Company Quick10K Filing
Quick10K
P&F Industries
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$6.92 3 $22
10-Q 2019-09-30 Quarter: 2019-09-30
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-11-12 Earnings, Exhibits
8-K 2019-10-25 Enter Agreement, M&A, Off-BS Arrangement, Other Events, Exhibits
8-K 2019-08-08 Earnings, Exhibits
8-K 2019-06-18 M&A, Off-BS Arrangement, Other Events, Exhibits
8-K 2019-05-22 Shareholder Vote
8-K 2019-05-09 Earnings, Exhibits
8-K 2019-04-19 Enter Agreement
8-K 2019-03-27 Earnings, Exhibits
8-K 2019-03-05 Officers, Exhibits
8-K 2019-02-14 Enter Agreement, Off-BS Arrangement, Other Events
8-K 2019-02-08 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-11-16 Enter Agreement, Other Events, Exhibits
8-K 2018-11-08 Earnings, Exhibits
8-K 2018-10-24 Officers, Exhibits
8-K 2018-10-01 Enter Agreement, Exhibits
8-K 2018-08-09 Earnings, Exhibits
8-K 2018-06-27 Enter Agreement, Exhibits
8-K 2018-05-23 Shareholder Vote
8-K 2018-05-10 Earnings, Exhibits
8-K 2018-03-27 Earnings, Exhibits
8-K 2018-01-30 Officers, Exhibits
CMI Cummins 23,482
SNA Snap-On 8,039
ITGR Integer Holdings 2,378
MTSC MTS Systems 1,028
KRNT Kornit Digital 1,013
ESIO Electro Scientific Industries 607
CPST Capstone Turbine 49
EKSO Ekso Bionics 47
BNSO Bonso Electronics 17
TBLT ToughBuilt Industries 7
PFIN 2019-09-30
Part I - Financial Information
Item 1. Financial Statements
Note 1 - Business and Summary of Accounting Policies
Note 2 - Earnings per Share
Note 3 - Stock-Based Compensation
Note 4 - Fair Value Measurements
Note 5 - Accounts Receivable and Allowance for Doubtful Accounts
Note 6 - Inventories
Note 7 - Goodwill and Other Intangible Assets
Note 8 - Debt
Note 9 - Dividend Payments
Note 10 - Subsequent Event
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 tm1919567d1_ex31-1.htm
EX-31.2 tm1919567d1_ex31-2.htm
EX-32.1 tm1919567d1_ex32-1.htm
EX-32.2 tm1919567d1_ex32-2.htm

P&F Industries Earnings 2019-09-30

PFIN 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tm1919567d1_10qseq1.htm FORM 10-Q

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

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

 

For the Quarterly Period Ended September 30, 2019

 

¨ 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 November 5, 2019, there were 3,143,810 shares of the registrant’s Class A common stock outstanding.

 

 

  

 

 

 

P&F INDUSTRIES, INC.

 

FORM 10-Q

 

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2019

 

TABLE OF CONTENTS

 

    PAGE
     
PART I — FINANCIAL INFORMATION 3
   
Item 1. Financial Statements 3
     
  Consolidated Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018 3
     
  Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2019 and 2018 (unaudited) 5
     
  Consolidated Statements of Shareholders’ Equity for the three and nine-month periods ended September 30, 2019 and 2018 (unaudited) 6
     
  Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 (unaudited) 8
     
  Notes to Consolidated Financial Statements (unaudited) 10
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 20
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
     
Item 4. Controls and Procedures 30
     
PART II — OTHER INFORMATION 31
     
Item 1. Legal Proceedings 31
     
Item 1A. Risk Factors 31
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 31
     
Item 3. Defaults Upon Senior Securities 31
     
Item 4. Mine Safety Disclosures 31
     
Item 5. Other Information 31
     
Item 6. Exhibits 31
     
Signature   32
     
Exhibit Index 33

 

 2 

 

  

PART I - FINANCIAL INFORMATION

 

Item 1.   Financial Statements

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

   September 30, 2019   December 31, 2018 
   (unaudited)   (See Note 1) 
ASSETS          
CURRENT ASSETS          
           
Cash  $809,000   $999,000 
Accounts receivable — net   9,596,000    9,574,000 
Inventories   23,223,000    20,496,000 
Prepaid expenses and other current assets   1,468,000    1,137,000 
TOTAL CURRENT ASSETS   35,096,000    32,206,000 
           
PROPERTY AND EQUIPMENT          
Land   507,000    1,281,000 
Buildings and improvements   3,163,000    6,262,000 
Machinery and equipment   23,858,000    22,612,000 
    27,528,000    30,155,000 
Less accumulated depreciation and amortization   18,608,000    20,380,000 
NET PROPERTY AND EQUIPMENT   8,920,000    9,775,000 
           
GOODWILL   4,430,000    4,436,000 
           
OTHER INTANGIBLE ASSETS — net   7,269,000    7,800,000 
           
DEFERRED INCOME TAXES — net   300,000    628,000 
           
RIGHT-OF-USE ASSETS – OPERATING LEASES   2,179,000     
           
OTHER ASSETS — net   534,000    741,000 
           
TOTAL ASSETS  $58,728,000   $55,586,000 

 

See accompanying notes to consolidated financial statements (unaudited).

 

 3 

 

  

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

   September 30, 2019   December 31, 2018 
   (unaudited)   (See Note 1) 
LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
CURRENT LIABILITIES          
           
Short-term borrowings  $1,789,000   $2,096,000 
Accounts payable   3,348,000    2,755,000 
Accrued compensation and benefits   1,743,000    2,336,000 
Accrued other liabilities   2,128,000    1,243,000 
Current maturities of long-term debt       453,000 
Current leased liabilities – operating leases   608,000     
Other current liabilities       1,000,000 
TOTAL CURRENT LIABILITIES   9,616,000    9,883,000 
           
Noncurrent leased liabilities – operating leases   1,576,000     
Other liabilities   152,000    168,000 
           
TOTAL LIABILITIES   11,344,000    10,051,000 
           
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 – 4,416,000 at September 30, 2019 and 4,410,000 at December 31, 2018   4,416,000    4,410,000 
Class B - $1 par; authorized - 2,000,000 shares; no shares issued        
Additional paid-in capital   14,026,000    13,904,000 
Retained earnings   39,912,000    34,588,000 
Treasury stock, at cost – 1,273,000 shares at September 30, 2019 and 816,000 shares at December 31, 2018   (10,213,000)   (6,695,000)
Accumulated other comprehensive loss   (757,000)   (672,000)
           
TOTAL SHAREHOLDERS’ EQUITY   47,384,000    45,535,000 
           
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $58,728,000   $55,586,000 

 

See accompanying notes to consolidated financial statements (unaudited).

 

 4 

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(unaudited)

 

   Three months   Nine months 
   ended September 30,   ended September 30, 
   2019   2018   2019   2018 
Net revenue  $14,776,000   $17,662,000   $43,896,000   $49,592,000 
Cost of sales   9,427,000    11,064,000    27,758,000    31,695,000 
Gross profit   5,349,000    6,598,000    16,138,000    17,897,000 
Selling, general and administrative expenses   5,208,000    5,737,000    15,930,000    16,371,000 
Operating income   141,000    861,000    208,000    1,526,000 
Gain on sale of property and equipment           7,817,000    6,000 
Other expense       28,000        86,000 
Interest expense   13,000    66,000    144,000    158,000 
Income   128,000    767,000    7,881,000    1,288,000 
Income tax (benefit) expense   (8,000)   226,000    2,083,000    377,000 
Net income  $136,000   $541,000   $5,798,000   $911,000 
                     
Basic earnings per share  $0.04   $0.15   $1.80   $0.25 
Diluted earnings per share  $0.04   $0.14   $1.76   $0.24 
                     
Weighted average common shares outstanding:                    
                     
Basic   3,144,000    3,701,000    3,229,000    3,626,000 
Diluted   3,193,000    3,784,000    3,289,000    3,738,000 
                     
Net income  $136,000   $541,000   $5,798,000   $911,000 
Other comprehensive loss - foreign currency translation adjustment   (78,000)   (32,000)   (85,000)   (91,000)
Total comprehensive income  $58,000   $509,000   $5,713,000   $820,000 

 

See accompanying notes to consolidated financial statements (unaudited).

 

 5 

 

  

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (unaudited)

 

       Class A common
stock, $1 par
   Additional
paid-in
   Retained   Treasury stock   Accumulated
other
comprehensive
 
   Total   Shares   Amount   capital   earnings   Shares   Amount   loss 
Balance, July 1, 2019  $47,494,000    4,416,000   $4,416,000   $13,986,000   $39,933,000    (1,266,000)  $(10,162,000)  $(679,000)
                                         
Net income   136,000                136,000             
                                         
Restricted common stock compensation   13,000            13,000                 
                                         
Purchase of Class A common stock   (51,000)                   (7,000)   (51,000)    
                                         
Stock-based compensation   27,000            27,000                 
                                         
Dividends   (157,000)               (157,000)            
                                         
Foreign currency translation adjustment   (78,000)                           (78,000)
                                         
Balance, September 30, 2019  $47,384,000    4,416,000   $4,416,000   $14,026,000   $39,912,000    (1,273,000)  $(10,213,000)  $(757,000)
                                   
       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 income   5,798,000                5,798,000             
                                         
Restricted common stock compensation   39,000    6,000    6,000    33,000                 
                                         
Purchase of Class A common stock   (3,518,000)                   (457,000)   (3,518,000)    
                                         
Stock-based compensation   89,000            89,000                 
                                         
Dividends   (474,000)               (474,000)            
                                         
Foreign currency translation adjustment   (85,000)                           (85,000)
                                         
Balance, September 30, 2019  $47,384,000    4,416,000   $4,416,000   $14,026,000   $39,912,000    (1,273,000)  $(10,213,000)  $(757,000)

 

See accompanying notes to consolidated financial statements (unaudited). 

 

6

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (unaudited)

 

       Class A common
stock, $1 par
   Additional
paid-in
   Retained   Treasury stock   Accumulated
other
comprehensive
 
   Total   Shares   Amount   capital   earnings   Shares   Amount   loss 
Balance, July 1, 2018  $46,410,000    4,394,000   $4,394,000   $13,748,000   $34,466,000    (683,000)  $(5,609,000)  $(589,000)
                                         
Net income   541,000                541,000             
                                         
Restricted common stock compensation   14,000            14,000                 
                                         
Purchase of Class A common stock   (159,000)                   (19,000)   (159,000)    
                                         
Stock-based compensation   49,000            49,000                 
                                         
Dividends   (185,000)               (185,000)            
                                         
Foreign currency translation adjustment   (32,000)                           (32,000)
                                         
Balance, September 30, 2018  $46,638,000    4,394,000   $4,394,000   $13,811,000   $34,822,000    (702,000)  $(5,768,000)  $(621,000)
                                                     
       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, 2018  $46,013,000    4,203,000   $4,203,000   $13,064,000   $34,455,000    (631,000)  $(5,179,000)  $(530,000)
                                         
Net income   911,000                911,000             
                                         
Exercise of stock options   737,000    184,000    184,000    553,000                 
                                         
Restricted common stock compensation   32,000    7,000    7,000    25,000                 
                                         
Purchase of Class A common stock   (589,000)                   (71,000)   (589,000)    
                                         
Stock-based compensation   169,000            169,000                 
                                         
Dividends   (544,000)               (544,000)            
                                         
Foreign currency translation adjustment   (91,000)                           (91,000)
                                         
Balance, September 30, 2018  $46,638,000    4,394,000   $4,394,000   $13,811,000   $34,822,000    (702,000)  $(5,768,000)  $(621,000)

 

See accompanying notes to consolidated financial statements (unaudited). 

 

7

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

 

   Nine months 
   ended September 30, 
   2019   2018 
Cash Flows from Operating Activities:          
Net income  $5,798,000   $911,000 
           
Adjustments to reconcile net income to net cash (used in) provided by operating activities:          
           
Non-cash charges:          
Depreciation and amortization   1,148,000    1,020,000 
Amortization of other intangible assets   514,000    531,000 
Amortization of operating leased assets   363,000     
Amortization of debt issue costs   18,000    71,000 
Amortization of consideration payable to a customer   202,000    42,000 
(Recovery of) provision for losses on accounts receivable - net   (60,000)   242,000 
Stock-based compensation   89,000    169,000 
Gain on sale of property and equipment   (7,817,000)   (6,000)
Restricted stock-based compensation   39,000    32,000 
Deferred income taxes   332,000    292,000 
Fair value increase in contingent consideration       86,000 
Changes in operating assets and liabilities:          
Accounts receivable   25,000    (2,914,000)
Inventories   (2,771,000)   (618,000)
Prepaid expenses and other current assets   (314,000)   185,000 
Other assets   (1,000)    
Accounts payable   600,000    582,000 
Accrued compensation and benefits   (594,000)   73,000 
Accrued other liabilities   915,000   (89,000)
Operating lease liabilities   (383,000)    
Other liabilities   (16,000)   (15,000)
Total adjustments   (7,711,000)   (317,000)
Net cash (used in) provided by operating activities   (1,913,000)   594,000 

 

See accompanying notes to consolidated financial statements (unaudited).

 

8

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

 

   Nine months 
   ended September 30, 
   2019   2018 
Cash Flows from Investing Activities:          
Capital expenditures  $(1,240,000)  $(1,757,000)
Payments of contingent consideration   (1,000,000)    
Proceeds from disposal of property and equipment   8,767,000    25,000 
Net cash provided by (used in) investing activities   6,527,000    (1,732,000)
           
Cash Flows from Financing Activities:          
Dividend payments   (474,000)   (544,000)
Proceeds from exercise of stock options       737,000 
Purchase of Class A common stock   (3,518,000)   (589,000)
Net (payment) proceeds from short-term borrowings   (307,000)   1,679,000 
Proceeds from long-term debt       400,000 
Repayments of long-term debt   (453,000)   (27,000)
Bank finance costs   (33,000)   (3,000)
Net cash (used in) provided by financing activities   (4,785,000)   1,653,000 
           
Effect of exchange rate changes on cash   (19,000)   (27,000)
Net (decrease) increase in cash   (190,000)   488,000 
Cash at beginning of period   999,000    1,241,000 
Cash at end of period  $809,000   $1,729,000 
           
Supplemental disclosures of cash flow information:          
           
Cash paid for:          
Interest  $135,000   $83,000 
Income taxes  $1,341,000   $77,000 
Cash paid for amounts included in the measurement of operating lease liabilities  $26,000   $ 
           
Noncash information:          
Right of Use (“ROU”) assets recognized for new operating lease liabilities  $2,500,000   $ 
Operating lease liability related to ROU assets recognized upon adoption of ASC 842  $418,000   $ 

 

See accompanying notes to consolidated financial statements (unaudited).

 

9

 

 

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, 2018 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, 2018 (“2018 Form 10-K”). The interim financial statements contained herein should be read in conjunction with the 2018 Form 10-K.

 

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

 

Principles of Consolidation

 

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

 

Reclassification

 

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

 

The Company

 

P&F is a Delaware corporation incorporated on April 19, 1963. 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. Lastly, the business of Air Tool Service Company (“ATSCO”) operates through a wholly-owned subsidiary of Hy-Tech.

 

Florida Pneumatic imports, manufactures and sells pneumatic hand tools and accessories, which are of the Company’s 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 brands including ATP, ATSCO, OZAT, 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 (“OEM”) under their own brand names. Hy-Tech’s OEM product line is known in the marketplace as “Engineered Solutions”.

 

10

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

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

 

Sale of real property

 

Effective June 18, 2019 (the “Jupiter Closing Date”), Florida Pneumatic completed the sale of real property located in Jupiter, Florida in which it conducts its principal operations (the “Jupiter Facility”). The Jupiter Facility was purchased by an unrelated third party for purchase price of $9.2 million. After broker fees and other expenses relating to the sale, the Company received approximately $8.7 million.

 

Purchase price  $9,200,000 
Selling expenses   451,000 
Net proceeds   8,749,000 
      
Land   774,000 
Building and improvements   2,956,000 
Accumulated depreciation   (2,798,000)
Net book value   932,000 
Gain on sale of the Jupiter Facility  $7,817,000 

 

Effective as of the Jupiter Closing Date, Florida Pneumatic, entered into a lease with respect to an approximately 42,000 square foot portion of the Jupiter Facility. The lease is for a term of five years, with either party able to terminate after four years. The initial monthly base rent under the lease is $32,345 with annual escalations of three percent. Florida Pneumatic will also be responsible for certain other payments of “additional rent” as set forth in the lease, including certain taxes, assessments and operating expenses. The Company considered the guidance in the current account literature relating to the recognition of the gain and determined that the full amount of $7,817,000 should be recognized as of the date of the transaction.

 

(See Note 8 and the Liquidity section of Management’s Discussion and Analysis for further information.)

 

Customer concentration

 

At September 30, 2019 and December 31, 2018, accounts receivable from The Home Depot was 28.1% and 32.6%, respectively, of total accounts receivable. Additionally, revenue from The Home Depot during the three and nine-month periods ended September 30, 2019 and 2018 were 21.8% and 20.8%, and 35.1% and 28.1%, respectively, of total revenue. There were no other customers that accounted for more than 10% of consolidated revenue or accounts receivable during the three or nine-month periods ended September 30, 2019 or 2018. 

 

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 2018 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.

 

11

 

 

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, 2018. The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU 2016-02 in February 2016, which was amended in some respects by subsequent ASUs (collectively the “leases standard” or “ASC 842”). The Company’s significant accounting policy relating to the adoption of ASC 842, which was effective January 1, 2019, is discussed below.

 

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. The Company recorded an operating Right of Use (“ROU”) asset of $394,000, and an operating lease liability of $418,000 as of January 1, 2019. The difference between the initial operating ROU asset and operating lease liability of $24,000 is accrued rent previously recorded under ASC 840. 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 as of September 30, 2019.

 

For the three and nine months ended September 30, 2019, the Company had $185,000 and $363,000, respectively, 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 September 30, 2019:

 

   As of September 30, 2019 
2019 (excluding the nine months ended September 30, 2019)  $184,000 
2020   586,000 
2021   507,000 
2022   466,000 
2023   468,000 
Thereafter   201,000 
Total operating lease payments   2,412,000 
Less imputed interest   (228,000)
Total operating lease liabilities  $2,184,000 
      
Weighted-average remaining lease term   4.3 years 
Weighted-average discount rate   5.0%

 

12

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

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

 

Revenue recognition

 

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 September 30, 
   2019   2018   (Decrease) increase 
   Revenue   Percent of 
revenue
   Revenue   Percent of
revenue
   $   % 
Retail  $3,240,000    29.5%  $6,343,000    45.2%  $(3,103,000)   (48.9)%
Automotive   3,293,000    30.1    2,930,000    20.9    363,000    12.4 
Industrial   1,301,000    11.9    1,592,000    11.3    (291,000)   (18.3)
Aerospace   2,977,000    27.2    3,015,000    21.5    (38,000)   (1.3)
Other   140,000    1.3    155,000    1.1    (15,000)   (9.7)
Total  $10,951,000    100.0%  $14,035,000    100.0%  $(3,084,000)   (22.0)%

 

   Nine months ended September 30, 
   2019   2018   (Decrease) increase 
       Percent of       Percent of         
   Revenue   revenue   Revenue   revenue   $   % 
Retail  $9,379,000    29.2%  $14,649,000    37.8%  $(5,270,000)   (36.0)%
Automotive   10,916,000    33.9    10,640,000    27.4    276,000    2.6 
Industrial   3,887,000    12.0    3,958,000    10.2    (71,000)   (1.8)
Aerospace   7,530,000    23.4    8,989,000    23.2    (1,459,000)   (16.2)
Other   465,000    1.5    534,000    1.4    (69,000)   (12.9)
Total  $32,177,000    100.0%  $38,770,000    100.0%  $(6,593,000)   (17.0)%

 

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. NUMATX, Thaxton and other peripheral product lines, such as general machining and gears, are reported as “Other” below:

 

   Three months ended September 30, 
   2019   2018   (Decrease) increase 
   Revenue   Percent of
revenue
   Revenue   Percent of
revenue
   $   % 
ATP  $1,375,000    36.0%  $1,487,000    41.0%  $(112,000)   (7.5)%
OEM   2,128,000    55.6    1,723,000    47.5    405,000    23.5 
Other   322,000    8.4    417,000    11.5    (95,000)   (22.8)
Total  $3,825,000    100.0%  $3,627,000    100.0%  $198,000    5.5%

 

   Nine months ended September 30, 
   2019   2018   (Decrease) increase 
   Revenue   Percent of
revenue
   Revenue   Percent of
revenue
   $   % 
ATP  $5,160,000    44.0%  $5,196,000    48.0%  $(36,000)   (0.7)%
OEM   5,472,000    46.7    4,371,000    40.4    1,101,000    25.2 
Other   1,087,000    9.3    1,255,000    11.6    (168,000)   (13.4)
Total  $11,719,000    100.0%  $10,822,000    100.0%  $897,000    8.3%

 

13

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

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

 

New Accounting Pronouncements

 

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

 

NOTE 2 – EARNINGS PER SHARE

 

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

 

Diluted earnings per common share is computed using the treasury stock method. Under this method, the aggregate number of shares of Common Stock outstanding reflects the assumed use of proceeds from the hypothetical exercise of any outstanding options to purchase shares of Common Stock. The average market value for the period is used as the assumed purchase price.

 

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

 

   Three months ended   Nine months ended 
   September 30,   September 30, 
   2019   2018   2019   2018 
Numerator for basic and diluted earnings per common share:                    
Net income  $136,000   $541,000   $5,798,000   $911,000 
                     
Denominator:                    
Denominator for basic earnings per share - weighted average common shares outstanding   3,144,000    3,701,000    3,229,000    3,626,000 
Dilutive securities (1)   49,000    83,000    60,000    112,000 
Denominator for diluted earnings per share - weighted average common shares outstanding   3,193,000    3,784,000    3,289,000    3,738,000 

 

  (1) Dilutive securities consist of  “in the money” stock options.

 

At September 30, 2019 and 2018, 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   Nine months ended 
   September 30,   September 30, 
   2019   2018   2019   2018 
Weighted average antidilutive stock options outstanding   57,000        24,000    16,000 

 

14

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

NOTE 3 – STOCK-BASED COMPENSATION

 

There were no options granted or issued during the three-month period ended September 30, 2019.

 

The following is a summary of the changes in outstanding options during the nine-month period ended September 30, 2019:

 

   Option Shares   Weighted
Average
Exercise
Price
   Weighted Average
Remaining
Contractual Life
(Years)
   Aggregate
Intrinsic
Value
 
Outstanding, January 1, 2019   218,075   $6.22       5.6   $335,310 
Granted   8,000    8.55           
Exercised                  
Forfeited                  
Expired                  
Outstanding, September 30, 2019   226,075   $6.30    5.0   $198,395 
Vested, September 30, 2019   188,409   $6.08    4.3   $198,395 

 

   Option Shares   Weighted
Average Grant-
Date Fair Value
 
Non-vested options, January 1, 2019   59,333   $4.41 
Granted   8,000    4.60 
Vested   (29,667)   4.41 
Forfeited         
Non-vested options, September 30, 2019   37,666   $4.45 

 

The number of shares of Common Stock available for issuance under the P&F Industries, Inc. 2012 Stock Incentive Plan (the “2012 Plan”) as of September 30, 2019 was 62,062. At September 30, 2019, there were 191,575 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.

 

In May 2018, 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 $8.43 per share, which was the closing price of the Company’s Common Stock on the date of the grant. The Company ratably amortized the total non-cash compensation expense of approximately $53,000 to selling, general and administrative expenses through May 2019.

 

15

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

NOTE 3 – STOCK-BASED COMPENSATION – (Continued)

 

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.

 

On September 12, 2018, subsequent to the expiration of a repurchase plan (the “2017 Repurchase Program”) that was adopted by the Board of Directors in 2017, the Company’s Board of Directors authorized the Company to repurchase up to 100,000 additional shares of its Common Stock (the “2018 Repurchase Program”) from time-to-time over the next twelve months through a 10b5-1 trading plan, and potentially through open market purchases, privately-negotiated transactions, or otherwise in compliance with Rule 10b-18 under the Securities Exchange Act of 1934. On September 14, 2018, the Company announced that, pursuant to the 2018 Repurchase Program, it had adopted a written trading plan in accordance with the guidelines specified under Rule 10b5-1 under the Securities Exchange Act of 1934. Repurchases made under the plan, that commenced on September 17, 2018, are subject to the SEC’s regulations, as well as certain price, market, volume, and timing constraints specified in the plan. In July 2019, the Company repurchased 7,000 shares of its Common Stock at an aggregate cost of approximately $51,000, thus completing the 2018 Repurchase Program.

 

NOTE 4 – 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 September 30, 2019, and December 31, 2018, 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).

 

16

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

NOTE 5 – ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

 

Accounts receivable - net consists of:

 

   September 30, 2019   December 31, 2018 
Accounts receivable  $9,808,000   $9,847,000 
Allowance for doubtful accounts, sales discounts and chargebacks   (212,000)   (273,000)
   $9,596,000   $9,574,000 

 

NOTE 6 – INVENTORIES

 

Inventories consist of:

 

   September 30, 2019   December 31, 2018 
Raw material  $2,166,000   $1,963,000 
Work in process   1,863,000    1,924,000 
Finished goods   19,194,000    16,609,000 
   $23,223,000   $20,496,000 

 

NOTE 7 – GOODWILL AND OTHER INTANGIBLE ASSETS  

 

Changes in the carrying amount of goodwill are as follows:

 

Balance, January 1, 2019  $4,436,000 
Currency translation adjustment   (6,000)
Balance, September 30, 2019  $4,430,000 

 

Other intangible assets were as follows:

 

   September 30, 2019   December 31, 2018 
   Cost   Accumulated
amortization
   Net book
value
   Cost   Accumulated
amortization
   Net book
value
 
Other intangible assets:                              
Customer relationships (1)  $6,813,000   $2,558,000   $4,255,000   $6,821,000   $2,135,000   $4,686,000 
Trademarks and trade names (1)   2,296,000        2,296,000    2,308,000        2,308,000 
Trademarks and trade names   200,000    42,000    158,000    200,000    32,000    168,000 
Engineering drawings   330,000    221,000    109,000    330,000    202,000    128,000 
Non-compete agreements (1)   229,000    223,000    6,000    233,000    223,000    10,000 
Patents   1,405,000    960,000    445,000    1,405,000    905,000    500,000 
Totals  $11,273,000   $4,004,000   $7,269,000   $11,297,000   $3,497,000   $7,800,000 

 

(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 September 30,   Nine months ended September 30, 
2019   2018   2019   2018 
$170,000   $172,000   $514,000   $531,000 

 

17

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

NOTE 7 – GOODWILL AND OTHER INTANGIBLE ASSETS – (Continued)  

 

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

 

   September 30, 2019   December 31, 2018 
Customer relationships   8.6    9.3 
Trademarks and trade names   11.8    12.5 
Engineering drawings   7.4    7.7 
Non-compete agreements   1.5    2.3 
Patents   7.3    7.9 

 

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

 

2020  $651,000 
2021   636,000 
2022   634,000 
2023   634,000 
2024   619,000 
Thereafter   1,799,000 
   $4,973,000 

 

18

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

NOTE 8 – 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, real property among other things. In June 2019, the Company repaid the principal amount of $100,000 under a Tranche A Term Loan, as defined in the Credit Agreement. 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 has an expiration date of 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.

 

SHORT–TERM BORROWINGS

 

At September 30, 2019, short-term or Revolver borrowing was $1,789,000, compared to $2,096,000, at December 31, 2018. Applicable Margin Rates at September 30, 2019 and December 31, 2018 for LIBOR and Base Rates were 1.50% and 0.50%, respectively. Additionally, at September 30, 2019 and December 31, 2018, there was approximately $13,500,000 and $12,024,000, respectively, available to the Company under its Revolver arrangement.

 

The average balance of short-term borrowings during the three and nine-month periods ended September 30, 2019 were $1,195,000 and $3,774,000, compared to $4,060,000 and $2,834,000 for the same periods in 2018.

 

NOTE 9 – DIVIDEND PAYMENTS

 

On August 8, 2019, 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 August 23, 2019, to shareholders of record at the close of business on August 19, 2019. The total amount of this dividend payment was approximately $157,000. During the nine-month period ended September 30, 2019, the Company has paid approximately $474,000 in dividend payments.

 

NOTE 10 – SUBSEQUENT EVENT

 

Effective October 25, 2019, 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., each an Illinois-based corporation that manufactures and distributes 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 contingent consideration based upon sale of certain categories of acquired inventory during the two-year period following the closing date. The Company is unable to present pro-forma information as required per ASC 805-10-50, due to among other things, the limited time available to determine accurate purchase price allocation, which is necessary in order to compute the fair value of intangible assets and amortization thereof.

 

In connection with the acquisition, the Company entered into Consent, Joinder and Amendment No. 8 to Second Amended and Restated Loan and Security Agreement (“Amendment No. 8”), with Capital One, National Association. Amendment No. 8, among other things, provided consent to the acquisitions. The Amendment also modified the Credit Agreement to suspend the requirement pertaining to compliance with the covenant relating to a Fixed Charge Coverage Ratio, unless a Default or Event of Default occurs, or availability is less than 17.5% of the aggregate amount of the Revolver Commitments, as defined, at any time. Further, it granted permission to the Company to continue its issuance of dividends and allow the Company to repurchase shares of its own common stock, provided that no Default or Event of Default has occurred, subject to Revolver availability limitations, among other things.

 

 19 

 

 

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 2019 fiscal year and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company for a number of reasons including, but not limited to:

 

  · Exposure to fluctuations in energy prices;
  · Debt and debt service requirements;
  · Borrowing and compliance with covenants under our credit facility;
  · Disruption in the global capital and credit markets;
  · The strength of the retail economy in the United States and abroad;
  · Risks associated with sourcing from overseas, including tariffs;
  · Importation delays;
  · 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;
  · Technology;
  · 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, 2018 (“2018 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.

 

 20 

 

 

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

 

OUR BUSINESS

 

P&F and each of its subsidiaries are herein referred to collectively as the “Company.” In addition, the words “we”, “our” and “us” refer to the Company. We conduct our 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.

 

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, OZAT, 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 new 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.

 

 21 

 

 

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 2018 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 third quarter 2019 results of operations were:

 

  · Reduction in retail revenue due to third quarter 2018 roll-out of a refreshed line to The Home Depot, not repeating in 2019;

 

  · Customer and product mix at Hy-Tech, which adversely impacted gross margin; and

 

  · Negative adjustment to the carrying value of certain items within Hy-Tech’s inventory.

 

RESULTS OF OPERATIONS

 

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.

 

Additionally, 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.

 

Lastly, 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.

 

 22 

 

 

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 and nine-month periods ended September 30, 2019 and 2018:

 

   Three months ended September 30, 
           Increase (decrease) 
   2019   2018   $   % 
Florida Pneumatic  $10,951,000   $14,035,000   $(3,084,000)   (22.0)%
Hy-Tech   3,825,000    3,627,000    198,000    5.5 
                     
Consolidated  $14,776,000   $17,662,000   $(2,886,000)   (16.3)%

 

   Nine months ended September 30, 
           Increase (decrease) 
   2019   2018   $   % 
Florida Pneumatic  $32,177,000   $38,770,000   $(6,593,000)   (17.0)%
Hy-Tech   11,719,000    10,822,000    897,000    8.3 
                     
Consolidated  $43,896,000   $49,592,000   $(5,696,000)   (11.5)%

 

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 September 30, 
   2019   2018   (Decrease) increase 
   Revenue   Percent of 
revenue
   Revenue   Percent of
revenue
   $   % 
Retail  $3,240,000    29.5%  $6,343,000    45.2%  $(3,103,000)   (48.9)%
Automotive   3,293,000    30.1    2,930,000    20.9    363,000    12.4 
Industrial   1,301,000    11.9    1,592,000    11.3    (291,000)   (18.3)
Aerospace   2,977,000    27.2    3,015,000    21.5    (38,000)   (1.3)
Other   140,000    1.3    155,000    1.1    (15,000)   (9.7)
Total  $10,951,000    100.0%  $14,035,000    100.0%  $(3,084,000)   (22.0)%

 

   Nine months ended September 30, 
   2019   2018   (Decrease) increase 
       Percent of       Percent of         
   Revenue   revenue   Revenue   revenue   $   % 
Retail  $9,379,000    29.2%  $14,649,000    37.8%  $(5,270,000)   (36.0)%
Automotive   10,916,000    33.9    10,640,000    27.4    276,000    2.6 
Industrial   3,887,000    12.0    3,958,000    10.2    (71,000)   (1.8)
Aerospace   7,530,000    23.4    8,989,000    23.2    (1,459,000)   (16.2)
Other   465,000    1.5    534,000    1.4    (69,000)   (12.9)
Total  $32,177,000    100.0%  $38,770,000    100.0%  $(6,593,000)   (17.0)%

 

 23 

 

 

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

 

RESULTS OF OPERATIONS - (Continued)

 

Florida Pneumatic

 

The most significant component of the change in our Retail revenue this quarter, compared to the same three-month period in 2018 was the shipment by Florida Pneumatic of approximately $3.6 million during the third quarter of 2018 of a then new, refreshed line of pneumatic tools and accessories to THD. There were no unusual shipments during the three-month period ended September 30, 2019. The decline in Industrial revenue this quarter was due primarily to recent sluggishness in the sector and reduced orders from certain customers that service the aircraft industry that have been negatively affected by the reduction in production by Boeing of certain civilian aircraft, compared to the same period in 2018. Florida Pneumatic’s three-month 2019 Automotive revenue increased, when compared to the same period in 2018 due primarily to the introduction of a new line of pneumatic hand tools. This new line features enhanced vibration reduction technology and longer life of the internal mechanism.

 

The most significant component to the decline in Florida Pneumatic’s nine-month revenue, compared to the same period in the prior year was lower sales to THD. As noted above, during the third quarter of 2019 there were no special orders, whereas during the third quarter of 2018, Florida Pneumatic shipped over $3.6 million of a then new, refreshed line of pneumatic tools and accessories. Additionally, we believe this reduction in revenue was partially due to THD being in an overstocked position at the end of 2018, which caused a reduction in orders during the early part of 2019. The decline in year-to-date Aerospace revenue, compared to the same nine-month period that ended September 30, 2018, was due to shipments to a customer in the first quarter of 2018 not repeating in 2019, and to a lesser degree, the decision by Boeing to reduce production of its 737 Max. Automotive revenue during the nine-month period ended September 30, 2019 improved compared to the same period in 2018, primarily due to the launch of a new line of tools.

 

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. NUMATX, Thaxton and other peripheral product lines, such as general machining and gears, are reported as “Other” below:

 

   Three months ended September 30, 
   2019   2018   (Decrease) increase 
   Revenue   Percent of
revenue
   Revenue   Percent of
revenue
   $   % 
ATP  $1,375,000    36.0%  $1,487,000    41.0%  $(112,000)   (7.5)%
OEM   2,128,000    55.6    1,723,000    47.5    405,000    23.5 
Other   322,000    8.4    417,000    11.5    (95,000)   (22.8)
Total  $3,825,000    100.0%  $3,627,000    100.0%  $198,000    5.5%

 

   Nine months ended September 30, 
   2019   2018   (Decrease) increase 
   Revenue   Percent of
revenue
   Revenue   Percent of
revenue
   $   % 
ATP  $5,160,000    44.0%  $5,196,000    48.0%  $(36,000)   (0.7)%
OEM   5,472,000    46.7    4,371,000    40.4    1,101,000    25.2 
Other   1,087,000    9.3    1,255,000    11.6    (168,000)   (13.4)
Total  $11,719,000    100.0%  $10,822,000    100.0%  $897,000    8.3%

 

 24 

 

 

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

 

RESULTS OF OPERATIONS - (Continued)

 

Hy-Tech

 

Overall, Hy-Tech revenue improved this quarter, compared to same three-month period in 2018 by 5.5%. The 23.5% net increase in Hy-Tech’s OEM revenue was driven primarily by Hy-Tech’s 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 and develop different applications for its tools, motors and related accessories. 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. However, their continuing effort to expand the Engineered Solutions initiative has, this quarter, negatively impacted both ATP and Other revenues as less resources are allocated to these product lines.

 

For the nine-month period ended September 30, 2019, the 25.2% growth in Hy-Tech’s OEM revenue, compared to the same nine-month period in 2018 was driven primarily by growth in its Engineered Solutions initiative. The net decline in ATP revenue was driven by reductions in shipments to a major customer as well as a slight decline in international sales. These declines were partially offset by increases in traditional ATP tools and parts. The slight decline in Hy-Tech’s Other revenue was due to lower general machining, partially offset by increased gears and Numatx revenue.

 

Gross profit / margin

 

   Three months ended September 30,   Increase (decrease) 
   2019   2018   Amount   % 
Florida Pneumatic  $4,436,000   $5,351,000   $(915,000)   (17.1)%
As percent of respective revenue   40.5%   38.1%   2.4% pts     
Hy-Tech  $913,000   $1,247,000   $(334,000)   (26.8)
As percent of respective revenue   23.9%   34.4%   (10.5)% pts     
Total  $5,349,000   $6,598,000   $(1,249,000)   (18.9)%
As percent of respective revenue   36.2%   37.4%   (1.2)% pts     

 

   Nine months ended September 30,   Increase (decrease) 
   2019   2018   Amount   % 
Florida Pneumatic  $12,628,000   $14,066,000   $(1,438,000)   (10.2)%
As percent of respective revenue   39.2%   36.3%   2.9% pts     
Hy-Tech  $3,510,000   $3,831,000   $(321,000)   (8.4)
As percent of respective revenue   30.0%   35.4%   (5.4)% pts     
Total  $16,138,000   $17,897,000   $(1,759,000)   (9.8)%
As percent of respective revenue   36.8%   36.1%   0.7% pts     

 

Factors contributing to the 2.4 percentage point improvement in Florida Pneumatic’s gross margin this quarter, compared to the same three-month period ended September 30, 2018, include: a) improved product and customer mix, price increases, and greater absorption of manufacturing overhead in aerospace at Jiffy, and b) its decision to greatly reduce AIRCAT promotional programs in 2019 that were offered during much of 2018.

 

The improved gross margin at Florida Pneumatic for the nine-month period ended September 30, 2019, compared to the same period a year ago is due primarily to a) its decision to greatly reduce AIRCAT promotional programs in 2019 that were offered during much of 2018, b) during the nine month period ended September 30, 2019, Jiffy was able to pass through various price increases, and increased its manufacturing efficiencies, and c) overall improved product and customer mix, compared to the same period in 2018. 

 

 25 

 

 

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

 

RESULTS OF OPERATIONS - (Continued)

 

When comparing the third quarter of 2019 to the same period in the prior year, Hy-Tech’s gross margin declined, primarily due to both customer and product mix, and a charge to its obsolete and slow-moving inventory reserve this quarter, compared to the same period a year ago.

 

The 5.4 percentage point decline in Hy-Tech’s nine-month gross margin stated in the table above, was due to a number of factors: (i) unusually high costs incurred during the three-month period ended March 31, 2019, in areas such as repairs and maintenance and sample costs; (ii) under absorption of manufacturing overhead, mostly in the first quarter of 2019, in turn primarily due to a complete enterprise-wide, information technologies system conversion occurring during the first quarter of 2019, which caused the facility to halt production for approximately three days, (iii) increased charges in obsolete and slow-moving inventory in both the second and third quarters of 2019, compared to the same period a year ago, (iv) product mix, and (v) increased material and labor costs. In an effort to improve its gross margin in the fourth quarter of 2019, Hy-Tech will be increasing the selling prices on several high-volume items and will implement a better sourcing and cost reduction program.

 

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 third quarter of 2019, our SG&A was $5,208,000, compared to $5,737,000 for the same three-month period in 2018. Significant components to the net reduction include: (i) a decrease of $174,000 in compensation expenses, which is comprised of base salaries and wages, accrued performance-based bonus incentives and associated payroll taxes and employee benefits; (ii) a decrease of $391,000 in variable expenses, due primarily to lower Retail revenue. Variable expenses include such expenses as, commissions, freight out, advertising and promotion expenses and travel and entertainment; and (iii) an increase of $98,000 in professional services, driven by the acquisition occurring in October 2019 (see Note 10 to the Consolidated Financial Statements).

 

Our SG&A for the nine-month period ended September 30, 2019 was $15,930,000, compared to $16,371,000 for the same period in 2018. Significant components to the net change include: (i) a decrease of $90,000 in compensation expenses; (ii) a decrease of $80,000 in stock-based compensation; (iii) a decrease of $337,000 in variable expenses due primarily to lower Retail revenue; and (iv) an increase in professional services of $109,000, due primarily to the acquisition in October 2019.

 

Gain on sale of property and equipment

 

Effective June 18, 2019, we completed the sale of real property located in Jupiter, the facility where Florida Pneumatic conducts its principal operations (the “Jupiter Facility”). The Jupiter Facility was purchased by an unrelated third party, for a final purchase price of $9.2 million. After broker fees and other expenses relating to the sale, the Company received approximately $8.7 million. The Jupiter Facility had at the time of sale a net book value of approximately $932,000. As the result of the sale of the Jupiter Facility, we recognized a gain of approximately $7.8 million (see Note 1 to the Consolidated Financial Statements, and the Liquidity section of Management’s Discussion and Analysis for further information).

 

Other expense

 

Other expense of $28,000 and $86,000, respectively, for the three and nine-month periods ended September 30, 2018, represents the adjustment of the fair value of the contingent consideration obligation to the Jiffy seller.

 

 26 

 

 

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

 

RESULTS OF OPERATIONS - (Continued)

 

Interest

 

   Three months ended
September 30,
   Decrease 
   2019   2018   Amount   % 
Interest expense attributable to:                    
Short-term borrowings  $11,000   $40,000   $29,000    72.5%
Term loans, including Capex Term Loans       5,000    5,000    100.0 
Amortization expense of debt issue costs   2,000    21,000    19,000    90.5 
                     
Total  $13,000   $66,000   $53,000    80.3%

 

   Nine months ended
September 30,
   (Increase) decrease 
   2019   2018   Amount   % 
Interest expense attributable to:                    
Short-term borrowings  $117,000   $77,000   $(40,000)   (51.9)%
Term loans, including Capex Term Loans   9,000    10,000    1,000    10.0 
Amortization expense of debt issue costs   18,000    71,000    53,000    74.6 
                     
Total  $144,000   $158,000   $14,000    8.9%

 

The decrease in short-term loan borrowings interest during the third quarter of 2019, compared to the same period in 2018, was driven primarily by lower borrowings against our Revolver, compared to the prior year. The proceeds from the sale of the Jupiter facility discussed previously in Note 1 to our consolidated financial statements, was the key factor to the reduced borrowings.

 

Our average balance of short-term borrowings during the three and nine-month periods ended September 30, 2019 was $1,195,000 and $3,774,000, respectively, compared to $4,060,000, and $2,834,000, respectively, during the same three and nine-month periods in 2018. Debt issue costs incurred in connection with the Amendment No. 5, which are being amortized through February 2024, were lower than the costs associated with the previous amendments.

 

Income taxes

 

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 and nine-month periods ended September 30, 2019 were (6.3)% and 26.4%, compared to the effective tax rates of 29.5% and 29.3%, respectively, for the three and nine-month periods ended September 30, 2018. The Company’s effective tax rates for all periods presented were impacted primarily by state taxes, and non-deductible expenses. A reduction in the annualized effective tax rate used by the Company relative to prior quarter, is creating a negative tax rate for the three month period ended September 30, 2019.

 

 27 

 

 

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:

 

   September 30, 2019   December 31, 2018 
Working Capital  $25,480,000   $22,323,000 
Current Ratio   3.65 to 1    3.26 to 1 
Shareholders’ Equity  $47,384,000   $45,535,000 

 

Credit facility

 

Our Credit Facility is discussed in detail in Note 8 to our consolidated financial statements.

 

We provide Capital One with monthly financial statements, borrowing base certificates and certificates of compliance with various financial covenants. Should an event of default occur, the interest rate on all borrowings would increase by two percent points per annum during the period of default, in addition to other remedies provided to Capital One.

 

At September 30, 2019, we had $13.5 million of availability under the Revolver portion of the Credit Facility. We believe that should a need arise for us to borrow funds in excess of the Revolver and Term loans currently in effect, our Bank would provide for additional borrowings, based on the value of our real property or other assets.

 

Cash flows

 

During the nine-month period ended September 30, 2019, our net cash decreased to $809,000 from $999,000 at December 31, 2018. Our total Bank debt at September 30, 2019 was $1,789,000 compared to $2,555,000 at December 31, 2018. The total debt to total book capitalization (total debt divided by total debt plus equity); at September 30, 2019 was 3.6% compared to 5.3% at December 31, 2018.

 

As discussed in Note 1 to our Consolidated Financial Statements, on June 18, 2019, Florida Pneumatic completed the sale of the Jupiter Facility. The Jupiter Facility was purchased by Jupiter Warehouse Holdings LLC, an unrelated third party, for a final purchase price of $9.2 million. After broker fees and other expenses relating to the sale, we received approximately $8.7 million.

 

In order to fund the purchase of the businesses referred to in Note 10 to the Consolidated Financial Statements, we borrowed approximately $3,500,000 from our Revolver.

 

Included in the change in Other current liabilities was the payment of $1,000,000, the contingent consideration, made to the Jiffy seller.

 

As a condition to Capital One approving the sale of the Jupiter Facility, we were required to apply the major portion of the net proceeds from the sale to pay off the Term Loan of $100,000, the Capex Loan of approximately $313,000, and the Revolver Loan, which on the date of the closing had a balance of approximately $7.4 million. This transaction did not affect our ability to continue to borrow funds under both the Capex Loan and the Revolver Loan under the terms of the Loan Agreement.

 

Additionally, effective as of the Closing Date, Florida Pneumatic, entered into a lease with respect to an approximately 42,000 square foot portion of the Jupiter Facility. The lease is for a term of five years, with either party able to terminate after four years. The initial monthly base rent under the lease is $32,345 with annual escalations of three percent. Florida Pneumatic is also responsible for certain other payments of additional rent as set forth in the lease, including certain taxes, assessments and operating expenses.

 

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

 

RESULTS OF OPERATIONS - (Continued)

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash flows – (continued)

 

In February, May and August 2019, our Board of Directors declared quarterly cash dividends of $0.05 per share of our common stock, which were paid in March, May and August 2019, respectively. The total dividends paid through September 30, 2019 were $474,000. We intend to maintain the dividend policy; however, the declaration of dividends under this policy going forward is dependent upon our financial condition, results of operations, capital requirements and other factors deemed relevant by our Board of Directors.

 

On September 12, 2018, our Board of Directors authorized us to repurchase up to 100,000 shares of our Common Stock (the “2018 Repurchase Program”) from time-to-time over a one-year period. In July 2019 we repurchased 7,000 shares of our Common Stock at an aggregate cost of approximately $51,000. These purchases completed the 2018 Repurchase Program in which we repurchased the maximum number of our shares of 100,000 for a total of approximately $819,000.

 

During the nine-month period ended September 30, 2019, we used $1,240,000 for capital expenditures, compared to $1,757,000 during the same period in the prior year.  Capital expenditures for the balance of 2019 are expected to be approximately $500,000, some of which may be financed through our credit facilities with Capital One Bank or financed through independent third-party financial institutions. The remaining 2019 capital expenditures will likely be for machinery and equipment, tooling, and computer hardware and software.

 

Customer concentration

 

At September 30, 2019 and December 31, 2018, accounts receivable from The Home Depot was 28.1% and 32.6%, respectively, of our total accounts receivable. Additionally, revenue from The Home Depot during the three and nine-month periods ended September 30, 2019 and 2018 were 21.8% and 20.8%, and 35.1% and 28.1%, 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 or nine-month periods ended September 30, 2019 or 2018.

 

We believe the loss of The Home Depot would negatively impact our financial condition but would not affect our ability to remain a going concern.

 

NEW ACCOUNTING PRONOUNCEMENTS

 

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

 

We 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.

 

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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 September 30, 2019, 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 September 30, 2019, the Company’s management, including its CEO and CFO, concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level at that date.

 

Changes in Internal Control over Financial Reporting

 

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

 

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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

There have been no material changes to the legal proceedings’ disclosure described in our 2018 Form 10-K.

 

Item 1A. Risk Factors

 

There were no material changes to the risk factors previously disclosed in our 2018 Form 10-K.

 

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

 

               Maximum 
               Number 
           Total Number of   of shares 
           Shares Purchased as   that May Yet 
           Part of Publicly   Be Purchased 
   Total Number of   Average Price   Announced Plan   Under the Plan 
Period  Shares Purchased   Paid per Share   or Program (1)   or Program (1) 
July 1, 2019 – July 31, 2019   6,103   $8.23    6,103     
August 1, 2019 – August 31, 2019      $         
September 1, 2019 – September 30, 2019      $         

 

(1) On September 14, 2018, the Company publicly announced that its Board of Directors authorized a stock repurchase program and the Company adopted a written trading plan thereunder for the purpose of repurchasing up to 100,000 shares of its Common Stock. During July 2019, the Company completed the repurchase of the maximum number of shares permitted under the stock repurchase program and the trading plan.  

 

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.

 

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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: November 13, 2019 (Principal Financial and Chief Accounting Officer)

 

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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 Income and Comprehensive 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.

 

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