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, 2015 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, 2015 (“2015 Form 10-K”). The
interim financial statements contained herein should be read in conjunction with the 2015 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 - 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.
The Company
P&F is a Delaware
corporation incorporated on April 19, 1963. Until February 11, 2016, the effective date of the sale of its Nationwide Industries,
Inc. (“Nationwide”) subsidiary, P&F operated in two primary lines of business or segments: (i) tools and other
products (“Tools”) and (ii) hardware and accessories (“Hardware”). As a result of the sale of Nationwide,
the Company currently only operates in the Tools segment. See Notes 2 and 9 to Consolidated Financial Statements for further discussion.
Tools
The Company conducts
its Tools business through a wholly-owned subsidiary, Continental Tool Group, Inc. (“Continental”), which in turn
operates through its wholly-owned subsidiaries, Florida Pneumatic Manufacturing Corporation (“Florida Pneumatic”)
and Hy-Tech Machine, Inc. (“Hy-Tech”). Exhaust Technologies Inc. (“ETI”) and Universal Air Tool Company
Limited (“UAT”) are wholly-owned subsidiaries of Florida Pneumatic. The business of Air Tool Service Company (“ATSCO”)
operates through a wholly-owned subsidiary of Hy-Tech.
Florida Pneumatic
is engaged in the importation and sale of pneumatic hand tools, primarily for the retail, industrial and automotive markets, and
the importation and sale of compressor air filters. Florida Pneumatic also markets, through its Berkley Tool division (“Berkley”),
a product line which includes pipe and bolt dies, pipe taps, wrenches, vises and stands, pipe and tubing cutting equipment, hydrostatic
test pumps, and replacement electrical components for a widely-used brand of pipe cutting and threading machines.
Hy-Tech manufactures
and distributes its own line of industrial pneumatic tools. Hy-Tech also produces and markets impact wrenches, grinders, drills,
and motors. Further, it also manufactures tools to customer specifications. Its customers include refineries, chemical plants,
power generation facilities, heavy construction enterprises, oil and gas and mining companies. In addition, Hy-Tech manufactures
an extensive line of pneumatic tool replacement parts that are sold to original equipment manufacturers (“OEMs”).
It also manufactures and distributes high pressure stoppers for hydrostatic testing fabricated pipe, gears, sprockets, splines
and racks and produces a line of siphons.
Hardware
Until the sale of
Nationwide, which was effective February 11, 2016 (the “Closing Date”), the Company conducted its Hardware business
through its wholly-owned subsidiary, Countrywide Hardware, Inc. (“Countrywide”). Countrywide conducted its business
operations through its wholly-owned subsidiary, Nationwide. Nationwide is an importer and manufacturer of door, window and fencing
hardware and accessories, including rollers, hinges, window operators, sash locks, custom zinc castings and door closers. On the
Closing Date, Countrywide sold Nationwide to an unrelated third party for approximately $22.2 million. See Notes 2 and 9 to Consolidated
Financial Statements for further discussion.
Management Estimates
The preparation of
financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the
financial statements and the reported amounts of revenues and expenses in those financial statements. Certain significant
accounting policies that contain subjective management estimates and assumptions include those related to revenue recognition,
inventory, goodwill, intangible assets and other long-lived assets, income taxes and deferred taxes. Descriptions of
these policies are discussed in the Company’s 2015 Form 10-K. Management evaluates its estimates and assumptions
on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustments
when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual
results could differ significantly from those estimates and assumptions. Significant changes, if any, in those estimates
resulting from continuing changes in the economic environment will be reflected in the consolidated financial statements in future
periods.
New Accounting Pronouncements
Recently Issued Accounting
Pronouncements
Not Yet Adopted
In March
2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-09,
Improvements to Employee Share-Based
Payment Accounting
. The standard reduces complexity in several aspects of the accounting for employee share-based
compensation, including the income tax consequences, classification of awards as either equity or liabilities, and
classification on the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2016, and
interim periods within those fiscal years, with early adoption permitted. The Company is still evaluating the impact this
standard will have on its consolidated financial statements and related disclosures.
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. Topic 842 retains
a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases
and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating
leases in the previous leases guidance. The ASU is effective for annual periods beginning after December 15, 2018, including interim
periods within those fiscal years; earlier adoption is permitted. In 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.
Practical expedients are available for election as a package and if applied consistently to all leases. The Company is currently
evaluating the impact of the adoption of this guidance on its consolidated financial condition, results of operations and cash
flows.
In May 2014, the FASB
issued ASU No. 2014-09, Revenue from Contracts with Customers, which supersedes existing accounting standards for revenue recognition
and creates a single framework. The new guidance requires either a retrospective or a modified retrospective approach at adoption.
Early adoption is permitted, but not before Company's fiscal year that begins on April 1, 2017 (the original effective date of
the ASU). Additional updates to Topic 606 issued by the FASB in 2015 and 2016 include the following:
|
·
|
ASU
No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective
Date, which defers the effective date of the new guidance such that the new provisions
will now be required for fiscal years, and interim periods within those years, beginning
after December 15, 2017.
|
|
·
|
ASU
No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent
Considerations, which clarifies the implementation guidance on principal versus agent
considerations (reporting revenue gross versus net).
|
|
·
|
ASU
No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance
Obligations and Licensing, which clarifies the implementation guidance on identifying
performance obligations and classifying licensing arrangements.
|
|
·
|
ASU
No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements
and Practical Expedients, which clarifies the implementation guidance in a number of
other areas.
|
The Company is currently
in the process of assessing the impact the adoption of the new revenue standards will have on its consolidated financial statements
and related disclosures, as well as the available transition methods.
In July 2015, the FASB
issued ASU No. 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
(“ASU 2015-11”). The
standard simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net
realizable value for entities using the first-in-first out method of valuing inventory. ASU 2015-11 eliminates other
measures required by current guidance to determine net realizable value. ASU 2015-11 is effective for fiscal years beginning
after December 15, 2016 and interim periods within those fiscal years and early adoption is permitted. The Company has
not adopted ASU 2015-11 and does not expect the new guidance to have a material effect on its Consolidated Financial Statements.
There are currently no
other accounting standards that have been issued that will have a significant impact on the Company’s financial position,
results of operations or cash flows upon adoption.
Recently Adopted
In November 2015,
the FASB issued ASU 2015-17,
Balance Sheet Classification of Deferred Taxes
. ASU 2015-17 is aimed at reducing complexity
in accounting standards. Currently, GAAP requires the deferred taxes for each jurisdiction to be presented as a net current asset
or liability and net noncurrent asset or liability. This requires a jurisdiction-by-jurisdiction analysis based on the classification
of the assets and liabilities to which the underlying temporary differences relate, or, in the case of loss or credit carryforwards,
based on the period in which the attribute is expected to be realized. Any valuation allowance is then required to be allocated
on a pro rata basis, by jurisdiction, between current and noncurrent deferred tax assets. To simplify presentation, the new guidance
requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent
on the balance sheet. As a result, each jurisdiction will now only have one net noncurrent deferred tax asset or liability. The
guidance does not change the existing requirement that only permits offsetting within a jurisdiction; companies are still prohibited
from offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. The new guidance
is effective in fiscal years beginning after December 15, 2016, including interim periods within those years, with early
adoption permitted. The Company early adopted and applied the new standard retrospectively to the prior period presented in the
Consolidated Balance Sheets.
The Company reported
Deferred income taxes-net in its 2015 Form 10-K as Current assets of $1,131,000. After adoption of this ASU, and giving effect
to the sale of Nationwide, discussed in Note 2, the Company now presents $229,000 of deferred tax assets being included in the
Current assets from discontinued operations, and the balance of $902,000 included net against the long-term deferred income tax
liability.
In April 2015,
the FASB issued ASU 2015-03, “
Interest – Imputation of Interest: Simplifying the Presentation of Debt Issuance
Costs
” (ASU 2015-03). The update requires that deferred debt issuance costs be reported as a reduction to long-term
debt (previously reported in other noncurrent assets). The Company adopted ASU 2015-03 in the first quarter of 2016 and for
all retrospective periods, as required. The impact of the adoption was not material to our consolidated financial statements,
and is discussed further in Note 9.
NOTE 2 – DISCONTINUED OPERATIONS
The Company, as
part of its strategic plan, which is to focus on expanding its position in the power tool and accessories market, sold
Nationwide. On the 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. Further, in accordance with the Stock Purchase Agreement, the Company
placed into escrow $1,955,000 (“escrow funds”), of which $250,000 related to the final working capital
adjustment. Pursuant to the terms of the Stock Purchase Agreement, the final working capital amount was determined to be
approximately $75,000 in the Company’s favor. As a result, during the three-month period ended June 30, 2016, the
$250,000 portion of the escrow funds was released to the Company, and the $75,000 was paid to the Company by the Buyer. The
Stock Purchase Agreement also requires Countrywide, under certain circumstances, to contribute an additional $400,000
into escrow. After paying closing costs, the net cash received from the Buyer was approximately $18.7 million.
The remaining $1,705,000
of the escrow funds, which is classified as Other Assets on the Company’s Consolidated Balance Sheet, is intended to be
released eighteen months from the Closing Date, less any claims made against these escrow funds, in accordance with the Stock
Purchase Agreement. The Company believes that these escrow funds are highly collectible, and that it is more likely than not that
with respect to any or all such potential claims made against the Company, these claims will not exceed the minimum dollar threshold
amount of $150,000 required under the Stock Purchase Agreement. The Company has therefore included the full amount of the $1,705,000
portion of the escrow funds in its gain on sale of Nationwide. Should claims made against the Company pursuant to the Stock Purchase
Agreement exceed the minimum threshold, then to the extent such claims are resolved in favor of the Buyer under the terms of the
Stock Purchase Agreement, the total amount of such claims will be recorded as a loss on sale of Nationwide in future periods.
See Note 9 to the Consolidated Financial Statements for further discussion.
As Nationwide was a substantial
and unique business unit of the Company, its sale was a strategic shift. Accordingly, in accordance with Accounting Standard Code
Topic 360, the Company has classified Nationwide as discontinued operations for all periods presented.
Income from discontinued
operations, net of taxes in the accompanying Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income, is comprised
of the following:
|
|
January 1,
2016
through the
Closing
Date
|
|
|
Three months
ended
June 30, 2015
|
|
|
Six months
ended
June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,830,000
|
|
|
$
|
6,502,000
|
|
|
$
|
11,769,000
|
|
Cost of goods sold
|
|
|
1,177,000
|
|
|
|
3,914,000
|
|
|
|
7,161,000
|
|
Gross margin
|
|
|
653,000
|
|
|
|
2,588,000
|
|
|
|
4,608,000
|
|
Selling and general and administrative expenses
|
|
|
483,000
|
|
|
|
1,359,000
|
|
|
|
2,573,000
|
|
Interest expense-net
|
|
|
60,000
|
|
|
|
172,000
|
|
|
|
335,000
|
|
Income before income taxes
|
|
|
110,000
|
|
|
|
1,057,000
|
|
|
|
1,700,000
|
|
Income taxes
|
|
|
38,000
|
|
|
|
377,000
|
|
|
|
612,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
72,000
|
|
|
$
|
680,000
|
|
|
$
|
1,088,000
|
|
The components of discontinued operations in the
accompanying consolidated balance sheet are as follows:
|
|
December 31,
2015
|
|
|
|
|
|
Accounts receivable-net
|
|
$
|
1,245,000
|
|
Inventories
|
|
|
4,211,000
|
|
Prepaid expenses and other current assets
|
|
|
92,000
|
|
Net property and equipment
|
|
|
768,000
|
|
Goodwill
|
|
|
1,873,000
|
|
Other intangible assets-net
|
|
|
12,000
|
|
Other assets- net
|
|
|
5,000
|
|
Deferred taxes - net
|
|
|
229,000
|
|
Assets of discontinued operations
|
|
$
|
8,435,000
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
765,000
|
|
Accrued compensation and benefits
|
|
|
247,000
|
|
Accrued other liabilities
|
|
|
330,000
|
|
Liabilities of discontinued operations
|
|
$
|
1,342,000
|
|
The Company recognized
a gain of $12,185,000, on the sale of Nationwide during the three-month period ended March 31, 2016, which represents the difference
between the adjusted net purchase price and the carrying book value of Nationwide. 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 loss has been recorded as a tax
benefit of $141,000. This tax benefit may only be applied against future capital gain transactions.
On the Closing Date,
the Company and the president of Nationwide, entered into a purchase agreement pursuant to which, among other things the Company
acquired 30,000 shares of the Company’s Class A Common Stock (“Common Stock”) at the aggregate purchase price
of $254,940 and options to acquire 6,667 shares of the Company’s Common Stock at an aggregate price of $16,597.
Effective as of the
Closing Date, Countrywide, as landlord, and Nationwide, as tenant, entered into a new lease relating to the Tampa, Florida real
property (the “Premises”). The lease provides for, among other things, a seven-year term commencing on the Closing
Date and an annual base rent of approximately $252,000 with annual escalations. The lease also provides that the tenant will pay
certain taxes and operating expenses associated with the Premises. The lease replaces the previous lease between Countrywide and
Nationwide.
Lastly, effective
as of the Closing Date, Countrywide and Nationwide entered into an Option and Right of First Refusal Agreement relating to the
Premises, pursuant to which Countrywide granted a purchase option to Nationwide relating to the Premises if such option is initiated
within 60 days following the Closing Date, which has since lapsed. In addition, Countrywide granted to Nationwide a right of first
refusal relating to certain offers made by third parties during the five-year period following the Closing Date.
NOTE 3 - (LOSS) EARNINGS PER SHARE
Basic (loss) earnings
per common share is based only on the average number of shares of Common Stock outstanding for the periods. Diluted (loss) earnings
per common share reflects the effect of shares of Common Stock issuable upon the exercise of options, unless the effect on earnings
is antidilutive.
Diluted (loss) earnings
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 (loss) earnings per common share:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Numerator for basic and diluted (loss) earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations
|
|
$
|
(5,370,000
|
)
|
|
$
|
632,000
|
|
|
$
|
(5,304,000
|
)
|
|
$
|
1,005,000
|
|
Net (loss) income from discontinued
operations
|
|
|
(14,000
|
)
|
|
|
680,000
|
|
|
|
12,243,000
|
|
|
|
1,088,000
|
|
Net (loss) income
|
|
$
|
(5,384,000
|
)
|
|
$
|
1,312,000
|
|
|
$
|
6,939,000
|
|
|
$
|
2,093,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For basic (loss) earnings per share - weighted average common
shares outstanding
|
|
|
3,595,000
|
|
|
|
3,606,000
|
|
|
|
3,598,000
|
|
|
|
3,598,000
|
|
Dilutive
securities
(1)
|
|
|
—
|
|
|
|
148,000
|
|
|
|
—
|
|
|
|
153,000
|
|
For diluted (loss) earnings per share - weighted
average common shares outstanding
|
|
|
3,595,000
|
|
|
|
3,754,000
|
|
|
|
3,598,000
|
|
|
|
3,751,000
|
|
(1)
Dilutive securities consist of “in the
money” stock options.
At June 30, 2016
and 2015 and during the six-month periods ended June 30, 2016 and 2015, there were outstanding stock options whose exercise
prices were higher than the average market values of the underlying common stock for the period. Options for the three and
six months ended June 30, 2015 are anti-dilutive and are excluded from the computation of diluted (loss) earnings per share.
For the three and six months ended June 30, 2016, we experienced a net loss from continuing operations, as such, these
options were not included in the computation of diluted (loss) earnings per share. The weighted average of anti-dilutive stock
options outstanding was as follows:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Weighted average
antidilutive stock options outstanding
|
|
|
73,000
|
|
|
|
182,000
|
|
|
|
81,000
|
|
|
|
182,000
|
|
NOTE 4 - STOCK-BASED COMPENSATION
In
connection with the equity restructuring event, which occurred during the three-month period ended March 31, 2016 relating to
the special dividend, the Company, modified all previously issued outstanding options to purchase its common stock. This
modification resulted in an aggregate increase of 19,174 options. The Company did not record any compensation expense in
connection with the issuance of these options, as the issuance was made as the result of an equity restructuring event. Other
than the aforementioned issuance, there were no other options granted or Common Stock awards issued during the three and
six-month periods ended June 30, 2016.
The following is a summary of the changes
in outstanding options during the six-month period ended June 30, 2016:
|
|
Option Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted Average
Remaining
Contractual Life
(Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding, January 1, 2016
|
|
|
457,000
|
|
|
$
|
6.15
|
|
|
|
4.0
|
|
|
$
|
1,431,000
|
|
Granted
|
|
|
19,174
|
|
|
|
5.89
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(6,000
|
)
|
|
|
3.81
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(26,500
|
)
|
|
|
6.55
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(16,723
|
)
|
|
|
10.72
|
|
|
|
|
|
|
|
|
|
Outstanding and Vested, June 30, 2016
|
|
|
426,951
|
|
|
$
|
5.71
|
|
|
|
3.4
|
|
|
$
|
1,655,000
|
|
Included in the forfeited options in the
table above are 20,998 options the Company purchased from Nationwide employees for $50,000 in connection with the sale of Nationwide.
The following is a summary of changes
in non-vested options for the six months ended June 30, 2016:
|
|
Option Shares
|
|
|
Weighted
Average Grant-
Date Fair Value
|
|
Non-vested options, January 1, 2016
|
|
|
23,840
|
|
|
$
|
6.72
|
|
Granted
|
|
|
829
|
|
|
|
6.45
|
|
Vested
|
|
|
(19,167
|
)
|
|
|
6.71
|
|
Forfeited
|
|
|
(5,502
|
)
|
|
|
6.72
|
|
Non-vested options, June 30, 2016
|
|
|
—
|
|
|
$
|
—
|
|
The number of shares
of Common Stock available for issuance under the P&F Industries, Inc. 2012 Stock Incentive Plan (the “2012 Plan”),
as of June 30, 2016 was 173,093. At June 30, 2016, there were 115,451 options outstanding issued under the 2012 Plan and 311,500
options outstanding issued under the 2002 Stock Incentive Plan.
Restricted Stock
Pursuant to the 2012
Plan, the Company, in May 2016, granted 1,000 restricted shares of its Common Stock to each non-employee member of its Board of
Directors, totaling 5,000 restricted shares. The Company determined that the fair value of these shares was $8.72, which was the
closing price of the Company’s Common Stock on the date of the grant. These shares cannot be traded earlier than the first
anniversary of the grant date. As such, the Company is ratably amortizing the total non-cash compensation expense of approximately
$44,000 in its selling, general and administrative expenses through May 2017.
Pursuant to the 2012 Plan, the Company, in May 2015, granted 1,000 restricted shares
of its Common Stock to each non-employee member of its Board of Directors, totaling 5,000 restricted shares. The Company determined
that the fair value of these shares was $8.63, which was the closing price of the Company’s Common Stock on the date of
the grant. These shares cannot be traded earlier than the first anniversary of the grant date. As such, the Company ratably amortized
the total non-cash compensation expense of approximately $43,000 in its selling, general and administrative expenses through May
2016.
NOTE
5
–
FAIR VALUE MEASUREMENTS
Accounting guidance
defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Under this guidance, the Company is required to classify certain assets and
liabilities based on the following hierarchy:
Level 1: Quoted
prices for identical assets or liabilities in active markets that can be assessed at the measurement date.
Level 2: Inputs
other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted
prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can
be corroborated by observable market data.
Level 3: Inputs
reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date.
The inputs are unobservable in the market and significant to the instruments valuation.
The guidance requires
the use of observable market data if such data is available without undue cost and effort.
As of June 30,
2016 and December 31, 2015, the carrying amounts reflected in the accompanying consolidated balance sheets for current assets
and current liabilities approximated fair value due to the short-term nature of these accounts.
The fair value
of the Other assets, which consists primarily of escrowed funds from the sale of Nationwide, which was estimated to be the same
as its carrying value, based on Level 3 inputs. The escrow will be released to the Company in August 2017, in accordance with the
terms and conditions set forth in the Stock Purchase Agreement .
Assets and liabilities
measured at fair value on a non-recurring basis include goodwill and intangible assets. Such assets are reviewed
quarterly for impairment indicators. If a triggering event has occurred, the assets are re-measured when the estimated fair value
of the corresponding asset group is less than the carrying value. The fair value measurements, in such instances, are based on
significant unobservable inputs (level 3).
NOTE 6 – ACCOUNTS RECEIVABLE AND ALLOWANCE
FOR DOUBTFUL ACCOUNTS
Accounts receivable - net consists of:
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
Accounts receivable
|
|
$
|
10,486,000
|
|
|
$
|
8,559,000
|
|
Allowance for doubtful accounts
|
|
|
(80,000
|
)
|
|
|
(82,000
|
)
|
|
|
$
|
10,406,000
|
|
|
$
|
8,477,000
|
|
NOTE 7 – INVENTORIES
Inventories consist of:
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
Raw material
|
|
$
|
1,954,000
|
|
|
$
|
2,070,000
|
|
Work in process
|
|
|
942,000
|
|
|
|
1,366,000
|
|
Finished goods
|
|
|
17,311,000
|
|
|
|
16,347,000
|
|
|
|
$
|
20,207,000
|
|
|
$
|
19,783,000
|
|
NOTE 8 – GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other
intangible assets with indefinite lives are tested for impairment annually or whenever events or circumstances indicate the carrying
value of these assets may not be recoverable.
The impairment testing
is performed in two steps: (i) The Company compares the fair value of a reporting unit with its carrying value, and (ii) if there
is impairment, the Company measures the amount of impairment loss by comparing the implied fair value of goodwill with the carrying
amount of that goodwill. The Company determines the fair value using the income approach methodology of valuation, which considers
the expected present value of future cash flows. As an integral part of the valuation process the Company utilizes its latest
cash flows forecasts for the remainder of the current fiscal year, if applicable, the next four fiscal years, and then applies
projected minimal growth for all remaining years, based upon available statistical data and management’s estimates.
During the second quarter of 2016, the
Company determined that an interim impairment analysis of the goodwill recorded in connection with its Hy-Tech reporting unit was
necessary based on consideration of a number of factors or assumptions, which included:
|
·
|
Negative changes in revenue, which was
driven primarily by continued weakness in the oil and gas exploration and extraction industries;
|
|
·
|
the recent loss of a major portion of
revenue from one of its larger customers;
|
|
·
|
recent significant reductions/guidance
of forecasted purchases from the largest customer acquired in the ATSCO acquisition; and
|
|
·
|
changes in gross margin, driven primary
by product mix and customer mix.
|
The combination of these factors
was considered to be a triggering event requiring an interim impairment test.
Certain of the factors considered
by management in the performance of the impairment test included:
|
·
|
Cash flows was determined
to be a key assumption primarily due to reductions in future revenue and gross margins; and
|
|
·
|
Discount rates. The discount rates applied
to internally developed cash flow projections were 14.5% for the previous annual impairment test as of November 30, 2015 and 13.8%
at May 31, 2016, which was the date of the interim impairment test. The discount rate represents the weighted average cost of capital
consistent with our views of the rate that an expected market participant would utilize for valuation, including the risk inherent
in future cash flows, taking into account the capital structure, debt ratings and current debt yields of comparable public companies
as well as an estimate of return on equity that reflects historical market returns.
|
Based on step one of
the impairment analysis, it was determined that the fair value of the reporting unit was less than the carrying value. Step two
of the goodwill impairment test resets the implied fair value of goodwill through a reallocation of the assets. That is, an entity
shall allocate the fair value of a reporting unit, in this case, Hy-Tech to all of the assets and liabilities of that unit (including
any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination. Accordingly, after resetting
the carrying values of its intangible assets, other than Goodwill, which resulted in a $2,968,000 impairment of intangible assets
(see below), the Company adjusted the carrying value of Goodwill by recording an impairment charge of $5,343,000
in the second quarter of 2016.
The carrying value
of Hy-Tech exceeded its estimated fair value by approximately 15.7% at November 30, 2015. The fair value of Hy-Tech was estimated
using 100% value based on internally developed cash flow projections. The internally developed cash flow projections reflect annual
estimates through a terminal year calculated using a terminal year EBITDA multiple approach.
The
impairment determinations involved significant assumptions and judgments. The calculations supporting the estimates of the fair
value of Hy-Tech and the fair values of its assets and liabilities utilized models that take into consideration multiple inputs
other than those discussed above. Assumptions regarding each of these inputs could have a significant effect on the related valuations.
In performing these calculations, we also take into consideration assumptions on how current market participants would value Hy-Tech
and its operating assets and liabilities. Changes to assumptions that reflect the views of current market participants can also
have a significant effect on the related valuations. The fair value measurements resulting from these models are classified as
non-recurring Level 3 measurements consistent with accounting standards related to the determination of fair value. Because of
the volatility of these factors, we cannot predict the likelihood of any future impairment
.
Trademarks and tradenames
were previously considered an indefinite-lived intangible asset. However, as a result of the testing for impairment, which determined
the fair value of Hy-Tech’s trademarks and tradenames exceeded the carrying value, and an impairment charge of $229,000 was
recorded at June 30, 2016. The Company will commence amortizing this intangible asset in July 2016 over a 15 year useful life.
Further, future amortization is included in the estimated future amortization expense table below.
Changes in the carrying amount of goodwill
are as follows:
|
Florida
Pneumatic
|
|
Hy-Tech
|
|
|
Total
|
|
Balance, January 1, 2016
|
$
|
3,931,000
|
|
|
|
$
|
6,223,000
|
|
|
$
|
10,154,000
|
|
Impairment of goodwill
|
|
—
|
|
|
|
|
(5,343,000
|
)
|
|
|
(5,343,000
|
)
|
Currency translation adjustment
|
|
(19,000
|
)
|
|
|
|
—
|
|
|
|
(19,000
|
)
|
Balance, June
30, 2016
|
$
|
3,912,000
|
|
|
|
$
|
880,000
|
|
|
$
|
4,792,000
|
|
Other intangible assets were as follows:
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
|
Cost
|
|
|
Accumulated
amortization
|
|
|
Net book
value
|
|
|
Cost
|
|
|
Accumulated
amortization
|
|
|
Net book
value
|
|
Other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships (1)
|
|
$
|
5,576,000
|
|
|
$
|
810,000
|
|
|
$
|
4,766,000
|
|
|
$
|
11,285,000
|
|
|
$
|
3,486,000
|
|
|
$
|
7,799,000
|
|
Trademarks and trade names (1)
|
|
|
1,746,000
|
|
|
|
—
|
|
|
|
1,746,000
|
|
|
|
2,015,000
|
|
|
|
—
|
|
|
|
2,015,000
|
|
Engineering drawings
|
|
|
330,000
|
|
|
|
134,000
|
|
|
|
196,000
|
|
|
|
410,000
|
|
|
|
159,000
|
|
|
|
251,000
|
|
Non-compete agreements (1)
|
|
|
221,000
|
|
|
|
125,000
|
|
|
|
96,000
|
|
|
|
362,000
|
|
|
|
134,000
|
|
|
|
228,000
|
|
Patents
|
|
|
1,205,000
|
|
|
|
533,000
|
|
|
|
672,000
|
|
|
|
1,205,000
|
|
|
|
400,000
|
|
|
|
805,000
|
|
Totals
|
|
$
|
9,078,000
|
|
|
$
|
1,602,000
|
|
|
$
|
7,476,000
|
|
|
$
|
15,277,000
|
|
|
$
|
4,179,000
|
|
|
$
|
11,098,000
|
|
|
(1)
|
A portion
of these intangibles are maintained in a foreign currency, and are therefore subject to foreign exchange rate fluctuations.
|
The table above reflects impairment charges
recorded during the second quarter of 2016 as follows:
|
|
June 30, 2016
|
|
Customer relationships
|
|
$
|
2,619,000
|
|
Trademarks and trade names
|
|
|
229,000
|
|
Engineering drawings
|
|
|
37,000
|
|
Non-compete agreements
|
|
|
83,000
|
|
|
|
|
|
|
|
|
$
|
2,968,000
|
|
Amortization expense of intangible assets
from continuing operations subject to amortization was as follows:
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
$
|
278,000
|
|
|
$
|
310,000
|
|
|
$
|
586,000
|
|
|
$
|
619,000
|
|
The weighted average amortization
period for intangible assets was as follows:
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
Customer relationships
|
|
|
9.8
|
|
|
|
10.0
|
|
Engineering drawings
|
|
|
9.1
|
|
|
|
8.5
|
|
Non-compete agreements
|
|
|
1.6
|
|
|
|
2.7
|
|
Patents
|
|
|
5.8
|
|
|
|
5.8
|
|
Amortization
expense for each of the next five years and thereafter is estimated to be as follows:
2017
|
|
$
|
870,000
|
|
2018
|
|
|
629,000
|
|
2019
|
|
|
597,000
|
|
2020
|
|
|
573,000
|
|
2021
|
|
|
549,000
|
|
Thereafter
|
|
|
2,722,000
|
|
|
|
$
|
5,940,000
|
|
NOTE 9 – DEBT
In October 2010, the
Company entered into a Loan and Security Agreement (“Credit Agreement”) with an affiliate of Capital One, National
Association (“Capital One”, or the “Bank”). The Credit Agreement provides for a Revolver Loan (“Revolver”),
borrowings under which are secured by the Company’s accounts receivable, mortgages on its real property located in Cranberry,
PA, Jupiter, FL and Tampa, FL (“Real Property”), inventory and equipment. P&F and certain of its subsidiaries
are borrowers under the Credit Agreement, and their obligations are cross-guaranteed by certain other subsidiaries. At the Company’s
option, Revolver borrowings bear interest at either LIBOR (“London InterBank Offered Rate”) or the Base Rate, as 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 the option of the Company, subject to limitations on the number of LIBOR
borrowings.
The Company, in August
2014, entered into an Amended and Restated Loan and Security Agreement, (the “Restated Loan Agreement”), with Capital
One. The Restated Loan Agreement, among other things, amended the Credit Agreement by: (1) increasing the total amount of the
credit facility from $29,423,000 to $33,657,000, (2) increasing the Revolver from $20,000,000 to $22,000,000, (3) creating a new
Term Loan, as defined in the Restated Loan Agreement (“Term Loan B”), and (4) re-designating as “Term Loan A”,
the previously existing outstanding Term Loan, which relates primarily to the Company’s Real Property. In addition, the
Restated Loan Agreement also reset certain financial covenants.
Contemporaneously
with the sale of Nationwide, as discussed in Note 2, the Company entered into the Consent and Second Amendment to the Restated
Loan Agreement (the “Amendment”) with Capital One. The Amendment, among other things; provided the Bank’s consent
to the transactions contained in the Stock Purchase Agreement and the repurchase of certain shares and options discussed in Note
2 and Note 4 to the Consolidated Financial Statements, and amended the Restated Loan Agreement by: (a) reducing the aggregate
Commitment (as defined in the Restated Loan Agreement) to $11,600,000; (b) reducing the Term Loan A to $100,000; (c) reducing
the Revolver Commitment to $10,000,000 (less the new Term Loan A balance of $100,000); (d) reducing the Capex Loan Commitment
to $1,600,000; (e) modifying certain financial covenants, (f) lowering interest rate margins and fee obligations; and (g) extending
the expiration of the Credit Agreement to February 11, 2019. Additionally, the Bank released the mortgage on the Company’s
Real Property, located in Tampa Florida.
The Company provides
Capital One with, among other things, monthly financial statements, and monthly borrowing base certificates. The Company is required
to comply with certain financial covenants. Under certain circumstances the Company would be required to submit certificates of
compliance. The Company believes it is in compliance with all covenants under the current Credit Facility.
The net proceeds provided
by the sale of Nationwide of approximately $18.7 million were used to pay down the Revolver and the Capex Term Loans in their
entirety, and paid approximately $6 million against the Term Loan A, discussed below.
SHORT–TERM
BORROWINGS
At June 30, 2016 and
December 31, 2015, the Company’s Revolver borrowings were $2,706,000 and $9,623,000, respectively. Applicable LIBOR Margins
added to Revolver borrowings at June 30, 2016 and December 31, 2015 were 1.50% and 2.00%, respectively. The Applicable Base Rate
Margin added to Revolver borrowings at June 30, 2016 and December 31, 2015 were 0.50% and 1.00%, respectively.
The Company purchased
vehicles for use by its UAT salesforce. The current portion of the balance due on these vehicles is $24,000 at June 30, 2016 and
was $31,000 at December 31, 2015.
LONG –TERM
BORROWINGS
The Restated Loan
Agreement provides for Term Loan A, which is secured by mortgages on the Real Property, accounts receivable, inventory and equipment. Term
Loan A borrowings can be at either LIBOR, or at the Base Rate, or a combination of the two plus the Applicable Margins, which
for LIBOR borrowings at June 30, 2016 and at December 31, 2015 was 1.5% and 3.0% respectively. The Applicable Margin for borrowings
at the Base Rate for the same timeframes were 0.5% and 2.0%, respectively. A portion of the net proceeds from the sale of Nationwide
repaid all but $100,000 of this Term Loan A, and accordingly such remaining balance is being borrowed at the Base Rate, and is
included in Long-term debt, less current maturities on the Company’s Consolidated Balance Sheet at June 30, 2016.
During 2012, the Company
borrowed $380,000 and $519,000, as loans to purchase machinery and equipment (“Capex Term Loans”). These loans were
fully repaid with funds from the sale of Nationwide.
The long-term portion
of the balance due on the purchased vehicles used by the UAT salesforce is $4,000 at June 30, 2016 and was $16,000 at December
31, 2015.
In accordance with
ASU 2015-03, the Company reduced its long-term debt by $15,000 and $64,000, respectively, relating to deferred financing fees
as of June 30, 2016 and December 31, 2015.
NOTE 10 – DIVIDEND PAYMENTS
On March 8, 2016,
the Company’s Board of Directors declared a special cash dividend of $0.50 per common share, which was paid on or about
April 4, 2016, to shareholders of record at the close of business on March 21, 2016. The total amount of this special dividend
payment was approximately $1.8 million. The Company’s Board of Directors declared quarterly cash dividends of $0.05 per
share to shareholders of record at the close of business on March 31, 2016 and July 18, 2016. These respective dividend payments
of approximately $180,000 each were paid on or about April 14, 2016 and July 25, 2016.
NOTE 11 – RELATED PARTY TRANSACTIONS
The president of one
of the Company’s subsidiaries is part owner of one of the subsidiary’s vendors. During the three and six-month periods
ended June 30, 2016, the Company purchased approximately $110,000 and $276,000, respectively, of product from this vendor. During
the three and six-month periods ended June 30, 2015, the Company purchased approximately $142,000 and $323,000, respectively,
of product from this vendor. At June 30, 2016 and December 31, 2015, the Company had trade payables to this vendor of $34,000
and $63,000, respectively. Additionally, during the three and six-month periods ended June 30, 2016, the Company recorded sales
to this vendor of $3,000 and $6,000, respectively. During the three and six-month periods ended June 30, 2015, the Company recorded
sales to this vendor of $3,000 and $5,000, respectively.
Additionally, this
same individual is part owner of the facility located in Punxsutawney, Pennsylvania, which one of the Company’s subsidiaries
leases. This lease expires in 2021, with rents of approximately $76,000 per annum.
P&F INDUSTRIES, INC. AND SUBSIDIARIES