UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended March 31, 2020  

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                   to                  

 

Commission File Number 1 - 5332

 

P&F INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   22-1657413
(State or other jurisdiction of   (I.R.S. Employer Identification Number)
incorporation or organization)    
     
445 Broadhollow Road, Suite 100, Melville, New York   11747
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (631) 694-9800

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which
registered
Class A common stock, $1.00 par value   PFIN   NASDAQ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No ¨

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x   No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x Smaller reporting company  x
       
      Emerging growth company  ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for the complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨   No x

 

As of May 12, 2020, there were 3,144,810 shares of the registrant’s Class A common stock outstanding.

 

 

 

 

 

 

P&F INDUSTRIES, INC.

 

FORM 10-Q

 

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2020

 

TABLE OF CONTENTS

 

    PAGE
     
PART I — FINANCIAL INFORMATION 3
     
Item 1. Financial Statements 3
     
  Consolidated Balance Sheets as of March 31, 2020 (unaudited) and December 31, 2019 3
     
  Consolidated Statements of Operations and Comprehensive (Loss) Income for the three months ended March 31, 2020 and 2019 (unaudited) 5
     
  Consolidated Statements of Shareholders’ Equity for the three-month periods ended March 31, 2020 and 2019 (unaudited) 6
     
  Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019 (unaudited) 7
     
  Notes to Consolidated Financial Statements (unaudited) 9
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
     
Item 4. Controls and Procedures 27
     
PART II — OTHER INFORMATION 28
     
Item 1. Legal Proceedings 28
     
Item 1A. Risk Factors 28
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
     
Item 3. Defaults Upon Senior Securities 28
     
Item 4. Mine Safety Disclosures 28
     
Item 5. Other Information 28
     
Item 6. Exhibits 28
     
Signature   29
     
Exhibit Index 30

 

2

 

 

PART I - FINANCIAL INFORMATION

 

Item 1.Financial Statements

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

   March 31, 2020   December 31, 2019 
   (unaudited)   (See Note 1) 
ASSETS          
CURRENT ASSETS          
           
Cash  $531,000   $380,000 
Accounts receivable — net   8,554,000    9,313,000 
Inventories   22,285,000    22,882,000 
Prepaid expenses and other current assets   2,021,000    1,497,000 
TOTAL CURRENT ASSETS   33,391,000    34,072,000 
           
PROPERTY AND EQUIPMENT          
Land   507,000    507,000 
Buildings and improvements   3,489,000    3,303,000 
Machinery and equipment   25,529,000    25,059,000 
    29,525,000    28,869,000 
Less accumulated depreciation and amortization   19,191,000    18,760,000 
NET PROPERTY AND EQUIPMENT   10,334,000    10,109,000 
           
GOODWILL   4,715,000    4,726,000 
           
OTHER INTANGIBLE ASSETS — net   8,032,000    8,259,000 
           
DEFERRED INCOME TAXES — net   269,000    216,000 
           
RIGHT-OF-USE ASSETS – OPERATING LEASES   3,673,000    3,859,000 
           
OTHER ASSETS — net   431,000    502,000 
           
TOTAL ASSETS  $60,845,000   $61,743,000 

 

See accompanying notes to consolidated financial statements (unaudited).

 

3

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

   March 31, 2020   December 31, 2019 
   (unaudited)   (See Note 1) 
LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
CURRENT LIABILITIES          
           
Short-term borrowings  $6,931,000   $5,648,000 
Accounts payable   2,318,000    1,843,000 
Accrued compensation and benefits   1,123,000    2,019,000 
Accrued other liabilities   1,005,000    1,568,000 
Current leased liabilities – operating leases   870,000    879,000 
TOTAL CURRENT LIABILITIES   12,247,000    11,957,000 
           
Noncurrent leased liabilities – operating leases   2,896,000    3,070,000 
Other liabilities   204,000    210,000 
           
TOTAL LIABILITIES   15,347,000    15,237,000 
           
SHAREHOLDERS’ EQUITY          
Preferred stock - $10 par; authorized - 2,000,000 shares; no shares issued        
Common stock          
Class A - $1 par; authorized - 7,000,000 shares; issued – 4,417,000 at March 31, 2020 and 4,416,000 at December 31, 2019   4,417,000    4,416,000 
Class B - $1 par; authorized - 2,000,000 shares; no shares issued        
Additional paid-in capital   14,087,000    14,056,000 
Retained earnings   37,952,000    38,867,000 
Treasury stock, at cost – 1,273,000 shares at March 31, 2020 and at December 31, 2019   (10,213,000)   (10,213,000)
Accumulated other comprehensive loss   (745,000)   (620,000)
           
TOTAL SHAREHOLDERS’ EQUITY   45,498,000    46,506,000 
           
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $60,845,000   $61,743,000 

 

See accompanying notes to consolidated financial statements (unaudited).

 

4

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

(unaudited)

 

   Three months 
   ended March 31, 
   2020   2019 
Net revenue  $13,350,000   $14,322,000 
Cost of sales   8,868,000    9,041,000 
Gross profit   4,482,000    5,281,000 
Selling, general and administrative expenses   5,690,000    5,263,000 
Operating (loss) income   (1,208,000)   18,000 
Other expense       6,000 
Interest expense   55,000    63,000 
Loss before income tax   (1,263,000)   (51,000)
Income tax benefit   (505,000)   (25,000)
Net loss  $(758,000)  $(26,000)
           
Basic and diluted loss per share  $(0.24)  $(0.01)
           
Weighted average common shares outstanding:          
           
Basic and diluted   3,144,000    3,381,000 
           
Net loss  $(758,000)  $(26,000)
Other comprehensive (loss) income - foreign currency translation adjustment   (125,000)   44,000 
Total comprehensive (loss) income  $(883,000)  $18,000 

 

See accompanying notes to consolidated financial statements (unaudited).

 

5

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (unaudited)

 

Three months ended March 31, 2020 

 

      Class A common
stock, $1 par
  Additional
paid-in
  Retained  Treasury stock  Accumulated
other
comprehensive
 
   Total  Shares  Amount  capital  earnings  Shares  Amount  loss 
Balance, January 1, 2020  $46,506,000   4,416,000  $4,416,000  $14,056,000  $38,867,000   (1,273,000) $(10,213,000) $(620,000)
                                  
Net loss   (758,000)           (758,000)         
                                  
Exercise of stock options   3,000   1,000   1,000   2,000                 
                                  
Restricted common stock compensation   13,000         13,000             
                                  
Stock-based compensation   16,000         16,000             
                                  
Dividends   (157,000)           (157,000)         
                                  
Foreign currency translation adjustment   (125,000)                    (125,000)
                                  
Balance, March 31, 2020  $45,498,000   4,417,000  $4,417,000  $14,087,000  $37,952,000   (1,273,000) $(10,213,000) $(745,000)

 

Three months ended March 31, 2019

 

      Class A common
stock, $1 par
  Additional
paid-in
  Retained  Treasury stock  Accumulated
other
comprehensive
 
   Total  Shares  Amount  capital  earnings  Shares  Amount  loss 
Balance, January 1, 2019  $45,535,000   4,410,000  $4,410,000  $13,904,000  $34,588,000   (816,000) $(6,695,000) $(672,000)
                                  
Net loss   (26,000)           (26,000)         
                                  
Restricted common stock compensation   13,000         13,000             
                                  
Purchase of Class A common stock   (3,202,000)              (418,000)  (3,202,000)   
                                  
Stock-based compensation   29,000         29,000             
                                  
Dividends   (158,000)           (158,000)         
                                  
Foreign currency translation adjustment   44,000                     44,000 
                                  
Balance, March 31, 2019  $42,235,000   4,410,000  $4,410,000  $13,946,000  $34,404,000   (1,234,000) $(9,897,000) $(628,000)

 

See accompanying notes to consolidated financial statements (unaudited). 

 

6

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

 

   Three months 
   ended March 31, 
   2020   2019 
Cash Flows from Operating Activities:          
Net loss  $(758,000)  $(26,000)
           
Adjustments to reconcile net loss to net cash used in operating activities:          
           
Non-cash charges:          
Depreciation and amortization   433,000    389,000 
Amortization of other intangible assets   195,000    172,000 
Amortization of operating leased assets   234,000    81,000 
Amortization of debt issue costs   4,000    15,000 
Amortization of consideration payable to a customer   67,000    67,000 
Provision for (recovery of) losses on accounts receivable   15,000    (69,000)
Stock-based compensation   16,000    29,000 
Loss on sale of property and equipment       6,000 
Restricted stock-based compensation   13,000    13,000 
Deferred income taxes   (47,000)   (25,000)
           
Changes in operating assets and liabilities:          
Accounts receivable   720,000    654,000 
Inventories   524,000    (88,000)
Prepaid expenses and other current assets   (528,000)   (208,000)
Accounts payable   482,000    (48,000)
Accrued compensation and benefits   (894,000)   (1,282,000)
Accrued other liabilities and other current liabilities   (556,000)   (99,000)
Operating lease liabilities   (230,000)   (65,000)
Other liabilities   (6,000)   (6,000)
Total adjustments   442,000    (464,000)
Net cash used in operating activities   (316,000)   (490,000)

 

See accompanying notes to consolidated financial statements (unaudited).

 

7

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

 

   Three months 
   ended March 31, 
   2020   2019 
Cash Flows from Investing Activities:          
Capital expenditures  $(658,000)  $(485,000)
Proceeds from disposal of property and equipment       11,000 
Net cash used in investing activities   (658,000)   (474,000)
           
Cash Flows from Financing Activities:          
Dividend payments   (157,000)   (158,000)
Proceeds from exercise of stock options   3,000     
Purchase of Class A common stock       (3,202,000)
Net proceeds from short-term borrowings   1,284,000    4,258,000 
Repayments of long-term debt       (20,000)
Bank finance costs       (20,000)
Net cash provided by financing activities   1,130,000    858,000 
           
Effect of exchange rate changes on cash   (5,000)   5,000 
Net increase (decrease) in cash   151,000    (101,000)
Cash at beginning of period   380,000    999,000 
Cash at end of period  $531,000   $898,000 
           
Supplemental disclosures of cash flow information:          
           
Cash paid for:          
Interest  $53,000   $37,000 
Cash paid for amounts included in the measurement of operating lease liabilities  $   $4,000 
           
Noncash information:          
Right of Use (“ROU”) assets recognized for new operating lease liabilities  $   $80,000 
Operating lease liability related to ROU assets recognized upon adoption of ASC 842  $   $577,000 

 

See accompanying notes to consolidated financial statements (unaudited).

 

8

 

 

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 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. 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, 2019 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, 2019 (“2019 Form 10-K”). The interim financial statements contained herein should be read in conjunction with the 2019 Form 10-K.

 

The consolidated financial statements have been reported in U.S. dollars by translating asset and liability amounts of a foreign wholly-owned subsidiary at the closing exchange rate, equity amounts at historical rates and the results of operations and cash flow at the average of the prevailing exchange rates during the periods reported. As a result, the Company is exposed to foreign currency translation gains or losses. These gains or losses are presented in the Company’s consolidated financial statements as “Other comprehensive (loss) income - foreign currency translation adjustment”.

 

Principles of Consolidation

 

The unaudited consolidated financial statements contained herein include the accounts of P&F Industries, Inc. and its subsidiaries (“P&F” or the “Company”). All significant intercompany balances and transactions have been eliminated.

 

Reclassification

 

Certain amounts in the consolidated financial statements of the Company have been reclassified to conform to classifications used in the current year. The reclassifications had no effect on previously reported results of operations or retained earnings.

 

The Company

 

P&F, a Delaware corporation incorporated on April 19, 1963, conducts its 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”), Universal Air Tool Company Limited (“UAT”), and Jiffy Air Tool, Inc. (“Jiffy”) are wholly-owned subsidiaries of Florida Pneumatic. The business of Air Tool Service Company (“ATSCO”) operates through a wholly-owned subsidiary of Hy-Tech. Effective October 25, 2019, the Company through a wholly owned subsidiary of Hy-Tech, acquired substantially all the operating assets comprising the businesses of Blaz-Man Gear, Inc. and Gear Products & Manufacturing, Inc., each an Illinois-based corporation that manufactures and distributes custom gears. See Note 2 – Acquisition, for further discussion.

 

Florida Pneumatic imports and sells pneumatic hand tools, most of which are of its own design, primarily to the retail, industrial, automotive and aerospace markets. Its products include sanders, grinders, drills, saws and impact wrenches. These tools are similar in appearance and function to electric hand tools, but are powered by compressed air, rather than by electricity or battery. Air tools, as they are more commonly referred to, generally offer better performance and weigh less than their electrical counterparts. Florida Pneumatic imports and/or manufactures approximately 75 types of pneumatic hand tools, most of which are sold at prices ranging from $50 to $1,000, under the names “Florida Pneumatic,” “Universal Tool”, “Jiffy Air Tool”, AIRCAT, NITROCAT, as well as under the trade names or trademarks of several private label customers. These products are sold to retailers, distributors, manufacturers and private label customers through in-house sales personnel and manufacturers’ representatives. The AIRCAT and NITROCAT brands of pneumatic tools are sold primarily to the automotive service and repair market (“automotive market”). Users of Florida Pneumatics’ hand tools include industrial maintenance and production staffs, do-it-yourself mechanics, professional automobile mechanics and auto body personnel. Jiffy manufactures and distributes pneumatic tools and components primarily to aerospace manufacturers.

 

9

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

NOTE 1 – BUSINESS AND SUMMARY OF ACCOUNTING POLICIES - Continued

 

Hy-Tech designs, manufactures and distributes industrial tools, systems, gearing, accessories and a wide variety of replacement parts under various brands including ATP, Numatx, Thaxton and Quality Gear.  Hy-Tech produces and sells heavy-duty pneumatic impact tools, grinders, air motors, hydro-pneumatic riveters, hydrostatic test plugs, impact sockets and custom gears, with prices ranging from $300 to $42,000.

 

Hy-Tech’s ”Engineered Solutions” products are sold direct to Original Equipment Manufacturers (“OEM’s”), and industrial branded products are sold through a broad network of specialized industrial distributors serving the power generation, petrochemical, aerospace, construction, railroad, mining, ship building and fabricated metals industries. Hy-Tech works directly with their industrial customers, designing and manufacturing products from finished components to complete turnkey systems to be sold under their own brand names.

 

Going Concern Assessment

 

Management assesses going concern uncertainty in the Company’s consolidated financial statements to determine whether there is sufficient cash on hand and working capital, including available borrowings on loans, to operate for a period of at least one year from the date the consolidated financial statements are issued, which is referred to as the "look-forward period", as defined in GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to management, it considers various scenarios, forecasts, projections, estimates and makes certain key assumptions, including the timing and nature of projected cash expenditures, its ability to reduce, delay or curtail cash out flows and its ability to raise additional capital, if necessary, among other factors. Management has prepared estimates of operations covering the look-forward period and believes that sufficient funds will be generated from operations to fund its operations. The Company has contingency plans in which it would further reduce or defer additional expenses and cash outlays, should operations weaken beyond current forecasts.

 

The impact of the novel coronavirus or COVID-19 on the Company’s business has been considered in these assumptions; however, it is too early to know the full impact of COVID-19 or its timing when the Company believes a return to more normal operations may occur. Further, as part of the business incentives offered in the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, the Company, on April 20, 2020, received a $2.9 million Payroll Protection Program (“PPP”) loan from the United States Small Business Administration (“SBA”). See Note 11 – Subsequent Event, for further discussion.

 

For the three-month period ended March 31, 2020, the Company incurred a net loss of $758,000, and incurred negative cash flows from operations of $316,000. The Company, at March 31, 2020 has working capital of $21,144,000.

 

The accompanying consolidated financial statements have been prepared on a going concern basis under which the Company is expected to be able to realize its assets and satisfy its liabilities in the normal course of business.

 

Customer concentration

 

At March 31, 2020 and December 31, 2019, accounts receivable from The Home Depot was 32.7% and 27.2%, respectively, of total accounts receivable. Additionally, revenue from The Home Depot during the three-month periods ended March 31, 2020 and 2019 were 22.4% and 17.6%, respectively, of total revenue. There were no other customers that accounted for more than 10% of consolidated revenue or accounts receivable during the three-month periods ended March 31, 2020 and 2019. 

 

Management Estimates

 

The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses in those financial statements.  Certain significant accounting policies that contain subjective management estimates and assumptions include those related to revenue recognition, inventory, goodwill, intangible assets and other long-lived assets, contingent consideration, income taxes and deferred taxes.  Descriptions of these policies are discussed in the Company’s 2019 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 adjusts 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.

 

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P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

NOTE 1 – BUSINESS AND SUMMARY OF ACCOUNTING POLICIES - (continued)

 

Significant Accounting Policies

 

The Company’s significant accounting policies are described in "Note 1: Summary of Significant Accounting Policies" of our Annual Report on Form 10-K for the year ended December 31, 2019.

 

Lease Accounting

 

On January 1, 2019, the Company adopted Accounting Standards Codification (“ASC”) ASC 842 “Leases” using the initial date of adoption method, whereby the adoption does not impact any periods prior to 2019. ASC Topic 842 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous leases’ guidance. When adopted, the Company elected to adopt the package of practical expedients and, accordingly, did not reassess any previously expired or existing arrangements and related classifications under ASC 840.

 

If the rate implicit in the lease is not readily determinable, the Company uses its incremental borrowing rate as the discount rate. The Company uses its best judgement when determining the incremental borrowing rate, which is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term to the lease payments in a similar currency.

 

The Company’s operating leases include vehicles, office space and the use of real property. The Company has not identified any material finance leases for the three months ended March 31, 2020.

 

The Company considers any options to extend the term of a lease when measuring the Right of Use lease asset.

 

For the three-month periods ended March 31, 2020 and 2019, the Company had $234,000 and $81,000 in Operating lease expense.

 

The following is a maturity analysis of the annual undiscounted cash flows reconciled to the carrying value of the operating lease liabilities as of March 31, 2020:

 

   As of
March 31, 2020
 
2020 (excluding the three months ended March 31, 2020)  $674,000 
2021   825,000 
2022   736,000 
2023   634,000 
2024   368,000 
Thereafter   1,053,000 
Total operating lease payments   4,290,000 
Less imputed interest   (524,000)
Total operating lease liabilities  $3,766,000 
      
Weighted-average remaining lease term   6.6 years 
Weighted-average discount rate   4.42%

 

11

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

NOTE 1 – BUSINESS AND SUMMARY OF ACCOUNTING POLICIES - Continued

 

Revenue recognition

 

The following table presents revenues recognized under ASC Topic 606, Revenue from Contracts with Customers.

 

Florida Pneumatic

 

Florida Pneumatic markets its air tool products to four primary sectors within the pneumatic tool market; Retail, Automotive, Industrial and Aerospace. It also generates revenue from its Berkley products line, as well as a line of air filters and other OEM parts (“Other”).

 

   Three months ended March 31, 
   2020   2019   (Decrease) increase 
   Revenue   Percent of 
revenue
   Revenue   Percent of
revenue
   $   % 
Automotive  $3,232,000    32.2%  $3,866,000    37.0%  $(634,000)   (16.4)%
Retail   2,990,000    29.8    2,709,000    26.0    281,000    10.4 
Aerospace   2,599,000    25.9    2,360,000    22.6    239,000    10.1 
Industrial   1,062,000    10.6    1,325,000    12.7    (263,000)   (19.8)
Other   147,000    1.5    180,000    1.7    (33,000)   (18.3)
Total  $10,030,000    100.0%  $10,440,000    100.0%  $(410,000)   (3.92.8)%

 

Hy-Tech

 

Hy-Tech designs, manufactures and sells a wide range of industrial products under the brands ATP, OZAT and ATSCO which are categorized as ATP for reporting purposes. Products manufactured for other companies under their brands are included in the OEM category in the table below. Power Transition Group (“PTG”) revenue is comprised of products manufactured and sold by the gear businesses that were acquired in October 2019, products sold through Hy-Tech’s legacy gear manufacturing division and products sold to a certain customer whose revenue was included in OEM in 2019. Numatx, Thaxton and other peripheral product lines, such as general machining, are reported as Other.

 

   Three months ended March 31, 
   2020   2019   (Decrease) increase 
   Revenue   Percent of
revenue
   Revenue   Percent of
revenue
   $   % 
OEM  $1,439,000    43.3%  $1,336,000    34.4%  $103,000    7.7%
ATP   1,061,000    32.0    1,986,000    51.2    (925,000)   (46.6)
PTG   735,000    22.1    355,000    9.1    380,000    107.0 
Other   85,000    2.6    205,000    5.3    (120,000)   (58.5)
Total  $3,320,000    100.0%  $3,882,000    100.0%  $(562,000)   (14.5)%

 

12

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – BUSINESS AND SUMMARY OF ACCOUNTING POLICIES - Continued

 

New Accounting Pronouncements

 

In December 2019, the FASB issued  ("ASU") 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The ASU is intended to simplify various aspects related to accounting for income taxes. This guidance is effective for fiscal years beginning after December 15, 2020, and for interim periods within those fiscal years, with early adoption permitted. The Company elected to early adopt this standard effective January 1, 2020. The adoption of this standard did not have a material effect on its Consolidated Financial Statements.

 

In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This new guidance is effective upon issuance of this ASU for contract modifications and hedging relationships on a prospective basis. While the Company is currently assessing the impact of the new guidance, it is not expected to have a material impact on the Company’s Consolidated Financial Statements.

 

The Company does not believe that any recently issued and effective accounting standard would have a material effect on its consolidated financial statements.

 

NOTE 2 – ACQUISITION

 

Effective October 25, 2019 (the “Gears Closing Date”) the Company, through a wholly owned subsidiary of Hy-Tech, acquired substantially all the assets comprising the businesses of Blaz-Man Gear, Inc. and Gear Products & Manufacturing, Inc. (the “Gears Acquisition”), each an Illinois-based corporation that manufactured and distributed custom gears. The Company believes that the acquisition of these two businesses will provide added expertise and market exposure into the customized/specialty gears market. The purchase price consisted of an aggregate of approximately $3.5 million in cash, which was funded by Revolver borrowings and the assumption of certain payables and contractual obligations. In addition, the sellers may be entitled to additional consideration based upon sale of certain categories of acquired inventory, which had no fair value at the time of the acquisition, during the two-year period following the Gears Closing Date. Accordingly, the Company, determined that, based primarily upon historical sales information provided, the most likely scenario could result in a payment of contingent consideration of approximately $64,000 and recorded such contingent consideration liability. This liability will be adjusted as needed with changes being recorded in the Company’s consolidated statement of income.

 

On the Gears Closing Date, Hy-Tech entered into a new five-year lease. This new leased facility, located in Punxsutawney, PA, is approximately 42,000 square feet, with annual lease payments of $165,800. Additionally, Hy-Tech elected to vacate a then existing leased space in Punxsutawney, which housed Hy-Tech’s gear operations prior to the Gears Acquisition. In April 2020, Hy-Tech and the landlord of the vacated facility agreed to terms which released Hy-Tech from the lease in exchange for a payment of $30,000. As a result, in April 2020, Hy-Tech will record a gain of approximately $33,000 on the early settlement of this lease obligation.

 

   Total 
Cash paid at closing  $3,518,000 
Fair value of contingent consideration   64,000 
Total estimated purchase price  $3,582,000 

 

13

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

NOTE 2 – ACQUISITION - Continued

 

The following table presents purchase price allocation:

 

Accounts receivable  $218,000 
Inventories   630,000 
Machinery, equipment and vehicle   1,437,000 
Customer relationships   995,000 
Trademarks and trade names   54,000 
Non-compete agreements   95,000 
Liabilities assumed   (131,000)
Goodwill   284,000 
Total estimated purchase price  $3,582,000 

 

The excess of the total purchase price over the fair value of the net assets acquired, including the value of the identifiable intangible assets, has been allocated to goodwill. Goodwill will be amortized over 15 years for tax purposes, but not deductible for financial reporting purposes. The intangible assets subject to amortization will be amortized over 15 years for tax purposes. For financial reporting purposes their respective useful lives have been determined as follows:

 

Customer relationships  10 years
Non-Compete agreements  4 years
Trademarks and trade names  indefinite

 

The following unaudited pro-forma combined financial information gives effect to the Acquisitions as if the transactions were consummated January 1, 2019. This unaudited pro-forma financial information is presented for information purposes only and is not intended to present actual results that would have been attained had the Acquisition been completed as of January 1, 2019 (the beginning of the earliest period presented) or to project potential operating results as of any future date or for any future periods.

 

  

For the

Three-Month

Period Ended
March 31, 2019

 
Revenue  $15,063,000 
Net income  $109,000 
Earnings per share – basic and diluted  $0.03 

 

NOTE 3 – LOSS PER SHARE

 

Basic loss per common share is based only on the average number of shares of Common Stock outstanding for the periods. Diluted loss per common share reflects the effect of shares of Common Stock issuable upon the exercise of options, unless the effect on earnings is anti-dilutive.

 

Diluted 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 loss per common share:

 

   Three months ended 
   March 31, 
   2020   2019 
Numerator for basic and diluted loss per common share:          
Net loss  $(758,000)  $(26,000)
Denominator:          
Denominator for basic and diluted loss per share - weighted average common shares outstanding   3,144,000    3,381,000 

 

14

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

NOTE 3 – LOSS PER SHARE - Continued

 

At March 31, 2020 and 2019, there were outstanding stock options whose exercise prices were higher than the average market values of the underlying Common Stock for the period. The weighted average of anti-dilutive stock options outstanding was as follows:

 

   Three months ended 
   March 31, 
   2020   2019 
Weighted average antidilutive stock options outstanding   146,000    8,000 

 

NOTE 4 – STOCK-BASED COMPENSATION

 

There were no options granted or issued during the three-month period ended March 31, 2020.

 

During the three-month period ended March 31, 2019, the Company granted 8,000 options to non-executives. The exercise price of these options is $8.55 per option and will expire in February 2029. Further, one third of these options vest on the anniversary date of the grant for the next three years.

 

The Company estimated the fair value of these options using the following assumptions:

  

Risk-free interest rate   2.73 % 
Expected term (in years)   10  years 
Volatility   62.08 % 
Dividend yield   2.34 % 
Weighted average fair value of options granted  $4.60   

 

The following is a summary of the changes in outstanding options during the three-month period ended March 31, 2020:

 

   Option Shares   Weighted
Average
Exercise
Price
   Weighted Average
Remaining
Contractual Life
(Years)
   Aggregate
Intrinsic
Value
 
Outstanding, January 1, 2020   226,075   $6.30    4.7   $219,983 
Granted                   
Exercised   (1,000)   2.92           
Forfeited                  
Expired                  
Outstanding, March 31, 2020   225,075   $6.32    4.5   $30,036 
Vested, March 31, 2020   190,075   $6.14    3.9   $30,036 

 

   Option Shares   Weighted
Average Grant-
Date Fair Value
 
Non-vested options, January 1, 2020   37,666   $4.45 
Granted          
Vested   (2,666)   4.60 
Forfeited         
Non-vested options, March 31, 2020   35,000   $4.44 

 

The remaining number of shares of Common Stock available for issuance under the P&F Industries, Inc. 2012 Stock Incentive Plan (the “2012 Plan”) as of March 31, 2020 was 62,062. At March 31, 2020, there were 190,575 options outstanding issued under the 2012 Plan and 34,500 options outstanding issued under the 2002 Stock Incentive Plan.

 

15

 

 

 P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

NOTE 4 – STOCK-BASED COMPENSATION - Continued

 

Restricted Stock

 

On May 22, 2019, the Company granted 1,250 restricted shares of its Common Stock to each non-employee member of its Board of Directors, totaling 6,250 restricted shares. The Company determined that the fair value of these shares was $8.31 per share, which was the closing price of the Company’s Common Stock on the date of the grant. These shares cannot be traded earlier than the first anniversary of the grant date. The Company will ratably amortize the total non-cash compensation expense of approximately $52,000 to selling, general and administrative expenses through May 2020.

 

Treasury Stock

 

On February 14, 2019, the Company entered into an agreement to repurchase 389,909 shares of its common stock from certain funds and accounts advised or sub-advised by Fidelity Management & Research Company or one of its affiliates in a privately negotiated transaction at approximately $7.62 per share for a total purchase price of $2,971,000. On February 15, 2019, the Company completed this transaction. On February 14, 2019, the Company entered into Amendment No. 6 to the Second Amended and Restated Loan and Security Agreement with Capital One, which permitted the Company to complete the above transaction.

 

NOTE 5 – FAIR VALUE MEASUREMENTS

 

Accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under this guidance, the Company is required to classify certain assets and liabilities based on the following hierarchy:

 

Level 1:   Quoted prices for identical assets or liabilities in active markets that can be assessed at the measurement date.

 

Level 2:   Inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3:   Inputs reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation.

 

The guidance requires the use of observable market data if such data is available without undue cost and effort.

 

As of March 31, 2020, and December 31, 2019, 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.

 

Assets and liabilities measured at fair value on a non-recurring basis include goodwill and intangible assets. Such assets are reviewed quarterly for impairment indicators. If a triggering event has occurred, the assets are re-measured when the estimated fair value of the corresponding asset group is less than the carrying value. The fair value measurements, in such instances, are based on significant unobservable inputs (level 3).

 

NOTE 6 – ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

 

Accounts receivable - net consists of:

 

   March 31, 2020  December 31, 2019 
Accounts receivable  $8,802,000  $9,547,000 
Allowance for doubtful accounts, sales discounts and chargebacks   (248,000)  (234,000)
   $8,554,000  $9,313,000 

 

16

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

NOTE 7 – INVENTORIES

 

Inventories consist of:

 

   March 31, 2020  December 31, 2019 
Raw material  $2,340,000  $2,178,000 
Work in process   2,078,000   2,302,000 
Finished goods   17,867,000   18,402,000 
   $22,285,000  $22,882,000 

 

NOTE 8 – GOODWILL AND OTHER INTANGIBLE ASSETS  

 

Changes in the carrying amount of goodwill are as follows:

 

Balance, January 1, 2020  $4,726,000 
Currency translation adjustment   (11,000)
Balance, March 31, 2020  $4,715,000 

 

   March 31, 2020  December 31, 2019 
   Cost  Accumulated
amortization
  Net book
value
  Cost  Accumulated
amortization
  Net book
value
 
Other intangible assets:                         
Customer relationships (1)  $7,809,000  $2,879,000  $4,930,000  $7,825,000  $2,724,000  $5,101,000 
Trademarks and trade names (1)   2,351,000      2,351,000   2,375,000      2,375,000 
Trademarks and trade names   200,000   49,000   151,000   200,000   45,000   155,000 
Engineering drawings   330,000   229,000   101,000   330,000   225,000   105,000 
Non-compete agreements (1)   325,000   235,000   90,000   331,000   235,000   96,000 
Patents   1,405,000   996,000   409,000   1,405,000   978,000   427,000 
Totals  $12,420,000  $4,388,000  $8,032,000  $12,466,000  $4,207,000  $8,259,000 

 

(1) A portion of these intangibles are maintained in a foreign currency and are therefore subject to foreign exchange rate fluctuations.

 

Amortization expense of intangible assets subject to amortization was as follows:

 

Three months ended March 31,    
2020     2019    
$ 195,000     $ 172,000    

 

The weighted average amortization period for intangible assets was as follows:

 

   March 31, 2020  December 31, 2019 
Customer relationships   8.5   8.7 
Trademarks and trade names   11.3   11.5 
Engineering drawings   6.9   7.1 
Non-compete agreements   3.6   3.7 
Patents   6.9   7.1 

 

Amortization expense for each of the next five years and thereafter is estimated to be as follows:

 

2021  $761,000 
2022   757,000 
2023   757,000 
2024   747,000 
2025   690,000 
Thereafter   1,969,000 
   $5,681,000 

 

17

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

NOTE 9 – DEBT

 

In October 2010, the Company entered into a Loan and Security Agreement (“Credit Agreement”) with an affiliate of Capital One, National Association (“Capital One” or the “Bank”). The Credit Agreement, as amended and restated in April 2017 and further amended from time-to-time, among other things, provides the ability to borrow funds under a $16,000,000 revolver line (“Revolver”), subject to certain borrowing base criteria. Additionally, there is a $2,000,000 line for capital expenditures (“Capex Loan”), with $1,600,000 available for future borrowings. Revolver and Capex Loan borrowings are secured by the Company’s accounts receivable, inventory, equipment, and real property, among other things. P&F and certain of its subsidiaries are borrowers under the Credit Agreement, and their obligations are cross guaranteed by certain other subsidiaries. The Credit Agreement expires on February 8, 2024.

  

At the Company’s option, Revolver borrowings bear interest at either LIBOR (“London interbank Offered Rate”) or the Base Rate, as the term is defined in the Credit Agreement, plus an Applicable Margin, as defined in the Credit Agreement. The Company is subject to limitations on the number of LIBOR borrowings.

 

The Company provides Capital One with monthly borrowing base certificates, and in certain circumstances, it is required to deliver monthly financial statements and certificates of compliance with various financial covenants. Should an event of default occur the interest rate would increase by two percent per annum during the period of default, in addition to other remedies provided to Capital One.

 

SHORT–TERM BORROWINGS

 

At March 31, 2020, short-term or Revolver borrowing was $6,931,000, compared to $5,648,000, at December 31, 2019. Applicable Margin Rates at March 31, 2020 and December 31, 2019 for LIBOR and Base Rates were 1.50% and 0.50%, respectively. Additionally, at March 31, 2020 and December 31, 2019, there was approximately $8,189,000 and $9,200,000, respectively, available to the Company under its Revolver arrangement.

 

The average balance of short-term borrowings during the three-month periods ended March 31, 2020 and 2019 were $6,281,000 and $4,076,000, respectively.

 

NOTE 10 – DIVIDEND PAYMENTS

 

On February 11, 2020, the Company’s Board of Directors, in accordance with its dividend policy, declared a quarterly cash dividend of $0.05 per common share, which was paid on February 28, 2020, to shareholders of record at the close of business on February 24, 2020. The total amount of this dividend payment was approximately $157,000.

 

NOTE 11 – SUBSEQUENT EVENT

 

On April 20, 2020, the Company received a $2.9 million PPP loan, as provided pursuant to the CARES Act, signed into law on March 27, 2020. PPP loans, which are unsecured and guaranteed by the SBA, were designed to create economic stimulus by providing additional operating capital to small businesses, such as P&F, in the United States for permitted uses during an eight-week period following receipt of funds. 

 

The loan, which was obtained from BNB Bank under a promissory note dated April 17, 2020, provides for a fixed rate of interest of one percent per year with a maturity date two years from the date the funds were received. No payments of principal or interest is due during the initial six-month period. Beginning in the seventh month, the Company is required to make monthly payments of principal and interest until maturity, for any portion of the loan that is not forgiven. Up to 100% of the loan may be forgiven based on the amount of funds used during the eight-week period after receiving the funds towards payroll, rent, and certain other permitted operating expenses calculated pursuant to the CARES Act, although no assurance can be provided that P&F will obtain forgiveness of the loan in whole or in part.

 

18

 

 

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 2020 fiscal year and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company for a number of reasons including, but not limited to:

 

  · Risks associated with health crises including epidemics and pandemics;
  · Exposure to fluctuations in energy prices;
  · Debt and debt service requirements;
  · Borrowing and compliance with covenants under our credit facility;
  · Disruption in the global capital and credit markets;
  · The strength of the retail economy in the United States and abroad;
  · Risks associated with sourcing from overseas;
  · Importation delays;
  · Risks associated with Brexit;
  · Customer concentration;
  · Adverse changes in currency exchange rates;
  · Impairment of long-lived assets and goodwill;
  · Unforeseen inventory adjustments or changes in purchasing patterns;
  · Market acceptance of products;
  · Competition;
  · Price reductions;
  · Interest rates;
  · Litigation and insurance;
  · Retention of key personnel;
  · Acquisition of businesses;
  · Regulatory environment;
  · The threat of terrorism and related political instability and economic uncertainty; and
  · Information technology system failures and attacks,

 

and those other risks and uncertainties described in its Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 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.

 

19

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

 

OUR BUSINESS

 

P&F Industries, Inc. (“P&F”) is a Delaware corporation incorporated on April 19, 1963. P&F (together with its subsidiaries, the “Company”) conducts its 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”), Universal Air Tool Company Limited (“UAT”), and Jiffy Air Tool, Inc. (“Jiffy”) are wholly-owned subsidiaries of Florida Pneumatic. The business of Air Tool Service Company (“ATSCO”) operates through a wholly-owned subsidiary of Hy-Tech. Effective October 25, 2019, the Company through a wholly owned subsidiary of Hy-Tech, acquired substantially all the operating assets comprising the businesses of Blaz-Man Gear, Inc. and Gear Products & Manufacturing, Inc., each an Illinois-based corporation that manufactures and distributes custom gears. See Note 2 – Acquisition, for further discussion.

 

Florida Pneumatic imports, manufactures and sells pneumatic hand tools and accessories, which are of its own design, primarily to the retail, industrial, automotive and aerospace markets.

 

Hy-Tech designs, manufactures and distributes industrial pneumatic tools, industrial gears, hydrostatic test plugs and a wide variety of parts under the brands ATP, ATSCO, Numatx, Thaxton and Quality Gear. Industries served include power generation, petrochemical, construction, railroad, mining, ship building and fabricated metals. Hy-Tech also manufactures components, assemblies, finished product and systems for various Original Equipment Manufacturers under their own brand names.

 

Economic Measures  

 

Much of our business is driven by the ebbs and flows of the general economic conditions in both the United States and, to a lesser extent, abroad. We focus on a wide array of customer types including but not limited to large retailers, aerospace manufacturers, large and small resellers of pneumatic tools and parts, and automotive related customers. We tend to track the general economic conditions of the United States, industrial production and general retail sales.

 

A key economic measure relevant to us is the cost of the raw materials in our products. Key materials include metals, especially various types of steel and aluminum. Also important is the value of the United States Dollar (“USD”) in relation to the Taiwanese dollar (“TWD”), as we purchase a significant portion of our products from Taiwan. Purchases from Chinese sources are made in USD; however, if the Chinese currency, the Renminbi (“RMB”), were to be revalued against the USD, there could be a negative impact on the cost of our products. Additionally, we closely monitor the fluctuation in the Great British Pound (“GBP”) to the USD, and the GBP to TWD, both of which can have an impact on the consolidated results. In addition, we monitor the number of operating rotary drilling rigs in the United States, as a means of gauging oil production, which is a key factor in our sales into the oil and gas exploration and extraction sector.

 

As the result of additional tariffs imposed since mid-2018, specifically those imposed on products imported from China, we now must consider tariffs a key economic measure, as a significant portion of products imported by Florida Pneumatic, primarily for our Retail customers, are subject to these tariffs.

 

Lastly, the cost and availability of a quality labor pool in the countries where products and components are manufactured, both overseas as well as in the United States, could materially affect our overall results.

 

Operating Measures

 

Key operating measures we use to manage our operations are 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 to established objectives. To the extent that these measures are relevant, they are discussed in detail below.

 

20

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued 

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Descriptions of these policies are discussed in the 2019 Form 10-K, and in the Notes to these financial statements. Certain of these accounting policies require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities, revenues and expenses. On an ongoing basis, we evaluate estimates, including, but not limited to those related to bad debts, inventory reserves, goodwill and intangible assets, warranty reserves, 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 first quarter 2020 results of operations were:

 

  · Negative effects of the novel coronavirus on revenue and income;  

 

  · relocation, transition and other costs related to the fourth quarter gear businesses acquisition and;

 

  · the downturn in oil and gas exploration.

 

TRENDS AND UNCERTAINTIES

 

While the novel coronavirus or COVID-19 pandemic has impacted our ability to source certain of our products, particularly with respect to factories that we utilize located in China, Vietnam and Italy, we do not believe this alone is likely to have a material negative impact on our results for the foreseeable future. However, we do believe the impact of the COVID-19 virus on the global economy, particularly within the U.S., is likely to have a material impact on our results for fiscal 2020. Furthermore, nearly all U.S. states and the United Kingdom, where we have operations, have ordered non-essential businesses to stop physical operations and ordered its residents to remain home in order to contend with the impact of this pandemic. While we are currently able to continue operations at all of our locations, the COVID-19 pandemic has significantly impacted orders and sales and will for the foreseeable future. We are closely monitoring the situation and taking actions to protect the safety of our employees and communities. For example, among other things, we have restricted international and domestic travel, taken a variety of steps to ensure social distancing in our facilities, including working remotely where available, and have increased our cleaning and sanitizing procedures in our facilities. 

 

Based on negotiations with our overseas suppliers and The Home Depot (“THD”), which is our largest customer that is currently affected by the tariffs imposed since July 2018, we have been able to avoid much of the impact of such tariffs. However, there is no guarantee that we will be able to avoid some or all of any new, or additional tariffs. Should we be unable to avoid such additional costs, our gross margin on these products likely would be severely impacted. This could cause us to terminate or alter certain customer/supplier relationships.

 

We believe that over time, several newer technologies and features will have a greater impact on the market for our traditional pneumatic tool offerings. The impact of this evolution has been felt initially by the advent of advanced cordless, or battery-powered hand tools, particularly in the automotive aftermarket or in the retail sector. We continue to perform a cost-benefit analysis of developing or incorporating more advanced technologies in our tool platforms.

 

The ongoing low production level of one of Boeing’s major aircraft has negatively impacted our aerospace sector revenue. Should the global decision to keep this aircraft grounded and the Federal Aviation Administration hold off on a decision that this aircraft is safe to fly, it is likely Boeing will continue to have lower production rates, which in turn will likely continue to have an adverse effect on our revenue. 

 

Other than the aforementioned or matters that may be discussed elsewhere in this Form 10-Q, there are no major trends or uncertainties that had, or we could have reasonably expected to have, a material impact on our revenue, nor was there any unusual or infrequent event, transaction or any significant economic change that materially affected our results of operations.

 

Unless otherwise discussed elsewhere in the Management’s Discussion and Analysis, we believe that our relationships with our key customers and suppliers remain satisfactory.

 

21

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

 

RESULTS OF OPERATIONS - (Continued)

 

REVENUE

 

The tables below provide an analysis of our net revenue for the three-month periods ended March 31, 2020 and 2019:

 

   Three months ended March 31, 
           Decrease 
   2020   2019   $   % 
Florida Pneumatic  $10,030,000   $10,440,000   $(410,000)   (3.9)%
Hy-Tech   3,320,000    3,882,000    (562,000)   (14.5)
                     
Consolidated  $13,350,000   $14,322,000   $(972,000)   (6.8)%

 

Florida Pneumatic

 

Florida Pneumatic markets its air tool products to four primary sectors within the pneumatic tool market; Automotive, Retail, Aerospace and Industrial. It also generates revenue from its Berkley products line, as well as a line of air filters and other OEM parts (“Other”).

 

    Three months ended March 31, 
    2020   2019   (Decrease) increase 
    Revenue   Percent of 
revenue
   Revenue   Percent of
revenue
   $   % 
Automotive   $3,232,000    32.2%  $3,866,000    37.0%  $(634,000)   (16.4)%
Retail    2,990,000    29.8    2,709,000    26.0    281,000    10.4 
Aerospace    2,599,000    25.9    2,360,000    22.6    239,000    10.1 
Industrial    1,062,000    10.6    1,325,000    12.7    (263,000)   (19.8)
Other    147,000    1.5    180,000    1.7    (33,000)   (18.3)
Total   $10,030,000    100.0%  $10,440,000    100.0%  $(410,000)   (3.9)%

 

The most significant component of the change in our Automotive revenue this quarter, compared to the same three-month period in 2019 is the loss of a large customer and, to a lesser degree, negative effects on our business caused by COVID-19. The 10.4 percent increase in Retail revenue was due primarily to low orders in the first quarter of 2019 that resulted from higher level of shipments in the fourth quarter of 2018. Principally due to greater than normal order and shipments during the first quarter of 2020 to a military-oriented customer, Florida Pneumatic’s Aerospace revenue improved this quarter compared to the same three-month period in 2019. The decline in Industrial revenue this quarter was due primarily to on-going sluggishness in the oil and gas sector and reduced orders from certain customers that service the aerospace industry that have been negatively affected by the reduction in production by Boeing of certain civilian aircraft, compared to the same period in 2019.

 

Hy-Tech

 

Hy-Tech designs, manufactures and sells a wide range of industrial products under the brands ATP, and ATSCO which are categorized as ATP for reporting purposes. Products manufactured for other companies under their brands are included in the OEM category in the table below. Power Transition Group (“PTG”) revenue is comprised of products manufactured and sold by the gear businesses that were acquired in October 2019, products sold through Hy-Tech’s legacy gear manufacturing division and products sold to a certain customer whose revenue was included in OEM in 2019. Numatx, Thaxton and other peripheral product lines, such as general machining, are reported as Other.

 

    Three months ended March 31, 
    2020   2019   (Decrease) increase 
    Revenue   Percent of
revenue
   Revenue   Percent of
revenue
   $   % 
OEM   $1,439,000    43.3%  $1,336,000    34.4%  $103,000    7.7%
ATP    1,061,000    32.0    1,986,000    51.2    (925,000)   (46.6)
PTG    735,000    22.1    355,000    9.1    380,000    107.0 
Other    85,000    2.6    205,000    5.3    (120,000)   (58.5)
Total   $3,320,000    100.0%  $3,882,000    100.0%  $(562,000)   (14.5)%

 

22

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

 

RESULTS OF OPERATIONS - (Continued)

 

Hy-Tech- Continued

 

The decline in Hy-Tech’s ATP revenue is due primarily to two factors: (a) the decision to allocate additional marketing and product development efforts to its Engineered Solutions products offering, which is designed to exploit Hy-Tech’s expertise in engineering and manufacturing and enable it to pursue alternate, non-traditional markets while developing different applications for its tools, motors and related accessories, and (b) the decline in the demand for its oil and gas related tools and accessories, due primarily to the significant decline in oil prices and the COVID-19 pandemic. We believe the development of the Engineered Solutions offering will continue to provide Hy-Tech an opportunity to generate additional sources of revenue in the future. The transition and relocation from Illinois to our facilities in Pennsylvania of the gears businesses acquired in late October 2019 continued throughout the first quarter of 2020. The process of relocation of equipment and the set-up of general operations that occurred during the quarter caused lower than expected PTG revenue and profits.  

 

GROSS MARGIN/PROFIT

 

   Three months ended March 31,   Decrease 
   2020   2019   Amount      % 
Florida Pneumatic  $3,774,000   $4,007,000   $(233,000)      (5.8)%
As percent of respective revenue   37.6%   38.4%   (0.8)%  pts     
Hy-Tech  $708,000   $1,274,000   $(566,000)     (44.4)
As percent of respective revenue   21.3%   32.8%   (11.5)%  pts     
Total  $4,482,000   $5,281,000   $(799,000)     (15.1)%
As percent of respective revenue   33.6%   36.9%   (3.3)%  pts     

 

Factors contributing to the slight decline in Florida Pneumatic’s gross margin this quarter, compared to the same three-month period ended March 31, 2019, was due mostly to product mix, as we had increases in lower gross margin Retail revenue, with declines in revenue of our generally stronger gross margin Automotive and Industrial lines. Additionally, as the result of COVID-19, we encountered weaker absorption of manufacturing overhead at Jiffy during the first quarter of 2020, compared to the same period in 2019.

 

The decline in Hy-Tech’s gross margin of 11.5 percentage points was due to the following: (i) increased outside processing costs; (ii) weaker manufacturing overhead absorption, which was due in part to labor hours being utilized in connection with the relocation of the gear businesses discussed earlier; (iii) less favorable mix of products sold this quarter, compared to the same period a year ago; and (iv) lower than expected gross margin on the sale of PTG products due primarily to start-up issues in the new facility.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses (“SG&A”) include salaries and related costs, commissions, travel, administrative facilities, communications costs and promotional expenses for our direct sales and marketing staff, administrative and executive salaries and related benefits, legal, accounting and other professional fees as well as general corporate overhead and certain engineering expenses.

 

During the first quarter of 2020, our SG&A was $5,690,000, compared to $5,263,000 for the same three-month period in 2019. The most significant factor driving the increase in our SGA was approximately $420,000 of relocation, transition and temporary labor and recruiting costs incurred in connection with the acquisition of the gear businesses in late October 2019. Nearly half of these costs were anticipated to be recorded during the second and third quarters of 2020. However, we elected to accelerate the integration of the acquired businesses, completing nearly all the tasks during the first quarter of 2020. As such, we anticipate minimal integration costs associated with the gear businesses moving forward. Additionally, rent, and bad debt expenses increased this quarter, compared to the same three-month period in 2019, by $22,000 and $19,000, respectively. Partially offsetting the above were reductions in compensation expenses, which is comprised of base salaries and wages, accrued performance-based bonus incentives and associated payroll taxes and employee benefits of $24,000. In addition, variable expenses and corporate expenses declined $73,000 and $26,000, respectively.

 

23

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations – Continued

 

RESULTS OF OPERATIONS - (Continued)

 

Interest

 

   Three months ended
March 31,
   Increase (decrease) 
   2020   2019   Amount   % 
Interest expense attributable to:                    
Short-term borrowings  $51,000   $43,000   $8,000    18.6%
Term loans, including Capex Term Loans       5,000    (5,000)   (100.0)
Amortization expense of debt issue costs   4,000    15,000    (11,000)   (73.3)
                     
Total  $55,000   $63,000   $(8,000)   (12.7)%

 

As the interest rates charged by our bank remained constant, the increase in interest expense related to short-term loan borrowings during the first quarter of 2020, compared to the same period in 2019, was driven by higher Revolver borrowings this quarter. There were no term loans in place during 2020. Debt issue costs incurred in connection with recent bank amendments are being amortized through February 2024, were lower than the costs associated with the previous amendments.

 

Our average balance of short-term borrowings during the three-month period ended March 31, 2020 was $6,281,000, compared to $4,076,000, during the same three-month period in 2019.

 

Income taxes

 

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law. The Act includes provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitation and technical corrections to tax depreciation methods for qualified improvement property.

 

At the end of each interim reporting period, the Company estimates its effective tax rate expected to be applied for the full year. This estimate is used to determine the income tax provision or benefit on a year-to-date basis and may change in subsequent interim periods. Accordingly, our effective tax rate for the three-month period ended March 31, 2020 was a tax benefit of 40.0%, compared to 49.0% for the three-month period ended March 31, 2019. Included in the three-month period ended March 31, 2020 is also consideration for net operating loss carrybacks under the CARES Act. The effective tax rates for all periods presented were impacted primarily by state taxes, and non-deductible expenses.

 

24

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations – Continued

 

RESULTS OF OPERATIONS - (Continued)

 

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:

 

   March 31, 2020   December 31, 2019 
Working Capital  $21,144,000   $22,115,000 
Current Ratio   2.73 to 1    2.85 to 1 
Shareholders’ Equity  $45,498,000   $46,506,000 

 

Credit facility

 

Our Credit Facility is discussed in detail in Note 9 to our consolidated financial statements.

 

Payroll Protection Program Loan

 

On April 20, 2020, we received a $2.9 million PPP loan, as provided pursuant to the CARES Act. This loan obtained from BNB Bank is unsecured and is guaranteed by the SBA.This loan provided funds that are being used to pay the salaries, wages and certain other employee-related costs for our employees, subject to certain PPP limitations, during the prescribed eight-week period as discussed in the CARES Act. See Note 11 for further discussion.

 

Cash flows

 

During the three-month period ended March 31, 2020, our net cash increased to $531,000 from $380,000 at December 31, 2019. Our total Bank debt at March 31, 2020 was $6,931,000 compared to $5,648,000 at December 31, 2019, the increase driven primarily from Company-wide bonuses paid in March 2020. The total debt to total book capitalization (total debt divided by total debt plus equity); at March 31, 2020 was 13.2% compared to 10.8% at December 31, 2019.

 

At March 31, 2020, our short-term or Revolver borrowing was $6,931,000 compared to $5,648,000, at December 31, 2019. Additionally, at March 31, 2020 and December 31, 2019, there was approximately $8,189,000 and $9,200,000, respectively, available to the Company under its Revolver arrangement.

 

During the three-month period ended March 31, 2020, we used $658,000 for capital expenditures, compared to $485,000 during the same period in the prior year. Capital expenditures for the balance of 2020 are expected to be approximately $553,000, some of which may be financed through our credit facilities with Capital One Bank or financed through independent third-party financial institutions. The remaining 2020 capital expenditures will likely be for machinery and equipment, tooling, and computer hardware and software.

 

We believe that should a need arise whereby the current credit facility is insufficient; we could raise additional funds through the sale of real property or other assets.

 

Customer concentration

 

At March 31, 2020 and December 31, 2019, accounts receivable from The Home Depot was 32.7% and 27.2%, respectively, of our total accounts receivable. Additionally, revenue from The Home Depot during the three-month periods ended March 31, 2020 and 2019 were 22.4% and 17.6%, respectively, of our total revenue. There were no other customers that accounted for more than 10% of our consolidated revenue or accounts receivable during the three-month periods ended March 31, 2020 and 2019.

 

25

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations – Continued

 

RESULTS OF OPERATIONS - (Continued)

 

NEW ACCOUNTING PRONOUNCEMENTS

 

Refer to Note 1 to our consolidated financial statements for a discussion of recent accounting standards and pronouncements.

 

We 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.

 

26

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not required.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

The Company's management, with the participation of the Company's Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated, as of March 31, 2020, the effectiveness of the Company's disclosure controls and procedures, which were designed to be effective at the reasonable assurance level. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company's disclosure controls and procedures as of March 31, 2020, the Company’s management, including its CEO and CFO, concluded that the Company's disclosure controls and procedures were effective at that date.

 

Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting, identified in connection with the evaluation required by Exchange Act Rule 13a-15(d), that occurred during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

27

 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

There have been no material changes to the legal proceedings’ disclosure described in our 2019 Form 10-K.

 

Item 1A. Risk Factors

 

There were no material changes to the risk factors previously disclosed in our 2019 Form 10-K, with the exception of the following risk factor which replaces the first risk factor in Item 1A of our 2019 Form 10-K in its entirety.

 

Risks related to the global outbreak of COVID-19 and other public health crises.

 

The Company faces risks related to pandemics, epidemics and other public health crises, including the global outbreak of COVID-19, which has reached and disrupted areas in which the Company has operations, suppliers, customers and employees. The COVID-19 pandemic and actions taken by governments and others in response have resulted in, and may continue to cause, the slowdown of the businesses of certain of the Company’s customers and the closure of certain of the Company’s customers’ facilities which in turn has reduced and may continue to reduce demand for some of the Company’s products. Additionally, certain of the Company’s products and parts are manufactured overseas. The COVID-19 pandemic has delayed supply from certain of the Company’s overseas suppliers, and the Company is unable to predict the ultimate duration of such disruptions in supply, whether products or parts from other suppliers will also be delayed,  whether such disruptions will become material to the Company and whether, if necessary, the Company will be able to secure such products or parts from alternate suppliers on favorable terms or at all. Moreover, the Company may need to close certain of its facilities in response to the COVID-19 pandemic. The COVID-19 pandemic has also impacted the Company’s operations, including by causing many of its employees to work remotely or in shifts designed to minimize exposure. There is also a heightened risk that a significant portion of the Company’s workforce will suffer illness or otherwise not be permitted or be unable to work. The Company cannot predict whether any of these disruptions will continue or whether its operations will experience more significant or frequent disruptions in the future. Any measures the Company implements to mitigate these risks and disruptions may not be successful.

 

The circumstances surrounding the COVID-19 pandemic continue to evolve and it is not possible to predict the full nature and extent of the impacts of the COVID-19 pandemic. However, the Company expects the continued spread of COVID-19 and reactions by governments and others to continue to cause an economic slowdown that could be significant and, therefore, could extend the duration of the period of reduced demand for the Company’s products and disruption of its supply chain. Additionally, deteriorating economic conditions could result in material impairment charges in the value of certain of the Company’s assets. Moreover, circumstances surrounding the COVID-19 pandemic have negatively impacted global financial markets leading to greater volatility and decreased access to capital. If such conditions continue, the Company’s ability to finance its operations and expenditures may be negatively impacted. Any of the risks set forth in this paragraph and the preceding paragraph could have a material adverse effect on our business, results of operations and financial position.

 

Additional public health crises could also emerge in the future, including other pandemics or epidemics. Such public health crises could pose further risks to the Company and could also have a material adverse effect on our business, results of operations and financial position. 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

None.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

See “Exhibit Index” immediately following the signature page.

 

28

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  P&F INDUSTRIES, INC.
  (Registrant)
   
    /s/ JOSEPH A. MOLINO, Jr.
    Joseph A. Molino, Jr.
    Chief Financial Officer
Dated: May 18, 2020   (Principal Financial and Chief Accounting Officer)

 

29

 

 

EXHIBIT INDEX

 

The following exhibits are either included in this report or incorporated herein by reference as indicated below:

 

Exhibit
Number
  Description of Exhibit
     
31.1   Certification of Richard A. Horowitz, Principal Executive Officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2   Certification of Joseph A. Molino, Jr., Principal Financial Officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1   Certification of Richard A. Horowitz, Principal Executive Officer of the Registrant, Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2   Certification of Joseph A. Molino, Jr., Principal Financial Officer of the Registrant, Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101   *  Interactive Data

 

* Attached as Exhibit 101 are the following, each formatted in Extensible Business Reporting Language (“XBRL”): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations and Comprehensive (Loss) Income, (iii) Consolidated Statements of Shareholders’ Equity; (iv) Consolidated Statements of Cash Flows; and (v) Notes to Consolidated Financial Statements.

 

A copy of any of the foregoing exhibits to this Quarterly Report on Form 10-Q may be obtained, upon payment of the Registrant’s reasonable expenses in furnishing such exhibit, by writing to P&F Industries, Inc., 445 Broadhollow Road, Suite 100, Melville New York 11747, Attention: Corporate Secretary.

 

30

 

 

EXHIBIT 31.1

 

P&F INDUSTRIES, INC.

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Richard A. Horowitz, certify that:

 

1.       I have reviewed this quarterly report on Form 10-Q of P&F Industries, Inc.;

 

2.       Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.       Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.       The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)       Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)       Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)       Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)       Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter, in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.       The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)       All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)       Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

  /s/ RICHARD A. HOROWITZ
  Richard A. Horowitz
Date: May 18, 2020 Principal Executive Officer

 

 

 

 

EXHIBIT 31.2

 

P&F INDUSTRIES, INC.

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Joseph A. Molino, Jr., certify that:

 

1.       I have reviewed this quarterly report on Form 10-Q of P&F Industries, Inc.;

 

2.       Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.       Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.       The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)       Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)       Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)       Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)       Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter, in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.       The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)       All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)       Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

  /s/ JOSEPH A. MOLINO, JR.
  Joseph A. Molino, Jr.
Date: May 18, 2020 Principal Financial Officer

 

 

 

 

EXHIBIT 32.1

 

P&F INDUSTRIES, INC.

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the quarterly report on Form 10-Q of P&F Industries, Inc. (the “Company”) for the period ended March 31, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Richard A. Horowitz, Principal Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. §1350, that:

 

  (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

  /s/ RICHARD A. HOROWITZ
  Richard A. Horowitz
Date: May 18, 2020 Principal Executive Officer

  

 

 

EXHIBIT 32.2

 

P&F INDUSTRIES, INC.

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the quarterly report on Form 10-Q of P&F Industries, Inc. (the “Company”) for the period ended March 31, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Joseph A. Molino, Jr., Principal Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. §1350, that:

 

  (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

  (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

  /s/ JOSEPH A. MOLINO, JR.
  Joseph A. Molino, Jr.
Date: May 18, 2020 Principal Financial Officer

 

 

v3.20.1
ACQUISITION (Tables)
3 Months Ended
Mar. 31, 2020
ACQUISITION  
Schedule of estimated purchase price of fair value of cash paid contingent consideration

 

 

 

 

 

    

Total

Cash paid at closing

 

$

3,518,000

Fair value of contingent consideration

 

 

64,000

Total estimated purchase price

 

$

3,582,000

 

Schedule of purchase price allocation

The following table presents purchase price allocation:

 

 

 

 

 

Accounts receivable

    

$

218,000

Inventories

 

 

630,000

 

 

 

  

Machinery, equipment and vehicle

 

 

1,437,000

Customer relationships

 

 

995,000

Trademarks and trade names

 

 

54,000

Non-compete agreements

 

 

95,000

Liabilities assumed

 

 

(131,000)

Goodwill

 

 

284,000

Total estimated purchase price

 

$

3,582,000

 

Schedule of intangible assets useful lives subject to amortization

The intangible assets subject to amortization will be amortized over 15 years for tax purposes. For financial reporting purposes their respective useful lives have been determined as follows:

 

 

 

 

Customer relationships

    

10 years

Non-Compete agreements

 

4 years

Trademarks and trade names

 

indefinite

 

Schedule of unaudited pro-forma combined financial information

 

 

 

 

 

 

For the Three-Month Period Ended

 

 

March 31, 2019

Revenue

    

$

15,063,000

Net income

 

$

109,000

Earnings per share – basic and diluted

 

$

0.03

 

v3.20.1
INVENTORIES (Tables)
3 Months Ended
Mar. 31, 2020
INVENTORIES  
Schedule of inventories

Inventories consist of:

 

 

 

 

 

 

 

 

 

    

March 31, 2020

    

December 31, 2019

Raw material

 

$

2,340,000

 

$

2,178,000

Work in process

 

 

2,078,000

 

 

2,302,000

Finished goods

 

 

17,867,000

 

 

18,402,000

 

 

$

22,285,000

 

$

22,882,000

 

v3.20.1
BUSINESS AND SUMMARY OF ACCOUNTING POLICIES - Additional information (Details)
3 Months Ended 12 Months Ended
Apr. 20, 2020
USD ($)
Mar. 31, 2020
USD ($)
item
$ / product
Mar. 31, 2019
USD ($)
Dec. 31, 2019
USD ($)
Schedule Of Summary Of Accounting Policies [Line Items]        
Working capital   $ 21,144,000    
Cash flow from operating activities   (316,000) $ (490,000)  
Operating Lease, Right-of-Use Asset   3,673,000   $ 3,859,000
Operating Lease, Liability   3,766,000    
Operating Lease, Expense   $ 234,000 $ 81,000  
Accounts Receivable [Member] | Home Depot [Member]        
Schedule Of Summary Of Accounting Policies [Line Items]        
Concentration Risk, Percentage   32.70%   27.20%
Sales Revenue, Net [Member] | Home Depot [Member]        
Schedule Of Summary Of Accounting Policies [Line Items]        
Concentration Risk, Percentage   22.40% 17.60%  
Florida Pneumatic [Member]        
Schedule Of Summary Of Accounting Policies [Line Items]        
Number Of Types Of Pneumatic Hand Tools Imported Or Manufactured | item   75    
Florida Pneumatic [Member] | Minimum [Member]        
Schedule Of Summary Of Accounting Policies [Line Items]        
Sale Price Per Product | $ / product   50    
Florida Pneumatic [Member] | Maximum [Member]        
Schedule Of Summary Of Accounting Policies [Line Items]        
Sale Price Per Product | $ / product   1,000    
Hy-Tech [Member] | Minimum [Member]        
Schedule Of Summary Of Accounting Policies [Line Items]        
Sale Price Per Product | $ / product   300    
Hy-Tech [Member] | Maximum [Member]        
Schedule Of Summary Of Accounting Policies [Line Items]        
Sale Price Per Product | $ / product   42,000    
Subsequent events | Payroll Protection Program        
Schedule Of Summary Of Accounting Policies [Line Items]        
Loan received $ 2,900,000      
v3.20.1
GOODWILL AND OTHER INTANGIBLE ASSETS - Estimated amortization expense (Details)
Mar. 31, 2020
USD ($)
GOODWILL AND OTHER INTANGIBLE ASSETS  
2020 $ 761,000
2022 757,000
2023 757,000
2024 747,000
2025 690,000
Thereafter 1,969,000
Total $ 5,681,000
v3.20.1
INVENTORIES (Details) - USD ($)
Mar. 31, 2020
Dec. 31, 2019
INVENTORIES    
Raw material $ 2,340,000 $ 2,178,000
Work in process 2,078,000 2,302,000
Finished goods 17,867,000 18,402,000
Inventory net $ 22,285,000 $ 22,882,000
v3.20.1
CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares
Mar. 31, 2020
Dec. 31, 2019
Preferred stock, par value (in dollars per share) $ 10 $ 10
Preferred stock, shares authorized 2,000,000 2,000,000
Preferred stock, shares issued 0 0
Treasury stock, shares 1,273,000 1,273,000
Common Class A [Member]    
Common stock, par value (in dollars per share) $ 1 $ 1
Common stock, shares authorized 7,000,000 7,000,000
Common stock, shares issued 4,417,000 4,416,000
Common Class B [Member]    
Common stock, par value (in dollars per share) $ 1 $ 1
Common stock, shares authorized 2,000,000 2,000,000
Common stock, shares issued 0 0
v3.20.1
BUSINESS AND SUMMARY OF ACCOUNTING POLICIES
3 Months Ended
Mar. 31, 2020
BUSINESS AND SUMMARY OF ACCOUNTING POLICIES  
BUSINESS AND SUMMARY OF ACCOUNTING POLICIES

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 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. 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, 2019 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, 2019 (“2019 Form 10-K”). The interim financial statements contained herein should be read in conjunction with the 2019 Form 10-K.

The consolidated financial statements have been reported in U.S. dollars by translating asset and liability amounts of a foreign wholly-owned subsidiary at the closing exchange rate, equity amounts at historical rates and the results of operations and cash flow at the average of the prevailing exchange rates during the periods reported. As a result, the Company is exposed to foreign currency translation gains or losses. These gains or losses are presented in the Company’s consolidated financial statements as “Other comprehensive (loss) income - foreign currency translation adjustment”.

Principles of Consolidation

The unaudited consolidated financial statements contained herein include the accounts of P&F Industries, Inc. and its subsidiaries (“P&F” or the “Company”). All significant intercompany balances and transactions have been eliminated.

Reclassification

Certain amounts in the consolidated financial statements of the Company have been reclassified to conform to classifications used in the current year. The reclassifications had no effect on previously reported results of operations or retained earnings.

The Company

P&F a Delaware corporation incorporated on April 19, conducts its 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”), Universal Air Tool Company Limited (“UAT”), and Jiffy Air Tool, Inc. (“Jiffy”) are wholly-owned subsidiaries of Florida Pneumatic. The business of Air Tool Service Company (“ATSCO”) operates through a wholly-owned subsidiary of Hy-Tech. Effective October 25, 2019, the Company through a wholly owned subsidiary of Hy-Tech, acquired substantially all the operating assets comprising the businesses of Blaz-Man Gear, Inc. and Gear Products & Manufacturing, Inc., each an Illinois-based corporation that manufactures and distributes custom gears. See Note 2 – Acquisition, for further discussion.

Florida Pneumatic imports and sells pneumatic hand tools, most of which are of its own design, primarily to the retail, industrial, automotive and aerospace markets. Its products include sanders, grinders, drills, saws and impact wrenches. These tools are similar in appearance and function to electric hand tools, but are powered by compressed air, rather than by electricity or battery. Air tools, as they are more commonly referred to, generally offer better performance and weigh less than their electrical counterparts. Florida Pneumatic imports and/or manufactures approximately 75 types of pneumatic hand tools, most of which are sold at prices ranging from $50 to $1,000, under the names “Florida Pneumatic,” “Universal Tool”, “Jiffy Air Tool”, AIRCAT, NITROCAT, as well as under the trade names or trademarks of several private label customers. These products are sold to retailers, distributors, manufacturers and private label customers through in-house sales personnel and manufacturers’ representatives. The AIRCAT and NITROCAT brands of pneumatic tools are sold primarily to the automotive service and repair market (“automotive market”). Users of Florida Pneumatics’ hand tools include industrial maintenance and production staffs, do-it-yourself mechanics, professional automobile mechanics and auto body personnel. Jiffy manufactures and distributes pneumatic tools and components primarily to aerospace manufacturers.

Hy-Tech designs, manufactures and distributes industrial tools, systems, gearing, accessories and a wide variety of replacement parts under various brands including ATP, Numatx, Thaxton and Quality Gear.  Hy-Tech produces and sells heavy-duty pneumatic impact tools, grinders, air motors, hydro-pneumatic riveters, hydrostatic test plugs, impact sockets and custom gears, with prices ranging from $300 to $42,000.

Hy-Tech’s ”Engineered Solutions” products are sold direct to Original Equipment Manufacturers (“OEM’s”), and industrial branded products are sold through a broad network of specialized industrial distributors serving the power generation, petrochemical, aerospace, construction, railroad, mining, ship building and fabricated metals industries . Hy-Tech works directly with their industrial customers, designing and manufacturing products from finished components to complete turnkey systems to be sold under their own brand names.

Going Concern Assessment

Management assesses going concern uncertainty in the Company’s consolidated financial statements to determine whether there is sufficient cash on hand and working capital, including available borrowings on loans, to operate for a period of at least one year from the date the consolidated financial statements are issued, which is referred to as the "look-forward period", as defined in GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to management, it considers various scenarios, forecasts, projections, estimates and makes certain key assumptions, including the timing and nature of projected cash expenditures, its ability to  reduce, delay or curtail cash out flows and its ability to raise additional capital, if necessary, among other factors. Management has prepared estimates of operations covering the look-forward period and believes that sufficient funds will be generated from operations to fund its operations. The Company has contingency plans in which it would further reduce or defer additional expenses and cash outlays, should operations weaken beyond current forecasts.

 

The impact of the novel coronavirus or COVID-19 on the Company’s business has been considered in these assumptions; however, it is too early to know the full impact of COVID-19 or its timing when the Company believes a return to more normal operations may occur. Further, as part of the business incentives offered in the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, the Company, on April 20, 2020, received a $2.9 million Payroll Protection Program (“PPP”) loan from the United States Small Business Administration (“SBA”). See Note 11 – Subsequent Event, for further discussion. 

For the three-month period ended March 31, 2020, the Company incurred a net loss of $758,000, and incurred negative cash flows from operations of $316,000. The Company, at March 31, 2020 has working capital of $21,144,000.  

The accompanying consolidated financial statements have been prepared on a going concern basis under which the Company is expected to be able to realize its assets and satisfy its liabilities in the normal course of business.

Customer concentration

At March 31, 2020 and December 31, 2019, accounts receivable from The Home Depot was 32.7% and 27.2%, respectively, of total accounts receivable. Additionally, revenue from The Home Depot during the three -month periods ended March 31, 2020 and  2019 were 22.4% and 17.6%, respectively, of total revenue. There were no other customers that accounted for more than 10% of consolidated revenue or accounts receivable during the three -month periods ended March 31, 2020 and 2019.

Management Estimates

The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses in those financial statements. Certain significant accounting policies that contain subjective management estimates and assumptions include those related to revenue recognition, inventory, goodwill, intangible assets and other long-lived assets, contingent consideration, income taxes and deferred taxes. Descriptions of these policies are discussed in the Company’s 2019 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 adjusts 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.

Significant Accounting Policies

The Company’s significant accounting policies are described in "Note 1: Summary of Significant Accounting Policies" of our Annual Report on Form 10‑K for the year ended December 31, 2019.

Lease Accounting

On January 1, 2019, the Company adopted Accounting Standards Codification (“ASC”) ASC 842 “Leases” using the initial date of adoption method, whereby the adoption does not impact any periods prior to 2019. ASC Topic 842 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous leases’ guidance. When adopted, the Company elected to adopt the package of practical expedients and, accordingly, did not reassess any previously expired or existing arrangements and related classifications under ASC 840.

If the rate implicit in the lease is not readily determinable, the Company uses its incremental borrowing rate as the discount rate. The Company uses its best judgement when determining the incremental borrowing rate, which is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term to the lease payments in a similar currency.

The Company’s operating leases include vehicles, office space and the use of real property. The Company has not identified any material finance leases for the three months ended March 31, 2020.

The Company considers any options to extend the term of a lease when measuring the Right of Use lease asset.

For the three-month periods ended March 31, 2020 and 2019, the Company had $234,000 and $81,000 in Operating lease expense.

The following is a maturity analysis of the annual undiscounted cash flows reconciled to the carrying value of the operating lease liabilities as of March 31, 2020:

 

 

 

 

 

 

 

    

As of March 31, 2020

 

2020 (excluding the three months ended March 31, 2020)

 

$

674,000

 

2021

 

 

825,000

 

2022

 

 

736,000

 

2023

 

 

634,000

 

2024

 

 

368,000

 

Thereafter

 

 

1,053,000

 

Total operating lease payments

 

 

4,290,000

 

Less imputed interest

 

 

(524,000)

 

Total operating lease liabilities

 

$

3,766,000

 

 

 

 

 

 

Weighted-average remaining lease term

    

6.6 years

 

Weighted-average discount rate

 

4.42

%

 

Revenue recognition

The following table presents revenues recognized under ASC Topic 606, Revenue from Contracts with Customers.

Florida Pneumatic

Florida Pneumatic markets its air tool products to four primary sectors within the pneumatic tool market; Retail, Automotive, Industrial and Aerospace. It also generates revenue from its Berkley products line, as well as a line of air filters and other OEM parts (“Other”).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

 

2020

 

2019

 

(Decrease) increase

 

 

    

 

 

    

Percent of 

    

 

 

    

Percent of

    

 

 

    

 

 

 

 

Revenue

 

revenue

 

Revenue

 

revenue

 

$

 

%  

 

Automotive

 

$

3,232,000

 

32.2

%  

$

3,866,000

 

37.0

%  

$

(634,000)

 

(16.4)

%

Retail

 

 

2,990,000

 

29.8

 

 

2,709,000

 

26.0

 

 

281,000

 

10.4

 

Aerospace

 

 

2,599,000

 

25.9

 

 

2,360,000

 

22.6

 

 

239,000

 

10.1

 

Industrial

 

 

1,062,000

 

10.6

 

 

1,325,000

 

12.7

 

 

(263,000)

 

(19.8)

 

Other

 

 

147,000

 

1.5

 

 

180,000

 

1.7

 

 

(33,000)

 

(18.3)

 

Total

 

$

10,030,000

 

100.0

%  

$

10,440,000

 

100.0

%  

$

(410,000)

 

(3.9)

%

 

Hy-Tech

Hy-Tech designs, manufactures and sells a wide range of industrial products under the brands ATP, OZAT and ATSCO which are categorized as ATP for reporting purposes. Products manufactured for other companies under their brands are included in the OEM category in the table below. Power Transition Group (“PTG”) revenue is comprised of products manufactured and sold by the gear businesses that were acquired in October 2019, products sold through Hy-Tech’s legacy gear manufacturing division and products sold to a certain customer whose revenue was included in OEM in 2019. Numatx, Thaxton and other peripheral product lines, such as general machining, are reported as Other.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

 

2020

 

2019

 

(Decrease) increase

 

 

    

 

    

Percent of

    

 

 

    

Percent of

    

 

 

    

 

 

 

 

Revenue

 

revenue

 

Revenue

 

revenue

 

 

$

 

%  

 

OEM

 

$

1,439,000

 

43.3

%  

$

1,336,000

 

34.4

%  

$

103,000

 

7.7

%

ATP

 

 

1,061,000

 

32.0

 

 

1,986,000

 

51.2

 

 

(925,000)

 

(46.6)

 

PTG

 

 

735,000

 

22.1

 

 

355,000

 

9.1

 

 

380,000

 

107.0

 

Other

 

 

85,000

 

2.6

 

 

205,000

 

5.3

 

 

(120,000)

 

(58.5)

 

Total

 

$

3,320,000

 

100.0

%  

$

3,882,000

 

100.0

%  

$

(562,000)

 

(14.5)

%

 

New Accounting Pronouncements

In December 2019, the FASB issued ("ASU") 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The ASU is intended to simplify various aspects related to accounting for income taxes. This guidance is effective for fiscal years beginning after December 15, 2020, and for interim periods within those fiscal years, with early adoption permitted. The Company elected to early adopt this standard effective January 1, 2020. The adoption of this standard did not have a material effect on its Consolidated Financial Statements.

In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This new guidance is effective upon issuance of this ASU for contract modifications and hedging relationships on a prospective basis. While the Company is currently assessing the impact of the new guidance, it is not expected to have a material impact on the Company’s Consolidated Financial Statements.

The Company does not believe that any recently issued and effective accounting standard would have a material effect on its consolidated financial statements.

v3.20.1
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
3 Months Ended
Mar. 31, 2020
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS  
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

NOTE 6 – ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

Accounts receivable - net consists of:

 

 

 

 

 

 

 

 

 

    

March 31, 2020

    

December 31, 2019

Accounts receivable

 

$

8,802,000

 

$

9,547,000

Allowance for doubtful accounts, sales discounts and chargebacks

 

 

(248,000)

 

 

(234,000)

 

 

$

8,554,000

 

$

9,313,000

 

v3.20.1
DIVIDEND PAYMENTS
3 Months Ended
Mar. 31, 2020
DIVIDEND PAYMENTS  
DIVIDEND PAYMENTS

NOTE 10– DIVIDEND PAYMENTS

On February 11, 2020, the Company’s Board of Directors, in accordance with its dividend policy, declared a quarterly cash dividend of $0.05 per common share, which was paid on February 28, 2020, to shareholders of record at the close of business on February 24, 2020. The total amount of this dividend payment was approximately $157,000.

v3.20.1
STOCK-BASED COMPENSATION - Additional information (Details) - USD ($)
1 Months Ended 3 Months Ended
Feb. 14, 2019
May 22, 2019
Mar. 31, 2020
Mar. 31, 2019
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]        
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Available for Grant     62,062  
Stock Repurchased During Period, Value       $ 3,202,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Weighted Average Grant Date Fair Value     $ 4.60  
Treasury Stock, Shares, Acquired 389,909      
Temporary Equity, Redemption Price Per Share $ 7.62      
Treasury Stock, Retired, Par Value Method, Amount $ 2,971,000      
Non Employee Director [Member]        
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]        
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross       8,000
Share-based Compensation Arrangements by Share-based Payment Award, Options, Grants in Period, Weighted Average Exercise Price       $ 8.55
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Rights       P3Y
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Date       Feb. 01, 2029
Restricted Stock [Member]        
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]        
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Available for Grant   1,250    
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number, Beginning Balance   6,250    
Restricted stock-based compensation   $ 52,000    
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Weighted Average Grant Date Fair Value   $ 8.31    
Incentive Stock Option Plan 2002 [Member]        
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]        
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number, Beginning Balance     34,500  
Incentive Stock Option Plan 2012 [Member]        
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]        
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number, Beginning Balance     190,575  
Stock Option [Member]        
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]        
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross     0  
Number of options issued     0  
v3.20.1
LOSS PER SHARE - Weighted average anti-dilutive stock options (Details) - shares
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Equity Option [Member]    
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]    
Weighted average antidilutive stock options outstanding 146,000 8,000
v3.20.1
ACQUISITION - Intangible useful life (Details)
3 Months Ended 12 Months Ended
Mar. 31, 2020
Dec. 31, 2019
Gears Acquisition    
Acquired Finite-Lived Intangible Assets [Line Items]    
Acquired Finite-lived Intangible Assets, Weighted Average Useful Life 15 years  
Customer Relationships [Member]    
Acquired Finite-Lived Intangible Assets [Line Items]    
Acquired Finite-lived Intangible Assets, Weighted Average Useful Life 8 years 6 months 8 years 8 months 12 days
Customer Relationships [Member] | Gears Acquisition    
Acquired Finite-Lived Intangible Assets [Line Items]    
Acquired Finite-lived Intangible Assets, Weighted Average Useful Life 10 years  
Non-compete agreements [Member] | Gears Acquisition    
Acquired Finite-Lived Intangible Assets [Line Items]    
Acquired Finite-lived Intangible Assets, Weighted Average Useful Life 4 years  
v3.20.1
INVENTORIES
3 Months Ended
Mar. 31, 2020
INVENTORIES  
INVENTORIES

NOTE 7 – INVENTORIES

Inventories consist of:

 

 

 

 

 

 

 

 

 

    

March 31, 2020

    

December 31, 2019

Raw material

 

$

2,340,000

 

$

2,178,000

Work in process

 

 

2,078,000

 

 

2,302,000

Finished goods

 

 

17,867,000

 

 

18,402,000

 

 

$

22,285,000

 

$

22,882,000

 

v3.20.1
SUBSEQUENT EVENT
3 Months Ended
Mar. 31, 2020
SUBSEQUENT EVENT  
SUBSEQUENT EVENT

NOTE 11 – SUBSEQUENT EVENT 

On April 20, 2020, the Company received a $2.9 million PPP loan, as provided pursuant to the CARES Act, signed into law on March 27, 2020.  PPP loans, which are unsecured and guaranteed by the SBA, were designed to create economic stimulus by providing additional operating capital to small businesses, such as P&F, in the United States for permitted uses during an eight-week period following receipt of funds.

 

The loan, which was obtained from BNB Bank under a promissory note dated April 17, 2020, provides for a fixed rate of interest of one percent per year with a maturity date two years from the date the funds were received. No payments of principal or interest is due during the initial six-month period.  Beginning in the seventh month, the Company is required to make monthly payments of principal and interest until maturity, for any portion of the loan that is not forgiven. Up to 100% of the loan may be forgiven based on the amount of funds used during the eight-week period after receiving the funds towards payroll, rent, and certain other permitted operating expenses calculated pursuant to the CARES Act, although no assurance can be provided that P&F will obtain forgiveness of the loan in whole or in part.

v3.20.1
CONSOLIDATED BALANCE SHEETS - USD ($)
Mar. 31, 2020
Dec. 31, 2019
CURRENT ASSETS    
Cash $ 531,000 $ 380,000
Accounts receivable - net 8,554,000 9,313,000
Inventories 22,285,000 22,882,000
Prepaid expenses and other current assets 2,021,000 1,497,000
TOTAL CURRENT ASSETS 33,391,000 34,072,000
PROPERTY AND EQUIPMENT    
Land 507,000 507,000
Buildings and improvements 3,489,000 3,303,000
Machinery and equipment 25,529,000 25,059,000
Property, Plant and Equipment, Gross 29,525,000 28,869,000
Less accumulated depreciation and amortization 19,191,000 18,760,000
NET PROPERTY AND EQUIPMENT 10,334,000 10,109,000
GOODWILL 4,715,000 4,726,000
OTHER INTANGIBLE ASSETS - net 8,032,000 8,259,000
DEFERRED INCOME TAXES - net 269,000 216,000
RIGHT-OF-USE ASSETS - OPERATING LEASES 3,673,000 3,859,000
OTHER ASSETS - net 431,000 502,000
TOTAL ASSETS 60,845,000 61,743,000
CURRENT LIABILITIES    
Short-term borrowings 6,931,000 5,648,000
Accounts payable 2,318,000 1,843,000
Accrued compensation and benefits 1,123,000 2,019,000
Accrued other liabilities 1,005,000 1,568,000
Current leased liabilities - operating leases 870,000 879,000
TOTAL CURRENT LIABILITIES 12,247,000 11,957,000
Noncurrent leased liabilities - operating leases 2,896,000 3,070,000
Other liabilities 204,000 210,000
TOTAL LIABILITIES 15,347,000 15,237,000
SHAREHOLDERS' EQUITY    
Preferred stock - $ 10 par; authorized - 2,000,000 shares; no shares issued 0 0
Additional paid-in capital 14,087,000 14,056,000
Retained earnings 37,952,000 38,867,000
Treasury stock, at cost - 1,273,000 shares at March 31, 2020 and at December 31, 2019 (10,213,000) (10,213,000)
Accumulated other comprehensive loss (745,000) (620,000)
TOTAL SHAREHOLDERS' EQUITY 45,498,000 46,506,000
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 60,845,000 61,743,000
Common Class A [Member]    
SHAREHOLDERS' EQUITY    
Common stock 4,417,000 4,416,000
TOTAL SHAREHOLDERS' EQUITY 4,417,000 4,416,000
Common Class B [Member]    
SHAREHOLDERS' EQUITY    
Common stock $ 0 $ 0
v3.20.1
CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Cash Flows from Operating Activities:    
Net loss $ (758,000) $ (26,000)
Non-cash charges:    
Depreciation and amortization 433,000 389,000
Amortization of other intangible assets 195,000 172,000
Amortization of operating leased assets 234,000 81,000
Amortization of debt issue costs 4,000 15,000
Amortization of consideration payable to a customer 67,000 67,000
Provision for (recovery of) losses on accounts receivable 15,000 (69,000)
Stock-based compensation 16,000 29,000
Loss on sale of property and equipment 0 6,000
Restricted stock-based compensation 13,000 13,000
Deferred income taxes (47,000) (25,000)
Changes in operating assets and liabilities:    
Accounts receivable 720,000 654,000
Inventories 524,000 (88,000)
Prepaid expenses and other current assets (528,000) (208,000)
Accounts payable 482,000 (48,000)
Accrued compensation and benefits (894,000) (1,282,000)
Accrued other liabilities and other current liabilities (556,000) (99,000)
Operating lease liabilities (230,000) (65,000)
Other liabilities (6,000) (6,000)
Total adjustments 442,000 (464,000)
Net cash used in operating activities (316,000) (490,000)
Cash Flows from Investing Activities:    
Capital expenditures (658,000) (485,000)
Proceeds from disposal of property and equipment 0 11,000
Net cash used in investing activities (658,000) (474,000)
Cash Flows from Financing Activities:    
Dividend payments (157,000) (158,000)
Proceeds from exercise of stock options 3,000 0
Purchase of Class A common stock 0 (3,202,000)
Net proceeds from short-term borrowings 1,284,000 4,258,000
Repayments of long-term debt 0 (20,000)
Bank finance costs 0 (20,000)
Net cash provided by financing activities 1,130,000 858,000
Effect of exchange rate changes on cash (5,000) 5,000
Net increase (decrease) in cash 151,000 (101,000)
Cash at beginning of period 380,000 999,000
Cash at end of period 531,000 898,000
Cash paid for:    
Interest 53,000 37,000
Cash paid for amounts included in the measurement of operating lease liabilities 0 4,000
Noncash information:    
Right of Use ("ROU") assets recognized for new operating lease liabilities 0 80,000
Operating lease liability related to ROU assets recognized upon adoption of ASC 842 $ 0 $ 577,000
v3.20.1
LOSS PER SHARE - Loss per share basic and diluted (Details) - USD ($)
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Numerator for basic and diluted loss per common share    
Net loss $ (758,000) $ (26,000)
Denominator:    
Denominator for basic and diluted loss per share - weighted average common shares outstanding 3,144,000 3,381,000
v3.20.1
ACQUISITION - Purchase price allocation (Details) - Gears Acquisition
Mar. 31, 2020
USD ($)
Business Acquisition [Line Items]  
Accounts receivable $ 218,000
Inventories 630,000
Machinery, equipment and vehicle 1,437,000
Liabilities assumed (131,000)
Goodwill 284,000
Total estimated purchase price 3,582,000
Trademarks and Trade Names [Member]  
Business Acquisition [Line Items]  
Trademarks and trade names 54,000
Customer Relationships [Member]  
Business Acquisition [Line Items]  
Customer relationships 995,000
Non-compete agreements [Member]  
Business Acquisition [Line Items]  
Non-compete agreements $ 95,000
v3.20.1
STOCK-BASED COMPENSATION - Employee Stock Option (Details) - Stock Option [Member]
3 Months Ended
Mar. 31, 2020
$ / shares
shares
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]  
Option Shares, Nonvested shares, beginning of year | shares 37,666
Option Shares, Vested | shares (2,666)
Option Shares, Forfeited | shares 0
Option Shares, Nonvested shares, end of year | shares 35,000
Weighted Average Grant-Date Fair Value, Non-vested shares, beginning of year (in dollars per share) | $ / shares $ 4.45
Weighted Average Grant-Date Fair Value, Vested (in dollars per share) | $ / shares 4.60
Weighted Average Grant-Date Fair Value, Forfeited (in dollars per share) | $ / shares 0
Weighted Average Grant-Date Fair Value, Non-vested shares, end of year (in dollars per share) | $ / shares $ 4.44
v3.20.1
ACQUISITION (Details)
3 Months Ended
Mar. 31, 2020
USD ($)
Business Acquisition [Line Items]  
Cash paid at closing $ 3,500,000
Gears Acquisition  
Business Acquisition [Line Items]  
Cash paid at closing 3,518,000
Fair value of contingent consideration 64,000
Total estimated purchase price $ 3,582,000
v3.20.1
LOSS PER SHARE (Tables)
3 Months Ended
Mar. 31, 2020
LOSS PER SHARE  
Schedule of computation of basic and diluted loss per common share

The following table sets forth the elements of basic and diluted loss per common share:

 

 

 

 

 

 

 

 

 

    

Three months ended

 

 

March 31, 

 

    

2020

    

2019

Numerator for basic and diluted loss per common share:

 

 

 

 

 

 

Net loss

 

$

(758,000)

 

$

(26,000)

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic and diluted loss per share - weighted average common shares outstanding

 

 

3,144,000

 

 

3,381,000

 

Schedule of weighted average of anti-dilutive stock options

At March 31, 2020 and 2019, there were outstanding stock options whose exercise prices were higher than the average market values of the underlying Common Stock for the period. The weighted average of anti-dilutive stock options outstanding was as follows:

 

 

 

 

 

 

 

    

Three months ended

 

 

March 31, 

 

    

2020

    

2019

Weighted average antidilutive stock options outstanding

 

146,000

 

8,000

 

v3.20.1
GOODWILL AND OTHER INTANGIBLE ASSETS (Tables)
3 Months Ended
Mar. 31, 2020
GOODWILL AND OTHER INTANGIBLE ASSETS  
Schedule of Changes in the carrying amount of goodwill

Changes in the carrying amount of goodwill are as follows:

 

 

 

 

 

Balance, January 1, 2020

    

$

4,726,000

Currency translation adjustment

 

 

(11,000)

Balance, March 31, 2020

 

$

4,715,000

 

Schedule of Other intangible assets

 

 

 

 

Balance, January 1, 2020

    

$

4,726,000

Currency translation adjustment

 

 

(11,000)

Balance, March 31, 2020

 

$

4,715,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 2020

    

December 31, 2019

 

    

 

 

    

Accumulated

    

Net book

    

 

 

    

Accumulated

    

Net book

 

 

Cost

 

amortization

 

value

 

Cost

 

amortization

 

value

Other intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships (1)

 

$

7,809,000

 

$

2,879,000

 

$

4,930,000

 

$

7,825,000

 

$

2,724,000

 

$

5,101,000

Trademarks and trade names (1)

 

 

2,351,000

 

 

 —

 

 

2,351,000

 

 

2,375,000

 

 

 —

 

 

2,375,000

Trademarks and trade names

 

 

200,000

 

 

49,000

 

 

151,000

 

 

200,000

 

 

45,000

 

 

155,000

Engineering drawings

 

 

330,000

 

 

229,000

 

 

101,000

 

 

330,000

 

 

225,000

 

 

105,000

Non-compete agreements (1)

 

 

325,000

 

 

235,000

 

 

90,000

 

 

331,000

 

 

235,000

 

 

96,000

Patents

 

 

1,405,000

 

 

996,000

 

 

409,000

 

 

1,405,000

 

 

978,000

 

 

427,000

Totals

 

$

12,420,000

 

$

4,388,000

 

$

8,032,000

 

$

12,466,000

 

$

4,207,000

 

$

8,259,000


(1)A portion of these intangibles are maintained in a foreign currency and are therefore subject to foreign exchange rate fluctuations.

 


The weighted average amortization period for intangible assets was as follows:

 

 

 

 

 

 

 

    

March 31, 2020

    

December 31, 2019

Customer relationships

 

8.5

 

8.7

Trademarks and trade names

 

11.3

 

11.5

Engineering drawings

 

6.9

 

7.1

Non-compete agreements

 

3.6

 

3.7

Patents

 

6.9

 

7.1

 

Schedule of Amortization expense of intangible assets

Amortization expense of intangible assets subject to amortization was as follows:

 

 

 

 

 

 

Three months ended March 31, 

2020

    

2019

$

195,000

 

$

172,000

 


Amortization expense for each of the next five years and thereafter is estimated to be as follows:

 

 

 

 

 

2021

    

$

761,000

2022

 

 

757,000

2023

 

 

757,000

2024

 

 

747,000

2025

 

 

690,000

Thereafter

 

 

1,969,000

 

 

$

5,681,000

 

v3.20.1
GOODWILL AND OTHER INTANGIBLE ASSETS - Amortization expense of intangible assets - (Details) - USD ($)
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
GOODWILL AND OTHER INTANGIBLE ASSETS    
Amortization of Intangible Assets $ 195,000 $ 172,000
v3.20.1
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS (Details) - USD ($)
Mar. 31, 2020
Dec. 31, 2019
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS    
Accounts receivable $ 8,802,000 $ 9,547,000
Allowance for doubtful accounts, sales discounts and chargebacks (248,000) (234,000)
Accounts Receivable, Net, Current, Total $ 8,554,000 $ 9,313,000
v3.20.1
SUBSEQUENT EVENT (Details) - Subsequent events
$ in Millions
Apr. 20, 2020
USD ($)
Fixed rate of interest 1.00%
Maturity term 2 years
Percentage of loan that may be forgiven based on the amount of funds 100.00%
Payroll Protection Program  
Loan received $ 2.9
v3.20.1
STOCK-BASED COMPENSATION - Common stock options (Details)
3 Months Ended
Mar. 31, 2020
$ / shares
STOCK-BASED COMPENSATION  
Risk-free interest rate 2.73%
Expected term 10 years
Volatility 62.08%
Dividend yield 2.34%
Fair value of options granted $ 4.60
v3.20.1
ACQUISITION - Unaudited pro-forma combined financial information (Details)
3 Months Ended
Mar. 31, 2019
USD ($)
$ / shares
ACQUISITION  
Revenue $ 15,063,000
Net income $ 109,000
Earnings per share - basic and diluted | $ / shares $ 0.03
v3.20.1
FAIR VALUE MEASUREMENTS
3 Months Ended
Mar. 31, 2020
FAIR VALUE MEASUREMENTS  
FAIR VALUE MEASUREMENTS

NOTE 5 – FAIR VALUE MEASUREMENTS

Accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Under this guidance, the Company is required to classify certain assets and liabilities based on the following hierarchy:

Level 1:   Quoted prices for identical assets or liabilities in active markets that can be assessed at the measurement date.

Level 2:   Inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3:   Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation.

The guidance requires the use of observable market data if such data is available without undue cost and effort.

As of March 31, 2020, and December 31, 2019, 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.

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).

v3.20.1
ACQUISITION
3 Months Ended
Mar. 31, 2020
ACQUISITION  
ACQUISITION

NOTE 2 – ACQUISITION

 

Effective October 25, 2019 (the “Gears Closing Date”) the Company, through a wholly owned subsidiary of Hy-Tech, acquired substantially all the assets comprising the businesses of Blaz-Man Gear, Inc. and Gear Products & Manufacturing, Inc. (the “Gears Acquisition”), each an Illinois-based corporation that manufactured and distributed custom gears. The Company believes that the acquisition of these two businesses will provide added expertise and market exposure into the customized/specialty gears market. The purchase price consisted of an aggregate of approximately $3.5 million in cash, which was funded by Revolver borrowings and the assumption of certain payables and contractual obligations. In addition, the sellers may be entitled to additional consideration based upon sale of certain categories of acquired inventory, which had no fair value at the time of the acquisition, during the two-year period following the Gears Closing Date. Accordingly, the Company, determined that, based primarily upon historical sales information provided, the most likely scenario could result in a payment of contingent consideration of approximately $64,000 and recorded such contingent consideration liability.  This liability will be adjusted as needed with changes being recorded in the Company’s consolidated statement of income.

 

On the Gears Closing Date, Hy-Tech entered into a new five-year lease. This new leased facility, located in Punxsutawney, PA,  is approximately 42,000 square feet, with annual lease payments of $165,800. Additionally, Hy-Tech elected to vacate a then existing leased space in Punxsutawney, which housed Hy-Tech’s gear operations prior to the Gears Acquisition. In April 2020, Hy-Tech and the landlord of the vacated facility agreed to terms which released Hy-Tech from  the lease in exchange for a payment of $30,000.  As a result, in April 2020, Hy-Tech will record a gain of approximately $33,000 on the early settlement of this lease obligation.

 

 

 

 

 

 

    

Total

Cash paid at closing

 

$

3,518,000

Fair value of contingent consideration

 

 

64,000

Total estimated purchase price

 

$

3,582,000

 

The following table presents purchase price allocation:

 

 

 

 

 

Accounts receivable

    

$

218,000

Inventories

 

 

630,000

 

 

 

  

Machinery, equipment and vehicle

 

 

1,437,000

Customer relationships

 

 

995,000

Trademarks and trade names

 

 

54,000

Non-compete agreements

 

 

95,000

Liabilities assumed

 

 

(131,000)

Goodwill

 

 

284,000

Total estimated purchase price

 

$

3,582,000

 

The excess of the total purchase price over the fair value of the net assets acquired, including the value of the identifiable intangible assets, has been allocated to goodwill. Goodwill will be amortized over 15 years for tax purposes, but not deductible for financial reporting purposes. The intangible assets subject to amortization will be amortized over 15 years for tax purposes. For financial reporting purposes their respective useful lives have been determined as follows:

 

 

 

 

Customer relationships

    

10 years

Non-Compete agreements

 

4 years

Trademarks and trade names

 

indefinite

 

The following unaudited pro-forma combined financial information gives effect to the Acquisitions as if the transactions were consummated January 1, 2019. This unaudited pro-forma financial information is presented for information purposes only and is not intended to present actual results that would have been attained had the Acquisition been completed as of January 1, 2019 (the beginning of the earliest period presented) or to project potential operating results as of any future date or for any future periods.

 

 

 

 

 

 

 

For the Three-Month Period Ended

 

 

March 31, 2019

Revenue

    

$

15,063,000

Net income

 

$

109,000

Earnings per share – basic and diluted

 

$

0.03

 

v3.20.1
DEBT
3 Months Ended
Mar. 31, 2020
DEBT  
DEBT

NOTE 9 – DEBT

In October 2010, the Company entered into a Loan and Security Agreement (“Credit Agreement”) with an affiliate of Capital One, National Association (“Capital One” or the “Bank”). The Credit Agreement, as amended and restated in April 2017 and further amended  from time-to-time, among other things, provides the ability to borrow funds under a $16,000,000 revolver line ("Revolver "), subject to certain borrowing base criteria. Additionally, there is a $2,000,000 line for capital expenditures ("Capex Loan"), with $1,600,000 available for future borrowings. Revolver and Capex Loan borrowings are secured by the Company’s accounts receivable, inventory, equipment, and real property, among other things. P&F and certain of its subsidiaries are borrowers under the Credit Agreement, and their obligations are cross guaranteed by certain other subsidiaries. The Credit Agreement expires on February 8, 2024.

At the Company’s option, Revolver borrowings bear interest at either LIBOR (“London interbank Offered Rate”) or the Base Rate, as the term is defined in the Credit Agreement, plus an Applicable Margin, as defined in the Credit Agreement. The Company is subject to limitations on the number of LIBOR borrowings.

The Company provides Capital One with monthly borrowing base certificates, and in certain circumstances, it is required to deliver monthly financial statements and certificates of compliance with various financial covenants. Should an event of default occur the interest rate would increase by two percent per annum during the period of default, in addition to other remedies provided to Capital One.

SHORT–TERM BORROWINGS

At March 31, 2020, short-term or Revolver borrowing was $6,931,000, compared to $5,648,000, at December 31, 2019. Applicable Margin Rates at March 31, 2020 and December 31, 2019 for LIBOR and Base Rates were 1.50% and 0.50%, respectively. Additionally, at March 31, 2020 and December 31, 2019, there was approximately $8,189,000 and $9,200,000, respectively, available to the Company under its Revolver arrangement.

The average balance of short-term borrowings during the three -month periods ended March 31, 2020 and 2019 were $6,281,000 and $4,076,000, respectively.

 

v3.20.1
BUSINESS AND SUMMARY OF ACCOUNTING POLICIES (Tables)
3 Months Ended
Mar. 31, 2020
BUSINESS AND SUMMARY OF ACCOUNTING POLICIES  
Schedule of operating lease liabilities

The following is a maturity analysis of the annual undiscounted cash flows reconciled to the carrying value of the operating lease liabilities as of March 31, 2020:

 

 

 

 

 

 

 

    

As of March 31, 2020

 

2020 (excluding the three months ended March 31, 2020)

 

$

674,000

 

2021

 

 

825,000

 

2022

 

 

736,000

 

2023

 

 

634,000

 

2024

 

 

368,000

 

Thereafter

 

 

1,053,000

 

Total operating lease payments

 

 

4,290,000

 

Less imputed interest

 

 

(524,000)

 

Total operating lease liabilities

 

$

3,766,000

 

 

 

 

 

 

Weighted-average remaining lease term

    

6.6 years

 

Weighted-average discount rate

 

4.42

%

 

Schedule of retail automotive aerospace and industrial

Florida Pneumatic markets its air tool products to four primary sectors within the pneumatic tool market; Retail, Automotive, Industrial and Aerospace. It also generates revenue from its Berkley products line, as well as a line of air filters and other OEM parts (“Other”).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

 

2020

 

2019

 

(Decrease) increase

 

 

    

 

 

    

Percent of 

    

 

 

    

Percent of

    

 

 

    

 

 

 

 

Revenue

 

revenue

 

Revenue

 

revenue

 

$

 

%  

 

Automotive

 

$

3,232,000

 

32.2

%  

$

3,866,000

 

37.0

%  

$

(634,000)

 

(16.4)

%

Retail

 

 

2,990,000

 

29.8

 

 

2,709,000

 

26.0

 

 

281,000

 

10.4

 

Aerospace

 

 

2,599,000

 

25.9

 

 

2,360,000

 

22.6

 

 

239,000

 

10.1

 

Industrial

 

 

1,062,000

 

10.6

 

 

1,325,000

 

12.7

 

 

(263,000)

 

(19.8)

 

Other

 

 

147,000

 

1.5

 

 

180,000

 

1.7

 

 

(33,000)

 

(18.3)

 

Total

 

$

10,030,000

 

100.0

%  

$

10,440,000

 

100.0

%  

$

(410,000)

 

(3.9)

%

 

Hy-Tech

Hy-Tech designs, manufactures and sells a wide range of industrial products under the brands ATP, OZAT and ATSCO which are categorized as ATP for reporting purposes. Products manufactured for other companies under their brands are included in the OEM category in the table below. Power Transition Group (“PTG”) revenue is comprised of products manufactured and sold by the gear businesses that were acquired in October 2019, products sold through Hy-Tech’s legacy gear manufacturing division and products sold to a certain customer whose revenue was included in OEM in 2019. Numatx, Thaxton and other peripheral product lines, such as general machining, are reported as Other.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

 

2020

 

2019

 

(Decrease) increase

 

 

    

 

    

Percent of

    

 

 

    

Percent of

    

 

 

    

 

 

 

 

Revenue

 

revenue

 

Revenue

 

revenue

 

 

$

 

%  

 

OEM

 

$

1,439,000

 

43.3

%  

$

1,336,000

 

34.4

%  

$

103,000

 

7.7

%

ATP

 

 

1,061,000

 

32.0

 

 

1,986,000

 

51.2

 

 

(925,000)

 

(46.6)

 

PTG

 

 

735,000

 

22.1

 

 

355,000

 

9.1

 

 

380,000

 

107.0

 

Other

 

 

85,000

 

2.6

 

 

205,000

 

5.3

 

 

(120,000)

 

(58.5)

 

Total

 

$

3,320,000

 

100.0

%  

$

3,882,000

 

100.0

%  

$

(562,000)

 

(14.5)

%

 

v3.20.1
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME - USD ($)
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME    
Net revenue $ 13,350,000 $ 14,322,000
Cost of sales 8,868,000 9,041,000
Gross profit 4,482,000 5,281,000
Selling, general and administrative expenses 5,690,000 5,263,000
Operating (loss)income (1,208,000) 18,000
Other expense 0 6,000
Interest expense 55,000 63,000
Loss before income tax (1,263,000) (51,000)
Income tax benefit (505,000) (25,000)
Net loss $ (758,000) $ (26,000)
Basic and diluted loss per share $ (0.24) $ (0.01)
Weighted average common shares outstanding:    
Basic and diluted 3,144,000 3,381,000
Net loss $ (758,000) $ (26,000)
Other comprehensive(loss) income - foreign currency translation adjustment (125,000) 44,000
Total comprehensive (loss) income $ (883,000) $ 18,000
v3.20.1
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS (Tables)
3 Months Ended
Mar. 31, 2020
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS  
Schedule of accounts receivable

Accounts receivable - net consists of:

 

 

 

 

 

 

 

 

 

    

March 31, 2020

    

December 31, 2019

Accounts receivable

 

$

8,802,000

 

$

9,547,000

Allowance for doubtful accounts, sales discounts and chargebacks

 

 

(248,000)

 

 

(234,000)

 

 

$

8,554,000

 

$

9,313,000

 

v3.20.1
BUSINESS AND SUMMARY OF ACCOUNTING POLICIES - Retail automotive industrial and aerospace (Details) - USD ($)
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Schedule Of Summary Of Accounting Policies [Line Items]    
Revenues $ 13,350,000 $ 14,322,000
Florida Pneumatic [Member]    
Schedule Of Summary Of Accounting Policies [Line Items]    
Revenues $ 10,030,000 $ 10,440,000
Percentage of revenue 100.00% 100.00%
(Decrease) increase $ (410,000)  
Percentage of (Decrease) increase (3.90%)  
Florida Pneumatic [Member] | Automotive    
Schedule Of Summary Of Accounting Policies [Line Items]    
Revenues $ 3,232,000 $ 3,866,000
Percentage of revenue 32.20% 37.00%
(Decrease) increase $ (634,000)  
Percentage of (Decrease) increase (16.40%)  
Florida Pneumatic [Member] | Retail    
Schedule Of Summary Of Accounting Policies [Line Items]    
Revenues $ 2,990,000 $ 2,709,000
Percentage of revenue 29.80% 26.00%
(Decrease) increase $ 281,000  
Percentage of (Decrease) increase 10.40%  
Florida Pneumatic [Member] | Aerospace    
Schedule Of Summary Of Accounting Policies [Line Items]    
Revenues $ 2,599,000 $ 2,360,000
Percentage of revenue 25.90% 22.60%
(Decrease) increase $ 239,000  
Percentage of (Decrease) increase 10.10%  
Florida Pneumatic [Member] | Industrial    
Schedule Of Summary Of Accounting Policies [Line Items]    
Revenues $ 1,062,000 $ 1,325,000
Percentage of revenue 10.60% 12.70%
(Decrease) increase $ (263,000)  
Percentage of (Decrease) increase (19.80%)  
Florida Pneumatic [Member] | Other    
Schedule Of Summary Of Accounting Policies [Line Items]    
Revenues $ 147,000 $ 180,000
Percentage of revenue 1.50% 1.70%
(Decrease) increase $ (33,000)  
Percentage of (Decrease) increase (18.30%)  
Hy-Tech [Member]    
Schedule Of Summary Of Accounting Policies [Line Items]    
Revenues $ 3,320,000 $ 3,882,000
Percentage of revenue 100.00% 100.00%
(Decrease) increase $ (562,000)  
Percentage of (Decrease) increase (14.50%)  
Hy-Tech [Member] | OEM    
Schedule Of Summary Of Accounting Policies [Line Items]    
Revenues $ 1,439,000 $ 1,336,000
Percentage of revenue 43.30% 34.40%
(Decrease) increase $ 103,000  
Percentage of (Decrease) increase 7.70%  
Hy-Tech [Member] | ATP    
Schedule Of Summary Of Accounting Policies [Line Items]    
Revenues $ 1,061,000 $ 1,986,000
Percentage of revenue 32.00% 51.20%
(Decrease) increase $ (925,000)  
Percentage of (Decrease) increase (46.60%)  
Hy-Tech [Member] | PTG    
Schedule Of Summary Of Accounting Policies [Line Items]    
Revenues $ 735,000 $ 355,000
Percentage of revenue 22.10% 9.10%
(Decrease) increase $ 380,000  
Percentage of (Decrease) increase 107.00%  
Hy-Tech [Member] | Other    
Schedule Of Summary Of Accounting Policies [Line Items]    
Revenues $ 85,000 $ 205,000
Percentage of revenue 2.60% 5.30%
(Decrease) increase $ (120,000)  
Percentage of (Decrease) increase (58.50%)  
v3.20.1
DEBT (Details) - USD ($)
3 Months Ended 12 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Dec. 31, 2019
Apr. 30, 2017
Debt Instrument [Line Items]        
Short-term Debt $ 6,931,000   $ 5,648,000  
Repayments of Long-term Debt 0 $ 20,000    
Line of Credit Facility, Average Outstanding Amount 6,281,000 $ 4,076,000    
Short-term Debt [Member]        
Debt Instrument [Line Items]        
Line of Credit Facility, Remaining Borrowing Capacity $ 8,189,000   $ 9,200,000  
Short-term Debt [Member] | Base Rate borrowing [Member]        
Debt Instrument [Line Items]        
Debt Instrument, Basis Spread on Variable Rate 1.50%   0.50%  
Revolving Credit Facility [Member]        
Debt Instrument [Line Items]        
Line of Credit Facility, Maximum Borrowing Capacity       $ 16,000,000
Line of Credit Facility, Capacity Available for Specific Purpose Other than for Trade Purchases       2,000,000
Capex Borrowing [Member]        
Debt Instrument [Line Items]        
Line of Credit Facility, Maximum Borrowing Capacity       $ 1,600,000
v3.20.1
GOODWILL AND OTHER INTANGIBLE ASSETS - Carrying amount of goodwill (Details)
3 Months Ended
Mar. 31, 2020
USD ($)
GOODWILL AND OTHER INTANGIBLE ASSETS  
Balance, beginning $ 4,726,000
Currency translation adjustment (11,000)
Balance, ending $ 4,715,000
v3.20.1
STOCK-BASED COMPENSATION (Tables)
3 Months Ended
Mar. 31, 2020
STOCK-BASED COMPENSATION  
Schedule of estimated fair value of its Common Stock options

 

 

 

 

 

Risk-free interest rate

    

 

2.73

%

Expected term (in years)

 

 

10 years

 

Volatility

 

 

62.08

%

Dividend yield

 

 

2.34

%

Weighted average fair value of options granted

 

$

4.60

 

 

Schedule of share-based compensation stock options

The following is a summary of the changes in outstanding options during the three-month period ended March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Weighted

    

Weighted Average

    

 

 

 

 

 

 

Average

 

Remaining

 

Aggregate

 

 

 

 

Exercise

 

Contractual Life

 

Intrinsic

 

    

Option Shares

    

Price

    

(Years)

    

Value

Outstanding, January 1, 2020

 

226,075

 

$

6.30

 

4.7

 

$

219,983

Granted

 

 —

 

 

 

 

 

 

 

 

Exercised

 

(1,000)

 

 

2.92

 

 

 

 

 

Forfeited

 

 —

 

 

 —

 

 

 

 

 

Expired

 

 —

 

 

 —

 

 

 

 

 

Outstanding, March 31, 2020

 

225,075

 

$

6.32

 

4.5

 

$

30,036

Vested, March 31, 2020

 

190,075

 

$

6.14

 

3.9

 

$

30,036

 

Schedule of share-based compensation arrangement by share-based payment award and options vested and expected to vest

 

 

 

 

 

 

 

    

 

    

Weighted

 

 

 

 

Average Grant-

 

    

Option Shares

    

Date Fair Value

Non-vested options, January 1, 2020

 

37,666

 

$

4.45

Granted

 

 

 

 

 

Vested

 

(2,666)

 

 

4.60

Forfeited

 

 —

 

 

 

Non-vested options, March 31, 2020

 

35,000

 

$

4.44

 

v3.20.1
BUSINESS AND SUMMARY OF ACCOUNTING POLICIES - Maturity analysis of the annual undiscounted cash flows (Details)
Mar. 31, 2020
USD ($)
Operating lease liabilities  
2020 (excluding the three months ended March 31, 2020) $ 674,000
2021 825,000
2022 736,000
2023 634,000
2024 368,000
Thereafter 1,053,000
Total operating lease payments 4,290,000
Less imputed interest (524,000)
Total operating lease liabilities $ 3,766,000
Weighted-average remaining lease term 6 years 7 months 6 days
Weighted-average discount rate 4.42%
v3.20.1
DIVIDEND PAYMENTS - (Details)
Feb. 11, 2020
USD ($)
$ / shares
DIVIDEND PAYMENTS  
Dividends Payable, Amount Per Share | $ / shares $ 0.05
Dividends Payable, Current | $ $ 157,000
v3.20.1
GOODWILL AND OTHER INTANGIBLE ASSETS - Other intangible assets - (Details) - USD ($)
3 Months Ended 12 Months Ended
Mar. 31, 2020
Dec. 31, 2019
Other intangible assets:    
Cost $ 12,420,000 $ 12,466,000
Accumulated amortization 4,388,000 4,207,000
Net book value 8,032,000 8,259,000
Customer Relationships [Member]    
Other intangible assets:    
Cost 7,809,000 7,825,000
Accumulated amortization 2,879,000 2,724,000
Net book value $ 4,930,000 $ 5,101,000
Acquired Finite-lived Intangible Assets, Weighted Average Useful Life 8 years 6 months 8 years 8 months 12 days
Trademarks and trade names one [Member]    
Other intangible assets:    
Cost $ 2,351,000 $ 2,375,000
Accumulated amortization 0 0
Net book value $ 2,351,000 $ 2,375,000
Acquired Finite-lived Intangible Assets, Weighted Average Useful Life 11 years 3 months 18 days 11 years 6 months
Trademarks and Trade Names Two [Member]    
Other intangible assets:    
Cost $ 200,000 $ 200,000
Accumulated amortization 49,000 45,000
Net book value 151,000 155,000
Engineering drawings [Member]    
Other intangible assets:    
Cost 330,000 330,000
Accumulated amortization 229,000 225,000
Net book value $ 101,000 $ 105,000
Acquired Finite-lived Intangible Assets, Weighted Average Useful Life 6 years 10 months 24 days 7 years 1 month 6 days
Non-compete agreements [Member]    
Other intangible assets:    
Cost $ 325,000 $ 331,000
Accumulated amortization 235,000 235,000
Net book value $ 90,000 $ 96,000
Acquired Finite-lived Intangible Assets, Weighted Average Useful Life 3 years 7 months 6 days 3 years 8 months 12 days
Patents [Member]    
Other intangible assets:    
Cost $ 1,405,000 $ 1,405,000
Accumulated amortization 996,000 978,000
Net book value $ 409,000 $ 427,000
Acquired Finite-lived Intangible Assets, Weighted Average Useful Life 6 years 10 months 24 days 7 years 1 month 6 days
v3.20.1
STOCK-BASED COMPENSATION - outstanding options (Details) - Stock Option [Member] - USD ($)
3 Months Ended 12 Months Ended
Mar. 31, 2020
Dec. 31, 2019
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]    
Number of Shares, Outstanding 226,075  
Number of Shares, Granted 0  
Number of Shares, Exercised (1,000)  
Number of Shares, Forfeited 0  
Number of Shares, Expired 0  
Number of Shares, Outstanding 225,075 226,075
Number of Shares, Vested 190,075  
Weighted Average Exercise Price per share, Outstanding (in dollars per share) $ 6.30  
Weighted Average Exercise Price per share, Exercised (in dollars per share) 2.92  
Weighted Average Exercise Price per share, Forfeited (in dollars per share) 0  
Weighted Average Exercise Price per share, Expired (in dollars per share) 0  
Weighted Average Exercise Price per share, Outstanding (in dollars per share) 6.32 $ 6.30
Weighted Average Exercise Price per share, Vested (in dollars per share) $ 6.14  
Weighted Average Remaining Contractual Life, Outstanding (Years) 4 years 6 months 4 years 8 months 12 days
Weighted Average Remaining Contractual Life, Vested (Years) 3 years 10 months 24 days  
Aggregate Intrinsic Value, Outstanding and Vested (in dollars) $ 30,036 $ 219,983
Aggregate Intrinsic Value, Vested (in dollars) $ 30,036  
v3.20.1
ACQUISITION - Additional information (Details)
1 Months Ended 3 Months Ended
Apr. 30, 2020
USD ($)
Mar. 31, 2020
USD ($)
ft²
Business Acquisition [Line Items]    
Payments to Acquire Businesses, Gross   $ 3,500,000
Gears Acquisition    
Business Acquisition [Line Items]    
Business Combination, Contingent Consideration, Liability   $ 64,000
Acquired Finite-lived Intangible Assets, Weighted Average Useful Life   15 years
Period for payments of additional contingent consideration based upon sale of certain categories of acquired inventory   2 years
Payments to Acquire Businesses, Gross   $ 3,518,000
Hy-Tech [Member]    
Business Acquisition [Line Items]    
Payment made in exchange for early settlement of lease $ 30,000  
Gain on early settlement of lease obligation $ 33,000  
Hy-Tech [Member] | Gears Acquisition    
Business Acquisition [Line Items]    
Lease term   5 years
Area of land | ft²   42,000
Annual lease payments   $ 165,800
v3.20.1
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2020
May 01, 2020
Document and Entity Information    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Mar. 31, 2020  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q1  
Entity Registrant Name P&F INDUSTRIES INC  
Entity Central Index Key 0000075340  
Current Fiscal Year End Date --12-31  
Entity Current Reporting Status Yes  
Entity Filer Category Non-accelerated Filer  
Trading Symbol PFIN  
Entity Common Stock, Shares Outstanding   3,144,810
Entity Shell Company false  
Entity Emerging Growth Company false  
Entity Small Business true  
Entity Interactive Data Current Yes  
v3.20.1
BUSINESS AND SUMMARY OF ACCOUNTING POLICIES (Policies)
3 Months Ended
Mar. 31, 2020
BUSINESS AND SUMMARY OF ACCOUNTING POLICIES  
Basis of Financial Statement Presentation

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 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. 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, 2019 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, 2019 (“2019 Form 10-K”). The interim financial statements contained herein should be read in conjunction with the 2019 Form 10-K.

The consolidated financial statements have been reported in U.S. dollars by translating asset and liability amounts of a foreign wholly-owned subsidiary at the closing exchange rate, equity amounts at historical rates and the results of operations and cash flow at the average of the prevailing exchange rates during the periods reported. As a result, the Company is exposed to foreign currency translation gains or losses. These gains or losses are presented in the Company’s consolidated financial statements as “Other comprehensive (loss) income - foreign currency translation adjustment”.

Principles of Consolidation

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

Reclassification

Certain amounts in the consolidated financial statements of the Company have been reclassified to conform to classifications used in the current year. The reclassifications had no effect on previously reported results of operations or retained earnings.

The Company

The Company

P&F a Delaware corporation incorporated on April 19, conducts its 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”), Universal Air Tool Company Limited (“UAT”), and Jiffy Air Tool, Inc. (“Jiffy”) are wholly-owned subsidiaries of Florida Pneumatic. The business of Air Tool Service Company (“ATSCO”) operates through a wholly-owned subsidiary of Hy-Tech. Effective October 25, 2019, the Company through a wholly owned subsidiary of Hy-Tech, acquired substantially all the operating assets comprising the businesses of Blaz-Man Gear, Inc. and Gear Products & Manufacturing, Inc., each an Illinois-based corporation that manufactures and distributes custom gears. See Note 2 – Acquisition, for further discussion.

Florida Pneumatic imports and sells pneumatic hand tools, most of which are of its own design, primarily to the retail, industrial, automotive and aerospace markets. Its products include sanders, grinders, drills, saws and impact wrenches. These tools are similar in appearance and function to electric hand tools, but are powered by compressed air, rather than by electricity or battery. Air tools, as they are more commonly referred to, generally offer better performance and weigh less than their electrical counterparts. Florida Pneumatic imports and/or manufactures approximately 75 types of pneumatic hand tools, most of which are sold at prices ranging from $50 to $1,000, under the names “Florida Pneumatic,” “Universal Tool”, “Jiffy Air Tool”, AIRCAT, NITROCAT, as well as under the trade names or trademarks of several private label customers. These products are sold to retailers, distributors, manufacturers and private label customers through in-house sales personnel and manufacturers’ representatives. The AIRCAT and NITROCAT brands of pneumatic tools are sold primarily to the automotive service and repair market (“automotive market”). Users of Florida Pneumatics’ hand tools include industrial maintenance and production staffs, do-it-yourself mechanics, professional automobile mechanics and auto body personnel. Jiffy manufactures and distributes pneumatic tools and components primarily to aerospace manufacturers.

Hy-Tech designs, manufactures and distributes industrial tools, systems, gearing, accessories and a wide variety of replacement parts under various brands including ATP, Numatx, Thaxton and Quality Gear.  Hy-Tech produces and sells heavy-duty pneumatic impact tools, grinders, air motors, hydro-pneumatic riveters, hydrostatic test plugs, impact sockets and custom gears, with prices ranging from $300 to $42,000.

Hy-Tech’s ”Engineered Solutions” products are sold direct to Original Equipment Manufacturers (“OEM’s”), and industrial branded products are sold through a broad network of specialized industrial distributors serving the power generation, petrochemical, aerospace, construction, railroad, mining, ship building and fabricated metals industries . Hy-Tech works directly with their industrial customers, designing and manufacturing products from finished components to complete turnkey systems to be sold under their own brand names.

Going Concern Assessment

Going Concern Assessment

Management assesses going concern uncertainty in the Company’s consolidated financial statements to determine whether there is sufficient cash on hand and working capital, including available borrowings on loans, to operate for a period of at least one year from the date the consolidated financial statements are issued, which is referred to as the "look-forward period", as defined in GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to management, it considers various scenarios, forecasts, projections, estimates and makes certain key assumptions, including the timing and nature of projected cash expenditures, its ability to  reduce, delay or curtail cash out flows and its ability to raise additional capital, if necessary, among other factors. Management has prepared estimates of operations covering the look-forward period and believes that sufficient funds will be generated from operations to fund its operations. The Company has contingency plans in which it would further reduce or defer additional expenses and cash outlays, should operations weaken beyond current forecasts.

 

The impact of the novel coronavirus or COVID-19 on the Company’s business has been considered in these assumptions; however, it is too early to know the full impact of COVID-19 or its timing when the Company believes a return to more normal operations may occur. Further, as part of the business incentives offered in the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, the Company, on April 20, 2020, received a $2.9 million Payroll Protection Program (“PPP”) loan from the United States Small Business Administration (“SBA”). See Note 11 – Subsequent Event, for further discussion. 

For the three-month period ended March 31, 2020, the Company incurred a net loss of $758,000, and incurred negative cash flows from operations of $316,000. The Company, at March 31, 2020 has working capital of $21,144,000.  

The accompanying consolidated financial statements have been prepared on a going concern basis under which the Company is expected to be able to realize its assets and satisfy its liabilities in the normal course of business.

Customer concentration

Customer concentration

At March 31, 2020 and December 31, 2019, accounts receivable from The Home Depot was 32.7% and 27.2%, respectively, of total accounts receivable. Additionally, revenue from The Home Depot during the three -month periods ended March 31, 2020 and  2019 were 22.4% and 17.6%, respectively, of total revenue. There were no other customers that accounted for more than 10% of consolidated revenue or accounts receivable during the three -month periods ended March 31, 2020 and 2019.

Management Estimates

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 2019 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 adjusts 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.

Significant Accounting Policies

Significant Accounting Policies

The Company’s significant accounting policies are described in "Note 1: Summary of Significant Accounting Policies" of our Annual Report on Form 10‑K for the year ended December 31, 2019.

Lease Accounting

Lease Accounting

On January 1, 2019, the Company adopted Accounting Standards Codification (“ASC”) ASC 842 “Leases” using the initial date of adoption method, whereby the adoption does not impact any periods prior to 2019. ASC Topic 842 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous leases’ guidance. When adopted, the Company elected to adopt the package of practical expedients and, accordingly, did not reassess any previously expired or existing arrangements and related classifications under ASC 840.

If the rate implicit in the lease is not readily determinable, the Company uses its incremental borrowing rate as the discount rate. The Company uses its best judgement when determining the incremental borrowing rate, which is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term to the lease payments in a similar currency.

The Company’s operating leases include vehicles, office space and the use of real property. The Company has not identified any material finance leases for the three months ended March 31, 2020.

The Company considers any options to extend the term of a lease when measuring the Right of Use lease asset.

For the three-month periods ended March 31, 2020 and 2019, the Company had $234,000 and $81,000 in Operating lease expense.

The following is a maturity analysis of the annual undiscounted cash flows reconciled to the carrying value of the operating lease liabilities as of March 31, 2020:

 

 

 

 

 

 

 

    

As of March 31, 2020

 

2020 (excluding the three months ended March 31, 2020)

 

$

674,000

 

2021

 

 

825,000

 

2022

 

 

736,000

 

2023

 

 

634,000

 

2024

 

 

368,000

 

Thereafter

 

 

1,053,000

 

Total operating lease payments

 

 

4,290,000

 

Less imputed interest

 

 

(524,000)

 

Total operating lease liabilities

 

$

3,766,000

 

 

 

 

 

 

Weighted-average remaining lease term

    

6.6 years

 

Weighted-average discount rate

 

4.42

%

 

Revenue recognition

Revenue recognition

The following table presents revenues recognized under ASC Topic 606, Revenue from Contracts with Customers.

Florida Pneumatic

Florida Pneumatic markets its air tool products to four primary sectors within the pneumatic tool market; Retail, Automotive, Industrial and Aerospace. It also generates revenue from its Berkley products line, as well as a line of air filters and other OEM parts (“Other”).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

 

2020

 

2019

 

(Decrease) increase

 

 

    

 

 

    

Percent of 

    

 

 

    

Percent of

    

 

 

    

 

 

 

 

Revenue

 

revenue

 

Revenue

 

revenue

 

$

 

%  

 

Automotive

 

$

3,232,000

 

32.2

%  

$

3,866,000

 

37.0

%  

$

(634,000)

 

(16.4)

%

Retail

 

 

2,990,000

 

29.8

 

 

2,709,000

 

26.0

 

 

281,000

 

10.4

 

Aerospace

 

 

2,599,000

 

25.9

 

 

2,360,000

 

22.6

 

 

239,000

 

10.1

 

Industrial

 

 

1,062,000

 

10.6

 

 

1,325,000

 

12.7

 

 

(263,000)

 

(19.8)

 

Other

 

 

147,000

 

1.5

 

 

180,000

 

1.7

 

 

(33,000)

 

(18.3)

 

Total

 

$

10,030,000

 

100.0

%  

$

10,440,000

 

100.0

%  

$

(410,000)

 

(3.9)

%

 

Hy-Tech

Hy-Tech designs, manufactures and sells a wide range of industrial products under the brands ATP, OZAT and ATSCO which are categorized as ATP for reporting purposes. Products manufactured for other companies under their brands are included in the OEM category in the table below. Power Transition Group (“PTG”) revenue is comprised of products manufactured and sold by the gear businesses that were acquired in October 2019, products sold through Hy-Tech’s legacy gear manufacturing division and products sold to a certain customer whose revenue was included in OEM in 2019. Numatx, Thaxton and other peripheral product lines, such as general machining, are reported as Other.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

 

2020

 

2019

 

(Decrease) increase

 

 

    

 

    

Percent of

    

 

 

    

Percent of

    

 

 

    

 

 

 

 

Revenue

 

revenue

 

Revenue

 

revenue

 

 

$

 

%  

 

OEM

 

$

1,439,000

 

43.3

%  

$

1,336,000

 

34.4

%  

$

103,000

 

7.7

%

ATP

 

 

1,061,000

 

32.0

 

 

1,986,000

 

51.2

 

 

(925,000)

 

(46.6)

 

PTG

 

 

735,000

 

22.1

 

 

355,000

 

9.1

 

 

380,000

 

107.0

 

Other

 

 

85,000

 

2.6

 

 

205,000

 

5.3

 

 

(120,000)

 

(58.5)

 

Total

 

$

3,320,000

 

100.0

%  

$

3,882,000

 

100.0

%  

$

(562,000)

 

(14.5)

%

 

New Accounting Pronouncements

New Accounting Pronouncements

In December 2019, the FASB issued ("ASU") 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The ASU is intended to simplify various aspects related to accounting for income taxes. This guidance is effective for fiscal years beginning after December 15, 2020, and for interim periods within those fiscal years, with early adoption permitted. The Company elected to early adopt this standard effective January 1, 2020. The adoption of this standard did not have a material effect on its Consolidated Financial Statements.

In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This new guidance is effective upon issuance of this ASU for contract modifications and hedging relationships on a prospective basis. While the Company is currently assessing the impact of the new guidance, it is not expected to have a material impact on the Company’s Consolidated Financial Statements.

The Company does not believe that any recently issued and effective accounting standard would have a material effect on its consolidated financial statements.

v3.20.1
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - USD ($)
Common Class A [Member]
Additional paid-in capital [Member]
Retained earnings [Member]
Treasury stock [Member]
Accumulated other comprehensive loss [Member]
Total
Balance at Dec. 31, 2018 $ 4,410,000 $ 13,904,000 $ 34,588,000 $ (6,695,000) $ (672,000) $ 45,535,000
Balance (in shares) at Dec. 31, 2018 4,410,000     (816,000)    
Net loss $ 0 0 (26,000) $ 0 0 (26,000)
Restricted common stock compensation 0 13,000 0 0 0 13,000
Purchase of Class A common stock $ 0 0 0 $ (3,202,000) 0 (3,202,000)
Purchase of Class A common stock (in shares) 0     (418,000)    
Stock-based compensation $ 0 29,000 0 $ 0 0 29,000
Dividends 0 0 (158,000) 0 0 (158,000)
Foreign currency translation adjustment 0 0 0 0 44,000 44,000
Balance at Mar. 31, 2019 $ 4,410,000 13,946,000 34,404,000 $ (9,897,000) (628,000) 42,235,000
Balance (in shares) at Mar. 31, 2019 4,410,000     (1,234,000)    
Balance at Dec. 31, 2019 $ 4,416,000 14,056,000 38,867,000 $ (10,213,000) (620,000) 46,506,000
Balance (in shares) at Dec. 31, 2019 4,416,000     (1,273,000)    
Net loss $ 0 0 (758,000) $ 0 0 (758,000)
Exercise of stock options $ 1,000 2,000 0 $ 0 0 3,000
Exercise of stock options (in shares) 1,000     0    
Restricted common stock compensation $ 0 13,000 0 $ 0 0 13,000
Stock-based compensation 0 16,000 0 0 0 16,000
Dividends 0 0 (157,000) 0 0 (157,000)
Foreign currency translation adjustment 0 0 0 0 (125,000) (125,000)
Balance at Mar. 31, 2020 $ 4,417,000 $ 14,087,000 $ 37,952,000 $ (10,213,000) $ (745,000) $ 45,498,000
Balance (in shares) at Mar. 31, 2020 4,417,000     (1,273,000)    
v3.20.1
STOCK-BASED COMPENSATION
3 Months Ended
Mar. 31, 2020
STOCK-BASED COMPENSATION  
STOCK-BASED COMPENSATION

NOTE 4 – STOCK-BASED COMPENSATION

There were no options granted or issued during the three-month period ended March 31, 2020.

During the three-month period ended March 31, 2019, the Company granted 8,000 options to non-executives.  The exercise price of these options is $8.55 per option and will expire in February 2029.  Further, one third of these options vest on the anniversary date of the grant for the next three years.

The Company estimated the fair value of these options using the following assumptions:

 

 

 

 

 

 

Risk-free interest rate

    

 

2.73

%

Expected term (in years)

 

 

10 years

 

Volatility

 

 

62.08

%

Dividend yield

 

 

2.34

%

Weighted average fair value of options granted

 

$

4.60

 

 

The following is a summary of the changes in outstanding options during the three-month period ended March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Weighted

    

Weighted Average

    

 

 

 

 

 

 

Average

 

Remaining

 

Aggregate

 

 

 

 

Exercise

 

Contractual Life

 

Intrinsic

 

    

Option Shares

    

Price

    

(Years)

    

Value

Outstanding, January 1, 2020

 

226,075

 

$

6.30

 

4.7

 

$

219,983

Granted

 

 —

 

 

 

 

 

 

 

 

Exercised

 

(1,000)

 

 

2.92

 

 

 

 

 

Forfeited

 

 —

 

 

 —

 

 

 

 

 

Expired

 

 —

 

 

 —

 

 

 

 

 

Outstanding, March 31, 2020

 

225,075

 

$

6.32

 

4.5

 

$

30,036

Vested, March 31, 2020

 

190,075

 

$

6.14

 

3.9

 

$

30,036

 

 

 

 

 

 

 

 

    

 

    

Weighted

 

 

 

 

Average Grant-

 

    

Option Shares

    

Date Fair Value

Non-vested options, January 1, 2020

 

37,666

 

$

4.45

Granted

 

 

 

 

 

Vested

 

(2,666)

 

 

4.60

Forfeited

 

 —

 

 

 

Non-vested options, March 31, 2020

 

35,000

 

$

4.44

 

The remaining number of shares of Common Stock available for issuance under the P&F Industries, Inc. 2012 Stock Incentive Plan (the “2012 Plan”) as of March 31, 2020 was 62,062. At March 31, 2020, there were 190,575 options outstanding issued under the 2012 Plan and 34,500 options outstanding issued under the 2002 Stock Incentive Plan.

Restricted Stock

On May 22, 2019, the Company granted 1,250 restricted shares of its Common Stock to each non-employee member of its Board of Directors, totaling 6,250 restricted shares. The Company determined that the fair value of these shares was $8.31 per share, which was the closing price of the Company's Common Stock on the date of the grant. These shares cannot be traded earlier than the first anniversary of the grant date. The Company will ratably amortize the total non-cash compensation expense of approximately $52,000 to selling, general and administrative expenses through May 2020.

Treasury Stock

On February 14, 2019, the Company entered into an agreement to repurchase 389,909 shares of its common stock from certain funds and accounts advised or sub-advised by Fidelity Management & Research Company or one of its affiliates in a privately negotiated transaction at approximately $7.62 per share for a total purchase price of $2,971,000. On February 15, 2019, the Company completed this transaction. On February 14, 2019, the Company entered into Amendment No. 6 to the Second Amended and Restated Loan and Security Agreement with Capital One, which permitted the Company to complete the above transaction.

v3.20.1
LOSS PER SHARE
3 Months Ended
Mar. 31, 2020
LOSS PER SHARE  
LOSS PER SHARE

NOTE 3 – LOSS PER SHARE

Basic loss per common share is based only on the average number of shares of Common Stock outstanding for the periods. Diluted loss per common share reflects the effect of shares of Common Stock issuable upon the exercise of options, unless the effect on earnings is anti-dilutive.

Diluted 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 loss per common share:

 

 

 

 

 

 

 

 

 

    

Three months ended

 

 

March 31, 

 

    

2020

    

2019

Numerator for basic and diluted loss per common share:

 

 

 

 

 

 

Net loss

 

$

(758,000)

 

$

(26,000)

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic and diluted loss per share - weighted average common shares outstanding

 

 

3,144,000

 

 

3,381,000

 

At March 31, 2020 and 2019, there were outstanding stock options whose exercise prices were higher than the average market values of the underlying Common Stock for the period. The weighted average of anti-dilutive stock options outstanding was as follows:

 

 

 

 

 

 

 

    

Three months ended

 

 

March 31, 

 

    

2020

    

2019

Weighted average antidilutive stock options outstanding

 

146,000

 

8,000

 

v3.20.1
GOODWILL AND OTHER INTANGIBLE ASSETS
3 Months Ended
Mar. 31, 2020
GOODWILL AND OTHER INTANGIBLE ASSETS  
GOODWILL AND OTHER INTANGIBLE ASSETS

NOTE 8 – GOODWILL AND OTHER INTANGIBLE ASSETS

Changes in the carrying amount of goodwill are as follows:

 

 

 

 

 

Balance, January 1, 2020

    

$

4,726,000

Currency translation adjustment

 

 

(11,000)

Balance, March 31, 2020

 

$

4,715,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 2020

    

December 31, 2019

 

    

 

 

    

Accumulated

    

Net book

    

 

 

    

Accumulated

    

Net book

 

 

Cost

 

amortization

 

value

 

Cost

 

amortization

 

value

Other intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships (1)

 

$

7,809,000

 

$

2,879,000

 

$

4,930,000

 

$

7,825,000

 

$

2,724,000

 

$

5,101,000

Trademarks and trade names (1)

 

 

2,351,000

 

 

 —

 

 

2,351,000

 

 

2,375,000

 

 

 —

 

 

2,375,000

Trademarks and trade names

 

 

200,000

 

 

49,000

 

 

151,000

 

 

200,000

 

 

45,000

 

 

155,000

Engineering drawings

 

 

330,000

 

 

229,000

 

 

101,000

 

 

330,000

 

 

225,000

 

 

105,000

Non-compete agreements (1)

 

 

325,000

 

 

235,000

 

 

90,000

 

 

331,000

 

 

235,000

 

 

96,000

Patents

 

 

1,405,000

 

 

996,000

 

 

409,000

 

 

1,405,000

 

 

978,000

 

 

427,000

Totals

 

$

12,420,000

 

$

4,388,000

 

$

8,032,000

 

$

12,466,000

 

$

4,207,000

 

$

8,259,000


(1)A portion of these intangibles are maintained in a foreign currency and are therefore subject to foreign exchange rate fluctuations.

 

Amortization expense of intangible assets subject to amortization was as follows:

 

 

 

 

 

 

Three months ended March 31, 

2020

    

2019

$

195,000

 

$

172,000

 

The weighted average amortization period for intangible assets was as follows:

 

 

 

 

 

 

 

    

March 31, 2020

    

December 31, 2019

Customer relationships

 

8.5

 

8.7

Trademarks and trade names

 

11.3

 

11.5

Engineering drawings

 

6.9

 

7.1

Non-compete agreements

 

3.6

 

3.7

Patents

 

6.9

 

7.1

 

Amortization expense for each of the next five years and thereafter is estimated to be as follows:

 

 

 

 

 

2021

    

$

761,000

2022

 

 

757,000

2023

 

 

757,000

2024

 

 

747,000

2025

 

 

690,000

Thereafter

 

 

1,969,000

 

 

$

5,681,000