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

PART I

ITEM 1. FINANCIAL STATEMENTS

CRAWFORD UNITED CORPORATION

CONSOLIDATED BALANCE SHEET

See accompanying notes to consolidated financial statements

CRAWFORD UNITED CORPORATION

CONSOLIDATED STATEMENT OF INCOME (Unaudited)

See accompanying notes to consolidated financial statements

CRAWFORD UNITED CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)

Three Months Ended September 30, 2023 and 2022

CRAWFORD UNITED CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)

Nine Months Ended September 30, 2023 and 2022

CRAWFORD UNITED CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOW (Unaudited)

See accompanying notes to consolidated financial statements

CRAWFORD UNITED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 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 nine months ended September 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 nine-month period ended  September 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:

* 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 balance of accounts receivable, net was $24,463,040, $21,884,807, and $18,387,744 at September 30, 2023,  December 31, 2022  and December 31, 2021, respectively.

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 $177,891, $143,631and $75,930 at September 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:

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 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 nine-month periods ended September 30, 2023.

Goodwill increased by $0.2 million from $16.2 million at  December 31, 2022 to $16.5 million at  September 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:

The Company's intangible assets have primarily 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:

Amortization of intangibles assets was: $315,302 and $316,729 for the three months ended September 30, 2023 and 2022, respectively and $945,907 and $956,853 for the nine months ended September 30, 2023 and 2022, respectively. 

Intangible amortization for the next five years is as follows:

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:

During the second quarter of 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 $806,639 and $597,320 for the three months ended September 30, 2023 and 2022, respectively and $2,177,123 and $1,778,566 for the nine months ended September 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 hierarchy, and summarized in the table below:

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:

The Company had $18.0 million and $10.7 million available to borrow on the revolving credit facility at September 30, 2023 and  December 31, 2022, respectively.

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 4.00% 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 (4.00%) per annum and the loan was paid in full on March 31, 2023.

Notes payable consists of the following: 

10. LEASES

The Company has operating leases for facilities, vehicles and equipment. These leases have remaining terms of under one year to 11 years, some of which include options to extend the leases for up to 10 years.

Supplemental balance sheet information related to leases:

11. EARNINGS PER COMMON SHARE 

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

12. ACQUISITIONS

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.

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 has allowed 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.

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 has expanded its offerings and diversified 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.

Goodwill has an assigned value of $0.6 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  September 30, 2023. The increase in Goodwill was driven by a purchase accounting adjustment to Goodwill in the second quarter of 2023 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 has allowed 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 nine months ended September 30, 2023 and 2022 are provided below.

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.

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.

Information by industry segment is set forth below: 

14. SUBSEQUENT EVENTS

None.

ITEM 2. MANAGEMENT’S 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 September 30, 2023 and December 31, 2022, results of operations for the three and nine month periods ended September 30, 2023 and 2022, and cash flows for the three and nine month periods ended September 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 Nine Months Ended September 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 Nine Months Ended September 30, 2022 do not include the full results of operations of Knitting Machinery, Reverso Pumps and Separ America.  

Results of Operations – Three Months Ended September 30, 2023 and 2022

Sales for the quarter ended September 30, 2023 (“current quarter”) increased to $33.6 million, an increase of approximately $1.5 million or 4.5% from sales of $32.2 million during the same quarter of the prior year. The increase in sales for the quarter ended September 30, 2023 was exclusively driven by organic growth, including price increases of percentages typically in the low single digits, 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 $24.7 million compared to $25.9 million for the same quarter of the prior year, a decrease of $(1.1)1 or 4.4%, which is directly attributable to efficiency efforts at our manufacturing facilities and certain supplier cost reductions largely tied to freight and raw material price normalization. Gross margin was 26.5% in the current quarter compared to 19.6% for the same quarter of the prior year.  In addition to the aforementioned factors, the 690 basis point increase is also attributable to price increases and the increased sales base allowing for better absorption of fixed costs. During the third quarter of 2023, the inflationary headwinds from the prior year substantially subsided, with the resultant elevated raw material prices largely being shared with customers.

Selling, general and administrative expenses (SG&A) in the current quarter were $4.6 million, compared to $4.3 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 growth.

Interest charges in the current quarter were $0.3 million compared to $0.3 million in the same quarter of the prior year. Total debt outstanding has decreased; however, interest expense has remained flat because of interest rate increases, which aligns with the macroeconomic environment. Average total debt (including notes) and average interest rates for the current quarter were $15.4 million and 7.0%, respectively, compared to $25.9 million and 4.1%, respectively, in the same period of last year.

Loss on investment in the current and prior year quarter was $0.1 million. 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 prior year.

The Company recognized other income of $0.2 million in the prior year quarter, resulting from incentives that Global-Tek received from the government of Puerto Rico that did not occur in the third quarter of 2023.

Income tax expense in the current quarter was $1.1 million compared to $0.5 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 $2.8 million, or $0.80 per diluted share, as compared to net income of $1.3 million, or $0.36 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 September 30, 2023 increased to $12.7 million, an increase of approximately $1.2 million, or 10.8%, from sales of $11.5 million during the same period of the prior year. This increase was primarily attributable to an increase in demand for clean air solutions following the COVID-19 pandemic, and the Company continues to work through a strong backlog of orders.

Segment operating profit in the Commercial Air Handling Equipment segment for the current quarter was $3.3 million, or 26.2%, compared to $1.5 million, or 13.3% in the same quarter of the prior year, an increase of $1.8 million or 1,300 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 third quarter of last year.

Industrial and Transportation Products Segment

Sales in the Industrial and Transportation Products segment for the quarter ended September 30, 2023 increased to $20.9 million, an increase of approximately $0.2 million, or 1.0%, from sales of $20.7 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. Also contributing to the increase were price increases, which offset certain elevated ongoing input costs

Segment operating profit in the Industrial and Transportation Products segment for the current quarter was $1.9 million, or 9.3% , compared to $1.1 million, or 5.5%, in the same quarter of the prior year, an increase of $0.8 million or 380 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 increased costs attributable to inflation. Segment selling, general and administrative costs have remained consistent as compared to the third quarter of last year.

Results of Operations – Nine Months Ended September 30, 2023 and 2022

Sales for the nine months ended September 30, 2023 (“current year-to-date period”) increased to $110.1 million, an increase of $15.0 million or 15.7% from sales of $95.1 million during the same year-to-date period of the prior year. The increase in sales for the nine months ended September 30, 2023 was almost exclusively driven by organic growth, including price increases of percentages typically in the low single digits, 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 nine months ended September 30, 2023 was $80.2 million compared to $75.6 million for the same period of the prior year, an increase of $4.5 million or 6.0%, which is directly attributable to the sales increase. Gross margin was 27.2% in the current year-to-date period compared to 19.6% for the same period of the prior year.  The 760 basis point increase was primarily attributable to an increased sales base allowing for better absorption of fixed costs, normalization of increased raw materials and logistics costs attributable to inflation, and several plant efficiency initiatives. During the nine months ended September 30, 2023, the inflationary headwinds from the prior year substantially subsided, with resultant elevated prices 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 $15.3 million, compared to $13.7 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 $1.0 million compared to $0.7 million in the prior year-to-date period. Total debt outstanding decreased, thus the comparability 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 nine-month period were $19.3 million and 6.7%, respectively, compared to $27.0 million and 3.2%, respectively, in the same period of last year.

Loss on investment in the current year-to-date period was immaterial, compared to a loss of $0.5 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 $3.8 million compared to $1.5 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 $10.1 million, or $2.86 per diluted share, as compared to net income of $3.5 million, or $1.01 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 nine months ended September 30, 2023 increased to $43.6 million, an increase of approximately $8.8 million, or 25.1%, from sales of $34.9 million during the same period of the prior year. This increase was primarily attributable to an increase in demand for clean air solutions following the COVID-19 pandemic. More specifically, pandemic-related restrictions were lifted, allowing for the on-site access necessary to complete installations for certain hospital and university customers. The Company continues to work through a strong backlog of orders.

Segment operating profit in the Commercial Air Handling Equipment segment for the current year-to-date period was $10.7 million, or 24.6%, compared to $4.5 million, or 12.8% in the same year-to-date period of the prior year, an increase of $6.3 million or 1,180 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.

Industrial and Transportation Products Segment

Sales in the Industrial and Transportation Products segment for the nine months ended September 30, 2023 increased to $66.4 million, an increase of approximately $6.2 million or 10.3%, from sales of $60.2 million during the same period of the prior year. The increase in sales for the nine months ended September 30, 2023 was primarily driven by increased sales across the Company's portfolio. Significantly contributing to the sales growth was an increase of approximately $3.7 million and $1.2 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 $1.9 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 $0.9 million for the Company's digital marketing entity. Sales of boating products have increased $0.3 million, fueled by strong demand in the first half of the year as orders placed during the pandemic were still being fulfilled.

Segment operating profit in the Industrial and Transportation Products segment for the current year-to-date period was $7.7 million, 11.7%, compared to $4.3 million, or 7.1%, in the same period of the prior year, an increase of $3.5 million or 460 basis points. The improved segment operating profit and segment operating margin were primarily a function of increased revenue from aerospace and defense sales and related 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 increased costs attributable to inflation 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 September 30, 2023, there was approximately $18.0 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 or extended 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 $11.0 million for the nine months ended September 30, 2023, compared to $6.2 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. Despite its growing sales base, the Company invested $3.3 million less in inventory during the nine months ended September 30, 2023 compared to the prior year period. Partially offsetting these improvements was a use of $2.7 million on accounts payable during the nine months ended September 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. Similarly resulting from timing, the Company has an unearned revenue balance $0.9 million higher than in the prior year period.

Investing Activities. Cash used in investing activities for the nine months ended September 30, 2023 was $1.4 million, compared to cash used in investing activities of $4.9 million in the prior year period. Cash used in investing activities for the period ended September 30, 2023 was for capital expenditures in the normal course of business. Cash used in investing activities for the period ended September 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 $9.3 million for the nine months ended September 30, 2023, compared to cash used in financing activities of $0.6 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 generate cash flow. 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 or extended credit facility. Based on a combination of increased profitability and decreased debt levels, the Company believes it is well positioned to negotiate a new or extended 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 or extended 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 September 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.

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 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 that compares the 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 the reporting unit's 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.

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 $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.

Impact of Inflation

Inflationary economic conditions during the past few years have increased, the Company’s costs of producing its products. While these inflationary conditions have stabilized during 2023, the Company's costs have remained elevated, and may increase further if inflationary economic conditions persist. 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 have elevated increase these various costs. If the Company is unable to continue mitigating cost increases through customer pricing actions, alternative supply arrangements or other cost reduction initiatives, the Company's 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 and Israel; (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.

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 September 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS. 

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

ITEM 1A. RISK FACTORS. 

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 September 30, 2023. 

ITEM 3 DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

During the quarter ended September 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.

ITEM 6. EXHIBITS

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned as of November 2, 2023, thereunto duly authorized.