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, 2017March 31, 2020
¨ | 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 |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Class A common stock, $1.00 par value | PFIN | NASDAQ |
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 Website, 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, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer¨ | Accelerated filer¨ | Non-accelerated filer | Smaller reporting company x |
Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for the complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨ Nox
As of November 7, 2017May 12, 2020, there were 3,603,8723,144,810 shares of the registrant’s Class A Common Stockcommon stock outstanding.
P&F INDUSTRIES, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017MARCH 31, 2020
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. | Financial Statements |
P&F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2017 | December 31, 2016 | March 31, 2020 | December 31, 2019 | |||||||||||||
(unaudited) | (See Note 1) | (unaudited) | (See Note 1) | |||||||||||||
ASSETS | ||||||||||||||||
CURRENT ASSETS | ||||||||||||||||
Cash | $ | 1,205,000 | $ | 3,699,000 | $ | 531,000 | $ | 380,000 | ||||||||
Accounts receivable — net | 10,994,000 | 7,906,000 | 8,554,000 | 9,313,000 | ||||||||||||
Inventories | 20,090,000 | 19,901,000 | 22,285,000 | 22,882,000 | ||||||||||||
Prepaid expenses and other current assets | 925,000 | 3,030,000 | 2,021,000 | 1,497,000 | ||||||||||||
TOTAL CURRENT ASSETS | 33,214,000 | 34,536,000 | 33,391,000 | 34,072,000 | ||||||||||||
PROPERTY AND EQUIPMENT | ||||||||||||||||
Land | 1,281,000 | 1,150,000 | 507,000 | 507,000 | ||||||||||||
Buildings and improvements | 6,136,000 | 5,209,000 | 3,489,000 | 3,303,000 | ||||||||||||
Machinery and equipment | 20,160,000 | 19,401,000 | 25,529,000 | 25,059,000 | ||||||||||||
27,577,000 | 25,760,000 | 29,525,000 | 28,869,000 | |||||||||||||
Less accumulated depreciation and amortization | 18,770,000 | 18,671,000 | 19,191,000 | 18,760,000 | ||||||||||||
NET PROPERTY AND EQUIPMENT | 8,807,000 | 7,089,000 | 10,334,000 | 10,109,000 | ||||||||||||
GOODWILL | 4,445,000 | 3,897,000 | 4,715,000 | 4,726,000 | ||||||||||||
OTHER INTANGIBLE ASSETS — net | 8,709,000 | 6,606,000 | 8,032,000 | 8,259,000 | ||||||||||||
DEFERRED INCOME TAXES — net | 1,643,000 | 1,793,000 | 269,000 | 216,000 | ||||||||||||
RIGHT-OF-USE ASSETS – OPERATING LEASES | 3,673,000 | 3,859,000 | ||||||||||||||
OTHER ASSETS — net | 120,000 | 130,000 | 431,000 | 502,000 | ||||||||||||
TOTAL ASSETS | $ | 56,938,000 | $ | 54,051,000 | $ | 60,845,000 | $ | 61,743,000 |
See accompanying notes to consolidated financial statements (unaudited).
P&F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2017 | December 31, 2016 | |||||||
(unaudited) | (See Note 1) | |||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Short-term borrowings | $ | 2,334,000 | $ | — | ||||
Accounts payable | 3,247,000 | 2,398,000 | ||||||
Accrued compensation and benefits | 1,694,000 | 1,733,000 | ||||||
Accrued other liabilities | 1,449,000 | 2,019,000 | ||||||
Current maturities of long-term debt | — | 13,000 | ||||||
TOTAL CURRENT LIABILITIES | 8,724,000 | 6,163,000 | ||||||
Long - term debt, less current maturities | 92,000 | 88,000 | ||||||
Other liabilities | 901,000 | 210,000 | ||||||
TOTAL LIABILITIES | 9,717,000 | 6,461,000 | ||||||
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 – 4,203,000 at September 30, 2017 and 4,181,000 at December 31, 2016 | 4,203,000 | 4,181,000 | ||||||
Class B - $1 par; authorized - 2,000,000 shares; no shares issued | — | — | ||||||
Additional paid-in capital | 12,996,000 | 12,906,000 | ||||||
Retained earnings | 35,481,000 | 36,061,000 | ||||||
Treasury stock, at cost – 596,000 shares at September 30, 2017 and 584,000 at December 31, 2016 | (4,910,000 | ) | (4,821,000 | ) | ||||
Accumulated other comprehensive loss | (549,000 | ) | (737,000 | ) | ||||
TOTAL SHAREHOLDERS’ EQUITY | 47,221,000 | 47,590,000 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 56,938,000 | $ | 54,051,000 |
See accompanying notes to consolidated financial statements (unaudited).
P&F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Three months | Nine months | |||||||||||||||
ended September 30, | ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net revenue | $ | 15,782,000 | $ | 14,633,000 | $ | 44,357,000 | $ | 44,769,000 | ||||||||
Cost of sales | 10,198,000 | 10,128,000 | 28,377,000 | 29,743,000 | ||||||||||||
Gross profit | 5,584,000 | 4,505,000 | 15,980,000 | 15,026,000 | ||||||||||||
Selling, general and administrative expenses | 5,352,000 | 4,915,000 | 15,765,000 | 15,088,000 | ||||||||||||
Impairment of goodwill and other intangible assets | — | — | — | 8,311,000 | ||||||||||||
Operating income (loss) | 232,000 | (410,000 | ) | 215,000 | (8,373,000 | ) | ||||||||||
Other expense (income), net | 11,000 | (43,000 | ) | (13,000 | ) | (75,000 | ) | |||||||||
Interest expense | 50,000 | 26,000 | 124,000 | 164,000 | ||||||||||||
Income (loss) from continuing operations before income taxes | 171,000 | (393,000 | ) | 104,000 | (8,462,000 | ) | ||||||||||
Income tax expense (benefit) | 166,000 | (107,000 | ) | 142,000 | (2,872,000 | ) | ||||||||||
Income (loss) from continuing operations | 5,000 | (286,000 | ) | (38,000 | ) | (5,590,000 | ) | |||||||||
Discontinued operations (Note 2) | ||||||||||||||||
Income from discontinued operations, net of tax of $-0- and $38,000 for the three and nine-month periods ended September 30, 2016, respectively. | — | — | — | 72,000 | ||||||||||||
Gain on sale of discontinued operations, net of tax benefit of $187,000 and $328,000 for the three and nine-month periods ended September 30, 2016, respectively. | — | 187,000 | — | 12,358,000 | ||||||||||||
Income from discontinued operations, net of tax | — | 187,000 | — | 12,430,000 | ||||||||||||
Net income (loss) | $ | 5,000 | $ | (99,000 | ) | $ | (38,000 | ) | $ | 6,840,000 | ||||||
Basic (loss) earnings per share | ||||||||||||||||
Continuing operations | $ | — | $ | (0.08 | ) | $ | (0.01 | ) | $ | (1.55 | ) | |||||
Discontinued operations | — | 0.05 | — | 3.45 | ||||||||||||
Net (loss) income | $ | — | $ | (0.03 | ) | $ | (0.01 | ) | $ | 1.90 | ||||||
Diluted (loss) earnings per share | ||||||||||||||||
Continuing operations | $ | — | $ | (0.08 | ) | $ | (0.01 | ) | $ | (1.55 | ) | |||||
Discontinued operations | — | 0.05 | — | 3.45 | ||||||||||||
Net (loss) income | $ | — | $ | (0.03 | ) | $ | (0.01 | ) | $ | 1.90 | ||||||
Weighted average common shares outstanding: | ||||||||||||||||
Basic | 3,617,000 | 3,598,000 | 3,609,000 | 3,598,000 | ||||||||||||
Diluted | 3,777,000 | 3,598,000 | 3,609,000 | 3,598,000 | ||||||||||||
Net income (loss) | $ | 5,000 | $ | (99,000 | ) | $ | (38,000 | ) | $ | 6,840,000 | ||||||
Other comprehensive income (loss) - foreign currency translation adjustment | 71,000 | (63,000 | ) | 188,000 | (299,000 | ) | ||||||||||
Total comprehensive income (loss) | $ | 76,000 | $ | (162,000 | ) | $ | 150,000 | $ | 6,541,000 |
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, 2017 | $ | 47,590,000 | 4,181,000 | $ | 4,181,000 | $ | 12,906,000 | $ | 36,061,000 | (584,000 | ) | $ | (4,821,000 | ) | $ | (737,000 | ) | |||||||||||||||
Net loss | (38,000 | ) | — | — | — | (38,000 | ) | — | — | — | ||||||||||||||||||||||
Restricted common stock compensation | 30,000 | 5,000 | 5,000 | 25,000 | — | — | — | — | ||||||||||||||||||||||||
Stock - based compensation | 20,000 | — | — | 20,000 | — | — | — | — | ||||||||||||||||||||||||
Exercise of stock options | 62,000 | 17,000 | 17,000 | 45,000 | — | — | — | — | ||||||||||||||||||||||||
Dividends | (542,000 | ) | — | — | — | (542,000 | ) | — | — | — | ||||||||||||||||||||||
Purchase of Treasury stock | (89,000 | ) | — | — | — | — | (12,000 | ) | (89,000 | ) | — | |||||||||||||||||||||
Foreign currency translation adjustment | 188,000 | — | — | — | — | — | — | 188,000 | ||||||||||||||||||||||||
�� | ||||||||||||||||||||||||||||||||
Balance, September 30, 2017 | $ | 47,221,000 | 4,203,000 | $ | 4,203,000 | $ | 12,996,000 | $ | 35,481,000 | (596,000 | ) | $ | (4,910,000 | ) | $ | (549,000 | ) |
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, | ||||||||
2017 | 2016 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net loss from continuing operations | $ | (38,000 | ) | $ | (5,590,000 | ) | ||
Net income from discontinued operations | — | 12,430,000 | ||||||
Adjustments to reconcile net loss from operations to net cash provided by (used in) operating activities: | ||||||||
Non-cash charges: | ||||||||
Depreciation and amortization | 975,000 | 1,227,000 | ||||||
Amortization of other intangible assets | 620,000 | 803,000 | ||||||
Amortization of debt issue costs | 42,000 | 118,000 | ||||||
Recovery for losses on accounts receivable - net | (12,000 | ) | — | |||||
Stock-based compensation | 20,000 | 13,000 | ||||||
Restricted stock-based compensation | 30,000 | 39,000 | ||||||
(Gain) loss on sale of fixed assets | (8,000 | ) | 3,000 | |||||
Deferred income taxes | 142,000 | (3,163,000 | ) | |||||
Fair value change in contingent consideration | 14,000 | — | ||||||
Impairment of goodwill and other intangible assets | — | 8,311,000 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (2,252,000 | ) | (2,166,000 | ) | ||||
Inventories | 1,468,000 | (681,000 | ) | |||||
Prepaid expenses and other current assets | 2,154,000 | (1,947,000 | ) | |||||
Other assets | 45,000 | 60,000 | ||||||
Accounts payable | 842,000 | 1,304,000 | ||||||
Accrued compensation and benefits | (129,000 | ) | (209,000 | ) | ||||
Accrued other liabilities | (623,000 | ) | 287,000 | |||||
Other liabilities | (14,000 | ) | (14,000 | ) | ||||
Total adjustments | 3,314,000 | 3,985,000 | ||||||
Net cash provided by (used in) operating activities – continuing operations | 3,276,000 | (1,605,000 | ) | |||||
Net cash used in operating activities – discontinued operations | — | (653,000 | ) | |||||
Net cash provided by (used in) operating activities | $ | 3,276,000 | $ | (2,258,000 | ) |
March 31, 2020 | December 31, 2019 | |||||||
(unaudited) | (See Note 1) | |||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Short-term borrowings | $ | 6,931,000 | $ | 5,648,000 | ||||
Accounts payable | 2,318,000 | 1,843,000 | ||||||
Accrued compensation and benefits | 1,123,000 | 2,019,000 | ||||||
Accrued other liabilities | 1,005,000 | 1,568,000 | ||||||
Current leased liabilities – operating leases | 870,000 | 879,000 | ||||||
TOTAL CURRENT LIABILITIES | 12,247,000 | 11,957,000 | ||||||
Noncurrent leased liabilities – operating leases | 2,896,000 | 3,070,000 | ||||||
Other liabilities | 204,000 | 210,000 | ||||||
TOTAL LIABILITIES | 15,347,000 | 15,237,000 | ||||||
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 – 4,417,000 at March 31, 2020 and 4,416,000 at December 31, 2019 | 4,417,000 | 4,416,000 | ||||||
Class B - $1 par; authorized - 2,000,000 shares; no shares issued | — | — | ||||||
Additional paid-in capital | 14,087,000 | 14,056,000 | ||||||
Retained earnings | 37,952,000 | 38,867,000 | ||||||
Treasury stock, at cost – 1,273,000 shares at March 31, 2020 and at December 31, 2019 | (10,213,000 | ) | (10,213,000 | ) | ||||
Accumulated other comprehensive loss | (745,000 | ) | (620,000 | ) | ||||
TOTAL SHAREHOLDERS’ EQUITY | 45,498,000 | 46,506,000 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 60,845,000 | $ | 61,743,000 |
See accompanying notes to consolidated financial statements (unaudited).
P&F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(unaudited)
Three months | ||||||||
ended March 31, | ||||||||
2020 | 2019 | |||||||
Net revenue | $ | 13,350,000 | $ | 14,322,000 | ||||
Cost of sales | 8,868,000 | 9,041,000 | ||||||
Gross profit | 4,482,000 | 5,281,000 | ||||||
Selling, general and administrative expenses | 5,690,000 | 5,263,000 | ||||||
Operating (loss) income | (1,208,000 | ) | 18,000 | |||||
Other expense | — | 6,000 | ||||||
Interest expense | 55,000 | 63,000 | ||||||
Loss before income tax | (1,263,000 | ) | (51,000 | ) | ||||
Income tax benefit | (505,000 | ) | (25,000 | ) | ||||
Net loss | $ | (758,000 | ) | $ | (26,000 | ) | ||
Basic and diluted loss per share | $ | (0.24 | ) | $ | (0.01 | ) | ||
Weighted average common shares outstanding: | ||||||||
Basic and diluted | 3,144,000 | 3,381,000 | ||||||
Net loss | $ | (758,000 | ) | $ | (26,000 | ) | ||
Other comprehensive (loss) income - foreign currency translation adjustment | (125,000 | ) | 44,000 | |||||
Total comprehensive (loss) income | $ | (883,000 | ) | $ | 18,000 |
See accompanying notes to consolidated financial statements (unaudited).
P&F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (unaudited)
Three months ended March 31, 2020
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, 2020 | $ | 46,506,000 | 4,416,000 | $ | 4,416,000 | $ | 14,056,000 | $ | 38,867,000 | (1,273,000 | ) | $ | (10,213,000 | ) | $ | (620,000 | ) | ||||||||
Net loss | (758,000 | ) | — | — | — | (758,000 | ) | — | — | — | |||||||||||||||
Exercise of stock options | 3,000 | 1,000 | 1,000 | 2,000 | |||||||||||||||||||||
Restricted common stock compensation | 13,000 | — | — | 13,000 | — | — | — | — | |||||||||||||||||
Stock-based compensation | 16,000 | — | — | 16,000 | — | — | — | — | |||||||||||||||||
Dividends | (157,000 | ) | — | — | — | (157,000 | ) | — | — | — | |||||||||||||||
Foreign currency translation adjustment | (125,000 | ) | — | — | — | — | — | — | (125,000 | ) | |||||||||||||||
Balance, March 31, 2020 | $ | 45,498,000 | 4,417,000 | $ | 4,417,000 | $ | 14,087,000 | $ | 37,952,000 | (1,273,000 | ) | $ | (10,213,000 | ) | $ | (745,000 | ) |
Three months ended March 31, 2019
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, 2019 | $ | 45,535,000 | 4,410,000 | $ | 4,410,000 | $ | 13,904,000 | $ | 34,588,000 | (816,000 | ) | $ | (6,695,000 | ) | $ | (672,000 | ) | ||||||||
Net loss | (26,000 | ) | — | — | — | (26,000 | ) | — | — | — | |||||||||||||||
Restricted common stock compensation | 13,000 | — | — | 13,000 | — | — | — | — | |||||||||||||||||
Purchase of Class A common stock | (3,202,000 | ) | — | — | — | — | (418,000 | ) | (3,202,000 | ) | — | ||||||||||||||
Stock-based compensation | 29,000 | — | — | 29,000 | — | — | — | — | |||||||||||||||||
Dividends | (158,000 | ) | — | — | — | (158,000 | ) | — | — | — | |||||||||||||||
Foreign currency translation adjustment | 44,000 | — | — | — | — | — | — | 44,000 | |||||||||||||||||
Balance, March 31, 2019 | $ | 42,235,000 | 4,410,000 | $ | 4,410,000 | $ | 13,946,000 | $ | 34,404,000 | (1,234,000 | ) | $ | (9,897,000 | ) | $ | (628,000 | ) |
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, | ||||||||
2020 | 2019 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net loss | $ | (758,000 | ) | $ | (26,000 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Non-cash charges: | ||||||||
Depreciation and amortization | 433,000 | 389,000 | ||||||
Amortization of other intangible assets | 195,000 | 172,000 | ||||||
Amortization of operating leased assets | 234,000 | 81,000 | ||||||
Amortization of debt issue costs | 4,000 | 15,000 | ||||||
Amortization of consideration payable to a customer | 67,000 | 67,000 | ||||||
Provision for (recovery of) losses on accounts receivable | 15,000 | (69,000 | ) | |||||
Stock-based compensation | 16,000 | 29,000 | ||||||
Loss on sale of property and equipment | — | 6,000 | ||||||
Restricted stock-based compensation | 13,000 | 13,000 | ||||||
Deferred income taxes | (47,000 | ) | (25,000 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 720,000 | 654,000 | ||||||
Inventories | 524,000 | (88,000 | ) | |||||
Prepaid expenses and other current assets | (528,000 | ) | (208,000 | ) | ||||
Accounts payable | 482,000 | (48,000 | ) | |||||
Accrued compensation and benefits | (894,000 | ) | (1,282,000 | ) | ||||
Accrued other liabilities and other current liabilities | (556,000 | ) | (99,000 | ) | ||||
Operating lease liabilities | (230,000 | ) | (65,000 | ) | ||||
Other liabilities | (6,000 | ) | (6,000 | ) | ||||
Total adjustments | 442,000 | (464,000 | ) | |||||
Net cash used in operating activities | (316,000 | ) | (490,000 | ) |
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, | ||||||||
2017 | 2016 | |||||||
Cash Flows from Investing Activities: | ||||||||
Capital expenditures | $ | (444,000 | ) | $ | (894,000 | ) | ||
Purchase of net assets of Jiffy Air Tool, Inc. | (6,845,000 | ) | — | |||||
Purchase of patents | (200,000 | ) | — | |||||
Proceeds from disposal of assets | 8,000 | 30,000 | ||||||
Net cash used in investing activities – continuing operations | (7,481,000 | ) | (864,000 | ) | ||||
Net cash provided by investing activities – discontinued operations | — | 20,149,000 | ||||||
Net cash (used in) provided by investing activities | (7,481,000 | ) | 19,285,000 | |||||
Cash Flows from Financing Activities: | ||||||||
Dividend payments | (542,000 | ) | (2,156,000 | ) | ||||
Proceeds from exercise of stock options | 62,000 | 23,000 | ||||||
Purchase of Class A Common Stock | (89,000 | ) | (255,000 | ) | ||||
Net proceeds from short-term borrowings | 2,334,000 | 10,536,000 | ||||||
Repayments of term loans | — | (6,343,000 | ) | |||||
Repayments of notes payable | (14,000 | ) | (27,000 | ) | ||||
Payments of debt issue costs | (74,000 | ) | (30,000 | ) | ||||
Net cash provided by financing activities – continuing operations | 1,677,000 | 1,748,000 | ||||||
Net cash used in financing activities – discontinued operations | — | (18,716,000 | ) | |||||
Net cash provided by (used in) financing activities | 1,677,000 | (16,968,000 | ) | |||||
Effect of exchange rate changes on cash | 34,000 | (45,000 | ) | |||||
Net (decrease) increase in cash | (2,494,000 | ) | 14,000 | |||||
Cash at beginning of period | 3,699,000 | 927,000 | ||||||
Cash at end of period | $ | 1,205,000 | $ | 941,000 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for: | ||||||||
Interest | $ | 74,000 | $ | 123,000 | ||||
Income taxes | $ | 342,000 | $ | 88,000 | ||||
Supplemental disclosure of non-cash investing and financing activities: | ||||||||
Contingent consideration on acquisition | $ | 692,000 | $ | — |
Three months | ||||||||
ended March 31, | ||||||||
2020 | 2019 | |||||||
Cash Flows from Investing Activities: | ||||||||
Capital expenditures | $ | (658,000 | ) | $ | (485,000 | ) | ||
Proceeds from disposal of property and equipment | — | 11,000 | ||||||
Net cash used in investing activities | (658,000 | ) | (474,000 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Dividend payments | (157,000 | ) | (158,000 | ) | ||||
Proceeds from exercise of stock options | 3,000 | — | ||||||
Purchase of Class A common stock | — | (3,202,000 | ) | |||||
Net proceeds from short-term borrowings | 1,284,000 | 4,258,000 | ||||||
Repayments of long-term debt | — | (20,000 | ) | |||||
Bank finance costs | — | (20,000 | ) | |||||
Net cash provided by financing activities | 1,130,000 | 858,000 | ||||||
Effect of exchange rate changes on cash | (5,000 | ) | 5,000 | |||||
Net increase (decrease) in cash | 151,000 | (101,000 | ) | |||||
Cash at beginning of period | 380,000 | 999,000 | ||||||
Cash at end of period | $ | 531,000 | $ | 898,000 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for: | ||||||||
Interest | $ | 53,000 | $ | 37,000 | ||||
Cash paid for amounts included in the measurement of operating lease liabilities | $ | — | $ | 4,000 | ||||
Noncash information: | ||||||||
Right of Use (“ROU”) assets recognized for new operating lease liabilities | $ | — | $ | 80,000 | ||||
Operating lease liability related to ROU assets recognized upon adoption of ASC 842 | $ | — | $ | 577,000 |
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, 20162019 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, 20162019 (“20162019 Form 10-K”). The interim financial statements contained herein should be read in conjunction with the 20162019 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 (loss) income (loss) - foreign currency translation 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 year. The reclassifications had no effect on previously reported results of operations or retained earnings.
Customer Concentration
The Company has one retail customer that during the three and nine-month periods ended September 30, 2017 accounted for 23.6% and 27.6%, respectively, of the Company’s revenue. Whereas for the same three and nine-month periods in 2016, the Company had two retail customers that accounted for 45.3% and 43.4%, respectively, of the Company’s revenue. Additionally, the Company has two retail customers that, in the aggregate, at September 30, 2017 and December 31, 2016, accounted for 39.6% and 53.5%, respectively, of the Company’s accounts receivable.
Out - of - period Adjustment
During the preparation of the Company’s tax provision for the three and nine-month periods ended September 30, 2017, it determined that the effect of forfeitures, expiration and exercise of certain of its common stock options should have been reflected in its second quarter and six-month period ended June 30, 2017’s income tax provision. The Company has concluded that this error was immaterial based upon a qualitative and quantitative analysis. As such, the Company reflected such effect in its three and nine-month period ended September 30, 2017.
The Company
P&F, is a Delaware corporation incorporated on April 19, 1963. Prior to February 11, 2016 (the “Nationwide Closing Date”), 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, which had been reported in the Hardware segment, the Company currently only operates in the Tools business. See Note 2 to consolidated financial statements for further discussion.
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1 – BUSINESS AND SUMMARY OF ACCOUNTING POLICIES – (Continued)
Tools
The Company1963, conducts its Tools business through a wholly-owned subsidiary, Continental Tool Group, Inc. (“Continental”), which in turn operates through its wholly-owned subsidiaries, Florida Pneumatic Manufacturing Corporation (“Florida Pneumatic”) and Hy-Tech Machine, Inc. (“Hy-Tech”). Exhaust Technologies Inc. (“ETI”) and, Universal Air Tool Company Limited (“UAT”), and Jiffy Air Tool, Inc. (“Jiffy”) are wholly-owned subsidiaries of Florida Pneumatic. Effective April 5, 2017, Florida Pneumatic, through a wholly-owned subsidiary, purchased substantially all of the operating assets, less certain payables of Jiffy Air Tool, Inc. See Note 3 for further discussion. The business of Air Tool Service Company (“ATSCO”) operates through a wholly-owned subsidiary of Hy-Tech.Effective October 25, 2019, the Company through a wholly owned subsidiary of Hy-Tech, acquired substantially all the operating assets comprising the businesses of Blaz-Man Gear, Inc. and Gear Products & Manufacturing, Inc., each an Illinois-based corporation that manufactures and distributes custom gears. See Note 2 – Acquisition, for further discussion.
Florida Pneumatic is engagedimports and sells pneumatic hand tools, most of which are of its own design, primarily to the retail, industrial, automotive and aerospace markets. Its products include sanders, grinders, drills, saws and impact wrenches. These tools are similar in the importationappearance and salefunction to electric hand tools, but are powered by compressed air, rather than by electricity or battery. Air tools, as they are more commonly referred to, generally offer better performance and weigh less than their electrical counterparts. Florida Pneumatic imports and/or manufactures approximately 75 types of pneumatic hand tools, primarily formost of which are sold at prices ranging from $50 to $1,000, under the retail, industrialnames “Florida Pneumatic,” “Universal Tool”, “Jiffy Air Tool”, AIRCAT, NITROCAT, as well as under the trade names or trademarks of several private label customers. These products are sold to retailers, distributors, manufacturers and automotive markets. Florida Pneumatic also markets,private label customers through its Berkley Tool division (“Berkley”), a product line which includes pipein-house sales personnel and bolt dies, pipe taps, wrenches, visesmanufacturers’ representatives. The AIRCAT and stands, pipe and tubing cutting equipment, hydrostatic test pumps, and replacement electrical components for a widely-used brandNITROCAT brands of pipe cutting and threading machines. Lastly as the result of the Jiffy acquisition, Florida Pneumatic now manufactures pneumatic tools marketedare sold primarily to the automotive service and repair market (“automotive market”). Users of Florida Pneumatics’ hand tools include industrial maintenance and production staffs, do-it-yourself mechanics, professional automobile mechanics and auto body personnel. Jiffy manufactures and distributes pneumatic tools and components primarily to aerospace sector.manufacturers.
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1 – BUSINESS AND SUMMARY OF ACCOUNTING POLICIES - Continued
Hy-Tech designs, manufactures and sellsdistributes industrial tools, systems, gearing, accessories and a wide rangevariety of industrial productsreplacement parts under thevarious brands including ATP, ATSCO, Ozat, Numatx, Thaxton and Quality Gear. These products, including heavy dutyHy-Tech produces and sells heavy-duty pneumatic impact tools, grinders, air tools, industrial grinders, impact sockets,motors, hydro-pneumatic riveters, hydrostatic test plugs, air motorsimpact sockets and custom gears, with prices ranging from $300 to $42,000.
Hy-Tech’s ”Engineered Solutions” products are all sold direct to major end users as well asOriginal Equipment Manufacturers (“OEM’s”), and industrial branded products are sold through a broad network of Industrial and Fluid Power Distributors. Industries served includespecialized industrial distributors serving the power generation, petrochemical, aerospace, construction, railroad, mining, ship building and fabricated metals.metals industries. Hy-Tech also manufacturesworks directly with their industrial customers, designing and manufacturing products from finished components assemblies and finished product for various Original Equipment Manufacturersto complete turnkey systems to be sold under their own brand names.
Going Concern Assessment
Management assesses going concern uncertainty in the Company’s consolidated financial statements to determine whether there is sufficient cash on hand and working capital, including available borrowings on loans, to operate for a period of at least one year from the date the consolidated financial statements are issued, which is referred to as the "look-forward period", as defined in GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to management, it considers various scenarios, forecasts, projections, estimates and makes certain key assumptions, including the timing and nature of projected cash expenditures, its ability to reduce, delay or curtail cash out flows and its ability to raise additional capital, if necessary, among other factors. Management has prepared estimates of operations covering the look-forward period and believes that sufficient funds will be generated from operations to fund its operations. The Company has contingency plans in which it would further reduce or defer additional expenses and cash outlays, should operations weaken beyond current forecasts.
The impact of the novel coronavirus or COVID-19 on the Company’s business has been considered in these assumptions; however, it is too early to know the full impact of COVID-19 or its timing when the Company believes a return to more normal operations may occur. Further, as part of the business incentives offered in the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, the Company, on April 20, 2020, received a $2.9 million Payroll Protection Program (“PPP”) loan from the United States Small Business Administration (“SBA”). See Note 11 – Subsequent Event, for further discussion.
For the three-month period ended March 31, 2020, the Company incurred a net loss of $758,000, and incurred negative cash flows from operations of $316,000. The Company, at March 31, 2020 has working capital of $21,144,000.
The accompanying consolidated financial statements have been prepared on a going concern basis under which the Company is expected to be able to realize its assets and satisfy its liabilities in the normal course of business.
Customer concentration
Hardware
Prior toAt March 31, 2020 and December 31, 2019, accounts receivable from The Home Depot was 32.7% and 27.2%, respectively, of total accounts receivable. Additionally, revenue from The Home Depot during the Nationwide Closing Date,three-month periods ended March 31, 2020 and 2019 were 22.4% and 17.6%, respectively, of total revenue. There were no other customers that accounted for more than 10% of consolidated revenue or accounts receivable during the Company conducted its Hardware business through its wholly-owned subsidiary, Countrywide Hardware, Inc. (“Countrywide”). Countrywide conducted its business operations through its wholly-owned subsidiary, Nationwide. Nationwide was an importerthree-month periods ended March 31, 2020 and manufacturer of door, window and fencing hardware and accessories, including rollers, hinges, window operators, sash locks, custom zinc castings and door closers. Effective as of the Nationwide Closing Date, Countrywide sold Nationwide to an unrelated third party for approximately $22,200,000. See Note 2 to consolidated financial statements for further discussion.2019.
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, contingent consideration, income taxes and deferred taxes. Descriptions of these policies are discussed in the Company’s 20162019 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 adjustmentsadjusts 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.
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1 – BUSINESS AND SUMMARY OF ACCOUNTING POLICIES – (Continued)- (continued)
NewSignificant Accounting PronouncementsPolicies
Recently AdoptedThe Company’s significant accounting policies are described in "Note 1: Summary of Significant Accounting Policies" of our Annual Report on Form 10-K for the year ended December 31, 2019.
In March 2016, the FinancialLease Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-09,Improvements to Employee Share-Based Payment Accounting. The standard reduces complexity in several aspects of the accounting for employee share-based compensation, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The ASU is effective for fiscal 2017. The impact of the adoption was not material to the Company’s consolidated financial statements.
In July 2015,On January 1, 2019, the FASB issued ASU No. 2015-11,Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”). The standard simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value for entities using the first-in, first-out method of valuing inventory. ASU 2015-11 eliminates other measures required by current guidance to determine net realizable value. ASU 2015-11 is effective for fiscal 2017. The impact of the adoption was not material to the Company’s consolidated financial statements.
Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02,Leases. This ASU is a comprehensive new leases standard that amends various aspects of existing guidance for leases and requires additional disclosures about leasing arrangements. It will require companies to recognize lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP.Company adopted Accounting Standards Codification (“ASC”) ASC 842“Leases” using the initial date of adoption method, whereby the adoption does not impact any periods prior to 2019. ASC Topic 842 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous leases’ guidance. When adopted, the Company elected to adopt the package of practical expedients and, accordingly, did not reassess any previously expired or existing arrangements and related classifications under ASC 840.
If the rate implicit in the lease is not readily determinable, the Company uses its incremental borrowing rate as the discount rate. The Company uses its best judgement when determining the incremental borrowing rate, which is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term to the lease payments in a similar currency.
The Company’s operating leases guidance.include vehicles, office space and the use of real property. The ASUCompany has not identified any material finance leases for the three months ended March 31, 2020.
The Company considers any options to extend the term of a lease when measuring the Right of Use lease asset.
For the three-month periods ended March 31, 2020 and 2019, the Company had $234,000 and $81,000 in Operating lease expense.
The following is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years; earlier adoption is permitted. In the financial statements in which the ASU is first applied, leases shall be measured and recognized at the beginninga maturity analysis of the earliest comparative period presented with an adjustmentannual undiscounted cash flows reconciled to equity. The Company is currently evaluating the impactcarrying value of the adoptionoperating lease liabilities as of this guidance on its consolidated financial statements. March 31, 2020:
As of March 31, 2020 | ||||
2020 (excluding the three months ended March 31, 2020) | $ | 674,000 | ||
2021 | 825,000 | |||
2022 | 736,000 | |||
2023 | 634,000 | |||
2024 | 368,000 | |||
Thereafter | 1,053,000 | |||
Total operating lease payments | 4,290,000 | |||
Less imputed interest | (524,000 | ) | ||
Total operating lease liabilities | $ | 3,766,000 | ||
Weighted-average remaining lease term | 6.6 years | |||
Weighted-average discount rate | 4.42 | % |
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1 – BUSINESS AND SUMMARY OF ACCOUNTING POLICIES - Continued
Revenue recognition
The following table presents revenues recognized under ASC Topic 606,Revenue from Contracts with Customers.
Florida Pneumatic
Florida Pneumatic markets its air tool products to four primary sectors within the pneumatic tool market; Retail, Automotive, Industrial and Aerospace. 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 March 31, | ||||||||||||||||||||||||
2020 | 2019 | (Decrease) increase | ||||||||||||||||||||||
Revenue | Percent of revenue | Revenue | Percent of revenue | $ | % | |||||||||||||||||||
Automotive | $ | 3,232,000 | 32.2 | % | $ | 3,866,000 | 37.0 | % | $ | (634,000 | ) | (16.4 | )% | |||||||||||
Retail | 2,990,000 | 29.8 | 2,709,000 | 26.0 | 281,000 | 10.4 | ||||||||||||||||||
Aerospace | 2,599,000 | 25.9 | 2,360,000 | 22.6 | 239,000 | 10.1 | ||||||||||||||||||
Industrial | 1,062,000 | 10.6 | 1,325,000 | 12.7 | (263,000 | ) | (19.8 | ) | ||||||||||||||||
Other | 147,000 | 1.5 | 180,000 | 1.7 | (33,000 | ) | (18.3 | ) | ||||||||||||||||
Total | $ | 10,030,000 | 100.0 | % | $ | 10,440,000 | 100.0 | % | $ | (410,000 | ) | (3.92.8 | )% |
Hy-Tech
Hy-Tech designs, manufactures and sells a wide range of industrial products under the brands ATP, OZAT and ATSCO which are categorized as ATP for reporting purposes. Products manufactured for other companies under their brands are included in the OEM category in the table below. Power Transition Group (“PTG”) revenue is comprised of products manufactured and sold by the gear businesses that were acquired in October 2019, products sold through Hy-Tech’s legacy gear manufacturing division and products sold to a certain customer whose revenue was included in OEM in 2019. Numatx, Thaxton and other peripheral product lines, such as general machining, are reported as Other.
Three months ended March 31, | ||||||||||||||||||||||||
2020 | 2019 | (Decrease) increase | ||||||||||||||||||||||
Revenue | Percent of revenue | Revenue | Percent of revenue | $ | % | |||||||||||||||||||
OEM | $ | 1,439,000 | 43.3 | % | $ | 1,336,000 | 34.4 | % | $ | 103,000 | 7.7 | % | ||||||||||||
ATP | 1,061,000 | 32.0 | 1,986,000 | 51.2 | (925,000 | ) | (46.6 | ) | ||||||||||||||||
PTG | 735,000 | 22.1 | 355,000 | 9.1 | 380,000 | 107.0 | ||||||||||||||||||
Other | 85,000 | 2.6 | 205,000 | 5.3 | (120,000 | ) | (58.5 | ) | ||||||||||||||||
Total | $ | 3,320,000 | 100.0 | % | $ | 3,882,000 | 100.0 | % | $ | (562,000 | ) | (14.5 | )% |
12
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – (Continued)BUSINESS AND SUMMARY OF ACCOUNTING POLICIES - Continued
New Accounting Pronouncements
Not Yet Adopted
In May 2014,December 2019, the FASB issued ASU No. 2014-09,("ASU") 2019-12, “Revenue from Contracts with Customers, as a new Topic, ASC Topic 606, which supersedes existing accounting standards for revenue recognition and creates a single framework. Additional updates to Topic 606 issued by the FASB in 2015 and 2016 include the following:
The underlying principle is to use a five-step analysis of transactions to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The standard permits the use of either a retrospective or modified retrospective application. The Company is in the final assessment phaseof what impact, if any, the new revenue standard and related updates will have on its consolidated financial statements and related disclosures, and based on its preliminary assessment, other than additional disclosures in its Notes to its consolidated financial statements, there will be no material impact to its consolidated financial statements.The standard update, as amended, will be effective for annual periods beginning after December 15, 2017.
In January 2017, the FASB issued ASU No. 2017-04,Intangibles – Goodwill and OtherIncome Taxes (Topic 350)740): Simplifying the TestAccounting for Goodwill Impairment (“Income Taxes.” The ASU 2017-04”),which simplified the testing of goodwillis intended to simplify various aspects related to accounting for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measured a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. ASU 2017-04income taxes. This guidance is effective for public companies for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019.2020, and for interim periods within those fiscal years, with early adoption permitted. The Company elected to early adopt this standard effective January 1, 2020. The adoption of this standard did not have a material effect on its Consolidated Financial Statements.
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This new guidance is effective upon issuance of this ASU for contract modifications and hedging relationships on a prospective basis. While the Company is currently evaluatingassessing the effects thatimpact of the adoption of ASU 2017-04 willnew guidance, it is not expected to have a material impact on its consolidated financial statements. the Company’s Consolidated Financial Statements.
Other than the aforementioned, theThe Company does not believe that any other recently issued but not yetand effective accounting standard if adopted, willwould have a material effect on its consolidated financial statements.statements.
NOTE 2 – ACQUISITION
Effective October 25, 2019 (the “Gears Closing Date”) the Company, through a wholly owned subsidiary of Hy-Tech, acquired substantially all the assets comprising the businesses of Blaz-Man Gear, Inc. and Gear Products & Manufacturing, Inc. (the “Gears Acquisition”), each an Illinois-based corporation that manufactured and distributed custom gears. The Company believes that the acquisition of these two businesses will provide added expertise and market exposure into the customized/specialty gears market. The purchase price consisted of an aggregate of approximately $3.5 million in cash, which was funded by Revolver borrowings and the assumption of certain payables and contractual obligations. In addition, the sellers may be entitled to additional consideration based upon sale of certain categories of acquired inventory, which had no fair value at the time of the acquisition, during the two-year period following the Gears Closing Date. Accordingly, the Company, determined that, based primarily upon historical sales information provided, the most likely scenario could result in a payment of contingent consideration of approximately $64,000 and recorded such contingent consideration liability. This liability will be adjusted as needed with changes being recorded in the Company’s consolidated statement of income.
On the Gears Closing Date, Hy-Tech entered into a new five-year lease. This new leased facility, located in Punxsutawney, PA, is approximately 42,000 square feet, with annual lease payments of $165,800. Additionally, Hy-Tech elected to vacate a then existing leased space in Punxsutawney, which housed Hy-Tech’s gear operations prior to the Gears Acquisition. In April 2020, Hy-Tech and the landlord of the vacated facility agreed to terms which released Hy-Tech from the lease in exchange for a payment of $30,000. As a result, in April 2020, Hy-Tech will record a gain of approximately $33,000 on the early settlement of this lease obligation.
Total | ||||
Cash paid at closing | $ | 3,518,000 | ||
Fair value of contingent consideration | 64,000 | |||
Total estimated purchase price | $ | 3,582,000 |
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 2 – DISCONTINUED OPERATIONSACQUISITION - Continued
Sale of Nationwide Industries, Inc.
The Company, as part of its strategic plan to focus on expanding its position in the power-tool and accessories market, sold Nationwide in February 2016. On the Nationwide Closing Date, P&F, Countrywide, Nationwide and Argosy NWI Holdings, LLC, a Delaware limited liability company (“Buyer”), entered into a Stock Purchase and Redemption Agreement (the “Stock Purchase Agreement”), pursuant to which, among other things, after giving effect to certain contributions and redemptions of Nationwide’s common shares (“Nationwide Shares”), the Buyer acquired all of the outstanding Nationwide Shares from Countrywide (the “Acquisition”). The purchase price for the Nationwide Shares acquired in the Acquisition was approximately $22,200,000, before giving effect to an estimated working capital adjustment, as defined in the Stock Purchase Agreement, of approximately $802,000 in favor of the Buyer. Further, in accordance with the Stock Purchase Agreement, the Company placed into escrow $1,955,000 (“escrow funds”), of which $250,000 related to the final working capital adjustment. Pursuant to the terms of the Stock Purchase Agreement, the final working capital adjustment amount was determined to be approximately $75,000 in the Company’s favor. As a result, during the three-month period ended June 30, 2016, the $250,000 portion of the escrow funds was released to the Company, and the final working capital adjustment amount of $75,000 was paid to the Company by the Buyer. In connection with the Acquisition, Countrywide agreed that, should it sell the real property it owned in Tampa, Florida (the “Premises”), it will contribute an additional $400,000 into the escrow funds. In November 2016, the Premises were sold, and as a result Countrywide contributed the additional $400,000 into the aforementioned escrow funds which, at that time, aggregated to approximately $2,105,000. In accordance with the Stock Purchase Agreement, in August 2017, as no claims were made against the Escrow funds, the Company received the full amount of the escrow plus interest.
At the closing of the Acquisition, after paying closing costs, the net cash received from the Buyer was approximately $18,700,000.
As Nationwide was a substantial and unique business unit of the Company, its sale was a strategic shift. Accordingly, in accordance with ASC Topic 360, the Company, in 2016, classified Nationwide as a discontinued operation.
The net income from discontinued operations, net of taxes in 2016 presented in the accompanying Consolidated Statements of Operations and Comprehensive Income (Loss), is comprised of the following:
January 1, 2016 through February 11, 2016 | ||||
Revenue | $ | 1,830,000 | ||
Cost of goods sold | 1,177,000 | |||
Gross margin | 653,000 | |||
Selling and general and administrative expenses | 483,000 | |||
Interest expense - net | 60,000 | |||
Income before income taxes | 110,000 | |||
Income taxes | 38,000 | |||
Net income | $ | 72,000 |
The Company recognized a gain of $12,185,000, 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. During the three-month period ended June 30, 2016, the Company incurred an additional $14,000 in expenses related to the sale. For income tax purposes, the Company’s tax basis in Nationwide was greater than the net proceeds, thus resulting in a tax loss. This tax loss may only be applied against future capital gain transactions. During the three-month period ended March 31, 2016; the Company recorded a tax benefit of $141,000, net of a valuation allowance against the gain on sale. In November 2016, Countrywide completed the sale of the real property located in Tampa Florida, which was treated as a capital gain transaction for tax purposes. As a result, during the three-month period ended September 30, 2016, the Company removed the valuation allowance initially recorded against the tax loss, resulting in an additional $187,000 tax benefit recorded against the gain on sale.
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 3 – ACQUISITION
On April 5, 2017 (the “Jiffy Closing Date”), Bonanza Holdings Corp. (now known as Jiffy Air Tool, Inc.), a Delaware corporation and newly formed wholly-owned subsidiary (“Jiffy”) of Florida Pneumatic, Jiffy Air Tool, Inc. a Nevada corporation (“Jiffy Seller”), The Jack E. Pettit—1996 Trust, the sole shareholder of Jiffy Seller and Jack E. Pettit, entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”), pursuant to which, among other things, Jiffy acquired (the “Jiffy Acquisition”) substantially all of the operating assets of Jiffy Seller for $5,950,000, in addition to the assumption of certain payables and contractual obligations as set forth in the Asset Purchase Agreement. Jiffy manufactures and distributes pneumatic tools and components, primarily sold to aerospace manufacturers. The purchase price was $5,950,000, less a post-closing working capital adjustment of $155,000, which was paid by Jiffy Seller to the Company in June 2017.
Additionally, the Jiffy Seller may be entitled to up to $1,000,000 in additional consideration, which is contingent upon Jiffy achieving certain revenue thresholds and other criteria as set forth in the Asset Purchase Agreement within two defined measurement periods occurring within approximately the first two years following the Jiffy Closing Date.
In connection with the Asset Purchase Agreement, a separate Purchase and Sale Agreement and Joint Escrow Instructions (the “Purchase and Sale Agreement” and together with the Asset Purchase Agreement, the “Agreements”) was entered into between Jiffy Seller and Bonanza Properties Corp. (“Bonanza Properties”), a Delaware corporation and newly formed wholly-owned subsidiary of Florida Pneumatic, pursuant to which Bonanza Properties purchased certain real property of the Jiffy Seller. Pursuant to the Purchase and Sale Agreement, the purchase price for the real property was $1,050,000.
The initial total consideration ($5,950,000 plus $1,050,000) was paid by Jiffy to the Jiffy Seller from funds available under the Revolver, as defined in Note 10, pursuant to the Second Amended and Restated Loan Agreement (defined below), less certain amounts escrowed pursuant to, among others, the terms of the Agreements.
Total | ||||
Cash paid at closing | $ | 7,000,000 | ||
Less working capital adjustment | (155,000 | ) | ||
Fair value of contingent consideration | 692,000 | |||
Total estimated purchase price | $ | 7,537,000 |
The following table presents preliminary purchase price allocation:
Accounts receivable | $ | 789,000 | ||
Inventories | 1,571,000 | |||
Other current assets | 45,000 | |||
Land | 131,000 | |||
Building | 919,000 | |||
Machinery and equipment | 1,196,000 | |||
Identifiable intangible assets: | ||||
Customer relationships | 1,670,000 | |||
Trademarks and trade names | 790,000 | |||
Non-compete agreements | 17,000 | |||
Liabilities assumed | (125,000 | ) | ||
Goodwill | 534,000 | |||
Total estimated purchase price | $ | 7,537,000 |
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 3 – ACQUISITION – (Continued)
Accounts receivable | $ | 218,000 | ||
Inventories | 630,000 | |||
Machinery, equipment and vehicle | 1,437,000 | |||
Customer relationships | 995,000 | |||
Trademarks and trade names | 54,000 | |||
Non-compete agreements | 95,000 | |||
Liabilities assumed | (131,000 | ) | ||
Goodwill | 284,000 | |||
Total estimated purchase price | $ | 3,582,000 |
The excess of the total purchase price over the fair value of the net assets acquired, including the value of the identifiable intangible assets, has been allocated to goodwill. Goodwill will be amortized over 15 years for tax purposes, but not deductible for financial reporting purposes. The intangible assets subject to amortization will be amortized over 15 years for tax purposes. For financial reporting purposes their respective useful lives have been assigneddetermined as follows:
Customer relationships | |||
Non-Compete agreements | 4 years | ||
Trademarks and trade names | |||
indefinite |
The following unaudited pro-forma combined financial information gives effect to the Jiffy AcquisitionAcquisitions as if the Jiffy Acquisition wastransactions were consummated January 1, 2016.2019. This unaudited pro-forma financial information is presented for information purposes only and is not intended to present actual results that would have been attained had the Jiffy Acquisition been completed as of January 1, 20162019 (the beginning of the earliest period presented) or to project potential operating results as of any future date or for any future periods.
Three months ended | Nine months ended | |||||||||||
September 30, | September 30, | |||||||||||
2016 | 2017 | 2016 | ||||||||||
Revenue | $ | 16,400,000 | $ | 45,835,000 | $ | 50,092,000 | ||||||
Net (loss) income from continuing operations | $ | (23,000 | ) | $ | 68,000 | $ | (5,002,000 | ) | ||||
(Loss) earnings per share – basic | $ | (0.01 | ) | $ | 0.02 | $ | (1.39 | ) | ||||
(Loss) earnings per share – diluted | $ | (0.01 | ) | $ | 0.02 | $ | (1.39 | ) |
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
For the Three-Month Period Ended | ||||
Revenue | $ | 15,063,000 | ||
Net income | $ | 109,000 | ||
Earnings per share – basic and diluted | $ | 0.03 |
NOTE 43 – EARNINGS (LOSS)LOSS PER SHARE
Basic earnings (loss)loss per common share is based only on the average number of shares of Common Stock outstanding for the periods. Diluted earnings (loss)loss per common share reflects the effect of shares of Common Stock issuable upon the exercise of options, unless the effect on earnings is antidilutive.anti-dilutive.
Diluted earnings (loss)loss per common share is computed using the treasury stock method. Under this method, the aggregate number of shares of Common Stock outstanding reflects the assumed use of proceeds from the hypothetical exercise of any outstanding options to purchase shares of 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 (loss)loss per common share:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Numerator for basic and diluted earnings (loss) per common share: | ||||||||||||||||
Net income (loss) from continuing operations | $ | 5,000 | $ | (286,000 | ) | $ | (38,000 | ) | $ | (5,590,000 | ) | |||||
Net income from discontinued operations | — | 187,000 | — | 12,430,000 | ||||||||||||
Net income (loss) | $ | 5,000 | $ | (99,000 | ) | $ | (38,000 | ) | $ | 6,840,000 | ||||||
Denominator: | ||||||||||||||||
For basic earnings (loss) per share - weighted average common shares outstanding | 3,617,000 | 3,598,000 | 3,609,000 | 3,598,000 | ||||||||||||
Dilutive securities(1) | 160,000 | — | — | — | ||||||||||||
For diluted earnings (loss) per share - weighted average common shares outstanding | 3,777,000 | 3,598,000 | 3,609,000 | 3,598,000 |
Three months ended | ||||||||
March 31, | ||||||||
2020 | 2019 | |||||||
Numerator for basic and diluted loss per common share: | ||||||||
Net loss | $ | (758,000 | ) | $ | (26,000 | ) | ||
Denominator: | ||||||||
Denominator for basic and diluted loss per share - weighted average common shares outstanding | 3,144,000 | 3,381,000 |
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 3 – LOSS PER SHARE - Continued
At September 30, 2017March 31, 2020 and 2016,2019, there were outstanding stock options whose exercise prices were higher than the average market values of the underlying Common Stock for the period. For all periods presented, other than the three months ended September 30, 2017, these options are considered anti-dilutive and are excluded from the computation of diluted earnings (loss) per share. The weighted average of anti-dilutive stock options outstanding was as follows:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Weighted average antidilutive stock options outstanding | 138,000 | 73,000 | 86,000 | 78,000 | ||||||||||||
Three months ended | ||||||||
March 31, | ||||||||
2020 | 2019 | |||||||
Weighted average antidilutive stock options outstanding | 146,000 | 8,000 |
NOTE 54 – EQUITY – COMMON STOCK REPURCHASE PLANSTOCK-BASED COMPENSATION
On August 9, 2017,There were no options granted or issued during the Company’s Board of Directors authorizedthree-month period ended March 31, 2020.
During the three-month period ended March 31, 2019, the Company to repurchase up to 100,000 shares of its common stock over a period of up to twelve months (the “Repurchase Program”).
On August 24, 2017, the Company announced that, pursuant to the Repurchase Program, it had adopted a written trading plan in accordance with the guidelines specified under Rule 10b5-1 under the Securities Exchange Act of 1934. A plan under Rule 10b5-1 allows the Company to repurchase shares at times when it might otherwise be prevented from doing so by securities laws or because of self-imposed trading blackout periods. Repurchases made under the plan are subject to the Securities and Exchange Commission's regulations, as well as certain price, market, volume, and timing constraints specified in the plan. Since repurchases under the plan are subject to certain constraints, there is no guarantee as to the exact number of shares that will be repurchased under the plan.
As of September 30, 2017, the Company repurchased 12,365 shares of its Common Stock pursuant to the Repurchase Program.
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 5 – EQUITY – COMMON STOCK REPURCHASE PLAN – (Continued)
Stock option compensation
The Company accounts for stock-based compensation, including options and non-vested shares, according to the provisions of FASB ASC 718,Share Based Payment.
On September 5, 2017 (“Grant Date”), the compensation committee of Company’s Board of Directors authorized the issuance of 89,000granted 8,000 options to purchase shares of the Company’s Class A Common Stock under the Company’s 2012 Stock Incentive Plan.non-executives. The options expire ten years from the Grant Date. The Company granted an aggregate of 55,000exercise price of these options to its Chief Executive Officeris $8.55 per option and its Chief Financial Officer, withwill expire in February 2029. Further, one third of these options vest on the balance to non-executive employeesanniversary date of the Company. All options granted ongrant for the Grant Date vest one-third on each of the firstnext three anniversaries of the Grant Date. Further, all options granted on the Grant Date have an exercise price of $7.09, which was the closing price of the Company’s common stock on the Grant Date.
Stock option compensation expense is attributable to the granting of, and the remaining requisite service periods of, stock options. Compensation expense attributable to stock-options was approximately $20,000 and $0 during the three-month periods ended September 30, 2017 and 2016, respectively. Compensation expense attributable to stock-options was approximately $20,000 and $13,000 during the nine-month periods ended September 30, 2017 and 2016, respectively. The compensation expense is recognized in selling, general and administrative expenses on the Company’s Statements of Operations and Comprehensive Income (Loss) on a straight-line basis over the vesting periods. The exercisability of the respective non-vested options, which are at pre-determined dates on a calendar year, does not necessarily correspond to the period(s) in which straight-line amortization of compensation cost is recorded. As of September 30, 2017, the Company had approximately $373,000 of total unrecognized compensation cost related to non-vested awards granted under its stock-based plans, which it expects to recognize over a weighted average period of 1.9 years. The expected term of stock options is based on historical exercises and terminations. The volatility is determined using historical volatilities based on historical stock prices.
The Company estimated the fair value of these options using the following assumption:assumptions:
Risk-free interest rate | 2.07 | % | 2.73 | % | ||||
Expected term (in years) | 10 | years | 10 | years | ||||
Volatility | 87.16 | % | 62.08 | % | ||||
Dividend yield | 2.82 | % | 2.34 | % | ||||
Weighted average fair value of options granted | $ | 4.41 | $ | 4.60 |
The following is a summary of the changes in outstanding options during the nine-monththree-month period ended September 30, 2017:March 31, 2020:
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 and vested, January 1, 2017 | 423,817 | $ | 5.68 | 2.9 | $ | 1,271,704 | ||||||||||||||||||||||||||
Outstanding, January 1, 2020 | 226,075 | $ | 6.30 | 4.7 | $ | 219,983 | ||||||||||||||||||||||||||
Granted | 89,000 | 7.09 | — | |||||||||||||||||||||||||||||
Exercised | (16,722 | ) | 3.65 | (1,000 | ) | 2.92 | ||||||||||||||||||||||||||
Forfeited | (6,793 | ) | 7.86 | — | — | |||||||||||||||||||||||||||
Expired | (71,069 | ) | 10.72 | — | — | |||||||||||||||||||||||||||
Outstanding, September 30, 2017 | 418,233 | $ | 5.17 | 4.1 | $ | 907,347 | ||||||||||||||||||||||||||
Vested, September 30, 2017 | 329,233 | $ | 4.65 | 2.5 | $ | 891,327 | ||||||||||||||||||||||||||
Outstanding, March 31, 2020 | 225,075 | $ | 6.32 | 4.5 | $ | 30,036 | ||||||||||||||||||||||||||
Vested, March 31, 2020 | 190,075 | $ | 6.14 | 3.9 | $ | 30,036 |
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 5 – EQUITY – COMMON STOCK REPURCHASE PLAN – (Continued)
Option Shares | Weighted Average Grant- Date Fair Value | Option Shares | Weighted Average Grant- Date Fair Value | |||||||||||||
Non-vested options, January 1, 2017 | — | $ | — | |||||||||||||
Non-vested options, January 1, 2020 | 37,666 | $ | 4.45 | |||||||||||||
Granted | 89,000 | 4.41 | ||||||||||||||
Vested | — | — | (2,666 | ) | 4.60 | |||||||||||
Forfeited | — | — | — | |||||||||||||
Non-vested options, September 30, 2017 | 89,000 | $ | 4.41 | |||||||||||||
Non-vested options, March 31, 2020 | 35,000 | $ | 4.44 |
The remaining 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, 2017March 31, 2020 was 88,812.62,062. At September 30, 2017,March 31, 2020, there were 192,233190,575 options outstanding issued under the 2012 Plan and 226,00034,500 options outstanding issued under the 2002 Stock Incentive Plan.
15
Restricted StockP&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
TheNOTE 4 – STOCK-BASED COMPENSATION - Continued
Restricted Stock
On May 22, 2019, the Company in May 2017, granted 1,0001,250 restricted shares of its Common Stock to each non-employee member of its Board of Directors, totaling 5,0006,250 restricted shares. The Company determined that the fair value of these shares was $6.17$8.31 per share, which was the closing price of the Company’s Common Stock on the date of the grant. These shares cannot be traded earlier than the first anniversary of the grant date. As such, theThe Company iswill ratably amortizingamortize the total non-cash compensation expense of approximately $30,000 in its$52,000 to selling, general and administrative expenses through May 2018.2020.
TheTreasury Stock
On February 14, 2019, the Company in May 2016, granted 1,000 restrictedentered into an agreement to repurchase 389,909 shares of its Common Stock to each non-employee membercommon stock from certain funds and accounts advised or sub-advised by Fidelity Management & Research Company or one of its Board of Directors, totaling 5,000 restricted shares. The Company determined that the fair value of these shares was $8.72affiliates in a privately negotiated transaction at approximately $7.62 per share which was the closingfor a total purchase price of the Company’s Common Stock on the date of the grant. These shares could not have been traded earlier than the first anniversary of the grant date. As such,$2,971,000. On February 15, 2019, the Company ratably amortizedcompleted this transaction. On February 14, 2019, the total non-cash compensation expense of approximately $44,000 in its selling, generalCompany entered into Amendment No. 6 to the Second Amended and administrative expenses through May 2017.Restated Loan and Security Agreement with Capital One, which permitted the Company to complete the above transaction.
NOTE 65 – FAIR VALUE MEASUREMENTS
Accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under this guidance, the Company is required to classify certain assets and liabilities based on the following hierarchy:
Level 1: Quoted prices for identical assets or liabilities in active markets that can be assessed at the measurement date.
Level 2: Inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Inputs reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrumentsinstrument’s valuation.
The guidance requires the use of observable market data if such data is available without undue cost and effort.
As of September 30, 2017March 31, 2020, and December 31, 2016,2019, the carrying amounts reflected in the accompanying Consolidated Balance Sheetsconsolidated balance sheets for current assets and current liabilities approximated fair value due to the short-term nature of these accounts.
The fair value of the prepaid expenses and other current assets at December 31, 2016 consisted primarily of escrowed funds from the sale of Nationwide, which was estimated to be the same as its carrying value, based on Level 3 inputs. In August 2017, the Company received the entire $2,105,000, in accordance with the terms and conditions set forth in the Stock Purchase Agreement.
The fair value of the contingent consideration payable to the Jiffy Seller, of $706,000, included in other liabilities was determined applying Level 3 inputs. The fair value of this contingent consideration is being adjusted quarterly.
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 6 – FAIR VALUE MEASUREMENTS – (Continued)
Assets and liabilities measured at fair value on a non-recurring basis include goodwill and intangible assets. Such assets are reviewed quarterly for impairment indicators. If a triggering event has occurred, the assets are re-measured when the estimated fair value of the corresponding asset group is less than the carrying value. The fair value measurements, in such instances, are based on significant unobservable inputs (Level(level 3).
NOTE 76 – ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable - net consists of:
September 30, 2017 | December 31, 2016 | March 31, 2020 | December 31, 2019 | ||||||||||||
Accounts receivable | $ | 11,067,000 | $ | 7,991,000 | $ | 8,802,000 | $ | 9,547,000 | |||||||
Allowance for doubtful accounts | (73,000 | ) | (85,000 | ) | |||||||||||
Allowance for doubtful accounts, sales discounts and chargebacks | (248,000 | ) | (234,000 | ) | |||||||||||
$ | 10,994,000 | $ | 7,906,000 | $ | 8,554,000 | $ | 9,313,000 |
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 87 – INVENTORIES
Inventories consist of:
September 30, 2017 | December 31, 2016 | March 31, 2020 | December 31, 2019 | ||||||||||||
Raw material | $ | 1,681,000 | $ | 1,918,000 | $ | 2,340,000 | $ | 2,178,000 | |||||||
Work in process | 1,642,000 | 658,000 | 2,078,000 | 2,302,000 | |||||||||||
Finished goods | 16,767,000 | 17,325,000 | 17,867,000 | 18,402,000 | |||||||||||
$ | 20,090,000 | $ | 19,901,000 | $ | 22,285,000 | $ | 22,882,000 |
NOTE 98 – GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill are as follows:
Balance, January 1, 2017 | $ | 3,897,000 | ||
Acquisition of Jiffy Air Tool, Inc. | 534,000 | |||
Currency translation adjustment | 14,000 | |||
Balance, September 30, 2017 | $ | 4,445,000 |
Balance, January 1, 2020 | $ | 4,726,000 | ||
Currency translation adjustment | (11,000 | ) | ||
Balance, March 31, 2020 | $ | 4,715,000 |
Other intangible assets were as follows:
September 30, 2017 | December 31, 2016 | March 31, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||
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) | $ | 6,834,000 | $ | 1,427,000 | $ | 5,407,000 | $ | 5,143,000 | $ | 1,022,000 | $ | 4,121,000 | $ | 7,809,000 | $ | 2,879,000 | $ | 4,930,000 | $ | 7,825,000 | $ | 2,724,000 | $ | 5,101,000 | |||||||||||||||||||
Trademarks and trade names (1) | 2,326,000 | — | 2,326,000 | 1,507,000 | — | 1,507,000 | 2,351,000 | — | 2,351,000 | 2,375,000 | — | 2,375,000 | |||||||||||||||||||||||||||||||
Trademarks and trade names | 200,000 | 15,000 | 185,000 | 200,000 | 5,000 | 195,000 | 200,000 | 49,000 | 151,000 | 200,000 | 45,000 | 155,000 | |||||||||||||||||||||||||||||||
Engineering drawings | 330,000 | 168,000 | 162,000 | 330,000 | 148,000 | 182,000 | 330,000 | 229,000 | 101,000 | 330,000 | 225,000 | 105,000 | |||||||||||||||||||||||||||||||
Non-compete agreements (1) | 238,000 | 201,000 | 37,000 | 212,000 | 150,000 | 62,000 | 325,000 | 235,000 | 90,000 | 331,000 | 235,000 | 96,000 | |||||||||||||||||||||||||||||||
Patents | 1,405,000 | 813,000 | 592,000 | 1,205,000 | 666,000 | 539,000 | 1,405,000 | 996,000 | 409,000 | 1,405,000 | 978,000 | 427,000 | |||||||||||||||||||||||||||||||
Totals | $ | 11,333,000 | $ | 2,624,000 | $ | 8,709,000 | $ | 8,597,000 | $ | 1,991,000 | $ | 6,606,000 | $ | 12,420,000 | $ | 4,388,000 | $ | 8,032,000 | $ | 12,466,000 | $ | 4,207,000 | $ | 8,259,000 |
(1) | A portion of these intangibles are maintained in a foreign currency and are therefore subject to foreign exchange rate fluctuations. | |
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 9 – GOODWILL AND OTHER INTANGIBLE ASSETS – (Continued)
Amortization expense of intangible assets from continuing operations subject to amortization was as follows:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||
$ | 181,000 | $ | 217,000 | $ | 620,000 | $ | 803,000 |
Three months ended March 31, | |||||||
2020 | 2019 | ||||||
$ | 195,000 | $ | 172,000 |
The weighted average amortization period for intangible assets was as follows:
September 30, 2017 | December 31, 2016 | March 31, 2020 | December 31, 2019 | ||||||||||||
Customer relationships | 10.4 | 9.3 | 8.5 | 8.7 | |||||||||||
Trademarks and trade names (see note 2 to the table above) | 13.8 | 14.5 | |||||||||||||
Trademarks and trade names | 11.3 | 11.5 | |||||||||||||
Engineering drawings | 8.3 | 8.8 | 6.9 | 7.1 | |||||||||||
Non-compete agreements | 1.9 | 1.2 | 3.6 | 3.7 | |||||||||||
Patents | 9.0 | 6.1 | 6.9 | 7.1 |
Amortization expense for each of the next five years and thereafter is estimated to be as follows:
2018 | $ | 709,000 | ||||||
2019 | 686,000 | |||||||
2020 | 653,000 | |||||||
2021 | 638,000 | $ | 761,000 | |||||
2022 | 635,000 | 757,000 | ||||||
2023 | 757,000 | |||||||
2024 | 747,000 | |||||||
2025 | 690,000 | |||||||
Thereafter | 3,062,000 | 1,969,000 | ||||||
$ | 6,383,000 | $ | 5,681,000 |
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 109 – DEBT
In October 2010, the Company entered into a Loan and Security Agreement (as amended from time to time, “Credit(“Credit Agreement”) with an affiliate of Capital One, National Association (“Capital One”, or the “Bank”). The Credit Agreement, as amended and restated in April 2017 and further amended from time-to-time, among other things, provides forthe ability to borrow funds under a Revolver Loan$16,000,000 revolver line (“Revolver”), subject to certain borrowing base criteria. Additionally, there is a $2,000,000 line for capital expenditures (“Capex Loan”), with $1,600,000 available for future borrowings. Revolver and Capex Loan borrowings under which are secured by the Company’s accounts receivable, mortgages on itsinventory, equipment, and real property, (“Real Property”), inventory and equipment.among other things. P&F and certain of its subsidiaries are borrowers under the Credit Agreement, and their obligations are cross-guaranteedcross guaranteed by certain other subsidiaries. The Credit Agreement expires on February 8, 2024.
At the Company’s option, Revolver borrowings will bear interest at either LIBOR (“London InterBankinterbank Offered Rate (“LIBOR”Rate”) or the Base Rate, as the term is defined in the Credit Agreement, plus thean Applicable Margin, as defined in the Credit Agreement. Further, the interest rate, either LIBOR or Base Rate, which is added to the Applicable Margin, is at the option of the Company. The Company is limited assubject to limitations on the number of LIBOR borrowings.
Contemporaneously with the Jiffy Acquisition, the Company entered into a Second Amended and Restated Loan and Security Agreement, effective as of the Jiffy Closing Date (the “Second Amended and Restated Loan Agreement”), with Capital One. The Second Amended and Restated Loan Agreement amended and restated the Credit Agreement.
The Second Amended and Restated Loan Agreement, among other things, amended the Credit Agreement by: (1) increasing the maximum amount the Company can borrow under the Revolver Commitment (as defined in the Second Amended and Restated Loan Agreement) to $16,000,000, subject to certain borrowing base criteria, and (2) modifying certain borrowing base criteria as well as financial and other covenants.
The Company provides Capital One with among other things,monthly borrowing base certificates, and in certain circumstances, it is required to deliver monthly financial statements and monthly borrowing base certificates. The Company is required to complycertificates of compliance with certainvarious financial covenants. The Company believes it isShould an event of default occur the interest rate would increase by two percent per annum during the period of default, in compliance with all covenants under the Credit Agreement.addition to other remedies provided to Capital One.
SHORT–TERM BORROWINGS
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 10 – DEBT – (Continued)
In connection with the Company’s common stock repurchase plan discussed in Note 5,At March 31, 2020, short-term or Revolver borrowing was $6,931,000, compared to $5,648,000, at December 31, 2019. Applicable Margin Rates at March 31, 2020 and December 31, 2019 for LIBOR and Base Rates were 1.50% and 0.50%, respectively. Additionally, at March 31, 2020 and December 31, 2019, there was approximately $8,189,000 and $9,200,000, respectively, available to the Company and the Bank amended the Second Amended and Restated Loan Agreement to permit the Company to implement the plan. Among other things, the amendment also reduced the Fixed Charge Coverage Ratio, as defined in the Credit Agreement.
Short-term Borrowingsunder its Revolver arrangement.
The Company had no revolveraverage balance of short-term borrowings at Decemberduring the three-month periods ended March 31, 2016, whereas at September 30, 2017, its Revolver borrowings2020 and 2019 were $2,334,000. During the nine-month period ended September 30, 2017, the primary item impacting the Company’s Revolver borrowings was the acquisition discussed in Note 3. The Applicable Margin added to LIBOR borrowings at September 30, 2017 was 1.75%, compared to 1.50% at December 31, 2016. The Applicable Margin added to the Base Rate (Prime rate) borrowings at September 30, 2017 was 0.75%$6,281,000 and 0.50% at December 31, 2016.$4,076,000, respectively.
The Company owns vehicles for use by its UAT salesforce. The current portion of the balance due relating to these vehicles is $0 at September 30, 2017 and $13,000 at December 31, 2016.
Long-term Borrowings
The Credit Agreement, as amended, provides for a Term Loan A, which is secured by mortgages on the Company’s Real Property, accounts receivable, inventory and equipment. Term Loan A borrowings can be at either LIBOR, or at the Base Rate, or a combination of the two plus the Applicable Margins. The Applicable Margin added to LIBOR borrowings at September 30, 2017 was 1.75% and 1.50% at December 31, 2016. Applicable Margin for borrowings at the Base Rate (Prime rate) for the same timeframes was 0.75% and 0.50%, respectively. A portion of the net proceeds from the sale of Nationwide repaid all but $100,000 of Term Loan A. This balance is being borrowed at the LIBOR Rate, and is included in long-term debt, less debt issue costs on the Company’s Consolidated Balance Sheets at September 30, 2017 and December 31, 2016.
In accordance with ASU No. 2015-03, the Company reduced its long-term debt by $8,000 and $12,000, respectively, relating to debt issue costs as of September 30, 2017 and December 31, 2016.
NOTE 1110 – DIVIDEND PAYMENTS
On August 10, 2017,February 11, 2020, the Company’s Board of Directors, in accordance with theirits dividend policy, declared a quarterly cash dividend of $0.05 per common share, which was paid on August 25, 2017,February 28, 2020, to shareholders of record at the close of business on August 21, 2017.February 24, 2020. The total amount of this dividend payment was approximately $180,000. During the nine-month period ended September 30, 2017,$157,000.
NOTE 11 – SUBSEQUENT EVENT
On April 20, 2020, the Company has paid approximately $542,000received a $2.9 million PPP loan, as provided pursuant to the CARES Act, signed into law on March 27, 2020. PPP loans, which are unsecured and guaranteed by the SBA, were designed to create economic stimulus by providing additional operating capital to small businesses, such as P&F, in dividends. The Company currently intends to continue its quarterly dividend payment; however, it will review its policy on a quarterly basis.the United States for permitted uses during an eight-week period following receipt of funds.
The loan, which was obtained from BNB Bank under a promissory note dated April 17, 2020, provides for a fixed rate of interest of one percent per year with a maturity date two years from the date the funds were received. No payments of principal or interest is due during the initial six-month period. Beginning in the seventh month, the Company is required to make monthly payments of principal and interest until maturity, for any portion of the loan that is not forgiven. Up to 100% of the loan may be forgiven based on the amount of funds used during the eight-week period after receiving the funds towards payroll, rent, and certain other permitted operating expenses calculated pursuant to the CARES Act, although no assurance can be provided that P&F will obtain forgiveness of the loan in whole or in part.
P&F INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Forward 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,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,” “should”“should,” 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 all or part the 20172020 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 including, but not limited to:
· | Risks associated with health crises including epidemics and pandemics; | |
· | Exposure to fluctuations in energy prices; | |
· | Debt and debt service requirements; | |
· | Borrowing and compliance with covenants under our credit facility; | |
· | Disruption in the global capital and credit markets; | |
· | The strength of the retail economy in the United States and abroad; | |
· | ||
· | Importation delays; | |
· | Risks associated with Brexit; | |
· | Customer concentration; | |
· | Adverse changes in currency exchange rates; | |
· | Impairment of long-lived assets and goodwill; | |
· | Unforeseen inventory adjustments or changes in purchasing patterns; | |
· | Market acceptance of products; | |
· | Competition; | |
· | Price reductions; | |
· | Interest rates; | |
· | Litigation and insurance; | |
· | Retention of key personnel; | |
· | Acquisition of businesses; | |
· | Regulatory environment; | |
· | The threat of terrorism and related political instability and economic uncertainty; and | |
· | Information technology system failures and attacks, |
and those other risks and uncertainties described in its Annual Report on Form 10-K for the year ended December 31, 20162019 (“20162019 Form 10-K”), its Quarterly Reports on Form 10-Q, and its other reports and statements filed by the Company with the Securities and Exchange Commission. 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. The Company cautions you against relying on any of these forward-looking statements.
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
P&F INDUSTRIES, INC. AND SUBSIDIARIES
BusinessOUR BUSINESS
P&F and each ofIndustries, Inc. (“P&F”) is a Delaware corporation incorporated on April 19, 1963. P&F (together with its subsidiaries, are herein referred to collectively as the “Company.” In addition, the words “we”, “our” and “us” refer to the Company. Prior to February 11, 2016, (the “Nationwide Closing Date”“Company”) 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 Note 2 to the consolidated financial statements for further discussion.
Tools
The Company conducts its Tools business through a wholly-owned subsidiary, Continental Tool Group, Inc. (“Continental”), which in turn operates through its wholly-owned subsidiaries, Florida Pneumatic Manufacturing Corporation (“Florida Pneumatic”) and Hy-Tech Machine, Inc. (“Hy-Tech”). Exhaust Technologies Inc. (“ETI”) and, Universal Air Tool Company Limited (“UAT”), and Jiffy Air Tool, Inc. (“Jiffy”) are wholly-owned subsidiaries of Florida Pneumatic. Effective April 5, 2017, we purchased substantially all of the operating assets, less certain payables of Jiffy Air Tool, Inc. through a wholly-owned subsidiary (“Jiffy”). See Note 3 to our consolidated financial statements for further discussion. The business of Air Tool Service Company (“ATSCO”) operates through a wholly-owned subsidiary of Hy-Tech.
Florida Pneumatic is engaged in Effective October 25, 2019, the importationCompany through a wholly owned subsidiary of Hy-Tech, acquired substantially all the operating assets comprising the businesses of Blaz-Man Gear, Inc. and sale of pneumatic hand tools, primarily for the retail, industrial and automotive markets. Florida Pneumatic also markets, through its Berkley Tool division (“Berkley”)Gear Products & Manufacturing, Inc., 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. Lastly, as the result of the acquisition of Jiffy, Florida Pneumatic now manufactures pneumatic tools marketed primarily to the aerospace sector.
Hy-Techeach an Illinois-based corporation that 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 for its own tools as well as several other widely-used brands of pneumatic tools. It also manufactures and distributes high pressure stoppers for hydrostatic testing fabricated pipe, gears, sprockets, splines and racks. Additionally, the Company develops highly engineered product solutions to specific customer requirements in the pneumatic tool market.
Hardware
Prior to the Nationwide Closing Date, we conducted our Hardware business through our wholly-owned subsidiary, Countrywide Hardware, Inc. (“Countrywide”). Countrywide conducted its business operations through its wholly-owned subsidiary, Nationwide. Nationwide was an importer and manufacturer of door, window and fencing hardware and accessories, including rollers, hinges, window operators, sash locks, custom zinc castings and door closers. On the Nationwide Closing Date, Countrywide sold Nationwide to an unrelated third party for approximately $22,200,000.gears. See Note 2 to consolidated financial statements– Acquisition, for further discussion.
KEY INDICATORSFlorida Pneumatic imports, manufactures and sells pneumatic hand tools and accessories, which are of its own design, primarily to the retail, industrial, automotive and aerospace markets.
Hy-Tech designs, manufactures and distributes industrial pneumatic tools, industrial gears, hydrostatic test plugs and a wide variety of parts under the brands ATP, ATSCO, Numatx, Thaxton and Quality Gear. Industries served include power generation, petrochemical, construction, railroad, mining, ship building and fabricated metals. Hy-Tech also manufactures components, assemblies, finished product and systems for various Original Equipment Manufacturers under their own brand names.
Economic Measures
Much of our business is driven by the ebbs and flows of the general economic conditions in both the United States and, to a lesser extent, abroad. We focus on a wide array of customer types including but not limited to large retailers, aerospace manufacturers, large and small resellers of pneumatic tools and parts, and automotive related customers. We tend to track the general economic conditions of the United States, industrial production and general retail sales.
A key economic measure relevant to us is the cost of the raw materials in our products. Key materials include metals, especially various types of steel and aluminum. Also important is the value of the United States Dollar (“USD”) in relation to the Taiwanese dollar (“TWD”), as we purchase a significant portion of our products from Taiwan. Purchases from Chinese sources are made in USD; however, if the Chinese currency, the Renminbi (“RMB”), were to be revalued against the USD, there could be a negative impact on the cost of our products. Additionally, we closely monitor the fluctuation in the Great British Pound (“GBP”) to the USD, and the GBP to TWD, both of which has hadcan have an impact on ourthe consolidated results in 2017.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.
TheAs the result of additional tariffs imposed since mid-2018, specifically those imposed on products imported from China, we now must consider tariffs a key economic measure, as a significant portion of products imported by Florida Pneumatic, primarily for our Retail customers, are subject to these tariffs.
Lastly, the cost and availability of a quality labor pool in the countries where products and components are manufactured, both overseas as well as in the United States, could materially affect our overall results.
Operating Measures
Key operating measures we use to manage our operations are:are orders; shipments; development of new products; customer retention; inventory levels and productivity. These measures are recorded and monitored at various intervals, including daily, weekly and monthly. To the extent these measures are relevant;relevant, they are discussed in the detailed sections 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; earnings before interest, taxes, depreciation and amortization; operating cash flows and capital expenditures; return on sales; return on assets; days sales outstanding and inventory turns. These measures are reviewed at monthly, quarterly and annual intervals and compared to historical periods as well as to established objectives. To the extent that these measures are relevant, they are discussed in the detail below.
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
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 20162019 Form 10-K.10-K, and in the Notes to these financial statements. 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.
OVERVIEW
Key factors or events impacting our thirdfirst quarter 20172020 results of operations were:
RESULTS OF OPERATIONSTRENDS AND UNCERTAINTIES
ContinuingWhile the novel coronavirus or COVID-19 pandemic has impacted our ability to source certain of our products, particularly with respect to factories that we utilize located in China, Vietnam and Italy, we do not believe this alone is likely to have a material negative impact on our results for the foreseeable future. However, we do believe the impact of the COVID-19 virus on the global economy, particularly within the U.S., is likely to have a material impact on our results for fiscal 2020. Furthermore, nearly all U.S. states and the United Kingdom, where we have operations, have ordered non-essential businesses to stop physical operations and ordered its residents to remain home in order to contend with the impact of this pandemic. While we are currently able to continue operations at all of our locations, the COVID-19 pandemic has significantly impacted orders and sales and will for the foreseeable future. We are closely monitoring the situation and taking actions to protect the safety of our employees and communities. For example, among other things, we have restricted international and domestic travel, taken a variety of steps to ensure social distancing in our facilities, including working remotely where available, and have increased our cleaning and sanitizing procedures in our facilities.
Unless otherwise discussed elsewhere in the Management’s Discussion and Analysis, we believe that our relationshipsBased on negotiations with our key customersoverseas suppliers and suppliers remain satisfactory. Global oil and gas exploration and extractionThe Home Depot (“THD”), which is our largest customer that is currently affected by the tariffs imposed since July 2018, we have been the primary market of Hy-Tech, which until recently has begunable to show signs of improving. Further, there remains a persistent weakness in the other markets that Hy-Tech serves most notably power generation and construction.
We elected not to renew our supply agreement with Sears, which expired on September 30, 2017. This decision was based on a number of factors including Sears’ continuing financial difficulties, the saleavoid much of the Craftsman brand to Stanley Black & Decker and our levelimpact of working capital exposure in relation to our return on that investment pertaining to Sears. Theresuch tariffs. However, there is no Sear’s inventory exposure at September 30, 2017. Further, we believe that all accounts receivable attributable to Sears, which approximates $1,100,000 at September 30, 2017, should be collected by December 31, 2017. However, at the present time, there can be no assuranceguarantee that we will fully recover this.be able to avoid some or all of any new, or additional tariffs. Should we be unable to avoid such additional costs, our gross margin on these products likely would be severely impacted. This could cause us to terminate or alter certain customer/supplier relationships.
We believe that over time, several newer technologies and features will begin to have ana greater impact on the market for the Company’sour traditional pneumatic tool offerings. ThisThe impact of this evolution has been felt initially by the advent of someadvanced cordless, operatedor battery-powered hand tools, particularly in the automotive aftermarket.aftermarket or in the retail sector. We are currently evaluating the developmentcontinue to perform a cost-benefit analysis of developing or incorporating more advanced technologies in our tool platforms.
RESULTS OF OPERATIONS
Continuing operations - (Continued)The ongoing low production level of one of Boeing’s major aircraft has negatively impacted our aerospace sector revenue. Should the global decision to keep this aircraft grounded and the Federal Aviation Administration hold off on a decision that this aircraft is safe to fly, it is likely Boeing will continue to have lower production rates, which in turn will likely continue to have an adverse effect on our revenue.
Other than the aforementioned or matters that may be discussed elsewhere in this Form 10-Q, there are no major trends or uncertainties that had, or we could have reasonably expect couldexpected to have, a material impact on our revenue, nor was there any unusual or infrequent event, transaction or any significant economic change that materially affected our results of operations.
DuringUnless otherwise discussed elsewhere in the first quarterManagement’s Discussion and Analysis, we believe that our relationships with our key customers and suppliers remain satisfactory.
Management’s Discussion and Analysis of 2016, we sold Nationwide to an unrelated third party for approximately $22,200,000. As a resultFinancial Condition and Results of this transaction, Nationwide’s 2016 results are reported under discontinued operations. Please see Note 2Operations - Discontinued Operations, to our consolidated financial statements for additional information.Continued
RESULTS OF OPERATIONS- (Continued)
REVENUE
The tables below provide an analysis of our net revenue from continuing operations for the three and nine-monththree-month periods ended September 30, 2017March 31, 2020 and 2016:2019:
Three months ended September 30, | Three months ended March 31, | |||||||||||||||||||||||||||||||
Increase | Decrease | |||||||||||||||||||||||||||||||
2017 | 2016 | $ | % | 2020 | 2019 | $ | % | |||||||||||||||||||||||||
Florida Pneumatic | $ | 12,295,000 | $ | 11,702,000 | $ | 593,000 | 5.1 | % | $ | 10,030,000 | $ | 10,440,000 | $ | (410,000 | ) | (3.9 | )% | |||||||||||||||
Hy-Tech | 3,487,000 | 2,931,000 | 556,000 | 19.0 | 3,320,000 | 3,882,000 | (562,000 | ) | (14.5 | ) | ||||||||||||||||||||||
Consolidated | $ | 15,782,000 | $ | 14,633,000 | $ | 1,149,000 | 7.9 | % | $ | 13,350,000 | $ | 14,322,000 | $ | (972,000 | ) | (6.8 | )% |
Nine months ended September 30, | ||||||||||||||||
Decrease | ||||||||||||||||
2017 | 2016 | $ | % | |||||||||||||
Florida Pneumatic | $ | 34,936,000 | $ | 35,270,000 | $ | (334,000 | ) | (0.9 | )% | |||||||
Hy-Tech | 9,421,000 | 9,499,000 | (78,000 | ) | (0.8 | ) | ||||||||||
Consolidated | $ | 44,357,000 | $ | 44,769,000 | $ | (412,000 | ) | (0.9 | )% |
Florida Pneumatic
Florida Pneumatic markets its air tool products to four primary sectors within the pneumatic tool market; retail, automotive, industrial/catalog,Automotive, Retail, Aerospace and aerospace.Industrial. 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, | Three months ended March 31, | ||||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | Increase (decrease) | 2020 | 2019 | (Decrease) increase | ||||||||||||||||||||||||||||||||||||||||||||
Revenue | Percent of revenue | Revenue | Percent of revenue | $ | % | Revenue | Percent of revenue | Revenue | Percent of revenue | $ | % | ||||||||||||||||||||||||||||||||||||||
Retail customers | $ | 5,212,000 | 42.4 | % | $ | 6,631,000 | 56.7 | % | $ | (1,419,000 | ) | (21.4 | )% | ||||||||||||||||||||||||||||||||||||
Automotive | 3,021,000 | 24.6 | 3,723,000 | 31.8 | (702,000 | ) | (18.9 | ) | $ | 3,232,000 | 32.2 | % | $ | 3,866,000 | 37.0 | % | $ | (634,000 | ) | (16.4 | )% | ||||||||||||||||||||||||||||
Industrial/catalog | 1,228,000 | 10.0 | 1,026,000 | 8.7 | 202,000 | 19.7 | |||||||||||||||||||||||||||||||||||||||||||
Retail | 2,990,000 | 29.8 | 2,709,000 | 26.0 | 281,000 | 10.4 | |||||||||||||||||||||||||||||||||||||||||||
Aerospace | 2,564,000 | 20.8 | 89,000 | 0.8 | 2,475,000 | 2,780.9 | 2,599,000 | 25.9 | 2,360,000 | 22.6 | 239,000 | 10.1 | |||||||||||||||||||||||||||||||||||||
Industrial | 1,062,000 | 10.6 | 1,325,000 | 12.7 | (263,000 | ) | (19.8 | ) | |||||||||||||||||||||||||||||||||||||||||
Other | 270,000 | 2.2 | 233,000 | 2.0 | 37,000 | 15.9 | 147,000 | 1.5 | 180,000 | 1.7 | (33,000 | ) | (18.3 | ) | |||||||||||||||||||||||||||||||||||
Total | $ | 12,295,000 | 100.0 | % | $ | 11,702,000 | 100.0 | % | $ | 593,000 | 5.1 | % | $ | 10,030,000 | 100.0 | % | $ | 10,440,000 | 100.0 | % | $ | (410,000 | ) | (3.9 | )% |
RESULTS OF OPERATIONS
Continuing operations - (Continued)
Nine months ended September 30, | ||||||||||||||||||||||||
2017 | 2016 | Increase (decrease) | ||||||||||||||||||||||
Percent of | Percent of | |||||||||||||||||||||||
Revenue | revenue | Revenue | revenue | $ | % | |||||||||||||||||||
Retail customers | $ | 15,976,000 | 45.7 | % | $ | 19,411,000 | 55.1 | % | $ | (3,435,000 | ) | (17.7 | )% | |||||||||||
Automotive | 10,024,000 | 28.7 | 11,336,000 | 32.1 | (1,312,000 | ) | (11.6 | ) | ||||||||||||||||
Industrial/catalog | 3,812,000 | 10.9 | 3,523,000 | 10.0 | 289,000 | 8.2 | ||||||||||||||||||
Aerospace | 4,426,000 | 12.7 | 320,000 | 0.9 | 4,106,000 | 1,283.1 | ||||||||||||||||||
Other | 698,000 | 2.0 | 680,000 | 1.9 | 18,000 | 2.6 | ||||||||||||||||||
Total | $ | 34,936,000 | 100.0 | % | $ | 35,270,000 | 100.0 | % | $ | (334,000 | ) | (0.9 | )% |
The majoritymost significant component of the decline in Florida Pneumatic’s third quarter 2017 Retail revenue was due to the reduction in shipments to Sears this quarter, compared to the same period in 2016. As discussed above, we elected not to renew an agreement with Sears, which expired on September 30, 2017. Also impacting our Retail revenue this quarter was a decline in shipments to The Home Depot, which was due primarily to their decision to reduce the number of items offered for sale at certain locations. Additionally, we believe that the recent hurricanes, which impacted the southern portion of the United States, was a contributing factor to the decline in our Retail revenue this quarter, compared to the third quarter of 2016. A major factor contributing to the net declinechange in our Automotive revenue this quarter, compared to the same three-month period in 2016, were two major automotive parts distributors continuing2019 is the loss of a large customer and, to adjust their inventory levels of pneumatic hand tools. Partially offsetting this decline was ana lesser degree, negative effects on our business caused by COVID-19. The 10.4 percent increase in revenue from our UAT division headquartered in the United Kingdom. OurIndustrial/catalog revenue increased slightly compared to the same period a year ago. We believe that activity in this sector has begun to improve; however, no assurance can be given that this trend will continue. Lastly, the Jiffy acquisition in April of this yearhas enabled us to approach the aerospace sector with a much stronger brand. As a result, aerospace sales contributed nearly $2.5 million to Florida Pneumatic’s total third quarter 2017 revenue.
With respect to our year to date results, seventy-five percent of the decline in our Retail revenue was due primarily to low orders in the reductionfirst quarter of 2019 that resulted from higher level of shipments in the fourth quarter of 2018. Principally due to greater than normal order and shipments during the first quarter of 2020 to Sears,a military-oriented customer, Florida Pneumatic’s Aerospace revenue improved this quarter compared to the same nine-monththree-month period in 2016. During 2016,2019. The Home Depot rolled-out several new tools, which did not occur in 2017, accounting for much of the decline in The Home Depot’s year-to-date revenue. Additionally, yearIndustrial revenue this quarter was due primarily to date revenue wason-going sluggishness in the oil and gas sector and reduced orders from certain customers that service the aerospace industry that have been negatively affected by The Home Depot’s decision to reduce the numberreduction in production by Boeing of items being offered at certain locations. We believe two major automotive distributors have been adjusting their inventory levels. As such, their decision is a primary cause of the year to date decline in our Automotive revenue. It should be noted that we have encountered increased sales to other major Automotive customers and distributors. Additionally, UAT’s 2017 year to date revenue has declined approximately 11%, whencivilian aircraft, compared to the same period a year ago. Our Industrial/catalog revenue, while sluggish during the first three months of 2017, has begun to see slight improvement during the second and third quarters of 2017. Lastly, aerospace revenue, driven by the Jiffy acquisition, added more than $4.1 million to Florida Pneumatic’s year to date 2017 revenue, compared to the same period a year ago.in 2019.
Hy-Tech
Hy-Tech designs, manufactures and sells a wide range of industrial products under the brands ATP, ATSCO and OzatATSCO which are categorized as “ATP”ATP for reporting purposespurposes. Products manufactured for other companies under their brands are included in the OEM category in the table below. Power Transition Group (“PTG”) revenue is comprised of products manufactured and include heavy duty air tools, industrial grinderssold by the gear businesses that were acquired in October 2019, products sold through Hy-Tech’s legacy gear manufacturing division and impact sockets. Hy-Tech’s other product lines,products sold to a certain customer whose revenue was included in OEM in 2019. Numatx, Thaxton and Quality Gear,other peripheral product lines, such as general machining, are reported as “Other” and include the hydro-pneumatic riveters, hydrostatic test plugs, air motors and custom gears.Other.
Three months ended September 30, | Three months ended March 31, | ||||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | Increase (decrease) | 2020 | 2019 | (Decrease) increase | ||||||||||||||||||||||||||||||||||||||||||||
Revenue | Percent of revenue | Revenue | Percent of revenue | $ | % | Revenue | Percent of revenue | Revenue | Percent of revenue | $ | % | ||||||||||||||||||||||||||||||||||||||
OEM | $ | 1,439,000 | 43.3 | % | $ | 1,336,000 | 34.4 | % | $ | 103,000 | 7.7 | % | |||||||||||||||||||||||||||||||||||||
ATP | $ | 3,092,000 | 88.7 | % | $ | 2,515,000 | 85.8 | % | $ | 577,000 | 22.9 | % | 1,061,000 | 32.0 | 1,986,000 | 51.2 | (925,000 | ) | (46.6 | ) | |||||||||||||||||||||||||||||
PTG | 735,000 | 22.1 | 355,000 | 9.1 | 380,000 | 107.0 | |||||||||||||||||||||||||||||||||||||||||||
Other | 395,000 | 11.3 | 416,000 | 14.2 | (21,000 | ) | (5.0 | ) | 85,000 | 2.6 | 205,000 | 5.3 | (120,000 | ) | (58.5 | ) | |||||||||||||||||||||||||||||||||
Total | $ | 3,487,000 | 100.0 | % | $ | 2,931,000 | 100.0 | % | $ | 556,000 | 19.0 | % | $ | 3,320,000 | 100.0 | % | $ | 3,882,000 | 100.0 | % | $ | (562,000 | ) | (14.5 | )% |
22
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued
RESULTS OF OPERATIONS- (Continued)
Hy-Tech- Continued
Continuing operations - (Continued)
Nine months ended September 30, | ||||||||||||||||||||||||
2017 | 2016 | Decrease | ||||||||||||||||||||||
Percent of | Percent of | |||||||||||||||||||||||
Revenue | revenue | Revenue | revenue | $ | % | |||||||||||||||||||
ATP | $ | 8,386,000 | 89.0 | % | $ | 8,411,000 | 88.5 | % | $ | (25,000 | ) | (0.3 | )% | |||||||||||
Other | 1,035,000 | 11.0 | 1,088,000 | 11.5 | (53,000 | ) | (4.9 | ) | ||||||||||||||||
Total | $ | 9,421,000 | 100.0 | % | $ | 9,499,000 | 100.0 | % | $ | (78,000 | ) | (0.8 | )% |
Significant components contributing to the increaseThe decline in Hy-Tech’s third quarter 2017 ATP revenue comparedis due primarily to two factors: (a) the same perioddecision to allocate additional marketing and product development efforts to its Engineered Solutions products offering, which is designed to exploit Hy-Tech’s expertise in 2016, include the resurgence in activity from a large customer acquired in the ATSCO acquisition that had reduced its orders until the second quarter of 2017,engineering and continues to place orders during the third quarter of 2017. Additionally, in 2016 we beganmanufacturing and enable it to pursue alternate, non-traditional markets where we believed we could exploit our engineering and manufacturing expertise, and develop different applications for our tools, motors and accessories. We believe the development of this new marketing strategy provides an opportunity to generate new sources of revenue from new markets in 2017 and beyond. While third quarter 2017 revenue from this new initiative was $156,000, at September 30, 2017 Hy-Tech had future orders just shy of $750,000. Although Hy-Tech’s third quarter 2017 revenue has increased compared to both the first and second quarters of 2017, we believe that there continues to be an excess inventory of tools and spare parts in the distribution channels. Additionally, we believe that the turn-around activities in the oil and gas sector continue to lag, compared to historic levels, further negatively impacting Hy-Tech’s revenue. Recent hurricanes and other major storms have also impacted Hy-Tech’s revenue. Further, we believe lower-priced imported tools and spare parts are adversely impacting Hy-Tech’s position in the marketplace.
The fluctuation in Hy-Tech’s year to date revenue for the nine-month period ended September 30, 2017, compared to the same period in 2016 was primarily due to a number of factors. A decline in ATP revenue from a large customer that was acquired in the ATSCO acquisition that had greatly reduced its purchases in the first quarter of 2017, compared to its purchases during the first quarter of 2016. By mid-2016 this customer ceased placing orders. However, as discussed above, this customer began placing orders during the second quarter of 2017 and continued into the third quarter of this year. A major component of Hy-Tech’s revenue is derived from the oil and gas sector. Currently, we estimate that the oil and gas sector revenue accounts for approximately 30% to 35% of Hy-Tech’s total revenue. This revenue stream is driven by a number of factors, such as, the number of off-shore rigs located in the Gulf of Mexico, “turn-arounds” or plant maintenance activities and, to a lesser extent, land rigs. We believe the lag in turn-around activities, the hurricanes that severely damaged the Gulf of Mexico and many of the oil refineries in the Gulf States, along with the growing presence of lower-priced imported tools and spare parts are impacting the markets in which Hy-Tech operates. However, as discussed earlier, Hy-Tech continues to pursue alternate markets where it believes it can exploit its engineering and manufacturing expertise, and developwhile developing different applications for its tools, motors and accessories. Revenuerelated accessories, and (b) the decline in the demand for its oil and gas related tools and accessories, due primarily to the significant decline in oil prices and the COVID-19 pandemic. We believe the development of the Engineered Solutions offering will continue to provide Hy-Tech an opportunity to generate additional sources of revenue in the future. The transition and relocation from these new sourcesIllinois to our facilities in Pennsylvania of the gears businesses acquired in late October 2019 continued throughout the first quarter of 2020. The process of relocation of equipment and the set-up of general operations that occurred during the quarter caused lower than expected PTG revenue and profits.
GROSS MARGIN/PROFIT
Three months ended March 31, | Decrease | |||||||||||||||||
2020 | 2019 | Amount | % | |||||||||||||||
Florida Pneumatic | $ | 3,774,000 | $ | 4,007,000 | $ | (233,000 | ) | (5.8 | )% | |||||||||
As percent of respective revenue | 37.6 | % | 38.4 | % | (0.8 | )% | pts | |||||||||||
Hy-Tech | $ | 708,000 | $ | 1,274,000 | $ | (566,000 | ) | (44.4 | ) | |||||||||
As percent of respective revenue | 21.3 | % | 32.8 | % | (11.5 | )% | pts | |||||||||||
Total | $ | 4,482,000 | $ | 5,281,000 | $ | (799,000 | ) | (15.1 | )% | |||||||||
As percent of respective revenue | 33.6 | % | 36.9 | % | (3.3 | )% | pts |
Factors contributing to the slight decline in Florida Pneumatic’s gross margin this quarter, compared to the same three-month period ended March 31, 2019, was due mostly to product mix, as we had increases in lower gross margin Retail revenue, with declines in revenue of our generally stronger gross margin Automotive and Industrial lines. Additionally, as the result of COVID-19, we encountered weaker absorption of manufacturing overhead at Jiffy during the first nine monthsquarter of 2017 was approximately $657,000, and is included2020, compared to the same period in the ATP grouping. Lastly, Hy-Tech has recently begun a new marketing strategy that is intended to re-energize its gear and hydraulic stopper business.2019.
RESULTS OF OPERATIONS
Continuing operations - (Continued)
Gross profit /The decline in Hy-Tech’s gross margin
Three months ended September 30, | Increase | |||||||||||||||||||||||
2017 | 2016 | Amount | % | |||||||||||||||||||||
Florida Pneumatic | $ | 4,579,000 | $ | 4,219,000 | $ | 360,000 | 8.5 | % | ||||||||||||||||
As percent of respective revenue | 37.2 | % | 36.1 | % | 1.1 | % pts | ||||||||||||||||||
Hy-Tech | $ | 1,005,000 | $ | 286,000 | $ | 719,000 | 251.4 | |||||||||||||||||
As percent of respective revenue | 28.8 | % | 9.8 | % | 19.0 | % pts | ||||||||||||||||||
Total | $ | 5,584,000 | $ | 4,505,000 | $ | 1,079,000 | 24.0 | % | ||||||||||||||||
As percent of respective revenue | 35.4 | % | 30.8 | % | 4.6 | % pts |
Nine months ended September 30, | Increase | |||||||||||||||||||||||
2017 | 2016 | Amount | % | |||||||||||||||||||||
Florida Pneumatic | $ | 13,116,000 | $ | 13,070,000 | $ | 46,000 | 0.4 | % | ||||||||||||||||
As percent of respective revenue | 37.5 | % | 37.1 | % | 0.4 | % pts | ||||||||||||||||||
Hy-Tech | $ | 2,864,000 | $ | 1,956,000 | $ | 908,000 | 46.4 | |||||||||||||||||
As percent of respective revenue | 30.4 | % | 20.6 | % | 9.8 | % pts | ||||||||||||||||||
Total | $ | 15,980,000 | $ | 15,026,000 | $ | 954,000 | 6.3 | % | ||||||||||||||||
As percent of respective revenue | 36.0 | % | 33.6 | % | 2.4 | % pts |
Customer and product mix were the primary factors that contributed of 11.5 percentage points was due to the increasefollowing: (i) increasedoutside processing costs; (ii) weaker manufacturing overhead absorption, which was due in Florida Pneumatic’s thirdpart to labor hours being utilized in connection with the relocation of the gear businesses discussed earlier; (iii) less favorable mix of products sold this quarter, 2017 gross margin, compared to the same period a year ago. Of note, Jiffy’s gross margin approximates that of Florida Pneumatic’s non-retail product lines. As such, the gross profit associated with the Aerospace revenue this quarter exceeded the gross profits lost as the result of the decline in Retail revenue. There were no significant changes to our cost structure or selling price during this quarter.
Florida Pneumatic’s overall gross margin for the nine-month period ended September 30, 2017 is essentially the same as the gross margin for the same period in 2016.
Hy-Tech’s 2017 third quarter gross margin increased 19.0 percentage points, a moreago; and (iv) lower than 250% improvement over the same period a year ago. Factors contributing to the positive change include, among other things: (a) in the third quarter of 2016, we increased Hy-Tech’s allowance for obsolete / slow moving inventory (“OSMI”). This adjustment in 2016 was compounded by lower overhead absorption, due to reduced manufacturing, in turn due to weakness in the oil and gas and power generation sectors and (b) during 2016, we were shipping a line of very low gross margin tools to a major customer. However, during the second and third quarters of 2017, shipments of these low gross margin tools declined compared to the prior year. Additional factors contributing to the improvement in Hy-Tech’s gross margin include: (a) improved overhead absorption as manufacturing activity has increased; (b) improved inventory turns, which directly impacts fluctuations in Hy-Tech’s OSMI, and (c) the sale of the low margin tools has been lower this year compared to the prior year.
Hy-Tech’s gross margin for the nine-month period ended September 30, 2017, improved 9.8 percentage points, when compared to the same period a year ago. Offsetting the primary factors to this improvement discussed above,expected gross margin on the sale of PTG products being sold under itsdue primarily to start-up issues in the new marketing initiative are below Hy-Tech’s historical range. In addition to margins on these products increasing as the result of manufacturing experience, we also expect average margins in this category to improve as we develop additional product offerings.facility.
Selling, and general and administrative expenses
Selling, general and administrative expenses (“SG&A” or “operating expenses”) 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.
RESULTS OF OPERATIONS
Continuing operations - (Continued)
During the thirdfirst quarter of 2017,2020, our SG&A was $5,352,000,$5,690,000, compared to $4,915,000$5,263,000 for the same three-month period in 2016.2019. The netmost significant factor driving the increase in our SGA was dueapproximately $420,000 of relocation, transition and temporary labor and recruiting costs incurred in large part toconnection with the acquisition of the Jiffy businessgear businesses in April 2017, with SG&Alate October 2019. Nearly half of approximately $575,000 forthese costs were anticipated to be recorded during the second and third quarters of 2020. However, we elected to accelerate the integration of the acquired businesses, completing nearly all the tasks during the first quarter of 2017. Other significant components of2020. As such, we anticipate minimal integration costs associated with the change include: (i) a $17,000 reductiongear businesses moving forward. Additionally, rent, and bad debt expenses increased this quarter, compared to the same three-month period in non-Jiffy2019, by $22,000 and $19,000, respectively. Partially offsetting the above were reductions in compensation expenses, which is comprised of base salaries and wages, accrued performance-based bonus incentives and associated payroll taxes and employee benefits; (ii) a decrease inbenefits of $24,000. In addition, variable expenses and corporate expenses declined $73,000 and $26,000, respectively.
Management’s Discussion and Analysis of $78,000, due primarily to lower Retail revenue; (iii) a decrease in professional feesFinancial Condition and Results of $56,000 and (iv) a reduction in amortization and depreciation expenses of $60,000. These reductions were partially offset by an increase in corporate related expenses of $24,000.Operations – Continued
Our SG&A for the nine-month period ended September 30, 2017 was $15,765,000, compared to $15,088,000 for the same period in 2016. As noted above, the most significant component to the net increase was the addition of Jiffy, with year to date 2017 SG&A of approximately $1,025,000. Other significant components include reductions in: (i) non-Jiffy compensation expenses of $74,000; (ii) variable expenses of $300,000, due primarily to lower Retail revenue; (iii) depreciation and amortization of $236,000, due mostly to the reduction in Hy-Tech’s intangible assets, which were written down in 2016; and (iv) corporate related expenses of $80,000. The reductions were partially offset by an increase in professional fees of $381,000, which include fees and expenses related to the Jiffy Acquisition and recruitment fees for executive positions at Hy-Tech.
Impairment of goodwill and other intangible assets - 2016
During the second quarter of 2016, we determined that an interim impairment analysis of the goodwill recorded in connection with Hy-Tech and ATSCO was necessary. As a result of the aforementioned, it was determined that Hy-Tech's short and long-term projections at that time had indicated an inability to generate sufficient discounted future cash flows to support the recorded amounts of goodwill, other intangible assets and other long-lived assets necessitating the impairment charge. Accordingly, adhering to current accounting literature, we recorded an impairment charge of $8,311,000 relating to goodwill and other intangible assets during the second quarter of 2016.
Other expense (income), net
The three-month period ended September 30, 2017 included $11,000 consisting primarily of an adjustment to the fair value of the contingent consideration obligation to the Jiffy Seller. During the same period in 2016, the most significant factor contributing to the net Other income was rental income of real property that was sold in November of 2016. There is no income of a similar nature for 2017.
For the nine-month period ended September 30, 2017, our Other expense (income), net, is primarily the fair value adjustment discussed above partially offsetting the receipt of the balance of an escrow related to the sale of the real property that was located in Tampa, Florida and used by Nationwide Industries Inc. See Note 2 to our consolidated financial statements for further discussion. The amount for the same period in 2016 was the net rental income on the real property that was sold in November of 2016.
RESULTS OF OPERATIONS
Continuing operations - (Continued)
Interest
Three months ended September 30, | Increase | |||||||||||||||
2017 | 2016 | Amount | % | |||||||||||||
Interest expense attributable to: | ||||||||||||||||
Short-term borrowings | $ | 32,000 | $ | 15,000 | $ | 17,000 | 113.3 | % | ||||||||
Term loans, including Capital Expenditure Term Loans | 1,000 | 1,000 | - | - | ||||||||||||
Amortization expense of debt issue costs | 17,000 | 10,000 | 7,000 | 70.0 | ||||||||||||
Total | $ | 50,000 | $ | 26,000 | $ | 24,000 | 92.3 | % |
Nine months ended September 30, | Increase (decrease) | Three months ended March 31, | Increase (decrease) | |||||||||||||||||||||||||||||
2017 | 2016 | Amount | % | 2020 | 2019 | Amount | % | |||||||||||||||||||||||||
Interest expense attributable to: | ||||||||||||||||||||||||||||||||
Short-term borrowings | $ | 80,000 | $ | 41,000 | $ | 39,000 | 95.1 | % | $ | 51,000 | $ | 43,000 | $ | 8,000 | 18.6 | % | ||||||||||||||||
Term loans, including Capital Expenditure Term Loans | 2,000 | 5,000 | (3,000 | ) | (60.0 | ) | ||||||||||||||||||||||||||
Term loans, including Capex Term Loans | — | 5,000 | (5,000 | ) | (100.0 | ) | ||||||||||||||||||||||||||
Amortization expense of debt issue costs | 42,000 | 118,000 | (76,000 | ) | (64.4 | ) | 4,000 | 15,000 | (11,000 | ) | (73.3 | ) | ||||||||||||||||||||
Total | $ | 124,000 | $ | 164,000 | $ | (40,000 | ) | (24.4 | )% | $ | 55,000 | $ | 63,000 | $ | (8,000 | ) | (12.7 | )% |
Primarily dueAs the interest rates charged by our bank remained constant, the increase in interest expense related to short-term loan borrowings during the first quarter of 2020, compared to the result of the sale of Nationwide and the real property locatedsame period in Tampa, Florida, occurring2019, was driven by higher Revolver borrowings this quarter. There were no term loans in February and November 2016, respectively, our totalplace during 2020. Debt issue costs incurred in connection with recent bank borrowings have been minimal. However, as discussed in Note 3 - Acquisition, to our consolidated financial statements, on April 5, 2017, we purchased the net assets of the Jiffy business and real property located in Carson City, Nevada. The funding for this transaction was from our Revolver Loan, which is our short-term borrowing.
In accordance with accounting guidance we have reported our short-term and term loan interest expense incurred during the period January 1, 2016amendments are being amortized through February 11, 2016, which was2024, were lower than the effective date of sale of Nationwide, in Discontinued operations. Further, as the result of the Company and Capital One, National Association (“Capital One”, or the “Bank”) agreeing to significantly modify the Credit Agreement, as defined below in our Liquidity and Capital Resources, we were required to write down and recognize as interest expense the debt issue costs associated with the then existing Credit Agreement. These costs are identified in the table above as “Amortization expense of debt issue costs”. See Note 2 to our consolidated financial statements for further discussion on the sale of Nationwide. See Liquidity and Capital Resources elsewhere in this Management’s Discussion and Analysis section for further information regarding our bank loans.previous amendments.
Our average balance of short-term borrowings during the three and nine-month periodsthree-month period ended September 30, 2017March 31, 2020 was $3,635,000 and $3,263,000, respectively,$6,281,000, compared to $2,585,000 and $3,593,000, respectively,$4,076,000, during the same periodsthree-month period in 2016.2019.
Income taxes
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law. The Act includes provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitation and technical corrections to tax depreciation methods for qualified improvement property.
At the end of each interim reporting period, we estimate anthe 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. Additionally, in the year to date computation we included the impact of options that expired, were exercised, or were forfeited. The aggregate net effect of these options reduced our deferred tax asset and increased the tax provision by approximately $116,000. As a result of the aforementioned,Accordingly, our effective tax rate applicable to continuing operations for the three and nine-month periodsthree-month period ended September 30, 2017March 31, 2020 was 97.1% and 136.5%a tax benefit of 40.0%, respectively. Forcompared to 49.0% for the same periodsthree-month period ended March 31, 2019. Included in 2016 our effective tax rate applicable to continuing operations was 27.2% and 33.9%, respectively.the three-month period ended March 31, 2020 is also consideration for net operating loss carrybacks under the CARES Act. The Company’s effective tax rates for all periods presented were also affectedimpacted primarily by state taxes, and non-deductible expenses and foreign tax rate differentials.expenses.
Management’s Discussion and Analysis of Financial Condition and Results of Operations – Continued
RESULTS OF OPERATIONS- (Continued)
Discontinued operations - 2016
Nationwide’s results of operations in our consolidated financial statements and Note 2, presents their revenue and cost of goods sold for the period January 1, 2016 through February 11, 2016. The SG&A incurred during the same period includes that of Nationwide plus $19,000 of expenses incurred at the corporate level that is specifically attributable to Nationwide. In accordance with current accounting guidance, we included, as part of discontinued operations, all interest expense incurred attributable to our Bank borrowings during the period January 1, 2016 through February 11, 2016. Additionally, we initially recognized an after tax gain of $12,171,000, on the sale of Nationwide. For income tax purposes, the Company’s tax basis in Nationwide was greater than the net proceeds, thus resulting in a tax loss. This gain represents the difference between the adjusted net purchase price and the carrying value of Nationwide. Further, in 2016, Countrywide completed the sale of the Tampa, Florida real property, which was treated as a capital gain transaction for tax purposes. During the three-month period ended September 30, 2016, the Company removed a valuation allowance initially recorded against the tax loss, resulting in an additional gain on sale $187,000.
LIQUIDITY AND CAPITAL RESOURCES
We monitor such metrics as days’ sales outstanding, inventory requirements, inventory turns, estimated future purchasing requirements and capital expenditures to project liquidity needs, as well as evaluate return on assets. Our primary sources of funds are operating cash flows and our Revolver Loan (“Revolver”) with our Bank.
We gauge our liquidity and financial stability by various measurements, some of which are shown in the following table:
September 30, 2017 | December 31, 2016 | March 31, 2020 | December 31, 2019 | |||||||||||||
Working Capital | $ | 24,490,000 | $ | 28,373,000 | $ | 21,144,000 | $ | 22,115,000 | ||||||||
Current Ratio | 3.81 to 1 | 5.60 to 1 | 2.73 to 1 | 2.85 to 1 | ||||||||||||
Shareholders’ Equity | $ | 47,221,000 | $ | 47,590,000 | $ | 45,498,000 | $ | 46,506,000 |
Credit facility
In October 2010,Our Credit Facility is discussed in detail in Note 9 to our consolidated financial statements.
Payroll Protection Program Loan
On April 20, 2020, we entered intoreceived a Loan$2.9 million PPP loan, as provided pursuant to the CARES Act. This loan obtained from BNB Bank is unsecured and Security Agreement (as amended from time to time, “Credit Agreement”) with an affiliate of Capital One. The Credit Agreement provides for Revolver borrowings, which are securedis guaranteed by the Company’s accounts receivable, mortgages on its real property (“Real Property”), inventory and equipment. P&FSBA.This loan provided funds that are being used to pay the salaries, wages and certain of its subsidiaries are borrowers under the Credit Agreement, and their obligations are cross-guaranteed by certain other subsidiaries.
Atemployee-related costs for our option, Revolver borrowings will bear interest at either LIBOR (“London InterBank Offered Rate”) or the Base Rate, as the term is defined in the Credit Agreement, plus 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 our option. We are limited in the number of LIBOR borrowings.
Contemporaneously with the acquisition of the Jiffy business discussed in Note 3 to the consolidated financial statements, we entered into a Second Amended and Restated Loan and Security Agreement, effective as of the April 5, 2017 closing date of the Jiffy Acquisition (the “Second Amended and Restated Loan Agreement”), with Capital One which amended and restated the previous amendment to the Credit Agreement.
The Second Amended and Restated Loan Agreement, among other things, amended the Credit Agreement by: (1) increasing the maximum amount we can borrow under the Revolver Commitment (as defined) from $10,000,000 to $16,000,000,employees, subject to certain borrowing base criteria, and (2) modifying certain borrowing base criteriaPPP limitations, during the prescribed eight-week period as well as financial and other covenants.
LIQUIDITY AND CAPITAL RESOURCES – (Continued)
The net funds of approximately $18,700,000 provided by the sale of Nationwide in 2016 were used to pay down the Revolver, Capex loans and the Term Loan A; however, we and the Bank agreed to have $100,000 remain outstanding under the Term Loan A, rather than pay it off in full, thus providing the Company and Capital One the ability to potentially increase future term loan borrowings more efficiently and at lower costs.
We funded the $7,000,000 Jiffy acquisition from Revolver borrowings. Cash flows from operations thereafter and receipt in August of the $2,100,000 escrow from the sale of Nationwide have reduced our Revolver balance to $2,334,000 at September 30, 2017. Revolver borrowings can be at either LIBOR or at the Base Rate, as defineddiscussed in the Credit Agreement with Capital One. Applicable LIBOR Margins in effect at September 30, 2017 was 1.75%, compared to 1.50% at December 31, 2016. The Applicable Base Rate Margins in effect as of September 30, 2017 and December 31, 2016 were 0.75% and 0.50%, respectively.CARES Act. See Note 11 for further discussion.
Cash flows
During the nine-monththree-month period ended September 30, 2017,March 31, 2020, our net cash decreasedincreased to $1,205,000$531,000 from $3,699,000$380,000 at December 31, 2016.2019. Our total bankBank debt at September 30, 2017, primarily driven by the Jiffy acquisition, whichMarch 31, 2020 was discussed in Note 3 to the accompanying consolidated financial statements, was $2,434,000,$6,931,000 compared to $100,000$5,648,000 at December 31, 2016.2019, the increase driven primarily from Company-wide bonuses paid in March 2020. The total debt to total book capitalization (total debt divided by total debt plus equity); at September 30, 2017March 31, 2020 was 4.9%,13.2% compared to 0.2%10.8% at December 31, 2016.2019.
InAt March 2016,31, 2020, our Board of Directors approved the initiation of a dividend policy under whichshort-term or Revolver borrowing was $6,931,000 compared to $5,648,000, at December 31, 2019. Additionally, at March 31, 2020 and December 31, 2019, there was approximately $8,189,000 and $9,200,000, respectively, available to the Company intends to declare quarterly cash dividends tounder its stockholders in the amount of $0.05 per quarter. During the nine-month period ended September 30, 2017, our Board of Directors voted to approve the payment of three quarterly dividends. As such, in February 2017, May 2017, and August 2017, we paid a $0.05 per share dividend to the shareholders of record. The aggregate of such dividend payments was approximately $542,000. Our Board of Directors expects to maintain this dividend policy; however, the future declaration of dividends under this policy is dependent upon several factors, which includes such things as our overall financial condition, results of operations, capital requirements and other factors our board may deemed relevant.
We believe we will be able to fund the repurchase of the remaining shares in accordance with our Repurchase Program, as discussed in Note 5 – Equity – Common Stock Repurchase Plan.Revolver arrangement.
During the nine-monththree-month period ended September 30, 2017,March 31, 2020, we used $444,000$658,000 for capital expenditures, compared to $894,000$485,000 during the same period in the prior year. Capital expenditures for the balance of 20172020 are expected to be approximately $500,000,$553,000, some of which may be financed through our credit facilities with Capital One Bank or financed through independent third partythird-party financial institutions. The remaining 20172020 capital expenditures will likely be for machinery and equipment, tooling, and computer hardware and software.
We believe that net cash flows from operations and available borrowings under our Credit Facility should provide sufficient cash to fund our consolidated cost structure for at leasta need arise whereby the next 12 months fromcurrent credit facility is insufficient; we could raise additional funds through the datesale of this filing.
LIQUIDITY AND CAPITAL RESOURCES – (Continued)real property or other assets.
Customer concentration
Florida Pneumatic has two customers, SearsAt March 31, 2020 and December 31, 2019, accounts receivable from The Home Depot that, in the aggregate, at September 30, 2017,was 32.7% and December 31, 2016, accounted for 39.6% and 53.5%27.2%, respectively, of our total accounts receivable. To date, these customers remain at or close to complying with their payment terms. Additionally, these two customers inrevenue from The Home Depot during the aggregate, accounted for 31.3%three-month periods ended March 31, 2020 and 35.4%2019 were 22.4% and 17.6%, respectively, of our total revenue. There were no other customers that accounted for more than 10% of our consolidated revenue foror accounts receivable during the three and nine-monththree-month periods ended September 30, 2017, compared to 45.3%March 31, 2020 and 43.4% for the same periods in 2016.2019.
Management’s Discussion and Analysis of Financial Condition and Results of Operations – Continued
As previously mentioned, we elected not to renew an agreement with Sears, which terminated on September 30, 2017. We believe the loss of Sears’s revenue will have a negative impact on our financial condition, but will not affect our ability to remain a going concern. RESULTS OF OPERATIONS- (Continued)
NEW ACCOUNTING PRONOUNCEMENTS
Refer to Note 1 to our consolidated financial statements for a discussion of recent accounting standards and pronouncements.
We are currently evaluating the impact of the adoption of ASU No. 2016-02,Leases, on our consolidated financial condition, results of operations and cash flows. In the financial statements in which the ASU is first applied, leases shall be measured and recognized at the beginning of the earliest comparative period presented with an adjustment to equity.
The Company is in the final assessment phaseof what impact, if any, the new revenue standard, ASU No. 2014-09,Revenue from Contracts with Customers, and related updates will have on its consolidated financial statements and related disclosures, and based on its preliminary assessment, other than additional disclosures in its Notes to its consolidated financial statements, there will be no material impact to its consolidated financial statements.
Other than the aforementioned, we do not believe that any other recently issued, but not yet effective accounting standard, if adopted, will have a material effect on our consolidated financial statements.
Item 3. | Quantitative |
Not required.
Item 4. | Controls and Procedures |
Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated, as of September 30, 2017,March 31, 2020, the effectiveness of the Company's disclosure controls and procedures, which were designed to be effective at the reasonable assurance level. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company'sCompany's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company's disclosure controls and procedures as of September 30, 2017,March 31, 2020, 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.
Item 1. | Legal Proceedings |
There have been no material changes to the legal proceedingsproceedings’ disclosure described in our 20162019 Form 10-K.
Item 1A. | Risk Factors |
There have beenwere no material changes to the risk factors previously disclosed in our 20162019 Form 10-K, and subsequent Quarterly reports onwith the exception of the following risk factor which replaces the first risk factor in Item 1A of our 2019 Form 10-Q.10-K in its entirety.
Risks related to the global outbreak of COVID-19 and other public health crises.
The Company faces risks related to pandemics, epidemics and other public health crises, including the global outbreak of COVID-19, which has reached and disrupted areas in which the Company has operations, suppliers, customers and employees. The COVID-19 pandemic and actions taken by governments and others in response have resulted in, and may continue to cause, the slowdown of the businesses of certain of the Company’s customers and the closure of certain of the Company’s customers’ facilities which in turn has reduced and may continue to reduce demand for some of the Company’s products. Additionally, certain of the Company’s products and parts are manufactured overseas. The COVID-19 pandemic has delayed supply from certain of the Company’s overseas suppliers, and the Company is unable to predict the ultimate duration of such disruptions in supply, whether products or parts from other suppliers will also be delayed, whether such disruptions will become material to the Company and whether, if necessary, the Company will be able to secure such products or parts from alternate suppliers on favorable terms or at all. Moreover, the Company may need to close certain of its facilities in response to the COVID-19 pandemic. The COVID-19 pandemic has also impacted the Company’s operations, including by causing many of its employees to work remotely or in shifts designed to minimize exposure. There is also a heightened risk that a significant portion of the Company’s workforce will suffer illness or otherwise not be permitted or be unable to work. The Company cannot predict whether any of these disruptions will continue or whether its operations will experience more significant or frequent disruptions in the future. Any measures the Company implements to mitigate these risks and disruptions may not be successful.
The circumstances surrounding the COVID-19 pandemic continue to evolve and it is not possible to predict the full nature and extent of the impacts of the COVID-19 pandemic. However, the Company expects the continued spread of COVID-19 and reactions by governments and others to continue to cause an economic slowdown that could be significant and, therefore, could extend the duration of the period of reduced demand for the Company’s products and disruption of its supply chain. Additionally, deteriorating economic conditions could result in material impairment charges in the value of certain of the Company’s assets. Moreover, circumstances surrounding the COVID-19 pandemic have negatively impacted global financial markets leading to greater volatility and decreased access to capital. If such conditions continue, the Company’s ability to finance its operations and expenditures may be negatively impacted. Any of the risks set forth in this paragraph and the preceding paragraph could have a material adverse effect on our business, results of operations and financial position.
Additional public health crises could also emerge in the future, including other pandemics or epidemics. Such public health crises could pose further risks to the Company and could also have a material adverse effect on our business, results of operations and financial position.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The following table presents our repurchase activity of our Class A Common stock during the three-month period ended September 30, 2017.None
Maximum | ||||||||||||||||
Number | ||||||||||||||||
Total Number of | of shares | |||||||||||||||
Shares Purchased as | that May Yet | |||||||||||||||
Part of Publicly | Be Purchased | |||||||||||||||
Total Number of | Average Price | Announced Plan | Under the Plan | |||||||||||||
Period | Shares Purchased | Paid per Share | or Program | or Program (1) | ||||||||||||
July 1, 2017 - July 31, 2017 | - | - | - | - | ||||||||||||
Aug., 1, 2017 – Aug., 31, 2017 | 1,505 | $ | 6.32 | 1,505 | 98,495 | |||||||||||
Sept. 1, 2017 – Sept 30, 2017 | 10,860 | $ | 7.26 | 10,860 | 87,635 |
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | Mine Safety Disclosures |
None.
Item 5. | Other Information |
None.
Item 6. | Exhibits |
See “Exhibit Index” immediately following the signature page.
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, | ||
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:
* Attached as Exhibit 101 are the following, each formatted in Extensible Business Reporting Language (“XBRL”): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations and Comprehensive (Loss) Income, (Loss); (iii) Consolidated StatementStatements 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.
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