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, 2016 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, 2016 (“2016 Form 10-K”). The interim financial
statements contained herein should be read in conjunction with the 2016 Form 10-K.
The consolidated financial
statements have been reported in U.S. dollars by translating asset and liability amounts of a foreign wholly-owned subsidiary at
the closing exchange rate, equity amounts at historical rates and the results of operations and cash flow at the average of the
prevailing exchange rates during the periods reported. As a result, the Company is exposed to foreign currency translation gains
or losses. These gains or losses are presented in the Company’s consolidated financial statements as “Other comprehensive
income (loss) - 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. 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 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
Prior to the Nationwide
Closing Date, the Company conducted its Hardware business through its wholly-owned subsidiary, Countrywide Hardware, Inc. (“Countrywide”).
Countrywide conducted its business operations through its wholly-owned subsidiary, Nationwide. 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. 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.
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 2016 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.
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 – BUSINESS AND SUMMARY OF ACCOUNTING POLICIES –
(Continued)
New Accounting Pronouncements
Recently Adopted
In March
2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update
(“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 2017. The impact of the adoption was not material to the Company’s consolidated financial
statements.
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 2017. The
impact of the adoption was not material to the Company’s consolidated financial statements.
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 to all periods presented in the Consolidated Balance Sheets.
Not Yet Adopted
In February
2016, the FASB issued ASU 2016-02,
Leases
. This ASU is a comprehensive new leases standard that amends various aspects
of existing guidance for leases and requires additional disclosures about leasing arrangements. It will require companies
to recognize lease assets and lease liabilities by lessees for those leases classified as operating leases under previous
GAAP. Accounting Standards Codification (“ASC”) Topic 842 retains a distinction between finance leases and
operating leases. The classification criteria for distinguishing between finance leases and operating leases are
substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the
previous leases guidance. The ASU is effective for annual periods beginning after December 15, 2018, including interim
periods within those fiscal years; earlier adoption is permitted. In 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.
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 – BUSINESS AND SUMMARY OF ACCOUNTING POLICIES –
(Continued)
New Accounting Pronouncements
Not Yet Adopted
In May 2014, the
FASB issued ASU No. 2014-09,
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:
|
·
|
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 Licensin
g, which clarifies the implementation guidance on identifying performance obligations and classifying licensing arrangements;
|
|
·
|
ASU No. 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
, which clarifies the implementation guidance in a number of other areas.
|
The underlying principle
is to use a five-step analysis of transactions to recognize revenue when promised goods or services are transferred to customers
in an amount that reflects the consideration that is expected to be received for those goods or services. The standard permits
the use of either a retrospective or modified retrospective application. The Company intends to use the modified retrospective
approach. The Company is
currently in the process of completing its assessment of any significant
contract and assessing the impact the adoption of the new revenue standard and related updates will have on its consolidated financial
statements and related disclosures. T
hus far the Company does not believe the adoption of this standard and related updates
will have a material effect on its consolidated financial statements and related disclosures. However, the Company will continue
its evaluation of the standards update through the date of adoption. The standard update, as amended, will be effective for annual
periods beginning after December 15, 2017.
In
January 2017, the FASB issued ASU No. 2017-04,
“Intangibles – Goodwill and Other (Topic 350): Simplifying the
Test for Goodwill Impairment”,
which simplified the testing of goodwill for impairment by eliminating Step 2 from
the goodwill impairment test. Step 2 measured a goodwill impairment loss by comparing the implied fair value of a reporting
unit’s goodwill with the carrying amount of that goodwill. ASU 2017-04 is effective for public companies for its annual
or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company is currently
evaluating the effects that the adoption of ASU 2017-04 will have on its consolidated financial statements.
Other than the
aforementioned, the Company does not believe that any other recently issued, but not yet effective accounting standard,
if adopted, will have a material effect on its consolidated financial statements
.
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 2 – DISCONTINUED OPERATIONS
Sale of Nationwide Industries, Inc.
Effective as of the
Nationwide Closing Date, the Company, as part of its strategic plan to focus on expanding its position in the power-tool and accessories
market, sold Nationwide. On this 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. After paying closing costs, the net cash received from the Buyer was approximately
$18,700,000.
The escrow funds, which
are classified as Prepaid expenses and other current assets on the Company’s Consolidated Balance Sheet, are to be released
in August 2017, less any claims made against these escrow funds, in accordance with the Stock Purchase Agreement. The Company believes
that these escrow funds are highly collectible, and that it is more likely than not that with respect to any or all such potential
claims made against the Company, these claims will not exceed the minimum dollar threshold amount of $150,000 required under the
Stock Purchase Agreement. The Company has included $1,705,000 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.
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 has classified Nationwide as a discontinued operation in 2016.
The net income from
discontinued operations, net of taxes in 2016 presented in the accompanying Consolidated Statements of Operations and Comprehensive
(Loss) Income, 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
|
|
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 2 – DISCONTINUED OPERATIONS – (Continued)
The
Company recognized a gain of $12,185,000, on the sale of Nationwide during the three-month period ended March 31, 2016, which represents
the difference between the adjusted net purchase price and the carrying book value of Nationwide. However, for income tax purposes,
the Company’s tax basis in Nationwide was greater than the net proceeds, thus resulting in a tax loss. At the applicable
tax rate of 34%, this loss has been recorded as a tax benefit of $141,000. This tax benefit may only be applied against future
capital gain transactions.
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
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Numerator for basic and diluted (loss) earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations
|
|
$
|
(60,000
|
)
|
|
$
|
66,000
|
|
Net income from discontinued operations
|
|
|
—
|
|
|
|
12,257,000
|
|
Net (loss) income
|
|
$
|
(60,000
|
)
|
|
$
|
12,323,000
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
For basic earnings per share - weighted average common shares outstanding
|
|
|
3,598,000
|
|
|
|
3,601,000
|
|
Dilutive securities
(1)
|
|
|
—
|
|
|
|
177,000
|
|
For diluted earnings per share - weighted average common shares outstanding
|
|
|
3,598,000
|
|
|
|
3,778,000
|
|
|
(1)
|
Dilutive securities consist of “in the money”
stock options.
|
At March 31, 2017 and
2016, 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 months ended March 31, 2017 are 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
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Weighted average antidilutive stock options outstanding
|
|
|
71,000
|
|
|
|
89,000
|
|
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 4 – STOCK-BASED COMPENSATION
There were no options
granted or issued during the three-month period ended March 31, 2017.
The following is a summary of the changes
in outstanding options during the three-month period ended March 31, 2017:
|
|
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
|
|
Granted
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and Vested, March 31, 2017
|
|
|
423,817
|
|
|
$
|
5.68
|
|
|
|
2.6
|
|
|
$
|
865,862
|
|
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 March 31, 2017 was 175,450. At March 31, 2017, there were 113,817 options outstanding issued under the 2012 Plan and 310,000
options outstanding issued under the 2002 Stock Incentive Plan.
Restricted Stock
The Company, in May
2016, granted 1,000 restricted shares of its Common Stock to each non-employee member of its Board of Directors, totaling 5,000
restricted shares. The Company determined that the fair value of these shares was $8.72 per share, which was the closing price
of the Company’s Common Stock on the date of the grant. These shares 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.
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 March 31,
2017 and December 31, 2016, the carrying amounts reflected in the accompanying consolidated balance sheets for current assets
and current liabilities approximated fair value due to the short-term nature of these accounts.
The fair value
of the Prepaid expenses and other current assets, which consists primarily of escrowed funds from the sale of Nationwide, which
was estimated to be the same as its carrying value, based on Level 3 inputs. The Company believes 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:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Accounts receivable
|
|
$
|
8,713,000
|
|
|
$
|
7,991,000
|
|
Allowance for doubtful accounts
|
|
|
(85,000
|
)
|
|
|
(85,000
|
)
|
|
|
$
|
8,628,000
|
|
|
$
|
7,906,000
|
|
NOTE 7 – INVENTORIES
Inventories consist of:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Raw material
|
|
$
|
1,985,000
|
|
|
$
|
1,918,000
|
|
Work in process
|
|
|
872,000
|
|
|
|
658,000
|
|
Finished goods
|
|
|
17,386,000
|
|
|
|
17,325,000
|
|
|
|
$
|
20,243,000
|
|
|
$
|
19,901,000
|
|
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 8 – GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill
are as follows:
|
|
|
|
Balance, January 1, 2017
|
|
$
|
3,897,000
|
|
Currency translation adjustment
|
|
|
2,000
|
|
Balance, March 31, 2017
|
|
$
|
3,899,000
|
|
Other intangible assets were as follows:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Cost
|
|
|
Accumulated
amortization
|
|
|
Net book
value
|
|
|
Cost
|
|
|
Accumulated
amortization
|
|
|
Net book
value
|
|
Other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships (1)
|
|
$
|
5,146,000
|
|
|
$
|
1,137,000
|
|
|
$
|
4,009,000
|
|
|
$
|
5,143,000
|
|
|
$
|
1,022,000
|
|
|
$
|
4,121,000
|
|
Trademarks and trade names (1)
|
|
|
1,511,000
|
|
|
|
—
|
|
|
|
1,511,000
|
|
|
|
1,507,000
|
|
|
|
—
|
|
|
|
1,507,000
|
|
Trademarks and trade names (2)
|
|
|
200,000
|
|
|
|
9,000
|
|
|
|
191,000
|
|
|
|
200,000
|
|
|
|
5,000
|
|
|
|
195,000
|
|
Engineering drawings
|
|
|
330,000
|
|
|
|
154,000
|
|
|
|
176,000
|
|
|
|
330,000
|
|
|
|
148,000
|
|
|
|
182,000
|
|
Non-compete agreements (1)
|
|
|
214,000
|
|
|
|
167,000
|
|
|
|
47,000
|
|
|
|
212,000
|
|
|
|
150,000
|
|
|
|
62,000
|
|
Patents
|
|
|
1,205,000
|
|
|
|
732,000
|
|
|
|
473,000
|
|
|
|
1,205,000
|
|
|
|
666,000
|
|
|
|
539,000
|
|
Totals
|
|
$
|
8,606,000
|
|
|
$
|
2,199,000
|
|
|
$
|
6,407,000
|
|
|
$
|
8,597,000
|
|
|
$
|
1,991,000
|
|
|
$
|
6,606,000
|
|
|
(1)
|
A portion of these intangibles are maintained in a foreign
currency, and are therefore subject to foreign exchange rate fluctuations.
|
|
(2)
|
These were previously considered an indefinite lived
intangible asset of Hy-Tech, however as the result of the testing for impairment the Company began amortizing these intangible
assets over a fifteen year useful life.
|
Amortization
expense of intangible assets from continuing operations subject to amortization was as follows:
Three months ended March 31,
|
|
2017
|
|
|
2016
|
|
$
|
206,000
|
|
|
$
|
308,000
|
|
The weighted average amortization period
for intangible assets was as follows:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Customer relationships
|
|
|
9.1
|
|
|
|
9.3
|
|
Trademarks and trade names (2)
|
|
|
14.3
|
|
|
|
14.5
|
|
Engineering drawings
|
|
|
8.6
|
|
|
|
8.8
|
|
Non-compete agreements
|
|
|
1.0
|
|
|
|
1.2
|
|
Patents
|
|
|
6.5
|
|
|
|
6.1
|
|
Amortization
expense for each of the next five years and thereafter is estimated to be as follows:
2018
|
|
$
|
648,000
|
|
2019
|
|
|
563,000
|
|
2020
|
|
|
544,000
|
|
2021
|
|
|
508,000
|
|
2022
|
|
|
508,000
|
|
Thereafter
|
|
|
2,125,000
|
|
|
|
$
|
4,896,000
|
|
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 (“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. Revolver borrowings will 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. 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 as to 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 “2016 Amendment”) with Capital One. The 2016 Amendment, among other things: (a) provided the Bank’s
consent to the transactions contained in the Stock Purchase Agreement and the repurchase of certain shares and options discussed
in Note 2 to the consolidated financial statements; (b) amended the Restated Loan Agreement by: (i) reducing the aggregate Commitment
(as defined in the Restated Loan Agreement) to $11,600,000; (ii) reducing the Term Loan A to $100,000; (iii) reducing the Revolver
Commitment to $10,000,000 (less the new Term Loan A balance of $100,000); (iv) reducing the Capex Loan Commitment to $1,600,000;
(v) modifying certain financial covenants, (vi) lowering interest rate margins and fee obligations; and (vii) extending the expiration
of the Credit Agreement to February 11, 2019. Additionally, the Bank released the mortgage on the Company’s Real Property
located in Tampa, Florida.
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 Credit Agreement.
See Note 11 –
Subsequent Events for discussion pertaining to the Second Amended Restated and Loan Agreement the Company entered into April 5,
2017 with Capital One.
SHORT–TERM
BORROWINGS
At March 31,
2017 and December 31, 2016, there were no Revolver borrowings outstanding. Applicable LIBOR Margins in effect as of March 31,
2017 and December 31, 2016 was 1.50%. The Applicable Base Rate Margins in effect as of March 31, 207 and December 31, 2016
was 0.50%.
The Company purchased
vehicles for use by its UAT salesforce. The current portion of the balance due relating to these vehicles is $8,000 at March 31,
2017 and $13,000 at December 31, 2016.
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 9 – DEBT – (Continued)
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. At March
31, 2017 and December 31, 2016, margins on LIBOR borrowings were 1.5%. The Applicable Margin for borrowings at the Base Rate for
the same timeframes was 0.5%. 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 LIBOR Rate, and is included in Long-term debt, less deferred
financing fees on the Company’s Consolidated Balance Sheet at March 31, 2017 and December 31, 2016.
In accordance with
ASU 2015-03, the Company reduced its long-term debt by $11,000 and $12,000, respectively, relating to debt issue costs as
of March 31, 2017 and December 31, 2016.
NOTE 10 – DIVIDEND PAYMENTS
On January 26, 2017,
the Company’s Board of Directors, in accordance with their dividend policy, declared a quarterly cash dividend of $0.05 per
common share, which was paid on February 10, 2017, to shareholders of record at the close of business on February 6, 2017. The
total amount of this dividend payment was approximately $180,000.
NOTE 11 – SUBSEQUENT EVENTS
On April 5,
2017 (the “Jiffy Closing Date”), Bonanza Holdings Corp., a Delaware corporation and newly formed wholly
owned subsidiary (“Jiffy Buyer”) of Florida Pneumatic, Jiffy Air Tool, Inc. a Nevada
corporation (“Seller”), The Jack E. Pettit—1996 Trust, the sole shareholder of Seller (the
“Shareholder”), and Jack E. Pettit entered into an Asset Purchase Agreement (the “Asset Purchase
Agreement”), pursuant to which, among other things, the Jiffy Buyer acquired (the “Jiffy Acquisition”)
substantially all of the operating assets of Seller for $5,950,000 in addition to the assumption of certain payables and
contractual obligations as set forth in the Asset Purchase Agreement. This amount is subject to a post-closing working
capital adjustment. In addition, the Seller may be entitled to up to $1,000,000 in additional contingent consideration based
upon certain revenue thresholds and other criteria set forth in the Asset Purchase Agreement with respect to two defined
measurement periods occurring within approximately the first two years following the Jiffy Closing Date. Jiffy Air Tool, Inc.
manufactures and distributes pneumatic tools and components, primarily sold to aerospace manufacturers.
Additionally, 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 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 Seller. Pursuant to the Purchase
and Sale Agreement, the purchase price for the real property was $1,050,000.
The
total consideration ($5,950,000 plus $1,050,000) paid by the Jiffy Buyer to the Seller was from availability under the
Revolver pursuant to the Second Amended and Restated Loan Agreement (defined below), less certain amounts escrowed pursuant
to, among others, the terms of the Agreements.
P&F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 11 – SUBSEQUENT EVENTS –
(Continued)
As the Jiffy Acquisition
has recently been completed, the Company is currently in the process of completing the purchase price allocation. As a result,
the Company expects that the purchase price allocation will be included in the Company’s consolidated financial statements
for the quarterly period ending June 30, 2017.
The following unaudited
pro-forma combined financial information gives effect to the Jiffy Acquisition as if the Jiffy Acquisition was consummated January
1, 2016. This unaudited pro-forma financial information is presented for information purposes only, and is not intended to present
actual results that would have been attained had the Jiffy Acquisition been completed as of January 1, 2016 (the beginning of the
earliest period presented) or to project potential operating results as of any future date or for any future periods.
|
|
For the Three-Month Period Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
$
|
14,694,000
|
|
|
$
|
16,174,000
|
|
Net income
|
|
$
|
8,000
|
|
|
$
|
161,000
|
|
Earnings per share - basic and diluted
|
|
$
|
0.00
|
|
|
$
|
0.04
|
|
Contemporaneously with
the Jiffy Acquisition,, the Company entered into a Second Amended and Restated Loan and Security Agreement, effective as of the
Closing Date (the “Second Amended and Restated Loan Agreement”), with Capital One. The Second Amended and Restated
Loan Agreement amended and restated the 2016 Amendment.
The Second Amended
and Restated Loan Agreement, among other things, amended the Credit Agreement by: (1) the maximum amount the Company can borrow
under the Revolver Commitment (as defined in the Second Amended and Restated Loan Agreement) increased from $10,000,000 to $16,000,000,
subject to certain borrowing base criteria; (2) maintaining the existing Tranche A Commitment of up to $100,000; (3) maintaining
the existing Capex Loan Commitment of up to $1,600,000, and (4) modifying certain borrowing base criteria as well as financial
and other covenants.
P&F INDUSTRIES, INC. AND SUBSIDIARIES