CRAWFORD UNITED Corp - Quarter Report: 2021 September (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 September 30, 2021 and 2020

CRAWFORD UNITED CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Nine Months Ended September 30, 2021 and 2020

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)
September 30, 2021

1.  BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. The consolidated financial statements include the accounts of Crawford United Corporation and its wholly-owned subsidiaries (the “Company”). Significant intercompany transactions and balances have been eliminated in the financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ended December 31, 2021. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020. 

During the nine-month period ended September 30, 2021, there have been no changes to our significant accounting policies.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company’s Summary of Significant Accounting Policies is provided with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

New Accounting Standards Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (as amended by ASU 2019-11). The standard requires a financial asset (including trade receivables) measured at amortized cost basis to be presented at the net amount expected to be collected. Thus, the income statement will reflect the measurement of credit losses for newly-recognized financial assets as well as the expected increases or decreases of expected credit losses that have taken place during the period. This standard will be effective for smaller reporting companies beginning after December 15, 2022. 

Fair Value of Financial Instruments

Accounting for "Financial Instruments" requires the Company to disclose estimated fair values of financial instruments. Financial instruments held by the Company include, among others, accounts receivable, accounts payable, and notes payable. The carrying amounts reported in the consolidated balance sheet for assets and liabilities qualifying as financial instruments is a reasonable estimate of fair value.

Fair Value Measurements

As defined in FASB ASC 820, "Fair Value Measurements", fair value is 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. In determining fair value, the Company utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable firm inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the examination of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

* Level 1: Quoted market prices in active markets for identical assets or liabilities.

* Level 2: Inputs to the valuation methodology include:

* Quoted prices for similar assets or liabilities in active markets;

* Quoted prices for identical assets or similar assets or liabilities in inactive markets;

* Inputs other than quoted prices that are observable for the asset or liability;

* Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

* Level 3: Unobservable inputs that are not corroborated by market data.

A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Following is a description of the valuation methodologies used for instruments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy.

Stock: The stock market value is based on valuation of market quotes from independent active market sources, and is considered a level 1 investment.

3.  ACCOUNTS RECEIVABLE 

The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. The reserve for doubtful accounts was $18,509 and $19,973 at September 30, 2021 and December 31, 2020, respectively.

4.  INVENTORY

Inventory is valued at the lower of cost (first-in, first-out) or net realizable value and consists of:

5. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

For the identified reporting units, a Step 1 impairment test was performed as of December 31, 2020 using an income approach based on management’s determination of the prospective financial information, with consideration given to the existing uncertainty in the global economy and aerospace and defense industry, particularly the commercial sector. The results of this test indicated the fair value exceeded carrying value for all reporting units tested. As a result of the impairment testing performed as of December 31, 2020, no indefinite-lived intangible assets or goodwill was determined to be impaired. Management updated their assessment during the third quarter of fiscal 2021 and validated the assumptions used in the analyses performed as of December 31, 2020 and determined that the resulting conclusions remained appropriate as of September 30, 2021.

Intangible assets relate to the purchase of businesses. Goodwill represents the excess of cost over the fair value of identifiable assets acquired. Goodwill is not amortized but is reviewed on an annual basis for impairment. Intangibles are amortized on a straight-line basis over periods ranging from one year to 15 years. Intangible assets are as follows:

Amortization of intangibles assets was: $186,784 and $175,715 for the three months ended September 30, 2021 and 2020, respectively, and $653,733 and $534,397 for the nine months ended September 30, 2021 and 2020, respectively. 

6.  PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment are recorded at cost and depreciated over their useful lives. Maintenance and repair costs are expenses as incurred. Property, plant and equipment are as follows:

Depreciation expense was $511,046 and $415,101 for the three months ended September 30, 2021 and 2020, respectively, and $1,535,870 and $1,275,854 for the nine months ended September 30, 2021 and 2020, respectively.

7.  INVESTMENTS IN EQUITY SECURITIES

Investments in equity securities are summarized in the table below:

Unrealized gains were $0 in the first nine months of 2021 compared to $0 in the same period of last year. Unrealized losses were $265,941 in the first nine months of 2021 compared to $28,093 in the same period of last year. Realized gains were $152,748 in the first nine months of 2021 compared to $0 in the same period of last year. Realized losses were $0 in the first nine months of 2021 compared to $0 in the same period of last year.

Investments by fair value level in the hierarchy as of September 30, 2021 and December 31, 2020 are as follows:

8.  BANK DEBT 

The Company entered into a Credit Agreement on June 1, 2017 with JPMorgan Chase Bank, N.A. as lender, which was amended in connection with funding the acquisition of CAD Enterprises, Inc. (“CAD”) on July 5, 2018 and further amended on September 30, 2019, December 30, 2019 and March 2, 2021 (as amended, the “Credit Agreement”). The March 2, 2021 amendment increased the maximum borrowing amount under the revolving credit facility from $20,000,000 to $30,000,000. As amended, the Credit Agreement is comprised of a revolving facility in the amount of $30,000,000 and a term A loan in the amount of $6,000,000. Outstanding borrowings on the term A loan are payable in consecutive monthly installments, which currently amount to $111,111 per month.

The revolving facility under the Credit Agreement includes a $3 million sublimit for the issuance of letters of credit thereunder. Interest for borrowings under the revolving facility accrues at a per annum rate equal to Prime Rate or LIBOR plus applicable margins of (i) (0.25%) for Prime Rate loans and (ii) 1.75% for LIBOR loans. The maturity date of the revolving facility is June 1, 2024. Interest for borrowings under the term A loan accrues at a per annum rate equal to Prime Rate or LIBOR plus applicable margins of (i) 0.25% for Prime Rate loans and (ii) 2.25% for LIBOR loans. The maturity date of the term A loan is December 1, 2022. The Credit Agreement includes a commitment fee on the unused portion of the revolving facility of 0.25% per annum payable quarterly. The obligations of the Company and other borrowers under the Credit Agreement are secured by a blanket lien on all the assets of the Company and its subsidiaries. The Credit Agreement also includes customary representations and warranties and applicable reporting requirements and covenants. The financial covenants under the Credit Agreement include a minimum fixed charge coverage ratio, a maximum senior funded debt to EBITDA ratio and a maximum total funded debt to EBITDA ratio.

Bank debt balances consist of the following:

The Company had $13.9 million and $9.2 million available to borrow on the revolving credit facility at September 30, 2021 and December 31, 2020, respectively.   

9.     NOTES PAYABLE

Notes Payable – Related Party

The Company had two separate outstanding promissory notes with First Francis Company Inc. (“First Francis”), which were originally issued in July 2016 in connection with the acquisition of Federal Hose Manufacturing (“Federal Hose”) and which were amended in July 2018 in connection with acquisition of CAD. The first promissory note was issued with original principal in the amount of $2,000,000, and the second was issued with original principal in the amount of $2,768,662. The promissory notes each had an interest rate of 6.25% per annum, which was increased from 4.0% per annum as part of the July 2018 amendments to the Credit Agreement.

In connection with the Komtek Forge acquisition, on January 15, 2021, the Company refinanced the outstanding First Francis promissory notes in the aggregate amount of $2,077,384, including accrued interest payable through the refinance date and combined this amount with an existing First Francis promissory note carried by Komtek Forge in the amount of $1,702,400 into one note for a combined $3,779,784 loan due to First Francis Company, payable in quarterly installments beginning April 15, 2021. The interest rate on the refinanced loan remained at 6.25% per annum. First Francis is owned by Edward Crawford and Matthew Crawford, both of whom serve on the Board of Directors of the Company.

Notes Payable – Seller Note

Effective July 1, 2018, the Company completed the acquisition of all of the issued and outstanding shares of capital stock of CAD.  Upon the closing of the transaction, the CAD shares were transferred and assigned to the Company in consideration of the payment by the Company of an aggregate purchase price of $21 million, $12 million of which was payable in cash at closing, with the remainder paid in the form of a subordinated promissory note issued by the Company in favor of a Seller (the “Seller Note”), which is subject to certain post-closing adjustments based on working capital, indebtedness and selling expenses, as specified in the Share Purchase Agreement entered into in connection with the acquisition (the “Share Purchase Agreement”).   The Seller Note bears interest at a rate of four percent (4%) per annum and is payable in full no later than June 30, 2023 (the “Maturity Date”).  The Maturity Date, with respect to any then-outstanding portion of the original principal amount which is subject to an indemnification claim by the Company (asserted in accordance with the terms of the Share Purchase Agreement) pending as of the date thereof, will be automatically extended until such time as any claim relating to such disputed amount is no longer pending, pursuant to the terms of the Seller Note and subject to additional conditions set forth therein and in the Share Purchase Agreement. The Company is not permitted to prepay any amounts due and owing under the Seller Note.  Payment of the Seller Note is secured by a second-priority security interest in the assets of CAD.   Interest accrued on the original principal amount is due and payable in arrears on the first day of each calendar quarter up to and including June 30, 2023.  The Company is required to make quarterly principal payments, the amount of which is calculated based on a four (4) year amortization schedule, on the last day of each calendar quarter up to and including the Maturity Date. The holders of the Seller Note and the Company agreed to defer the quarterly principal payment due June 30, 2020 until June 30, 2023; quarterly interest was paid on the Seller Note.

Paycheck Protection Program Notes

The Company applied for and was approved for a loan in the amount of $3,679,383 (the “PPP Loan”) on April 10, 2020 pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). On May 5, 2020, the Company instructed JPMorgan to repay in full the Promissory Note pursuant to the Paycheck Protection Program under the CARES Act. On June 4, 2020, Federal Hose and CAD each entered into unsecured loans with First Federal Savings and Loan Association of Lakewood, pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), in the amounts of $253,071 and $1,200,766, respectively (the “PPP Loans”). The Company received notice of forgiveness from First Federal Savings and Loan Association of Lakewood of 100% of the CAD and Federal Hose PPP loans on January 22, 2021 and January 29, 2021 respectively.

Notes payable consists of the following: 

10. LEASES

The Company has operating and finance leases for facilities, vehicles and equipment. These leases have remaining terms of 2 years to 15 years, some of which include options to extend the leases for up to 10 years.

Supplemental balance sheet information related to leases:

11. EARNINGS PER COMMON SHARE 

The following table sets forth the computation of basic and diluted earnings per share.

12. ACQUISITIONS

Effective January 15, 2021, the Company completed the acquisition of all of the issued and outstanding membership interests of KT Acquisition LLC (dba Komtek Forge, “Komtek”), a Massachusetts limited liability company and supplier of highly engineered forgings for the aerospace, industrial gas turbine, medical prosthetics. alternative energy, petrochemical, and defense industries, pursuant to a Membership Interest Purchase Agreement entered into as of January 15, 2021. The Company acquired Komtek in consideration of the payment by the Company of an aggregate purchase price of $3.6 million, subject to certain post-closing adjustments based on working capital, indebtedness and selling expenses, as specified in the Membership Interest Purchase Agreement, which was comprised of cash, the issuance of 60,000 Class A common shares of the Company and the assumption of approximately $1,702,000 of specified liabilities of the seller.

Effective March 1, 2021, MTA Acquisition Company, LLC, a Delaware limited liability company (“MTA”) and indirect wholly-owned subsidiary of Crawford United Corporation, completed the acquisition of all of the membership interests of Global-Tek-Manufacturing LLC, a Puerto Rico limited liability company and specialist in machining parts from wrought, rounds, castings or extrusions and providing in house anodizing and other finishing and assembly operations and substantially all of the assets of Machining Technology L.L.C., a Colorado limited liability company with CNC machining capability, pursuant to a Membership Interest and Asset Purchase Agreement entered into March 2, 2021 and effective as of March 1, 2021. The stock and assets were transferred and assigned to MTA in exchange for approximately $4.9 million in cash and the repayment of remaining outstanding indebtedness and transaction costs totaling approximately $1.6 million, subject to customary post-closing adjustments. The Purchase Agreement also includes a post-closing “earnout” that provides for up to an aggregate of $1.5 million in additional consideration to the certain sellers (up to $750,000 per year) if specified performance targets are met in the two years following closing. If earned, the additional consideration is payable in cash or, at the election of each such seller, in Company common shares up to a maximum aggregate amount of 61,475 shares.

Effective July 1, 2021, Crawford EH Acquisition Company, LLC, a Delaware limited liability company and indirect wholly-owned subsidiary of Crawford United Corporation, completed the acquisition of all of the operating assets of Emergency Hydraulics LLC, (“Emergency Hydraulics”) a Florida limited liability company and provider of hydraulic hoses, air tank assemblies and related products to manufacturers of firefighting trucks and other emergency vehicles, pursuant to an Asset Purchase Agreement entered into July 1, 2021. The acquired business is strategically important to the Company’s growing industrial hose platform and will expand its offerings and diversify its customer base in this important market segment. The assets were transferred and assigned to Emergency Hydraulics in exchange for approximately $0.3 million of repayment of remaining outstanding indebtedness and transaction costs.

13. SEGMENT AND RELATED INFORMATION  

As of January 1, 2021, the Company elected to report operations for two business segments: (1) Commercial Air Handling Equipment, and (2) Industrial and Transportation Products. The decision to change from three to two reportable business segments was the result of a board-level discussion and was deemed appropriate given the size of the Company. The Company's management evaluates segment performance based primarily on operating income. Certain corporate costs are allocated to the segments and interest expense directly related to financing the acquisition of a business is allocated to that segment, respectively.  Intangible assets are allocated to each segment and the related amortization of these assets are recorded in selling, general and administrative expenses.

Commercial Air Handling:
The Commercial Air Handling segment was added June 1, 2017, when the Company purchased certain assets and assumed certain liabilities of Air Enterprises Acquisition LLC in Akron, Ohio. The acquired business, which operates under the name Air Enterprises, is an industry leader in designing, manufacturing and installing large-scale commercial, institutional, and industrial custom air handling solutions. Its customers are typically in the health care, education, pharmaceutical and industrial manufacturing markets in the United States. This segment also sells to select international markets. The custom air handling units are constructed of non-corrosive aluminum, resulting in sustainable, long-lasting, and energy efficient solutions with life expectancies of 50 years or more. These products are distributed through a network of sales representatives, based on relationships with health care networks, building contractors and engineering firms. The custom air handling equipment is designed, manufactured and installed under the brand names FactoryBilt® and SiteBilt®. FactoryBilt® air handling solutions are designed, fabricated and assembled in a vertically integrated process entirely within the Akron, Ohio facility. SiteBilt® air handling solutions are designed and fabricated in Akron, but are then crated and shipped to the field and assembled on-site.

Industrial and Transportation Products: 

The Industrial and Transportation Products segment was added July 1, 2016, when the Company purchased the assets of the Federal Hose Manufacturing, LLC of Painesville, Ohio. This business segment includes the manufacture of flexible interlocking metal hoses and the distribution of silicone and hydraulic hoses. Metal hoses are sold primarily to major heavy-duty truck manufacturers and major aftermarket suppliers in North America. Metal hoses are also sold into the agricultural, industrial and petrochemical markets. Silicone hoses are distributed to a number of industries in North America, including agriculture and general industrial markets. The Company purchased all of the issued and outstanding shares of capital stock of CAD Enterprises, Inc.(“CAD”) in Phoenix, Arizona on July 1, 2018. CAD provides complete end-to-end engineering, machining, grinding, welding, brazing, heat treat and assembly solutions.  Utilizing state-of-the-art machining and welding technologies, this segment is an industry leader in providing complex components produced from nickel-based superalloys and stainless steels.  CAD’s quality certifications include ISO 9001:2015/AS9100D, as well as Nadcap accreditation for Fluorescent Penetrant Inspection (FPI), Heat Treating/Braze, Non-Conventional Machining EDM, TIG/E-Beam welding. The Company added the distribution of marine hose to this segment through the acquisition of the assets of MPI Products, Inc. (“MPI”) on January 2, 2020. MPI specialized in rubber and plastic marine hose for the recreational boating industry. MPI offers certified products that meet marine industry standards and regulations. 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 Company purchased all of the issued and outstanding membership interests of KT Acquisition LLC (name later changed to Komtek Forge LLC), in Worcester, Massachusetts on January 15, 2021. Komtek Forge LLC is a supplier of highly engineered forgings for the aerospace, industrial gas turbine, medical prosthetics, alternative energy, petrochemical and defense industries. The Company purchased all of the membership interests of Global-Tek-Manufacturing LLC (“Global-Tek”), in Ceiba, Puerto Rico and substantially all of the assets of Machining Technology L.L.C. (“Machining Technologies”), in Longmont, Colorado on March 2, 2021. Global-Tek and Machining Technologies specialize in providing customers with highly engineered manufacturing solutions, including CNC machining, anodizing, electro polishing and laser marking for customers in the defense, aerospace and medical device markets. The Company purchased substantially all of the assets of Emergency Hydraulics LLC (“Emergency Hydraulics”), in Ocala, Florida on July 1, 2021. Emergency Hydraulics provides hydraulic hoses, air tank assemblies and related products to manufacturers of firefighting trucks and other emergency vehicles.

Corporate and Other: 

Corporate costs not allocated to the two primary business segments are aggregated here.

Information by industry segment is set forth below: 

14. UNCERTAINTIES

The coronavirus (COVID-19) pandemic had a material adverse effect on the Company’s reported results for the three month and nine month periods ended September 30, 2021. 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 2021 and possibly beyond. The extent to which the Company’s business and operations will 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 outbreak; new and growing outbreaks of COVID-19 or new strains of COVID-19; actions by government authorities to contain COVID-19 or treat its impact, such as reimposed public health restrictions; efforts to combat COVID-19, such as vaccine development and distribution, among other things.

RESULTS OF OPERATIONS.

The following discussion is intended to assist in the understanding of the Company's financial position at September 30, 2021 and December 31, 2020, results of operations for the three month and nine month periods ended September 30, 2021 and 2020, and cash flows for the three month and nine month periods ended September 30, 2021 and 2020, 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, 2020. The coronavirus (COVID-19) pandemic had a material adverse effect on the Company’s reported results for the three month and nine month periods ended September 30, 2021. The Company will continue to actively monitor the impact of the COVID-19 pandemic, which is expected to negatively impact the Company’s business and results of operations for the remainder of fiscal year 2021 and possibly beyond, depending upon the pace at which pandemic-related restrictions are lifted, commercial activity resumes and the economy recovers. 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 first three quarters of 2021. Nearly all of the Company’s facilities have remained operational. Our supply chain has been negatively impacted by rising costs for materials and supplies and by unplanned delays in receipt of materials in recent months. 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; new and growing outbreaks of COVID-19 or new strains of COVID-19; actions by government authorities to contain COVID-19 or treat its impact, such as reimposed public health restrictions; and efforts to combat COVID-19, such as vaccine distribution, among other things.

Items Affecting the Comparability of our Financial Results

The Company purchased all of the issued and outstanding membership interests of KT Acquisition LLC (name later changed to Komtek Forge LLC “Komtek”), in Worcester, Massachusetts on January 15, 2021.

The Company purchased all of the membership interests of Global-Tek Manufacturing LLC (“Global-Tek”) in Ceiba, Puerto Rico and substantially all of the assets of Machining Technology L.L.C. (“Machining Technology”), in Longmont, Colorado on March 2, 2021.

The Company purchased substantially all of the assets of Emergency Hydraulics LLC (“Emergency Hydraulics”) in Ocala, Florida on July 1, 2021.

Accordingly, in light of the timing of these transactions, the Company’s results for the three month and nine month periods ended on September 30, 2021 include the added results of operations of Komtek, Global-Tek, Machining Technology and Emergency Hydraulics in the Industrial and Transportation Products segment. Conversely, our results for the three month and nine month periods ended September 30, 2020 do not include the results of operations of Komtek, Global-Tek, Machining Technology and Emergency Hydraulics in the Industrial and Transportation Products segment.

Results of Operations – Three Months Ended September 30, 2021 and 2020

Sales for the quarter ended September 30, 2021 (“current quarter”) increased to $26.4 million, an increase of approximately $5.1 million or 24.1% from sales of $21.3 million during the same quarter of the prior year. This increase in sales was primarily attributable to a recovery in demand as COVID-19 pandemic-related restrictions loosened and commercial activity increased, in addition to the acquisitions of Komtek, Global-Tek, Machining Technology and Emergency Hydraulics.

Cost of sales for the current quarter was $21.0 million compared to $16.4 million, an increase of $4.6 million or 27.9% from the same quarter of the prior year.  Gross profit was $5.4 million in the current quarter compared to $4.9 million, an increase of $0.5 million from the same quarter of the prior year.  The increase in cost of sales and gross profit was attributable to a recovery in demand as the COVID-19 pandemic eased, in addition to the acquisitions of Komtek, Global-Tek, Machining Technology and Emergency Hydraulics. Cost of sales as a percentage of sales was 79.6% in the current quarter compared to 77.2% in the same quarter of the prior year. The increases in cost of sales as a percentage of sales was primarily attributable to disruptions in the global supply chain that drove an increase in the cost of raw materials.

Selling, general and administrative expenses (SG&A) in the current quarter were $3.5 million, or 13.4% of sales, compared to $2.7 million, or 12.8% of sales in the third quarter of last year. Selling, general and administrative expenses increased as a percentage of sales due primarily to an additional $0.4 million of expense as a result of the acquisitions of Komtek, Global-Tek, Machining Technology and Emergency Hydraulics.

Interest charges in the current quarter were approximately $0.2 million compared to $0.2 million in the same quarter of the prior year. Average total debt (including notes) and average interest rates for the current quarter were $26.3 million and 2.9% compared to $26.8 million and 2.9% in the same period of last year.

Other expense, net was $0.1 million in the current quarter compared to $0.0 million of other income, net in the same quarter of the prior year.  The increase in other expense, net is primarily driven by a loss of $0.3 million related to investments in marketable securities and $0.1 million of transaction costs as a result of the acquisitions of Komtek, Global-Tek, Machining Technology and Emergency Hydraulics partially offset by other income of $0.3 million related to tax incentives at Global-Tek.

Income tax expense in the current quarter was $0.3 million compared to $0.5 million in the same quarter of the prior year. Tax expense is lower than the Company’s historical expected effective tax rate of 25% primarily because the expected tax rate for Global-Tek in Puerto Rico is lower than 25%.

Net income in the current quarter was $1.2 million or $0.35 per diluted share as compared to the net income of $1.4 million or $0.43 per diluted share for the same quarter of the prior year. Unrealized losses related to investments in marketable securities reduced net income by approximately $0.3 million or $0.07 per diluted share in the current quarter.   

Results of Operations – Nine Months Ended September 30, 2021 and 2020

Sales for the nine months ended September 30, 2021 (“current year to date”) were $76.8 million, an increase of approximately $11.7 million or 18.0% from sales of $65.1 million during the same period of the prior year. This increase in sales was primarily attributable to a recovery in demand as COVID-19 pandemic-related restrictions loosened and commercial activity increased, in addition to the acquisitions of Komtek, Global-Tek, Machining Technology and Emergency Hydraulics.

Cost of sales for the current year to date was $59.7 million compared to $50.6 million in the same period of the prior year, an increase of $9.1 million or 18.0%.  Gross profit was $17.2 million in the current year to date compared to $14.6 million in the same period of prior year in the same period of the prior year, an increase of $2.6 million.  The increase in cost of sales and gross profit was attributable to a recovery in demand as the COVID-19 pandemic eased, in addition to the acquisitions of Komtek, Global-Tek, Machining Technology and Emergency Hydraulics.

Selling, general and administrative expenses (SG&A) in the current year to date were $10.9 million, or 14.1% of sales, compared to $8.8 million, or 13.5% of sales, in the same period of the prior year. Selling, general and administrative expenses increased by $2.1 million driven primarily by an additional $1.4 million of expense as a result of the acquisitions of Komtek, Global-Tek, Machining Technology and Emergency Hydraulics.

Interest charges in the current year to date were approximately $0.7 million compared to $0.7 million in the same period of the prior year. Average total debt (including notes) and average interest rates for the current year to date were $26.6 million and 3.0%, compared to $26.7 million and 3.2% in the same period of the prior year.

Other income, net was $1.1 million in the current year to date compared to $0.1 million of other expense, net in the same period of the prior year.  The increase in other income is primarily driven by the forgiveness in full during the first quarter of 2021 of the $1.5 million in aggregate Payroll Protection Program Loans (“PPP Loans”) accepted by two of the Company’s subsidiaries, in accordance with the terms of the CARES Act. The forgiveness of the PPP loans is treated as income. This increase in other income was partially offset by an unrealized loss of $0.3 million related to investments in marketable securities

Income tax expense in the current year to date was $1.2 million compared to $1.3 million in the same period of the prior year. Tax expense is lower than the Company’s historical expected effective tax rate of 25% primarily because the expected tax rate for Global-Tek in Puerto Rico is lower than 25%.

Net income in the current year to date was $5.6 million or $1.64 per diluted share as compared to the net income of $3.7 million or $1.12 per diluted share for the same period of the prior year.  

Liquidity and Capital Resources

As described further in Note 12 to the Company’s consolidated financial statements, effective January 15, 2021, the Company completed the Komtek acquisition for a purchase price of $3.6 million, which included the assumption of $1.7 million of debt and the issuance of $1.1 million of Class A common shares.

As described further in Note 12 to the Company’s consolidated financial statements, effective March 1, 2021, the Company completed the Global-Tek and Machining Technology acquisition for a purchase price of $8.0 million, subject to certain post-closing adjustments based on working capital and the achievement of future performance milestones.

As described further in Note 12 to the Company’s consolidated financial statements, effective July 1, 2021, the Company completed the Emergency Hydraulics acquisition for a purchase price of $0.3 million.

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 for a revolving credit facility. On March 2, 2021, the Company amended its Credit Agreement to increase availability under the revolving credit facility to $30.0 million from $20.0 million. The amendment to the loan agreement provided additional flexibility to fund acquisitions, working capital and other strategic initiatives. 

Total current assets at September 30, 2021 increased to $41.6 million from $35.2 million at December 31, 2020, an increase of $6.4 million. The increase in current assets is comprised of the following: an increase of accounts receivable of $7.0 million; an increase in inventory of $4.4 million; an increase in prepaid expenses of $0.5 million; partially offset by a decrease in cash of $3.6 million; an increase in contract assets of $1.5 million; and a decrease in investments of $0.4 million. The increases in inventory and accounts receivable were driven primarily by the recent acquisitions of Komtek, Global-Tek, Machining Technology and Emergency Hydraulics. The Company is carrying lower cash balances due to funding those acquisitions.

Total current liabilities at June 30, 2021 increased to $33.0 million from $17.5 million at December 31, 2020, an increase of $5.4 million.  The increase in current liabilities is comprised of the following: an increase accounts payable of $2.6 million; an increase in unearned revenue of $2.4 million; and an increase in contingent liabilities of $0.8 million.

Cash provided by operating activities for the nine months ended September 30, 2021 was approximately $3.9 million, compared to cash provided by operating activities of $6.7 million in the same period a year ago. Cash provided by operating activities for the nine-month period is comprised of the following: net income of $5.6 million; cash provided by adjustments for non-cash items of $1.4 million; and cash used in working capital adjustments of $3.2 million. The primary drivers of decreased working capital during the current quarter were the increase in accounts receivable of $4.4 million, the increase of inventories of $2.5 million in an effort to mitigate recent supply chain disruptions and the decrease in accrued income taxes of $1.3 million partially offset by the increase in deferred revenue of $2.7 million, the decrease in contract assets of $1.5 million and the increase in accounts payable of $1.0 million.

Cash used in investing activities for the nine months ended September 30, 2021 was $9.6 million, compared to cash used in investing activities of $10.7 million in the same period a year ago. Cash used in investing activities was for the acquisitions of Komtek, Global-Tek, Machining Technology and Emergency Hydraulics in the Industrial and Transportation Products segment and capital expenditures in the normal course of business.

Cash provided by financing activities was approximately $2.1 million for the nine months ended September 30, 2021, compared to cash provided by financing activities of $8.5 million in the same period a year ago. Cash provided by financing activities for the year-to-date period was primarily related to: $8.9 million borrowings on bank debt related to the acquisitions of Komtek, Global-Tek, Machining Technology and Emergency Hydraulics; offset by cash used for $4.8 million in payments on bank debt and $2.0 million 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 $13.9 million available to borrow on the revolving credit facility at September 30, 2021. 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, supply chain disruptions, increased costs of supplies and materials, 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 14 of the notes to the consolidated financial statements.

Off-Balance Sheet Arrangements

From time to time, the Company enters into performance and payment bonds in the ordinary course of business. These bonds are secured by certain assets of the Company by the surety until the Company’s completion of the requirements of the commercial air handling contract. At September 30, 2021, the Company has secured performance and payment bonds in the amount of $8.3 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 expenditure or capital resources.

Critical Accounting Policies

The Company’s critical accounting policies are as presented in the 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, 2020.

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 acquisitions of Komtek, Global-Tek and Machining Technology, and manage the larger operations of the combined businesses (b) the duration and scope of the COVID-19 pandemic, the resumption of operations by the Company’s customers, loosening of public health restrictions, or an reimposed restrictions or tightening of public health restrictions which could impact the demand for the Company’s products; (c) the Company’s inability to obtain, or the increase costs of, needed products, components or raw materials from its suppliers; (d) actions that governments, businesses and individuals take in response to the pandemic, including mandatory business closures and restrictions on onsite commercial interactions; (e) the impact of the pandemic and actions taken in response to the pandemic on global and regional economies and economic activity; (f) the pace of recovery when the COVID-19 pandemic subsides; (g) the Company's dependence upon a limited number of customers and the aerospace industry, (h) the highly competitive industry in which the Company operates, which includes several competitors with greater financial resources and larger sales organizations, (i) the Company's ability to capitalize on market opportunities in certain sectors, (j) the Company's ability to obtain cost effective financing and (k) the Company's ability to satisfy obligations under its financing arrangements, 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 September 30, 2021, 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 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 September, 2021 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 controls over financial reporting during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect the Company's internal control over financial reporting.

The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles. The Company's internal control over financial reporting includes policies and procedures that (1) pertain to maintaining records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the Company's receipts and expenditures are being made only in accordance with authorization of the Company's management and directors, and (3) provide reasonable assurance regarding prevention or the timely detection of unauthorized acquisition, use or disposal of the company's assets that could have a material effect on the financial statements.

Management, including the Company's Chief Executive Officer along with the Company's Vice President, Finance and Chief Financial Officer, does not expect that the Company's internal controls will prevent or detect all errors and all fraud. An internal control system no matter how well designed and operated can provide only reasonable, not absolute, assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, collusion of two or more people, or by management override of the control. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS. 

None.

ITEM 1A. RISK FACTORS. 

There have been no material changes from the risk factors disclosed in Part 1, Item 1A, of our Annual Report on Form 10-K for the year ended December 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 9th day of November 2021, thereunto duly authorized.