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CRAWFORD UNITED Corp - Quarter Report: 2023 June (Form 10-Q)

crawa20230630c_10q.htm
 
 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-Q 

 

☒ 

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

 

For the quarterly period ended June 30, 2023

OR

☐ 

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

 

For the transition period from Not Applicable to Not Applicable

Commission file number: 000-000147

 

CRAWFORD UNITED CORPORATION 

(Exact name of registrant as specified in its charter)

 

Ohio

34-0288470

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

10514 Dupont Avenue, Suite 200, Cleveland, Ohio

44108

(Address of principal executive offices)

(Zip Code)

 

Registrant's telephone number (216) 243-2614

 

Securities registered pursuant to Section 12(b) of the Act: None.

 

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 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 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 ☒

Smaller reporting company ☒

 

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 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

 

As of August 7, 2023, 2,778,892 shares of Class A Common Stock and 731,848 shares of Class B Common Stock were outstanding.

 

 

1

 

 

 

PART I

 

ITEM 1. FINANCIAL STATEMENTS

 

CRAWFORD UNITED CORPORATION

CONSOLIDATED BALANCE SHEET

 

  

(Unaudited)

     
  

June 30,

  

December 31,

 
  

2023

  

2022

 

ASSETS

        

CURRENT ASSETS:

        

Cash and cash equivalents

 $3,284,782  $1,247,627 

Accounts receivable less allowance for doubtful accounts

  21,187,681   21,884,807 

Contract assets

  3,409,909   3,284,301 

Inventories less allowance for obsolete inventory

  21,015,713   20,176,142 

Investments

  776,453   657,971 

Prepaid expenses and other current assets

  1,292,156   1,522,516 

Total Current Assets

  50,966,694   48,773,364 

Property, plant and equipment, net

  14,726,493   15,213,443 

Operating right of use asset, net

  9,189,216   9,524,280 

OTHER ASSETS:

        

Goodwill

  16,453,049   16,231,938 

Intangibles, net of accumulated amortization

  8,861,955   9,492,560 

Other non-current assets

  122,018   362,489 

Total Non-Current Other Assets

  25,437,022   26,086,987 

Total Assets

 $100,319,425  $99,598,074 
         

LIABILITIES AND STOCKHOLDERS’ EQUITY

        

CURRENT LIABILITIES:

        

Notes payable – current

 $814,351  $1,303,972 

Bank debt – current

  15,709,850   222,222 

Leases payable – current

  1,686,426   1,705,224 

Accounts payable

  12,766,907   14,017,973 

Unearned revenue

  3,748,093   4,354,868 

Accrued income taxes

  222,748   1,239,289 

Accrued expenses

  4,121,870   3,224,188 

Total Current Liabilities

  39,070,245   26,067,736 

LONG-TERM LIABILITIES:

        

Notes payable

  888,711   1,846,405 

Bank debt

  -   19,224,318 

Leases payable

  7,751,179   8,060,152 

Deferred income taxes

  1,384,558   1,384,558 

Total Long-Term Liabilities

  10,024,448   30,515,433 

STOCKHOLDERS' EQUITY

        

Class A common shares - 10,000,000 shares authorized, 2,832,966 issued at June 30, 2023 and 2,791,449 issued at December 31, 2022

  8,430,351   7,351,563 

Class B common shares - 2,500,000 shares authorized, 914,283 shares issued at June 30, 2023 and December 31, 2022

  1,465,522   1,465,522 

Contributed capital

  1,741,901   1,741,901 

Treasury shares

  (2,237,027)  (2,125,252)

Class A common shares – 54,074 shares held at June 30, 2023 and 47,412 shares held at December 31, 2022

        

Class B common shares – 182,435 shares held at June 30, 2023 and December 31, 2022

        

Retained earnings

  41,823,985   34,581,171 

Total Stockholders' Equity

  51,224,732   43,014,905 

Total Liabilities and Stockholders' Equity

 $100,319,425  $99,598,074 

 

See accompanying notes to consolidated financial statements

 

2

 

 

CRAWFORD UNITED CORPORATION

CONSOLIDATED STATEMENT OF INCOME (Unaudited)

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2023

   

2022

   

2023

   

2022

 
                                 

Total Sales

  $ 36,933,015     $ 31,902,027     $ 76,417,371     $ 62,904,773  

Cost of Sales

    26,458,137       25,133,536       55,425,942       49,769,877  

Gross Profit

    10,474,878       6,768,491       20,991,429       13,134,896  
                                 

Operating Expenses:

                               

Selling, general and administrative expenses

    5,322,514       4,392,964       10,719,797       9,362,048  

Operating Income

    5,152,364       2,375,527       10,271,632       3,772,848  
                                 

Other (Income) and Expenses:

                               

Interest charges

    366,101       154,065       735,904       415,081  

Unrealized (gain) loss on investments

    (177,515 )     608,954       (118,482 )     434,069  

Other (income) expense, net

    (345,968 )     16,838       (344,971 )     (313,063 )

Total Other (Income) and Expenses

    (157,382 )     779,857       272,451       536,088  

Income before Provision for Income Taxes

    5,309,746       1,595,670       9,999,181       3,236,761  
                                 

Provision for Income Taxes

    1,458,404       424,406       2,756,366       999,622  

Net Income

  $ 3,851,342     $ 1,171,264     $ 7,242,815     $ 2,237,139  
                                 

Net Income Per Common Share - Basic

  $ 1.10     $ 0.34     $ 2.07     $ 0.65  
                                 

Net Income Per Common Share - Diluted

  $ 1.09     $ 0.34     $ 2.07     $ 0.65  
                                 

Weighted Average Shares of Common Stock Outstanding

                               

Basic

    3,507,108       3,464,765       3,504,978       3,449,465  

Diluted

    3,518,386       3,464,765       3,507,286       3,449,465  

 

See accompanying notes to consolidated financial statements

 

3

 
 

 

CRAWFORD UNITED CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)

 

Three Months Ended June 30, 2023 and 2022

 

   

COMMON SHARES -

                                 
   

NO PAR VALUE

                                 
                   

CONTRIBUTED

   

TREASURY

   

RETAINED

         
   

CLASS A

   

CLASS B

   

CAPITAL

   

SHARES

   

EARNINGS

   

TOTAL

 
                                                 

Balance at March 31, 2023

  $ 7,844,228     $ 1,465,522     $ 1,741,901     $ (2,196,437 )   $ 37,972,643     $ 46,827,857  

Share-based compensation expense

    436,123       -       -       -       -       436,123  

Stock issuance

    150,000       -       -       -       -       150,000  

Repurchase of shares

    -       -       -       (40,590 )     -       (40,590 )

Net Income

    -       -       -       -       3,851,342       3,851,342  

Balance at June 30, 2023

  $ 8,430,351     $ 1,465,522     $ 1,741,901     $ (2,237,027 )   $ 41,823,985     $ 51,224,732  

 

   

COMMON SHARES

                   

COMMON SHARES

 
   

ISSUED

   

TREASURY SHARES

   

OUTSTANDING

 
   

CLASS A

   

CLASS B

   

CLASS A

   

CLASS B

   

CLASS A

   

CLASS B

 
                                                 

Balance at March 31, 2023

    2,826,149       914,283       52,274       182,435       2,773,875       731,848  

Stock awards (forfeits) issued to directors and officers

    (500 )     -       -       -       (500 )     -  

Stock issuance

    7,317       -       -       -       7,317       -  

Repurchase of shares

    -       -       1,800       -       (1,800 )     -  

Balance at June 30, 2023

    2,832,966       914,283       54,074       182,435       2,778,892       731,848  

 

   

COMMON SHARES -

                                 
   

NO PAR VALUE

                                 
                   

CONTRIBUTED

   

TREASURY

   

RETAINED

         
   

CLASS A

   

CLASS B

   

CAPITAL

   

SHARES

   

EARNINGS

   

TOTAL

 
                                                 

Balance at March 31, 2022

  $ 6,292,130     $ 1,465,522     $ 1,741,901     $ (2,046,822 )   $ 29,085,643     $ 36,538,374  

Share-based compensation expense

    19,807       -       -       -       -       19,807  

Acquisition

    1,000,012       -       -       -       -       1,000,012  

Repurchase of shares

    -       -       -       (75,000 )     -       (75,000 )

Net Income

    -       -       -       -       1,171,264       1,171,264  

Balance at June 30, 2022

  $ 7,311,949     $ 1,465,522     $ 1,741,901     $ (2,121,822 )   $ 30,256,907     $ 38,654,457  

 

   

COMMON SHARES

                   

COMMON SHARES

 
   

ISSUED

   

TREASURY SHARES

   

OUTSTANDING

 
   

CLASS A

   

CLASS B

   

CLASS A

   

CLASS B

   

CLASS A

   

CLASS B

 
                                                 

Balance at March 31, 2022

    2,752,987       914,283       44,210       182,435       2,708,777       731,848  

Acquisition

    38,462       -       -       -       38,462       -  

Repurchase of shares

    -       -       3,000       -       (3,000 )     -  

Balance at June 30, 2022

    2,791,449       914,283       47,210       182,435       2,744,239       731,848  

 

4

 

CRAWFORD UNITED CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)

 

Six Months Ended June 30, 2023 and 2022

 

   

COMMON SHARES -

                                 
   

NO PAR VALUE

                                 
                   

CONTRIBUTED

   

TREASURY

   

RETAINED

         
   

CLASS A

   

CLASS B

   

CAPITAL

   

SHARES

   

EARNINGS

   

TOTAL

 
                                                 

Balance at December 31, 2022

  $ 7,351,563     $ 1,465,522     $ 1,741,901     $ (2,125,252 )   $ 34,581,171     $ 43,014,905  

Share-based compensation expense

    928,788       -       -       -       -       928,788  

Stock issuance

    150,000       -       -       -       -       150,000  

Repurchase of shares

    -       -       -       (111,775 )     -       (111,775 )

Net Income

    -       -       -       -       7,242,815       7,242,815  

Balance at June 30, 2023

  $ 8,430,351     $ 1,465,522     $ 1,741,901     $ (2,237,027 )   $ 41,823,985     $ 51,224,732  

 

   

COMMON SHARES

                   

COMMON SHARES

 
   

ISSUED

   

TREASURY SHARES

   

OUTSTANDING

 
   

CLASS A

   

CLASS B

   

CLASS A

   

CLASS B

   

CLASS A

   

CLASS B

 
                                                 

Balance at December 31, 2022

    2,791,449       914,283       47,412       182,435       2,744,037       731,848  

Stock awards (forfeits) issued to directors and officers

    34,200       -       -       -       34,200       -  

Stock issuance

    7,317       -       -       -       7,317       -  

Repurchase of shares

    -       -       6,662       -       (6,662 )     -  

Balance at June 30, 2023

    2,832,966       914,283       54,074       182,435       2,778,892       731,848  

 

   

COMMON SHARES -

                                 
   

NO PAR VALUE

                                 
                   

CONTRIBUTED

   

TREASURY

   

RETAINED

         
   

CLASS A

   

CLASS B

   

CAPITAL

   

SHARES

   

EARNINGS

   

TOTAL

 

Balance at December 31, 2021

  $ 5,393,823     $ 1,465,522     $ 1,741,901     $ (1,981,113 )   $ 28,019,768     $ 34,639,901  

Share-based compensation expense

    918,114       -       -       -       -       918,114  

Issuance for acquisition

    1,000,012       -       -       -       -       1,000,012  

Repurchase of shares

    -       -       -       (140,709 )     -       (140,709 )

Net Income

    -       -       -       -       2,237,139       2,237,139  

Balance at June 30, 2022

  $ 7,311,949     $ 1,465,522     $ 1,741,901     $ (2,121,822 )   $ 30,256,907     $ 38,654,457  

 

   

COMMON SHARES

                   

COMMON SHARES

 
   

ISSUED

   

TREASURY SHARES

   

OUTSTANDING

 
   

CLASS A

   

CLASS B

   

CLASS A

   

CLASS B

   

CLASS A

   

CLASS B

 

Balance at December 31, 2021

    2,720,787       914,283       41,844       182,435       2,678,943       731,848  

Stock awards (forfeits) issued to directors and officers

    32,200       -       -       -       32,200       -  

Acquisition

    38,462       -       -       -       38,462       -  

Repurchase of shares

    -       -       5,366       -       (5,366 )     -  

Balance at June 30, 2022

    2,791,449       914,283       47,210       182,435       2,744,239       731,848  

 

5

 

 

 

CRAWFORD UNITED CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOW (Unaudited)

 

  

Six Months Ended June 30,

 
  

2023

  

2022

 

Cash Flows from Operating Activities

        

Net Income

 $7,242,815  $2,237,139 

Adjustments to reconcile net income to net cash provided by operating activities:

        

Depreciation and amortization

  2,024,296   1,855,257 

Unrealized loss (gain) on investments in equity securities

  (118,482)  434,069 

Amortization of right of use assets

  792,382   647,471 

Loss on disposal of assets

  59,071   15,370 

Non-cash share-based compensation expense

  928,788   918,114 

Changes in assets and liabilities:

        

Accounts receivable

  697,128   (3,100,400)

Inventories

  (987,162)  (2,219,722)

Contract assets

  (125,609)  71,046 

Prepaid expenses & other assets

  470,831   (599,793)

Accounts payable

  (1,251,066)  2,603,596 

Lease liabilities

  (327,772)  (639,452)

Other current liabilities

  (576,177)  1,383,324 

Unearned revenue

  (606,775)  843,202 

Total adjustments

  979,453   2,212,082 

Net Cash Provided by Operating Activities

  8,222,268   4,449,221 

Cash Flows from Investing Activities

        

Cash paid for business acquisitions

  -   (4,331,739)

Capital expenditures

  (866,127)  (324,967)

Net Cash (Used in) Investing Activities

  (866,127)  (4,656,706)

Cash Flows from Financing Activities

        

Payments on notes

  (1,447,315)  (2,030,541)

Payments on bank debt

  (9,304,931)  (1,916,666)

Borrowings on bank debt

  5,545,035   6,702,395 

       Payments on contingent liability

  -   (750,000)

Share repurchase

  (111,775)  (140,709)

Net Cash (Used in) Provided by Financing Activities

  (5,318,986)  1,864,479 

Net Increase in cash and cash equivalents

  2,037,155   1,656,994 

Cash and cash equivalents at beginning of period

  1,247,627   1,494,415 

Cash and cash equivalents at end of period

 $3,284,782  $3,151,409 

Supplemental disclosures of cash flow information

        

Interest Paid

 $742,808  $438,210 

Supplemental disclosures of noncash financing and investing activity

        

Additions to ROU assets obtained from new operating lease liabilities

 $457,317  $380,298 

Purchase accounting adjustment to Goodwill for a change in inventory

 $147,591  $- 

Purchase accounting adjustment to Goodwill for a change in fixed assets

 $73,520  $- 

Issuance of Class A common shares in business acquisition

 $-  $1,000,012 

Issuance of Class A common shares for capital expenditures

 $150,000  $- 

 

See accompanying notes to consolidated financial statements

 

6

 

 

CRAWFORD UNITED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2023

 

 

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. Certain prior period financial information has been reclassified to conform to the current presentation. Operating results for the three and six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ended December 31, 2023. 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 year ended December 31, 2022

 

During the six-month period ended  June 30, 2023 there have been no changes to the Company's 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 year ended December 31, 2022.

 

New Accounting Standards Recently Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses. 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 reflects 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 became effective for the Company on January 1, 2023 and did not have a material impact on the Company’s results of operations and internal controls on reporting.

 

Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that may affect the reported amounts of certain assets and liabilities and disclosure of contingencies at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

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:

 

7

 

* 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.

 

The following is a description of the valuation methodologies used for the Company's 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 $181,954, $143,631, and $75,930 at June 30, 2023 December 31, 2022  and December 31, 2021, respectively.

  

 

4.  INVENTORY

 

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

 

   

June 30,

   

December 31,

 
   

2023

   

2022

 

Raw materials and component parts

  $ 4,207,457     $ 2,892,820  

Work-in-process

    5,697,360       5,158,252  

Finished products

    11,712,743       13,483,017  

Total inventory

  $ 21,617,560     $ 21,534,089  

Less: inventory reserves

    601,847       1,357,947  

Net inventory

  $ 21,015,713     $ 20,176,142  

 

8

 
  
 

5. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

 

Goodwill represents the excess of cost over the fair value of identifiable assets acquired. Goodwill is tested annually for impairment, or more frequently if indicators of impairment are identified.

 

For the identified reporting units, impairment testing was performed as of  December 31, 2022 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 fair value exceeded carrying value for all reporting units and no indefinite-lived intangible assets or goodwill was determined to be impaired. There have been no impairment indicators identified during the three or six-month periods ended June 30, 2023.

 

Goodwill increased by $0.2 million from $16.2 million at  December 31, 2022 to $16.4 million at  June 30, 2023. The increase in Goodwill was driven by a purchase accounting adjustment to Goodwill, recorded in the second quarter, for Knitting Machinery Company of America (KMC). Goodwill increased by $1.8 million from $14.4 million at  December 31, 2021 to $16.2 million at December 31, 2022. The increase in Goodwill was driven by the addition of $2.0 million in the Industrial and Transportation Products segment related to the acquisitions of Reverso Pumps & Separ America and KMC and in the first and second quarters of 2022, respectively. These increases were partially offset by a decrease of $0.2 million related to a purchase accounting adjustment for Global-Tek, also in the Industrial and Transportation Products segment.

 

Goodwill by reportable segment is as follows:

  

  

June 30,

  

December 31,

 
  

2023

  

2022

 

Commercial Air Handling Equipment Segment:

        

Beginning Balance

 $478,256  $478,256 

Acquisitions

  -   - 

Adjustments

  -   - 

Ending Balance

 $478,256  $478,256 
         

Industrial and Transportation Products Segment:

        

Beginning Balance

 $15,753,682  $13,926,362 

Acquisitions

  -   1,997,174 

Adjustments

  221,111   (169,854)

Ending Balance

 $15,974,793  $15,753,682 
         

Total Company:

        

Beginning Balance

 $16,231,938  $14,404,618 

Acquisitions

  -   1,997,174 

Adjustments

  221,111   (169,854)

Ending Balance

 $16,453,049  $16,231,938 

 

The Company's intangible assets have been generated via acquisitions. Intangibles are being amortized on a straight-line basis over periods ranging from one to 15 years.

 

Intangible assets are as follows:

 

  

June 30,

  

December 31,

 
  

2023

  

2022

 

Customer list intangibles

 $9,316,000  $9,316,000 

Non-compete agreements

  200,000   200,000 

Trademarks

  4,445,649   4,445,649 

Total intangible assets

  13,961,649   13,961,649 

Less: accumulated amortization

  5,099,694   4,469,089 

Intangible assets, net

 $8,861,955  $9,492,560 

 

Amortization of intangibles assets was: $315,302 and $320,895 for the three months ended June 30, 2023 and 2022, respectively and $630,605 and $640,124 for the six months ended June 30, 2023 and 2022, respectively.

 

9

 
  
 

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 expensed as incurred. Property, plant and equipment are as follows:

 

   

June 30,

   

December 31,

 
   

2023

   

2022

 

Land

  $ 231,034     $ 231,034  

Buildings and improvements

    3,492,667       3,222,243  

Machinery & equipment

    23,914,606       23,301,660  

Total property, plant & equipment

    27,638,307       26,754,937  

Less: accumulated depreciation

    12,911,814       11,541,494  

Property plant & equipment, net

  $ 14,726,493     $ 15,213,443  

 

During the three months ended June 30, 2023, the Company issued 7,317 Class A Common Shares, valued at $150,000, to Air Power Dynamics, LLC in an arms-length exchange for an aerospace tooling machine. Air Power Dynamics, LLC is controlled by Ambassador Edward Crawford, who is the chairman of the Company's board. 

 

Depreciation expense was $774,162 and $585,412 for the three months ended June 30, 2023 and 2022, respectively and $1,370,484 and $1,181,246 for the six months ended June 30, 2023 and 2022, respectively.

 

  

 

7.  INVESTMENTS IN EQUITY SECURITIES

 

Investments in equity securities are valued based on quotes stock prices in active markets, thus Level 1 in the fair value hierarcy, and summarized in the table below:

 

                   

UNREALIZED

   

REALIZED

         
   

BALANCE

   

ACQUISITIONS,

   

GAINS

   

GAINS

   

BALANCE

 
   

AT

   

DISPOSITIONS

   

(LOSSES)

   

INCLUDED

   

AT END

 
   

BEGINNING

   

AND

   

INCLUDED

   

IN

   

OF

 
   

OF YEAR

   

SETTLEMENTS

   

IN EARNINGS

   

EARNINGS

   

PERIOD

 

December 31, 2022

  $ 1,518,244     $ -     $ (860,273 )   $ -     $ 657,971  
                                         

Year-to-date June 30, 2023

    657,971       -       118,482       -       776,453  

 

 

 

 

10

 
  
 

8.  BANK DEBT 

 

The Company is party to a Credit Agreement with JPMorgan Chase Bank, N.A. as lender (as amended, the “Credit Agreement”). The Company entered into a sixth amendment to the Credit Agreement on June 12, 2023. The most significant change in the amended Credit Agreement was the discontinued use of LIBOR as a reference rate, with the adoption of the Federal Reserve Bank of New York's Secured Overnight Financing Rate (SOFR) as the primary reference rate. This change was anticipated and aligns with the US Dollar LIBOR panel ceasing on June 30, 2023.  

 

The Credit Agreement, both before and after the execution of the sixth amendment, is comprised of a revolving facility in the amount of $30,000,000 that matures on June 1, 2024. A Term Loan A matured December 1, 2022, and was paid in full on January 4, 2023.

 

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 SOFR (previously LIBOR) plus applicable margins of (i) (0.25%) for Prime Rate loans and (ii) 1.75% for SOFR (previously LIBOR) loans. 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:

 

   

June 30,

   

December 31,

 
   

2023

   

2022

 

Term debt

  $ -     $ 222,222  

Revolving debt

    15,743,444       19,281,119  

Total Bank debt

    15,743,444       19,503,341  

Less: current portion

    15,709,850       222,222  

Non-current bank debt

    33,594       19,281,119  

Less: unamortized debt costs

    33,594       56,801  

Net non-current bank debt

  $ -     $ 19,224,318  

 

The Company had $14.3 million and $10.7 million available to borrow on the revolving credit facility at June 30, 2023 and  December 31, 2022, respectively.

11

 
  
 

9.     NOTES PAYABLE

 

Notes Payable Related Party

The Company had two separate 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 Enterprises, Inc. (“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.

 

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”). The Seller Note had an interest rate of four percent (4%) per annum and the loan was paid in full on March 31, 2023.

 

Notes payable consists of the following: 

 

  

June 30,

  

December 31,

 
  

2023

  

2022

 

In connection with the Komtek Forge acquisition, the Company refinanced the outstanding First Francis promissory notes, accrued interest payable through the refinance date and the assumed First Francis promissory note into one note on January 15, 2021 for a $3,779,784 loan due to First Francis Company, payable in quarterly installments beginning April 15, 2021 and maturing on October 15, 2025

 $1,703,062  $2,587,877 

In connection with the CAD acquisition, the Company entered into a promissory note on July 1, 2018 for a $9,000,000 loan due to the seller, payable in quarterly installments beginning September 30, 2018. The note was paid in full on March 31, 2023

  -   562,500 

Total notes payable

  1,703,062   3,150,377 

Less current portion

  814,351   1,303,972 

Notes payable – non-current portion

 $888,711  $1,846,405 

12

 
  
 

10. LEASES

 

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

 

Supplemental balance sheet information related to leases:

 

   

June 30,

   

December 31,

 
   

2023

   

2022

 

Operating leases:

               

Operating lease right-of-use assets, net

  $ 9,189,216     $ 9,524,280  
                 

Other current liabilities

    1,686,426       1,705,224  

Operating lease liabilities

    7,751,179       8,060,152  

Total operating lease liabilities

  $ 9,437,605     $ 9,765,376  

Weighted Average Remaining Lease Term

               

Operating Leases (in years)

    7.4       7.7  

Weighted Average Discount Rate

               

Operating Leases

    5 %     5 %

  

 

11. EARNINGS PER COMMON SHARE 

 

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

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
                                 
   

2023

   

2022

   

2023

   

2022

 
                                 

Earnings Per Share - Basic

                               

Net Income

  $ 3,851,342     $ 1,171,264     $ 7,242,815     $ 2,237,139  

Weighted average shares of common stock outstanding - Basic

    3,507,108       3,464,765       3,504,978       3,449,465  

Earnings Per Share - Basic

  $ 1.10     $ 0.34     $ 2.07     $ 0.65  
                                 

Earnings Per Share - Diluted

                               

Weighted average shares of common stock outstanding - Basic

    3,507,108       3,464,765       3,504,978       3,449,465  

Unvested Restricted Stock Awards

    11,278       -       2,308       -  

Weighted average shares of common stock - Diluted

    3,518,386       3,464,765       3,507,286       3,449,465  

Earnings Per Share - Diluted

  $ 1.09     $ 0.34     $ 2.07     $ 0.65  

 

13

 
  
 

12. ACQUISITIONS

 

Reverso Pumps and Separ America

 

Effective January 10, 2022, Crawford REV Acquisition Company LLC (name later changed to Reverso Pumps LLC or “Reverso Pumps”), a Delaware limited liability company and indirect wholly-owned subsidiary of Crawford United Corporation (the “Company”), completed the acquisition (the “Reverso Transaction”) of substantially all the assets of Reverso Pumps, Inc., a Florida corporation and developer, designer, manufacturer, seller and distributor of oil change systems, fuel and oil transfer pumps, fuel primers, fuel polishing systems and engine flushing systems (“Reverso”), pursuant to an Asset Purchase Agreement (the “Reverso Asset Purchase Agreement”) entered into and effective January 10, 2022 by and among Reverso Pumps, the Seller, the seller parties named therein and the Seller Parties’ representatives named therein. Upon the closing of the Transaction, the assets were transferred and assigned to Reverso Pumps in exchange for approximately $2.6 million in cash.

 

Additionally, effective on January 10, 2022, Crawford SEP Acquisition Company LLC (name later changed to Separ America LLC or “Separ America”), a Delaware limited liability company and indirect wholly-owned subsidiary of the Company, completed the acquisition (the “Separ Transaction,” and with the Reverso Transaction, the “Transactions”) of substantially all the assets of Separ of the Americas, LLC, a Florida limited liability company and developer, designer, manufacturer, seller and distributor of oil change systems, fuel and oil transfer pumps, fuel primers, fuel polishing systems and engine flushing systems (“Separ”) pursuant to an Asset Purchase Agreement (the “Separ Asset Purchase Agreement,” and together with the Reverso Asset Purchase Agreement, the “Purchase Agreements”) by and among Separ America, the Seller, the seller parties named therein and the Seller Parties’ representative named therein. Upon the closing of the Transaction, the assets were transferred and assigned to Separ America in exchange for approximately $1.6 million in cash.

 

Cash Consideration Transferred

  $ 3,951,392  

Seller Transaction Costs

    230,359  

Total Consideration

  $ 4,181,751  
         

Accounts Receivable

    466,887  

Inventory

    1,308,822  

Fixed Assets

    64,710  

Prepaid and Other Assets

    64,080  

Intangible Asset: Customer List & Trademark

    1,300,000  

Goodwill

    1,572,913  

Total Assets Acquired

  $ 4,777,412  
         

Accounts Payable

  $ 542,359  

Accrued Expense

    53,302  

Total Liabilities Assumed

  $ 595,661  

Total Fair Value

  $ 4,181,751  
         

Acquisition transaction costs incurred were:

  $ 124,825  

 

 

 

Goodwill has an assigned value of $1.6 million and represents the expected synergies generated by combining the operations of Reverso, Separ, and the Company. The Company sells marine hoses and related products and the acquisition of Reverso Pumps and Separ America will allow the Company to expand its offerings to customers in the strategically important marine and defense markets. Intangible assets, customer list has an assigned value of $0.5 million which represents the expected value of the list of the customers of Reverso Pumps and Separ America. Intangible assets, trademarks has an assigned value of $0.8 million which represents the expected value of the trademarks of Reverso Pumps and Separ America.

 

14

 
 

Knitting Machinery Company

 

Effective May 1, 2022, Knitting Machinery Company of America, LLC, a Delaware limited liability company (“Knitting Machinery”) and indirect wholly-owned subsidiary of Crawford United Corporation, completed the acquisition of all of the operating assets of KMC Corp. dba Knitting Machinery Corp., a Delaware corporation and specialist in the manufacture of hose reinforcement machinery for the plastic, rubber and silicone industries pursuant to an Asset Purchase Agreement entered into as of May 1, 2022. 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 Knitting Machinery in exchange for approximately $250,000 in cash and 38,462 Class A Common Shares valued at $1.0 million.

 

Cash Consideration Transferred

  $ 250,000  

Fair Value of Stock Consideration

    1,000,012  

Total Consideration

  $ 1,250,012  
         

Cash

  $ 100,000  

Accounts Receivable

    155,932  

Inventory

    517,270  

Fixed Assets

    90,603  

Intangible Assets

    150,000  

Goodwill

    645,372  

Total Assets Acquired

  $ 1,659,177  
         

Accounts Payable

  $ 33,694  

Deferred Revenue

    375,471  

Total Liabilities Assumed

  $ 409,165  

Total Fair Value

    1,250,012  
         

Acquisition transaction costs incurred were:

  $ 30,479  

 

Goodwill has an assigned value of $0.65 million and represents the expected synergies generated by combining the operations of KMC and the Company. Goodwill increased by $0.2 million from $0.4 million at  December 31, 2022 to $0.6 million at  June 30, 2023. The increase in Goodwill was driven by a purchase accounting adjustment to Goodwill for a change in inventory and fixed assets. The Company utilizes industrial hoses for customers in the Industrial and Transportation Products segment and the acquisition of KMC allows the Company to strengthen its supply chain. Intangible asset, trademark has an assigned value of $0.075 million which represents the expected value of the KMC trade name in the market. Intangible asset, customer list has an assigned value of $0.075 million which represents the expected value of the list of the customers of KMC to the Company.

 

Sales and Net Income for the Acquired Companies

Sales and net income information for the acquired companies, Reverso Pumps LLC (“Reverso Pumps”), Separ America LLC (“Separ America”) and Knitting Machinery Company of America LLC (“Knitting Machinery”) since the respective acquisition dates for the six months ended June 30, 2023 and 2022 are provided below.

 

   

Six Months ended

   

Six Months ended

 
   

June 30, 2023

   

June 30, 2022

 
   

Sales

   

Net Income

   

Sales

   

Net Income

 

Acquired Companies:

                               

Reverso Pumps (acquired January 10, 2022)

  $ 3,488,362     $ 628,288     $ 2,548,563     $ 351,769  

Separ America (acquired January 10, 2022)

    1,493,852       487,400       869,739       234,595  

Knitting Machinery (acquired May 1, 2022)

    138,566       15,519       579,388       61,415  

Subtotal Acquired Companies

  $ 5,120,780       1,131,207       3,997,690       647,779  
                                 

All Other Companies

    71,296,591       6,111,608       58,907,083       1,589,360  

Total

  $ 76,417,371     $ 7,242,815     $ 62,904,773     $ 2,237,139  

 

15

 
  
 

13. SEGMENT AND RELATED INFORMATION  

 

The Company reports operations for two business segments: (1) Commercial Air Handling Equipment and (2) Industrial and Transportation Products. The identification of our operating segments is based on guidance in ASC 280-10-50-1. The Company's management evaluates segment performance based primarily on segment operating profit. Intangible assets are allocated to each segment and the related amortization of these assets are recorded in selling, general and administrative expenses. The Company does not allocate corporate costs to the respective segments.

 

Both the Commercial Air Handling Equipment segment and the Industrial and Transportation Products segment may engage in business activities from which they may recognize revenues and incur expenses relating to transactions with other components of the Company. The operating results for both the Commercial Air Handling Equipment segment and the Industrial and Transportation Products segment are reviewed regularly by our chief operating decision maker and is considered in making decisions about resources to be allocated to the segment in assessing its performance. Financial information for both segments is available in internal reports that are prepared on a monthly basis.

 

Commercial Air Handling Equipment:

The Commercial Air Handling Equipment 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 ("Federal Hose") of Painesville, Ohio. Federal Hose manufactures 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, CAD 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, and 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 specializes 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 LLC (name later changed to Global-Tek Colorado LLC or “Global-Tek Colorado”) in Longmont, Colorado on March 2, 2021. Global-Tek and Global-Tek Colorado 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. The Company purchased substantially all of the assets of Crawford REV Acquisition Company LLC (name later changed to Reverso Pumps LLC or “Reverso Pumps”), in Davie, Florida on January 10, 2022. Reverso Pumps develops, designs, manufactures, sells and distributes oil change systems, fuel and oil transfer pumps, fuel primers, fuel polishing systems and engine flushing systems.

 

16

 
 

The Company purchased substantially all of the assets of Crawford SEP Acquisition Company LLC (name later changed to Separ America LLC or “Separ America”), in Davie, Florida on January 10, 2022. Separ America develops, designs, manufactures, sells and distributes oil change systems, fuel and oil transfer pumps, fuel primers, fuel polishing systems and engine flushing systems. The Company purchased substantially all of the assets of KMC Corp. dba Knitting Machinery Corp. (“Knitting Machinery”), in Cleveland, Ohio and Greenville, Ohio on May 1, 2022. Knitting Machinery specializes in manufacturing hose reinforcement machinery for the plastic, rubber and silicone industries.

 

The factors used to determine the Company’s reportable segments follow the guidance of ASC 280-10-50-21 and 50-10-22 and include consideration of the type of products or services delivered, the customers and end markets served, the appliable revenue recognition methodology and the length of time it takes to deliver products or services to customers. The Commercial Air Handling Equipment segment was identified as a reportable segment consisting of Air Enterprises, because Air Enterprises is strategically and operationally different from our other companies in several ways. First, Air Enterprises sells equipment to end customers and our other businesses that fall into the Industrial and Transportation Products segment sell products and components to end customers, not equipment. Second, the Commercial Air Handling Equipment segment delivers custom air handling solutions to customers which is different than the Industrial and Transportation Products segment which delivers manufactured metal, silicone, hydraulic and marine hoses, complex engineered components, highly engineered forgings, highly engineered and machined parts and data analytic technology applications. Third, the Commercial Air Handling Equipment segment serves customers primarily in the health care and education end markets while the Industrial and Transportation Products segment delivers products to customers in the heavy-duty truck manufacturing, agricultural, industrial, petrochemical, aerospace, defense, industrial gas turbine, medical prosthetics, alternative energy and emergency vehicle end markets. Fourth, the Commercial Air Handling Equipment segment recognizes revenue primarily over time while the Industrial and Transportation Products segment recognizes revenue primarily at a point in time. Fifth, the Commercial Air Handling Equipment segment manufactures custom air handling solutions for customers over a period of three to eighteen months from the time the order is received to the time the air handling solution is delivered to the end customer as compared to the Industrial and Transportation Products segment which sells and delivers products to customers much more quickly, often within 30 days or less. For the reasons previously mentioned, Air Enterprises is strategically and operationally different than the other businesses owned by the Company and management finds it useful to include this business in the Commercial Air Handling Segment which is separate and distinct from all of our other businesses that reside in the Industrial and Transportation Products segment.

 

Corporate costs not allocated to the segments: 

Costs incurred at corporate headquarters do not directly relate to the two reportable segments and thus are not allocated. The nature of these costs has remained consistent, but the dollar values have increased which coincides with the Company's growth.

 

17

 
 

Information by industry segment is set forth below: 

 

 

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 
  

2023

  

2022

  

2023

  

2022

 

Sales summary by segment

                

Commercial Air Handling

 $14,860,001  $11,845,380  $30,911,194  $23,403,254 

Industrial and Transportation Products

  22,073,014   20,056,647   45,506,177   39,501,519 

Total Sales

  36,933,015   31,902,027   76,417,371   62,904,773 
                 

Gross profit summary by segment

                

Commercial Air Handling

  5,029,777   2,453,139   9,469,684   5,082,796 

Industrial and Transportation Products

  5,445,101   4,315,352   11,521,745   8,052,100 

Total Gross Profit

  10,474,878   6,768,491   20,991,429   13,134,896 
                 

Segment operating profit

                

Commercial Air Handling

  3,987,554   1,382,553   7,402,749   2,944,897 

Industrial and Transportation Products

  2,605,748   1,839,634   5,796,850   3,121,620 

Total Segment Operating Profit

  6,593,302   3,222,187   13,199,599   6,066,517 
                 

Corporate charges not allocated to segments

  1,440,938   846,660   2,927,967   2,293,669 

Operating Income

  5,152,364   2,375,527   10,271,632   3,772,848 

Interest charges

  366,101   154,065   735,904   415,081 

Unrealized (gain) loss on investments

  (177,515)  608,954   (118,482)  434,069 

Other (income) expense, net

  (345,968)  16,838   (344,971)  (313,063)

Income before Provision for Income Taxes

 $5,309,746  $1,595,670  $9,999,181  $3,236,761 

 

 

18

 
  
 

14. SUBSEQUENT EVENTS

 

None.

  

 

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS.

 

The following discussion is intended to assist in the understanding of the Company's financial position at June 30, 2023 and December 31, 2022, results of operations for the three and six month periods ended June 30, 2023 and 2022, and cash flows for the three and six month periods ended June 30, 2023 and 2022, 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 within the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. 

 

Items Affecting the Comparability of our Financial Results

 

The Company purchased substantially all of the operating assets of Reverso Pumps, Inc, (“Reverso Pumps”) and Separ of the Americas, LLC, (“Separ America”), both located in Davie, Florida on January 10, 2022.

 

The Company purchased substantially all of the operating assets of KMC Corp. dba Knitting Machinery Corp. (“Knitting Machinery”) located in Cleveland, Ohio and Greenville, Ohio on May 1, 2022.

 

Accordingly, in light of the timing of these transactions, the Company’s results for the Three Months Ended June 30, 2023 include the added results of operations of Knitting Machinery in the Industrial and Transportation Products segment. Conversely, our results for the Three Months Ended June 30, 2022 do not include the full results of operations of Knitting Machinery.

 

Accordingly, in light of the timing of these transactions, the Company’s results for the Six Months Ended June 30, 2023 include the added results of operations of Reverso Pumps, Separ America and Knitting Machinery in the Industrial and Transportation Products segment. Conversely, our results for the Six Months Ended June 30, 2022 do not include the full results of operations of Knitting Machinery, Reverso Pumps and Separ America.  

 

 

19

 

 

Results of Operations Three Months Ended June 30, 2023 and 2022

 

Sales for the quarter ended June 30, 2023 (“current quarter”) increased to $36.9 million, an increase of approximately $5.0 million or 15.8% from sales of $31.9 million during the same quarter of the prior year. The increase in sales for the quarter ended June 30, 2023 was almost exclusively driven by organic growth, including pricing initiatives to offset inflation as well as increased volume, in both of the Company's reportable segments. Discussion regarding segment performance is included in the sections below.

 

    Cost of sales for the current quarter was $26.5 million compared to $25.1 million for the same quarter of the prior year, an increase of $1.3 or 5.3%, which is directly attributable to the sales increase. Gross margin was 28.4% in the current quarter compared to 21.2% for the same quarter of the prior year.  The 720 basis point increase is primarily attributable to an increased sales base allowing for better absorption of fixed costs, normalization of inflationary raw materials and logistics costs, and several plant efficiency initiatives. During the second quarter of 2023, the inflationary headwinds from the prior year have substantially subsided, with permanent raw material price increases largely being shared with customers, combined with direct cost management programs which have resulted in savings.

 

Selling, general and administrative expenses (SG&A) in the current quarter were $5.3 million, compared to $4.4 million, in the same quarter of last year. Selling, general and administrative expenses were consistent as a percentage of sales, with the increased expense incurred to support the Company's rapid sales growth.

 

Interest charges in the current quarter were $0.4 million compared to $0.2 million in the same quarter of the prior year. Total debt outstanding has decreased, thus the increase in interest expense is directly attributable to interest rate increases, which align with the macroeconomic environment. Average total debt (including notes) and average interest rates for the current quarter were $20.4 million and 6.8%, respectively, compared to $29.0 million and 3.1%, respectively, in the same period of last year.

 

Unrealized gain on investment in the current quarter was $0.2 million, compared to a loss of $0.6 million in the prior year quarter. The change is the result of market price changes in the Company's investments in marketable securities. There were no significant changes in the Company's investment strategy or portfolio compared to the second quarter of last year.

 

The Company recognized other income of $0.3 million in the current quarter, resulting from incentives that Global-Tek received from the government of Puerto Rico in the second quarter of 2023 that did not occur in the second quarter of 2022.

 

Income tax expense in the current quarter was $1.5 million compared to $0.4 million in the same quarter of the prior year. Tax expense is higher compared to the same quarter of the prior year primarily because of higher pre-tax income.

 

Net income in the current quarter was $3.9 million, or $1.09 per diluted share, as compared to net income of $1.2 million, or $0.34 per diluted share, for the same quarter of the prior year because of the factors noted above.

 

Commercial Air Handling Segment

 

Sales in the Commercial Air Handling Equipment segment for the quarter ended June 30, 2023 increased to $14.9 million, an increase of approximately $3.0 million, or 25.4%, from sales of $11.8 million during the same period of the prior year. This increase was primarily attributable to an increase in demand as COVID-19 pandemic-related restrictions were lifted and the on-site access necessary to complete the installation of commercial air handling units was restored for certain hospital and university customers.

 

Segment operating profit in the Commercial Air Handling Equipment segment for the current quarter was $4.0 million, or 26.8%, compared to $1.4 million, or 11.7% in the same quarter of the prior year, an increase of $2.6 million or 1,520 basis points. The improved segment operating profit and segment operating margin were primarily a function of the increased revenue base, combined with lessened input costs and a factory that has implemented several efficiency and continuous improvement initiatives. Segment selling, general and administrative costs have remained consistent as compared to the second quarter of last year.

 

 

20

 

Industrial and Transportation Products Segment

 

Sales in the Industrial and Transportation Products segment for the quarter ended June 30, 2023 increased to $22.1 million, an increase of approximately $2.0 million, or 10.1%, from sales of $20.1 million during the same period of the prior year. By design, this segment is diversified and operates across several industries. The growth in the current quarter was primarily the result of increased demand for aerospace components, which is consistent with increased travel in 2023 following the COVID-19 pandemic.

 

Segment operating profit in the Industrial and Transportation Products segment for the current quarter was $2.6 million, or 11.8% , compared  $1.8 million, or 9.2%, in the same quarter of the prior year, an increase of $0.8 million or 260 basis points. The improved segment operating profit and segment operating margin were primarily a function of the increased revenue base, combined with the pass-through of certain inflationary costs. Segment selling, general and administrative costs increased consistent with the sales increase.

 

 

 

21

 

Results of Operations Six Months Ended June 30, 2023 and 2022

 

Sales for the six months ended June 30, 2023 (“current year-to-date period”) increased to $76.4 million, an increase of $13.5 million or 21.5% from sales of $62.9 million during the same year-to-date period of the prior year. The increase in sales for the six months ended June 30, 2023 was almost exclusively driven by organic growth, including pricing initiatives to offset inflation as well as increased volume, spread almost equally between both of the Company's reportable segments.

 

Cost of sales for the six months ended June 30, 2023 was $55.4 million compared to $49.8 million for the same period of the prior year, an increase of $5.7 million or 11.4%, which is directly attributable to the sales increase. Gross margin was 27.5% in the current year-to-date period compared to 21.2% for the same period of the prior year.  The 630 basis point increase was primarily attributable to an increased sales base allowing for better absorption of fixed costs, normalization of inflationary raw materials and logistics costs, and several plant efficiency initiatives. During the six months ended June 30, 2023, the inflationary headwinds from the prior year substantially subsided, with permanent raw material price increases largely being shared with customers, combined with direct cost management programs which have resulted in savings.

 

Selling, general and administrative expenses (SG&A) in the current year-to-date period were $10.7 million, compared to $9.4 million, in the prior year-to-date period. Selling, general and administrative expenses are consistent as a percentage of sales, with the increased expenses incurred to support the Company's rapid sales growth. 

 

Interest charges in the current year-to-date period were approximately $0.7 million compared to $0.4 million in the prior year-to-date period. Total debt outstanding decreased, thus the increase in interest expense was directly attributable to interest rate increases, which align with the macroeconomic environment. Average total debt (including notes) and average interest rates for the most recent six-month period were $21.4 million and 6.6%, respectively, compared to $29.0 million and 2.9%, respectively, in the same period of last year.

Unrealized gain on investment in the current year-to-date period was $0.1 million, compared to a loss of $0.4 million in the prior year-to-date period. The change is the result of market price changes in the Company's investments in marketable securities. There have been no significant changes in the Company's investment strategy or portfolio as compared to the prior year-to-date period.

 

The Company recognized other income of $0.3 million in the current and prior year-to-date periods, resulting from recurring incentives that Global-Tek received from the government of Puerto Rico.

 

Income tax expense in the current year-to-date period was $2.8 million compared to $1.0 million in the same period of the prior year. Tax expense was higher compared to the prior year-to-date period primarily because of higher pre-tax income.

 

Net income in the current year-to-date period was $7.2 million, or $2.07 per diluted share, as compared to net income of $2.2 million, or $ per $0.65 per diluted share, for the same period of the prior year because of the factors noted above.

 

Commercial Air Handling Segment

 

Sales in the Commercial Air Handling Equipment segment for the six months ended June 30, 2023 increased to $30.9 million, an increase of approximately $7.5 million, or 32.1%, from sales of $23.4 million during the same period of the prior year. This increase was primarily attributable to an increase in demand as COVID-19 pandemic-related restrictions were lifted and the on-site access necessary to complete the installation of commercial air handling units was restored for certain hospital and university customers.

 

Segment operating profit in the Commercial Air Handling Equipment segment for the current year-to-date period was $7.4 million, or 23.9%, compared to $2.9 million, or 12.6% in the same year-to-date period of the prior year, an increase of $4.5 million or 1,140 basis points. The improved segment operating profit and segment operating margin were primarily a function of the increased revenue base, combined with lessened input costs and a factory that has implemented several efficiency, cost management and continuous improvement initiatives. Segment selling, general and administrative costs have remained consistent compared to the prior year-to-date period.

 

22

 

Industrial and Transportation Products Segment

 

Sales in the Industrial and Transportation Products segment for the six months ended June 30, 2023 increased to $45.5 million, an increase of approximately $6.0 million or 15.2%, from sales of $39.5 million during the same period of the prior year. The increase in sales for the six months ended June 30, 2023 was primarily driven by increased sales across the Company's portfolio, most notably an improvement of approximately $2.7 million of which is attributable to increased sales of boat hose and filter products, stemming from the macroeconomic trend of higher demand for new boat craft. Also significantly contributing to the sales growth was an increase of approximately $1.8 million and $1.1 million in the Company's sales of aerospace tooling and forged aerospace products, respectively, stemming from the re-emergence of the travel industry. Also contributing to the sales improvement was growth of approximately $1.1 million in sales of the Company's machined defense parts, which largely aligns with the factory's return to historical sales volumes. Offsetting these increases was a decrease of approximately $0.8 million for the Company's digital marketing entity.

 

Segment operating profit in the Industrial and Transportation Products segment for the current year-to-date period was $5.8 million, 12.7%, compared to $3.1 million, or 7.9%, in the same period of the prior year, an increase of $2.7 million or 480 basis points. The improved segment operating profit and segment operating margin were primarily a function of increased revenue from boating, aerospace and defense sales and improved segment gross margin. The segment gross margin improvement was the result of improved absorption of fixed costs due to the growth in sales volume, the pass-through of certain inflationary costs and certain efficiency initiatives. Segment selling, general and administrative costs have increased consistent with the sales increase compared to the prior year-to-date period.

 

Liquidity and Capital Resources

 

The Company’s credit agreement, by and between the Company and JPMorgan Chase Bank, N.A. as lender (as amended, the “Credit Agreement”), provides for a revolving credit facility of up to $30.0 million. At June 30, 2023, there was approximately $14.3 million of borrowing availability, which has increased in recent quarters as the Company generated cash, and used that cash to pay down debt. As the Credit Agreement reaches maturity in June 2024, the Company believes it is well positioned to negotiate a new credit facility which will provide financial flexibility to fund not only working capital, but acquisitions and other strategic initiatives. 

 

Operating Activities. Cash flows from operating activities can fluctuate significantly from period to period as working capital needs and the timing of payments impact reported cash flows. Net cash provided by operating activities was $8.2 million for the six months ended June 30, 2023, compared to $4.4 million net cash provided by operating activities for the prior year period. The improvement in cash flow from operations is most directly attributable to the increase in net income. Another key contributor of the improvement was the Company's focus on receivable collections, which provided $0.7 million in cash during the six months ended June 30, 2023, compared to usage of $3.1 million in the prior year period. Despite its growing sales base, the Company invested $1.2 million less in inventory during the six months ended June 30, 2023 compared to the prior year period. Partially offsetting these improvements was a use of $1.3 million on accounts payable during the six months ended June 30, 2023 compared to proceeds of $2.6 million in the prior year period. The Company maintains strict oversight of disbursements, and this change is largely the result of invoice timing.

 

Investing Activities. Cash used in investing activities for the six months ended June 30, 2023 was $0.9 million, compared to cash used in investing activities of $4.7 million in the prior year period. Cash used in investing activities for the period ended June 30, 2023 was for capital expenditures in the normal course of business. Cash used in investing activities for the period ended June 30, 2022 was for the acquisitions of Knitting Machinery Corporation, Reverso Pumps and Separ America in the Industrial and Transportation Products segment as well as capital expenditures in the normal course of business.

 

Financing Activities. Cash used in financing activities was approximately $5.3 million for the six months ended June 30, 2023, compared to cash provided by financing activities of $1.9 million in the same period a year ago. Beginning in the second half of 2022, the Company has utilized cash flow from operations to pay down its total debt. In the prior year period, the Company borrowed on its revolving credit facility to fund the acquisitions noted above.

 

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 until the anticipated execution of a new credit facility. Based on a combination of increased profitability and decreased debt levels, the Company believes it is well positioned to negotiate a new credit facility to support ongoing operations as well as growth initiatives. Notwithstanding the Company's expectations, if the Company's operating results decrease as the result of pressures on the business due to, for example, supply chain interruptions or delays, increases in material, freight or labor costs, inflationary pressures, currency or interest rate fluctuations, regulatory issues, a downturn in general economic conditions, 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. Similarly, and while also not expected, it is possible that some or all of these factors could make it difficult to secure a new credit agreement, and there is no assurance that the Company will be able to do so on attractive terms or at all. See Note 8 and 9 to the consolidated financial statements for further information on the Company's total debt.

 

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 until the Company’s completion of certain contractual requirements. At June 30, 2023, the Company had secured performance and payment bonds in the amount of $8.5 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

 

Preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make certain estimates and assumptions which affect amounts reported in our consolidated financial statements. On an ongoing basis, we evaluate the accounting policies and estimates that are used to prepare financial statements. Management has made their best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We do not believe that there is great likelihood that materially different amounts would be reported under different conditions or using different assumptions related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.

 

23

 

Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed below. On a regular basis, critical accounting policies are reviewed with the Audit Committee of the Board of Directors.

 

Revenue Recognition: We recognize revenue with respect to customer orders when our obligations under the contract terms are satisfied and control of the product transfers to the customer, typically upon shipment. Revenue from certain contracts in the Commercial Air Handling Equipment segment is accounted for over time, when products are manufactured or services are performed, as control transfers under these arrangements. We follow a cost-based input method, since there is no objective output measure that would fairly depict the transfer of control over the life of the performance obligation. Progress on the performance obligation is measured by the proportion of actual costs incurred to the total costs expected to complete the contract. Costs included in the measure of progress include direct labor and third-party. This cost-based method of revenue recognition requires the Company to make estimates of costs to complete its projects on an ongoing basis. Significant judgment is required to evaluate assumptions related to these estimates. The effect of revisions to estimates related to the transaction price or costs to complete a project are recorded on a cumulative catch-up basis. Certain contracts may be terminated by the customer; however, in the event of termination, most contracts require payment for services rendered through the date of termination.

 

Allowance for Obsolete and Slow-Moving Inventory: Inventories are valued using the first-in, first-out (“FIFO”) method; stated at the lower of cost or net realizable value; and are reduced by an allowance for obsolete and slow-moving inventories. The allowance is estimated based on management’s review of inventories on hand with minimal sales activity, which is compared to estimated future usage and sales. Inventories identified by management as slow-moving or obsolete are reserved for based on estimated selling prices less disposal costs. Though we consider these allowances adequate and proper, changes in economic conditions in specific markets in which we operate could have a material effect on allowances required.

 

Business Combinations: Business combinations are accounted for using the purchase method of accounting under ASC 805, “Business Combinations.” This method requires the Company to record assets and liabilities of the businesses acquired at their estimated fair values as of the acquisition date. Any excess of the cost of the acquisition over the fair value of the net assets acquired is recorded as goodwill. Determining the fair value requires management to make estimates and assumptions including discount rates, rates of return on assets, and long-term sales growth rates.

 

Goodwill and Indefinite Lived Intangible Assets: As referenced by ASC 350 “Intangibles- Goodwill and other” (“ASC 350”), management performs its annual impairment test for goodwill and intangible assets at least annually or more frequently, if impairment indicators arise at the reporting unit level. Our reporting units have been identified at the individual company component level, with each individual subsidiary operating company constituting its own reporting unit. For 2022 management performed qualitative and quantitative testing for each individual company with a goodwill balance other than those companies that were newly acquired within one year.

 

Our goodwill impairment analysis utilizes a qualitative approach comparing carrying amount of the reporting unit to its estimated fair value. To the extent that the qualitative approach indicates that it is more likely than not that the carrying amount is less than its fair value, we apply a quantitative approach as a secondary step. In applying the quantitative approach, we use an income approach to estimate the fair value of the reporting unit. The income approach uses a number of factors, including future business plans and actual and forecasted operating results. The significant assumptions employed under this method include discount rates; revenue growth rates, including assumed terminal growth rates; and operating margins used to project future cash flows for the operating company. The discount rates utilized reflect market-based estimates of capital costs and discount rates adjusted for management’s assessment of a market participant’s view with respect to other risks associated with the projected cash flows of the individual company. Our estimates are based upon assumptions we believe to be reasonable, but which by nature are uncertain and unpredictable. We believe we incorporate reasonable assumptions into our analysis of goodwill impairment testing for a reporting unit, such that actual experience would need to be materially out of the range of expected assumptions in order for an impairment to remain undetected.

 

24

 

 

In conducting our 2022 annual goodwill impairment analysis, we determined that the goodwill for CAD Enterprises at December 31, 2022 was $7.3 million. In our qualitative assessment of CAD Enterprises, we noted a decline in revenue from $30.1 million in 2019 to $18.9 million in 2020, $18.3 million in 2021 and $15.5 million in 2022 and a decline in after-tax income margin from 5.8% in 2019 to -4.6% in 2020, -0.5% in 2021, and -3.4% in 2022 and thus determined to conduct a quantitative assessment of CAD Enterprises. The quantitative assessment of CAD Enterprises confirmed that the estimated fair value exceeded carrying value by 12.2 percent, and thus no impairment existed at December 31, 2022. The key assumptions used to estimate fair value included discount rates; revenue growth rates, including assumed terminal growth rates; and after-tax income margins used to project future cash flows for CAD Enterprises. The discount rate used to estimate fair value was 10% and was based on estimates of capital costs and management’s assessment of a market participant’s view with respect to other risks associated with the projected cash flows for CAD Enterprises. Our revenue growth rate for the 9-year period in the discounted cash flow model was 10.2% per year, which reflects management’s assessment of estimated future orders for CAD Enterprises based in part on a Long-Term-Agreement (“LTA”) with the Company’s largest customer, a new $7.5 million incremental purchase order with this customer, our previous revenue history including actual revenues of $30.1 million in 2019 before the onset of the COVID-19 pandemic, and a continued business rebound in the aerospace industry. The assumed terminal growth rate for CAD Enterprises was 3% based on management’s assessment of long-term growth rates for the Aerospace industry. The after-tax income margins used to project future margins for the Company were based on the historical margins for CAD Enterprises prior to the COVID-19 pandemic. In 2019, CAD Enterprises earned a debt-free after-tax income margin of 16.6%. The discounted cash flow model used to estimate fair value assumes a debt-free after-tax income margin of 17.3% in 2027, or year 5 of the forecast period and expanding margins to 17.5% in the terminal year. This is based on management’s assessment of our ability to grow SG&A expenses at a slower rate than revenues as the Company achieves more scale. Our estimates are based upon assumptions we believe to be reasonable, but which by nature are uncertain and unpredictable. Potential events and circumstances including global conflicts, materials shortages, inability to increase prices to keep pace with expenses, onset of a global pandemic, departure of key employees and loss of a key customer could negatively affect the key assumptions used for the recent fair value test and are similar to the risk factors noted in Item 1A, Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

 

In conducting our 2022 annual goodwill impairment analysis, we determined that the goodwill for Global-Tek Manufacturing and Global-Tek Colorado at December 31, 2022 was $1.9 million. In our qualitative assessment of Global-Tek Manufacturing and Global-Tek Colorado, we noted a decline in revenue from $9.2 million in 2021 to $6.5 million in 2022 and a decline in after-tax income margin from 17.3% in 2021 to -3.3% in 2022 and thus determined to conduct a quantitative assessment of Global-Tek Manufacturing and Global-Tek Colorado. The quantitative assessment of Global-Tek Manufacturing and Global-Tek Colorado confirmed that the estimated fair value exceeded carrying value by 23.3%, and thus no impairment existed at December 31, 2022. The key assumptions used to estimate fair value included discount rates; revenue growth rates, including assumed terminal growth rates; and after-tax income margins used to project future cash flows for Global-Tek Manufacturing and Global-Tek Colorado. The discount rate used to estimate fair value was 10% and was based on estimates of capital costs and management’s assessment of a market participant’s view with respect to other risks associated with the projected cash flows for Global-Tek Manufacturing and Global-Tek Colorado. Our revenue growth rate for the 9-year period in the discounted cash flow model was 6.5% per year, which reflects management’s assessment of estimated future orders for Global-Tek Manufacturing and Global-Tek Colorado based on our previous revenue history including actual revenues of $9.2 million in 10 months of operations after the acquisition in 2021 before the untimely passing of the General Manager. The assumed terminal growth rate for Global-Tek Manufacturing and Global-Tek Colorado was 3% based on management’s assessment of long-term growth rates for the Aerospace and Defense industries. The after-tax income margins used to project future margins for the Company were based on the historical margins for Global-Tek Manufacturing and Global-Tek Colorado prior to the untimely passing of the General Manager. In 2021, Global-Tek Manufacturing and Global-Tek Colorado earned an debt-free after-tax income margin of 16.4%. The discounted cash flow model used to estimate fair value assumes an after-tax income margin of 6.2% in 2027, or year 5 of the forecast period and expanding margins to 7.8% in the terminal year. This is based on management’s assessment of our ability to grow SG&A expenses at a slower rate than revenues as the Company achieves more scale. Our estimates are based upon assumptions we believe to be reasonable, but which by nature are uncertain and unpredictable. Potential events and circumstances including global conflicts, materials shortages, inability to increase prices to keep pace with expenses, onset of a global pandemic, departure of key employees and loss of a key customer could negatively affect the key assumptions used for the recent fair value test and are similar to the risk factors noted in Item 1A, Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

 

Income Taxes: In accordance with ASC 740, “Income Taxes” (“ASC 740”), we account for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and the tax bases of assets and liabilities and are measured using the currently enacted tax rates. Specifically, we measure gross deferred tax assets for deductible temporary differences and carryforwards, such as operating losses and tax credits, using the applicable enacted tax rates and apply the more likely than not measurement criterion. Further, at each interim reporting period, we estimate an effective income tax rate that is expected to be applicable for the full year. Significant judgment is involved regarding the application of income tax laws and regulations and when projecting the jurisdictional mix of income. Additionally, interpretation of tax laws, court decisions or other guidance provided by taxing authorities influences our estimate of the effective income tax rates. As a result, our actual annual effective income tax rates and related income tax liabilities may differ materially from our interim estimated effective tax rates and related income tax liabilities. Any resulting differences are recorded in the period they become known.

 

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Impact of Inflation

Inflationary economic conditions have increased, and may continue to increase, the Company’s costs of producing its products. The Company’s products are manufactured using various metals and other commodity-based materials including steel, aluminum, rubber and silicone. Freight and labor costs also are significant elements of the Company’s production costs. Inflationary economic conditions increase these various costs. If the Company is unable to continue mitigating inflationary increases through customer pricing actions, alternative supply arrangements or other cost reduction initiatives, its profitability may be adversely affected.

 

Forward-Looking Statements

 

This press release contains forward-looking statements within the meaning of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995, including statements made regarding the Company’s future results. 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) shortages in supply or increased costs of necessary products, components or raw materials from the Company’s suppliers; (b) availability shortages or increased costs of freight and labor for the Company and/or its suppliers; (c) actions that governments, businesses and individuals take in response to public health crises, such as the COVID-19 pandemic, including mandatory business closures and restrictions on onsite commercial interactions; (d) conditions in the global and regional economies and economic activity, including slow economic growth or recession, inflation, currency and credit market volatility, reduced capital expenditures and changes in government trade, fiscal, tax and monetary policies; (e) adverse effects from evolving geopolitical conditions, such as the military conflict in Ukraine; (f) the Company's ability to effectively integrate acquisitions, and manage the larger operations of the combined businesses, (g) the Company's dependence upon a limited number of customers and the aerospace industry, (h) the highly competitive industries 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 our Annual Report 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.

 

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ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of disclosure controls and procedures.

 

Under the supervision of and with the participation of our management, including our chief executive officer and chief financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. Based on that evaluation, our chief executive officer and chief financial officer have concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were effective.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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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. 

 

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, 2022.

 

ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The following table discloses shares repurchased by the Company during the quarter ended June 30, 2023. All shares noted in the table below were Class A common shares repurchased in a privately negotiated transaction.

 

Period

 

Total number of shares purchased

   

Average price paid per share

   

Total number of shares purchased as part of publicly announced program

   

Approximate dollar value of shares that may yet be purchased under the program

 

April 1 to April 30, 2023

    -       -       -       -  

May 1 to May 31, 2023

    -       -       -       -  

June 1 to June 30, 2023

    1,800     $ 22.55       -       -  

Total

    1,800     $ 22.55       -       -  

 

 

ITEM 3 DEFAULTS UPON SENIOR SECURITIES

None

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

During the quarter ended June 30, 2023, no director or officer of the Company adopted or terminated any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement, each as defined in Item 408 of Regulation S-K.

 

 

28

 

 

ITEM 6. EXHIBITS

 

 

10.1

Separation Agreement and Release by and between Crawford United Corporation and John P. Daly (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 4, 2023).
  10.2 Sixth Amendment Credit Agreement
 

31.1

Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive Officer.

 

31.2

Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer.

 

32.1

Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2

Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101.INS*

Inline XBRL Instance

 

101.SCH*

Inline XBRL Taxonomy Extension Schema

 

101.CAL*

Inline XBRL Taxonomy Extension Calculation

 

101.DEF*

Inline XBRL Extension Definition

 

101.LAB*

Inline XBRL Taxonomy Extension Labels

 

101.PRE*

Inline XBRL Taxonomy Extension Presentation

 

104

Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101)

 

 

*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.

 

29

 

 

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 August 9, 2023, thereunto duly authorized.

 

SIGNATURE:

TITLE

/s/ Brian E. Powers

President and Chief Executive Officer

Brian E. Powers

(Principal Executive Officer)

   
   
   

/s/ Jeffrey J. Salay

Vice President and Chief Financial Officer

Jeffrey J. Salay

(Principal Accounting and Financial Officer)

 

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