P&F INDUSTRIES INC - Quarter Report: 2010 September (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
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x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the Quarterly Period Ended September 30, 2010
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period
from to
Commission
File Number 1 - 5332
P&F
INDUSTRIES, INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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22-1657413
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(State
or other jurisdiction of
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(I.R.S.
Employer Identification Number)
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incorporation
or organization)
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445
Broadhollow Road, Suite 100, Melville, New York
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11747
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (631) 694-9800
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, and (2) has been subject to such filing
requirements for the past 90 days.Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and
posted to its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§
232.405 of this chapter) during the preceding 12 months (or for such shorter
period the registrant was required to submit and post such
files). Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
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Large
accelerated filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting company x
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(Do
not check if a smaller reporting company)
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No x
As of
November 12, 2010 there were 3,614,562 shares of the registrant’s Class A
Common Stock outstanding.
P&F
INDUSTRIES, INC.
FORM 10-Q
FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010
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PAGE
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PART I
— FINANCIAL INFORMATION
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1
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Item
1.
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Financial
Statements
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1
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Consolidated
Condensed Balance Sheets as of September 30, 2010 (unaudited) and
December 31, 2009
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1
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Consolidated
Condensed Statements of Operations for the three and nine months ended
September 30, 2010 and 2009 (unaudited)
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3
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Consolidated
Condensed Statement of Shareholders’ Equity for the nine months
ended September 30, 2010 (unaudited)
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4
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Consolidated
Condensed Statements of Cash Flows for the nine months ended
September 30, 2010 and 2009 (unaudited)
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5
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Notes
to Consolidated Condensed Financial Statements
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7
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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18
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
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26
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Item
4
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Controls
and Procedures
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26
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PART II
— OTHER INFORMATION
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27
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Item
1.
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Legal
Proceedings
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27
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Item
1A.
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Risk
Factors
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27
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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27
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Item
3.
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Defaults
Upon Senior Securities
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27
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Item
4.
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RESERVED
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27
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Item
5.
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Other
Information
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27
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Item
6.
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Exhibits
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27
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Signature
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28
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Exhibit Index
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29
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i
P&F
INDUSTRIES, INC. AND SUBSIDIARIES
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September 30, 2010
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December 31, 2009
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(unaudited)
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(See Note 1)
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ASSETS
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CURRENT
ASSETS
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||||||||
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Cash
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$ | 430,000 | $ | 546,000 | ||||
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Accounts
receivable — net
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9,029,000 | 7,545,000 | ||||||
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Inventories
– net
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18,706,000 | 19,746,000 | ||||||
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Notes
and other receivables
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69,000 | 110,000 | ||||||
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Deferred
income taxes — net
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670,000 | 670,000 | ||||||
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Income
tax refund receivable
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- | 3,270,000 | ||||||
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Prepaid
expenses and other current assets
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516,000 | 169,000 | ||||||
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Assets
of discontinued operations
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128,000 | 10,797,000 | ||||||
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TOTAL
CURRENT ASSETS
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29,548,000 | 42,853,000 | ||||||
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PROPERTY
AND EQUIPMENT
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Land
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1,550,000 | 1,550,000 | ||||||
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Buildings
and improvements
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7,480,000 | 7,476,000 | ||||||
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Machinery
and equipment
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16,254,000 | 16,130,000 | ||||||
| 25,284,000 | 25,156,000 | |||||||
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Less
accumulated depreciation and amortization
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13,205,000 | 11,990,000 | ||||||
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NET
PROPERTY AND EQUIPMENT
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12,079,000 | 13,166,000 | ||||||
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GOODWILL
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5,150,000 | 5,150,000 | ||||||
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OTHER
INTANGIBLE ASSETS — net
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2,388,000 | 2,651,000 | ||||||
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DEFERRED
INCOME TAXES -net
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1,437,000 | 1,437,000 | ||||||
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ASSETS
OF DISCONTINUED OPERATIONS
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16,000 | 3,924,000 | ||||||
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OTHER
ASSETS — net
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233,000 | 237,000 | ||||||
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TOTAL
ASSETS
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$ | 50,851,000 | $ | 69,418,000 | ||||
See
accompanying notes to consolidated condensed financial statements
(unaudited).
1
P&F
INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED
CONDENSED BALANCE SHEETS
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September 30, 2010
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December 31, 2009
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(unaudited)
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(See Note 1)
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LIABILITIES
AND SHAREHOLDERS’ EQUITY
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CURRENT
LIABILITIES
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Short-term
borrowings
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$ | 11,300,000 | $ | 16,300,000 | ||||
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Accounts
payable
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3,745,000 | 1,396,000 | ||||||
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Other
accrued liabilities
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3,483,000 | 2,003,000 | ||||||
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Liabilities
of discontinued operations
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12,560,000 | 9,719,000 | ||||||
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Current
maturities of long-term debt
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4,814,000 | 5,015,000 | ||||||
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TOTAL
CURRENT LIABILITIES
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35,902,000 | 34,433,000 | ||||||
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Long–term
debt, less current maturities
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1,172,000 | 4,148,000 | ||||||
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Liabilities
of discontinued operations
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310,000 | 5,222,000 | ||||||
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TOTAL
LIABILITIES
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37,384,000 | 43,803,000 | ||||||
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COMMITMENTS
AND CONTINGENCIES
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SHAREHOLDERS’
EQUITY
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Preferred
stock - $10 par; authorized - 2,000,000 shares; no shares
issued
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— | — | ||||||
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Common
stock
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Class A
- $1 par; authorized - 7,000,000 shares; issued - 3,956,431 at
September 30, 2010 and December 31, 2009
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3,956,000 | 3,956,000 | ||||||
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Class B
- $1 par; authorized - 2,000,000 shares; no shares issued
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— | — | ||||||
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Additional
paid-in capital
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10,702,000 | 10,615,000 | ||||||
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Retained
earnings
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1,764,000 | 13,999,000 | ||||||
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Treasury
stock, at cost – 341,869 shares at September 30, 2010 and
December 31, 2009
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(2,955,000 | ) | (2,955,000 | ) | ||||
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TOTAL
SHAREHOLDERS’ EQUITY
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13,467,000 | 25,615,000 | ||||||
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TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
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$ | 50,851,000 | $ | 69,418,000 | ||||
See
accompanying notes to consolidated condensed financial statements
(unaudited).
2
P&F
INDUSTRIES, INC. AND SUBSIDIARIES
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Three months
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Nine months
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|||||||||||||||
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ended September 30,
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ended September 30,
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2010
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2009
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2010
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2009
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Net
revenue
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$ | 14,267,000 | $ | 13,144,000 | $ | 38,734,000 | $ | 39,438,000 | ||||||||
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Cost
of sales
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9,526,000 | 8,798,000 | 25,304,000 | 27,024,000 | ||||||||||||
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Gross
profit
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4,741,000 | 4,346,000 | 13,430,000 | 12,414,000 | ||||||||||||
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Selling,
general and administrative expenses
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3,845,000 | 3,909,000 | 12,246,000 | 11,935,000 | ||||||||||||
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Operating
income
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896,000 | 437,000 | 1,184,000 | 479,000 | ||||||||||||
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Interest
expense
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264,000 | 368,000 | 990,000 | 995,000 | ||||||||||||
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Income
from continuing operations before income taxes
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632,000 | 69,000 | 194,000 | (516,000 | ) | |||||||||||
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Income
tax expense (benefit)
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— | 13,000 | — | (162,000 | ) | |||||||||||
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Net
income (loss) from continuing operations
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632,000 | 56,000 | 194,000 | (354,000 | ) | |||||||||||
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Income
(loss) from discontinued operations (net of tax benefit of none for the
three and nine-month periods ended September 30, 2010 and $344,000
and $670,000 for the three and nine-month periods ended September 30,
2009)
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200,000 | (832,000 | ) | (12,429,000 | ) | (1,593,000 | ) | |||||||||
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Net
income (loss)
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$ | 832,000 | $ | (776,000 | ) | $ | (12,235,000 | ) | $ | (1,947,000 | ) | |||||
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Basic
and diluted earnings (loss) per share
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Continuing
operations
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$ | 0.17 | $ | 0.02 | $ | 0.05 | $ | (0.10 | ) | |||||||
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Discontinued
operations
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0.06 | (0.23 | ) | (3.44 | ) | (0.44 | ) | |||||||||
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Net income
(loss)
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$ | 0.23 | $ | (0.21 | ) | $ | (3.39 | ) | $ | (0.54 | ) | |||||
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Weighted
average common shares outstanding:
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||||||||||||||||
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Basic
and diluted
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3,615,000 | 3,615,000 | 3,615,000 | 3,615,000 | ||||||||||||
See
accompanying notes to consolidated condensed financial statements
(unaudited).
3
P&F
INDUSTRIES, INC. AND SUBSIDIARIES
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Class A Common
Stock, $1 Par
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Additional
paid-in
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Retained
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Treasury stock
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|||||||||||||||||||||||||
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Total
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Shares
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Amount
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capital
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earnings
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Shares
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Amount
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||||||||||||||||||||||
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Balance,
January 1, 2010
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$ | 25,615,000 | 3,956,000 | $ | 3,956,000 | $ | 10,615,000 | $ | 13,999,000 | 342,000 | $ | (2,955,000 | ) | |||||||||||||||
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Net
loss
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(12,235,000 | ) | (12,235,000 | ) | ||||||||||||||||||||||||
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Stock-based
compensation
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87,000 | 87,000 | ||||||||||||||||||||||||||
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Balance,
September 30, 2010
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$ | 13,467,000 | 3,956,000 | $ | 3,956,000 | $ | 10,702,000 | $ | 1,764,000 | 342,000 | $ | (2,955,000 | ) | |||||||||||||||
See
accompanying notes to consolidated condensed financial statements
(unaudited).
4
P&F
INDUSTRIES, INC. AND SUBSIDIARIES
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Nine months
ended September 30,
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||||||||
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2010
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2009
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|||||||
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Cash
Flows from Operating Activities
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||||||||
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Net
loss
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$ | (12,235,000 | ) | $ | (1,947,000 | ) | ||
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Adjustments
to reconcile net loss to net cash provided by operating activities of
continuing operations:
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Loss
from discontinued operations
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12,429,000 | 1,593,000 | ||||||
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Non-cash
charges:
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||||||||
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Depreciation
and amortization
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1,239,000 | 1,176,000 | ||||||
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Amortization
of other intangible assets
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263,000 | 263,000 | ||||||
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Amortization
of other assets
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57,000 | 10,000 | ||||||
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Provision
for losses on accounts receivable
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32,000 | (119,000 | ) | |||||
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Stock-based
compensation
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87,000 | 173,000 | ||||||
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Deferred
income taxes - net
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— | 651,000 | ||||||
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Loss
(gain) on sale of fixed assets
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2,000 | (2,000 | ) | |||||
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Changes
in operating assets and liabilities:
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||||||||
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Accounts
receivable
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(1,516,000 | ) | (890,000 | ) | ||||
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Notes
and other receivables
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41,000 | 17,000 | ||||||
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Inventories
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1,040,000 | 4,694,000 | ||||||
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Income
tax refund receivable
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3,270,000 | (748,000 | ) | |||||
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Prepaid
expenses and other current assets
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(47,000 | ) | 3,000 | |||||
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Other
assets
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(53,000 | ) | 169,000 | |||||
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Accounts
payable
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2,349,000 | 1,614,000 | ||||||
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Accrued
liabilities
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1,480,000 | (676,000 | ) | |||||
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Total
adjustments
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20,673,000 | 7,928,000 | ||||||
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Net
cash provided by operating activities of continuing
operations
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$ | 8,438,000 | $ | 5,981,000 | ||||
See
accompanying notes to consolidated condensed financial statements
(unaudited).
5
P&F
INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS (unaudited)
|
Nine months
ended September 30,
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||||||||
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2010
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2009
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Cash
Flows from Investing Activities:
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||||||||
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Capital
expenditures
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$ | (154,000 | ) | $ | (1,592,000 | ) | ||
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Proceeds
from sale of fixed assets
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— | 3,000 | ||||||
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Additional
purchase price – Hy-Tech
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— | (2,362,000 | ) | |||||
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Net
cash used in investing activities
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(154,000 | ) | (3,951,000 | ) | ||||
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Cash
Flows from Financing Activities:
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||||||||
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Proceeds
from short-term borrowings
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— | 11,614,000 | ||||||
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Repayments
of short-term borrowings
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(5,000,000 | ) | (11,114,000 | ) | ||||
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Term
loan advances
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957,000 | — | ||||||
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Repayments
of term loan
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(4,280,000 | ) | (7,334,000 | ) | ||||
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Net
proceeds from equipment lease financing
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— | 540,000 | ||||||
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Principal
payments on long-term debt
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(604,000 | ) | (194,000 | ) | ||||
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Proceeds
from notes payable
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750,000 | 1,433,000 | ||||||
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Bank
financing costs
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(300,000 | ) | — | |||||
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Net
cash used in financing activities
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(8,477,000 | ) | (5,055,000 | ) | ||||
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Cash
Flows from Discontinued Operations:
|
||||||||
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Operating
activities
|
2,778,000 | 727,000 | ||||||
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Investing
activities
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(2,110,000 | ) | (13,477,000 | ) | ||||
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Financing
activities
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(591,000 | ) | 15,497,000 | |||||
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Net
cash provided by Discontinued Operations
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77,000 | 2,747,000 | ||||||
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Net
decrease in cash
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(116,000 | ) | (278,000 | ) | ||||
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Cash
at beginning of period
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546,000 | 845,000 | ||||||
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Cash
at end of period
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$ | 430,000 | $ | 567,000 | ||||
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Supplemental
disclosures of cash flow information:
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||||||||
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Cash
paid for:
|
||||||||
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Interest
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$ | 914,000 | $ | 960,000 | ||||
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Income
taxes
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$ | 27,000 | $ | 30,000 | ||||
See
accompanying notes to consolidated condensed financial statements
(unaudited).
6
P&F
INDUSTRIES, INC. AND SUBSIDIARIES
NOTE
1 - SUMMARY OF ACCOUNTING POLICIES
Basis
of Financial Statement Presentation
The
accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”) for interim financial information, and with
the rules and regulations of the Securities and Exchange Commission
regarding interim financial reporting. Accordingly, these interim financial
statements do not include all of the information and footnotes required by GAAP
for complete financial statements. In the opinion of the Company, these
unaudited consolidated condensed financial statements include all adjustments
necessary to present fairly the information set forth therein. All such
adjustments are of a normal recurring nature. Results for interim periods are
not necessarily indicative of results to be expected for a full
year.
The
unaudited consolidated condensed balance sheet information as of
December 31, 2009 was derived from the audited consolidated financial
statements included in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2009. The interim financial statements contained
herein should be read in conjunction with that Report.
Principles
of Consolidation
The
unaudited consolidated condensed financial statements contained herein include
the accounts of P&F Industries, Inc. and its subsidiaries (“P&F”).
All significant intercompany balances and transactions have been
eliminated.
P&F
conducts its business operations through two of its wholly-owned subsidiaries:
Continental Tool Group, Inc. (“Continental”) and Countrywide
Hardware, Inc. (“Countrywide”). P&F and its subsidiaries are herein
referred to collectively as the “Company.” In addition, the words “we”, “our”
and “us” refer to the Company. P&F operates in two primary lines
of business, or segments: (i) tools and other products (“Tools”) and
(ii) hardware and accessories (“Hardware”).
The
Company
Tools
The
Company conducts its Tools business through Continental, which in turn currently
operates through its wholly-owned subsidiaries, Florida Pneumatic Manufacturing
Corporation (“Florida Pneumatic”) and Hy-Tech Machine, Inc.
(“Hy-Tech”).
Florida
Pneumatic is engaged in the importation, manufacture and sale of pneumatic hand
tools, primarily for the industrial, retail and automotive markets, and the
importation and sale of compressor air filters. Florida Pneumatic also markets,
through its Berkley Tool division (“Berkley”), a line of pipe cutting and
threading tools, wrenches and replacement electrical components for a
widely-used brand of pipe cutting and threading
machines. Through its Franklin Manufacturing (“Franklin”)
division, Florida Pneumatic imported and marketed a line of door and window
hardware including locksets, deadbolts, door and window security hardware,
rope-related hardware products and fire escape ladders. However, primarily due
to an ongoing diminishing market for its products, Florida Pneumatic
discontinued marketing the Franklin products line effective December 31,
2009.
Hy-Tech
manufactures and distributes pneumatic tools and parts for industrial
applications. Hy-Tech manufactures approximately sixty types of industrial
pneumatic tools, most of which are sold at prices ranging from $300 to $7,000,
under the names “ATP”, “Thaxton”, “THOR” and “Eureka”, as well as under the
trade names or trademarks of other private label customers. This line of
products includes grinders, drills, saws, impact wrenches and pavement
breakers.
Hy-Tech’s
products are sold to distributors and private label customers through in-house
sales personnel and manufacturers’ representatives. Users of Hy-Tech’s tools
include refineries, chemical plants, power generation facilities, the heavy
construction industry, oil and mining companies and heavy machine industry.
Hy-Tech’s products are sold off the shelf, and are also produced to customers’
orders. The business is not seasonal, but it may be subject to significant
periodic changes resulting from scheduled shutdowns in refineries, power
generation facilities and chemical plants.
Hardware
The
Company conducts its Hardware business through Countrywide, which in turn
operates through its wholly-owned subsidiary, Nationwide Industries, Inc
(“Nationwide”). Nationwide designs and manufactures quality hardware for the
fence, rail, gate, and window and door industry. It also markets a
full line of components for other companies which produce pool and patio
enclosures and storm and screen doors. Nationwide distributes a wide
array of sweep and sash locks manufactured for vinyl, aluminum or wood windows.
As part of Nationwide’s product offering, it began distributing kitchen and bath
hardware and accessories during the second quarter of 2009.
7
Prior to
June 8, 2009, Countrywide also operated through its wholly owned subsidiaries,
Woodmark International, L.P. (“Woodmark”) and Pacific Stair Products, Inc.
(“PSP”). Woodmark was, until the transactions (“WMC transactions”) which formed
WM Coffman, LLC (“WMC”) in June 2009, an importer of both stair parts
components and kitchen and bath hardware and accessories. Woodmark marketed its
stair parts nationally. Effective with the WMC transactions, the operations of
Woodmark’s kitchen and bath hardware and accessories product line was
transferred to Nationwide. PSP marketed Woodmark’s staircase
components to the building industry in southern California and the southwestern
region of the United States. As a result of the WMC transactions,
Woodmark and PSP no longer functioned as operating units. Woodmark
and PSP contributed certain net assets to WMC in return for members’ equity.
Accordingly, effective with the WMC transactions, the stair parts business,
which formerly reported through Woodmark and PSP, became part of WMC. On
June 10, 2009, pursuant to an Asset Purchase Agreement dated as of
June 8, 2009, WMC acquired substantially all of the assets of Coffman
Stairs, LLC, a Delaware limited liability company (“Coffman”).
As the
result of a decision reached by the Company’s board of directors in
March 2010, that it was in the best interest of the Company, its
shareholders and creditors that the Company sell, liquidate or otherwise dispose
of its ownership of WMC, the Company began reporting WMC as a discontinued
operation effective January 1, 2010.Additionally, as of June 7, 2010, WMC
ceased operations and its bank began liquidating its assets. The Company has
restated prior year financial information to present WMC as a discontinued
operation. See Note 3.
Reclassifications
Certain
amounts in the consolidated condensed financial statements for the three and
nine- month periods ended September 30, 2010 and the year ended
December 31, 2009 have been reclassified to conform to the current period’s
presentation.
Management
Estimates
The
preparation of financial statements and related disclosures in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses in those financial statements. Certain
significant accounting policies that contain subjective management estimates and
assumptions include those related to revenue recognition, inventory, goodwill,
intangible assets and other long-lived assets, income taxes and deferred
taxes. Descriptions of these policies are discussed in the Company’s
Annual Report on Form 10-K for the year ended December 31,
2009. Management evaluates its estimates and assumptions on an
ongoing basis using historical experience and other factors, including the
current economic environment, and makes adjustments when facts and circumstances
dictate. Illiquid credit markets and declines in consumer spending
have, among other things, combined to increase the uncertainty inherent in such
estimates and assumptions. As future events and their effects cannot
be determined with precision, actual results could differ significantly from
those estimates and assumptions. Significant changes, if any, in
those estimates resulting from continuing changes in the economic environment
will be reflected in the consolidated financial statements in future
periods.
Recently
Adopted Accounting Standards
During
the three-month period ended September 30, 2010, the Company did not adopt
any new accounting standards.
NOTE
2—FAIR VALUE MEASUREMENTS
The
Company is required to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value.
The fair
value hierarchy consists of three broad levels, which gives the highest priority
to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1) and the lowest priority to unobservable inputs
(Level 3). The three levels of the fair value hierarchy are described as
follows:
|
|
·
|
Level 1—Unadjusted
quoted prices in active markets for identical assets or liabilities that
are accessible at the measurement
date.
|
8
|
|
·
|
Level 2—Inputs
other than quoted prices included within Level 1 that are observable
for the asset or liability, either directly or indirectly. Level 2
inputs include quoted prices for similar assets or liabilities in active
markets; quoted prices for identical or similar assets or liabilities in
markets that are not active; inputs other than quoted prices that are
observable for the asset or liability; and inputs that are derived
principally from or corroborated by observable market data by correlation
or other means.
|
|
|
·
|
Level 3—Inputs
that are unobservable for the asset or
liability.
|
The
following describes the valuation methodologies that we used to measure
financial instruments at fair value.
WMC
entered into an advisory agreement with Visador Holding Corporation (“Visador”),
the parent company of Coffman, pursuant to which WMC agreed to pay Visador,
subject to certain conditions, advisory fees, aggregating during the first three
years to a maximum of $750,000 in exchange for Visador providing consulting and
advisory services to WMC. Cash payments to Visador may be made only with
permission of PNC Bank (“PNC”).
The
following table presents the liabilities that are measured and recognized at
fair value on a recurring basis classified under the appropriate level of the
fair value hierarchy as of September 30, 2010:
|
Roll-forward
of Level 3 Liabilities:
|
||||
|
Balance
— December 31, 2009
|
$
|
603,000
|
||
|
Adjustment
to liability due to termination of advisory arrangement
|
(482,000
|
) | ||
|
Balance
September 30, 2010
|
$
|
121,000
|
||
The
carrying amounts of cash, accounts payable and accrued expenses approximate fair
value due to the immediate or short-term maturity of these financial
instruments. The fair value of long-term debt and short-term borrowings
are determined using current applicable rates for similar instruments
as of the balance sheet date and they approximate the carrying
amounts.
At
September 30, 2010 and 2009, the Company had no material foreign exchange
forward contracts outstanding. Additionally, there was no material
realized or unrealized gains related to these contracts during the three
ornine-month periods ended September 30, 2010 and 2009,
respectively.
NOTE
3 — DISCONTINUED OPERATIONS
WMC was
primarily engaged in the manufacturing and importing of stair parts and related
accessories. In an effort to improve the overall results of the
Company’s existing stair parts operation, the Company acquired, as of
June 8, 2009, through a newly formed subsidiary, WMC, substantially all of
the assets of one of its competitors in the stair parts business, Coffman. These
transactions were executed in an attempt to take advantage of the synergies
available by combining two large players in an industry at the bottom of its
economic cycle with complementary distribution channels and
operations.
WMC was
not able to achieve the revenue levels anticipated prior to the WMC transactions
and, as a result, never produced positive cash flows. This caused, among other
things, defaults on the loan agreement specific to WMC. As the result of a
decision reached by the Company’s board of directors in March 2010, that it
was in the best interest of the Company, its shareholders and creditors that the
Company sell, liquidate or otherwise dispose of its membership interests in WMC,
the Company reported WMC as a discontinued operation effective January 1,
2010.
Effective
June 7, 2010, WMC executed and delivered to PNC an Acknowledgment of Events
of Default and Peaceful Possession Letter (the “Peaceful Possession Letter”),
dated as of June 4, 2010, pursuant to which (1) WMC acknowledged that
a material adverse change in its business and assets occurred and that such
event constituted a forbearance default under the Loan Agreement, and (2) among
other things:
(a) consented
to PNC’s exercise of all rights of possession in and to the Collateral
consistent with the Loan Agreement, the Other Documents (as defined in the Loan
Agreement) and applicable law, to be disposed of consistent with the Loan
Agreements, the Other Documents and applicable law;
(b) consented
to a sale of substantially all of the Collateral, other than the Marion Fixed
Assets by PNC to WM Coffman Resources, LLC, or the “Buyer”, pursuant to the
terms and conditions of a Foreclosure Agreement,
(c) consented
to the Fixed Asset Auction; and
(d) agreed
to change its name from WM Coffman, LLC to Old Stairs Co.
LLC.
9
Included
within the WMC loan agreement, see Note 12, was a term loan with an original
principal amount of $1,134,000, which was to be repaid in twenty-four equal
monthly installments of $47,000. This term note between PNC and WMC
was collateralized by WMC’s fixed assets. As the result of the Notice and
Peaceful Foreclosure Letter described in prior filings, PNC took title to and
possession of all of WMC’s fixed assets located in Marion, Virginia and in July
2010 arranged for their sale.
At the
time of the sale by PNC to the Buyer, the total outstanding amount of principal
and accrued interest owing to PNC was approximately $5.2 million. Upon the
effectiveness of the aforementioned sale by PNC, and sale of the Marion fixed
assets, the outstanding amount of principal and accrued interest was
paid. PNC is required to provide to WMC an accounting of the proceeds
of the disposition of all the collateral and to turn over, after all fees and
expenses, have been paid, any surplus proceeds from the disposition. PNC
has not yet provided WMC with a final accounting of the results of the auction
and sale of the Marion Fixed Assets.
The table
below presents the items that have been reclassified into assets and liabilities
of discontinued operations:
|
September 30, 2010
|
December 31, 2009
|
|||||||
|
Cash
|
$ | 100,000 | $ | 53,000 | ||||
|
Accounts
receivable, net
|
— | 2,124,000 | ||||||
|
Inventory,
net
|
— | 7,919,000 | ||||||
|
Other
current assets
|
28,000 | 701,000 | ||||||
|
Total
assets reclassified to current assets of discontinued
operations
|
$ | 128,000 | $ | 10,797,000 | ||||
|
Machinery
and equipment, net
|
$ | — | $ | 2,439,000 | ||||
|
Other
|
16,000 | 1,485,000 | ||||||
|
Total
assets reclassified to non-current assets of discontinued
operations
|
$ | 16,000 | $ | 3,924,000 | ||||
|
Short-term
borrowings
|
$ | — | $ | 4,382,000 | ||||
|
Accounts
payable and accrued expenses
|
3,244,000 | 4,251,000 | ||||||
|
Current
maturities of long-term debt
|
9,316,000 | 1,086,000 | ||||||
|
Total
liabilities reclassified to current liabilities of discontinued
operations
|
$ | 12,560,000 | $ | 9,719,000 | ||||
|
Long-term
debt, less current portion
|
$ | 310,000 | $ | 5,222,000 | ||||
|
Total
non-current liabilities reclassified to non-current liabilities of
discontinued operations
|
$ | 310,000 | $ | 5,222,000 | ||||
The table
below presents the results of operations of discontinued
operations:
|
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Revenue
|
$ | — | $ | 7,300,000 | $ | 10,136,000 | $ | 15,122,000 | ||||||||
|
Gross
profit
|
$ | — | $ | 967,000 | $ | 907,000 | $ | 2,241,000 | ||||||||
|
(Income)
loss on foreclosure and other expenses
|
(250,000 | ) | — | 5,579,000 | — | |||||||||||
|
Termination
of lease
|
— | — | 4,280,000 | — | ||||||||||||
|
Selling,
general and administrative expenses and interest expense
|
50,000 | 2,143,000 | 3,477,000 | 4,504,000 | ||||||||||||
|
(Income)
loss before income taxes
|
(200,000 | ) | 1,176,000 | 12,429,000 | 2,263,000 | |||||||||||
|
Income
tax benefit
|
— | (344,000 | ) | — | (670,000 | ) | ||||||||||
|
(Income)
loss from discontinued operations
|
$ | (200,000 | ) | $ | 832,000 | $ | 12,429,000 | $ | 1,593,000 | |||||||
10
NOTE
4 — (LOSS) EARNINGS PER SHARE
Basic
(loss) earnings per common share is based only on the average number of shares
of common stock outstanding for the periods. Diluted earnings per common share
reflects the effect of shares of common stock issuable upon the exercise of
options, unless the effect on earnings is antidilutive.
Diluted
(loss) earnings per common share is computed using the treasury stock method.
Under this method, the aggregate number of shares of common stock outstanding
reflects the assumed use of proceeds from the hypothetical exercise of any
outstanding options to purchase shares of the Company’s Class A Common
Stock. The average market value for the period is used as the assumed purchase
price.
The
following table sets forth the computation of basic and diluted (loss) earnings
per common share:
|
Three months ended
|
Nine months ended
|
|||||||||||||||
|
September 30,
|
September 30,
|
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Numerator:
|
||||||||||||||||
|
Numerator
for basic and diluted earnings (loss) per common share:
|
||||||||||||||||
|
Earnings
(loss) from continuing operations
|
$ | 632,000 | $ | 56,000 | $ | 194,000 | $ | (354,000 | ) | |||||||
|
Earnings
(loss) from discontinued operations
|
200,000 | (832,000 | ) | (12,429,000 | ) | (1,593,000 | ) | |||||||||
|
Net
earnings (loss)
|
$ | 832,000 | $ | (776,000 | ) | $ | (12,235,000 | ) | $ | (1,947,000 | ) | |||||
|
Denominator:
|
||||||||||||||||
|
Denominator
for basic and diluted earnings (loss) per share — weighted average common
shares outstanding
|
3,615,000 | 3,615,000 | 3,615,000 | 3,615,000 | ||||||||||||
At
September 30, 2010 and 2009 and during the three and nine-month periods
ended September 30, 2010 and 2009, there were outstanding stock options
whose exercise prices were higher than the average market values of the
underlying Class A Common Stock for the period. These options are
antidilutive and are excluded from the computation of (loss) earnings per share.
The weighted average antidilutive stock options outstanding were as
follows:
|
Three months ended
|
Nine months ended
|
|||||||||||||||
|
September 30,
|
September 30,
|
|||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
Weighted
average antidilutive stock options outstanding
|
517,000 | 554,000 | 515,000 | 554,000 | ||||||||||||
Diluted
loss per share for the nine-month period ended September 30, 2010 and
diluted loss per share for the three and nine-month periods ended
September 30, 2009 were the same as basic loss per share, since the effect
of the inclusion of common share equivalents would be anti-dilutive, because of
the reported loss after including the loss from discontinued
operations.
11
NOTE
5 - STOCK-BASED COMPENSATION
Stock-based
Compensation
Total
stock-based compensation expense is attributable to the granting of, and the
remaining requisite service periods of, stock options and warrants.
Compensation expense attributable to stock-based compensation during the three
and nine-month periods ended September 30, 2010 was approximately $18,000
and $87,000, respectively, and for the three and nine-month periods ended
September 30, 2009 was approximately $35,000 and $173,000,
respectively. The compensation expense is recognized in selling,
general and administrative expenses on the Company’s statements of operations on
a straight-line basis over the vesting periods. The Company
recognizes compensation cost over the requisiteservice period. However, the
exercisability of the respective non-vested options, which are at pre-determined
dates on a calendar year, do not necessarily correspond to the period(s) in
which straight-line amortization of compensation cost is recorded. As of
September 30, 2010, the Company had approximately $92,000 of total
unrecognized compensation cost related to non-vested awards granted under our
stock-based plans, which we expect to recognize over a weighted-average period
of 1.1 years.On July 29, 2010, the Company granted 2,000 fully vested stock
options, which expire in ten years, to a new member of its board of directors,
with an exercise price of $2.17 per share, which represents the closing price of
the Company’s common stock on the date of the grant.There were no other stock
options or warrants grant during the nine- month period ended September 30,
2010.
|
September 30, 2010
|
||||
|
Risk-free
interest rate
|
2.97 | % | ||
|
Expected
term (in years)
|
10
years
|
|||
|
Volatility
|
51.4 | % | ||
|
Dividend
yield
|
0 | % | ||
|
Weighted-average
fair value of options granted
|
$ | 1.40 | ||
The
expected term was based on historical exercises and terminations. The volatility
for the periods with the expected term of the options is determined using
historical volatilities based on historical stock prices. The dividend yield is
0% as the Company has historically not declared dividends and does not expect to
declare any in the future.
Stock Option
Plan
The
Company’s 2002 Incentive Stock Option Plan (the “Current Plan”) authorizes the
issuance, to employees and directors, of options to purchase a maximum of
1,100,000 shares of Class A Common Stock. These options must be issued
within ten years of the effective date of the Current Plan and are exercisable
for a ten year period from the date of grant, at prices not less than 100% of
the market value of the Class A Common Stock on the date the option is
granted. Incentive stock options granted to any 10% stockholder are exercisable
for a five year period from the date of grant, at prices not less than 110% of
the market value of the Class A Common Stock on the date the option is
granted. Pursuant to the Current Plan, the Stock Option Committee has the
discretion to award non-qualified stock option grants with various vesting
parameters. Options have vesting periods of immediate to three years. In the
event options granted contain a vesting schedule over a period of years, the
Company recognizes compensation cost for these awards on a straight-line basis
over the requisite service period. The Current Plan, which terminates in 2012,
is the successor to the Company’s 1992 Incentive Stock Option Plan (the “Prior
Plan”).
The
following is a summary of the changes in outstanding options for the nine months
ended September 30, 2010:
|
Option Shares
|
Weighted
Average
Exercise
Price
|
Weighted Average
Remaining
Contractual Life
(Years)
|
Aggregate
Intrinsic
Value
|
|||||||||||||
|
Outstanding,
January 1, 2010
|
514,624 | $ | 7.26 | 6.0 | — | |||||||||||
|
Granted
|
2,000 | 2.17 | 9.8 | — | ||||||||||||
|
Exercised
|
— | — | ||||||||||||||
|
Forfeited
|
— | — | ||||||||||||||
|
Expired
|
— | — | ||||||||||||||
|
Outstanding,
September 30, 2010
|
516,624 | $ | 7.24 | 5.3 | — | |||||||||||
|
Vested,
September 30, 2010
|
421,291 | $ | 7.94 | 4.7 | — | |||||||||||
The
following is a summary of changes in non-vested shares for the nine months ended
September 30, 2010:
|
Option Shares
|
WeightedAverage Grant-
DateFair Value
|
|||||||
|
Non-vested
shares, January 1, 2010
|
147,667 | $ | 2.85 | |||||
|
Granted
|
— | |||||||
|
Vested
|
52,334 | 3.61 | ||||||
|
Forfeited
|
— | |||||||
|
Non-vested
shares, September 30, 2010
|
95,333 | $ | 2.44 | |||||
The
number of shares of Class A common stock reserved for stock options
available for issuance under the Current Plan as of September 30, 2010 was
441,212. Of the options outstanding at September 30, 2010, all were issued
under the Current Plan.
NOTE
6 — RECENT ACCOUNTING PRONOUNCEMENTS
Management
does not believe that any other recently issued, but not yet effective
accounting standards, if currently adopted would have a material effect on our
consolidated condensed financial statements.
12
NOTE
7 - ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts
receivable - net consists of:
|
September 30, 2010
|
December 31, 2009
|
|||||||
|
Accounts
receivable
|
$ | 9,210,000 | $ | 7,694,000 | ||||
|
Allowance
for doubtful accounts
|
(181,000 | ) | (149,000 | ) | ||||
| $ | 9,029,000 | $ | 7,545,000 | |||||
NOTE
8 — INVENTORIES
Inventories
- net consist of:
|
September 30, 2010
|
December 31, 2009
|
|||||||
|
Raw
material
|
$ | 1,914,000 | $ | 2,086,000 | ||||
|
Work
in process
|
475,000 | 680,000 | ||||||
|
Finished
goods
|
17,772,000 | 18,532,000 | ||||||
| 20,161,000 | 21,298,000 | |||||||
|
Reserve
for obsolete and slow-moving inventories
|
(1,455,000 | ) | (1,552,000 | ) | ||||
| $ | 18,706,000 | $ | 19,746,000 | |||||
NOTE
9 - GOODWILL AND OTHER INTANGIBLE ASSETS
During
the three and nine-month periods ended September 30, 2010, there was no
change to the carrying value of goodwill.
Other
intangible assets were as follows:
|
September 30, 2010
|
December 31, 2009
|
|||||||||||||||||||||||
|
Cost
|
Accumulated
amortization
|
Net book
value
|
Cost
|
Accumulated
amortization
|
Net book
value
|
|||||||||||||||||||
|
Other
intangible assets:
|
||||||||||||||||||||||||
|
Customer
relationships
|
$ | 5,070,000 | $ | 3,174,000 | $ | 1,896,000 | $ | 5,070,000 | $ | 2,930,000 | $ | 2,140,000 | ||||||||||||
|
Non-compete
and employment agreements
|
760,000 | 760,000 | — | 760,000 | 760,000 | — | ||||||||||||||||||
|
Trademarks
|
199,000 | — | 199,000 | 199,000 | — | 199,000 | ||||||||||||||||||
|
Drawings
|
290,000 | 52,000 | 238,000 | 290,000 | 41,000 | 249,000 | ||||||||||||||||||
|
Licensing
|
105,000 | 50,000 | 55,000 | 105,000 | 42,000 | 63,000 | ||||||||||||||||||
|
Totals
|
$ | 6,424,000 | $ | 4,036,000 | $ | 2,388,000 | $ | 6,424,000 | $ | 3,773,000 | $ | 2,651,000 | ||||||||||||
Amortization
expense for intangible assets subject to amortization was as
follows:
|
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||
| $ | 88,000 | $ | 88,000 | $ | 263,000 | $ | 263,000 | |||||||
Amortization
expense for each of the twelve-month periods ending September 30, 2011
through September 30, 2015 is estimated to be as follows: 2011 - $350,000 ;
2012 - $351,000 ; 2013 - $247,000; 2014 - $186,000 and 2015 -
$185,000. The weighted average amortization period for intangible
assets was8.78 years at September 30, 2010 and 9.3 years at
December 31, 2009.
NOTE
10- WARRANTY LIABILITY
The
Company offers to its customers, warranties against product defects for periods
primarily ranging from one to three years. Certain products carry
limited lifetime warranties. The Company’s typical warranties require it to
repair or replace the defective products during the warranty period at no cost
to the customer. At the time the product revenue is recognized, the Company
records a liability for estimated costs under its warranties, which are
estimated based on historical experience. The Company periodically assesses the
adequacy of its recorded warranty liability and adjusts the amounts as
necessary. While the Company believes that its estimated liability for product
warranties is adequate, the estimated liability for the product warranties could
differ materially from future actual warranty costs.
13
Changes
in the Company’s warranty liability, included in other accrued liabilities, were
as follows:
|
Nine months ended September 30,
|
||||||||
|
2010
|
2009
|
|||||||
|
Balance,
beginning of period
|
$ | 183,000 | $ | 337,000 | ||||
|
Warranties
issued and changes in estimated pre-existing warranties
|
261,000 | 391,000 | ||||||
|
Actual
warranty costs incurred
|
(188,000 | ) | (500,000 | ) | ||||
|
Balance,
end of period
|
$ | 256,000 | $ | 228,000 | ||||
NOTE
11 — DEBT
SHORT-TERM
BORROWINGS
The
Company and its subsidiaries, other than WMC, as co-borrowers, in 2004 entered
into a Credit Agreement, (“Credit Agreement”) as amended, with two banks
(“banks”). The Credit Agreement, among other things, includes a
revolving credit loan facility (“revolving loan”). The revolving loan can be
used for direct borrowings, with various sub-limits for letters of credit,
bankers’ acceptances and equipment loans. There were no letters of credit,
bankers’ acceptances or equipment loan borrowings at September 30, 2010 or
December 31, 2009. There are no commitment fees for any unused portion of
this Credit Agreement. Direct borrowings under the revolving loan are secured by
the Company’s accounts receivable, inventory, equipment and real property, and
are cross-guaranteed by each of the Company’s subsidiaries, except WMC. These
borrowings bear interest at either LIBOR (London InterBank Offered Rate), at a
minimum of 1.0%, plus the currently applicable loan margin of 4.25%, or the
prime interest rate, which September 30, 2010 was 3.25% plus the currently
applicable loan margin of 2.50%. As such, the interest rates in
effect at September 30, 2010 were 5.25% for borrowings at LIBOR and 5.75%
for borrowings at prime rate. On April 23, 2010, the Company and
the banks executed a waiver and amendment which, among other things, extended
the termination date of the revolving credit loan portion of the Credit
Agreement facility to January 1, 2011 and waived all then existing
defaults. Further, the waiver and amendment set new financial covenants and
adjusted the borrowing base calculation as well as reduced the size of the
facility from $17,500,000 to $16,500,000. In addition, it required
that all future advances shall be subject to the requirement that the aggregate
amount advanced after giving effect to any such future advances be at least
$750,000 less than the aggregate lendable value in eligible borrowing base
assets. Finally, the amendment dated April 23, 2010 required a
subordinated loan of $750,000, which, in the aggregate, was provided by the
Company’s Chief Executive Officer, President and Chairman of the Board of
Directors, (“CEO”), and another unrelated party. See Note 12 which discusses
related party transactions. See Note 14 which discusses the Company’s
actions taken in connection with a new banking facility entered into in October
2010, which replaces the Credit Agreement.
LONG TERM
DEBT
As part
of an amendment dated March 30, 2009 to the Credit Agreement, the banks agreed
to cancel and refinance two term loans as a single new term loan which was set
to expire March 30, 2012. Further, this term loan requires the Company to
make monthly principal installment payments, which aggregate to approximately
$1,780,000 annually. Borrowings under this term loan created by the
March 2009 amendment are secured by the Company’s accounts receivable,
inventory, equipment and real property and are cross-guaranteed by each of the
Company’s subsidiaries, with the exception of WMC. The balance of this term loan
at September 30, 2010 and December 31, 2009 was $2,459,000 and
$5,782,000, respectively. This term loan bears interest at LIBOR, at
a minimum of 1%, plus the currently applicable loan margin of 4.50%, or the
prime interest rate, which September 30, 2010 was 3.25% plus the currently
applicable loan margin of 2.5%. As such, the interest rates in effect
at September 30, 2010 were 5.50% for borrowings at LIBOR and 5.75% for
borrowings at prime rate.See Note 14 which discusses the Company’s actions taken
in connection with a new banking facility entered into in October 2010, which
replaces the Credit Agreement.
Countrywide
is a party to a loan agreement with Wells Fargo Bank, N.A. (successor by merger
to Wachovia Bank, National Association) (“Wachovia Bank”), which is secured by a
mortgage with respect to the real property owned by Countrywide and utilized by
Nationwide. Countrywide did not make the final “balloon” payment that
was due on September 21, 2009. As a result of the non-payment,
cross-default provisions set forth in the loan agreement between Florida
Pneumatic and Wachovia, secured by a mortgage with respect to the real property
owned and utilized by Florida Pneumatic, were triggered. On
February 23, 2010, Wachovia amended the underlying loan document to among
other things, extend the maturity date of the balloon payment to
September 1, 2010 and require the Company to make monthly principal
payments of approximately $11,000 plus accrued interest commencing on
March 24, 2010. On April 22, 2010, the Company and Wachovia
entered into a new Loan Modification Agreement, which became effective
April 23, 2010, wherein the Company prepaid $150,000 toward the balance due
on theCountrywideloan agreement. In exchange, Wachovia waived all prior defaults
and extended the maturity date to January 1, 2011. The balance on this loan
agreement at September 30, 2010 and December 31, 2009 was $862,000and $1,091,000,
respectively. The balance on the mortgage pertaining to Florida Pneumatic was
$596,000 and $708,000 at September 30, 2010 and December 31, 2009,
respectively.See Note 14 which discusses the Company’s actions taken in
connection with a new banking facility entered into in October 2010, which
replaces the Credit Agreement and provides for the repayment of these
mortgages.
14
The
Credit Agreement entered into with the banks also includes a foreign exchange
line, which provides for the availability of up to $10,000,000 in foreign
currency forward contracts. These contracts fix the exchange rate on
future purchases of foreign currencies needed for payments to foreign
suppliers. At September 30, 2010, there were no foreign currency
forward contracts outstanding.
In
connection with the acquisition of Hy-Tech, the Company agreed to make
additional payments (“Contingent Consideration”) to the sellers. The amount of
the Contingent Consideration was based upon Hy-Tech achieving certain financial
performance thresholds during the two year period ending on the second
anniversary of the acquisition. Further, the Company agreed to make an
additional payment (“Additional Contingent Consideration”), subject to certain
conditions related primarily to an exclusive supply agreement with a major
customer and, to a certain extent, and subject to certain provisions, the
achievement of Contingent Consideration. Hy-Tech successfully achieved the
required thresholds necessary to be entitled to both the Contingent
Consideration and the Additional Contingent Consideration. The total amount of
the Contingent Consideration and the Additional Contingent Consideration was
approximately $2,292,000. According to the Company’s purchase agreement with the
Hy-Tech sellers, the amounts due the sellers were payable in May 2009. The
Company and the sellers agreed upon a payment arrangement wherein the Company
was required and did make a payment of approximately $573,000 in May 2009,
with the balance of approximately $1,719,000 to be paid in six equal payments
with interest at 6.0% per annum, payable quarterly commencing in
August 2009. The August 2009 and November 2009 installment
payments with interest were paid timely. However, due to the default on the
Credit Agreement, the Company was not permitted to make any subsequent payment
without permission from the banks. Further, pursuant to the Waiver and Amendment
dated April 23, 2010, the Company is still not permitted to make any future
payments without permission from the banks. The balance owing on this obligation
was $1,146,000 at September 30, 2010 and December 31,
2009. The Company is accruing interest at 12.0% per annum, the
default rate of interest. At September 30, 2010, accrued interest was
approximately $103,000. See Note 14 which discusses the Company’s actions taken
in connection with a new banking facility entered into in October 2010, which
replaces the Credit Agreement.
NOTE
12—RELATED PARTY TRANSACTIONS
On
February 22, 2010, in connection with a Forbearance and Amendment Agreement
by and among WMC and PNC, the Company’s CEO and the president of one
of our subsidiaries (collectively the “Junior Participants”), entered into a
Junior Participation Agreement with PNC. Each Junior Participant remitted to PNC
$125,000. As part of the transactions described in Notes 3 and 11 in July 2010,
PNC repaid the Junior Participants the $250,000 plus approximately $6,000 in
total interest.
As
discussed in Note 11, on April 23, 2010, the Company and the banks executed
a waiver and amendment which extended the termination date of the revolving
credit loan portion of the Credit Agreement facility to January 1, 2011 and
waived any existing events of default. Among other things, the banks required
the Company to obtain an advance of $750,000. This advance was, in the
aggregate, received from its CEO and another unrelated party as a subordinated
loan. These loans bear interest at 8.0% per annum. As part of the new
banking arrangement, which is further discussed in Note 14, the CEO and the
unrelated party modified the terms of their loans.
The
president of one of our subsidiaries is part owner of one of the subsidiary’s
vendors. During the three and nine-month periods ended September 30, 2010,
we purchased approximately $156,000 and $582,000 respectively, of product from
this vendor. During the three and nine-month periods ended September 30,
2009, we purchased approximately $165,000 and $671,000, respectively, of product
from this vendor.
NOTE
13 - BUSINESS SEGMENTS
P&F
operates in two primary lines of business, or segments: (i) tools and other
products (“Tools”) and (ii) hardware and accessories (“Hardware”). For
reporting purposes, Florida Pneumatic and Hy-Tech are combined in the Tools
segment, while Nationwide is currently the only subsidiary in the Hardware
segment. The Company evaluates segment performance based primarily on segment
operating income. The accounting policies of each of the segments are the same
as those described in Note 1.
15
|
Three months ended September 30, 2010
|
Consolidated
|
Tools
|
Hardware
|
|||||||||
|
Revenues
from unaffiliated customers
|
$ | 14,267,000 | $ | 10,609,000 | $ | 3,658,000 | ||||||
|
Segment
operating income
|
$ | 1,978,000 | $ | 1,593,000 | $ | 385,000 | ||||||
|
General
corporate expense
|
(1,082,000 | ) | ||||||||||
|
Interest
expense – net
|
(264,000 | ) | ||||||||||
|
Earnings
before income taxes
|
$ | 632,000 | ||||||||||
|
Segment
assets
|
$ | 47,254,000 | $ | 36,516,000 | $ | 10,738,000 | ||||||
|
Corporate
assets
|
3,597,000 | |||||||||||
|
Total
assets
|
$ | 50,851,000 | ||||||||||
|
Long-lived
assets, including $355,000 at corporate
|
$ | 19,617,000 | $ | 14,673,000 | $ | 4,589,000 | ||||||
|
Three months ended September 30, 2009
|
Consolidated
|
Tools
|
Hardware
|
|||||||||
|
Revenues
from unaffiliated customers
|
$ | 13,144,000 | $ | 9,753,000 | $ | 3,391,000 | ||||||
|
Segment
operating income
|
$ | 1,606,000 | $ | 1,149,000 | $ | 457,000 | ||||||
|
General
corporate expense
|
(1,169,000 | ) | ||||||||||
|
Interest
expense – net
|
(368,000 | ) | ||||||||||
|
Income
before income taxes
|
$ | 69,000 | ||||||||||
|
Segment
assets
|
$ | 52,238,000 | $ | 42,198,000 | $ | 10,040,000 | ||||||
|
Corporate
assets
|
8,126,000 | |||||||||||
|
Total
assets
|
$ | 60,364,000 | ||||||||||
|
Long-lived
assets, including $193,000 at corporate
|
$ | 21,088,000 | $ | 16,130,000 | $ | 4,765,000 | ||||||
|
Nine months ended September 30, 2010
|
Consolidated
|
Tools
|
Hardware
|
|||||||||
|
Revenues
from unaffiliated customers
|
$ | 38,734,000 | $ | 27,124,000 | $ | 11,610,000 | ||||||
|
Segment
operating income
|
$ | 5,187,000 | $ | 3,541,000 | $ | 1,646,000 | ||||||
|
General
corporate expense
|
(4,003,000 | ) | ||||||||||
|
Interest
expense – net
|
(990,000 | ) | ||||||||||
|
Loss
before income taxes
|
$ | 194,000 | ||||||||||
|
Segment
assets
|
$ | 47,254,000 | $ | 36,516,000 | $ | 10,738,000 | ||||||
|
Corporate
assets
|
3,597,000 | |||||||||||
|
Total
assets
|
$ | 50,851,000 | ||||||||||
|
Long-lived
assets, including $355,000 at corporate
|
$ | 19,617,000 | $ | 14,673,000 | $ | 4,589,000 | ||||||
16
|
Nine months ended September 30, 2009
|
Consolidated
|
Tools
|
Hardware
|
|||||||||
|
Revenues
from unaffiliated customers
|
$ | 39,438,000 | $ | 28,234,000 | $ | 11,204,000 | ||||||
|
Segment
operating income
|
$ | 3,785,000 | $ | 2,745,000 | $ | 1,040,000 | ||||||
|
General
corporate expense
|
(3,306,000 | ) | ||||||||||
|
Interest
expense – net
|
(995,000 | ) | ||||||||||
|
Loss
before income taxes
|
$ | (516,000 | ) | |||||||||
|
Segment
assets
|
$ | 52,238,000 | $ | 42,198,000 | $ | 10,040,000 | ||||||
|
Corporate
assets
|
8,126,000 | |||||||||||
|
Total
assets
|
$ | 60,364,000 | ||||||||||
|
Long-lived
assets, including $193,000 at corporate
|
$ | 21,088,000 | $ | 16,130,000 | $ | 4,765,000 | ||||||
NOTE
14 — SUBSEQUENT EVENTS
On
October 25, 2010 P&F, Florida Pneumatic, Hy-Tech and Nationwide as
Borrowers, and P&F’s other subsidiaries, excluding WMC, as Guarantors,
entered into a three year, $22,000,000 Loan and Security Agreement (“Loan
Agreement”) with Capital One Leverage Finance Corporation (“COLF”). This Loan
Agreement, among other things, includes a revolving credit loan facility, (the
“revolving loan”). There is an unused line fee of 0.5% (0.75%, if the revolving
loan plus letters of credit do not exceed 50% of the maximum
availableBorrowings). As part of the Loan Agreement there is a
default rate of 2.0% upon the occurence of an event of default. The
Borrowers are subject to various financial covenants.
The
Borrowers can borrow a maximum of $15,910,000 under the revolving loan portion
of the Loan Agreement. The revolving loan has various sub-limits for letters of
credit and equipment loans. Direct borrowings under the
revolving loan are secured by the Borrowers’ accounts receivable, inventory and
equipment and real property, and are cross-guaranteed by the Borrowers and
Guarantors. Borrowings under the revolving loan will bear interest at either
LIBOR (London InterBank Offered Rate), plus the currently applicable loan
margin, which can range from 3.25% to 4.0%, or the Base Rate, as defined, plus
the currently applicable loan margin which can range from 2.25% to 3.0%, both
depending upon certain financial measurements.
Additionally,
the Loan Agreement provides for a term loan in the amount of
$6,090,000. The term loan is collateralized by the Borrowers’ real
property, and is cross-guaranteed by the Borrowers and Guarantors. The term loan
shall be repaid with monthly installments of $34,000 until the term loan
maturity date, on October 25, 2013, on which date all principal, interest and
other amounts owing with respect to the term loan shall be due and payable in
full. This term loan bears interest at LIBOR plus 5.75% or the Base
Rate, as defined, plus 4.75%.
Concurrent
with the formation of the new credit facility with COLF, the Company paid its
previous banks $14,610,000 as full settlement of its then revolving credit
facility, term note and accrued interest. Further, it paid in their
entirety two mortgage loans with Wachovia Bank, aggregating
$1,504,000. Additionally, the Company paid to the holders of the
Hy-Tech Sellers Note $685,000, representing 50% of the principal balance due and
all of the accrued interest through October 25, 2010. As a result,
the balance due on this note is $573,000. Interest will accrue at a rate of
8.0%. With respect to the $750,000 of subordinated notes payable,of
which $250,000 is owed to the CEO, the Company paid interest through October 25,
2010 of approximately $30,000, including approximately $9,000 to its
CEO.
The
Company also restructured certain obligations to its subordinated lenders,
including extending the term of the underlying promissory notes to its CEO and
unrelated third party and the holders of the Hy-Tech Sellers Note, to correspond
with the three-year term of the credit facility, and agreeing to make current
interest payments under such promissory notes, and in the case of the holders of
the Hy-Tech Sellers Note and the unrelated third party, make partial principal
payments during the term based on Company performance.
The
Company incurred approximately $675,000 in fees and other expenses in connection
with this new credit facility. These fees and other expenses will be amortized
over the life of the credit facility or 36 months.
17
P&F
INDUSTRIES, INC. AND SUBSIDIARIES
General
The
Private Securities Litigation Reform Act of 1995 (the “Reform Act”) provides a
safe harbor for forward-looking statements made by or on behalf of P&F
Industries, Inc. and subsidiaries (“P&F”, or “the Company”). P&F
and its representatives may, from time to time, make written or verbal
forward-looking statements, including statements contained in the Company’s
filings with the Securities and Exchange Commission and in its reports to
stockholders. Generally, the inclusion of the words “believe,” “expect,”
“intend,” “estimate,” “anticipate,” “will,” and their opposites and similar
expressions identify statements that constitute “forward-looking statements”
within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and that are intended to
come within the safe harbor protection provided by those sections. Any
forward-looking statements contained herein, including those related to the
Company’s future performance, are based upon the Company’s historical
performance and on current plans, estimates and expectations. All
forward-looking statements involve risks and uncertainties. These risks and
uncertainties could cause the Company’s actual results for the 2010 fiscal year
and beyond to differ materially from those expressed in any forward-looking
statement made by or on behalf of the Company for a number of reasons, as
previously disclosed in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2009.Forward-looking statements speak only as of
the date on which they are made. The Company undertakes no obligation to update
publicly or revise any forward-looking statement, whether as a result of new
information, future developments or otherwise.
Business
The
unaudited consolidated condensed financial statements contained herein include
the accounts of P&F Industries, Inc. and its subsidiaries (“P&F”).
All significant intercompany balances and transactions have been
eliminated.
P&F
conducts its business operations through two of its wholly-owned subsidiaries:
Continental Tool Group, Inc. (“Continental”) and Countrywide
Hardware, Inc. (“Countrywide”). P&F and its subsidiaries are herein
referred to collectively as the “Company.” In addition, the words “we”, “our”
and “us” refer to the Company. P&F operates in two primary lines
of business, or segments: (i) tools and other products (“Tools”) and
(ii) hardware and accessories (“Hardware”).
Tools
We
conduct our Tools business through Continental, which in turn operates through
its wholly-owned subsidiaries, Florida Pneumatic Manufacturing Corporation
(“Florida Pneumatic”) and Hy-Tech Machine, Inc. (“Hy-Tech”).
Florida
Pneumatic
Florida
Pneumatic is engaged in the importation, manufacture and sale of pneumatic hand
tools, primarily for the industrial, retail and automotive markets, and the
importation and sale of compressor air filters. Florida Pneumatic also markets,
through its Berkley Tool division (“Berkley”), a line of pipe cutting and
threading tools, wrenches and replacement electrical components for a
widely-used brand of pipe cutting and threading
machines. Through its Franklin Manufacturing (“Franklin”)
division, Florida Pneumatic imported and marketed a line of door and window
hardware including locksets, deadbolts, door and window security hardware,
rope-related hardware products and fire escape ladders. However, primarily due
to an ongoing diminishing market, Florida Pneumatic decided to discontinue
marketing the Franklin products line effective December 31,
2009.
Hy-Tech
Hy-Tech
manufactures and distributes pneumatic tools and parts for industrial
applications. Hy-Tech manufactures approximately sixty types of industrial
pneumatic tools, most of which are sold at prices ranging from $300 to $7,000,
under the names “ATP”, “Thaxton”, “THOR” and “Eureka”, as well as under the
trade names or trademarks of other private label customers. This line of
products includes grinders, drills, saws, impact wrenches and pavement
breakers.
Hy-Tech’s
products are sold to distributors and private label customers through in-house
sales personnel and manufacturers’ representatives. Users of Hy-Tech’s tools
include refineries, chemical plants, power generation facilities, the heavy
construction industry, oil and mining companies and heavy machine industry.
Hy-Tech’s products are sold off the shelf, and are also produced to customer’s
orders. The business is not seasonal, but it may be subject to significant
periodic changes resulting from scheduled shutdowns in refineries, power
generation facilities and chemical plants.
18
Hardware
The
Company conducts its Hardware business through Countrywide, which in turn
operates through its wholly-owned subsidiary, Nationwide Industries, Inc
(“Nationwide”). Nationwide designs and manufactures quality hardware for the
fence, rail, gate, and window and door industry. It also markets a
full line of components for other companies which produce pool and patio
enclosures and storm and screen doors. Nationwide distributes a wide
array of sweep and sash locks manufactured for vinyl, aluminum or wood windows.
As part of Nationwide’s product offering, it began distributing kitchen and bath
hardware and accessories during the second quarter of 2009.
Prior to
June 8, 2009, Countrywide also operated through its wholly owned subsidiaries,
Woodmark International, L.P. (“Woodmark”) and Pacific Stair Products, Inc.
(“PSP”). Woodmark was, until the transactions(“WMC transactions”) which formed
WM Coffman, LLC (“WMC”) in June 2009, an importer of both stair parts
components and kitchen and bath hardware and accessories. Woodmark marketed its
stair parts nationally. Additionally, effective with the WMC transactions, the
operations of Woodmark’s kitchen and bath hardware and accessories product line
was transferred to Nationwide. PSP marketed Woodmark’s staircase
components to the building industry in southern California and the southwestern
region of the United States. As a result of the WMC transactions,
Woodmark and PSP no longer functioned as operating units. Woodmark
and PSP contributed certain net assets to WMC in return for members’ equity.
Accordingly, effective with the WMC transactions, the stair parts business,
which formerly reported through Woodmark and PSP, became part of WMC. On
June 10, 2009, pursuant to an Asset Purchase Agreement dated as of
June 8, 2009, WMC acquired substantially all of the assets of Coffman
Stairs, LLC, a Delaware limited liability company (“Coffman”).
As the
result of a decision reached by the Company’s board of directors in March
2010, that it was in the best interest of the Company, its
shareholders and creditors that the Company sell, liquidate or otherwise dispose
of its ownership of WMC.” the Company began reporting WMC as a discontinued
operation effective January 1, 2010. Additionally, as of June 7, 2010, WMC
ceased operations and its bank began liquidating its assets. The Company has
restated prior year financial information to present WMC as a discontinued
operation. See Note 3.
Overview
In spite of the continued economic
sluggishness, P&F has begun to show revenue growth as the result of market
share gains as we take advantage of the weakness of competitors and also the
sales of products that have been developed over the last several
years. This revenue increase, coupled with the results of major cost
reduction initiatives introduced during 2009, dramatically improved profits for
the third quarter of 2010. Overall revenues increased 8.5% in the
third quarter of 2009 as compared to the third quarter of 2009. This
increase was contributed to by both the Tools and Hardware
lines. Whiles the sales increase is important, there was an even more
dramatic improvement in overall net income, increasing from $56,000 in the third
quarter of 2009 to $632,000 for the third quarter of 2010. The
two main reasons we are seeing such results at this point are that we believe
that the bottom of the market for sales of P&F’s products was approximately
the third quarter of 2009 and that the third quarter of 2010 saw relatively
little in expenses related to addressing the Company’s bank issues that were
incurred in the first six months of 2010. To that end, it should be
noted that following the third quarter of 2010, the Company secured a new
comprehensive credit facility in late October.
KEY
INDICATORS
Economic
Measure
We focus
on a wide array of customer types, and as such, do not rely as much on specific
economic measures or indicators. As such, we tend to track the
general economic conditions of the United States, industrial production and
general retail sales, all of which have, for the most part, trended downward
during the past year.
We pay
particular attention to the cost of our raw materials, in particular metals,
especially various types of steel and aluminum. To a lesser extent,
we are impacted by the value of the U.S. dollar in relation to the Japanese yen
(“yen”) and the Taiwan dollar (“TWD”), as we purchase a portion of our products
from these two countries in the local currencies. We also make purchases from
Chinese sources in U.S. dollars. However, if the Chinese currency, the Renminbi
(“RMB”), were to be revalued against the dollar, there could be a significant
negative impact on the cost of our products.
Operating
Measures
Key
operating measures we use to manage our operating segments are: future sales
orders; shipments; development of new products; controlling customer retention;
inventory levels and productivity. These measures are recorded and monitored at
various intervals, including daily, weekly and monthly. To the extent these
measures are relevant; they are discussed in the detailed sections for each
operating segment.
19
Financial
Measures
Key
financial measures we use to evaluate the results of our business include:
revenue; gross margin; selling, general and administrative expenses; earnings
before interest, taxes and bonus; operating cash flows, capital expenditures;
return on sales; return on assets; days sales outstanding and inventory turns.
These measures are reviewed at monthly, quarterly and annual intervals and are
compared to historical periods as well as established objectives. To the extent
that these measures are relevant, they are discussed in the detailed sections
for each operating segment below.
Critical
Accounting Policies and Estimates
We
prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America, (“GAAP”). Certain
of these accounting policies require us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
the related disclosure of contingent assets and liabilities, revenues and
expenses. On an ongoing basis, we evaluate estimates, including those related to
bad debts, inventory reserves, goodwill and intangible assets, deferred tax
assets and warranty reserves. We base our estimates on historical data and
experience, when available, and on various other assumptions that are believed
to be reasonable under the circumstances, the combined results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates.
There
have been no material changes in our critical accounting policies and estimates
from those discussed in Item 7 of our Annual Report on Form 10-K for the
year ended December 31, 2009.
RESULTS OF
OPERATIONS
The table
below provides an analysis of our net revenue for the three month and nine-month
periods ended September 30, 2010 and 2009:
Revenue
|
Three-months Ended September 30,
|
||||||||||||||||
|
2010
|
2009
|
Variance
|
Variance
|
|||||||||||||
|
$
|
%
|
|||||||||||||||
|
Tools
|
||||||||||||||||
|
Florida
Pneumatic
|
$ | 7,241,000 | $ | 6,483,000 | $ | 758,000 | 11.7 | % | ||||||||
|
Hy-Tech
|
3,368,000 | 3,270,000 | 98,000 | 3.0 | ||||||||||||
|
Tools
Total
|
10,609,000 | 9,753,000 | 856,000 | 8.8 | ||||||||||||
|
Hardware
|
||||||||||||||||
|
Hardware
Total
|
3,658,000 | 3,391,000 | 267,000 | 7.9 | ||||||||||||
|
Consolidated
|
$ | 14,267,000 | $ | 13,144,000 | $ | 1,123,000 | 8.5 | % | ||||||||
|
Nine-months Ended September 30,
|
||||||||||||||||
|
2010
|
2009
|
Variance
|
Variance
|
|||||||||||||
|
$
|
%
|
|||||||||||||||
|
Tools
|
||||||||||||||||
|
Florida
Pneumatic
|
$ | 16,902,000 | $ | 17,313,000 | $ | (411,000 | ) | (2.4 | )% | |||||||
|
Hy-Tech
|
10,222,000 | 10,921,000 | (699,000 | ) | (6.4 | ) | ||||||||||
|
Tools
Total
|
27,124,000 | 28,234,000 | (1,110,000 | ) | (3.9 | ) | ||||||||||
|
Hardware
|
||||||||||||||||
|
Hardware
Total
|
11,610,000 | 11,204,000 | 406,000 | 3.6 | ||||||||||||
|
Consolidated
|
$ | 38,734,000 | $ | 39,438,000 | $ | (704,000 | ) | (1.8 | )% | |||||||
All
revenues are generated in U.S. dollars and are not impacted by changes in
foreign currency exchange rates.
20
Tools
When
comparing the three-month periods ended September 30, 2010 and 2009,
revenue reported by our Tools segment increased $856,000 or 8.8%. Specifically,
Florida Pneumatic increased its revenue from its major retail customer by
$981,000, when comparing the three-month periods ended September 30, 2010 and
2009. Additionally, when comparing the three-month period ended
September 30, 2010 to the same period in the prior year, Florida Pneumatic
improved its industrial/catalog, automotive and filters productsrevenue by
$277,000, $68,000 and $13,000, respectively. As the result of our
decision to no longer market the Franklin products line effective December 31,
2009, revenue from the Franklin products line reflect a decrease of $590,000. We
believe that Florida Pneumatic’s relationships with its key customers, given the
current economic conditions remain good.
Revenue
at Hy-Tech, which focuses on the industrial sector of the pneumatic tools
market, increased $98,000 this quarter compared to the same period in the prior
year. During the three-month period ended September 30, 2010,
Hy-Tech was able to increase its volume over the prior year to a major customer,
accounting for much of its increase. Revenue from its ATP product
line increased nominally over the prior year. Given the current
economic conditions, we believe Hy-Tech’s relationships with its customer base
remain good.
During
the nine-month period ended September 30, 2010, revenue for our Tools
segment decreased to $27,124,000 from $28,234,000 in the same period a year ago.
It should be noted that Hy-Tech revenue during the three month period ended
March 31, 2009 included unusually large orders from one of its customers
that have not repeated thus far in 2010. Although its revenue for the
for both the second and third quarters of 2010 reflect an increase over the
prior year, revenue for the nine-month period ended September 30, 2010 is
down $699,000 when compared to the same period in
2009. Revenue at Florida Pneumatic for the nine-month
period ended September 30, 2010, has decreased 2.4% or
$411,000. This decrease in revenue is, primarily due to the decision
effective December 31, 2009, to discontinue marketing the Franklin products
line, resulting in revenue decreasing $1,336,000, partially offset by revenue
growth in the more profitable Industrial/Catalog line of
$738,000. Additionally, during the nine month period ended September
30, 2010, revenue in the automotive product line increased by $211,000, with
revenue decreasing $68,000 from Florida Pneumatic’s major customer during the
nine-month period ended September 30, 2010.
Hardware
Our
Hardware revenue is comprised of the sales of fencing and gate hardware, kitchen
and bath accessories, OEM products and patio hardware.
|
Three-months Ended September 30,
|
||||||||||||||||
|
2010
|
2009
|
Variance
|
Variance
|
|||||||||||||
|
$
|
%
|
|||||||||||||||
|
Hardware
|
||||||||||||||||
|
Fence
and gate hardware
|
$ | 2,348,000 | $ | 1,867,000 | $ | 481,000 | 25.8 | % | ||||||||
|
Kitchen
and Bath
|
606,000 | 734,000 | (128,000 | ) | (17.4 | ) | ||||||||||
|
OEM
|
517,000 | 590,000 | (73,000 | ) | (12.4 | ) | ||||||||||
|
Patio
|
187,000 | 200,000 | (13,000 | ) | (6.5 | ) | ||||||||||
|
Total
Hardware
|
$ | 3,658,000 | $ | 3,391,000 | $ | 267,000 | 7.9 | |||||||||
|
Nine-months Ended September 30,
|
||||||||||||||||
|
2010
|
2009
|
Variance
|
Variance
|
|||||||||||||
|
$
|
%
|
|||||||||||||||
|
Hardware
|
||||||||||||||||
|
Fence
and gate hardware
|
$ | 7,312,000 | $ | 6,289,000 | $ | 1,023,000 | 16.3 | % | ||||||||
|
Kitchen
and Bath
|
2,129,000 | 2,443,000 | (314,000 | ) | (12.9 | ) | ||||||||||
|
OEM
|
1,523,000 | 1,853,000 | (330,000 | ) | (17.8 | ) | ||||||||||
|
Patio
|
646,000 | 619,000 | 27,000 | 4.4 | ||||||||||||
|
Total
Hardware
|
$ | 11,610,000 | $ | 11,204,000 | $ | 406,000 | 3.6 | % | ||||||||
The
increase in fence and gate hardware during the three-month period ended
September 30, 2010 compared to the same three-month period in the prior year is
due primarily to new product sales and increased customer
base. Further, kitchen and bath product sales declined due primarily
to declines in the recreational vehicle and modular home markets, and
competitive pressures. Much of the decline in OEM revenue was due to
the loss of Coffman, which prior to the WMC transaction in September 2009,
was a customer of Nationwide. Sales by Nationwide to WMC after the date of the
WMC transaction were eliminated on consolidation. Given
the current economic conditions, we believe relationships with the major
customers within our Hardware segment remain good.
21
Analysis
of our revenue for the Hardware segment during the nine-month period ended
September30, 2010 falls much in line with that of the current quarter; there has
been year over year growth in the fence and gate hardware product line revenue
due primarily to an expanded customer base as well as the launching of new
products. With respect to OEM product line, revenue decreased due
primarily to the loss of recognition of revenue generated from shipments to
Coffman. As noted earlier, after June 9, 2009 Nationwide shipments to WMC
were eliminated on consolidation. Revenue for the kitchen and bath
product line during the nine month period ended September 30, 2010 reflects
a 12.4% decline when compared to the same period in 2009, due to further
weakening within this market sector. Patio hardware product line
revenue for the nine-month period ended September 30, 2010 increased 4.4%,
compared to the same nine-month period in 2009.
Gross Margins /
Profits
Gross
profits for the three and nine-month periods ended September 30, 2010 and
2009:
|
Three months ended September 30,
|
Consolidated
|
Tools
|
Hardware
|
|||||||||||
|
2010
|
Gross Profit
|
$ | 4,741,000 | $ | 3,452,000 | $ | 1,289,000 | |||||||
|
Gross Margin
|
33.2 | % | 32.5 | % | 35.2 | % | ||||||||
|
2009
|
Gross Profit
|
$ | 4,346,000 | $ | 3,112,000 | $ | 1,234,000 | |||||||
|
Gross Margin
|
33.1 | % | 31.9 | % | 36.4 | % | ||||||||
|
Nine months ended September 30,
|
Consolidated
|
Tools
|
Hardware
|
|||||||||||
|
2010
|
Gross Profit
|
$ | 13,430,000 | $ | 9,096,000 | $ | 4,334,000 | |||||||
|
Gross Margin
|
34.7 | % | 33.5 | % | 37.3 | % | ||||||||
|
2009
|
Gross Profit
|
$ | 12,414,000 | $ | 8,836,000 | $ | 3,578,000 | |||||||
|
Gross Margin
|
31.5 | % | 31.3 | % | 31.9 | % | ||||||||
Tools
Gross
margins in the Tools segment for the three-month period ended September 30,
2010 increased 0.6 percentage points to 32.5% from 31.9% for the three-month
period ended September 30, 2009. Gross profit for this segment increased
$340,000.Specifically, when comparing the three-month periods ended
September 30, 2010 and 2009, there was no change in Florida Pneumatic’s
gross margin. However, due to increased revenue, Florida Pneumatic’s
gross profit increased approximately $226,000.Hy-Tech’s gross margin increased
2.3% percentage points when comparing the three-month periods ended
September 30, 2010 and 2009. This improvement is due in part to
improved cost of manufacturing. This improvement in Hy-Tech’s gross
margin, combined with the increase in revenue, resulted in Hy-Tech’s gross
profit increase of $114,000, when comparing the three-month periods ended
September 30, 2010 and 2009.
Gross
margin for the Tools segment for the nine-month period ended September 30,
2010 increased to 33.5% from 31.3% during the same period in 2009, with gross
profit increasing by $260,000. Florida Pneumatic, during the
nine-month period ended September 30, 2010, was able to improve its year to
date gross margin 4.6 percentage points when compared to the same period in
2009, due primarily to improved mix of products sold, lower pricing from its
overseas suppliers, lower indirect labor and improved utilization of fixed
overhead. Despite revenue decreasing during the nine-month period
ended September 30, 2010 compared to the same time a year ago, Florida
Pneumatic was able to increase its gross profit by $670,000.Hy-Tech’s gross
margin for the nine-month period ended September 30, 2010 decreased 1.2
percentage points when comparing the nine-month periods ended September 30, 2010
and 2009, due in part to less product being manufactured, thereby adversely
affecting absorption of fixed overhead, thus increasing costs. The
lower gross margin in 2010 applied to decreased year to date revenue caused
Hy-Tech’s gross profit to decline $410,000, when comparing the nine-month
periods ended September 30, 2010 and 2009.
Hardware
Our gross
margin attributable to Hardware product lines for the three-month period ended
September 30, 2010 decreased to 35.2% from 36.4% during the same period in the
prior year. However, as the result of increased revenue during the thirdquarter
of 2010 compared to 2009 the Hardware’s gross profit grew to $1,289,000 from
$1,234,000 during the same three-month period in 2009.
However
gross margin at our Hardware segment for the nine-month period ended September
30, 2010 increased to 37.3% from 31.9% during the same period in the prior year.
When comparing the nine-month periods ended September 30, 2010 and 2009, gross
profit increased for all product lines, except for Patio, which decreased
slightly, This improvement is primarily the result of
(i) product mix, (ii) reduction in the cost of products being relieved
from inventory, and (iii) greater absorption of warehouse
overhead.
22
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses, (“SG&A”) include salaries and related
costs, commissions, travel, administrative facilities, communications costs and
promotional expenses for our direct sales and marketing staff, administrative
and executive salaries and related benefits, legal, accounting and other
professional fees as well as general corporate overhead and certain engineering
expenses.
For the
three-month period ended September 30, 2010, our SG&A was $3,845,000,
reflecting a slight decrease of $64,000 when compared to $3,909,000 for the
three-month period ended September 30, 2009. More importantly, as a percentage
of revenue, SG&A was 27.0% for the three-month period ended September 30,
2010 compared to 29.7% for the same period in the prior
year. Significant line items contributing to the net change were
decreases in legal and other professional fees of $94,000 and warranty costs of
$110,000. Offsetting the above, when comparing the three-month periods ended
September 30, 2010 and 2009, we incurred increases in commissions and freight
out of $50,000 and $65,000,respectively, due to higher revenue, depreciation of
$45,000, due to the installation of new software and $80,000 in compensation due
to accrued performance bonuses at the subsidiary level only. We
intend to continue to examine our operating expenses, for further possible
reductions particularly during these difficult times.
Our
SG&A for the nine-month period ended September 30, 2010 of $12,246,000,
reflects an increase of $311,000 from $11,935,000 reported during the same
period in the prior year. The most significant component of the
increase are legal, consulting, accounting and bank fees of $509,000 incurred in
connection with our efforts to resolve matters with our banks, including a new
waiver and amendment entered into during the second quarter of 2010, and costs
incurred as the result of PNC’s actions pertaining to their foreclosure on WMC.
Additional areas which encountered increases were depreciation and amortization
of $121,000, which is due primarily to a software application implementation and
freight costs, which increased by $124,000. These increases were
partially offset by, among other things, our continuing compensation and
benefits reduction plan and reduced staff, which has resulted in a savings of
$233,000, lower warranty costs of $117,000, due to improved product quality and
inspections overseas and a reduction of $86,000 in the required expensing of
prior period, non-cash, stock based compensation charges.
Interest
- Net
Our net
interest expense of $264,000 for the three-month period ended September 30,
2010, reflects a decrease of $104,000 or 28.3%, when compared to net interest
expense of $368,000 incurred for the same period in the prior year. The most
significant item affecting our debt / interest expense this quarter was a
reduction in the term loan of an additional $1,989,000, in May 2010 from the tax
refunds received in May 2010, which resulted in lowering interest expense to
$39,000 for the three-month period ended September 30, 2010, compared to $83,000
incurred during the same period in 2009, a decrease of
$44,000. Additionally, our interest expense on borrowings under
our revolving credit loan facility for the three-month period ended September
30, 2010 was $153,000, compared to $205,000 for the same period in 2009, a
decrease of $52,000. The primary factor contributing to this decrease was lower
average loan balances, in turn due to the application of a tax refund received
in May 2010. Other items included in our interest expense include approximately
$35,000 of interest attributable to the Hy-Tech Sellers Note and $15,000 of
accrued interest on the loan from our CEO and an unrelated third party made as a
condition by the banks to the waiver and amendment to our credit facility dated
April 23, 2010.
Our total
average debt balances under the terms of our credit facilities with our banks
for the quarters ended September 30, 2010 and 2009 were $14,055,000 and
$23,238,000, respectively. The total average interest rate for the
quarters ended September 30, 2010 and 2009 were 5.47% and 4.967%,
respectively.
Our net
interest for the nine-month period ended September 30, 2010 was $990,000,
compared to $995,000 during the same period in 2009, a decrease of $5,000.
Interest expense incurred in connection with our term loan was $200,000,
compared to $295,000 in 2009. This decrease, as discussed earlier, is primarily
due a significant reduction of principal, which occurred in May 2010. Interest
expense on borrowings under our revolving credit loan facility for the
nine-month period ended September 30, 2010 was $585,000, compared to $549,000
for the same period in 2009, an increase of $36,000. A primary factor
contributing to this increase wasthe higher interest rates that were applied
when default rate adjustments were imposed. Other items included in our interest
expense are approximately $94,000 of interest attributable to the Hy-Tech
Seller’sNote and $27,000 of accrued interest on the loan from our CEO and an
unrelated third party made as a condition to the waiver and amendment to our
credit facility dated April 23, 2010.
Our total
average debt balances under the terms of our credit facilities with our banks
was $16,923,000 and $25,801,000 for the nine-month periods ended September 30,
2010 and 2009, respectively. The total average interest rate for the
six-month periods ended September 30, 2010 and 2009 were 6.18% and 4.36%,
respectively.
23
Income
Taxes
The
effective rate applicable to our income from continuing operations for the three
and nine-month periods ended September 30, 2010, differs from the statutory rate
primarily due to uncertainties relating to projected future taxable
income.
The
effective rate (benefit) applicable to the income / (loss) from
continuing operations for the three and nine-month periods ended September 30,
2009 was approximately 19% and (31)%. The primary
factors affecting our effective tax rate for the three and nine-month periods
ended September 30, 2009, were state income taxes and permanent
differences.
LIQUIDITY AND CAPITAL
RESOURCES
Our cash
flows from operations can be somewhat cyclical, typically with the greatest
demand in the second and third quarters followed by positive cash flows in the
fourth quarter as receivables and inventories trend down. We monitor
average days sales outstanding, inventory turns, estimated future purchasing
requirements and capital expenditures to project liquidity needs and evaluate
return on assets employed.
We gauge
our liquidity and financial stability by various measurements, some of which are
shown in the following table:
|
September 30, 2010
|
December 31, 2009
|
|||||||
|
Working
Capital of continuing operations
|
$ | 6,078,000 | $ | 7,342,000 | ||||
|
Current
Ratio of continuing operations
|
1.26
to 1.0
|
1.30
to 1.0
|
||||||
|
Shareholders’
Equity
|
$ | 13,467,000 | $ | 25,615,000 | ||||
SHORT-TERM
BORROWINGS
The
Company and its subsidiaries, other than WMC, as co-borrowers, in 2004 entered
into a Credit Agreement, (“Credit Agreement”) as amended, with two banks
(“banks”). The Credit Agreement, among other things, includes a
revolving credit loan facility (“revolving loan”). The revolving loan can be
used for direct borrowings, with various sub-limits for letters of credit,
bankers’ acceptances and equipment loans. There were no letters of credit,
bankers’ acceptances or equipment loan borrowings at September 30, 2010 or
December 31, 2009. There are no commitment fees for any unused portion of this
Credit Agreement. Direct borrowings under the revolving loan are secured by the
Company’s accounts receivable, inventory, equipment and real property, and are
cross-guaranteed by each of the Company’s subsidiaries, except WMC. These
borrowings bear interest at either LIBOR (London InterBank Offered Rate), at a
minimum of 1.0%, plus the currently applicable loan margin of 4.25%, or the
prime interest rate, which September 30, 2010 was 3.25% plus the currently
applicable loan margin of 2.50%. As such, the interest rates in
effect at September 30, 2010 were 5.25% for borrowings at LIBOR and 5.75% for
borrowings at prime rate. On April 23, 2010, the Company and the
banks executed a waiver and amendment which, among other things, extended the
termination date of the revolving credit loan portion of the Credit Agreement
facility to January 1, 2011 and waived all then existing defaults. Further, the
waiver and amendment set new financial covenants and adjusted the borrowing base
calculation as well as reduced the size of the facility from $17,500,000 to
$16,500,000. In addition, it required that all future advances shall
be subject to the requirement that the aggregate amount advanced after giving
effect to any such future advances be at least $750,000 less than the aggregate
lendable value in eligible borrowing base assets. Finally, the
amendment dated April 23, 2010 required a subordinated loan of $750,000, which,
in the aggregate, was provided by the Company’s Chief Executive Officer,
President and Chairman of the Board of Directors, (“CEO”), and another unrelated
party. See Note 12 which discusses related party transactions. See
Note 14 which discusses the Company’s actions taken in connection with its
obligation, related to a new banking facility entered into in October
2010.
As the
result of the new credit facility entered into on October 25, 2010, we believe
that the cash on hand, the more favorable payment terms on our long term debt
and increased funds available under the terms of this new facility will be
sufficient to meet our operating requirements in the future.
LONG TERM
DEBT
As part
of an amendment dated March 30, 2009 to the Credit Agreement, the banks agreed
to cancel and refinance two term loans as a single new term loan which was set
to expire March 30, 2012. Further, this term loan requires the Company to make
monthly principal installment payments, which aggregate to approximately
$1,780,000 annually. Borrowings under this term loan created by the
March 2009 amendment are secured by the Company’s accounts receivable,
inventory, equipment and real property and are cross-guaranteed by each of the
Company’s subsidiaries, with the exception of WMC. The balance of this term loan
at September 30, 2010 and December 31, 2009 was $2,459,000 and $5,782,000,
respectively. This term loan bears interest at LIBOR, at a minimum of
1%, plus the currently applicable loan margin of 4.50%, or the prime interest
rate, which September 30, 2010 was 3.25% plus the currently applicable loan
margin of 2.5%. As such, the interest rates in effect at September
30, 2010 were 5.50% for borrowings at LIBOR and 5.75% for borrowings at prime
rate. See Note 14 which discusses the Company’s actions taken in
connection with its obligation, related to a new banking facility entered into
in October 2010.
24
Countrywide
is a party to a loan agreement with Wachovia Bank, which is secured by a
mortgage with respect to the real property owned by Countrywide and utilized by
Nationwide. Countrywide did not make the final “balloon” payment that
was due on September 21, 2009. As a result of the non-payment,
cross-default provisions set forth in the loan agreement between Florida
Pneumatic and Wachovia, secured by a mortgage with respect to the real property
owned and utilized by Florida Pneumatic, were triggered. On February
23, 2010, Wachovia amended the underlying loan document to among other things,
extend the maturity date of the balloon payment to September 1, 2010 and require
the Company to make monthly principal payments of approximately $11,000 plus
accrued interest commencing on March 24, 2010. On April 22, 2010, the
Company and Wachovia entered into a new Loan Modification Agreement, which
became effective April 23, 2010, wherein the Company prepaid $150,000 toward the
balance due on the Countrywide loan agreement. In exchange, Wachovia waived all
prior defaults and extended the maturity date to January 1, 2011. The balance on
this loan agreement at September 30, 2010 and December 31, 2009 was $862,000 and
$1,091,000, respectively. The balance on the mortgage pertaining to Florida
Pneumatic was $596,000 and $708,000 at September 30, 2010 and December 31, 2009,
respectively, See Note 14 which discusses the Company’s actions taken in
connection with these obligations, related to a new banking facility entered
into in October, 2010.
The
Credit Agreement entered into with the banks also includes a foreign exchange
line, which provides for the availability of up to $10,000,000 in foreign
currency forward contracts. These contracts fix the exchange rate on
future purchases of foreign currencies needed for payments to foreign
suppliers. At September 30, 2010, there were no foreign currency
forward contracts outstanding.
As the
result of PNC’s actions and other events, WMC is no longer in operation and has
no assets to settle its liabilities, which at September 30, 2010, were
approximately $12,529,000 and is the major portion of Liabilities of
Discontinued Operations presented in current liabilities in the Consolidated
Condensed Balance Sheet. We believe neither P&F nor any of its
subsidiaries other than WMC are legally responsible for any of WMC’s liabilities
belonging to WMC. However, until such time as these obligations have
been resolved, either directly with the creditors or discharged by a court of
law, or otherwise eliminated, we believe we are required to maintain these
obligations on our financial statements.
In
connection with the acquisition of Hy-Tech, the Company agreed to make
additional payments (“Contingent Consideration”) to the sellers. The amount of
the Contingent Consideration was based upon Hy-Tech achieving certain financial
performance thresholds during the two year period ending on the second
anniversary of the acquisition. Further, the Company agreed to make an
additional payment (“Additional Contingent Consideration”), subject to certain
conditions related primarily to an exclusive supply agreement with a major
customer and, to a certain extent, and subject to certain provisions, the
achievement of Contingent Consideration. Hy-Tech successfully achieved the
required thresholds necessary to be entitled to both the Contingent
Consideration and the Additional Contingent Consideration. The total amount of
the Contingent Consideration and the Additional Contingent Consideration was
approximately $2,292,000. According to the Company’s purchase agreement with the
Hy-Tech sellers, the amounts due the sellers were payable in May 2009. The
Company and the sellers agreed upon a payment arrangement wherein the Company
was required and did make a payment of approximately $573,000 in May 2009, with
the balance of approximately $1,719,000 to be paid in six equal payments with
interest at 6.0% per annum, payable quarterly commencing in August 2009. The
August 2009 and November 2009 installment payments with interest were paid
timely. However, due to the default on the Credit Agreement, the Company was not
permitted to make any subsequent payment without permission from the banks.
Further, pursuant to the Waiver and Amendment dated April 23, 2010, the Company
is still not permitted to make any future payments without permission from the
banks. The balance owing on this obligation was $1,146,000 at September 30, 2010
and December 31, 2009. The Company is accruing interest at 12.0% per
annum, the default rate of interest. At September 30, 2010, accrued interest was
approximately $103,000. See Note 14 which discusses the
Company’s actions taken in connection with its obligation, related to a new
banking facility entered into in October 2010.
During
the nine-month period ended September 30, 2010, our cash decreased $116,000 to
$430,000 from $546,000 at December 31, 2009. Our total bank debt
at September 30, 2010, excluding any bank debt included in Liabilities of
Discontinued operations, was $17,286,000, compared to $25,463,000 at
December 31, 2009. The percent of total debt to total book capitalization
(total debt divided by total bank debt plus equity) was 56.2% at September 30,
2010, compared to 50.9% at December 31, 2009.
We had
net cash of $8,138,000 provided by operating activities of continuing operations
for the nine-month period ended September 30, 2010, compared to $5,981,000
provided by operating activities of continuing operations during the nine-month
period ended September 30, 2009.
25
Capital
spending was approximately $154,000 for the nine-month period ended
September 30, 2010, compared to $1,592,000 during the nine-month period
ended September 30, 2009. Capital expenditures for the balance of
2010 are expected to be approximately $100,000, some of which may be financed
through our credit facilities or financed through independent third party
financial institutions. Included in the expected total for 2010 are capital
expenditures relating to new products, expansion of existing product lines and
replacement of equipment.
OFF-BALANCE
SHEET ARRANGEMENTS
Our
foreign exchange line within the Credit Agreement provides for the availability
of up to $10,000,000 in foreign currency forward contracts. These contracts fix
the exchange rate on future purchases of foreign currencies needed for payments
to foreign suppliers. We have not purchased forward contracts on New Taiwan
dollars (“TWD”). At September 30, 2010 and 2009, the Company had no
material foreign exchange forward contracts
outstanding. Additionally, there was no material realized or
unrealized gains related to these contracts during the three andnine month
periods ended September 30, 2010 and 2009, respectively.
RECENT
ACCOUNTING PRONOUNCEMENTS
Management
does not believe that any other recently issued, but not yet effective
accounting standards, if currently adopted would have a material effect on our
condensed consolidated financial statements.
Not
required.
Evaluation
of disclosure controls and procedures
An
evaluation was performed, under the supervision of, and with the participation
of, our management including the Principal Executive Officer and Principal
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
to the Securities and Exchange Act of 1934). Based on that evaluation, our
management, including the Principal Executive Officer and Principal Financial
Officer, concluded that our disclosure controls and procedures as of September
30, 2010 were effective. Accordingly, management believes that the consolidated
condensed financial statements included in this Quarterly Report on Form 10-Q
fairly present, in all material respects, our financial condition, results of
operations and cash flows for the periods presented.
P&F
management is responsible for establishing and maintaining effective internal
controls. Because of our inherent limitations, internal controls may not prevent
or detect misstatements. A control system, no matter how well designed and
operated, can only provide reasonable, not absolute, assurance that the control
system’s objectives will be met. Also, projections of any evaluation of
effectiveness as to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with policies and procedures may deteriorate.
The
Certifications of our Principal Executive Officer and Principal Financial
Officer included as Exhibits 31.1 and 31.2 to this Quarterly Report on Form 10-Q
include, in paragraph 4 of such certifications, information concerning our
disclosure controls and procedures and internal control over financial
reporting. Such certifications should be read in conjunction with the
information contained in this Item 4 - Controls and Procedures for a more
complete understanding of the matters covered by such
certifications.
Changes
in Internal Control Over Financial Reporting
There
have been no significant changes in our internal control over financial
reporting during the three-month period ended September 30, 2010, that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
26
There
have been no material changes to the legal proceedings described in our Annual
Report on Form 10-K for the year ended December 31, 2009.
There
were no material changes from risk factors previously disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2009.
None.
None.
None.
See
“Exhibit Index” immediately following the signature page.
27
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
P&F
INDUSTRIES, INC.
|
||
|
(Registrant)
|
||
|
By
|
/s/ Joseph A. Molino,
Jr.
|
|
|
Joseph
A. Molino, Jr.
|
||
|
Chief
Financial Officer
|
||
|
Dated:
November 12, 2010
|
(Principal
Financial and Chief Accounting
Officer)
|
|
28
The
following exhibits are either included in this report or incorporated herein by
reference as indicated below:
|
Exhibit
Number
|
Description of Exhibit
|
|
|
31.1
|
Certification
of Richard A. Horowitz, Principal Executive Officer of the Registrant,
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
31.2
|
Certification
of Joseph A. Molino, Jr., Principal Financial Officer of the Registrant,
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.1
|
Certification
of Richard A. Horowitz, Principal Executive Officer of the Registrant,
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
|
|
32.2
|
Certification
of Joseph A. Molino, Jr., Principal Financial Officer of the Registrant,
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of
2002.
|
A copy of
any of the foregoing exhibits to this Quarterly Report on Form 10-Q may be
obtained, upon payment of the Registrant’s reasonable expenses in furnishing
such exhibit, by writing to P&F Industries, Inc., 445 Broadhollow Road,
Suite 100, Melville New York 11747, Attention: Corporate
Secretary.
29