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P&F INDUSTRIES INC - Quarter Report: 2015 March (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

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

 

For the Quarterly Period Ended March 31, 2015

 

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

 

For the transition period from                 to             

 

Commission File Number 1 - 5332

 

P&F INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   22-1657413
(State or other jurisdiction of   (I.R.S. Employer Identification Number)
incorporation or organization)    
     
445 Broadhollow Road, Suite 100, Melville, New York   11747
(Address of principal executive offices)   (Zip Code)

 

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on 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 that the registrant was required to submit and post such files). Yes x   No ¨

 

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 the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company   x
    (Do not check if a smaller reporting company)  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨   No x

 

As of May 12, 2015 there were 3,609,870 shares of the registrant’s Class A Common Stock outstanding.

 

 
 

 

P&F INDUSTRIES, INC.

 

FORM 10-Q

 

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2015

 

TABLE OF CONTENTS

 

      PAGE
       
PART I — FINANCIAL INFORMATION      
       
Item 1.  Financial Statements   1
       
  Consolidated Balance Sheets as of March 31, 2015 (unaudited) and December 31, 2014   1
       
  Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2015 and 2014 (unaudited)   3
       
  Consolidated Statement of Shareholders’ Equity for the three months ended March 31, 2015 (unaudited)   4
       
  Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014 (unaudited)   5
       
  Notes to Consolidated Financial Statements (unaudited)   7
       
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations    15
       
Item 3.  Quantitative and Qualitative Disclosures About Market Risk    22
       
Item 4  Controls and Procedures    23
       
PART II — OTHER INFORMATION     24
       
Item 1.  Legal Proceedings    24
       
Item 1A.  Risk Factors    24
       
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds    24
       
Item 3.  Defaults Upon Senior Securities    24
       
Item 4.  Mine Safety Disclosures    24
       
Item 5.  Other Information    24
       
Item 6.  Exhibits    24
       
Signature     25
     
Exhibit Index     26

 

 
 

 

PART I - FINANCIAL INFORMATION

 

Item 1.                Financial Statements

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

   March 31, 2015   December 31, 2014 
   (unaudited)   (See Note 1) 
ASSETS          
CURRENT ASSETS          
           
Cash  $659,000   $1,011,000 
Accounts receivable — net   11,891,000    9,547,000 
Inventories   26,316,000    24,335,000 
Deferred income taxes — net   1,149,000    1,149,000 
Prepaid expenses and other current assets   1,989,000    1,511,000 
TOTAL CURRENT ASSETS   42,004,000    37,553,000 
           
PROPERTY AND EQUIPMENT          
Land   1,550,000    1,550,000 
Buildings and improvements   7,697,000    7,683,000 
Machinery and equipment   20,601,000    20,460,000 
    29,848,000    29,693,000 
Less accumulated depreciation and amortization   19,513,000    19,101,000 
NET PROPERTY AND EQUIPMENT   10,335,000    10,592,000 
           
GOODWILL   12,027,000    11,980,000 
           
OTHER INTANGIBLE ASSETS — net   12,081,000    12,437,000 
           
OTHER ASSETS — net   460,000    514,000 
           
TOTAL ASSETS  $76,907,000   $73,076,000 

 

See accompanying notes to consolidated financial statements (unaudited).

 

1
 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES  

 

CONSOLIDATED BALANCE SHEETS  

 

   March 31, 2015   December 31, 2014 
   (unaudited)   (See Note 1) 
LIABILITIES AND SHAREHOLDERS’ EQUITY          
CURRENT LIABILITIES          
           
Short-term borrowings  $15,022,000   $11,817,000 
Accounts payable   4,580,000    3,160,000 
Accrued liabilities   4,397,000    5,482,000 
Current maturities of long-term debt   2,904,000    3,167,000 
TOTAL CURRENT LIABILITIES   26,903,000    23,626,000 
           
Long–term debt, less current maturities   6,376,000    6,493,000 
Deferred tax liabilities - net   2,658,000    2,720,000 
Other liabilities   242,000    246,000 
           
TOTAL LIABILITIES   36,179,000    33,085,000 
           
           
           
SHAREHOLDERS’ EQUITY          
Preferred stock - $10 par; authorized - 2,000,000 shares; no shares issued        
Common stock          
Class A - $1 par; authorized - 7,000,000 shares; issued – 4,146,000 at March 31, 2015 and 4,139,000 at December 31, 2014   4,146,000    4,139,000 
Class B - $1 par; authorized - 2,000,000 shares; no shares issued        
Additional paid-in capital   12,752,000    12,695,000 
Retained earnings   28,732,000    27,951,000 
Treasury stock, at cost – 554,000 shares at March 31, 2015 and December 31, 2014   (4,566,000)   (4,566,000)
Accumulated other comprehensive loss   (336,000)   (228,000)
           
TOTAL SHAREHOLDERS’ EQUITY   40,728,000    39,991,000 
           
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $76,907,000   $73,076,000 

 

See accompanying notes to consolidated financial statements (unaudited).

 

2
 

  

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)

 

   Three Months Ended March 31, 
   2015   2014 
Net revenue  $19,826,000   $15,932,000 
Cost of sales   12,307,000    9,897,000 
Gross profit   7,519,000    6,035,000 
Selling, general and administrative expenses   6,096,000    5,227,000 
Operating income   1,423,000    808,000 
Interest expense   192,000    89,000 
Income before income taxes   1,231,000    719,000 
Income tax expense   450,000    257,000 
Net income  $781,000   $462,000 
           
Basic earnings per share  $0.22   $0.13 
           
Diluted earnings per share  $0.21   $0.12 
           
Weighted average common shares outstanding:          
Basic   3,589,000    3,694,000 
Diluted   3,746,000    3,878,000 

 

Net income  $781,000   $462,000 
Other comprehensive loss - foreign currency translation adjustment   (108,000)    
Total comprehensive income  $673,000   $462,000 

 

See accompanying notes to consolidated financial statements (unaudited).

 

3
 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (unaudited)

 

       Class A Common
Stock, $1 Par
   Additional
paid-in
   Retained   Treasury stock   Accumulated
other
comprehensive
 
   Total   Shares   Amount   capital   earnings   Shares   Amount   loss 
                                 
Balance, January 1, 2015  $39,991,000    4,139,000   $4,139,000   $12,695,000   $27,951,000    (554,000)  $(4,566,000)  $(228,000)
                                         
Net income   781,000                781,000             
                                         
Exercise of stock options   20,000    7,000    7,000    13,000                 
                                         
Restricted common stock compensation   6,000            6,000                 
                                         
Stock-based compensation   38,000            38,000                 
                                         
Foreign currency translation adjustment   (108,000)                           (108,000)
                                         
Balance, March 31, 2015  $40,728,000    4,146,000   $4,146,000   $12,752,000   $28,732,000    (554,000)  $(4,566,000)  $(336,000)

 

See accompanying notes to consolidated financial statements (unaudited).

 

4
 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

 

   Three months 
   ended March 31, 
   2015   2014 
Cash Flows from Operating Activities:          
Net income  $781,000   $462,000 
           
Adjustments to reconcile net income to net cash used in operating activities:          
Non-cash charges:          
Depreciation and amortization   416,000    374,000 
Amortization of other intangible assets   324,000    58,000 
Amortization of debt issue costs   28,000    22,000 
Provision for (recovery of) losses on accounts receivable - net   5,000    (8,000)
Stock-based compensation   38,000    90,000 
Loss on sale of fixed assets   4,000     
Restricted stock-based compensation   6,000    7,000 
Deferred income taxes   (54,000)   231,000 
           
Changes in operating assets and liabilities:          
Accounts receivable   (2,373,000)   (1,142,000)
Inventories   (2,097,000)   285,000 
Prepaid expenses and other current assets   (479,000)   (49,000)
Other assets   26,000    11,000 
Accounts payable   1,435,000    (511,000)
Accrued liabilities   (1,071,000)   (1,249,000)
Other liabilities   (4,000)   (4,000)
Total adjustments   (3,796,000)   (1,885,000)
Net cash used in operating activities  $(3,015,000)  $(1,423,000)

  

See accompanying notes to consolidated financial statements (unaudited).

 

5
 

 

 P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

 

   Three months 
   ended March 31, 
   2015   2014 
Cash Flows from Investing Activities:          
Capital expenditures  $(184,000)  $(182,000)
Proceeds from disposal of assets   12,000     
Net cash used in investing activities   (172,000)   (182,000)
           
Cash Flows from Financing Activities:          
Proceeds from exercise of stock options   20,000     
Proceeds from short-term borrowings   18,809,000    15,712,000 
Repayments of short-term borrowings   (15,604,000)   (13,822,000)
Repayments of term loans   (365,000)   (115,000)
Repayments of notes payable   (11,000)    
Net cash provided by financing activities   2,849,000    1,775,000 
Effect of exchange rate changes on cash   (14,000)    
Net (decrease) increase in cash   (352,000)   170,000 
Cash at beginning of period   1,011,000    413,000 
Cash at end of period  $659,000   $583,000 
           
Supplemental disclosures of cash flow information:          
           
Cash paid for:          
Interest  $161,000   $68,000 
Income taxes  $60,000   $18,000 

 

See accompanying notes to consolidated financial statements (unaudited).

 

6
 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

NOTE 1 - BUSINESS AND SUMMARY OF ACCOUNTING POLICIES

 

Basis of Financial Statement Presentation

 

The accompanying unaudited consolidated 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 management of the Company, as defined below, these unaudited consolidated 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 balance sheet information as of December 31, 2014 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, 2014 (“2014 Form 10-K”). The interim financial statements contained herein should be read in conjunction with the 2014 Form 10-K.

 

The consolidated financial statements have been reported in U.S. dollars by translating asset and liability amounts of a foreign wholly-owned subsidiary at the closing exchange rate, equity amounts at historical rates and the results of operations and cash flow at the average of the prevailing exchange rates during the periods reported. As a result, the Company is exposed to foreign currency translation gain or losses. These gains or losses are presented in the Company’s consolidated financial statements as “Other comprehensive income (loss) - foreign currency translation adjustments”.

 

Principles of Consolidation

 

The unaudited consolidated financial statements contained herein include the accounts of P&F Industries, Inc. and its subsidiaries, (“P&F” or the “Company”). All significant intercompany balances and transactions have been eliminated.

 

The Company

 

P&F is a Delaware corporation incorporated on April 19, 1963, that operates in two primary lines of business or segments: (i) tools and other products (“Tools”) and (ii) hardware and accessories (“Hardware”).

 

Tools

 

The Company conducts its Tools business through a wholly-owned subsidiary, Continental Tool Group, Inc. (“Continental”), which in turn operates through its wholly-owned subsidiaries, Florida Pneumatic Manufacturing Corporation (“Florida Pneumatic”) and Hy-Tech Machine, Inc. (“Hy-Tech”). During the third quarter of 2014, the Company acquired Exhaust Technologies Inc. (“ETI”) and Universal Air Tool Company Limited (“UAT”). Both ETI and UAT are wholly-owned subsidiaries of Florida Pneumatic, and unless otherwise indicated, the operations and results of operations of Florida Pneumatic herein include ETI and UAT as of the respective dates such companies were acquired. Additionally, during the third quarter of 2014, the Company acquired substantially all the assets of Air Tool Service Company (“ATSCO”), which business operates through a wholly-owned subsidiary of Hy-Tech. Unless otherwise indicated, the results of operations of Hy-Tech herein include ATSCO from the date the business was acquired.  

 

Florida Pneumatic is engaged in the importation and sale of pneumatic hand tools, primarily for the retail, industrial and automotive markets, and the importation and sale of compressor air filters.  Florida Pneumatic also markets, through its Berkley Tool division (“Berkley”), a product line which includes pipe and bolt dies, pipe taps, wrenches, vises and stands, pipe and tubing cutting equipment, hydrostatic test pumps, and replacement electrical components for a widely-used brand of pipe cutting and threading machines.

 

Hy-Tech manufactures and distributes its own line of industrial pneumatic tools. Hy-Tech also produces and markets impact wrenches, grinders, drills, and motors. Further, it also manufactures tools to customer specifications. Its customers include refineries, chemical plants, power generation facilities, heavy construction enterprises, oil and gas and mining companies. In addition, Hy-Tech manufactures an extensive line of pneumatic tool replacement parts that are sold to original equipment manufacturers (“OEMs”), and competitively. It also manufactures and distributes high pressure stoppers for hydrostatic testing fabricated pipe, gears, sprockets, splines and racks and produces a line of siphons.

 

Hardware

 

The Company conducts its Hardware business through a wholly-owned subsidiary, Countrywide Hardware, Inc. (“Countrywide”). Countrywide conducts its business operations through its wholly-owned subsidiary, Nationwide Industries, Inc. (“Nationwide”). Nationwide is an importer and manufacturer of door, window and fencing hardware and accessories, including rollers, hinges, window operators, sash locks, custom zinc castings and door closers. Nationwide’s products are sold through in-house sales personnel and manufacturers’ representatives to distributors, retailers and OEM customers. End users of Nationwide’s products include contractors, home builders, pool and patio distributors, OEM/private label customers and general consumers.  

 

7
 

 

 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 as of 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 2014 Form 10-K.  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.  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.  

 

New Accounting Pronouncements  

 

Recently Issued Accounting Pronouncements

 

In April 2015, the Financial Accounting Standards Board issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” which amends the current presentation of debt issuance costs in the financial statements. ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts, instead of as an asset. The amendments are to be applied retrospectively and are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015, but early adoption is permitted. The adoption of the new guidance is not expected to have a material impact on the Company’s consolidated financial statements.

 

NOTE 2 – ACQUISITIONS

 

Exhaust Technologies Inc.

 

On July 1, 2014, the Company acquired ETI, a developer and distributor of pneumatic tools, through a merger between a newly formed wholly-owned subsidiary of Florida Pneumatic and ETI. ETI markets its AIRCAT and NITROCAT brand pneumatic tools primarily to the automotive market. Currently, ETI’s business operates through Florida Pneumatic. The purchase price for this acquisition consisted of $10,377,000 in cash plus the assumption of certain payables.

 

Universal Air Tool Company Limited

 

On July 29, 2014, the Company acquired all of the outstanding shares of UAT, a distributor of pneumatic tools. UAT, which is located in High Wycombe, England, markets pneumatic tools to the automotive market sector primarily in the United Kingdom and Ireland. The purchase price for this acquisition consisted of approximately $1,947,000 in cash less a post-closing working capital adjustment. There is a potential contingent consideration payment due to the former shareholders of UAT of a maximum of £250,000.

  

Air Tool Service Company

 

On August 13, 2014, a newly formed wholly owned subsidiary of Hy-Tech, acquired substantially all of the assets comprising the business of ATSCO, an Ohio based corporation engaged in the design, manufacture and distribution of pneumatic tools and parts. The purchase price consisted of approximately $7,659,000 in cash and the assumption of certain liabilities, and is subject to a post-closing working capital adjustment.

 

8
 

 

All three acquisitions are included as a part of the Company’s Tool Business Segment.

 

The following unaudited pro-forma combined financial information gives effect to the acquisition of ETI, UAT and ATSCO as if they were consummated January 1, 2014. This unaudited pro-forma financial information is presented for information purposes only, and is not intended to present actual results that would have been attained had the acquisitions been completed as of January 1, 2014 (the beginning of the earliest period presented) or to project potential operating results as of any future date or for any future periods.

 

   Three months ended
March 31, 2014
(Unaudited)
 
Revenue  $19,854,000 
Net income  $1,076,000 
Earnings per share - basic  $0.29 
Earnings per share - diluted  $0.28 

 

ETI and UAT have been integrated into the business operations of Florida Pneumatic, and ATSCO has been integrated into the business operations of Hy-Tech since their respective dates of acquisition. As such, it is impracticable to determine the specific revenue and earnings directly attributable to any of the acquired businesses.

 

NOTE 3 — EARNINGS PER SHARE

 

Basic 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 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 (“Common Stock”). The average market value for the period is used as the assumed purchase price.

 

 

The following table sets forth the elements of basic and diluted earnings per common share:

 

   Three months ended 
   March 31, 
   2015   2014 
Numerator:          
Numerator for basic and diluted earnings per common share:          
Net income  $781,000   $462,000 
           
Denominator:          
Denominator for basic earnings per share weighted average common shares outstanding   3,589,000    3,694,000 
Dilutive securities (1)   157,000    184,000 
Denominator for diluted earnings per share weighted average common shares outstanding   3,746,000    3,878,000 

 

(1)    Dilutive securities consist of “in the money” stock options.

 

9
 

 

At March 31, 2015 and 2014 and during the three-month periods ended March 31, 2015 and 2014, there were outstanding stock options whose exercise prices were higher than the average market values of the underlying Common Stock for the period. These options are anti-dilutive and are excluded from the computation of diluted earnings per share. The weighted average of anti-dilutive stock options outstanding was as follows:

 

   Three months ended 
   March 31, 
   2015   2014 
Weighted average anti-dilutive stock options outstanding   182,000    299,000 

 

NOTE 4 - STOCK-BASED COMPENSATION

 

During the three month periods ended March 31, 2015 and 2014, the Company did not grant any stock options or issue any Common Stock awards.

 

The following is a summary of the changes in outstanding options during the three-month period ended March 31, 2015:

 

   Option Shares   Weighted
Average
Exercise
Price
   Weighted Average
Remaining
Contractual Life
(Years)
   Aggregate
Intrinsic
Value
 
Outstanding, January 1, 2015   505,000   $6.51    4.8   $1,232,000 
Granted                 
Exercised   (6,500)   3.05           
Forfeited                  
Expired                  
Outstanding, March 31, 2015   498,500   $6.56    4.5   $845,000 
                     
Vested, March 31, 2015   437,494   $6.43    4.1   $820,000 

 

The following is a summary of changes in non-vested options for the three months ended March 31, 2015:

 

   Option Shares   Weighted Average Grant-
Date Fair Value
 
Nonvested options, January 1, 2015   61,006   $6.14 
Granted         
Vested         
Forfeited         
Nonvested options, March 31, 2015   61,006   $6.14 

 

The number of shares of Common Stock available for issuance under the 2012 Stock Incentive Plan as of March 31, 2015 was 194,517. At March 31, 2015, there were 113,500 options outstanding issued under the 2012 Stock Incentive Plan and 385,000 options outstanding issued under the 2002 Stock Incentive Plan.

 

Restricted Stock

 

Pursuant to the 2012 Plan, the Company, in May 2014, granted 666 restricted shares of its common stock to each non-employee member of its Board of Directors, totaling 3,330 restricted shares. The Company determined that the fair value of these shares was $7.43, which was the closing price of the Company’s Common Stock on the date of the grant. These shares cannot be traded earlier than the first anniversary of the grant date. As such, the Company is ratably amortizing the total non-cash compensation expense of approximately $25,000 in its selling, general and administrative expenses through May 2015.

 

10
 

 

 NOTE 5 - ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

 

Accounts receivable - net consists of:

 

   March 31, 2015   December 31, 2014 
Accounts receivable  $12,042,000   $9,693,000 
Allowance for doubtful accounts   (151,000)   (146,000)
   $11,891,000   $9,547,000 

 

NOTE 6 - INVENTORIES

 

Inventories consist of:

 

   March 31, 2015   December 31, 2014 
Raw material  $2,132,000   $2,014,000 
Work in process   1,449,000    1,433,000 
Finished goods   22,735,000    20,888,000 
   $26,316,000   $24,335,000 

 

NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS

 

The changes in the carrying amount of goodwill by segment are as follows:

 

   Consolidated   Tools   Hardware 
Balance, January 1, 2015  $11,980,000   $10,107,000   $1,873,000 
Adjustment to Acquisition of ATSCO   62,000    62,000     
Currency translation adjustments   (15,000)   (15,000)    
Balance, March 31, 2015  $12,027,000   $10,154,000   $1,873,000 

 

Other intangible assets were as follows:

 

   March 31, 2015   December 31, 2014 
   Cost   Accumulated
amortization
   Net book
value
   Cost   Accumulated
amortization
   Net book
value
 
Other intangible assets:                              
Customer relationships (1)  $13,185,000   $4,760,000   $8,425,000   $13,194,000   $4,551,000   $8,643,000 
Trademarks and trade names (1)   2,016,000        2,016,000    2,035,000        2,035,000 
Engineering drawings   410,000    130,000    280,000    410,000    120,000    290,000 
Licensing   305,000    250,000    55,000    305,000    235,000    70,000 
Non-compete agreements (1)   362,000    63,000    299,000    368,000    41,000    327,000 
Patents   1,205,000    199,000    1,006,000    1,205,000    133,000    1,072,000 
Totals  $17,483,000   $5,402,000   $12,081,000   $17,517,000   $5,080,000   $12,437,000 

 

(1)A portion of these intangibles are maintained in a foreign currency, and are therefore subject to foreign exchange rate fluctuations.

 

Amortization expense for intangible assets subject to amortization was as follows:

 

Three months ended March 31, 
2015   2014 
$324,000   $58,000 

 

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The weighted average amortization period for intangible assets was as follows:

 

   March 31, 2015   December 31, 2014 
Customer relationships   10.7    10.9 
Trademarks and trade names        
Engineering drawings   9.1    9.2 
Licensing   1.0    1.2 
Non-compete agreements   3.4    3.6 
Patents   6.0    6.1 
Total   9.9    10.1 

 

 Amortization expense for each of the next five years and thereafter is estimated to be as follows:

 

2016  $1,290,000 
2017   1,235,000 
2018   1,053,000 
2019   966,000 
2020   908,000 
Thereafter   4,613,000 
   $10,065,000 

 

 NOTE 8 - DEBT

 

SHORT-TERM LOANS

 

The Company entered into a Loan and Security Agreement in October 2010, as amended (“Credit Agreement”), with Capital One Business Credit Corp., formerly known as Capital One Leverage Finance Corporation, as agent and lender (“COBC”). The Credit Agreement expires December 19, 2017 (the “Maturity Date”). The Credit Agreement provides for a Revolver Loan (“Revolver”), borrowings under which are secured by the Company’s accounts receivable, mortgages on its real property located in Cranberry, PA, Jupiter, FL and Tampa, FL (“Real Property”),  inventory and equipment. P&F and certain of its subsidiaries are borrowers under the Credit Agreement, and their obligations are cross-guaranteed by certain other subsidiaries. Revolver borrowings bear interest at either LIBOR (London InterBank Offered Rate) or the Base Rate, as defined in the Credit Agreement (“Base Rate”), or a combination of the two, plus the Applicable Margin (the “Applicable Margin”), as defined in the Credit Agreement. The interest rate, either LIBOR or Base Rate, which is added to the Applicable Margin, is at the option of the Company, subject to limitations on the number of LIBOR borrowings. 

 

Contemporaneously with the ATSCO acquisition in August 2014, the Company entered into an Amended and Restated Loan and Security Agreement (the “Restated Loan Agreement”) with COBC. The Restated Loan Agreement, among other things, amended the Credit Agreement by: (1) increasing the total amount of the credit facility from $29,423,000 to $33,657,000, (2) increasing the Revolver from $20,000,000 to $22,000,000, (3) creating a new $3,000,000 Term Loan, as defined in the Restated Loan Agreement (“Term Loan B”), and (4) re-designating as “Term Loan A”, the previously existing outstanding Term Loan, which relates primarily to the Company’s real property. In addition, the Restated Loan Agreement also reset certain financial covenants.

 

At March 31, 2015 and December 31, 2014, the balance of Revolver borrowings outstanding was $15,022,000 and $11,817,000, respectively. Applicable Margins added to Revolver borrowings at LIBOR and the Base Rate were 2.25% and 1.25%, respectively, at March 31, 2015 and December 31, 2014. These applicable margin rates were constant throughout the three-month period ended March 31, 2015.

 

The Company is required to provide COBC with, among other things, monthly financial statements, monthly borrowing base certificates and certificates of compliance with various financial covenants. The Company believes it is in compliance with all covenants under the Restated Loan Agreement. As part of the Restated Loan Agreement, if an event of default occurs, the interest rate would increase by 2% per annum during the period of default, in addition to other remedies provided to COBC.

 

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LONG-TERM

 

The Restated Loan Agreement also provides for Term Loan A, which is secured by mortgages on the Real Property, accounts receivable, inventory and equipment.  Term Loan A borrowings can be at either LIBOR, or at the Base Rate, as defined in the Restated Loan Agreement, or a combination of the two plus the Applicable Margins, which for LIBOR borrowings at March 31, 2015 and December 31, 2014 was 3.0%. The Applicable Margin for borrowings at the Base Rate was 2.0% at March 31, 2015 and December 31, 2014.

 

Additionally, the Restated Loan Agreement provides for a Term Loan B, pursuant to which the Company borrowed the maximum principal amount of $3,000,000 as part of the ATSCO acquisition. This Term Loan B is to be repaid in 36 consecutive monthly payments of $83,000, with an additional mandatory repayment each year equal to 50% of the Company’s Excess Cash Flow (as defined in the Restated Loan Agreement) for such year, if any. Term Loan B borrowings incur interest at LIBOR or the Base Rate or a combination, plus the Applicable Margins, which was 3.25% and 2.25% at March 31, 2015 and December 31, 2014. As the result of computing the Company’s Excess Cash Flow for the year 2014, in April 2015, the Company repaid $2,417,000, which was the balance of the Term Loan B at March 31, 2015 with funds available from its Revolver.

 

The Company borrowed $380,000 and $519,000 in March 2012 and September 2012, respectively, as loans primarily for machinery and equipment (“Capex Term Loans”). Applicable Margins added to these Capex Term Loans at March 31, 2015 and December 31, 2014 were 3.00% and 2.00%, respectively for borrowings at LIBOR and the Base Rate, respectively.

 

Long-term debt:

 

   March 31, 2015   December 31, 2014 
Term Loan A - $23,000 payable monthly January 2013 through December 2017, balance due December 19, 2017.  $6,370,000   $6,440,000 
Term Loan B - $83,000 payable monthly September 2014 through March 2015.   2,417,000    2,667,000 
Capex Term Loan - $6,000 payable monthly May 2012 through April 2017.   158,000    178,000 
Capex Term Loan - $9,000 payable monthly October 2012 through September 2017.   260,000    285,000 
Other   75,000    90,000 
    9,280,000    9,660,000 
Less: current maturities   2,904,000    3,167,000 
   $6,376,000   $6,493,000 

 

NOTE 9 - RELATED PARTY TRANSACTIONS

 

The president of one of the Company’s subsidiaries is part owner of one of the subsidiary’s vendors. During the three-month periods ended March 31, 2015 and 2014, the Company purchased approximately $181,000 and $263,000, respectively, of product from this vendor. At March 31, 2015 and December 31, 2014, the Company had trade payables to this vendor of $60,000 and $103,000, respectively. Additionally, during the three-month periods ended March 31, 2015 and 2014, the Company recorded sales to this vendor of $2,000 and $4,000, respectively.

 

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NOTE 10 - BUSINESS SEGMENTS

   

P&F operates in two primary lines of business, or segments: Tools and 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 referred to in Note 1.  

 

Three months ended March 31, 2015  Consolidated   Tools   Hardware 
             
Revenue  $19,826,000   $14,559,000   $5,267,000 
                
Segment operating income  $2,865,000   $1,908,000   $957,000 
General corporate expense   (1,442,000)          
Interest expense   (192,000)          
Earnings before income taxes  $1,231,000           
                
Segment assets  $75,143,000   $61,836,000   $13,307,000 
Corporate assets   1,764,000           
Total assets  $76,907,000           
                
Long-lived assets, including $47,000 at corporate  $34,443,000   $29,800,000   $4,596,000 
                

 

Three months ended March 31, 2014  Consolidated   Tools   Hardware 
             
Revenue  $15,932,000   $11,191,000   $4,741,000 
                
Segment operating income  $2,219,000   $1,328,000   $891,000 
General corporate expense   (1,411,000)          
Interest expense   (89,000)          
Earnings before income taxes  $719,000           
                
Segment assets  $50,659,000   $37,385,000   $13,274,000 
Corporate assets   3,153,000           
Total assets  $53,812,000           
                
Long-lived assets, including $20,000 at corporate  $16,631,000   $12,032,000   $4,579,000 
                

 

Revenue and long-lived assets by geographic region were as follows:

 

   Three months ended March 31, 
   2015   2014 
Revenue:          
North America  $18,571,000   $15,711,000 
Europe   900,000    42,000 
All other   355,000    179,000 
Total Revenue  $19,826,000   $15,932,000 
Long-Lived Assets:          
North America  $33,311,000   $16,631,000 
Europe   1,132,000     
Total Long-Lived Assets  $34,443,000   $16,631,000 

 

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P&F INDUSTRIES, INC. AND SUBSIDIARIES  

  

Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations  

 

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,” “may,” “would,” “could” 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 2015 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 public filings, including in its Annual Report on Form 10-K for the year ended December 31, 2014 (“2014 Form 10-K”). 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

 

P&F and each of its subsidiaries are herein referred to collectively as the “Company.” In addition, the words “we”, “our” and “us” refer to the Company. The Company operates in two primary lines of business or segments: (i) tools and other products (“Tools”) and (ii) hardware and accessories (“Hardware”).

 

Tools

 

The Company conducts its Tools business through a wholly-owned subsidiary, Continental Tool Group, Inc. (“Continental”), which in turn currently operates through its wholly-owned subsidiaries, Florida Pneumatic Manufacturing Corporation (“Florida Pneumatic”) and Hy-Tech Machine, Inc. (“Hy-Tech”). During the third quarter of 2014, the Company acquired Exhaust Technologies Inc. (“ETI”) and Universal Air Tool Company Limited (“UAT”). Both ETI and UAT are wholly-owned subsidiaries of Florida Pneumatic, and unless otherwise indicated, the operations and results of operations of Florida Pneumatic herein include ETI and UAT as of the respective dates such companies were acquired. Additionally, during the third quarter of 2014, the Company acquired substantially all of the assets of Air Tool Service Company (“ATSCO”), which business operates through a wholly-owned subsidiary of Hy-Tech. Unless otherwise indicated, the results of operations of Hy-Tech herein include ATSCO from the date the business was acquired.  

 

Florida Pneumatic is engaged in the importation and sale of pneumatic hand tools, primarily for the retail, industrial and automotive markets, and the importation and sale of compressor air filters.  Florida Pneumatic also markets, through its Berkley Tool division (“Berkley”), a product line which includes pipe and bolt dies, pipe taps, wrenches, vises and stands, pipe and tubing cutting equipment, hydrostatic test pumps, and replacement electrical components for a widely-used brand of pipe cutting and threading machines.

 

Hy-Tech manufactures and distributes its own line of industrial pneumatic tools. Hy-Tech also produces and markets impact wrenches, grinders, drills, and motors. Further, it also manufactures tools to customer specifications. Its customers include refineries, chemical plants, power generation facilities, heavy construction enterprises, oil and gas and mining companies. In addition, Hy-Tech manufactures an extensive line of pneumatic tool replacement parts that are sold to original equipment manufacturers (“OEMs”), and competitively. It also manufactures and distributes high pressure stoppers for hydrostatic testing fabricated pipe, gears, sprockets, splines and racks and produces a line of siphons.

 

Hardware

 

The Company conducts its Hardware business through a wholly-owned subsidiary, Countrywide Hardware, Inc. (“Countrywide”). Countrywide conducts its business operations through its wholly-owned subsidiary, Nationwide Industries, Inc. (“Nationwide”). Nationwide is an importer and manufacturer of door, window and fencing hardware and accessories, including rollers, hinges, window operators, sash locks, custom zinc castings and door closers. Nationwide’s products are sold through in-house sales personnel and manufacturers’ representatives to distributors, retailers and OEM customers. End users of Nationwide’s products include contractors, home builders, pool and patio distributors, OEM/private label customers and general consumers.  

 

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Overview

 

During the first quarter of 2015, our results of operations were impacted by a number of factors.

 

  · The most significant factor is the positive impact on revenue and earnings provided by the three acquisitions completed during the third quarter of 2014.
     
  · We believe the harsh, prolonged winter weather during the first quarter adversely impacted the performance of all of our operating subsidiaries. We continue to encounter softness in the pneumatic tools market, both at Hy-Tech and Florida Pneumatic, especially in the oil and gas exploration and production channels.
     
  · Hy-Tech’s gross margin was negatively affected by the transition of ATSCO’s manufacturing operation from Mentor, Ohio to its facility in Cranberry, Pennsylvania.   

 

KEY INDICATORS    

 

Economic Measures    

 

Much of our business is driven by the ebbs and flows of the general economic conditions in both the United States and, to a lesser extent, abroad.  Our Tools segment focuses on a wide array of customer types including, but not limited to large retailers, aerospace, large and small resellers of pneumatic tools and parts; and automotive related customers. The Tools segment tends to track the general economic conditions of the United States, industrial production and general retail sales.  The key economic measures for our Hardware group are housing starts and remodeling spending activity.

 

A key economic measure relevant to us is the cost of the raw materials in our products. Key materials include metals, especially various types of steel and aluminum. Also important is the value of the United States dollar (“USD”) in relation to the Taiwanese dollar (“TWD”), as we purchase a significant portion of our products from Taiwan. Purchases from Chinese sources are made in USDs. However, if the Chinese currency, (“RMB”), were to be revalued against the USD, there could be a significant negative impact on the cost of our products. As the result of the UAT acquisition, we closely monitor the fluctuation in the Great British Pound (“GBP”) to the USD, and the GBP to TWD, both of which can have an impact on the consolidated results.

 

The cost and availability of a quality labor pool in the countries where products and components are manufactured, both overseas as well as in the United States, could materially affect our overall results. 

 

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Operating Measures    

 

Key operating measures we use to manage our operating segments are: orders; shipments; development of new products; 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 below for each operating segment.

 

Financial Measures    

 

Key financial measures we use to evaluate the results of our business include: various revenue metrics; gross margin; selling, general and administrative expenses; earnings before interest and taxes; operating cash flows and 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 compared to historical periods as well as established objectives. To the extent that these measures are relevant, they are discussed in the detailed sections below for each operating segment.

 

 

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”). Descriptions of these policies are discussed in the 2014 Form 10-K. 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, but not limited to those related to bad debts, inventory reserves, goodwill and intangible assets, warranty reserves and taxes and deferred taxes. 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. 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.  

 

There have been no material changes in our critical accounting policies and estimates from those discussed in Item 7 of our 2014 Form 10-K.

 

17
 

  

RESULTS OF OPERATIONS

 

Unless otherwise discussed below, we believe that our relationships with our key customers, given current economic conditions, remain satisfactory. For 2015, we have elected not to sell certain promotional products to Sears, which we did sell in 2014. This decision will result in a reduction of approximately $3 million of Sears revenue during the remainder of this year, when compared to the prior year. Other than the aforementioned, there were no major trends or uncertainties that had, or we could reasonably expect could have, a material impact on our revenue. Other than the three acquisitions that occurred during the third quarter of 2014, there was no unusual or infrequent event, transaction or any significant economic change that materially affected our results of operations. However, we believe that the prolonged, inclement weather during the first quarter of 2015 had some negative impact our results for the three-month period ended March 31, 2015.

 

The table below provides an analysis of our net revenue for the three-month periods ended March 31, 2015 and 2014:

 

Revenue  

 

   Three months ended March 31, 
           Increase (decrease) 
   2015   2014   $   % 
Tools                    
Florida Pneumatic  $10,254,000   $7,475,000   $2,779,000    37.2%
Hy-Tech   4,305,000    3,716,000    589,000    15.9 
Tools Total   14,559,000    11,191,000    3,368,000    30.1 
                     
Hardware                    
Hardware Total   5,267,000    4,741,000    526,000    11.1 
                     
Consolidated  $19,826,000   $15,932,000   $3,894,000    24.4%

 

Tools

 

Florida Pneumatic markets its air tool products to three primary sectors within the pneumatic tool market; retail, industrial/catalog and the automotive market. It also generates revenue from its Berkley products line as well as a line of air filters and other OEM parts (“Other”).

 

 

   Three months ended March 31, 
   2015   2014   Increase (decrease) 
   Revenue   Percent of 
revenue
   Revenue   Percent of
revenue
   $   % 
Retail customers  $5,278,000    51.5%  $5,291,000    70.8%  $(13,000)   (0.2)%
Automotive   3,095,000    30.2    296,000    4.0    2,799,000    945.6 
Industrial/catalog   1,581,000    15.4    1,505,000    20.1    76,000    5.0 
Other   300,000    2.9    383,000    5.1    (83,000)   (21.7)
Total  $10,254,000    100.0%  $7,475,000    100.0%  $2,779,000    37.2%

  

The most significant factors contributing to Florida Pneumatic’s overall growth in its first quarter 2015 revenue, compared to the first quarter of 2014, is the incremental automotive revenue generated by the addition of the AIRCAT and NITROCAT pneumatic tools lines acquired in the ETI acquisition in July 2014, to Florida Pneumatic’s existing line of automotive air tools, and revenue from UAT, located in the United Kingdom, which was acquired in July, 2014. With respect to Florida Pneumatic’s Retail revenue, during the first quarter of 2015, when compared to the same period last year, there was a slight decline in revenue from The Home Depot, partially offset by a modest increase in Sears revenue. Industrial/catalog revenue during the first quarter of 2015, although up slightly, compared to the same period in 2014, remains sluggish, most notably in aerospace and oil and gas exploration and production channels. We believe this weakness may continue. Florida Pneumatic’s Other revenue declined when compared to the same period in 2014, primarily due to Florida Pneumatic’s decision to place greater emphasis on expanding its other product lines.

 

18
 

 

Hy-Tech focuses primarily on the industrial sector of the pneumatic tools market.  Hy-Tech manufactures and markets its own value-added line of air tools and parts, which now includes the ATSCO brand, as well as distributes a high quality line of complementary sockets, which, in the aggregate make up the “ATP” category.  Hy-Tech Machine products (“Hy-Tech Machine”) are primarily marketed to the mining, construction and industrial manufacturing sectors.

 

   Three months ended March 31, 
   2015   2014   Increase (decrease) 
   Revenue   Percent of
revenue
   Revenue   Percent of
revenue
   $   % 
ATP  $3,018,000    70.1%  $2,562,000    68.9%  $456,000    17.8%
Other   734,000    17.1    451,000    12.2    283,000    62.7 
Major customer   553,000    12.8    703,000    18.9    (150,000)   (21.3)
                               
Total  $4,305,000    100.0%  $3,716,000    100.0%  $589,000    15.9%

 

A primary factor contributing to the increase in ATP product line revenue was revenue generated by the sales of the ATSCO product line, which was acquired in the third quarter of 2014. This increase was partially offset by lower sales of its drilling motors and to a lesser degree, non-ATSCO related ATP tool and parts. Hy-Tech’s Other revenue, which focuses on specialty products manufactured for the mining, construction and industrial markets, as well as gears, sprockets, splines, and hydraulic stoppers, improved primarily due to a large order shipped during the first quarter of 2015. The ordering pattern from Hy-Tech’s Major customer is erratic and unpredictable, which results in quarter to quarter revenue swings. We believe this unpredictability is likely to continue at least for the remainder of 2015.

 

Hardware  

 

Our Hardware segment, which currently consists of only Nationwide, generates revenue from the sale of Fence and Gate hardware, OEM products and Patio hardware.  

 

   Three months ended March 31, 
   2015   2014   Increase (decrease) 
   Revenue   Percent of
revenue
   Revenue   Percent of
revenue
   $   % 
Fence and Gate hardware  $4,191,000    79.6%  $3,932,000    82.9%  $259,000    6.6%
OEM   644,000    12.2    399,000    8.4    245,000    61.4 
Patio   432,000    8.2    410,000    8.7    22,000    5.4 
                               
Total  $5,267,000    100.0%  $4,741,000    100.0%  $526,000    11.1%

 

Fence and Gate hardware continues to be Nationwide’s primary focus. As such, we intend to continue our current strategy, which is to develop new, innovative Fence and Gate hardware products and accessories. Additionally, Nationwide will continue its marketing efforts in both the United States and abroad. However, this strategy could impact the performance of Nationwide’s other product lines. The increase in Nationwide’s OEM products revenue is due primarily to the addition of a new, lower margin customer. We expect the buying pattern of this new OEM customer to be sporadic throughout the year. The increase in Patio revenue is due primarily to increased activity in the sale of foreclosed home units occurring primarily in Florida.  Nationwide believes a portion of its overall revenue growth is due to the increase in new home construction and increased spending in the area of home renovation.

 

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Gross Margins / Profits

 

    Three months ended March 31,     Increase (decrease)  
    2015     2014     Amount     %  
Florida Pneumatic   $ 3,825,000     $ 2,626,000     $ 1,199,000       45.7  
As percent of respective revenue     37.3 %     35.1 %     2.2 % pts.        
Hy-Tech   $ 1,674,000     $ 1,523,000     $ 151,000       9.9  
As percent of respective revenue     38.9 %     41.0 %     (2.1) % pts.        
Total Tools   $ 5,499,000     $ 4,149,000     $ 1,350,000       32.5  
As percent of respective revenue     37.8 %     37.1 %     0.7 % pts.        
Hardware   $ 2,020,000     $ 1,886,000     $ 134,000       7.1  
As percent of respective revenue     38.4 %     39.8 %     (1.4) % pts.        
Consolidated   $ 7,519,000     $ 6,035,000     $ 1,484,000       24.6  
As percent of respective revenue     37.9 %     37.9 %     % pts.        

 

 Tools

 

Significant factors contributing to Florida Pneumatic’s first quarter of 2015 gross margin improvement over the same period a year ago, include, among other things, the slightly higher gross margins generated at its overseas UAT subsidiary and its expanded automotive product line, which now includes the AIRCAT and NITROCAT suite of pneumatic power tools. Additionally, the strengthening of the U.S dollar also contributed to Florida Pneumatic’s improved gross margin. Further, its Retail gross margin also improved slightly this quarter compared to the first quarter of 2014, primarily due to product mix. However, due to a lower margin special order, our Industrial/catalog gross margin during the first quarter of 2015 was down from the same period in the prior year.

 

Hy-Tech’s gross margin this quarter, compared to the same period in 2014 is lower due primarily to the non-productive labor used to close and relocate ATSCO’s manufacturing equipment and inventory from Mentor, Ohio into Hy-Tech’s existing facility in Cranberry, PA. We believe that most of the integration of the ATSCO suite of products into Hy-Tech’s manufacturing facility should occur by late 2015, at which time its overhead absorption should improve. Additionally, the ATSCO product line is currently generating a gross margin that is lower than Hy-Tech’s historical gross margins

 

Hardware

 

Nationwide’s first quarter 2015 overall gross margin declined, compared to the same period in the prior year, due primarily to product mix. Additionally, Nationwide encountered slight competitive pricing pressure in both its Fence and Gate hardware, as well as its Patio product line. Lastly, a new OEM customer negatively impacted Nationwide’s gross margin. As Nationwide has decided to service this lower margin customer, it is likely that its OEM gross margins in future periods may be less than in the same period in prior years.

 

Selling and 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.

 

During the first quarter of 2015, our SG&A was $6,096,000 or 30.7% of revenue, compared to $5,227,000, or 32.8% of revenue during the same three-month period in 2014. Although our SG&A, as a percentage of revenue declined, significant factors contributing to the dollar increase are primarily attributable to the three acquisitions completed during the third quarter of 2014. Specifically, our depreciation and amortization increased by $270,000, when comparing the three-month periods ended March 31, 2015 and 2014. In addition, as the result of the increased revenue our incremental variable costs which includes among other costs, commissions, warranty costs, freight out and advertising/promotional fees, increased by $144,000 during the first quarter of 2015, compared to the same period in the prior year. Further, when comparing the first quarters of 2015 and 2014, our professional services increased approximately $47,000. Compensation, which is comprised of base salaries and wages, accrued performance-based bonus incentives, associated payroll taxes and employee benefits, increased $270,000, the majority of this increase was due to the added staffing resulting from the three acquisitions. Lastly, during the three-month period ended March 31, 2014, Nationwide received $30,000 for providing various services for the benefit of the buyers of its Kitchen and Bath product line, which did not occur in 2015.

 

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Interest

 

Our interest expense during the first quarter of 2015 was $192,000, compared to $89,000 for the same period in the prior year. The most significant factor affecting interest expense was the financing of the three acquisitions completed during the third quarter of 2014. The average balance of short-term borrowings during the first quarter of 2015 was $13,440,000, compared to $1,116,000 during the same three-month period in 2014. An increase in the applicable loan margins that are added to both our LIBOR (London InterBank Offered Rate) or Base Rate, as defined in the Credit Agreement borrowings, also negatively impacted our interest expense. See Liquidity and Capital Resources for further discussion on the applicable margin rates. Included in our interest expense for the three-month periods ended March 31, 2015 and 2014 is amortization expense of debt financing costs of $28,000 and $22,000, respectively.

 

Income Taxes

 

At the end of each interim reporting period, the Company estimates its effective tax rate expected to be applied for the full year. This estimate is used to determine the income tax provision on a year-to-date basis and may change in subsequent interim periods. As a result, our effective tax rate for the three months ended March 31, 2015 and 2014 was 36.6% and 35.7%, respectively. The Company’s effective tax rate for both periods was affected primarily by state taxes and nondeductible expenses.

 

LIQUIDITY AND CAPITAL RESOURCES

  

Our cash flows from operations can be somewhat cyclical, typically with the greatest demand in the first and third quarters followed by positive cash flows in the second and 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:  

 

   March 31, 2015   December 31, 2014 
Working Capital  $15,101,000   $13,927,000 
Current Ratio   1.56 to 1    1.59 to 1 
Shareholders’ Equity  $40,728,000   $39,991,000 

 

Credit Facility

 

We entered into a Loan and Security Agreement in October 2010, as amended (“Credit Agreement”) with COBC, as agent and lender. The Credit Agreement expires December 19, 2017 (the “Maturity Date”). The Credit Agreement provides for Revolver borrowings, which are secured by the Company’s accounts receivable, mortgages on its real property located in Cranberry, PA, Jupiter, FL and Tampa, FL (“Real Property”),  inventory and equipment. P&F and certain of its subsidiaries are borrowers under the Credit Agreement, and their obligations are cross-guaranteed by certain other subsidiaries. Revolver borrowings bear interest at either LIBOR (London InterBank Offered Rate) or the Base Rate, as defined in the Credit Agreement (“Base Rate”), plus the Applicable Margin (the “Applicable Margin”), as defined in the Credit Agreement. The interest rate, either LIBOR or Base Rate, which is added to the Applicable Margin, is at the option of the Company, subject to limitations on the number of LIBOR borrowings. 

 

On August 13, 2014, we entered into an Amended and Restated Loan and Security Agreement (the “Restated Loan Agreement”) with COBC. The Restated Loan Agreement, among other things, amended the Credit Agreement by: (1) increasing the total amount of the credit facility from $29,423,000 to $33,657,000, (2) increasing the Revolver from $20,000,000 to $22,000,000, (3) creating a new $3,000,000 Term Loan, as defined in the Restated Loan Agreement (“Term Loan B”), and (4) re-designating as “Term Loan A”, the previously existing outstanding Term Loan, which relates primarily to the Company’s real property.

 

The balance of Revolver borrowings outstanding was $15,022,000 and $11,817,000, at March 31, 2015 and December 31, 2014, respectively. Applicable Margins added to Revolver borrowings at LIBOR and the Base Rate at March 31, 2015 and December 31, 2014 were 2.25% and 1.25%, respectively.

 

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Additionally, the Restated Loan Agreement provided for a Term Loan B, pursuant to which the Company borrowed the maximum principal amount of $3,000,000 as part of the ATSCO acquisition. This Term Loan B was to be repaid in 36 consecutive monthly payments of $83,000, with an additional mandatory repayment each year equal to 50% of the Company’s Excess Cash Flow (as defined in the Restated Loan Agreement) for such year, if any. As the result of computing the Company’s Excess Cash Flow for the year 2014, in April 2015, the Company repaid $2,417,000, which was the balance of the Term Loan B at March 31, 2015, with funds available from its Revolver.

 

Additionally, we borrowed $380,000 and $519,000 in March 2012 and September 2012, respectively, as loans primarily for machinery and equipment (“Capex Term Loans”). The repayment of these two Capex Term Loans is based on sixty-month amortization periods, resulting in repayments of approximately $6,000 and $9,000, respectively. Applicable Margins added to these Capex Term Loans at March 31, 2015 and December 31, 2014 were 3.0% and 2.0% respectively, for borrowings at LIBOR and the Base Rate, respectively.

 

Cash flows

 

During the three-month period ended March 31, 2015, our net cash decreased $352,000 to $659,000 from $1,011,000 at December 31, 2014.   Our total bank debt at March 31, 2015 was $24,227,000, compared to $21,387,000 at December 31, 2014. Our revolver borrowings increased approximately $3.2 million, due primarily to our seasonal need for cash during the first quarter. The aforementioned also contributed to the increase in the percent of the total debt to total book capitalization (total debt divided by total debt plus equity), which at March 31, 2015 was 37.4%, compared to 34.9% at December 31, 2014. During the remainder of 2015, as we generate cash from operations, barring unexpected events, we believe that our short-term borrowings should decline to amounts below December 31, 2014 levels.

 

Our capital spending was $184,000 for the three-month period ended March 31, 2015, compared to $182,000 during the same period in the prior year.  Capital expenditures for the balance of 2015 are expected to be approximately $1,500,000, some of which may be financed through our credit facilities or financed through independent third party financial institutions. The remaining 2015 capital expenditures will primarily be for expansion of existing product lines and replacement of equipment.

 

Customer concentration

 

Within our Tools segment we have two retail customers that account for 6.3% and 26.6% of our consolidated accounts receivable at March 31, 2015, and 17.7% and 25.6% at December 31, 2014. To date, these customers, with minor exceptions, are current in their payments. Further, these two customers in the aggregate, accounted for 26.1% of our consolidated revenue for the three-month period ended March 31, 2015, compared to 31.1% for the same three-month period in 2014.

 

We believe that the loss of one or both of these customers would negatively impact our working capital, but would not affect our ability to remain a going concern.

 

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 financial statements.

 

Item 3.             Quantitative And Qualitative Disclosures About Market Risk

 

Not required.

 

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Item 4.             Controls and Procedures

 

Disclosure Controls and Procedures

 

The Company's management, with the participation of the Company's CEO and CFO, evaluated, as of March 31, 2015, the effectiveness of the Company's disclosure controls and procedures, which were designed to be effective at the reasonable assurance level. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company's disclosure controls and procedures as of March 31, 2015, the Company’s management, including its CEO and CFO, concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level at that date.

  

Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting, identified in connection with the evaluation required by Exchange Act Rule 13a-15(d), that occurred during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings
   
  There have been no material changes to the legal proceedings disclosure described in our 2014 Form 10-K.
   
Item 1A. Risk Factors
   
  There were no material changes to the risk factors previously disclosed in our 2014 Form 10-K.
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   
  None.
   
Item 3. Defaults Upon Senior Securities
   
  None.
   
Item 4. Mine Safety Disclosures
   
  None.
   
Item 5. Other Information
   
  None.
   
Item 6. Exhibits
   
  See “Exhibit Index” immediately following the signature page.

 

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SIGNATURE

 

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)
   
  /s/ JOSEPH A. MOLINO, Jr.
  Joseph A. Molino, Jr.
  Chief Financial Officer
Dated: May 14, 2015 (Principal Financial and Chief Accounting Officer)

 

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EXHIBIT INDEX

 

The following exhibits are either included in this report or incorporated herein by reference as indicated below:

 

Exhibit

Number

  Description of Exhibit
10.1   Executive Employment Agreement, dated as of January 1, 2015, between the Registrant and Richard A. Horowitz (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated January 5, 2015).
     
10.2     Executive Employment Agreement, dated as of January 1, 2015, between the Registrant and Joseph A. Molino, Jr. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated April 2, 2015).  
     
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.
     
101    *  Interactive Data

 

* Attached as Exhibit 101 are the following, each formatted in Extensible Business Reporting Language (“XBRL”): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income and Comprehensive Income; (iii) Consolidated Statement of Shareholders’ Equity; (iv) Consolidated Statements of Cash Flows; and (v) Notes to Consolidated Financial Statements.

 

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.   

 

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