CRAWFORD UNITED Corp - Quarter Report: 2020 June (Form 10-Q)

PART I

ITEM 1. FINANCIAL STATEMENTS

CRAWFORD UNITED CORPORATION

CONSOLIDATED BALANCE SHEET

See accompanying notes to consolidated financial statements

CRAWFORD UNITED CORPORATION

CONSOLIDATED BALANCE SHEET

See accompanying notes to consolidated financial statements

CRAWFORD UNITED CORPORATION

CONSOLIDATED STATEMENT OF INCOME (Unaudited)

See accompanying notes to consolidated financial statements

CRAWFORD UNITED CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Three Months Ended June 30, 2020 and 2019

CRAWFORD UNITED CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Six Months Ended June 30, 2020 and 2019

CRAWFORD UNITED CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOW (Unaudited)

See accompanying notes to consolidated financial statements

CRAWFORD UNITED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2020

RESULTS OF OPERATIONS.

The following discussion is intended to assist in the understanding of the Company's financial position at June 30, 2020 and December 31, 2019, results of operations for the three and six months ended June 30, 2020 and 2019, and cash flows for the six months ended June 30, 2020 and 2019, and should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019. The coronavirus (COVID-19) pandemic had a material adverse effect on the Company’s reported results for the three and six months ended June 30, 2020. The Company will continue to actively monitor the impact of the coronavirus pandemic, which is expected to negatively impact the Company’s business and results of operations for the remainder of fiscal year 2020 and possibly beyond. Many of our customers are considered “essential” and have remained operational during the pandemic, although in some cases in a limited capacity. This, together with the overall economic downturn that has resulted from the pandemic, slowed demand in the second quarter and into the second half of 2020. Nearly all of the Company’s facilities have remained operational. While there are some restrictions to the supply of materials and products and those restrictions may continue or expand, our supply chain has remained largely intact.The extent to which the Company’s business and operations will continue to be impacted by the pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the severity of the pandemic and actions by government authorities to contain the pandemic or treat its impact, among other things.

Items Affecting the Comparability of our Financial Results

Effective January 2, 2020, the Company completed the acquisition of certain assets of MPI Products, Inc., (“MPI”). The results of this acquisition are reported under the Industrial Hose segment.

Effective April 19, 2019, the Company, completed the acquisition of substantially all of the assets of Data Genomix, Inc., an Ohio corporation (“DG”). DG is in the business of developing and commercializing marketing and data analytic technology applications. The results of this acquisition are reported under the Corporate and Other segment.

Accordingly, in light of the timing of these transactions, the Company’s results for the quarter ended on June 30, 2020 include the added results of operations of MPI in the Industrial Hose segment and DG in the Corporate and Other segment. Conversely, our results for the quarter ended June 30, 2019 do not include the results of operation of MPI in the Industrial Hose segment.

Results of Operations – Three Months Ended June 30, 2020 and 2019

Sales for the quarter ended June 30, 2020 (“current quarter”) were $18.6 million, a decrease of approximately $5.9 million or 24% from sales of $24.5 million during the same quarter of the prior year. This decrease in sales was primarily attributable to lower demand resulting from the impact of the COVID-19 pandemic, including temporary closures by certain customers.

Cost of sales for the current quarter was $15.1 million compared to $19.3 million, a decrease of $4.2 million or 22% from the same quarter of the prior year.  Gross profit was $0.5 million in the current quarter compared to $2.8 million, a decrease of $2.3 million from the same quarter of the prior year.  The decrease in cost of sales and gross profit was attributable lower sales resulting from decreased demand due to the COVID-19 pandemic. The Company took a number of steps to reduce costs during the quarter in response to lower sales levels, including staff reductions, shortened work weeks, and compensation decreases for certain salaried employees.

Selling, general and administrative expenses (SG&A) in the current quarter were $3.0 million, compared to $2.4 million, in the same quarter of the prior year. Selling, general and administrative expenses increased by $0.6 million due the acquisition of MPI, which includes approximately $0.1 million of intangible amortization expense. In addition, stock compensation was approximately $0.2 million in the current quarter resulting from director stock awards that are typically granted during the first fiscal quarter. These expense increases were partially offset by the cost reduction actions taken during the quarter, as described above.

Interest charges in the current quarter were approximately $0.2 million compared to $0.3 million in the same quarter of the prior year. The interest expense decreased due to lower average interest rates on the Company’s floating rate bank debt. Average total debt (including notes) and average interest rates for the current quarter were $25.7 million and 3.4%, compared to $21.0 million and 4.6% in the same quarter of the prior year.

Other income, net was $12 thousand in the current quarter compared to $25 thousand other expense, net in the same quarter of the prior year.  Other (income) expense, net was comprised of rental income, gains and losses on the disposal of assets, legal settlements, acquisition expenditures and other miscellaneous charges.

Income tax expense in the current quarter was $0.1 million compared to $0.7 million in the same quarter of the prior year. Tax expense in the current quarter was recorded at the Company’s expected effective tax rate of 25%.

Net income in the current quarter was $0.2 million or $0.07 per diluted share as compared to the net income of $1.8 million or $0.57 per diluted share for the same quarter of the prior year.  

Results of Operations – Six Months Ended June 30, 2020 and 2019

Sales for the six months ended June 30, 2020 (“current year to date”) were $43.9 million, a decrease of approximately $2.5 million or 5% from sales of $46.4 million during the same period of the prior year. This decrease in sales was primarily attributable to lower demand resulting from the impact of the COVID-19 pandemic, including temporary closures by certain customers.

Cost of sales for the current year to date was $34.2 million compared to $36.3 million, a decrease of $2.1 million or 6% from the same period of the prior year.  Gross profit was $9.7 million in the current year to date compared to $10.1 million, a decrease of $0.3 million from the same period of the prior year.  The decrease in cost of sales and gross profit was attributable lower sales resulting from decreased demand due to the COVID-19 pandemic. The Company took a number of steps during the second quarter to reduce costs in response to lower sales levels, including staff reductions, shortened work weeks, and compensation decreases for certain salaried employees.

Selling, general and administrative expenses (SG&A) in the current year to date were $6.0 million, compared to $4.7 million, in the same period of the prior year. Selling, general and administrative expenses increased by $1.4 million due the acquisition of MPI, which includes approximately $0.2 million of intangible amortization expense. These expense increases were partially offset by the cost reduction actions taken during the quarter, as described above.

Interest charges in the current year to date were approximately $0.5 million compared to $0.6 million in the same period of the prior year. The interest expense decreased due to lower average interest rates on the Company’s floating rate bank debt. Average total debt (including notes) and average interest rates for the current year to date were $26.2 million and 3.5%, compared to $21.4 million and 4.4% in the same period of the prior year.

Other expense, net was $59 thousand in the current year to date compared to $2 thousand other expense, net in the same period of the prior year.  Other (income) expense, net was comprised of rental income, gains and losses on the disposal of assets, legal settlements, acquisition expenditures and other miscellaneous charges.

Income tax expense in the current year to date was $0.8 million compared to $1.2 million in the same period of the prior year. Tax expense in the current year to date is recorded at the Company’s expected effective tax rate of 25%.

Net income in the current year to date was $2.3 million or $0.69 per diluted share as compared to the net income of $3.6 million or $1.12 per diluted share for the same period of the prior year.  

Liquidity and Capital Resources

As described further in Note 11 to the Company’s consolidated financial statements, effective January 2, 2020, the Company completed the MPI acquisition for a purchase price of $9.4 million cash, which is subject to certain post-closing adjustments based on working capital. 

The Company’s credit agreement, dated as of June 1, 2017, by and between the Company and JPMorgan Chase Bank, N.A. as lender (as amended, the “Credit Agreement”), provides availability under our revolving credit facility of $20 million, which matures June 1, 2024, of which approximately $12.3 million was outstanding at June 30, 2020. Management believes the amount of the revolving credit facility and the terms of the loan agreement provide the flexibility to fund acquisitions, working capital and other strategic initiatives. 

Total current assets at June 30, 2020 increased to $35.9 million from $27.0 million at December 31, 2019, an increase of $8.9 million. The increase in current assets is comprised of the following: an increase in cash of $4.7 million; an increase in inventory of $3.4 million; and an increase in contract assets of $2.3 million, offset by a decrease in accounts receivable of $1.5 million. Fluctuations in accounts receivable and costs and estimated earnings in excess of billing related to the Commercial Air Handling division are dependent upon progress billing milestones for contracts. The increase in inventory is related to the expansion of our Industrial Hose division through the acquisition of MPI. The Company is carrying higher cash balances due to the uncertainty of future economic conditions directly related to the COVID-19 pandemic.

Total current liabilities at June 30, 2020 increased to $19.1 million from $16.3 million at December 31, 2019, an increase of $2.8 million.  The increase in current liabilities is comprised of the following: the increase in accounts payable of $3.2 million; and an increase in accrued expenses of $0.8 million, offset by a decrease in contract liabilities (included in the unearned revenue item on the balance sheet) $1.2 million. The increases in accounts payable and accrued expenses are primarily attributable to the Company’s extension of payment timeframes for certain payables and expenses.

Cash provided by operating activities for the six months ended June 30, 2020 was approximately $5.8 million, compared to cash used by operating activities of $2.5 million in the same period a year ago. Cash used by operating activities for the current year is comprised of the following: net income of $2.3 million; adjustments for non-cash items of $1.5 million; and cash provided by working capital adjustments of $2.0 million. The primary drivers of increased working capital during the current year were the decrease in accounts receivable of $2.3 million and the increase in accounts payable of $2.4 million.

Cash used in investing activities for the six months ended June 30, 2020 of $9.6 million, compared to cash used in investing activities of $0.5 million in the same period a year ago. The increase in cash used in investing activities was largely due to the acquisition of MPI in the Industrial Hose segment and capital expenditures in the normal course of business.

Cash provided by financing activities was approximately $8.5 million for the six months ended June 30, 2020, compared to cash used by financing activities of $1.3 million in the same period a year ago. Cash provided by financing activities for the current year was primarily related to: $11.3 million borrowings on the revolving credit facility related to the acquisition of MPI and $1.5 million of borrowings under the PPP Loans described below; offset by cash used for $3.4 million in payments on bank debt; and $0.8 in payments on notes.

The Company is actively managing its business to maintain cash flow and liquidity. We believe that cash and availability on our revolving credit facility to be sufficient to fund working capital needs and service principal and interest payments due related to the bank debt and notes payable. The Company had $7.7 million available to borrow on the revolving credit facility at June 30, 2020. Notwithstanding the Company's expectations, if the Company's operating results decrease as the result of pressures on the business due to, for example, the impact of the COVID-19 pandemic, currency fluctuations, regulatory issues, or the Company's failure to execute its business plans, the Company may require additional financing, or may be unable to comply with its obligations under the credit facility, and its lenders could demand repayment of any amounts outstanding under the Company’s credit facility. As the company cannot predict the duration or scope of the COVID-19 pandemic and its impact on the Company’s customers and suppliers, the negative financial impact to the Company’s results cannot be reasonably estimated, but could be material. In addition, see Note 7 of the notes to the consolidated financial statements.

The Company applied for and was approved for a loan in the amount of $3,679,383 on April 10, 2020 pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”); however, on May 5, 2020, the Company opted to return all of the proceeds and repay the loan in full. On June 4, 2020, each of Federal Hose and CAD entered into unsecured loans with First Federal Savings and Loan Association of Lakewood, pursuant to the Paycheck Protection Program under the CARES Act, in the amounts of $253,071 and $1,200,766, respectively (the “PPP Loans”).

The PPP Loans each have a two-year term and bear interest at a rate of 1.00% per annum. Monthly principal and interest payments are deferred for six months after the date of disbursement, and will begin in January 4, 2021, in monthly installments based on the principal balance of the PPP Loan outstanding following the deferral period and taking into consideration any portion of the PPP Loan that may be forgiven prior to that time. The PPP Loans may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act. Federal Hose and CAD each intend to use their entire respective PPP Loan amounts for qualifying expenses and to apply for forgiveness of the loans in accordance with the terms of the CARES Act. The PPP Loans may be forgivable, partially or in full, if certain conditions are met, principally based on having been disbursed for permissible purposes and on maintaining certain average levels of employment and payroll as required by the CARES Act. Federal Hose and CAD each intend to use the loan proceeds only for permissible purposes, and to date have used all proceeds from the PPP Loans to retain employees and maintain payroll; however, the Company can provide no assurances that the amounts borrowed by Federal Hose and CAD under the PPP Loans will be eligible for forgiveness, in whole or in part. The PPP Loans are unsecured and guaranteed by the U.S. Small Business Administration. See Note 8 of the notes to the consolidated financial statements for a further description of the PPP Loans.

Due to the uncertainty of future economic conditions directly related to the COVID-19 pandemic, management has decided to carry higher cash balances and levels of liquidity, rather than focus on debt reduction goals. Management believes the Company has adequate liquidity for debt service, working capital, capital expenditures and other strategic initiatives. However, because the Company cannot predict the duration or scope of the COVID-19 pandemic and its impact on the Company, the pandemic may adversely impact the Company’s available liquidity for debt service, working capital, or cause delay or curtailment of the Company’s planned capital expenditures or other strategic initiatives.

Off-Balance Sheet Arrangements

The Company has secured performance and payment bonds in the amount of $8.2 million as surety on completion of the requirements of certain commercial air handling contracts. The Company has no other off-balance sheet arrangements (as defined in Regulation S-K Item 303 paragraph (a)(4)(ii)) that have or are reasonably likely to have a material current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Policies

The Company’s critical accounting policies are as presented in Notes to Consolidated Financial Statements and Management’s Discuss and Analysis of Financial Condition and Results of Operations in our Annual Report Form 10-K for the year ended December 31, 2019.

Forward-Looking Statements

The foregoing discussion includes forward-looking statements relating to the business of the Company. Generally, these statements can be identified by the use of words such as “guidance,” “outlook,” “believes,” “estimates,” “anticipates,” “expects,” “forecasts,” “seeks,” “projects,” “intends,” “plans,” “may,” “will,” “should,” “could,” “would” and similar expressions intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements, or other statements made by the Company, are made based on management's expectations and beliefs concerning future events impacting the Company and are subject to uncertainties and factors (including, but not limited to, those specified below) which are difficult to predict and, in many instances, are beyond the control of the Company. As a result, actual results of the Company could differ materially from those expressed in or implied by any such forward-looking statements. These uncertainties and factors include (a) the Company's ability to effectively integrate acquisitions, including the acquisition of MPI Products, Inc. (dba Marine Products International), and manage the larger operations of the combined businesses, (b) the Company's dependence upon a limited number of customers and the aerospace industry, (c) the highly competitive industry in which the Company operates, which includes several competitors with greater financial resources and larger sales organizations, (d) the Company's ability to capitalize on market opportunities in certain sectors, (e) the Company's ability to obtain cost effective financing (f) the Company's ability to satisfy obligations under its financing arrangements, (g) statements related to the expected effects on the Company’s business of the COVID-19 pandemic, (h) the duration and scope of the COVID-19 pandemic and impact on the demand for the Company’s products, (i) actions that governments, businesses and individuals take in response to the pandemic, including mandatory business closures and restrictions on onsite commercial interactions, (j) the impact of the pandemic and actions taken in response to the pandemic on global and regional economies and economic activity, (k) the restoration of operations of the Company’s customers and suppliers, the lifting of public health measures and the pace of recovery when the COVID-19 pandemic subsides, (l) general economic uncertainty in key global markets and a worsening of global economic conditions or low levels of economic growth, and the other risks described in “Item 1A. Risk Factors” in this Annual Report on Form 10-K and the Company’s subsequent filings with the SEC. 

ITEM 3. MARKET RISK

This item is not applicable to the Company as a smaller reporting company.

ITEM 4. CONTROLS AND PROCEDURES

As of June 30, 2020, an evaluation was performed, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer along with the Company's Vice President, Finance and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon that evaluation, the Company's management, including the Chief Executive Officer along with the Company's Vice President, Finance and Chief Financial Officer, concluded that the Company's disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act") were effective as of June 30, 2020 to ensure that information required to be disclosed by the Company in reports that it files and submits under the Exchange Act is (1) recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms, and (2) is accumulated and communicated to the Company's management, including its principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

There were no changes in the Company's internal control over financial reporting during the quarter ended June 30, 2020 that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS. 

At the time of filing this Quarterly Report on Form 10-Q, there were no material legal proceedings pending or threatened against the Company.

ITEM 1A. RISK FACTORS. 

The COVID-19 pandemic has disrupted the company’s operations and could have a material adverse effect on the company’s business, financial condition and liquidity. 

The Company’s business could be further materially and adversely affected by the outbreak of a widespread health epidemic. The present coronavirus (or COVID-19) pandemic has affected the Company’s operations including government authorities imposing mandatory closures, work-from-home orders and social distancing protocols, and imposing other restrictions that could materially adversely affect the Company’s ability to maintain its operations. Specifically, the Company may experience, in the future, temporary facility closures in response to government mandates in certain jurisdictions in which the Company operates and in response to positive diagnoses for COVID-19 in certain facilities for the safety of the Company’s employees. The COVID-19 outbreak could also disrupt the Company’s supply chain and may materially adversely impact its ability to secure supplies for its facilities, which could materially adversely affect the Company’s operations. There may also be long-term effects on the Company’s customers in and the economies of affected countries.

New and changing government actions to address the COVID-19 pandemic continue to occur on a regular basis. As a result, the jurisdictions in which the Company’s products are manufactured and distributed are in varying stages of restrictions. Certain jurisdictions have had to re-establish restrictions due to a resurgence in COVID-19 cases. Additionally, although the operations of many of the company’s customers have begun to be restored or increased, such operations may be forced to be limited or closed as any new COVID-19 outbreaks occur. Even as government restrictions are lifted and economies gradually reopen, the shape of the economic recovery is uncertain and may continue to negatively impact the Company's results of operations, cash flows and financial position in subsequent quarters. Given this current level of economic and operational uncertainty over the impacts of COVID-19, the ultimate financial impact cannot be reasonably estimated at this time.

The COVID-19 pandemic and similar issues in the future could have a material adverse effect on the Company’s ability to operate, results of operations, financial condition and liquidity. In addition, preventive measures the Company may voluntarily put in place, may have a material adverse effect on its business for an indefinite period of time, such as the potential shut down of certain locations, decreased employee availability, potential border closures and others. The Company’s suppliers and customers may also face these and other challenges, which could lead to disruption in the company’s supply chain, as well as decreased customer demand for the company’s products. These issues may also materially affect the Company’s future access to its sources of liquidity, particularly its cash flows from operations, financial condition and capitalization. Although these disruptions may continue to occur, the long-term economic impact and near-term financial impacts of such issues, may not be reasonably estimated due to the uncertainty of future developments.

In addition to the foregoing risk factor and the other information set forth in this report, you should carefully consider the risk factors disclosed in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and Part II, Item 1A of the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2020.

ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3 DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

*XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

SIGNATURES

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 as of the 14th day of August 2020, thereunto duly authorized.