Company Quick10K Filing
P&F Industries
Price6.58 EPS2
Shares3 P/E4
MCap22 P/FCF-11
Net Debt-1 EBIT8
TEV21 TEV/EBIT3
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-06-30 Filed 2020-08-13
10-Q 2020-03-31 Filed 2020-05-18
10-K 2019-12-31 Filed 2020-03-30
10-Q 2019-09-30 Filed 2019-11-13
10-Q 2019-06-30 Filed 2019-08-09
10-Q 2019-03-31 Filed 2019-05-10
10-K 2018-12-31 Filed 2019-03-29
10-Q 2018-09-30 Filed 2018-11-09
10-Q 2018-06-30 Filed 2018-08-10
10-Q 2018-03-31 Filed 2018-05-11
10-K 2017-12-31 Filed 2018-03-29
10-Q 2017-09-30 Filed 2017-11-13
10-Q 2017-06-30 Filed 2017-08-11
10-Q 2017-03-31 Filed 2017-05-12
10-K 2016-12-31 Filed 2017-03-29
10-Q 2016-09-30 Filed 2016-11-14
10-Q 2016-06-30 Filed 2016-08-15
10-Q 2016-03-31 Filed 2016-05-13
10-K 2015-12-31 Filed 2016-03-30
10-Q 2015-09-30 Filed 2015-11-13
10-Q 2015-06-30 Filed 2015-08-14
10-Q 2015-03-31 Filed 2015-05-14
10-K 2014-12-31 Filed 2015-03-31
10-Q 2014-09-30 Filed 2014-11-13
10-Q 2014-06-30 Filed 2014-08-13
10-Q 2014-03-31 Filed 2014-05-14
10-K 2013-12-31 Filed 2014-03-28
10-Q 2013-09-30 Filed 2013-11-13
10-Q 2013-06-30 Filed 2013-08-13
10-Q 2013-03-31 Filed 2013-05-15
10-K 2012-12-31 Filed 2013-03-29
10-Q 2012-09-30 Filed 2012-11-14
10-Q 2012-06-30 Filed 2012-08-14
10-Q 2012-03-31 Filed 2012-05-11
10-K 2011-12-31 Filed 2012-03-30
10-Q 2011-09-30 Filed 2011-11-14
10-Q 2011-06-30 Filed 2011-08-15
10-Q 2011-03-31 Filed 2011-05-13
10-K 2010-12-31 Filed 2011-03-31
10-Q 2010-09-30 Filed 2010-11-12
10-Q 2010-06-30 Filed 2010-08-13
10-Q 2010-03-31 Filed 2010-05-17
10-K 2009-12-31 Filed 2010-04-27
8-K 2020-08-17 Enter Agreement, Exhibits
8-K 2020-08-11 Earnings, Exhibits
8-K 2020-05-20
8-K 2020-05-18
8-K 2020-05-15
8-K 2020-04-17
8-K 2020-03-30
8-K 2019-11-12
8-K 2019-10-25
8-K 2019-08-08
8-K 2019-06-18
8-K 2019-05-22
8-K 2019-05-09
8-K 2019-04-19
8-K 2019-03-27
8-K 2019-03-05
8-K 2019-02-14
8-K 2019-02-08
8-K 2018-11-16
8-K 2018-11-08
8-K 2018-10-24
8-K 2018-10-01
8-K 2018-08-09
8-K 2018-06-27
8-K 2018-05-23
8-K 2018-05-10
8-K 2018-03-27
8-K 2018-01-30

PFIN 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements
Note 1 - Business and Summary of Accounting Policies
Note 2 - Acquisition
Note 3 - (Loss) Income per Share
Note 4 - Stock - Based Compensation
Note 5 - Fair Value Measurements
Note 6 - Accounts Receivable and Allowance for Doubtful Accounts
Note 7 - Inventories
Note 8 - Goodwill and Other Intangible Assets
Note 9 - Debt
Note 10 - Cares Act
Note 11 - Dividend Payments
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
Part II - Other Information
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 tm2024629d1_ex31-1.htm
EX-31.2 tm2024629d1_ex31-2.htm
EX-32.1 tm2024629d1_ex32-1.htm
EX-32.2 tm2024629d1_ex32-2.htm

P&F Industries Earnings 2020-06-30

Balance SheetIncome StatementCash Flow
806448321602012201420172020
Assets, Equity
2518114-3-102012201420172020
Rev, G Profit, Net Income
20124-4-12-202012201420172020
Ops, Inv, Fin

10-Q 1 tm2024629d1_10q.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 June 30, 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth 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 August 6, 2020, there were 3,151,060 shares of the registrant’s Class A common stock outstanding.

 

 

 

 

 

 

P&F INDUSTRIES, INC.

 

FORM 10-Q

 

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020

 

TABLE OF CONTENTS

 

    PAGE
PART I — FINANCIAL INFORMATION
     
Item 1. Financial Statements 2
     
  Consolidated Balance Sheets as of June 30, 2020 (unaudited) and December 31, 2019 2
     
  Consolidated Statements of Operations and Comprehensive (Loss) Income for the three and six months ended June 30, 2020 and 2019 (unaudited) 4
     
  Consolidated Statements of Shareholders’ Equity for the three and six months ended June 30, 2020 and 2019 (unaudited) 5
     
  Consolidated Statements of Cash Flows for the six months ended June 30, 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 24
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 35
     
Item 4. Controls and Procedures 35
     
PART II — OTHER INFORMATION 36
     
Item 1. Legal Proceedings 36
     
Item 1A. Risk Factors 36
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 37
     
Item 3. Defaults Upon Senior Securities 37
     
Item 4. Mine Safety Disclosures 37
     
Item 5. Other Information 37
   
Item 6. Exhibits 37
     
Signature   38
     
Exhibit Index 39

 

 1 

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

   June 30, 2020   December 31, 2019 
   (unaudited)   (See Note 1) 
ASSETS          
CURRENT ASSETS          
           
Cash  $368,000   $380,000 
Accounts receivable — net   7,419,000    9,313,000 
Inventories   21,597,000    22,882,000 
Prepaid expenses and other current assets   2,226,000    1,497,000 
TOTAL CURRENT ASSETS   31,610,000    34,072,000 
           
PROPERTY AND EQUIPMENT          
Land   507,000    507,000 
Buildings and improvements   3,527,000    3,303,000 
Machinery and equipment   25,742,000    25,059,000 
    29,776,000    28,869,000 
Less accumulated depreciation and amortization   19,637,000    18,760,000 
NET PROPERTY AND EQUIPMENT   10,139,000    10,109,000 
           
GOODWILL   4,431,000    4,726,000 
           
OTHER INTANGIBLE ASSETS — net   6,512,000    8,259,000 
           
DEFERRED INCOME TAXES — net   878,000    216,000 
           
RIGHT-OF-USE ASSETS – OPERATING LEASES   3,636,000    3,859,000 
           
OTHER ASSETS — net   360,000    502,000 
           
TOTAL ASSETS  $57,566,000   $61,743,000 

 

See accompanying notes to consolidated financial statements (unaudited).

 

 2 

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

   June 30, 2020   December 31, 2019 
    (unaudited)    (See Note 1) 
LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
CURRENT LIABILITIES          
           
Short-term borrowings  $2,573,000   $5,648,000 
Accounts payable   3,170,000    1,843,000 
Accrued compensation and benefits   802,000    2,019,000 
Accrued other liabilities   1,154,000    1,568,000 
Current leased liabilities – operating leases   843,000    879,000 
Current maturities of long-term debt (PPP loan)   1,312,000     
TOTAL CURRENT LIABILITIES   9,854,000    11,957,000 
           
Noncurrent leased liabilities – operating leases   2,821,000    3,070,000 
Long-term debt, less current maturities (PPP loan)   1,618,000     
Other liabilities   143,000    210,000 
           
TOTAL LIABILITIES   14,436,000    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 – 4,423,000 at June 30, 2020 and 4,416,000 at December 31, 2019   4,423,000    4,416,000 
Class B - $1 par; authorized - 2,000,000 shares; no shares issued        
Additional paid-in capital   14,106,000    14,056,000 
Retained earnings   35,571,000    38,867,000 
Treasury stock, at cost – 1,273,000 shares at June 30, 2020 and at December 31, 2019   (10,213,000)   (10,213,000)
Accumulated other comprehensive loss   (757,000)   (620,000)
           
TOTAL SHAREHOLDERS’ EQUITY   43,130,000    46,506,000 
           
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $57,566,000   $61,743,000 

 

See accompanying notes to consolidated financial statements (unaudited).

 

 3 

 

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

(unaudited)

 

   Three months   Six months 
   ended June 30,   ended June 30, 
   2020   2019   2020   2019 
                 
Net revenue  $11,520,000   $14,798,000   $24,870,000   $29,120,000 
Cost of sales   8,472,000    9,290,000    17,339,000    18,331,000 
Gross profit   3,048,000    5,508,000    7,531,000    10,789,000 
Selling, general and administrative expenses   4,620,000    5,460,000    10,310,000    10,722,000 
Impairment of goodwill and other intangible assets   1,612,000        1,612,000     
Operating (loss) income   (3,184,000)   48,000    (4,391,000)   67,000 
Loss (gain) on sale of property and equipment   1,000    (7,824,000)   1,000    (7,817,000)
Other income   (31,000)       (31,000)    
Interest expense   41,000    68,000    97,000    131,000 
(Loss) income   (3,195,000)   7,804,000    (4,458,000)   7,753,000 
Income tax (benefit) expense   (814,000)   2,116,000    (1,319,000)   2,091,000 
Net (loss) income  $(2,381,000)  $5,688,000   $(3,139,000)  $5,662,000 
                     
Basic (loss) earnings per share  $(0.76)  $1.74   $(1.00)  $1.73 
Diluted (loss) earnings per share  $(0.76)  $1.71   $(1.00)  $1.70 
                     
Weighted average common shares outstanding:                    
                     
Basic   3,148,000    3,163,000    3,146,000    3,271,000 
Diluted   3,148,000    3,230,000    3,146,000    3,337,000 
                     
Net (loss) income  $(2,381,000)  $5,688,000   $(3,139,000)  $5,662,000 
Other comprehensive loss - foreign currency translation adjustment   (12,000)   (51,000)   (137,000)   (7,000)
Total comprehensive (loss) income  $(2,393,000)  $5,637,000   $(3,276,000)  $5,655,000 

 

See accompanying notes to consolidated financial statements (unaudited).

 

 4 

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)

 

Three months ended June 30, 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, April 1, 2020  $45,498,000    4,417,000   $4,417,000   $14,087,000   $37,952,000    (1,273,000)  $(10,213,000)  $(745,000)
                                         
Net loss   (2,381,000)               (2,381,000)            
                                         
Restricted common stock compensation   12,000    6,000    6,000    6,000                 
                                         
Stock-based compensation   13,000            13,000                 
                                         
Foreign currency translation adjustment   (12,000)                           (12,000)
                                         
Balance, June 30, 2020  $43,130,000    4,423,000   $4,423,000   $14,106,000   $35,571,000    (1,273,000)  $(10,213,000)  $(757,000)

 

Three months ended June 30, 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, April 1, 2019  $42,235,000    4,410,000   $4,410,000   $13,946,000   $34,404,000    (1,234,000)  $(9,897,000)  $(628,000)
                                         
Net income   5,688,000                5,688,000             
                                         
Restricted common stock compensation   13,000    6,000    6,000    7,000                 
                                         
Purchase of Class A common stock   (265,000)                   (32,000)   (265,000)    
                                         
Stock-based compensation   33,000            33,000                 
                                         
Dividends   (159,000)               (159,000)            
                                         
Foreign currency translation adjustment   (51,000)                           (51,000)
                                         
Balance, June 30, 2019  $47,494,000    4,416,000   $4,416,000   $13,986,000   $39,933,000    (1,266,000)  $(10,162,000)  $(679,000)

 

 

See accompanying notes to consolidated financial statements (unaudited).

 

 5 

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)

 

Six months ended June 30, 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   (3,139,000)               (3,139,000)            
                                         
Exercise of stock options   3,000    1,000    1,000    2,000                     
                                         
Restricted common stock compensation   25,000    6,000    6,000    19,000                 
                                         
Stock-based compensation   29,000            29,000                 
                                         
Dividends   (157,000)               (157,000)            
                                         
Foreign currency translation adjustment   (137,000)                           (137,000)
                                         
Balance, June 30, 2020  $43,130,000    4,423,000   $4,423,000   $14,106,000   $35,571,000    (1,273,000)  $(10,213,000)  $(757,000)

 

Six months ended June 30, 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 income   5,662,000                5,662,000             
                                         
Restricted common stock compensation   26,000    6,000    6,000    20,000                 
                                         
Purchase of Class A common stock   (3,467,000)                   (450,000)   (3,467,000)    
                                         
Stock-based compensation   62,000            62,000                 
                                         
Dividends   (317,000)               (317,000)            
                                         
Foreign currency translation adjustment   (7,000)                           (7,000)
                                         
Balance, June 30, 2019  $47,494,000    4,416,000   $4,416,000   $13,986,000   $39,933,000    (1,266,000)  $(10,162,000)  $(679,000)

 

See accompanying notes to consolidated financial statements (unaudited).

 

 6 

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

 

   Six months 
   ended June 30, 
   2020   2019 
Cash Flows from Operating Activities:          
Net (loss) income  $(3,139,000)  $5,662,000 
           
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:          
           
Non-cash and other charges:          
Depreciation and amortization   881,000    774,000 
Amortization of other intangible assets   386,000    344,000 
Rent expense from lease obligations   452,000    159,000 
Amortization of debt issue costs   8,000    17,000 
Amortization of consideration payable to a customer   135,000    135,000 
Recovery of losses on accounts receivable   (7,000)   (61,000)
Stock-based compensation   29,000    62,000 
Loss on sale of fixed assets   1,000    5,000 
Gain on sale of property and equipment       (7,817,000)
Restricted stock-based compensation   25,000    26,000 
Deferred income taxes   (656,000)   364,000 
Gain on lease obligation settlement   (31,000)    
Impairment of goodwill and other intangible assets   1,612,000     
Changes in operating assets and liabilities:          
Accounts receivable   1,882,000    48,000 
Inventories   1,206,000    (1,255,000)
Prepaid expenses and other current assets   (732,000)   (214,000)
Other assets       (5,000)
Accounts payable   1,332,000    149,000 
Accrued compensation and benefits   (1,215,000)   (1,040,000)
Accrued other liabilities and other current liabilities   (477,000)   1,832,000 
Payments on lease liabilities   (482,000)   (167,000)
Other liabilities   6,000    (8,000)
Total adjustments   4,355,000    (6,652,000)
Net cash provided by (used in) operating activities   1,216,000    (990,000)

 

See accompanying notes to consolidated financial statements (unaudited).

 

 7 

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

 

   Six months 
   ended June 30, 
   2020   2019 
Cash Flows from Investing Activities:          
Capital expenditures  $(915,000)  $(920,000)
Proceeds from disposal of property and equipment   1,000    8,760,000 
Net cash (used in) provided by investing activities   (914,000)   7,840,000 
           
Cash Flows from Financing Activities:          
Dividend payments   (157,000)   (317,000)
Proceeds from exercise of stock options   3,000     
Purchase of Class A common stock       (3,467,000)
Net payments relating to short-term borrowings   (3,074,000)   (1,915,000)
Repayments of long-term debt       (453,000)
Bank finance costs       (25,000)
Proceeds from PPP loan   2,929,000     
Net cash used in financing activities   (299,000)   (6,177,000)
           
Effect of exchange rate changes on cash   (15,000)    
Net (decrease) increase in cash   (12,000)   673,000 
Cash at beginning of period   380,000    999,000 
Cash at end of period  $368,000   $1,672,000 
           
Supplemental disclosures of cash flow information:          
           
Cash paid for:          
Interest  $97,000   $112,000 
Cash paid for amounts included in the measurement of operating lease liabilities  $5,000   $21,000 
           
Non-cash information:          
Right of Use (“ROU”) assets recognized for new operating lease liabilities  $140,000   $2,074,000 
Operating lease liability related to ROU assets recognized upon adoption of ASC 842  $   $418,000 

 

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 consolidated 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 consolidated 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 to the Company’s consolidated financial statements for further discussion.

 

 9 

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

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

 

The Company - Continued

 

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, and Thaxton.  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 its industrial customers, designing and manufacturing products from finished components to complete turnkey systems to be sold under their own brand names.

 

COVID-19

 

On March 11, 2020, the World Health Organization designated the recent novel coronavirus (“COVID-19”) as a global pandemic. The Company continues to actively monitor COVID-19 and its continued impact on its operations and financial results. To date, there has been minimal disruption to the Company’s supply chain network, and all its manufacturing plants are currently open. The Company is also working closely with its business units, external business partners and customers to minimize the continued impact on its business.

 

Due in large part to shelter-in-place restrictions that were implemented in late March and early April, as well as decreases in travel and customer consumption behavior, the Company experienced a reduction in its net sales and earnings per share during the second quarter of 2020. It is too early to determine what the financial impacts from COVID-19 will be on the Company’s businesses in the future.

 

 10 

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

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

 

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 outflows 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 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 (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 10 – CARES Act to the Company’s consolidated financial statements for further discussion.

 

For the three and six-month periods ended June 30, 2020, the Company incurred net losses of $2,381,000, and $3,139,000, respectively. The Company, at June 30, 2020 has working capital of $21,756,000 and availably on its bank facility of $12,249,000.

 

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 June 30, 2020 and December 31, 2019, accounts receivable from The Home Depot was 34.9% and 27.2%, respectively, of total accounts receivable. Additionally, revenue from The Home Depot during the three and six-month periods ended June 30, 2020 and 2019 were 24.8% and 23.5%, and 23.0% and 20.3%, respectively, of total revenue. There were no other customers that accounted for more than 10% of consolidated revenue or accounts receivable during the three and six-month periods ended June 30, 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.

 

 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 2019 Form 10-K.

 

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 (previous standard).

 

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 six months ended June 30, 2020.

 

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

 

For the six-month periods ended June 30, 2020 and 2019, the Company had $452,000 and $159,000, 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 June 30, 2020:

 

   As of June 30, 2020 
2020 (excluding the six months ended June 30, 2020)  $432,000 
2021   859,000 
2022   769,000 
2023   657,000 
2024   388,000 
Thereafter   1,049,000 
Total operating lease payments   4,154,000 
Less imputed interest   (490,000)
Total operating lease liabilities  $3,664,000 
      
Weighted average remaining lease term   6.3 years 
Weighted average discount rate   4.3%

 

 12 

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

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

 

Revenue Recognition

 

The Company’s revenue recognition policies are detailed in its 2019 Form 10-K. The following tables present the Company’s revenues recognized under ASC Topic 606, “Revenue from Contracts with Customers”, for the three and six-month periods ended June 30, 2020 and 2019.

 

Florida Pneumatic

 

   Three months ended June 30, 
   2020   2019   Decrease 
   Revenue  

Percent of 

revenue

   Revenue  

Percent of

revenue

   $   % 
Retail  $2,860,000    33.1%  $3,427,000    31.8%  $(567,000)   (16.5)%
Automotive   2,928,000    33.9    3,759,000    34.8    (831,000)   (22.1)
Industrial   817,000    9.4    1,223,000    11.3    (406,000)   (33.2)
Aerospace   1,934,000    22.4    2,231,000    20.7    (297,000)   (13.3)
Other   101,000    1.2    146,000    1.4    (45,000)   (30.8)
Total  $8,640,000    100.0%  $10,786,000    100.0%  $(2,146,000)   (19.9)%

 

   Six months ended June 30, 
   2020   2019   Decrease 
       Percent of       Percent of         
   Revenue   revenue   Revenue   revenue   $   % 
Retail  $5,851,000    31.3%  $6,139,000    28.9%  $(288,000)   (4.7)%
Automotive   6,160,000    33.0    7,624,000    35.9    (1,464,000)   (19.2)
Industrial   1,879,000    10.1    2,547,000    12.0    (668,000)   (26.2)
Aerospace   4,533,000    24.3    4,591,000    21.6    (58,000)   (1.3)
Other   247,000    1.3    325,000    1.6    (78,000)   (24.0)
Total  $18,670,000    100.0%  $21,226,000    100.0%  $(2,556,000)   (12.0)%

 

Hy-Tech

 

   Three months ended June 30, 
   2020   2019   (Decrease) increase 
   Revenue  

Percent of

revenue

   Revenue  

Percent of

revenue

   $   % 
ATP  $569,000    19.8%  $1,912,000    47.7%  $(1,343,000)   (70.2)%
OEM   1,202,000    41.7    1,622,000    40.4    (420,000)   (25.9)
PTG   1,021,000    35.5    242,000    6.0    779,000    321.9 
Other   88,000    3.0    236,000    5.9    (148,000)   (62.7)
Total  $2,880,000    100.0%  $4,012,000    100.0%  $(1,132,000)   (28.2)%

 

   Six months ended June 30, 
   2020   2019   (Decrease) increase 
   Revenue  

Percent of

revenue

   Revenue  

Percent of

revenue

   $   % 
ATP  $1,629,000    26.3%  $3,898,000    49.4%  $(2,269,000)   (58.2)%
OEM   2,641,000    42.6    2,959,000    37.5    (318,000)   (10.7)
PTG   1,757,000    28.3    597,000    7.6    1,160,000    194.3 
Other   173,000    2.8    440,000    5.5    (267,000)   (60.7)
Total  $6,200,000    100.0%  $7,894,000    100.0%  $(1,694,000)   (21.5)%

 

 13 

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

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

 

Recently Adopted Accounting Pronouncements

 

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 became 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.

 

No other new accounting pronouncement issued or effective during the fiscal year had or is expected to have a material impact on our consolidated financial statements or disclosures.

 

 14 

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

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 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 statements of operations and comprehensive (loss) 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, during the second quarter of 2020, Hy-Tech recorded a gain of approximately $31,000 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. This goodwill is part of the Hy-Tech reporting unit. See Note 8 regarding impairment of goodwill during the three months ended June 30, 2020. 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 

 

 15 

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

NOTE 2 – ACQUISITION – (Continued)

 

The following unaudited pro-forma combined financial information gives effect to the Gears Acquisition 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 Gears 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 June 30, 2019

  

For the

six-month

period ended June 30, 2019

 
Revenue  $15,586,000   $30,649,000 
Net income  $5,842,000   $5,951,000 
Earnings per share – basic  $1.79   $1.82 
Earnings per share – diluted  $1.76   $1.78 

 

NOTE 3 – (LOSS) INCOME PER SHARE

 

Basic (loss) income per common share is based only on the average number of shares of Common Stock outstanding for the periods. Diluted (loss) income 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) income 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) income per common share:

 

   Three months ended   Six months ended 
   June 30,   June 30, 
   2020   2019   2020   2019 
Numerator for basic and diluted loss per common share:                    
Net (loss) income  $(2,381,000)  $5,688,000   $(3,139,000)  $5,662,000 
Denominator:                    
Denominator for basic (loss) earnings per share - weighted average common shares outstanding   3,148,000    3,163,000    3,146,000    3,271,000 
Dilutive securities (1)       67,000        66,000 
Denominator for diluted (loss) income per share - weighted average common shares outstanding   3,148,000    3,230,000    3,146,000    3,337,000 

 

(1)Dilutive securities consist of “in the money” stock options. In the event of a loss, options are considered anti-dilutive and therefore not included in the calculation of diluted loss per share.

 

 16 

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

NOTE 3 – (LOSS) INCOME PER SHARE – (Continued)

 

At June 30, 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   Six months ended 
   June 30,   June 30, 
   2020   2019   2020   2019 
Weighted average anti-dilutive stock options outstanding   186,000    8,000    166,000    8,000 

 

NOTE 4 – STOCK-BASED COMPENSATION

 

There were no options granted or issued during the six-month period ended June 30, 2020.

 

The following is a summary of the changes in outstanding options during the six-month period ended June 30, 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   (4,158)   5.34           
Expired                  
Outstanding, June 30, 2020   220,917   $6.34    4.3    53,965 
Vested, June 30, 2020   186,415   $6.16    3.7    53,965 

 

   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   (498)   4.41 
Non-vested options, June 30, 2020   34,502   $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 June 30, 2020 was 54,345. At June 30, 2020, there were 189,917 options outstanding issued under the 2012 Plan and 31,000 options outstanding issued under the 2002 Stock Incentive Plan.

 

 17 

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

NOTE 4 – STOCK-BASED COMPENSATION - (Continued)

 

Restricted Stock

 

On May 20, 2020, 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 $5.14 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 $32,000 to selling, general and administrative expenses through May 2021.

 

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 could not be traded earlier than the first anniversary of the grant date. The Company ratably amortized 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.

 

 18 

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

NOTE 5 – FAIR VALUE MEASUREMENTS

 

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

 

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

 

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

 

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

 

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

 

As of June 30, 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:

 

   June 30, 2020   December 31, 2019 
Accounts receivable  $7,646,000   $9,547,000 
Allowance for doubtful accounts, sales discounts and chargebacks   (227,000)   (234,000)
   $7,419,000   $9,313,000 

 

NOTE 7 – INVENTORIES

 

Inventories consist of:

 

   June 30, 2020   December 31, 2019 
Raw material  $2,398,000   $2,178,000 
Work in process   1,214,000    2,302,000 
Finished goods   17,985,000    18,402,000 
   $21,597,000   $22,882,000 

 

 19 

 

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

NOTE 8 – GOODWILL AND OTHER INTANGIBLE ASSETS

 

Goodwill

 

Changes in the carrying amount of goodwill are as follows:

 

Balance, January 1, 2020  $4,726,000 
Currency translation adjustment   (11,000)
Impairment of goodwill   (284,000)
Balance, June 30, 2020  $4,431,000 

 

Goodwill is evaluated for impairment at least annually. A more frequent evaluation is performed if events or circumstances indicate that impairment could have occurred. During the second quarter of 2020, the Company determined that a triggering event occurred as it concluded that the impact of COVID-19 on its sales, profitability and cash flows resulted in a reduction to its operating forecasts reflecting the uncertainty of the current environment.  As a result, the Company performed an interim goodwill impairment test.

 

After completion of the interim goodwill impairment test, the Company concluded that Hy-Tech’s goodwill was fully impaired and recorded a non-cash goodwill impairment charge of $284,000 this quarter. Consistent with the procedures followed in the Company’s annual impairment test, it estimated the fair values of each of its reporting units using the income approach.  The income approach uses projected future cash flows that are discounted using a weighted average cost of capital analysis that reflects current market conditions.

 

Other intangible assets

 

   June 30, 2020   December 31, 2019 
   Cost   Accumulated
amortization
   Net book
value
   Cost   Accumulated
amortization
   Net book
value
 
Other intangible assets:                        
Customer relationships (1)  $6,475,000   $2,763,000   $3,712,000   $7,825,000   $2,724,000   $5,101,000 
Trademarks and trade names (1)   2,169,000        2,169,000    2,375,000        2,375,000 
Trademarks and trade names   200,000    52,000    148,000    200,000    45,000    155,000 
Engineering drawings   330,000    232,000    98,000    330,000    225,000    105,000 
Non-compete agreements (1)   324,000    242,000    82,000    331,000    235,000    96,000 
Patents   1,286,000    983,000    303,000    1,405,000    978,000    427,000 
Totals  $10,784,000   $4,272,000   $6,512,000   $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.

 

 20 

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

NOTE 8 – GOODWILL AND OTHER INTANGIBLE ASSETS - (Continued)

 

At June 30, 2020, based primarily on the impact of COVID-19 on the Company’s financial results, the Company determined that a triggering event occurred. As a result, the Company completed an interim impairment test, which resulted in non-cash impairment charges of $183,000 against the Universal Air Tool trade name; $88,000 against the NUMATX patent; and $1,057,000 against Hy-Tech’s customer relationships.

 

If events or circumstances change that would more likely than not further reduce the fair value of the remaining intangible assets, we may be required to record additional impairment charges, which could have a material effect on future results of operations and financial condition.

 

The Company estimated the fair value of the NUMATX patent, and its Universal Air Tool (“UAT”) trade name based on an income approach using the relief-from-royalty method.  This approach is dependent upon a number of factors, including estimates of future growth and trends, royalty rates, discount rates and other variables.  For the interim impairment test, its estimates of future revenue and profitability associated with NUMATX and UAT were significantly reduced, primarily reflecting the impact of COVID-19.  The Company reduced the royalty rate used to estimate the fair value, reflecting the impact of the uncertain environment resulting from COVID-19.  Additionally, the weighted average cost of capital used to discount the cash flows for the interim goodwill impairment test was slightly higher than the last annual test, also reflecting the increasing uncertainty resulting from COVID-19. Additionally, the Company estimated the fair value of Hy-Tech’s customer relationships based on the discounted value of future cash flows and determined that, primarily for the same reasons noted above related to impairment of the NUMATX patent and the UAT trade name, Hy-Tech’s customer relationships were fully impaired.

 

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

 

Three months ended June 30,   Six months ended June 30, 
2020   2019   2020   2019 
$191,000   $172,000   $386,000   $344,000 

 

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

 

   June 30, 2020   December 31, 2019 
Customer relationships   8.0    8.7 
Trademarks and trade names   11.0    11.5 
Engineering drawings   6.6    7.1 
Non-compete agreements   3.4    3.7 
Patents   5.6    7.1 

 

Amortization expense for the balance of 2020, and for each of the next five years and thereafter is estimated to be as follows:

 

2020  $316,000 
2021   629,000 
2022   627,000 
2023   624,000 
2024   575,000 
2025   546,000 
Thereafter   1,026,000 
   $4,343,000 

 

 21 

 

 

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 London Interbank Offered Rate (“LIBOR”) 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.

 

At June 30, 2020, short-term or Revolver borrowing was $2,573,000, compared to $5,648,000, at December 31, 2019. Applicable Margin Rates at June 30, 2020 and December 31, 2019 for LIBOR and Base Rates were 1.50% and 0.50%, respectively. Additionally, at June 30, 2020 and December 31, 2019, there was approximately $12,249,000 and $9,200,000, respectively, available to the Company under its Revolver arrangement.

 

The average balance of short-term borrowings during the three and six-month periods ended June 30, 2020 and 2019 were $5,347,000 and $5,812,000, and $6,083,000 and $5,085,000, respectively.

 

NOTE 10 – CARES Act

 

On April 20, 2020, the Company received a $2.9 million PPP loan, as provided pursuant to the CARES Act and administered by the SBA. The PPP Loan, which is unsecured and guaranteed by the SBA, was designed to create economic stimulus by providing additional operating capital to small businesses in the U.S., such as P&F. To facilitate the PPP Loan, the Company entered\into a Promissory Note dated April 17, 2020, with BNB Bank as the lender (the “Lender”) (the “PPP Promissory Note”).

 

Under the terms of the CARES Act, as amended by the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”), the Company is eligible to apply for and receive forgiveness for all or a portion of the PPP Loan. Such forgiveness will be determined, subject to limitations, based on the use of the loan proceeds for certain permissible purposes as set forth in the PPP, including, but not limited to, payroll costs (as defined under the PPP) and mortgage interest, rent or utility costs (collectively, “Qualifying Expenses”) incurred during the 24 weeks subsequent to funding, and on the maintenance of employee and compensation levels, as defined, following the funding of the PPP Loan. The Company believes it has used the proceeds of the PPP Loan for Qualifying Expenses. However, no assurance is provided that the Company will be able to obtain forgiveness of the PPP Loan in whole or in part. Any amounts that are not forgiven incur interest at 1.0% per annum and monthly repayments of principal and interest are deferred until the SBA makes a determination on forgiveness. While the PPP Loan currently has a two-year maturity, pursuant to the Flexibility Act, the Company may request a five-year maturity from BNB Bank.

 

As of June 30, 2020, the current maturities of long-term debt pursuant to the PPP Loan was $1,312,000 and the long-term debt, less current maturities pursuant to the PPP Loan was $1,618,000.

 

 22 

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

NOTE 11 – DIVIDEND PAYMENTS

 

The Company’s Board of Directors elected not to issue a quarterly dividend during the three-month period ended June 30, 2020.

 

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.

 

 23 

 

 

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

 

 24 

 

 

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 to the Company’s consolidated financial statements 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, and Thaxton. 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.

 

 25 

 

 

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

 

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.

 

 26 

 

 

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 consolidated 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 second quarter 2020 results of operations were:

 

  · Ongoing negative effects of COVID-19 on revenue and income;  

 

  · Impairment of goodwill and other intangible assets;  

 

  · Production halt  by Boeing of its 737 MAX and significant reduction in activity at many commercial and military manufacturing facilities;

 

  · Weakness in oil and gas exploration.

 

TRENDS AND UNCERTAINTIES

 

COVID-19 PANDEMIC

 

On March 11, 2020, the World Health Organization designated the recent novel coronavirus, or COVID-19, as a global pandemic. COVID-19 was first detected in Wuhan City, Hubei Province, China and continued to spread, significantly impacting various markets around the world, including the United States. Various policies and initiatives have been implemented to reduce the global transmission of COVID-19.

 

The impact of the COVID-19 virus on the global economy, particularly within the U.S., has had a material impact on our results during the first six months of 2020. In March 2020, nearly all of the United States, United Kingdom and much of Europe, had ordered non-essential businesses to stop physical operations and ordered its residents to remain home or “shelter-in-place”, in order to attempt to control the impact of this pandemic. While we are currently able to continue operations at all of our locations, the COVID-19 pandemic has, for the first six months of 2020, significantly impacted orders and revenue. Further, we believe this pandemic could continue to negatively affect our businesses in the future. However, our manufacturing facilities are currently open. Staffing levels remain reduced at all of our locations across the country and in the United Kingdom as we continue to monitor the latest COVID-19 related public health and government guidance. As a result, at some of our locations, many of our office-based employees continue to work remotely where possible. We are closely monitoring the situation and taking actions to protect the safety of our employees and communities. For example, among other things, throughout the organization 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.

 

 27 

 

 

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

 

TRENDS AND UNCERTAINTIES - (Continued)

 

BOEING/AEROSPACE

 

The current halt in production of Boeing’s 737 MAX and a dramatic reduction in staffing levels across all of its facilities due to the COVID pandemic has reduced production activity dramatically at Boeing. In addition, production of military and commercial aircraft has also slowed as well due to COVID concerns. As long as the 737 MAX is grounded, it will likely continue to have an adverse effect on our revenue. However, as all other commercial and military production lines throughout the United States come back online, an increase in our revenue should follow.

 

TARIFFS

 

Based on arrangements 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.

 

TECHNOLOGIES

 

We believe that over time, several newer technologies and features may have a greater impact on the market for our traditional pneumatic tool offerings than currently exists. 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.

 

RESULTS OF OPERATIONS

 

REVENUE

 

During the second quarter of 2020, nearly all of our product lines were adversely affected by the global COVID-19 pandemic. Business closures and travel restrictions in the United States and Europe resulted in greatly reduced orders and revenues for the three and six-month periods ended June 30, 2020.

 

The tables below provide an analysis of our net revenue for the three and six-month periods ended June 30, 2020 and 2019:

 

Consolidated

 

   Three months ended June 30, 
           Decrease 
   2020   2019   $   % 
Florida Pneumatic  $8,640,000   $10,786,000   $(2,146,000)   (19.9)%
Hy-Tech   2,880,000    4,012,000    (1,132,000)   (28.2)
Consolidated  $11,520,000   $14,798,000   $(3,278,000)   (22.2)%

 

   Six months ended June 30, 
           Decrease 
   2020   2019   $   % 
Florida Pneumatic  $18,670,000   $21,226,000   $(2,556,000)   (12.0)%
Hy-Tech   6,200,000    7,894,000    (1,694,000)   (21.5)
Consolidated  $24,870,000   $29,120,000   $(4,250,000)   (14.6)%

 

 28 

 

 

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

 

RESULTS OF OPERATIONS - (Continued)

 

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 June 30, 
   2020   2019   Decrease 
   Revenue   Percent of 
revenue
   Revenue   Percent of
revenue
   $   % 
Retail  $2,860,000    33.1%  $3,427,000    31.8%  $(567,000)   (16.5)%
Automotive   2,928,000    33.9    3,759,000    34.8    (831,000)   (22.1)
Industrial   817,000    9.4    1,223,000    11.3    (406,000)   (33.2)
Aerospace   1,934,000    22.4    2,231,000    20.7    (297,000)   (13.3)
Other   101,000    1.2    146,000    1.4    (45,000)   (30.8)
Total  $8,640,000    100.0%  $10,786,000    100.0%  $(2,146,000)   (19.9)%

 

Stated as a percentage, Industrial incurred the largest decline this quarter compared to the same period a year ago, declining 33.2%, which was driven by several factors, including the COVID-19 pandemic, the ongoing sluggishness in the oil and gas sector and a reduction in orders from a large customer this quarter, compared to second quarter 2019. In addition to the adverse impact caused by the pandemic, Automotive revenue declined this quarter, compared to the same three-month period in 2019, due primarily to two factors: (a) a decline in our United Kingdom (“UK”) operations of $508,000, driven by the pandemic, and (b) the loss of a large domestic distributer/customer. The decline in Retail revenue we believe was due to reduced in-store traffic at The Home Depot, again due to COVID-19. The primary cause for the decline in the second quarter Aerospace revenue, compared to the same period in 2019, is the reduction in production by Boeing of certain civilian aircraft.

 

   Six months ended June 30, 
   2020   2019   Decrease 
       Percent of       Percent of         
   Revenue   revenue   Revenue   revenue   $   % 
Retail  $5,851,000    31.3%  $6,139,000    28.9%  $(288,000)   (4.7)%
Automotive   6,160,000    33.0    7,624,000    35.9    (1,464,000)   (19.2)
Industrial   1,879,000    10.1    2,547,000    12.0    (668,000)   (26.2)
Aerospace   4,533,000    24.3    4,591,000    21.6    (58,000)   (1.3)
Other   247,000    1.3    325,000    1.6    (78,000)   (24.0)
Total  $18,670,000    100.0%  $21,226,000    100.0%  $(2,556,000)   (12.0)%

 

The decline in Florida Pneumatic’s fiscal 2020 year-to-date revenue of 12%, compared to the same period in 2019, is due to similar factors that drove Florida Pneumatic’s second quarter’s results. The global pandemic was the key factor for the decline in our six-month revenue. Of note, our UK Automotive revenue declined $668,000 or approximately 46% of the change, the balance occurring domestically, driven by the loss of the large domestic distributor/customer. The major decline in the drilling rigs and the production of oil and gas and sluggish orders from ancillary businesses to the aerospace industry, have significantly impacted our Industrial revenue. After an increase in Retail revenue during the first quarter of 2020, the pandemic adversely affected revenue during the second quarter. Orders from Boeing, a major Jiffy customer began to slow in late first quarter and has continued to date. The issues at Boeing relating to the 737 MAX and other civilian aircraft, we believe are the cause for decline. Further, we believe that when production of the 737 MAX resumes orders levels should improve.

 

 29 

 

 

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

 

RESULTS OF OPERATIONS - (Continued)

 

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. In addition to Engineered Solutions, 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 June 30, 
   2020   2019   (Decrease) increase 
   Revenue   Percent of
revenue
   Revenue   Percent of
revenue
   $   % 
ATP  $569,000    19.8%  $1,912,000    47.7%  $(1,343,000)   (70.2)%
OEM   1,202,000    41.7    1,622,000    40.4    (420,000)   (25.9)
PTG   1,021,000    35.5    242,000    6.0    779,000    321.9 
Other   88,000    3.0    236,000    5.9    (148,000)   (62.7)
Total  $2,880,000    100.0%  $4,012,000    100.0%  $(1,132,000)   (28.2)%

 

In addition to the negative impact on all lines of business at P&F caused by COVID-19, the recent collapse of the oil and gas sector in the United States has severely affected our ATP revenue of tools, parts, sockets and accessories this quarter. According to Baker Hughes Inc. the number of operating drilling rigs were 265 at June 28, 2020, compared to 967 at June 28, 2019. At July 24, 2020 the rig count decreased to 251. Until such time when the market price of oil attains levels where it is profitable for oil and gas producing companies to substantially resume operations, the market will remain suppressed. The growth in PTG revenue was driven by the gear businesses acquired in fourth quarter of 2019.

 

   Six months ended June 30, 
   2020   2019   (Decrease) increase 
   Revenue   Percent of
revenue
   Revenue   Percent of
revenue
   $   % 
ATP  $1,629,000    26.3%  $3,898,000    49.4%  $(2,269,000)   (58.2)%
OEM   2,641,000    42.6    2,959,000    37.5    (318,000)   (10.7)
PTG   1,757,000    28.3    597,000    7.6    1,160,000    194.3 
Other   173,000    2.8    440,000    5.5    (267,000)   (60.7)
Total  $6,200,000    100.0%  $7,894,000    100.0%  $(1,694,000)   (21.5)%

 

The decline in Hy-Tech’s total net revenue for the six-month period ended June 30, 2020, compared to the same period in 2019, was the result of the global pandemic, the severe downturn of the oil and gas market, and certain key customers currently in over-stock positions that are hesitant to expand their inventory levels. Additionally, during the first quarter of 2020, as the market for our ATP lines began to encounter the effects of the decline in demand in the oil and gas exploration sector, we made a decision to focus a greater portion of our marketing and product development efforts to our Engineered Solutions products offering. 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. Further, the transition and relocation from Illinois to our facilities in Pennsylvania of the gears businesses acquired in late October 2019 continued through April 2020, resulting in lower than projected PTG revenue and profits during the first third of this year. The process of relocation of equipment and the set-up of general operations was completed during the second quarter. As such, we believe that as travel and other restriction are removed, PTG revenue should improve.

 

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

 

GROSS MARGIN/PROFIT

 

   Three months ended June 30,   Decrease 
   2020   2019   Amount       % 
Florida Pneumatic  $3,208,000   $4,185,000   $(977,000)        (23.3)%
As percent of respective revenue   37.1%   38.8%   (1.7)%   pts      
Hy-Tech  $(160,000)  $1,323,000   $(1,483,000)        (112.1)
As percent of respective revenue   (5.6)%   33.0%   (38.6)%   pts      
Total  $3,048,000   $5,508,000   $(2,460,000)        (44.7)%
As percent of respective revenue   26.5%   37.2%   (10.7)%   pts      

 

Factors contributing to the 1.7 percentage point decline in Florida Pneumatic’s gross margin this quarter, compared to the same three-month period ended June 30, 2019, was due mostly to weak manufacturing overhead absorption at Jiffy during the second quarter of 2020. The decline in Jiffy revenue, as discussed above effectively caused a reduction in production, which in turn has caused manufacturing absorption to decline. Florida Pneumatic’s gross margin also declined due to overall product mix, as the decline in the higher gross margin lines of Aerospace and Industrial drove gross margin lower this quarter, compared to the same period a year ago. Lastly, its operations in the United Kingdom encountered lower gross margin this quarter, due primarily to mix.

 

During the second quarter of 2020 Hy-Tech had negative gross margin. Factors that caused the decline include:

 

·Weak absorption of manufacturing overhead

 

oweak manufacturing overhead absorption, due in part to labor hours being utilized in connection with the relocation of the gear businesses, and

 

olower than planned manufacturing caused primarily by the COVID-19 global pandemic;

 

·general mix of products sold during the quarter;

 

·physical inventory adjustment;

 

·an increase in charges relating to obsolete, slow moving inventory (“OSMI”).

 

   Six months ended June 30,   Decrease 
   2020   2019   Amount       % 
Florida Pneumatic  $6,984,000   $8,192,000   $(1,208,000)        (14.7)%
As percent of respective revenue   37.4%   38.6%   (1.2)%   pts      
Hy-Tech  $547,000   $2,597,000   $(2,050,000)       (78.9)
As percent of respective revenue   8.8%   32.9%   (24.1)%   pts      
Total  $7,531,000   $10,789,000   $(3,258,000)       (30.2)%
As percent of respective revenue   30.3%   37.1%   (6.8)%   pts      

 

Our gross margin for the six-month period ended June 30, 2020 was 6.8 percentage points below the same period a year ago. In addition to the factors discussed above, during the first six-months of fiscal 2020 our consolidated gross margin was impacted by lower than expected gross margin on the sale of PTG products due primarily to start-up issues in the new facility, increases in costs incurred from outside vendors for certain manufacturing processes and increased duty charged on certain imported parts.

 

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

 

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 second quarter of 2020, our SG&A declined $840,000, to $4,620,000, from $5,460,000 for the same three-month period in 2019. The most significant factor driving the decrease in our SGA was a reduction in variable expenses of $489,000. Variable expenses include among other things, commissions, freight out, travel, advertising, shipping supplies and warranty costs. Additionally, there was a reduction of approximately $444,000 of compensation expenses, which is comprised of base salaries and wages, accrued performance-based bonus incentives and associated payroll taxes and employee benefits. Partially offsetting the above-mentioned declines in SGA were increases in professional fees of $72,000 and corporate expenses of $58,000.

 

SG&A for the six-month period ended June 30, 2020 declined $412,000 to $10,310,000 from $10,722,000. Significant items driving this net decrease were a reduction of $423,000 in compensation expenses and variable expenses declined $607,000. The above being partially offset by an increase in professional fees of $532,000 which consisted primarily of costs incurred with the relocation, transition and temporary labor and recruiting costs incurred in connection with the acquisition of the gear businesses in late October 2019. Additionally, rent, and bad debt expenses increased $28,000 and $33,000, respectively.

 

GOODWILL AND INTANGIBLE ASSETS IMPARMENT

 

We recorded goodwill and intangible asset impairment charges totaling $1,612,000, with $284,000 related to goodwill and $1,328,000 related to customer relationships, patents and trade name. See Note 8 – Goodwill and other intangible assets to the consolidated financial statements for additional information.

 

OTHER INCOME

 

Other income for the current quarter and year to date consists of a grant received at our United Kingdom operation from Her Majesty’s Government, which is not required to be repaid.

 

INTEREST

 

   Three months ended June 30,   Increase (decrease) 
   2020   2019   Amount   % 
Interest expense attributable to:                    
Short-term borrowings  $31,000   $63,000   $(32,000)   (50.8)%
PPP loan   6,000    ---    6,000    NA 
Term loans   ---    4,000    (4,000)   (100.0)
Amortization expense of debt issue costs   4,000    1,000    3,000    300.0 
                     
Total  $41,000   $68,000   $(27,000)   (39.7)%

 

   Six months ended June 30,   Increase (decrease) 
   2020   2019   Amount   % 
Interest expense attributable to:                    
Short-term borrowings  $83,000   $105,000   $(22,000)   (21.0)%
PPP loan   6,000    ---    6,000    NA 
Term loans   ---    9,000    (9,000)   (100.0)
Amortization expense of debt issue costs   8,000    17,000    (9,000)   (52.9)
                     
Total  $97,000   $131,000   $(34,000)   (26.0)%

 

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

 

INTEREST – (Continued)

 

The Applicable Margin, as defined in our Credit Agreement was the same during the three-month periods ended June 30, 2020 and 2019. While our average monthly borrowings were slightly higher during the three-month period ended June 30, 2020, compared to the same three-month period in 2019, that average interest rate on borrowed funds decreased approximately 1.6 %, resulting in the decrease in short-term interest expense.

 

As discussed in Note 10 – CARES Act to the Company’s consolidated financial statements, in late April 2020, we borrowed approximately $2.9 million from BNB Bank as provided under the Coronavirus Aid, Relief and Economic Security (“CARES”) Act. The PPP Loan, as defined in Note 10, accrues interest at a rate of 1.0% per annum. Pursuant to the Flexibility Act, as defined in Note 10, interest on any unforgiven amount is deferred until the forgiveness determination is made by the SBA.

 

During the three and six-month periods ended June 30, 2019, a term loan existed. This term loan was fully paid off in June 2019. Lastly, 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.

 

The average balance of short-term borrowings during the three and six-month periods ended June 30, 2020 and 2019 were $5,347,000 and $5,812,000, and $6,083,000 and $5,085,000, respectively.

 

INCOME TAXES

 

On March 27, 2020 the CARES Act was signed into law. The CARES 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 and six-month periods ended June 30, 2020 were a tax benefit of 25.5% and 29.6%, respectively, compared to tax expense of 27.1% and 27.0% for the three and six-month periods ended June 30, 2019, respectively. Included in the three-month period ended June 30, 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.

 

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, existing working capital 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:

 

   June 30, 2020   December 31, 2019 
Working capital  $21,756,000   $22,115,000 
Current ratio   3.21 to 1    2.85 to 1 
Shareholders’ equity  $43,130,000   $46,506,000 

 

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

 

LIQUIDITY AND CAPITAL RESOURCES - (Continued)

 

Credit facility

 

Our Credit Facility is discussed in Note 9 to these 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. See Note 10 to these consolidated financial statements for further discussion.

 

Cash flows

 

During the six-month period ended June 30, 2020; our net cash decreased to $368,000 from $380,000 at December 31, 2019. Our total Bank debt at June 30, 2020 was $5,503,000 compared to $5,648,000 at December 31, 2019, The total debt to total book capitalization (total debt divided by total debt plus equity); at June 30, 2020 was 11.3% compared to 10.8% at December 31, 2019.

 

At June 30, 2020, our short-term or Revolver borrowing was $2,573,000 compared to $5,648,000, at December 31, 2019. Additionally, at June 30, 2020 and December 31, 2019, there was approximately $12,249,000 and $9,200,000, respectively, available to the Company under its Revolver arrangement.

 

During the six-month period ended June 30, 2020, we used $915,000 for capital expenditures, compared to $920,000 during the same period in the prior year. Capital expenditures for the balance of 2020 are expected to be approximately $200,000, 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.

 

Customer concentration

 

At June 30, 2020 and December 31, 2019, accounts receivable from The Home Depot was 34.9% and 27.2%, respectively, of our total accounts receivable. Additionally, revenue from The Home Depot during the three and six-month periods ended June 30, 2020 and 2019 were 24.8% and 23.5%, and 23.0% and 20.3%, 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 June 30, 2020 and 2019.

 

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.

 

 34 

 

 

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 June 30, 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 June 30, 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.

 

 35 

 

 

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 (as amended by our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020) 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 did delay supply from certain of the Company’s overseas suppliers during the first quarter. These disruptions ceased during the second quarter. However, should these disruptions resume, the Company would be 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.

 

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PART II - OTHER INFORMATION

 

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.

 

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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: August 13, 2020   (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
     
10.1   Note, dated April 17, 2020 by the Registrant in favor of BNB Bank (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, dated April 17, 2020).
     
10.2   Payroll Protection Program Consent, dated as of April 17, 2020 among the Registrant, Florida Pneumatic Manufacturing Corporation, Hy-Tech Machine, Inc., ATSCO Holdings Corp, Jiffy Air Tool, Inc., Bonanza Properties Corp., Continental Tool Group, Inc., Countrywide Hardware, Inc., Embassy Industries, Inc., Exhaust Technologies, Inc., Hy-Tech Illinois, Inc. and Capital One, National Association, as lender and agent (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated April 17, 2020).
     
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.

 

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