Item 1.
|
Financial Statements
|
P&F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
(unaudited)
|
|
|
(See Note 1)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,205,000
|
|
|
$
|
3,699,000
|
|
Accounts receivable — net
|
|
|
10,994,000
|
|
|
|
7,906,000
|
|
Inventories
|
|
|
20,090,000
|
|
|
|
19,901,000
|
|
Prepaid expenses and other current assets
|
|
|
925,000
|
|
|
|
3,030,000
|
|
TOTAL CURRENT ASSETS
|
|
|
33,214,000
|
|
|
|
34,536,000
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT
|
|
|
|
|
|
|
|
|
Land
|
|
|
1,281,000
|
|
|
|
1,150,000
|
|
Buildings and improvements
|
|
|
6,136,000
|
|
|
|
5,209,000
|
|
Machinery and equipment
|
|
|
20,160,000
|
|
|
|
19,401,000
|
|
|
|
|
27,577,000
|
|
|
|
25,760,000
|
|
Less accumulated depreciation and amortization
|
|
|
18,770,000
|
|
|
|
18,671,000
|
|
NET PROPERTY AND EQUIPMENT
|
|
|
8,807,000
|
|
|
|
7,089,000
|
|
|
|
|
|
|
|
|
|
|
GOODWILL
|
|
|
4,445,000
|
|
|
|
3,897,000
|
|
|
|
|
|
|
|
|
|
|
OTHER INTANGIBLE ASSETS — net
|
|
|
8,709,000
|
|
|
|
6,606,000
|
|
|
|
|
|
|
|
|
|
|
DEFERRED INCOME TAXES — net
|
|
|
1,643,000
|
|
|
|
1,793,000
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS — net
|
|
|
120,000
|
|
|
|
130,000
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
56,938,000
|
|
|
$
|
54,051,000
|
|
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
|
)
|
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
|
|
|
$
|
—
|
|
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, 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.
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 Company conducts
its Tools business through a wholly-owned subsidiary, Continental Tool Group, Inc. (“Continental”), which in turn operates
through its wholly-owned subsidiaries, Florida Pneumatic Manufacturing Corporation (“Florida Pneumatic”) and Hy-Tech
Machine, Inc. (“Hy-Tech”). Exhaust Technologies Inc. (“ETI”) and Universal Air Tool Company Limited (“UAT”)
are wholly-owned subsidiaries of Florida Pneumatic. Effective April 5, 2017, Florida Pneumatic, through a wholly-owned subsidiary,
purchased substantially all of the operating assets, less certain payables 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.
Florida Pneumatic is
engaged in the importation and sale of pneumatic hand tools, primarily for the retail, industrial and automotive markets. 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. Lastly as the result of the Jiffy acquisition,
Florida Pneumatic now manufactures pneumatic tools marketed primarily to the aerospace sector.
Hy-Tech designs, manufactures and sells a wide range of industrial products under the brands ATP, ATSCO,
Ozat, Numatx, Thaxton and Quality Gear. These products, including heavy duty air tools, industrial grinders, impact sockets, hydro-pneumatic
riveters, hydrostatic test plugs, air motors and custom gears, are all sold direct to major end users as well as through a broad
network of Industrial and Fluid Power Distributors. Industries served include power generation, petrochemical, construction, railroad,
mining, ship building and fabricated metals. Hy-Tech also manufactures components, assemblies and finished product for various
Original Equipment Manufacturers under their own brand names.
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, contingent consideration, 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”) 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, 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. 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. The Company is currently evaluating the impact of the adoption
of this guidance on its consolidated financial statements.
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 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 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 phase
of
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 Other (Topic 350): Simplifying the Test for
Goodwill Impairment (“ASU 2017-04”),
which simplified the testing of goodwill for impairment by eliminating Step
2 from the goodwill impairment test. Step 2 measured a goodwill impairment loss by comparing the implied fair value of a reporting
unit’s goodwill with the carrying amount of that goodwill. ASU 2017-04 is effective for public companies for 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.
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)
The excess of the total
purchase price over the fair value of the net assets acquired, including the value of the identifiable intangible assets, has been
allocated to goodwill. Goodwill will be amortized over 15 years for tax purposes, but not deductible for financial reporting purposes.
The intangible assets subject to amortization will be amortized over 15 years for tax purposes. For financial reporting purposes,
useful lives have been assigned as follows:
Customer relationships
|
|
15 years
|
|
Trademarks and trade names
|
|
Indefinite
|
|
Non-compete agreements
|
|
4 years
|
|
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.
|
|
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)
NOTE 4 – EARNINGS (LOSS) PER SHARE
Basic earnings (loss)
per common share is based only on the average number of shares of Common Stock outstanding for the periods. Diluted earnings (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.
Diluted earnings (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) 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
|
|
|
(1)
|
Dilutive securities consist of “in the money” stock options.
|
At September 30, 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. 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 5 – EQUITY – COMMON STOCK REPURCHASE PLAN
On August 9, 2017,
the Company’s Board of Directors authorized the Company to repurchase up to 100,000 shares of its common stock over a period
of up to twelve months (the “Repurchase Program”).
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 89,000
options to purchase shares of the Company’s Class A Common Stock under the Company’s 2012 Stock Incentive Plan. The
options expire ten years from the Grant Date. The Company granted an aggregate of 55,000 of these options to its Chief Executive
Officer and its Chief Financial Officer, with the balance to non-executive employees of the Company. All options granted
on the Grant Date vest one-third on each of the first 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:
|
|
|
Risk-free interest rate
|
|
2.07
|
%
|
Expected term (in years)
|
|
10
|
years
|
Volatility
|
|
87.16
|
%
|
Dividend yield
|
|
2.82
|
%
|
Weighted average fair value of options granted
|
$
|
4.41
|
|
The following is a
summary of the changes in outstanding options during the nine-month period ended September 30, 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
|
|
|
89,000
|
|
|
|
7.09
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(16,722
|
)
|
|
|
3.65
|
|
|
|
|
|
|
|
|
|
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
|
|
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
|
|
Non-vested options, January 1, 2017
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
|
89,000
|
|
|
|
4.41
|
|
Vested
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
Non-vested options, September 30, 2017
|
|
|
89,000
|
|
|
$
|
4.41
|
|
The number of shares
of Common Stock available for issuance under the P&F Industries, Inc. 2012 Stock Incentive Plan (the “2012 Plan”)
as of September 30, 2017 was 88,812. At September 30, 2017, there were 192,233 options outstanding issued under the 2012 Plan and
226,000 options outstanding issued under the 2002 Stock Incentive Plan.
Restricted Stock
The Company, in May
2017, 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 $6.17 per share, which was the closing price
of the Company’s Common Stock on the date of the grant. These shares cannot be traded earlier than the first anniversary
of the grant date. As such, the Company is ratably amortizing the total non-cash compensation expense of approximately $30,000
in its selling, general and administrative expenses through May 2018.
The Company, in May
2016, granted 1,000 restricted shares of its Common Stock to each non-employee member of its Board of Directors, totaling 5,000
restricted shares. The Company determined that the fair value of these shares was $8.72 per share, which was the closing price
of the Company’s Common Stock on the date of the grant. These shares could not have been traded earlier than the first anniversary
of the grant date. As such, the Company ratably amortized the total non-cash compensation expense of approximately $44,000 in its
selling, general and administrative expenses through May 2017.
NOTE 6 – 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 September 30,
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 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 3).
NOTE 7 – ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL
ACCOUNTS
Accounts receivable - net consists of:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Accounts receivable
|
|
$
|
11,067,000
|
|
|
$
|
7,991,000
|
|
Allowance for doubtful accounts
|
|
|
(73,000
|
)
|
|
|
(85,000
|
)
|
|
|
$
|
10,994,000
|
|
|
$
|
7,906,000
|
|
NOTE 8 – INVENTORIES
Inventories consist of:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Raw material
|
|
$
|
1,681,000
|
|
|
$
|
1,918,000
|
|
Work in process
|
|
|
1,642,000
|
|
|
|
658,000
|
|
Finished goods
|
|
|
16,767,000
|
|
|
|
17,325,000
|
|
|
|
$
|
20,090,000
|
|
|
$
|
19,901,000
|
|
NOTE 9 – 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
|
|
Other intangible assets were as follows:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
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
|
|
Trademarks and trade names (1)
|
|
|
2,326,000
|
|
|
|
—
|
|
|
|
2,326,000
|
|
|
|
1,507,000
|
|
|
|
—
|
|
|
|
1,507,000
|
|
Trademarks and trade names (2)
|
|
|
200,000
|
|
|
|
15,000
|
|
|
|
185,000
|
|
|
|
200,000
|
|
|
|
5,000
|
|
|
|
195,000
|
|
Engineering drawings
|
|
|
330,000
|
|
|
|
168,000
|
|
|
|
162,000
|
|
|
|
330,000
|
|
|
|
148,000
|
|
|
|
182,000
|
|
Non-compete agreements (1)
|
|
|
238,000
|
|
|
|
201,000
|
|
|
|
37,000
|
|
|
|
212,000
|
|
|
|
150,000
|
|
|
|
62,000
|
|
Patents (3)
|
|
|
1,405,000
|
|
|
|
813,000
|
|
|
|
592,000
|
|
|
|
1,205,000
|
|
|
|
666,000
|
|
|
|
539,000
|
|
Totals
|
|
$
|
11,333,000
|
|
|
$
|
2,624,000
|
|
|
$
|
8,709,000
|
|
|
$
|
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 a prior impairment, the Company began amortizing these intangible assets over a 15 year useful life.
|
|
(3)
|
The $200,000 increase represents a patent acquired during the third quarter of 2017.
|
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
|
|
The weighted average amortization period
for intangible assets was as follows:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Customer relationships
|
|
|
10.4
|
|
|
|
9.3
|
|
Trademarks and trade names (see note 2 to the table above)
|
|
|
13.8
|
|
|
|
14.5
|
|
Engineering drawings
|
|
|
8.3
|
|
|
|
8.8
|
|
Non-compete agreements
|
|
|
1.9
|
|
|
|
1.2
|
|
Patents
|
|
|
9.0
|
|
|
|
6.1
|
|
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
|
|
2022
|
|
|
635,000
|
|
Thereafter
|
|
|
3,062,000
|
|
|
|
$
|
6,383,000
|
|
NOTE 10 – DEBT
In October 2010,
the Company entered into a Loan and Security Agreement (as amended from time to time, “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 London InterBank Offered Rate (“LIBOR”) 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.
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 financial statements, and monthly borrowing base certificates. The Company is required
to comply with certain financial covenants. The Company believes it is in compliance with all covenants under the Credit Agreement.
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, 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 Borrowings
The Company had no
revolver borrowings at December 31, 2016, whereas at September 30, 2017, its Revolver borrowings 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% and 0.50% at December 31,
2016.
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 11 – DIVIDEND PAYMENTS
On August 10, 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 August 25, 2017, to shareholders of record at the close of business on August 21, 2017. The total
amount of this dividend payment was approximately $180,000. During the nine-month period ended September 30, 2017, the Company
has paid approximately $542,000 in dividends. The Company currently intends to continue its quarterly dividend payment; however,
it will review its policy on a quarterly basis.
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, 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” 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 2017 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:
|
·
|
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;
|
|
·
|
Supply chain disruptions;
|
|
·
|
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, 2016 (“2016 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.
P&F INDUSTRIES, INC. AND SUBSIDIARIES
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
Business
P&F and each of
its subsidiaries are herein referred to collectively as the “Company.” In addition, the words “we”, “our”
and “us” refer to the Company. 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, 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”)
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 the importation and sale of pneumatic hand tools, primarily for the retail, industrial and automotive markets. 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. Lastly, as the result of the acquisition of Jiffy, Florida
Pneumatic now manufactures pneumatic tools marketed primarily to the aerospace sector.
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 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.
See Note 2 to consolidated financial statements for further discussion.
KEY INDICATORS
Economic Measures
Much of our business
is driven by the ebbs and flows of the general economic conditions in both the United States and, to a lesser extent, abroad. We
focus on a wide array of customer types including, but not limited to large retailers, aerospace manufacturers, large and small
resellers of pneumatic tools and parts, and automotive related customers. 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 had an impact on our consolidated results in 2017. In addition, we monitor the number of
operating rotary drilling rigs in the United States, as a means of gauging oil production, which is a key factor in our sales into
the oil and gas exploration and extraction sector.
The cost and availability
of a quality labor pool in the countries where products and components are manufactured, both overseas as well as in the United
States, could materially affect our overall results.
Operating
Measures
Key operating measures
we use to manage our operations are: orders; shipments; development of new products; customer retention; inventory levels and productivity.
These measures are recorded and monitored at various intervals, including daily, weekly and monthly. To the extent these measures
are relevant; they are discussed in the detailed sections below.
Financial Measures
Key financial measures
we use to evaluate the results of our business include: 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 established objectives. To the extent
that these measures are relevant, they are discussed in the detail below.
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 2016 Form 10-K. Certain of these accounting policies require us to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent
assets and liabilities, revenues and expenses. On an ongoing basis, we evaluate estimates, including, but not limited to those
related to bad debts, inventory reserves, goodwill and intangible assets, warranty reserves and taxes and deferred taxes. We base
our estimates on historical data and experience, when available, and on various other assumptions that are believed to be reasonable
under the circumstances, the combined results of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. As future events and their effects cannot be determined with
precision, actual results could differ significantly from those estimates and assumptions. Significant changes, if any,
in those estimates resulting from continuing changes in the economic environment will be reflected in the consolidated financial
statements in future periods.
OVERVIEW
Key factors or events
impacting our third quarter 2017 results of operations were:
|
●
|
Decline in Florida Pneumatic’s Automotive and Retail revenue
|
|
●
|
Improvement in Hy-Tech’s gross margin
|
|
●
|
Addition of Jiffy’s operations
|
RESULTS OF OPERATIONS
Continuing operations
Unless otherwise discussed
elsewhere in the Management’s Discussion and Analysis, we believe that our relationships with our key customers and suppliers
remain satisfactory. Global oil and gas exploration and extraction have been the primary market of Hy-Tech, which until recently
has begun 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 sale of the Craftsman brand to Stanley Black & Decker and our level of
working capital exposure in relation to our return on that investment pertaining to Sears. 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 assurance that we will
fully recover this.
We believe that over
time several newer technologies and features will begin to have an impact on the market for the Company’s traditional pneumatic
tool offerings. This evolution has been felt initially by the advent of some cordless operated hand tools in the automotive aftermarket.
We are currently evaluating the development of more advanced technologies in our tool platforms.
RESULTS OF OPERATIONS
Continuing operations - (Continued)
Other than the aforementioned,
there are no major trends or uncertainties that had, or we could reasonably expect could 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.
During the first quarter
of 2016, we sold Nationwide to an unrelated third party for approximately $22,200,000. As a result of this transaction, Nationwide’s
2016 results are reported under discontinued operations. Please see Note 2 - Discontinued Operations, to our consolidated financial
statements for additional information.
REVENUE
The tables below provide
an analysis of our net revenue from continuing operations for the three and nine-month periods ended September 30, 2017 and 2016:
|
|
Three months ended September 30,
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
2017
|
|
|
2016
|
|
|
$
|
|
|
%
|
|
Florida Pneumatic
|
|
$
|
12,295,000
|
|
|
$
|
11,702,000
|
|
|
$
|
593,000
|
|
|
|
5.1
|
%
|
Hy-Tech
|
|
|
3,487,000
|
|
|
|
2,931,000
|
|
|
|
556,000
|
|
|
|
19.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
15,782,000
|
|
|
$
|
14,633,000
|
|
|
$
|
1,149,000
|
|
|
|
7.9
|
%
|
|
|
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, 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 September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
Increase (decrease)
|
|
|
|
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
|
)
|
Industrial/catalog
|
|
|
1,228,000
|
|
|
|
10.0
|
|
|
|
1,026,000
|
|
|
|
8.7
|
|
|
|
202,000
|
|
|
|
19.7
|
|
Aerospace
|
|
|
2,564,000
|
|
|
|
20.8
|
|
|
|
89,000
|
|
|
|
0.8
|
|
|
|
2,475,000
|
|
|
|
2,780.9
|
|
Other
|
|
|
270,000
|
|
|
|
2.2
|
|
|
|
233,000
|
|
|
|
2.0
|
|
|
|
37,000
|
|
|
|
15.9
|
|
Total
|
|
$
|
12,295,000
|
|
|
|
100.0
|
%
|
|
$
|
11,702,000
|
|
|
|
100.0
|
%
|
|
$
|
593,000
|
|
|
|
5.1
|
%
|
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 majority 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 decline in our Automotive revenue this
quarter compared to the same three-month period in 2016, were two major automotive parts distributors continuing to adjust their
inventory levels of pneumatic hand tools. Partially offsetting this decline was an increase in revenue from our UAT division headquartered
in the United Kingdom. Our
Industrial/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 year
has 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 the reduction in shipments
to Sears, compared to the same nine-month period in 2016. During 2016, 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, year to date
revenue was negatively affected by The Home Depot’s decision to reduce the number 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%,
when 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.
Hy-Tech
Hy-Tech designs,
manufactures and sells a wide range of industrial products under the brands ATP, ATSCO and Ozat which are categorized as “ATP”
for reporting purposes and include heavy duty air tools, industrial grinders and impact sockets. Hy-Tech’s other product
lines, Numatx, Thaxton and Quality Gear, are reported as “Other” and include the hydro-pneumatic riveters, hydrostatic
test plugs, air motors and custom gears.
|
|
Three months ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
Increase (decrease)
|
|
|
|
Revenue
|
|
|
Percent of
revenue
|
|
|
Revenue
|
|
|
Percent of
revenue
|
|
|
$
|
|
|
%
|
|
ATP
|
|
$
|
3,092,000
|
|
|
|
88.7
|
%
|
|
$
|
2,515,000
|
|
|
|
85.8
|
%
|
|
$
|
577,000
|
|
|
|
22.9
|
%
|
Other
|
|
|
395,000
|
|
|
|
11.3
|
|
|
|
416,000
|
|
|
|
14.2
|
|
|
|
(21,000
|
)
|
|
|
(5.0
|
)
|
Total
|
|
$
|
3,487,000
|
|
|
|
100.0
|
%
|
|
$
|
2,931,000
|
|
|
|
100.0
|
%
|
|
$
|
556,000
|
|
|
|
19.0
|
%
|
RESULTS OF OPERATIONS
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 increase in Hy-Tech’s third quarter 2017 ATP revenue, compared to the same period 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, and continues to place orders during the third quarter of 2017. Additionally, in 2016 we began to pursue alternate 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 develop different applications for its tools, motors and accessories. Revenue from these new sources
during the first nine months of 2017 was approximately $657,000, and is included 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.
RESULTS OF OPERATIONS
Continuing operations - (Continued)
Gross profit / 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 to the increase in Florida Pneumatic’s third 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 more 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, gross margin on the products being sold under its 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.
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 third quarter
of 2017, our SG&A was $5,352,000, compared to $4,915,000 for the same three-month period in 2016. The net increase was due
in large part to the acquisition of the Jiffy business in April 2017, with SG&A of approximately $575,000 for the third quarter
of 2017. Other significant components of the change include: (i) a $17,000 reduction in non-Jiffy compensation expenses, which
is comprised of base salaries and wages, accrued performance-based bonus incentives, associated payroll taxes and employee benefits;
(ii) a decrease in variable expenses of $78,000, due primarily to lower Retail revenue; (iii) a decrease in professional fees 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.
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)
|
|
|
|
2017
|
|
|
2016
|
|
|
Amount
|
|
|
%
|
|
Interest expense attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
80,000
|
|
|
$
|
41,000
|
|
|
$
|
39,000
|
|
|
|
95.1
|
%
|
Term loans, including Capital Expenditure Term Loans
|
|
|
2,000
|
|
|
|
5,000
|
|
|
|
(3,000
|
)
|
|
|
(60.0
|
)
|
Amortization expense of debt issue costs
|
|
|
42,000
|
|
|
|
118,000
|
|
|
|
(76,000
|
)
|
|
|
(64.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
124,000
|
|
|
$
|
164,000
|
|
|
$
|
(40,000
|
)
|
|
|
(24.4
|
)%
|
Primarily due to the
result of the sale of Nationwide and the real property located in Tampa, Florida, occurring in February and November 2016, respectively,
our total bank borrowings have been minimal. However, 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, 2016 through
February 11, 2016, which was 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.
Our average balance
of short-term borrowings during the three and nine-month periods ended September 30, 2017 was $3,635,000 and $3,263,000, respectively,
compared to $2,585,000 and $3,593,000, respectively, during the same periods in 2016.
Income taxes
At the end of each
interim reporting period, we estimate an 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, our effective tax rate applicable to continuing operations
for the three and nine-month periods ended September 30, 2017 was 97.1% and 136.5%, respectively. For the same periods in 2016
our effective tax rate applicable to continuing operations was 27.2% and 33.9%, respectively. The Company’s effective tax
rates were also affected by state taxes, non-deductible expenses and foreign tax rate differentials.
RESULTS OF OPERATIONS
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
|
|
Working Capital
|
|
$
|
24,490,000
|
|
|
$
|
28,373,000
|
|
Current Ratio
|
|
|
3.81 to 1
|
|
|
|
5.60 to 1
|
|
Shareholders’ Equity
|
|
$
|
47,221,000
|
|
|
$
|
47,590,000
|
|
Credit facility
In October 2010, we
entered into a Loan 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 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.
At 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, subject to certain borrowing base criteria, and (2)
modifying certain borrowing base criteria 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 defined 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.
Cash flows
During the nine-month
period ended September 30, 2017, our cash decreased to $1,205,000 from $3,699,000 at December 31, 2016. Our total bank
debt at September 30, 2017, primarily driven by the Jiffy acquisition, which was discussed in Note 3 to the accompanying consolidated
financial statements, was $2,434,000, compared to $100,000 at December 31, 2016. The total debt to total book capitalization
(total debt divided by total debt plus equity) at September 30, 2017 was 4.9%, compared to 0.2% at December 31, 2016.
In March 2016, our
Board of Directors approved the initiation of a dividend policy under which the Company intends to declare quarterly cash dividends
to 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.
During the nine-month
period ended September 30, 2017, we used $444,000 for capital expenditures, compared to $894,000 during the same period in the
prior year. Capital expenditures for the balance of 2017 are expected to be approximately $500,000, some of which may
be financed through our credit facilities or financed through independent third party financial institutions. The remaining 2017
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 least the next 12 months from the date of this filing.
LIQUIDITY AND CAPITAL RESOURCES –
(Continued)
Customer concentration
Florida Pneumatic has
two customers, Sears and The Home Depot that, in the aggregate, at September 30, 2017, and December 31, 2016, accounted for 39.6%
and 53.5%, respectively of our accounts receivable. To date, these customers remain at or close to complying with their payment
terms. Additionally, these two customers in the aggregate, accounted for 31.3% and 35.4%, respectively, of our revenue for the
three and nine-month periods ended September 30, 2017, compared to 45.3% and 43.4% for the same periods in 2016.
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.
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 phase
of 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.