapsed. In addition Countrywide granted to Nationwide a right of first refusal relating to certain offers made by third parties during the five-year period presented) or to project potential operating results as of any future date or for any future periods.following the Closing Date.
Three months ended September 30, 2014 (Unaudited) | Nine months ended September 30, 2014 (Unaudited) | |||||||
Revenue | $ | 23,500,000 | $ | 65,452,000 | ||||
Net income | $ | 805,000 | $ | 2,845,000 | ||||
Earnings per share - basic | $ | 0.21 | $ | 0.76 | ||||
Earnings per share - diluted | $ | 0.20 | $ | 0.73 |
NOTE 3 — EARNINGS PER SHARE
Basic earnings per common share is based only on the average number of shares of the Company’s Class A Common Stock (“Common Stock”) outstanding for the periods presented.periods. Diluted earnings per common share reflects the effect of shares of the common stockCommon Stock issuable upon the exercise of options, unless the effect on earnings is antidilutive.
Diluted earnings per common share is computed using the treasury stock method. Under this method, the aggregate number of shares of the common stock outstanding reflects the assumed use of proceeds from the hypothetical exercise of any outstanding options to purchase shares of the Common Stock. The average market value for the period is used as the assumed purchase price.
The following table sets forth the elements of basic and diluted earnings per common share:
Three months ended | Nine months ended | Three months ended | ||||||||||||||||||||||
September 30, | September 30, | March 31, | ||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | 2016 | 2015 | |||||||||||||||||||
Numerator: | ||||||||||||||||||||||||
Numerator for basic and diluted earnings per common share: | ||||||||||||||||||||||||
Net income from continuing operations | $ | 66,000 | $ | 373,000 | ||||||||||||||||||||
Net income from discontinued operations | 12,257,000 | 408,000 | ||||||||||||||||||||||
Net income | $ | 1,050,000 | $ | 816,000 | $ | 3,143,000 | $ | 1,850,000 | $ | 12,323,000 | $ | 781,000 | ||||||||||||
Denominator: | ||||||||||||||||||||||||
For basic earnings per share - weighted average common shares outstanding | 3,616,000 | 3,792,000 | 3,604,000 | 3,737,000 | ||||||||||||||||||||
Denominator for basic earnings per share weighted average common shares outstanding | 3,601,000 | 3,589,000 | ||||||||||||||||||||||
Dilutive securities (1) | 176,000 | 176,000 | 160,000 | 180,000 | 177,000 | 157,000 | ||||||||||||||||||
For diluted earnings per share - weighted average common shares outstanding | 3,792,000 | 3,968,000 | 3,764,000 | 3,917,000 | ||||||||||||||||||||
Denominator for diluted earnings per share weighted average common shares outstanding | 3,778,000 | 3,746,000 |
(1) Dilutive securities consist of “in the money” stock options.
At September 30,March 31, 2016 and 2015, and 2014 and during the nine-monththree-month periods ended September 30,March 31, 2016 and 2015, and 2014, there were outstanding stock options whose exercise prices were higher than the average market values of the underlying common stockCommon Stock for the period. These options are anti-dilutive and are excluded from the computation of diluted earnings per share. The weighted average of anti-dilutive stock options outstanding was as follows:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Weighted average antidilutive stock options outstanding | 88,000 | 184,000 | 150,000 | 232,000 |
Three months ended | ||||||||
March 31, | ||||||||
2016 | 2015 | |||||||
Weighted average anti-dilutive stock options outstanding | 89,000 | 182,000 |
NOTE 4 - STOCK-BASED COMPENSATION
During the three and nine-month periodsmonth period ended September 30, 2015,March 31, 2016, 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 grantrecord any compensation expense in connection with the issuance of these options, as the issuance was made as the result of an equity restructuring event. See Note 9 for further discussion. There were no options granted or Common Stock options.awards issued during the three-month period ended March 31, 2015.
The following is a summary of the changes in outstanding options during the nine-monththree-month period ended September 30, 2015:March 31, 2016:
Option Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | Aggregate Intrinsic Value | Option Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | Aggregate Intrinsic Value | |||||||||||||||||||||||||
Outstanding, January 1, 2015 | 505,000 | $ | 6.51 | 4.8 | $ | 1,232,000 | ||||||||||||||||||||||||||
Outstanding, January 1, 2016 | 457,000 | $ | 6.15 | 4.0 | $ | 1,431,000 | ||||||||||||||||||||||||||
Granted | — | — | — | 19,174 | 5.89 | |||||||||||||||||||||||||||
Exercised | (23,500 | ) | 3.11 | (6,000 | ) | 3.81 | ||||||||||||||||||||||||||
Forfeited | — | — | (26,500 | ) | 6.55 | |||||||||||||||||||||||||||
Expired | (22,500 | ) | 16.68 | — | — | |||||||||||||||||||||||||||
Outstanding, September 30, 2015 | 459,000 | $ | 6.19 | 4.2 | $ | 1,720,000 | ||||||||||||||||||||||||||
Outstanding, March 31, 2016 | 443,674 | $ | 5.90 | 3.5 | $ | 1,729,000 | ||||||||||||||||||||||||||
Vested, September 30, 2015 | 435,160 | $ | 6.08 | 4.0 | $ | 1,687,000 | ||||||||||||||||||||||||||
Vested, March 31, 2016 | 424,507 | $ | 5.81 | 3.4 | $ | 1,697,000 |
Included in the forfeited options in the table above are 20,998 options the Company purchased from Nationwide employees for $50,000 in connection with the sale of Nationwide.
The following is a summary of changes in non-vested options for the ninethree months ended September 30, 2015:March 31, 2016:
Option Shares | Weighted Average Grant-Date Fair Value | Option Shares | Weighted Average Grant- Date Fair Value | |||||||||||||
Non-vested options, January 1, 2015 | 61,006 | $ | 6.14 | |||||||||||||
Non-vested options, January 1, 2016 | 23,840 | $ | 6.72 | |||||||||||||
Granted | --- | 829 | 6.45 | |||||||||||||
Vested | (37,166 | ) | $ | 5.76 | — | — | ||||||||||
Forfeited | --- | (5,502 | ) | 6.72 | ||||||||||||
Non-vested options, September 30, 2015 | 23,840 | $ | 6.72 | |||||||||||||
Non-vested options, March 31, 2016 | 19,167 | $ | 6.71 |
The number of shares of Common Stock available for issuance under the P&F Industries, Inc. 2012 Stock Incentive Plan (the “2012 Plan”), as of September 30, 2015March 31, 2016 was 183,267.180,593. At September 30, 2015,March 31, 2016, there were 113,500116,174 options outstanding issued under the 2012 Stock Incentive Plan and 345,500327,500 options outstanding issued under the 2002 Stock Incentive Plan.
Restricted Stock
Pursuant to the 2012 Plan, the Company, onin May 20, 2015, issuedgranted 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 to bewas $8.63, 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. TheAs such, the Company willis ratably amortizeamortizing the total non-cash compensation expense of approximately $43,000 in its selling, general and administrative expenses through May 2016.
The Company issued 2,500 restricted shares of its common stock to Joseph A. Molino, Jr., the Company’s Chief Financial Officer, in accordance with an Employment Agreement dated April 2, 2015. The Company determined the fair value of these shares to be $6.86, which was the closing price of the Company’s Common Stock on the date of the grant. These shares shall vest as to 833 shares on April 2, 2016, 833 shares on April 2, 2017, and 834 shares on April 2, 2018; provided, however, that 100% of the then unvested portion of the shares shall vest in the event of Mr. Molino’s death or termination due to disability or upon a Change in Control (as defined in the 2012 Plan). These shares cannot be traded earlier than the first anniversary of the grant date. The Company will ratably amortize the total non-cash value of approximately $17,000 as compensation expense in its selling, general and administrative expenses through April 2018.
NOTE 5 - ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable - net consists of:
September 30, 2015 | December 31, 2014 | March 31, 2016 | December 31, 2015 | |||||||||||||
Accounts receivable | $ | 11,229,000 | $ | 9,693,000 | $ | 9,265,000 | $ | 8,559,000 | ||||||||
Allowance for doubtful accounts | (168,000 | ) | (146,000 | ) | (84,000 | ) | (82,000 | ) | ||||||||
$ | 11,061,000 | $ | 9,547,000 | $ | 9,181,000 | $ | 8,477,000 |
NOTE 6 -– INVENTORIES
Inventories consist of:
September 30, 2015 | December 31, 2014 | |||||||
Raw material | $ | 2,354,000 | $ | 2,014,000 | ||||
Work in process | 1,450,000 | 1,433,000 | ||||||
Finished goods | 20,448,000 | 20,888,000 | ||||||
$ | 24,252,000 | $ | 24,335,000 |
March 31, 2016 | December 31, 2015 | |||||||
Raw material | $ | 2,133,000 | $ | 2,070,000 | ||||
Work in process | 1,335,000 | 1,366,000 | ||||||
Finished goods | 16,511,000 | 16,347,000 | ||||||
$ | 19,979,000 | $ | 19,783,000 |
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill by segment areis as follows:
Consolidated | Tools | Hardware | ||||||||||
Balance, January 1, 2015 | $ | 11,980,000 | $ | 10,107,000 | $ | 1,873,000 | ||||||
Adjustment to Acquisition of ATSCO | 62,000 | 62,000 | — | |||||||||
Currency translation adjustments | (10,000 | ) | (10,000 | ) | — | |||||||
Balance, September 30, 2015 | $ | 12,032,000 | $ | 10,159,000 | $ | 1,873,000 |
Balance, January 1, 2016 | $ | 10,154,000 | ||
Currency translation adjustment | (6,000 | ) | ||
Balance, March 31, 2016 | $ | 10,148,000 |
Other intangible assets were as follows:
September 30, 2015 | December 31, 2014 | March 31, 2016 | December 31, 2015 | |||||||||||||||||||||||||||||||||||||||||||||
Cost | Accumulated amortization | Net book value | Cost | Accumulated amortization | Net book value | Cost | Accumulated amortization | Net book value | Cost | Accumulated amortization | Net book value | |||||||||||||||||||||||||||||||||||||
Other intangible assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Customer relationships (1) | $ | 13,192,000 | $ | 5,178,000 | $ | 8,014,000 | $ | 13,194,000 | $ | 4,551,000 | $ | 8,643,000 | $ | 11,276,000 | $ | 3,695,000 | $ | 7,581,000 | $ | 11,285,000 | $ | 3,486,000 | $ | 7,799,000 | ||||||||||||||||||||||||
Trademarks and trade names (1) | 2,025,000 | — | 2,025,000 | 2,035,000 | — | 2,035,000 | 2,003,000 | — | 2,003,000 | 2,015,000 | — | 2,015,000 | ||||||||||||||||||||||||||||||||||||
Engineering drawings | 410,000 | 149,000 | 261,000 | 410,000 | 120,000 | 290,000 | 410,000 | 168,000 | 242,000 | 410,000 | 159,000 | 251,000 | ||||||||||||||||||||||||||||||||||||
Licensing | 305,000 | 279,000 | 26,000 | 305,000 | 235,000 | 70,000 | ||||||||||||||||||||||||||||||||||||||||||
Non-compete agreements (1) | 365,000 | 112,000 | 253,000 | 368,000 | 41,000 | 327,000 | 359,000 | 156,000 | 203,000 | 362,000 | 134,000 | 228,000 | ||||||||||||||||||||||||||||||||||||
Patents | 1,205,000 | 333,000 | 872,000 | 1,205,000 | 133,000 | 1,072,000 | 1,205,000 | 466,000 | 739,000 | 1,205,000 | 400,000 | 805,000 | ||||||||||||||||||||||||||||||||||||
Totals | $ | 17,502,000 | $ | 6,051,000 | $ | 11,451,000 | $ | 17,517,000 | $ | 5,080,000 | $ | 12,437,000 | $ | 15,253,000 | $ | 4,485,000 | $ | 10,768,000 | $ | 15,277,000 | $ | 4,179,000 | $ | 11,098,000 |
(1) | A portion of these intangibles are maintained in a foreign currency, and are therefore subject to foreign exchange rate fluctuations. |
Amortization expense for intangible assets from continuing operations subject to amortization was as follows:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||
$ | 324,000 | $ | 245,000 | $ | 971,000 | $ | 361,000 | |||||||
Three months ended March 31, | ||||||
2016 | 2015 | |||||
$ | 308,000 | $ | 309,000 | |||
The weighted average amortization period for intangible assets was as follows:
September 30, 2015 | December 31, 2014 | March 31, 2016 | December 31, 2015 | |||||||||||||
Customer relationships | 10.2 | 10.9 | 9.8 | 10.0 | ||||||||||||
Trademarks and trade names(1) | — | — | ||||||||||||||
Engineering drawings | 8.7 | 9.2 | 8.4 | 8.5 | ||||||||||||
Licensing | 0.5 | 1.2 | ||||||||||||||
Non-compete agreements | 2.9 | 3.6 | 2.5 | 2.7 | ||||||||||||
Patents | 5.8 | 6.1 | 5.8 | 5.8 | ||||||||||||
(1)Haveindefinite lives.
Amortization expense for each of the next five years and thereafter is estimated to be as follows:
2016 | $ | 1,263,000 | ||||||
2017 | 1,178,000 | $ | 1,233,000 | |||||
2018 | 981,000 | 1,052,000 | ||||||
2019 | 954,000 | 966,000 | ||||||
2020 | 809,000 | 907,000 | ||||||
2021 | 748,000 | |||||||
Thereafter | 4,241,000 | 3,859,000 | ||||||
Total | $ | 9,426,000 | ||||||
$ | 8,765,000 |
NOTE 8 - DEBT
SHORT-TERM LOANS
TheIn October 2010, the Company entered into a Loan and Security Agreement in October 2010, as amended (“Credit Agreement”), with an affiliate of Capital One, Business Credit Corp.National Association (“Capital One”, formerly known as Capital One Leverage Finance Corporation, as agent and lender (“COBC”). The Credit Agreement expires December 19, 2017 (the “Maturity Date”or the “Bank”). The Credit Agreement provides for a Revolver Loan (“Revolver”), borrowings under which are secured by the Company’s accounts receivable, mortgages on its real property located in Cranberry, PA, Jupiter, FL and Tampa, FL (“Real Property”), inventory and equipment. P&F and certain of its subsidiaries are borrowers under the Credit Agreement, and their obligations are cross-guaranteed by certain other subsidiaries. At the Company’s option, Revolver borrowings bear interest at either LIBOR (London(“London InterBank Offered Rate)Rate”) or the Base Rate, as defined in the Credit Agreement, (“Base Rate”), or a combination of the two, plus the Applicable Margin, (the “Applicable Margin”), as defined in the Credit Agreement. The interest rate, either LIBOR or Base Rate, which is added to the Applicable Margin, is at the option of the Company, subject to limitations on the number of LIBOR borrowings.
InThe Company, in August 2014, the Company entered into an Amended and Restated Loan and Security Agreement, (the “Restated Loan Agreement”), with COBC.Capital One. The Restated Loan Agreement, among other things, amended the Credit Agreement by: (1) increasing the total amount of the credit facility from $29,423,000 to $33,657,000, (2) increasing the Revolver from $20,000,000 to $22,000,000, (3) creating a new $3,000,000 Term Loan, as defined in the Restated Loan Agreement (“Term Loan B”), and (4) re-designating as “Term Loan A”, the previously existing outstanding Term Loan, which relates primarily to the Company’s real property.Real Property. In addition, the Restated Loan Agreement also reset certain financial covenants.
Contemporaneously with the sale of Nationwide, as discussed in Note 2, the Company entered into the Consent and Second Amendment to the Restated Loan Agreement (the “Amendment”) with Capital One. The Amendment, among other things; provided the Bank’s consent to the transactions contained in the Stock Purchase Agreement and the repurchase of certain shares and options discussed in Note 2 and Note 4 to the Consolidated Financial Statements, and amended the Restated Loan Agreement by: (a) reducing the aggregate Commitment (as defined in the Restated Loan Agreement) to $11,600,000; (b) reducing the Term Loan A to $100,000; (c) reducing the Revolver Commitment to $10,000,000 (less the new Term Loan A balance of $100,000); (d) reducing the Capex Loan Commitment to $1,600,000; (e) modifying certain financial covenants, (f) lowering interest rate margins and fee obligations; and (g) extending the expiration of the Credit Agreement to February 11, 2019. Additionally, the Bank released the mortgage on the Company’s Real Property, located in Tampa Florida.
The Company provides Capital One with, among other things, monthly financial statements, and monthly borrowing base certificates. The Company is required to comply with certain financial covenants. Under certain circumstances the Company would be required to submit certificates of compliance. The Company believes it is in compliance with all covenants under the current Credit Facility.
The net proceedsprovided by the sale of Nationwide of approximately $18.7 million were used to pay down the Revolver borrowings outstanding was $11,461,000 and $11,817,000, at September 30, 2015the Capex Term Loans in their entirety, and paid approximately $6 million against the Term Loan A, discussed below.
SHORT-TERM
At March 31, 2016 and December 31, 2014,2015, the Company’s Revolver borrowings were $-0- and $9,623,000, respectively. Applicable LIBOR Margins added to Revolver borrowings at LIBOR and theDecember 31, 2015 was 2.00%. The Applicable Base Rate Margin added to Revolver borrowings at September 30, 2015March 31, 2016 and December 31, 20142015 were 2.25%0.50% and 1.25%1.00%, respectively. During the nine-month period ended September 30, 2015, the Applicable Margin rates for LIBOR borrowings and Base Rate borrowings ranged from 2.25% to 2.50% and 1.25% and 1.50%, respectively, compared to 1.50% to 2.00% and 0.50% to 1.00%, respectively, for the same nine-month period in 2014.
The Company purchased vehicles for use by its UAT salesforce. The current portion of the balance due on these vehicles is $29,000 at March 31, 2016 and was $31,000 at December 31, 2015.
LONG-TERM
LONG-TERM
The Restated Loan Agreement provides for Term Loan A, which is secured by mortgages on the Real Property, accounts receivable, inventory and equipment. Term Loan A borrowings can be at either LIBOR, or at the Base Rate, as defined in the Restated Loan Agreement, or a combination of the two plus the Applicable Margins, which for LIBOR and Base Rate borrowings at September 30, 2015March 31, 2016 and at December 31, 2014 were2015 was 3.0% and 2.0%, respectively.
Additionally, the Restated Loan Agreement provided. The Applicable Margin for a Term Loan B, pursuant to which the Company borrowed the maximum principal amount of $3,000,000 in connection with the ATSCO acquisition. Term Loan B borrowings incurred interest at LIBOR or the Base Rate or a combination, plusfor the Applicable Margins, whichsame timeframes was 3.25% and 2.25% at December 31, 2014. This2.0%. A portion of the net proceeds from the sale of Nationwide repaid all but $100,000 of this Term Loan B was scheduled to be repaidA, and accordingly such remaining balance is included in 36 consecutive monthly payments of $83,000, with additional mandatory repayments each year equal to 50% ofLong-term debt, less current maturities on the Company’s Excess Cash Flow (as defined in the Restated Loan Agreement) for such year, if any. As the result of the Company’s Excess Cash Flow for the year ended DecemberConsolidated Balance Sheet at March 31, 2014, on April 2, 2015 the Company repaid $2,417,000, which was the balance of the Term Loan B, with funds available from its Revolver.2016.
TheDuring 2012, the Company borrowed $380,000 and $519,000, in March 2012 and September 2012, respectively, as loans primarily forto purchase machinery and equipment (“Capex Term Loans”). Applicable Margins added to these Capex Term Loans during the period from January 1, 2016 through the Closing Date, and at September 30, 2015 and December 31, 20142015, were 3.00% and 2.00%, for borrowings at LIBOR and the Base Rate, respectively. These loans were fully repaid with funds from the sale of Nationwide.
Long-term debt:
September 30, 2015 | December 31, 2014 | |||||||
Term Loan A - $23,000 payable monthly January 2013 through December 2017, balance due December 19, 2017. | $ | 6,230,000 | $ | 6,440,000 | ||||
Term Loan B - $83,000 payable monthly September 2014 through March 2015. | — | 2,667,000 | ||||||
Capex Term Loan - $6,000 payable monthly May 2012 through April 2017. | 121,000 | 178,000 | ||||||
Capex Term Loan - $9,000 payable monthly October 2012 through September 2017. | 208,000 | 285,000 | ||||||
Other | 57,000 | 90,000 | ||||||
6,616,000 | 9,660,000 | |||||||
Less: current maturities | 494,000 | 3,167,000 | ||||||
$ | 6,122,000 | $ | 6,493,000 |
The long-term portion of the balance due on the purchased vehicles used by the UAT salesforce is $9,000 at March 31, 2016 and was $16,000 at December 31, 2015.
In accordance with ASU 2015-03, the Company reduced its long-term debt by $11,000 and $64,000, respectively, relating to deferred financing fees as of March 31, 2016 and December 31, 2015.
NOTE 9 – DIVIDENDS PAYABLE – OPTIONS ADJUSTMENTS (EQUITY RESTRUCTURING EVENT)
On March 8, 2016, the Company’s Board of Directors declared a special cash dividend of $0.50 per common share, which was paid on April 4, 2016, to shareholders of record at the close of business on March 21, 2016. The total amount of this special dividend payment is requiredapproximately $1.8 million. Further, the Company’s Board of Directors also announced that it approved the initiation of a dividend policy under which the Company intends to provide COBC with, among other things, monthly financial statements, monthly borrowing base certificatesdeclare a cash dividend to the Company’s shareholders 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 a quarterly cash dividend of $0.05 per share to shareholders of record at the close of business on March 31, 2016. This dividend of approximately $180,000 was paid on April 14, 2016.
The Compensation Committee of the Board of Directors of the Company serves as administrator of the 2012 Plan, and certificatesthe P&F Industries, Inc. 2002 Stock Incentive Plan (“2002 Plan”). The 2012 Plan requires that options granted under the 2012 Plan be equitably adjusted when an equity restructuring transaction or event occurs. Additionally, the 2002 Plan allows the Compensation Committee to equitably adjust any outstanding options granted under the 2002 Plan in the event of compliance with various financial covenants.an equity restructuring event. The Compensation Committee determined that the special dividend met the applicable criteria under both the 2012 Plan and the 2002 Plan and authorized an equitable adjustment be made to all outstanding options under both plans. The equitable adjustment lowered the exercise price of all outstanding options, and added, in the aggregate, 19,174 options to purchase Common Stock relating to options held by all Company option holders. The reduction in the exercise price ranged from $0.13 to $0.48. The Company believes it isdetermined that, in complianceaccordance with all covenants underASU 718-20-20, the Restated Loan Agreement. As partspecial dividend described above was an equity restructuring event, and, as such, there was no impact on the Company’s consolidated statement of income as the result of adjustments to the exercise price or the issuance of the Restated Loan Agreement, if an event of default occurs,additional stock options that resulted from the interest rate would increase by 2% per annum during the period of default, in addition to other remedies provided to COBC.aforementioned modification.
NOTE 910 - RELATED PARTY TRANSACTIONS
The president of one of the Company’s subsidiaries is part owner of one of the subsidiary’s vendors. During the three and nine-monththree-month periods ended September 30, 2015;March 31, 2016 and 2015, the Company purchased approximately $154,000$166,000 and $477,000, respectively, of product from this vendor. During the three and nine-month periods ended September 30, 2014, the Company purchased approximately $254,000 and $672,000,$181,000, respectively, of product from this vendor. At September 30, 2015March 31, 2016 and December 31, 2014,2015, the Company had trade payables to this vendor of $67,000$44,000 and $103,000,$63,000, respectively. Additionally, during the three and nine-monththree-month periods ended September 30,March 31, 2016 and 2015, the Company recorded sales to this vendor of $3,000 and $2,000, and $7,000, respectively, compared to $11,000 and $22,000 for the three and nine-month periods ended September 30, 2014.
respectively.
NOTE 10 - BUSINESS SEGMENTS
P&F operates in two primary lines of business, or segments: Tools and Hardware. For reporting purposes, Florida Pneumatic and Hy-Tech are combined in the Tools segment, while Nationwide is currently the only subsidiary in the Hardware segment. The Company evaluates segment performance based primarily on segment operating income. The accounting policies of each of the segments are the same as those referred to in Note 1.
As of and for the three months ended September 30, 2015 | Consolidated | Tools | Hardware | |||||||||
Revenues from unaffiliated customers | $ | 21,678,000 | $ | 15,924,000 | $ | 5,754,000 | ||||||
Segment operating income | $ | 3,060,000 | $ | 1,947,000 | $ | 1,113,000 | ||||||
General corporate expense | (1,157,000 | ) | ||||||||||
Other expense | (75,000 | ) | ||||||||||
Interest expense | (173,000 | ) | ||||||||||
Income before income taxes | $ | 1,655,000 | ||||||||||
Segment assets | $ | 71,608,000 | $ | 60,688,000 | $ | 10,920,000 | ||||||
Corporate assets | 2,243,000 | |||||||||||
Total assets | $ | 73,851,000 | ||||||||||
Long-lived assets, including $52,000 at corporate | $ | 33,900,000 | $ | 29,338,000 | $ | 4,510,000 |
As of and for the three months ended September 30, 2014 | Consolidated | Tools | Hardware | |||||||||
Revenues from unaffiliated customers | $ | 22,932,000 | $ | 17,865,000 | $ | 5,067,000 | ||||||
Segment operating income | $ | 3,217,000 | $ | 2,201,000 | $ | 1,016,000 | ||||||
General corporate expense | (1,627,000 | ) | ||||||||||
Interest expense | (158,000 | ) | ||||||||||
Income before income taxes | $ | 1,432,000 | ||||||||||
Segment assets | $ | 77,023,000 | $ | 65,054,000 | $ | 11,969,000 | ||||||
Corporate assets | 2,344,000 | |||||||||||
Total assets | $ | 79,367,000 | ||||||||||
Long-lived assets, including $55,000 at corporate | $ | 35,470,000 | $ | 30,815,000 | $ | 4,600,000 |
As of and for the nine months ended September 30, 2015 | Consolidated | Tools | Hardware | |||||||||
Revenues from unaffiliated customers | $ | 64,064,000 | $ | 46,541,000 | $ | 17,523,000 | ||||||
Segment operating income | $ | 9,352,000 | $ | 5,888,000 | $ | 3,464,000 | ||||||
General corporate expense | (4,059,000 | ) | ||||||||||
Other income | 126,000 | |||||||||||
Interest expense | (566,000 | ) | ||||||||||
Income before income taxes | $ | 4,853,000 |
As of and for the nine months ended September 30, 2014 | Consolidated | Tools | Hardware | |||||||||
Revenues from unaffiliated customers | $ | 57,132,000 | $ | 41,749,000 | $ | 15,383,000 | ||||||
Segment operating income | $ | 8,112,000 | $ | 4,887,000 | $ | 3,225,000 | ||||||
General corporate expense | (4,667,000 | ) | ||||||||||
Interest expense | (335,000 | ) | ||||||||||
Income before income taxes | $ | 3,110,000 |
Revenue and long-lived assets by geographic region were as follows:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Revenue: | ||||||||||||||||
North America | $ | 20,508,000 | $ | 22,132,000 | $ | 60,554,000 | $ | 55,785,000 | ||||||||
Europe | 900,000 | 690,000 | 2,712,000 | 843,000 | ||||||||||||
All Other | 270,000 | 110,000 | 798,000 | 504,000 | ||||||||||||
Total Revenue | $ | 21,678,000 | $ | 22,932,000 | $ | 64,064,000 | $ | 57,132,000 | ||||||||
Long-Lived Assets: | ||||||||||||||||
North America | $ | 32,802,000 | $ | 34,094,000 | ||||||||||||
Europe | 1,098,000 | 1,376,000 | ||||||||||||||
Total Long-Lived Assets | $ | 33,900,000 | $ | 35,470,000 |
P&F INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
GeneralForward Looking Statement
The Private Securities Litigation Reform Act of 1995 (the “Reform Act”) provides a safe harbor for forward-looking statements made by or on behalf of P&F Industries, Inc. and subsidiaries (“P&F”, or the “Company”). P&F and its representatives may, from time to time, make written or verbal forward-looking statements, including statements contained in the Company’s filings with the Securities and Exchange Commission and in its reports to shareholders. Generally, the inclusion of the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “will,” “may,” “would,” “could” and their opposites and similar expressions identify statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and that are intended to come within the safe harbor protection provided by those sections. Any forward-looking statements contained herein, including those related to the Company’s future performance, are based upon the Company’s historical performance and on current plans, estimates and expectations. All forward-looking statements involve risks and uncertainties. These risks and uncertainties could cause the Company’s actual results for the 20152016 fiscal year and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company for a number of reasons, as previously disclosed in the Company’s public filings, including in its Annual Report on Form 10-K for the year ended December 31, 20142015 (“20142015 Form 10-K”). Forward-looking statements speak only as of the date on which they are made. The Company undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.
Business
P&F and each of its subsidiaries are herein referred to collectively as the “Company.” In addition, the words “we”, “our” and “us” refer to the Company. The Company operatesUntil February 11, 2016, the effective date of the sale of its Nationwide Industries, Inc. (“Nationwide”) subsidiary, P&F operated in two primary lines of business or segments: (i) tools and other products (“Tools”) and (ii) hardware and accessories (“Hardware”). As a result of the sale of Nationwide, the Company currently only operates in the Tools segment. See Notes 2 and 8 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 currently operates through its wholly-owned subsidiaries, Florida Pneumatic Manufacturing Corporation (“Florida Pneumatic”) and Hy-Tech Machine, Inc. (“Hy-Tech”). During the third quarter of 2014, the Company acquired Exhaust Technologies Inc. (“ETI”) and Universal Air Tool Company Limited (“UAT”). Both ETI and UAT, which were acquired by us in 2014, are wholly-owned subsidiaries of Florida Pneumatic, and unless otherwise indicated, the operations and results of operations of Florida Pneumatic herein include ETI and UAT as of the respective dates such companies were acquired. Additionally, during the third quarter of 2014, the Company acquired substantially all of the assetsPneumatic. The business of Air Tool Service Company (“ATSCO”), which businesswas also acquired in 2014, operates through a wholly-owned subsidiary of Hy-Tech. Unless otherwise indicated, the results of operations of Hy-Tech herein include ATSCO from the date the business was acquired.
Florida Pneumatic is engaged in the importation and sale of pneumatic hand tools, primarily for the retail, industrial and automotive markets, and the importation and sale of compressor air filters. Florida Pneumatic also markets, through its Berkley Tool division (“Berkley”), a product line which includes pipe and bolt dies, pipe taps, wrenches, vises and stands, pipe and tubing cutting equipment, hydrostatic test pumps, and replacement electrical components for a widely-used brand of pipe cutting and threading machines.
Hy-Tech manufactures and distributes its own line of industrial pneumatic tools. Hy-Tech also produces and markets impact wrenches, grinders, drills, and motors. Further, it also manufactures tools to customer specifications. Its customers include refineries, chemical plants, power generation facilities, heavy construction enterprises, oil and gas and mining companies. In addition, Hy-Tech manufactures an extensive line of pneumatic tool replacement parts that are sold to original equipment manufacturers (“OEMs”). It also manufactures and distributes high pressure stoppers for hydrostatic testing fabricated pipe, gears, sprockets, splines and racks and produces a line of siphons.
Hardware
TheUntil the sale of Nationwide, which was effective February 11, 2016, the Company conductsconducted its Hardware business through aits wholly-owned subsidiary, Countrywide Hardware, Inc. (“Countrywide”). Countrywide conductsconducted its business operations through its wholly-owned subsidiary, Nationwide. Nationwide Industries, Inc. (“Nationwide”). Nationwide iswas 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. Nationwide’s products areOn February 11, 2016, Countrywide sold through in-house sales personnelNationwide to a private investment organization for approximately $22.2 million. See Notes 2 and manufacturers’ representatives8 to distributors, retailers and OEM customers. End users of Nationwide’s products include contractors, home builders, pool and patio distributors, OEM/private label customers and general consumers. Consolidated Financial Statements for further discussion.
Overview16
During the third quarter of 2015, our results of operations were impacted by a number of factors, some of which were:
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. Our Tools segment focuses on a wide array of customer types including, but not limited to large retailers, aerospace, large and small resellers of pneumatic tools and parts; and automotive related customers. The Tools segment tends to track the general economic conditions of the United States, industrial production and general retail sales. The key economic measures for our Hardware group are housing starts and remodeling spending activity.
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 USDs. However, if the Chinese currency, (“RMB”), were to be revalued against the USD, there could be a significant negative impact on the cost of our products. As the result of the UAT acquisition, we closely monitor the fluctuation in the Great British Pound (“GBP”) to the USD, and the GBP to TWD, both of which can have an impact on the consolidated results. In addition, we monitor the number of operating rotary drilling rigs in the United States, as a means of gauging oil production, which is a key factor in our sales into the oil and gas exploration and extraction sector.
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 operating segmentsoperations 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 relevantrelevant; they are discussed in the detailed sections below for each operating segment.below.
Financial Measures
Key financial measures we use to evaluate the results of our business include: various revenue metrics; gross margin; selling, general and administrative expenses; earnings before interest and taxes; 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 established objectives. To the extent that these measures are relevant, they are discussed in the detailed sections below for each operating segment.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Descriptions of these policies are discussed in the 20142015 Form 10-K. Certain of these accounting policies require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities, revenues and expenses. On an ongoing basis, we evaluate estimates, including, but not limited to those related to bad debts, inventory reserves, goodwill and intangible assets, warranty reserves and taxes and deferred taxes. We base our estimates on historical data and experience, when available, and on various other assumptions that are believed to be reasonable under the circumstances, the combined results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. As future events and their effects cannot be determined with precision, actual results could differ significantly from those estimates and assumptions. Significant changes, if any, in those estimates resulting from continuing changes in the economic environment will be reflected in the consolidated financial statements in future periods.
ThereOther than the new critical accounting policy discussed in Note 2 to our Consolidated Financial Statements, there have been no material changes in our critical accounting policies and estimates from those discussed in Item 7 of our 20142015 Form 10-K.
17
Overview
During the first quarter of 2016, our results of operations were impacted by:
● | the sale of Nationwide effective February 11, 2016, for approximately $22.2 million; |
● | the on-going downturn in oil and gas exploration and extraction continues to negatively impact Hy-Tech’s and, to a lesser degree, Florida Pneumatic’s results, and |
● | the decision by a major customer of Hy-Tech to begin to manufacture internally certain air tools that were formerly manufactured by Hy-tech contributed to the reduction in Hy-Tech’s total revenue. |
RESULTS OF OPERATIONS
Continuing operations
Unless otherwise discussed elsewhere in the Management’s Discussion and Analysis, (“MD&A”) section, we believe that our relationships with our key customers and suppliers, given current economic conditions, remain satisfactory. ForThe on-going weakness in the global oil and gas exploration and extraction markets continues to hamper both Hy-Tech and to a lesser degree, Florida Pneumatic.
We sold Nationwide to an unrelated third party for approximately $22.2 million. As a result of this transaction, Nationwide’s results are reported under discontinued operations for the three-month periods ended March 31, 2016, and 2015, we have elected notand are therefore excluded from continuing operations for all periods presented. Please see Note 2 Discontinued Operations, to sell certain promotional-type products to Sears, which we did sell to Sears during 2014. Revenue from Sears is included in Florida Pneumatic’s Retail category. This decision will result in a reduction of approximately $3 million of Sears’ revenue during 2015. our Consolidated Financial Statements for additional information.
Other than the aforementioned,discussed in the Management’s Discussion and Analysis, there were no major trends or uncertainties that had, or we could reasonably expect could have, a material impact on our revenue. Further, other than the three acquisitions that occurred during the third quarter of 2014, thereThere was no unusual or infrequent event, transaction or any significant economic change that materially affected our results of operations. However, we believe that the on-going slowdown in the global oil and gas extraction and exploration sector continues to negatively impact our results for the three and nine-month periods ended September 30, 2015.
The table below provides an analysis of our net revenue from continuing operations for the three and nine-monththree-month periods ended September 30, 2015March 31, 2016 and 2014:2015:
Three months ended March 31, | ||||||||||||||||
Increase (decrease) | ||||||||||||||||
2016 | 2015 | $ | % | |||||||||||||
Tools | ||||||||||||||||
Florida Pneumatic | $ | 10,830,000 | $ | 10,254,000 | $ | 576,000 | 5.6 | % | ||||||||
Hy-Tech | 3,669,000 | 4,305,000 | (636,000 | ) | (14.8 | ) | ||||||||||
Consolidated | $ | 14,499,000 | $ | 14,559,000 | $ | (60,000 | ) | (0.4 | )% |
Revenue
Three months ended September 30, | ||||||||||||||||
Increase (decrease) | ||||||||||||||||
2015 | 2014 | $ | % | |||||||||||||
Tools | ||||||||||||||||
Florida Pneumatic | $ | 11,729,000 | $ | 13,973,000 | $ | (2,244,000 | ) | (16.1 | )% | |||||||
Hy-Tech | 4,195,000 | 3,892,000 | 303,000 | 7.8 | ||||||||||||
Tools Total | 15,924,000 | 17,865,000 | (1,941,000 | ) | (10.9 | ) | ||||||||||
Hardware | ||||||||||||||||
Hardware Total | 5,754,000 | 5,067,000 | 687,000 | 13.6 | ||||||||||||
Consolidated | $ | 21,678,000 | $ | 22,932,000 | $ | (1,254,000 | ) | (5.5 | )% |
Nine months ended September 30, | ||||||||||||||||
Increase (decrease) | ||||||||||||||||
2015 | 2014 | $ | % | |||||||||||||
Tools | ||||||||||||||||
Florida Pneumatic | $ | 33,986,000 | $ | 30,335,000 | $ | 3,651,000 | 12.0 | % | ||||||||
Hy-Tech | 12,555,000 | 11,414,000 | 1,141,000 | 10.0 | ||||||||||||
Tools Total | 46,541,000 | 41,749,000 | 4,792,000 | 11.5 | ||||||||||||
Hardware | ||||||||||||||||
Hardware Total | 17,523,000 | 15,383,000 | 2,140,000 | 13.9 | ||||||||||||
Consolidated | $ | 64,064,000 | $ | 57,132,000 | $ | 6,932,000 | 12.1 | % |
ToolsFlorida Pneumatic
Florida Pneumatic markets its air tool products to three primary sectors within the pneumatic tool market; retail, Industrial/industrial/catalog and the automotive market. It also generates revenue from its Berkley products line as well as a line of air filters and other OEM parts (“Other”).
Three months ended September 30, | ||||||||||||||||||||||||
2015 | 2014 | Increase (decrease) | ||||||||||||||||||||||
Revenue | Percent of revenue | Revenue | Percent of revenue | $ | % | |||||||||||||||||||
Retail customers | $ | 7,035,000 | 60.0 | % | $ | 9,339,000 | 66.8 | % | $ | (2,304,000 | ) | (24.7 | )% | |||||||||||
Automotive | 2,982,000 | 25.4 | 2,652,000 | 19.0 | 330,000 | 12.4 | ||||||||||||||||||
Industrial/catalog | 1,412,000 | 12.0 | 1,591,000 | 11.4 | (179,000 | ) | (11.3 | ) | ||||||||||||||||
Other | 300,000 | 2.6 | 391,000 | 2.8 | (91,000 | ) | (23.3 | ) | ||||||||||||||||
Total | $ | 11,729,000 | 100.0 | % | $ | 13,973,000 | 100.0 | % | $ | (2,244,000 | ) | (16.1 | )% |
Three months ended March 31, | ||||||||||||||||||||||||
2016 | 2015 | Increase (decrease) | ||||||||||||||||||||||
Revenue | Percent of revenue | Revenue | Percent of revenue | $ | % | |||||||||||||||||||
Retail customers | $ | 5,549,000 | 51.2 | % | $ | 5,278,000 | 51.5 | % | $ | 271,000 | 5.1 | % | ||||||||||||
Automotive | 3,721,000 | 34.4 | 3,095,000 | 30.2 | 626,000 | 20.2 | ||||||||||||||||||
Industrial/catalog | 1,357,000 | 12.5 | 1,581,000 | 15.4 | (224,000 | ) | (14.2 | ) | ||||||||||||||||
Other | 203,000 | 1.9 | 300,000 | 2.9 | (97,000 | ) | (32.3 | ) | ||||||||||||||||
Total | $ | 10,830,000 | 100.0 | % | $ | 10,254,000 | 100.0 | % | $ | 576,000 | 5.6 | % |
Nine months ended September 30, | ||||||||||||||||||||||||
2015 | 2014 | Increase (decrease) | ||||||||||||||||||||||
Percent of | Percent of | |||||||||||||||||||||||
Revenue | revenue | Revenue | revenue | $ | % | |||||||||||||||||||
Retail customers | $ | 19,352,000 | 56.9 | % | $ | 21,277,000 | 70.1 | % | $ | (1,925,000 | ) | (9.0 | )% | |||||||||||
Automotive | 9,122,000 | 26.8 | 3,262,000 | 10.8 | 5,860,000 | 179.6 | ||||||||||||||||||
Industrial/catalog | 4,679,000 | 13.8 | 4,679,000 | 15.4 | --- | --- | ||||||||||||||||||
Other | 833,000 | 2.5 | 1,117,000 | 3.7 | (284,000 | ) | (25.4 | ) | ||||||||||||||||
Total | $ | 33,986,000 | 100.0 | % | $ | 30,335,000 | 100.0 | % | $ | 3,651,000 | 12.0 | % |
As noted earlier in this MD&A, we elected notThe most significant factor contributing to sell certain promotional-type products to Sears, which we did sell to Sears during 2014. This decision was a primary factorFlorida Pneumatic’s total revenue growth in the reductionfirst quarter 2016, compared to the first quarter of 2015, is the incremental automotive revenue generated by the AIRCAT and NITROCAT pneumatic tools lines, being slightly offset by a modest decline in ourUAT revenue, which is included in the automotive sector. This growth is primarily attributable to new product releases and expanded marketing efforts. Florida Pneumatic intends to release additional new products into the automotive market during the remainder of 2016. A portion of UAT’s revenue is derived from the sale of pneumatic air tools to customers that are located and operate in the North Sea region of Scotland, and whose businesses are in the oil and gas sector. As a result of the ongoing weakness in the global oil and gas exploration sector in the geographic area that UAT currently services, revenue from this particular portion of UAT’s customer base declined, when comparing the three-month periods ended March 31, 2016 and 2015. We are currently developing a marketing strategy that is intended to enable UAT to expand its presence into other Western European countries; however no specific timetable has been established for this expansion. With respect to Florida Pneumatic’s Retail revenue. Additionally, certain promotional-typerevenue, during the first quarter of 2016, there wasan increase over the same period in 2015, due primarily to higher sales to The Home Depot, that occurred duringas well as the third quarteraddition of 2014 did not occur during the third quarter of 2015. These reductions wereThe Home Depot Canada. This improvement was partially offset by increasesa decline inSearsrevenue.We continue to encounter weakness in higher margin base products. As a result ofthe Industrial/catalog market, with the ETI acquisition, Florida Pneumatic now markets the AIRCAT and NITROCAT line of pneumatic air tools, which are primarily targeteddecline thisquarter compared to the automotive markets. UAT, located in the United Kingdom, currently enables Florida Pneumatic the opportunity to expand its automotive air tools product line into Europe. Currently, UAT continues to focus its sales efforts primarily in the United Kingdom and Ireland. Florida Pneumatic intends to expand UAT to other European countries; however, at this time no timetable has been established. Both ETI and UAT have been absorbed into Florida Pneumatic’s overall operations.The Industrial/catalog market remains sluggish,same period a year ago, occurring most notably in theaerospaceand oil and gas exploration/production channels. We believethisweakness maycontinue.A special order that shipped during the first quarter of 2015 and not recurring during the first quarter of 2016 also contributed to lower Industrial/catalog revenue. Florida Pneumatic’s first quarter of 2016 Other revenue declined when compared to thesameperiod in 2014,2015, primarily due to itsdecision to place greateremphasison expanding its othermajor product lines.
When comparing the nine-month periods ended September 30, 2015 and 2014, the most significant factor contributing to Florida Pneumatic’s overall revenue increase is the result of its two acquisitions made during the third quarter of 2014. As discussed previously, both ETI and UAT focus their marketing efforts to the automotive sector. As a result, Florida Pneumatic’s Automotive revenue improved by more than $5.8 million, when comparing the nine-month periods ended September 30, 2015 and 2014. The decline in Florida Pneumatic’s nine-month Retail revenue is due primarily to its decision in 2015 to not sell certain promotional-type products to Sears. It should be noted that during the nine-month period ended September 30, 2015, sales to its Retail customers of primary or basic stock pneumatic tools and accessories has increased when compared to the same period a year ago, which partially offset the decline in Retail revenue.Hy-Tech
Hy-Tech focuses primarily on the industrial sector of the pneumatic tools market. Hy-Tech manufactures and markets its own value-added line of air tools and parts, including the ATSCO products,product line, as well as distributes a complementary line of sockets, which in the aggregate are referred to as (“ATP”). Hy-Tech MachineThe classification of “Other” below includes special products (“Hy-Tech Machine”)that are primarily marketed to the mining, construction and industrial manufacturing sectors.sectors, as well as gears, sprockets, splines, and hydraulic stoppers.
Three months ended March 31, | ||||||||||||||||||||||||
2016 | 2015 | Decrease | ||||||||||||||||||||||
Revenue | Percent of revenue | Revenue | Percent of revenue | $ | % | |||||||||||||||||||
ATP | $ | 3,406,000 | 92.8 | % | $ | 3,571,000 | 83.0 | % | $ | (165,000 | ) | (4.6 | )% | |||||||||||
Other | 263,000 | 7.2 | 734,000 | 17.0 | (471,000 | ) | (64.2 | ) | ||||||||||||||||
Total | $ | 3,669,000 | 100.0 | % | $ | 4,305,000 | 100.0 | % | $ | (636,000 | ) | (14.8 | )% |
An analysis of Hy-Tech’s
ATP revenue for the three and nine-month periods ended September 30, 2015 and 2014 is as follows:
Three months ended September 30, | ||||||||||||||||||||||||
2015 | 2014 | Increase (decrease) | ||||||||||||||||||||||
Revenue | Percent of revenue | Revenue | Percent of revenue | $ | % | |||||||||||||||||||
ATP | $ | 3,248,000 | 77.4 | % | $ | 2,967,000 | 76.2 | % | $ | 281,000 | 9.5 | % | ||||||||||||
Hy-Tech Machine | 524,000 | 12.5 | 392,000 | 10.1 | 132,000 | 33.7 | ||||||||||||||||||
Major customer | 303,000 | 7.2 | 453,000 | 11.6 | (150,000 | ) | (33.1 | ) | ||||||||||||||||
Other | 120,000 | 2.9 | 80,000 | 2.1 | 40,000 | 50.0 | ||||||||||||||||||
Total | $ | 4,195,000 | 100.0 | % | $ | 3,892,000 | 100.0 | % | $ | 303,000 | 7.8 | % |
Nine months ended September 30, | ||||||||||||||||||||||||
2015 | 2014 | Increase (decrease) | ||||||||||||||||||||||
Percent of | Percent of | |||||||||||||||||||||||
Revenue | revenue | Revenue | revenue | $ | % | |||||||||||||||||||
ATP | $ | 9,290,000 | 74.0 | % | $ | 8,131,000 | 71.2 | % | $ | 1,159,000 | 14.3 | % | ||||||||||||
Hy-Tech Machine | 1,576,000 | 12.5 | 1,128,000 | 9.9 | 448,000 | 39.7 | ||||||||||||||||||
Major customer | 1,391,000 | 11.1 | 1,941,000 | 17.0 | (550,000 | ) | (28.3 | ) | ||||||||||||||||
Other | 298,000 | 2.4 | 214,000 | 1.9 | 84,000 | 39.3 | ||||||||||||||||||
Total | $ | 12,555,000 | 100.0 | % | $ | 11,414,000 | 100.0 | % | $ | 1,141,000 | 10.0 | % |
The increase in Hy-Tech’s ATP thirdfirst quarter of 2015 revenue was driven by the new product line attained through the ATSCO acquisition, which occurred mid-third quarter of 2014. Despite the increase, Hy-Tech’s ATP business in particular, continues to be negatively impacted by the sluggish trends in the oil and gas industry world-wide. According to the October 2015 Compressed Air & Gas Institute report, new orders for mining machinery in the United Sates, during the twelve-month period ended August 31, 2015, are down more than 34%2016 declined compared to the same twelve-month period ended August 31, 2014. Further, accordingin 2015 primarily due to this report, the United States rotary rig count average, which is one ofon-going weakness in the measures of exploration and extraction activities, was, for the month of September 2015, 56.1% below the number for September 2014. We believe the reduced level of oil and gas exploration and extraction market, which has resulted in, among other things,caused a decline in the sale of drilling motors and relatedsuch things as demand for pneumatic tools, spare/replacement parts and sockets. With respectdrilling motors. Evidencing the deep decline is, according to information published by Baker Hughes Incorporated, the average U.S. rig count for March 2016 was 478, down 54 from the 532 counted in February 2016, and down 632 from the 1,110 counted in March 2015. Further, the worldwide rig count for March 2016 was 1,551, down 1,006 from the 2,557 counted in March 2015. Additionally, we believe one of Hy-Tech’s Major customer, orders continuemajor customers in the past has decided to be erraticsource certain impact wrenches and unpredictable. We believeother products formerly purchased from Hy-Tech internally, which has contributed to the above-mentioned market factors also negatively impact sales to this Major customer. decline. Partially offsetting the revenue decline was an increase in the shipments of ATSCO products.Further, we alsowe believe that should the reduction in orders from this customeroil and gas sector remain at or near current levels of exploration and extraction,it is due tolikely that future periods may reflect a decline in its international market. Additionally, we believe this Major customer may be exploring overseas sources for certain products we currently provide them. Hy-Tech’s Other revenue category, which focuses on specialty products manufactured for the mining, construction and industrial markets, improved primarily due to an increase in products shipped to power generation customers.
Hy-Tech’s ATP revenue for the nine-month period ended September 30, 2015 improved when compared to the same period in 2014. The growth in ATP revenue attributable to ATSCO product sales were partially offset by declines in revenue of sockets and drilling motors and parts, as well as a net decline in non-ATSCO tools and parts revenue. As stated above we believe, among other factors, that the reduction in oil and gas exploration and extraction has throughout 2015 to date, negatively impacted Hy-Tech’s overall revenue, most notably its ATP product line. Until such time when major exploration and related activity levels return to recent historic levels, it is difficult to predict when this sector of the ATP category will improve. As such,prior year. Hy-Tech will continue to pursueexplore alternate markets and customers with added focus onapplications of its ATSCO products releases. In line with the aforementioned,air tools and motors, as well as to utilize and emphasize its Hy-Tech Machine’s 2015 nine-month revenue improved nearly 40%, when compared to the same nine-month period a year ago. Lastly, revenue from Hy-Tech’s Major customer during the nine-month period ended September 30, 2015 declined when compared to the same period in 2014. As previously stated, we believe that thismanufacturing expertise. The decline in orders from this customer is due toHy-Tech’s Other revenue was driven primarily by two factors: (i) a slow-down$240,000 order that shipped in its international market, which services similar sectors, such as oil and gas exploration. If the current sales trend continues, it is likely this customer, in future reporting periods, may no longer merit specific discussion in our MD&A.
Hardware
Our Hardware segment, which currently consists of only Nationwide, generates revenue from the sale of Fence and gate hardware, OEM products and Patio hardware.
Three months ended September 30, | ||||||||||||||||||||||||
2015 | 2014 | Increase (decrease) | ||||||||||||||||||||||
Revenue | Percent of revenue | Revenue | Percent of revenue | $ | % | |||||||||||||||||||
Fence and gate hardware | $ | 4,686,000 | 81.5 | % | $ | 4,199,000 | 82.9 | % | $ | 487,000 | 11.6 | % | ||||||||||||
OEM | 617,000 | 10.7 | 467,000 | 9.2 | 150,000 | 32.1 | ||||||||||||||||||
Patio | 451,000 | 7.8 | 401,000 | 7.9 | 50,000 | 12.5 | ||||||||||||||||||
Total | $ | 5,754,000 | 100.0 | % | $ | 5,067,000 | 100.0 | % | $ | 687,000 | 13.6 | % |
Nine months ended September 30, | ||||||||||||||||||||||||
2015 | 2014 | Increase (decrease) | ||||||||||||||||||||||
Percent of | Percent of | |||||||||||||||||||||||
Revenue | revenue | Revenue | revenue | $ | % | |||||||||||||||||||
Fence and gate hardware | $ | 14,331,000 | 81.8 | % | $ | 12,785,000 | 83.1 | % | $ | 1,546,000 | 12.1 | % | ||||||||||||
OEM | 1,826,000 | 10.4 | 1,339,000 | 8.7 | 487,000 | 36.4 | ||||||||||||||||||
Patio | 1,366,000 | 7.8 | 1,259,000 | 8.2 | 107,000 | 8.5 | ||||||||||||||||||
Total | $ | 17,523,000 | 100.0 | % | $ | 15,383,000 | 100.0 | % | $ | 2,140,000 | 13.9 | % |
Fence and gate hardware continues to be Nationwide’s primary product line, accounting for 81.5% of its thirdfirst quarter of 2015, revenue. Key drivers that impact Nationwide’s revenue are: (i) housing startsnot recurring in the first quarter of 2016, and (ii) renovationweakness this quarter in specialty manufacturing for the mining, mine safety and remodeling. Both these drivers continue to improve in 2015, compared to 2014. As a result, Nationwide intends to continue its growth strategy in its Fence and gate hardware sector which is to focus on developing new, innovative fence and gate hardware products and related product accessories. In addition, Nationwide intends to continue its marketing efforts outside the United States. This strategy could however, in future periods, impact the performance of Nationwide’s other product lines. The increase in Nationwide’s OEM products revenue is driven primarily by the addition of a new, lower margin customer that purchases pneumatic storm door closure kits. We expect the buying pattern of this new OEM customer to be sporadic throughout the year. The increase in Patio revenue is due primarily to increased activity in the sale of foreclosed home units occurring principally in Florida.
Nationwide believes its increase in total revenue during the nine-month period ended September 30, 2015, compared to the same period in 2014, is due primarily to an increase in both the number of housing starts and consumer spending in the remodeling and renovation sectors during the respective nine-month periods. As Fence and gate hardware remains the primary product line marketed by Nationwide, its current business strategy is to focus on the development and marketing of its Fence and gate hardware business. The 36.4% increase in its OEM product line revenue is primarily due to Nationwide obtaining a new, low margin customer that purchases pneumatic storm door closing kits. Its year to date 2015 Patio revenue continues to be driven by new home construction, renovation and the foreclosure market, primarily in Florida.
railroad markets.
Gross Margins / Profits
Three months ended September 30, | Increase (decrease) | ||||||||||||||||||||
2015 | 2014 | Amount | % | ||||||||||||||||||
Florida Pneumatic | $ | 4,007,000 | $ | 4,428,000 | $ | (421,000) | (9.5)% | ||||||||||||||
As percent of respective revenue | 34.2 | % | 31.7 | % | 2.5% pts | ||||||||||||||||
Hy-Tech | 1,623,000 | 1,543,000 | 80,000 | 5.2 | |||||||||||||||||
As percent of respective revenue | 38.7 | % | 39.6 | % | (0.9)% pts | ||||||||||||||||
Total Tools | 5,630,000 | 5,971,000 | (341,000) | (5.7) | |||||||||||||||||
As percent of respective revenue | 35.4 | % | 33.4 | % | 2.0% pts | ||||||||||||||||
Total Hardware | 2,235,000 | 2,057,000 | 178,000 | 8.7 | |||||||||||||||||
As percent of respective revenue | 38.8 | % | 40.6 | % | (1.8)% pts | ||||||||||||||||
Consolidated | $ | 7,865,000 | $ | 8,028,000 | $ | (163,000) | (2.0)% | ||||||||||||||
As percent of respective revenue | 36.3 | % | 35.0 | % | 1.3% pts |
Nine months ended September 30, | Increase (decrease) | ||||||||||||||||||||
2015 | 2014 | Amount | % | ||||||||||||||||||
Florida Pneumatic | $ | 12,059,000 | $ | 9,990,000 | $ | 2,069,000 | 20.7% | ||||||||||||||
As percent of respective revenue | 35.5 | % | 32.9 | % | 2.6% pts | ||||||||||||||||
Hy-Tech | 4,902,000 | 4,574,000 | 328,000 | 7.2 | |||||||||||||||||
As percent of respective revenue | 39.0 | % | 40.1 | % | (1.1)% pts | ||||||||||||||||
Total Tools | 16,961,000 | 14,564,000 | 2,397,000 | 16.5 | |||||||||||||||||
As percent of respective revenue | 36.4 | % | 34.9 | % | 1.5% pts | ||||||||||||||||
Total Hardware | 6,842,000 | 6,102,000 | 740,000 | 12.1 | |||||||||||||||||
As percent of respective revenue | 39.0 | % | 39.7 | % | (0.7)% pts | ||||||||||||||||
Consolidated | $ | 23,803,000 | $ | 20,666,000 | $ | 3,137,000 | 15.2% | ||||||||||||||
As percent of respective revenue | 37.2 | % | 36.2 | % | 1.0% pts |
Tools
Three months ended March 31, | Increase (decrease) | |||||||||||||||
2016 | 2015 | Amount | % | |||||||||||||
Florida Pneumatic | $ | 4,124,000 | $ | 3,825,000 | $ | 299,000 | 7.8 | |||||||||
As percent of respective revenue | 38.1 | % | 37.3 | % | 0.8 | % pts. | ||||||||||
Hy-Tech | $ | 1,092,000 | $ | 1,674,000 | $ | (582,000 | ) | (34.8 | ) | |||||||
As percent of respective revenue | 29.8 | % | 38.9 | % | (9.1 ) | % pts. | ||||||||||
Total | $ | 5,216,000 | $ | 5,499,000 | $ | (283,000 | ) | (5.1 | ) | |||||||
As percent of respective revenue | 36.0 | % | 37.8 | % | (1.8 ) | % pts. |
Florida Pneumatic’s expanded automotive product line, which now includes the AIRCAT and NITROCAT suite of pneumatic power tools, plus slightly higher gross margins generated at its overseas UAT subsidiary are the significant factors contributing to Florida Pneumatic’s thirdfirst quarter of 20152016 gross margin improvement over the same period a year ago. However, its Retailago was driven primarily by product mix, specifically aided by an increase in revenue of the stronger gross margin forautomotive products line. Additionally, during the thirdfirst quarter of 20152016, the foreign exchange rate of the U.S. dollar to the Taiwan Dollar was more favorable than during the first quarter of 2015.
Hy-Tech’s gross margin this quarter, compared to the same period in 2014 declined slightly,2015 is lower due primarily to product mix. Further, due to a lower margin special order, our Industrial/catalog gross margin during the third quarter of 2015 was down from the same period in the prior year. Hy-Tech’s gross margin this quarter is the same as in the third quarter last year. We continue the process of incorporating the ATSCO suite of products into Hy-Tech’s Cranberry, PA manufacturing facility; however, it is difficult to predict exactly when the entire suite can be produced. During this process we anticipate gross margins should improve as Hy-Tech’s overhead absorption, should increase.
Florida Pneumatic’s gross margin during the nine-month period ended September 30, 2015 improved 2.6 percentage points over the same periodwhich in the prior yearturn is due primarily to lower manufacturing activity levels. This has resulted primarily from the additional $5.8 millionon-going down-turn in the oil and gas exploration and extraction sector, which is the key market for Hy-Tech’s products. In addition, product mix had an adverse effect on Hy-Tech’s gross margins. Most notably, there was a reduction in sales of Automotive sales, which generate slightlyits higher gross margins than Florida Pneumatic’s historical average. However, this improvement was somewhat offset by slight gross margin declines from its RetailATP parts and Industrial/catalog product lines, due primarily to product and or customer mix. Hy-Tech’s gross margin during the first nine months of 2015, compared to the same period a year ago, is down slightly, due in large part to the non-productive labor used to close and relocate ATSCO’s manufacturing equipment and inventory from Mentor, Ohio into Hy-Tech’s existing facility in Cranberry, PA during the first quarter of 2015. However, as the manufacturing of the acquired ATSCO product line becomes more efficient, we anticipate that gross margins will improve.
Hardware
Competitive pricing pressure in its Fence and gate hardware, and Patio product lines,tools, as well as a servicing a new, low margin OEM customer, resulted in a decline in Nationwide’s third quarter 2015 gross margin, compared to the third quarter of 2014. Fence and gate hardware generate the highest gross margins, followed by OEM, then Patio. As Nationwide has decided to service the lower margin OEM customer, its OEM gross margins will be lessdrilling motors, when compared to the same period in prior years, which in turn could negatively affect its overall gross margin.
Significant factors contributing to Nationwide’s slight decline (0.7 percentage points) in its year to date 2015 gross margins, compared to2015. Additionally, during the same period in the prior year are new, lowerfirst quarter of 2016, Hy-Tech manufactured and sold very low gross margin OEM revenue and increased competitive pricing pressure. However, introductionproducts to a key ATSCO customer. We are investigating alternate manufacturing methods in an attempt to improve our costs of new products have partially mitigated this pressure. Nationwide intendsproduct line. A decision to continue its current strategy, whichto manufacture and market this line of products is to expand the development of new products for its Fence and gate hardware product line and to continue its growth into new or expanded locations.currently being evaluated.
Selling and general and administrative expenses
Selling, general and administrative expenses, (“SG&A”) include salaries and related costs, commissions, travel, administrative facilities, communications costs and promotional expenses for our direct sales and marketing staff, administrative and executive salaries and related benefits, legal, accounting and other professional fees as well as general corporate overhead and certain engineering expenses.
During the thirdfirst quarter of 2015,2016, our SG&A was $5,962,000$5,056,000 or 27.5%34.9% of revenue, compared to $6,438,000,$4,932,000, or 28.1%33.9% of revenue during the same three-month period in 2014.2015. Significant items contributing tocomponents of this change include the change in SG&A include:following: (i) with the three acquisitions occurring during the third quarter of 2014, our professional fees and transaction expenses are lower by $410,000; (ii) our incremental variable costs and expenses, which includesinclude such things as commissions, warranty costs, freight out and advertising/promotional fees, decreasedincreased by $172,000 during the third$145,000. This increase was due primarily to greater automotive revenue, which results in higher commission costs, and greater revenue from The Home Depot, which generally tend to increase both warranty and freight expenses; (ii) compensation, which is comprised of base salaries and wages, accrued performance-based bonus incentives, associated payroll taxes and employee benefits increased $52,000, and (iii) our professional fees and related expenses declined $69,000, this quarter, of 2015, compared to the same three-month period in 2015, partially offsetting the prior year; due primarily to lower revenue and (iii) depreciation and amortization increased by $75,000, when comparing the three-month periods ended September 30, 2015 and 2014, most of which is attributable to the three acquisitions completed during the third quarter of 2014.
During the nine-month period ended September 30, 2015 our SG&A was $18,510,000, or 28.9% of revenue, compared to $17,221,000, or 30.1% of revenue during the same period in 2014. Significant elements of this change are: (i) depreciation and amortization increased by $629,000, most of which being attributable to the three acquisitions occurring during the third quarter of 2014; (ii) incremental variable costs and expenses increased $292,000, due in large part to the added revenue in 2015; (iii) compensation expenses increased $558,000, due mostly to additional staffing resulting from the three acquisitions plus slightly higher, performance–based bonus incentives; (iv) bad debt expenses increased $148,000, due primarily to adjustments made during the second quarter of 2014, which lowered our 2014 bad debt expense, and (v) a decline in our professional fees and transaction expenses, in the aggregate of $457,000.
above factors.
Interest
Three months ended March 31, | Increase | |||||||||||||||
2016 | 2015 | Amount | % | |||||||||||||
Interest expense attributable to: | ||||||||||||||||
Short-term borrowings | $ | 3,000 | $ | — | $ | (3,000 | ) | NA | % | |||||||
Term loans, including Capital Expenditure Term Loans | 1,000 | — | (1,000 | ) | NA | |||||||||||
Amortization expense of debt financing costs | 98,000 | 29,000 | (69,000 | ) | (237.9 | ) | ||||||||||
Total | $ | 102,000 | $ | 29,000 | $ | (73,000 | ) | (251.7 | )% |
Our short-term and term loan interest expense during the third quarterincurred in 2015 of 2015 was $173,000, compared to $158,000$163,000, and for the same period January 1, 2016 through February 11, 2016 of $60,000, the effective date of sale of Nationwide (the “Closing Date”), are included in discontinued operations. The Amendment significantly reduced or eliminated certain term loans that were originally included in the prior year. Impacting our interestCredit Agreement. As a result, we wrote down the deferred financing costs associated with the repayment of those term loans. As such, $80,000 is included in amortization expense during the third quarter of 2015 was thedebt financing of the three acquisitions completed during the third quarter of 2014. Interest expense incurred on our Revolver borrowings during the third quarter of 2015 was $89,000, compared to $61,000 during the third quarter of 2014. The average balance of our Revolver borrowings during the third quarter of 2015 was $13,550,000, compared to $11,852,000 during the same three-month period in 2014. Interest expense on our Long-term borrowings was $55,000, compared to $72,000 during the same three-month period in 2014. Includedcosts in our interest expense for the three-month periodsperiod ended September 30, 2015March 31, 2016. See Notes 2 and 2014 is amortization expense of debt financing costs of $28,000 and $23,000, respectively. The applicable loan margins as defined in the Credit Agreement borrowings that are added8 to our LIBOR (London InterBank Offered Rate)Consolidated Financial Statements for further discussion on the sale of Nationwide and Base Rate borrowing also impactthe Amendment to our interest expense. (SeeCredit Agreement. See Liquidity and Capital Resources elsewhere in this Management’s Discussion and Analysis section for further discussion.)information regarding our bank loans.
Our interest expense during the nine-month period ended September 30, 2015 was $566,000, compared to $335,000 for the same period in the prior year. The most significant factor affecting interest expense was the financing of the three acquisitions completed during the third quarter of 2014. As a result, interest expense on our short term, or Revolver borrowings during the first nine months of 2015 was $291,000, compared to $78,000, recorded during the first nine months of 2014. Theactual average balance of short-term borrowings during the first three quarters of 2015three-month period ended March 31, 2016, was $14,807,000,$5,227,000, compared to $4,862,000$13,440,000 during the same period in 2014. Interest expense incurred during both nine-month periods ended September 30, 2015 and 2014 on our Long-term borrowings was $188,000. Lastly, included in the nine-month interest expense is amortization expense of debt financing costs of $83,000 in 2015 and $67,000 in 2014. An increase in the applicable loan margins that are added to both our LIBOR or Base Rate, may also impact our interest expense.
Other expense (income)
In connection with the UAT acquisition, there was the possibility that we could pay as additional consideration to the former shareholders of UAT (the “Sellers”) up to a maximum of £250,000 (“contingent consideration”), should UAT’s net earnings, during the period from date of acquisition, July 29, 2014 through the first anniversary date, July 29, 2015, after adjusting for among other things, interest, taxes, depreciation and amortization (“adjusted net income”) exceed a minimum threshold. At the time of the acquisition we believed, based on a range of possible outcomes that it was more likely than not that UAT would achieve the amount of adjusted net income that would entitle the Sellers to the maximum amount, and accordingly recorded a $425,000 obligation as contingent consideration (£250,000 at the then foreign exchange rate). Based upon projected results, at June 30, 2015, we adjusted the estimated contingent consideration payable to the Sellers to $224,000. Subsequently, we and the Sellers have agreed that the contingent consideration payable to the Sellers shall be £193,435, or approximately $299,000. As a result of finalizing the contingent consideration payable to the Sellers we recognized $75,000 as Other expense in the three-month period ended September 30,March 31, 2015. The $299,000 agreed upon amount was paid to the Sellers in October 2015.
Income Taxes
At the end of each interim reporting period, we estimate the Company estimates its effective tax rate expected to be applied for the full year. This estimate is used to determine the income tax provision or benefit applicable to continuing operations, on a year-to-date basis, and may change in subsequent interim periods. Our effective tax rates for the three and nine-months ended September 30, 2015 were 36.6% and 35.2%, respectively, compared to 43.0% and 40.5%, respectively, for the three and nine-month periods ended September 30, 2014. Expenses incurred in connection with the three acquisitions completed during the third quarter of 2014, were included in our selling and general and administrative expenses during the third quarter of 2014, however these expenses are not deductible for income tax purposes. As a result, our effective tax ratesrate applicable to continuing operations for the three months ended March 31, 2016 and nine-month periods ended September 30, 2014,2015 were higher than the statutory rate of 34.0%. Further, with regard to our 201539.4% and 36.6%, respectively. The Company’s effective tax rates the non-taxable income on a year to date basis related to the contingent consideration payment of approximately $126,000 is an additional factor for a lower effective tax rate for the nine-month period ended September 30, 2015, compared to the sameboth periods in 2014. Lastly,were affected primarily by state taxes and other non-deductible expenses.
Discontinued operations
Nationwide’s results of operations in our Consolidated Financial Statements and Note 2 presents their actual revenue and cost of goods sold for the period January 1, 2016 through the Closing Date. The SG&A of $483,000 includes that of Nationwide plus approximately $19,000 of expenses causeincurred at the corporate level that is specifically attributable to Nationwide. Nationwide’s pro-forma data for the three-month period ended March 31, 2015 represents their revenue and cost of goods sold. The SG&A for the three-month period ended March 31, 2015, includes all of Nationwide plus approximately $116,000 of corporate expenses directly attributable to Nationwide. In accordance with current accounting guidance, we have included as part of discontinued operations all interest expense incurred attributable to our effectiveBank borrowings during the three-month period ended March 31, 2015, and for the period January 1, 2016 through the Closing Date,
We recognized a gain of $12,185,000, on the sale of Nationwide during the three-month period ended March 31, 2016, which represents the difference between the adjusted net selling price and the carrying book value of Nationwide. However, for income tax rates to differ frompurposes, the U.S. federal statutoryCompany’s tax basis in Nationwide was greater than the net proceeds, thus resulting in a tax loss. At the applicable tax rate of 34.0%.34%, this loss has been recorded as a tax benefit of $141,000. This tax benefit may only be applied against future capital gain transactions. See Note 2 to our Consolidated Financial Statements for further discussion.
LIQUIDITY AND CAPITAL RESOURCES
Our cash flows from operations can be somewhat cyclical, typically with the greatest demand for cash typically in the first and third quarters followed by positive cash flows in the second and fourth quarter as receivables and inventories trend down.quarters. We monitor average dayssuch metrics as days’ sales outstanding, inventory requirements, inventory turns, estimated future purchasing requirements and capital expenditures to project liquidity needs, andas well as evaluate return on assets employed.assets. Our primary sources of funds are operating cash flows and our Revolver Loan (“Revolver”) with our Bank.
We gauge our liquidity and financial stability by various measurements, some of which are shown in the following table:
September 30, 2015 | December 31, 2014 | March 31, 2016 | December 31, 2015 | |||||||||||||
Working Capital | $ | 18,143,000 | $ | 13,927,000 | $ | 23,976,000 | $ | 21,023,000 | ||||||||
Current Ratio | 1.85 to 1 | 1.59 to 1 | 4.17 to 1 | 2.19 to 1 | ||||||||||||
Shareholders’ Equity | $ | 43,255,000 | $ | 39,991,000 | $ | 53,677,000 | $ | 43,642,000 |
21
Credit Facility
WeIn October 2010, we entered into a Loan and Security Agreement in October 2010, as amended (“Credit Agreement”) with COBC, as agent and lender. The Credit Agreement expires December 19, 2017 (the “Maturity Date”an affiliate of Capital One, National Association (“Capital One”, or the “Bank”). The Credit Agreement provides for Revolver borrowings under which are secured by the Company’s accounts receivable, mortgages on its real property located in Cranberry, PA, Jupiter, FL and Tampa, FL (“Real Property”), inventory and equipment. 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 will bear interest at either LIBOR (London(“London InterBank Offered Rate)Rate”) or the Base Rate, as the term is defined in the Credit Agreement, (“Base Rate”), plus the Applicable Margin, (the “Applicable Margin”), as defined in the Credit Agreement. The interest rate, either LIBOR or Base Rate, which is added to the Applicable Margin, is at the option of the Company, subject to limitations on the number of LIBOR borrowings.
OnIn August 13, 2014, we entered into an Amended and Restated Loan and Security Agreement, (the “Restated Loan Agreement”), with COBC.Capital One. The Restated Loan Agreement, among other things, amended the Credit Agreement by: (1) increasing the total amount of the credit facility from $29,423,000 to $33,657,000, (2) increasing the Revolver from $20,000,000 to $22,000,000, (3) creating a new $3,000,000 Term Loan, as defined in the Restated Loan Agreement (“Term Loan B”), and (4) re-designating as “Term Loan A”, the previously existing outstanding Term Loan, which relates primarily to the Company’s real property.
The balance of Revolver borrowings outstanding was $11,461,000 and $11,817,000, at September 30, 2015 and December 31, 2014, respectively. Applicable Margins added to Revolver borrowings at LIBOR andReal Property. In addition, the Base Rate at September 30, 2015 and December 31, 2014 were 2.25% and 1.25%, respectively. During the nine-month period ended September 30, 2015, the Applicable Margin rates for LIBOR borrowings and Base rate borrowings ranged from 2.25% to 2.50% and 1.25% and 1.50%, respectively, compared to 1.50% to 2.00% and 0.50% to 1.00%, respectively, for the same nine-month period in 2014.
The Restated Loan Agreement provided for a Term Loan B, pursuant to which we borrowed the maximum principal amount of $3,000,000, which funds were used in connectionalso reset certain financial covenants.
Contemporaneously with the ATSCO acquisition. This Termsale of Nationwide, as discussed in Note 2 to our Consolidated Financial Statements, we entered into the Consent and Second Amendment to the Restated Loan B wasAgreement (the “Amendment”) with Capital One. The Amendment, among other things; provided the Bank’s consent to be repaidthe transactions contained in 36 consecutive monthly paymentsthe Stock Purchase Agreement and the repurchase of $83,000, with an additional mandatory repayment each year equalcertain shares and options discussed in Note 2, and Note 4 to 50% of the Company’s Excess Cash FlowConsolidated Financial Statements, and amended the Restated Loan Agreement by: (a) reducing the aggregate Commitment (as defined in the Restated Loan Agreement) for such year, if any. As the result, of our determination of the Excess Cash Flow for the year ended December 31, 2014, in April 2015, we repaid $2,417,000, which was the balance ofto $11,600,000; (b) reducing the Term Loan BA to $100,000; (c) reducing the Revolver Commitment to $10,000,000 (less the new Term Loan A balance of $100,000); (d) reducing the Capex Loan Commitment to $1,600,000; (e) modifying certain financial covenants, (f) lowering interest rate margins and fee obligations; and (g) extending the expiration of the Credit Agreement to February 11, 2019. We believe that despite the reduction in the overall facility, our cash requirements to operate our business will be funded by operations and the Revolver. Further, we believe that should a need arise whereby the current credit facility is insufficient, we can borrow additional amounts against our Real Property, as well as secure additional funds.
The net funds provided by the sale of Nationwide of approximately $18.7 million were used to pay down the Revolver, the Cap-Ex loans and the Term Loan A; however, the Amendment provided for $100,000 to remain outstanding under the Term Loan A, rather than pay it off in full so that the Company and Capital One could facilitate potential increased future term loan borrowings more inexpensively and efficiently.
At March 31, 2016 and December 31, 2015, Revolver borrowings outstanding was $-0- and $9,623,000, respectively. Applicable LIBOR Margins added to Revolver borrowings at December 31, 2015 was 2.00%. The Applicable Base Rate Margin added to Revolver borrowings at March 31, 2016 and December 31, 2015 with funds available from our Revolver. In accordance with the terms set forth in the Restated Loan Agreement, funds cannot be re-borrowed from this Term Loan B.were 0.50% and 1.00%, respectively.
Additionally,We purchased vehicles for use by our UAT salesforce. The current portion of the balance due on these loans applicable to these purchased vehicles is $29,000 at March 31, 2016 and $31,000 at December 31, 2015.
In 2012 we borrowed $380,000 and $519,000, in March 2012 and September 2012, respectively, as loans primarily for machinery and equipment (“Capex Term Loans”). Currently, the maximum amount we can borrow as a Capex Term Loan is $2,123,000. As such, if necessary, we could borrow an additional $1,224,000, under the termsThe original repayment of the current credit facility. Repayment of thethese two Capex Term Loans iswas based on sixty-month amortization periods, resulting in repayments of approximately $6,000 and $9,000 per month, respectively. Applicable Margins added to these Capex Term Loans during the period January 1, 2016 through February 11, 2016 (date of sale of Nationwide) and at September 30, 2015 and December 31, 20142015 were 3.0% and 2.0%, respectively, for borrowings at LIBOR and the Base Rate. OnceRate, respectively. As noted earlier, these loans were repaid funds cannot be re-borrowed from this portion ofin their entirety on the Restated Loan Agreement.Closing Date
Cash flows
OurDuring the three-month period ended March 31, 2016, our net cash at September 30, 2015 was $1,682,000, compareddecreased $43,000 to $1,011,000$884,000 from $927,000 at December 31, 2014.2015. Our total bank debt at September 30, 2015March 31, 2016 was $18,019,000,$100,000, compared to $21,387,000$16,066,000 at December 31, 2014. During2015. As discussed earlier and in Note 2 and 8 to the third quarter of 2015 we were able to reduceconsolidated Financial Statements, our revolver borrowings approximately $3.5 million from the June 30, 2015 balance of $14,916,000, due primarily to positive cash flows. Additionally, during the nine-month period ended September 30, 2015, we made the final payment of $2,417,000reduction in settlementdebt is a result of the Term Loan B, which was discussed above. We lowered thesale of Nationwide operations. The total debt to total book capitalization (total debt divided by total debt plus equity); at March 31, 2016 was 0.2%, which was 29.5% at September 30, 2015, from 34.9%,compared to 26.9% at December 31, 2014. During2015.
Our Board of Directors announced that it approved the remainderinitiation of 2015, as we generatea 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. As all cash remitted to us by our customers is delivered to a Capital One Lockbox, the cash required for the payment of the special $0.50 per common share dividend and the aforementioned $0.05 quarterly dividend, both paid in April 2016, was from operations, barring unexpected events,Revolver borrowings.
We believe the net cash flows from our current operating units should provide cash to fund our consolidated cost structure for the next twelve months. As such, we believe that the loss of the cash flows generated by Nationwide will not materially affect our short-term borrowings should decline to amounts below December 31, 2014 levels.financial position.
Our capital spending from continuing operations was $1,144,000 during$242,000 for the nine-monththree-month period ended September 30, 2015,March 31, 2016, compared to $713,000$151,000 during the same period in the prior year. Capital expenditures for the balance of 20152016 are expected to be approximately $200,000,$800,000, some of which may be financed through our credit facilities or financed through independent third party financial institutions. The remaining 20152016 capital expenditures will primarily be for expansion of existing product lines and replacement of equipment.
Customer concentration
Within our Tools segment we have two retail customers that, in the aggregate account for 41.0% and 56.1% of our consolidated accounts receivable at September 30, 2015 and 2014. To date, these customers, with minor exceptions, are current in their payments. Further, these two customers in the aggregate, accounted for 32.5% and 30.2%, of our consolidated revenue for the three and nine-month periods ended September 30, 2015, compared to 40.7% and 37.2% during the same three and nine-month periods in 2014.
We believe that the loss of one or both of these customers would negatively impact our financial condition, but would not affect our ability to remain a going concern.
RECENT ACCOUNTING PRONOUNCEMENTS
Management does not believe that any other recently issued, but not yet effective accounting standards, if currently adopted would have a material effect on our consolidated financial statements.
Customer concentration
We have two customers that account for 12.7% and 36.3% at March 31, 2016, and 11.4% and 35.6% at December 31, 2015 of our consolidated accounts receivable. To date, these customers, with minor exceptions, are current in their payments. Further, these two customers in the aggregate, accounted for 38.3% of our consolidated revenue from continuing operations for the three-month period ended March 31, 2016, compared to 35.6% for the same three-month period in 2015.
We believe the loss of either of these customers would negatively impact our working capital, but would not affect our ability to remain a going concern.
Item 3. Quantitative And Qualitative Disclosures About Market Risk
Not required.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Company's management, with the participation of the Company's CEO and CFO, evaluated, as of September 30, 2015,March 31, 2016, 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 September 30, 2015,March 31, 2016, the Company’s management, including its CEO and CFO, concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level at that date.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting, identified in connection with the evaluation required by Exchange Act Rule 13a-15(d), that occurred during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
P&F INDUSTRIES, INC. | |
(Registrant) | |
/s/ JOSEPH A. MOLINO, Jr. | |
Joseph A. Molino, Jr. | |
Chief Financial Officer | |
Dated: | (Principal Financial and Chief Accounting Officer) |
The following exhibits are either included in this report or incorporated herein by reference as indicated below:
Exhibit
| Description of Exhibit | |
2.1 | Stock Purchase and Redemption Agreement, dated as of February 11, 2016, by and among Countrywide Hardware, Inc., Argosy NWI Holdings, LLC, the Company and Nationwide Industries, Inc. (Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated February 11, 2016) | |
10.1 | Purchase Agreement, dated as of February 11, 2016, by and between the Company and Christopher J. Kliefoth (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated February 11, 2016). | |
10.2 | Consent and Second Amendment to Amended and Restated Loan and Security Agreement, dated as of February 11, 2016, by and among the Company, Florida Pneumatic Manufacturing Corporation, Hy-Tech Machine, Inc., Nationwide Industries, Inc., ATSCO Holdings Corp, Continental Tool Group, Inc., Countrywide Hardware, Inc., Embassy Industries, Inc., Exhaust Technologies, Inc., Green Manufacturing, Inc., Pacific Stair Products, Inc., WILP Holdings, Inc., Woodmark International, L.P., and Capital One, National Association, as lender and agent (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated February 11, 2016) | |
10.3 | Lease, dated as of February 11, 2016, between Countrywide Hardware, Inc. and Nationwide Industries, Inc. (Incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K dated February 11, 2016) | |
10.4 | Option and Right of First Refusal Agreement, dated as of February 11, 2016, between Countrywide Hardware, Inc. and Nationwide Industries, Inc. (Incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K dated February 11, 2016) | |
10.5 | Third Amendment to Amended and Restated Loan and Security Agreement, dated as of March 31, 2016, by and among the Registrant, Florida Pneumatic Manufacturing Corporation, Hy-Tech Machine, Inc., Nationwide Industries, Inc., ATSCO Holdings Corp, Continental Tool Group, Inc., Countrywide Hardware, Inc., Embassy Industries, Inc., Exhaust Technologies, Inc., Green Manufacturing, Inc., Pacific Stair Products, Inc., WILP Holdings, Inc., Woodmark International, L.P., and Capital One, National Association, as lender and agent (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated March 31, 2016). | |
31.1 | Certification of Richard A. Horowitz, Principal Executive Officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Joseph A. Molino, Jr., Principal Financial Officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of Richard A. Horowitz, Principal Executive Officer of the Registrant, Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 . | |
32.2 | Certification of Joseph A. Molino, Jr., Principal Financial Officer of the Registrant, Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101 | * Interactive Data |
* Attached as Exhibit 101 are the following, each formatted in Extensible Business Reporting Language (“XBRL”): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income and Comprehensive Income; (iii) Consolidated Statement of Shareholders’ Equity; (iv) Consolidated Statements of Cash Flows; and (v) Notes to Consolidated Financial Statements.
A copy of any of the foregoing exhibits to this Quarterly Report on Form 10-Q may be obtained, upon payment of the Registrant’s reasonable expenses in furnishing such exhibit, by writing to P&F Industries, Inc., 445 Broadhollow Road, Suite 100, Melville New York 11747, Attention: Corporate Secretary.