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 (“SEC”) 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, except for those adjustments relating to discontinued operations
are of a normal recurring nature. Results for interim periods are not necessarily indicative of results to be expected for a full
year.
The consolidated balance
sheet information as of December 31, 2015 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, 2015 (“2015 Form 10-K”). The interim financial
statements contained herein should be read in conjunction with the 2015 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 gains
or losses. These gains or losses are presented in the Company’s consolidated financial statements as “Other comprehensive
loss - foreign currency translation adjustment”.
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.
Reclassification
Certain amounts in the
consolidated financial statements of the Company have been reclassified to conform to classifications used in the current year.
The reclassifications had no effect on previously reported results of operations or retained earnings.
The Company
P&F is a Delaware corporation
incorporated on April 19, 1963. Prior to February 11, 2016, the effective date of the sale of its Nationwide Industries, Inc. (“Nationwide”)
subsidiary, P&F operated in two primary lines of business or segments: (i) tools and other products (“Tools”) and
(ii) hardware and accessories (“Hardware”). As a result of the sale of Nationwide, the Company currently only operates
in the Tools segment. See Note 2 to Consolidated Financial Statements for further discussion.
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”). Exhaust Technologies Inc. (“ETI”) and Universal Air Tool Company Limited (“UAT”)
are wholly-owned subsidiaries of Florida Pneumatic. The business of Air Tool Service Company (“ATSCO”) operates through
a wholly-owned subsidiary of Hy-Tech.
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”). 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
Prior to the sale of Nationwide,
which was effective February 11, 2016 (the “Closing Date”), the Company conducted its Hardware business through its
wholly-owned subsidiary, Countrywide Hardware, Inc. (“Countrywide”). Countrywide conducted its business operations
through its wholly-owned subsidiary, Nationwide. As of the Closing Date, Nationwide was 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.
On the Closing Date, Countrywide sold Nationwide to an unrelated third party for approximately $22.2 million. See Note 2 to Consolidated
Financial Statements for further discussion.
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 2015 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.
Assets Held for Sale
The Company classifies
assets as held for sale when specific criteria have been met. Assets classified as held for sale are recorded at the lower of the
carrying value or the estimated fair value less cost to sell those assets. We cease depreciation and amortization of the assets
in the period they are considered held for sale.
New Accounting Pronouncements
Recently Issued Accounting
Pronouncements
Not Yet Adopted
In March 2016, the
Financial Accounting Standards Board (“FASB”) issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
.
The standard reduces complexity in several aspects of the accounting for employee share-based compensation, including the income
tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.
The ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early
adoption permitted. The Company is still evaluating the impact this standard will have on its consolidated financial statements
and related disclosures.
I
n
February 2016, the FASB issued ASU No. 2016-02,
Leases
. This ASU is a comprehensive new leases standard that amends various
aspects of existing guidance for leases and requires additional disclosures about leasing arrangements. It will require companies
to recognize lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP.
Topic 842 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between
finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital
leases and operating leases in the previous leases guidance. The ASU is effective for annual periods beginning after December
15, 2018, including interim periods within those fiscal years; earlier adoption is permitted. In the financial statements in which
the ASU is first applied, leases shall be measured and recognized at the beginning of the earliest comparative period presented
with an adjustment to equity. Practical expedients are available for election as a package and if applied consistently to all
leases. The Company is currently evaluating the impact of the adoption of this guidance on its consolidated financial condition,
results of operations and cash flows.
In May 2014, the FASB
issued ASU No. 2014-09,
Revenue from Contracts with Customers
, which supersedes existing accounting standards for revenue
recognition and creates a single framework. The new guidance requires either a retrospective or a modified retrospective approach
at adoption. Early adoption is permitted, but not before the Company's fiscal year that begins on April 1, 2017 (the original
effective date of the ASU). Additional updates to Topic 606 issued by the FASB in 2015 and 2016 include the following:
|
·
|
ASU No. 2015-14,
Revenue from Contracts with Customers (Topic
606): Deferral of the Effective Date
, which defers the effective date of the new guidance such that the new provisions
will now be required for fiscal years, and interim periods within those years, beginning after December 15, 2017.
|
|
·
|
ASU No. 2016-08,
Revenue from Contracts with Customers (Topic
606): Principal versus Agent Considerations
, which clarifies the implementation guidance on principal versus agent considerations
(reporting revenue gross versus net).
|
|
·
|
ASU No. 2016-10,
Revenue from Contracts with Customers (Topic
606): Identifying Performance Obligations and Licensin
g, which clarifies the implementation guidance on identifying performance
obligations and classifying licensing arrangements.
|
|
·
|
ASU No. 2016-12,
Revenue from Contracts with Customers (Topic
606): Narrow-Scope Improvements and Practical Expedients
, which clarifies the implementation guidance in a number of other
areas.
|
The Company is currently in
the process of assessing the impact the adoption of the new revenue standards will have on its consolidated financial statements
and related disclosures, as well as the available transition methods.
In July 2015, the
FASB issued ASU No. 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
(“ASU
2015-11”). The standard simplifies the subsequent measurement of inventory by requiring inventory to be
measured at the lower of cost and net realizable value for entities using the first-in-first out method of valuing
inventory. ASU 2015-11 eliminates other measures required by current guidance to determine net realizable
value. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016 and interim periods within
those fiscal years and early adoption is permitted. The Company has not early adopted ASU 2015-11 and does not
expect the new guidance to have a material effect on its consolidated financial statements when adopted for fiscal 2017 and
beyond.
There are currently no other
accounting standards that have been issued that will have a significant impact on the Company’s financial position, results
of operations or cash flows upon adoption.
Recently Adopted
In November 2015, the FASB
issued ASU 2015-17,
Balance Sheet Classification of Deferred Taxes
. ASU 2015-17 is aimed at reducing complexity in accounting
standards. Currently, GAAP requires the deferred taxes for each jurisdiction to be presented as a net current asset or liability
and net noncurrent asset or liability. This requires a jurisdiction-by-jurisdiction analysis based on the classification of the
assets and liabilities to which the underlying temporary differences relate, or, in the case of loss or credit carryforwards, based
on the period in which the attribute is expected to be realized. Any valuation allowance is then required to be allocated on a
pro rata basis, by jurisdiction, between current and noncurrent deferred tax assets. To simplify presentation, the new guidance
requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent
on the balance sheet. As a result, each jurisdiction will now only have one net noncurrent deferred tax asset or liability. The
guidance does not change the existing requirement that only permits offsetting within a jurisdiction; companies are still prohibited
from offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. The new guidance
is effective in fiscal years beginning after December 15, 2016, including interim periods within those years, with early adoption
permitted. The Company early adopted and applied the new standard retrospectively to the prior period presented in the Consolidated
Balance Sheets.
The Company reported Deferred
income taxes-net in its 2015 Form 10-K as Current assets of $1,131,000. After adoption of this ASU, and giving effect to the sale
of Nationwide, discussed in Note 2, the Company now presents $229,000 of deferred tax assets being included in the Current assets
from discontinued operations, and the balance of $902,000 included net against the long-term deferred income tax liability.
In April 2015, the FASB
issued ASU 2015-03, “
Interest – Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs
”
(ASU 2015-03). The update requires that deferred debt issuance costs be reported as a reduction to long-term debt (previously reported
in other noncurrent assets). The Company adopted ASU 2015-03 in the first quarter of 2016 and for all retrospective periods, as
required. The impact of the adoption was not material to our consolidated financial statements, and is discussed further in Note
9.
NOTE 2 – DISCONTINUED OPERATIONS
The Company, as part of
its strategic plan, which is to focus on expanding its position in the power-tool and accessories market, sold Nationwide. On the
Closing Date, P&F, Countrywide, Nationwide and Argosy NWI Holdings, LLC, a Delaware limited liability company (“Buyer”),
entered into a Stock Purchase and Redemption Agreement (the “Stock Purchase Agreement”), pursuant to which, among other
things, after giving effect to certain contributions and redemptions of Nationwide’s common shares (“Nationwide Shares”),
the Buyer acquired all of the outstanding Nationwide Shares from Countrywide (the “Acquisition”). The purchase price
for the Nationwide Shares acquired in the Acquisition was approximately $22,200,000, before giving effect to an estimated working
capital adjustment, as defined in the Stock Purchase Agreement, of approximately $802,000. Further, in accordance with the Stock
Purchase Agreement, the Company placed into escrow $1,955,000 (“escrow funds”), of which $250,000 related to the final
working capital adjustment. Pursuant to the terms of the Stock Purchase Agreement, the final working capital amount was determined
to be approximately $75,000 in the Company’s favor. As a result, during the three-month period ended June 30, 2016, the $250,000
portion of the escrow funds was released to the Company, and the final working capital adjustment amount of $75,000 was paid to
the Company by the Buyer. The Stock Purchase Agreement also requires Countrywide, under certain circumstances, to contribute an
additional $400,000 into escrow. After paying closing costs, the net cash received from the Buyer was approximately $18.7 million.
The remaining $1,705,000
of the escrow funds, which is classified as Prepaid expenses and other current assets on the Company’s Consolidated Balance
Sheet, is intended to be released eighteen months from the Closing Date, which is August 2017, less any claims made against these
escrow funds, in accordance with the Stock Purchase Agreement. The Company believes that these escrow funds are highly collectible,
and that it is more likely than not that with respect to any or all such potential claims made against the Company, these claims
will not exceed the minimum dollar threshold amount of $150,000 required under the Stock Purchase Agreement. The Company has therefore
included the full amount of the $1,705,000 portion of the escrow funds in its gain on sale of Nationwide. Should claims made against
the Company pursuant to the Stock Purchase Agreement exceed the minimum threshold, then to the extent such claims are resolved
in favor of the Buyer under the terms of the Stock Purchase Agreement, the total amount of such claims will be recorded as a loss
on sale of Nationwide in future periods.
As Nationwide was a substantial and unique business
unit of the Company, its sale was a strategic shift. Accordingly, in accordance with Accounting Standard Code Topic 360, the Company
has classified Nationwide as discontinued operations for all periods presented.
Net income from
discontinued operations, net of taxes in the accompanying Consolidated Statements of Operations and Comprehensive (Loss)
Income, is comprised of the following:
|
|
January 1,
2016
through the
Closing Date
|
|
|
Three months
ended
September 30, 2015
|
|
|
Nine months
ended
September 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,830,000
|
|
|
$
|
5,754,000
|
|
|
$
|
17,523,000
|
|
Cost of goods sold
|
|
|
1,177,000
|
|
|
|
3,519,000
|
|
|
|
10,681,000
|
|
Gross margin
|
|
|
653,000
|
|
|
|
2,235,000
|
|
|
|
6,842,000
|
|
Selling and general and administrative expenses
|
|
|
483,000
|
|
|
|
1,212,000
|
|
|
|
3,784,000
|
|
Interest expense-net
|
|
|
60,000
|
|
|
|
144,000
|
|
|
|
479,000
|
|
Income before income taxes
|
|
|
110,000
|
|
|
|
879,000
|
|
|
|
2,579,000
|
|
Income taxes
|
|
|
38,000
|
|
|
|
334,000
|
|
|
|
946,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
72,000
|
|
|
$
|
545,000
|
|
|
$
|
1,633,000
|
|
The components of discontinued operations in the accompanying
Consolidated Balance Sheet are as follows:
|
|
December 31, 2015
|
|
|
|
|
|
Accounts receivable-net
|
|
$
|
1,245,000
|
|
Inventories
|
|
|
4,211,000
|
|
Prepaid expenses and other current assets
|
|
|
92,000
|
|
Net property and equipment
|
|
|
768,000
|
|
Goodwill
|
|
|
1,873,000
|
|
Other intangible assets-net
|
|
|
12,000
|
|
Other assets- net
|
|
|
5,000
|
|
Deferred taxes - net
|
|
|
229,000
|
|
Assets of discontinued operations
|
|
$
|
8,435,000
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
765,000
|
|
Accrued compensation and benefits
|
|
|
247,000
|
|
Accrued other liabilities
|
|
|
330,000
|
|
Liabilities of discontinued operations
|
|
$
|
1,342,000
|
|
On the Closing Date, the
Company and the president of Nationwide, entered into a purchase agreement pursuant to which, among other things the Company acquired
30,000 shares of the Company’s Class A Common Stock (“Common Stock”) at the aggregate purchase price of $254,940
and options to acquire 6,667 shares of the Company’s Common Stock at an aggregate price of $16,597.
Effective as of the Closing
Date, Countrywide, as landlord, and Nationwide, as tenant, entered into a new lease relating to the Tampa, Florida real property
(the “Premises”). The lease provides for, among other things, a seven-year term commencing on the Closing Date and
an annual base rent of approximately $252,000 with annual escalations. The lease also provides that the tenant will pay certain
taxes and operating expenses associated with the Premises. The lease replaces the previous lease between Countrywide and Nationwide.
Lastly, effective as of
the Closing Date, Countrywide and Nationwide entered into an Option and Right of First Refusal Agreement relating to the Premises,
pursuant to which Countrywide granted a purchase option to Nationwide relating to the Premises if such option is initiated within
60 days following the Closing Date, which has since lapsed. In addition, Countrywide granted to Nationwide a right of first refusal
relating to certain offers made by third parties during the five-year period following the Closing Date.
The Company recognized a gain of $12,185,000, on the sale of Nationwide during the three-month period
ended March 31, 2016, which represents the difference between the adjusted net purchase price and the carrying book value of Nationwide.
During the three-month period ended June 30, 2016 the Company incurred an additional $14,000 in expenses related to the sale. For
income tax purposes, the Company’s tax basis in Nationwide was greater than the net proceeds, thus resulting in a tax loss.
This tax loss may only be applied against future capital gain transactions. During the three-month period ended March 31,
2016, the Company recorded a tax benefit of $141,000, net of a valuation allowance against the gain on sale. Subsequent to
September 30, 2016, Countrywide completed the sale of the Premises, which is treated as a capital gain transaction for tax purposes.
As a result, during the three-month period ended September 30, 2016, the Company removed the valuation allowance initially recorded
against the tax loss, resulting in an additional $187,000 tax benefit recorded against the gain on sale. See Note 12-Subsequent
Events, for further discussion.
NOTE 3 - (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 (loss) 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
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 (loss) earnings per common share:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Numerator for basic and diluted (loss) earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations
|
|
$
|
(286,000
|
)
|
|
$
|
505,000
|
|
|
$
|
(5,590,000
|
)
|
|
$
|
1,510,000
|
|
Net income from discontinued operations
|
|
|
187,000
|
|
|
|
545,000
|
|
|
|
12,430,000
|
|
|
|
1,633,000
|
|
Net (loss) income
|
|
$
|
(99,000
|
)
|
|
$
|
1,050,000
|
|
|
$
|
6,840,000
|
|
|
$
|
3,143,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For basic (loss) earnings per share - weighted average common shares outstanding
|
|
|
3,598,000
|
|
|
|
3,616,000
|
|
|
|
3,598,000
|
|
|
|
3,604,000
|
|
Dilutive securities
(1)
|
|
|
—
|
|
|
|
176,000
|
|
|
|
—
|
|
|
|
160,000
|
|
For diluted (loss) earnings per share - weighted average common shares outstanding
|
|
|
3,598,000
|
|
|
|
3,792,000
|
|
|
|
3,598,000
|
|
|
|
3,764,000
|
|
(1)
Dilutive securities consist of “in the money” stock options.
At September 30,
2016 and 2015 and during the nine-month periods ended September 30, 2016 and 2015, there were outstanding stock options
whose exercise prices were higher than the average market values of the underlying Common Stock for the period. Options for
the three and nine months ended September 30, 2015 are anti-dilutive and are excluded from the computation of diluted
earnings per share. For the three and nine months ended September 30, 2016, we experienced a net loss from continuing
operations, as such, these options were not included in the computation of diluted (loss) earnings per share from continuing
operations. The weighted average of anti-dilutive stock options outstanding was as follows:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Weighted average antidilutive stock options outstanding
|
|
|
73,000
|
|
|
|
88,000
|
|
|
|
78,000
|
|
|
|
150,000
|
|
NOTE 4 - STOCK-BASED COMPENSATION
In connection with an equity restructuring event, which occurred during the three-month period ended March
31, 2016 relating to a special dividend granted by the Company, the Company modified all previously issued outstanding options
to purchase its Common Stock. This modification resulted in an aggregate increase of 19,174 options. The Company did not record
any compensation expense in connection with the issuance of these options, as the issuance was made as the result of an equity
restructuring event. Other than the aforementioned issuance, there were no other options granted or issued during the three and
nine-month periods ended September 30, 2016.
The following is a summary of the changes in
outstanding options during the nine-month period ended September 30, 2016:
|
|
Option Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted Average
Remaining
Contractual Life
(Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding, January 1, 2016
|
|
|
457,000
|
|
|
$
|
6.15
|
|
|
|
4.0
|
|
|
$
|
1,431,000
|
|
Granted
|
|
|
19,174
|
|
|
|
5.89
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(6,000
|
)
|
|
|
3.81
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(26,500
|
)
|
|
|
6.55
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(16,723
|
)
|
|
|
10.72
|
|
|
|
|
|
|
|
|
|
Outstanding and Vested, September 30, 2016
|
|
|
426,951
|
|
|
$
|
5.71
|
|
|
|
3.1
|
|
|
$
|
1,283,000
|
|
Included in the forfeited options in the table
above are 20,998 options the Company purchased from Nationwide employees for $50,000 in connection with the sale of Nationwide.
The following is a summary of changes in non-vested
options for the nine months ended September 30, 2016:
|
|
Option Shares
|
|
|
Weighted Average Grant-
Date Fair Value
|
|
Non-vested options, January 1, 2016
|
|
|
23,840
|
|
|
$
|
6.72
|
|
Granted
|
|
|
829
|
|
|
|
6.45
|
|
Vested
|
|
|
(19,167
|
)
|
|
|
6.71
|
|
Forfeited
|
|
|
(5,502
|
)
|
|
|
6.72
|
|
Non-vested options, September 30, 2016
|
|
|
—
|
|
|
$
|
—
|
|
The number of shares of
Common Stock available for issuance under the P&F Industries, Inc. 2012 Stock Incentive Plan (the “2012 Plan”)
as of September 30, 2016 was 173,093. At September 30, 2016, there were 115,451 options outstanding issued under the 2012 Plan
and 311,500 options outstanding issued under the 2002 Stock Incentive Plan.
Restricted Stock
Pursuant to the 2012 Plan,
the Company, in May 2016, granted 1,000 restricted shares of its Common Stock to each non-employee member of its Board of Directors,
totaling 5,000 restricted shares. The Company determined that the fair value of these shares was $8.72, 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 $44,000
in its selling, general and administrative expenses through May 2017.
NOTE 5 – FAIR VALUE MEASUREMENTS
Accounting guidance
defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Under this guidance, the Company is required to classify certain assets and
liabilities based on the following hierarchy:
Level 1: Quoted
prices for identical assets or liabilities in active markets that can be assessed at the measurement date.
Level 2: Inputs other
than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices
for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated
by observable market data.
Level 3: Inputs reflect
management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. The
inputs are unobservable in the market and significant to the instruments valuation.
The guidance requires
the use of observable market data if such data is available without undue cost and effort.
As of September 30,
2016 and December 31, 2015, the carrying amounts reflected in the accompanying consolidated balance sheets for current assets
and current liabilities approximated fair value due to the short-term nature of these accounts.
The fair value of the
Prepaid expenses and other current assets, which consists primarily of escrowed funds from the sale of Nationwide, which was estimated
to be the same as its carrying value, based on Level 3 inputs. The escrow will be released to the Company in August 2017, in accordance
with the terms and conditions set forth in the Stock Purchase Agreement.
Assets and liabilities
measured at fair value on a non-recurring basis include goodwill, and intangible assets. Such assets are reviewed quarterly for
impairment indicators. If a triggering event has occurred, the assets are re-measured when the estimated fair value of the corresponding
asset group is less than the carrying value. The fair value measurements, in such instances, are based on significant unobservable
inputs (level 3).
NOTE 6 – ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL
ACCOUNTS
Accounts receivable - net consists of:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Accounts receivable
|
|
$
|
10,663,000
|
|
|
$
|
8,559,000
|
|
Allowance for doubtful accounts
|
|
|
(82,000
|
)
|
|
|
(82,000
|
)
|
|
|
$
|
10,581,000
|
|
|
$
|
8,477,000
|
|
NOTE 7 – INVENTORIES
Inventories consist of:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Raw material
|
|
$
|
1,907,000
|
|
|
$
|
2,070,000
|
|
Work in process
|
|
|
664,000
|
|
|
|
1,366,000
|
|
Finished goods
|
|
|
17,751,000
|
|
|
|
16,347,000
|
|
|
|
$
|
20,322,000
|
|
|
$
|
19,783,000
|
|
NOTE 8 – GOODWILL AND OTHER INTANGIBLE
ASSETS
Goodwill and other intangible
assets with indefinite lives are tested for impairment annually or whenever events or circumstances indicate the carrying value
of these assets may not be recoverable.
The impairment testing
is performed in two steps: (i) The Company compares the fair value of a reporting unit with its carrying value, and (ii) if there
is impairment, the Company measures the amount of impairment loss by comparing the implied fair value of goodwill with the carrying
amount of that goodwill. The Company determines the fair value using the income approach methodology of valuation, which considers
the expected present value of future cash flows. As an integral part of the valuation process the Company utilizes its latest cash
flows forecasts for the remainder of the current fiscal year, if applicable, the next four fiscal years, and then applies projected
minimal growth for all remaining years, based upon available statistical data and management’s estimates.
During the second quarter
of 2016, the Company determined that an interim impairment analysis of the goodwill recorded in connection with its Hy-Tech reporting
unit was necessary based on consideration of a number of factors or assumptions, which included:
|
·
|
Negative changes in revenue, which was driven primarily by continued weakness in the oil and gas exploration and extraction industries;
|
|
·
|
the recent loss of a major portion of revenue from one of its larger customers;
|
|
·
|
recent significant reductions/guidance of forecasted purchases from the largest customer acquired in the ATSCO acquisition; and
|
|
·
|
changes in gross margin, driven primary by product mix and customer mix.
|
The combination of these factors
was considered to be a triggering event requiring an interim impairment test.
Certain of the factors considered
by management in the performance of the impairment test included:
|
·
|
Cash flows was determined to be a key assumption primarily due to reductions in future revenue and gross margins; and
|
|
·
|
Discount rates. The discount rates applied to internally developed cash flow projections were 14.5% for the previous annual impairment test as of November 30, 2015 and 13.8% at May 31, 2016, which was the date of the interim impairment test. The discount rate represents the weighted average cost of capital consistent with our views of the rate that an expected market participant would utilize for valuation, including the risk inherent in future cash flows, taking into account the capital structure, debt ratings and current debt yields of comparable public companies as well as an estimate of return on equity that reflects historical market returns.
|
Based on step one of the
impairment analysis, it was determined that the fair value of the reporting unit was less than the carrying value. Step two of
the goodwill impairment test resets the implied fair value of goodwill through a reallocation of the assets. That is, an entity
shall allocate the fair value of a reporting unit, in this case, Hy-Tech to all of the assets and liabilities of that unit (including
any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination. Accordingly, after resetting
the carrying values of its intangible assets, other than Goodwill, which resulted in a $2,968,000 impairment of intangible assets
(see below), the Company adjusted the carrying value of Goodwill by recording an impairment charge of $5,343,000 in the second
quarter of 2016.
The carrying value of Hy-Tech
exceeded its estimated fair value by approximately 15.7% at November 30, 2015. The fair value of Hy-Tech was estimated using 100%
value based on internally developed cash flow projections. The internally developed cash flow projections reflect annual estimates
through a terminal year calculated using a terminal year EBITDA multiple approach.
The impairment determinations
involved significant assumptions and judgments. The calculations supporting the estimates of the fair value of Hy-Tech and the
fair values of its assets and liabilities utilized models that take into consideration multiple inputs other than those discussed
above. Assumptions regarding each of these inputs could have a significant effect on the related valuations. In performing these
calculations, we also take into consideration assumptions on how current market participants would value Hy-Tech and its operating
assets and liabilities. Changes to assumptions that reflect the views of current market participants can also have a significant
effect on the related valuations. The fair value measurements resulting from these models are classified as non-recurring Level
3 measurements consistent with accounting standards related to the determination of fair value. Because of the volatility of these
factors, we cannot predict the likelihood of any future impairment.
Trademarks and
tradenames were previously considered an indefinite-lived intangible asset. However, as a result of the testing for
impairment, which determined the carrying value of Hy-Tech’s trademarks and tradenames exceeded the fair value,
and an impairment charge of $229,000 was recorded at June 30, 2016. The Company will commence amortizing this intangible
asset in July 2016 over a 15 year useful life. Further, future amortization is included in the estimated future amortization
expense table below.
Changes in the carrying amount of goodwill are
as follows:
|
|
Florida
Pneumatic
|
|
|
Hy-Tech
|
|
|
Total
|
|
Balance, January 1, 2016
|
|
$
|
3,931,000
|
|
|
$
|
6,223,000
|
|
|
$
|
10,154,000
|
|
Impairment of goodwill
|
|
|
—
|
|
|
|
(5,343,000
|
)
|
|
|
(5,343,000
|
)
|
Currency translation adjustment
|
|
|
(25,000
|
)
|
|
|
—
|
|
|
|
(25,000
|
)
|
Balance, September 30, 2016
|
|
$
|
3,906,000
|
|
|
$
|
880,000
|
|
|
$
|
4,786,000
|
|
Other intangible assets were as follows:
|
|
September
30, 2016
|
|
|
December 31,
2015
|
|
|
|
Cost
|
|
|
Accumulated
amortization
|
|
|
Net book
value
|
|
|
Cost
|
|
|
Accumulated
amortization
|
|
|
Net book
value
|
|
Other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships (1)
|
|
$
|
5,568,000
|
|
|
$
|
933,000
|
|
|
$
|
4,635,000
|
|
|
$
|
11,285,000
|
|
|
$
|
3,486,000
|
|
|
$
|
7,799,000
|
|
Trademarks and trade names (1)
|
|
|
1,524,000
|
|
|
|
—
|
|
|
|
1,524,000
|
|
|
|
1,576,000
|
|
|
|
—
|
|
|
|
1,576,000
|
|
Trademarks and trade names (2)
|
|
|
210,000
|
|
|
|
4,000
|
|
|
|
206,000
|
|
|
|
439,000
|
|
|
|
—
|
|
|
|
439,000
|
|
Engineering drawings
|
|
|
330,000
|
|
|
|
141,000
|
|
|
|
189,000
|
|
|
|
410,000
|
|
|
|
159,000
|
|
|
|
251,000
|
|
Non-compete agreements (1)
|
|
|
217,000
|
|
|
|
138,000
|
|
|
|
79,000
|
|
|
|
362,000
|
|
|
|
134,000
|
|
|
|
228,000
|
|
Patents
|
|
|
1,205,000
|
|
|
|
599,000
|
|
|
|
606,000
|
|
|
|
1,205,000
|
|
|
|
400,000
|
|
|
|
805,000
|
|
Totals
|
|
$
|
9,054,000
|
|
|
$
|
1,815,000
|
|
|
$
|
7,239,000
|
|
|
$
|
15,277,000
|
|
|
$
|
4,179,000
|
|
|
$
|
11,098,000
|
|
Included in the table above is the impairment
charge recorded during the second quarter of 2016.
|
|
September 30, 2016
|
|
Customer relationships
|
|
$
|
2,619,000
|
|
Trademarks and trade names (2)
|
|
|
229,000
|
|
Engineering drawings
|
|
|
37,000
|
|
Non-compete agreements
|
|
|
83,000
|
|
|
|
|
|
|
|
|
$
|
2,968,000
|
|
|
(1)
|
A portion of these intangibles are maintained in a foreign currency, and are therefore subject to foreign exchange rate fluctuations.
|
|
(2)
|
These were previously considered an indefinite lived intangible asset of Hy-Tech, however as the result of the testing for impairment the Company began amortizing these intangible assets over a fifteen year useful life.
|
Amortization expense of intangible assets from
continuing operations subject to amortization was as follows:
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
$
|
217,000
|
|
|
$
|
309,000
|
|
|
$
|
803,000
|
|
|
$
|
928,000
|
|
The weighted average amortization period for
intangible assets was as follows:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Customer relationships
|
|
|
9.6
|
|
|
|
10.0
|
|
Trademarks and trade names (2)
|
|
|
14.7
|
|
|
|
—
|
|
Engineering drawings
|
|
|
8.9
|
|
|
|
8.5
|
|
Non-compete agreements
|
|
|
1.4
|
|
|
|
2.7
|
|
Patents
|
|
|
5.9
|
|
|
|
5.8
|
|
Amortization expense
for each of the next five years and thereafter is estimated to be as follows:
2017
|
|
$
|
810,000
|
|
2018
|
|
|
618,000
|
|
2019
|
|
|
595,000
|
|
2020
|
|
|
562,000
|
|
2021
|
|
|
549,000
|
|
Thereafter
|
|
|
2,581,000
|
|
|
|
$
|
5,715,000
|
|
NOTE 9 – DEBT
In October 2010, the Company
entered into a Loan and Security Agreement (“Credit Agreement”) with an affiliate of Capital One, National Association
(“Capital One”, or the “Bank”). 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, Tampa, FL and Jupiter, 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
will bear interest at either LIBOR (“London InterBank Offered Rate”) or the Base Rate, as defined in the Credit Agreement,
plus the Applicable Margin, as defined in the Credit Agreement. Further, the interest rate, either LIBOR or Base Rate, which is
added to the Applicable Margin, is at the option of the Company. The Company is limited as to the number of LIBOR borrowings.
The Company, in August
2014, entered into an Amended and Restated Loan and Security Agreement, (the “Restated Loan Agreement”), with Capital
One. 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 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.
Contemporaneously with
the sale of Nationwide, as discussed in Note 2, the Company entered into the Consent and Second Amendment to the Restated Loan
Agreement (the “Amendment”) with Capital One. The Amendment, among other things; (a) provided the Bank’s consent
to the transactions contained in the Stock Purchase Agreement and the repurchase of certain shares and options discussed in Note
2 and Note 4 to the Consolidated Financial Statements; (b) amended the Restated Loan Agreement by: (i) reducing the aggregate Commitment
(as defined in the Restated Loan Agreement) to $11,600,000; (ii) reducing the Term Loan A to $100,000; (iii) reducing the Revolver
Commitment to $10,000,000 (less the new Term Loan A balance of $100,000); (iv) reducing the Capex Loan Commitment to $1,600,000;
(v) modifying certain financial covenants, (vi) lowering interest rate margins and fee obligations; and (vii) extending the expiration
of the Credit Agreement to February 11, 2019. Additionally, the Bank released the mortgage on the Company’s Real Property
located in Tampa Florida.
The Company provides Capital
One with, among other things, monthly financial statements, and monthly borrowing base certificates. The Company is required to
comply with certain financial covenants. Under certain circumstances the Company would be required to submit certificates of compliance.
The Company believes it is in compliance with all covenants under the current Credit Facility.
The net proceeds provided
by the sale of Nationwide of approximately $18.7 million were used to pay down the Revolver and the Capex Term Loans in their entirety,
and paid approximately $6 million against the Term Loan A, discussed below.
SHORT–TERM
BORROWINGS
At September 30, 2016 and
December 31, 2015, the Company’s Revolver borrowings were $1,449,000 and $9,623,000, respectively. Applicable LIBOR Margins
added to Revolver borrowings at September 30, 2016 and December 31, 2015 were 1.50% and 2.00%, respectively. The Applicable Base
Rate Margin added to Revolver borrowings at September 30, 2016 and December 31, 2015 were 0.50% and 1.00%, respectively.
The Company purchased vehicles
for use by its UAT salesforce. The current portion of the balance due on these vehicles is $17,000 at September 30, 2016 and was
$31,000 at December 31, 2015.
LONG –TERM
BORROWINGS
The Restated Loan Agreement
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, or a combination of the two plus the Applicable Margins. LIBOR borrowings
at September 30, 2016 and at December 31, 2015 were 1.5% and 3.0% respectively. The Applicable Margin for borrowings at the Base
Rate for the same timeframes were 0.5% and 2.0%, respectively. A portion of the net proceeds from the sale of Nationwide repaid
all but $100,000 of this Term Loan A and, accordingly, such remaining balance is being borrowed at the Base Rate, and is included
in Long-term debt, less current maturities on the Company’s Consolidated Balance Sheet at September 30, 2016.
During 2012, the Company
borrowed $380,000 and $519,000, as loans to purchase machinery and equipment (“Capex Term Loans”). These loans were
fully repaid with funds from the sale of Nationwide.
The long-term portion of
the balance due on the purchased vehicles used by the UAT salesforce is $0 at September 30, 2016 and was $16,000 at December 31,
2015.
In accordance with ASU
2015-03, the Company reduced its long-term debt by $13,000 and $64,000, respectively, relating to deferred financing fees as of
September 30, 2016 and December 31, 2015.
NOTE 10 – DIVIDEND PAYMENTS
On March 8, 2016, the Company’s
Board of Directors declared a special cash dividend of $0.50 per common share, which was paid on or about April 4, 2016, to shareholders
of record at the close of business on March 21, 2016. The total amount of this special dividend payment was approximately $1.8
million. The Company’s Board of Directors declared quarterly cash dividends of $0.05 per share to shareholders of record
at the close of business on March 31, 2016 and July 18, 2016. These respective dividend payments of approximately $180,000 each
were paid on or about April 14, 2016 and July 25, 2016. See Note 12 for discussion relating to dividends paid subsequent to September
30, 2016.
NOTE 11 – 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 and nine-month periods
ended September 30, 2016, the Company purchased approximately $137,000 and $413,000, respectively, of product from this vendor.
During the three and nine-month periods ended September 30, 2015, the Company purchased approximately $154,000 and $477,000, respectively,
of product from this vendor. At September 30, 2016 and December 31, 2015, the Company had trade payables to this vendor of $78,000
and $63,000, respectively. Additionally, during the three and nine-month periods ended September 30, 2016, the Company recorded
sales to this vendor of $2,000 and $8,000, respectively. During the three and nine-month periods ended September 30, 2015, the
Company recorded sales to this vendor of $2,000 and $7,000, respectively.
Additionally, this same
individual is part owner of the facility located in Punxsutawney, Pennsylvania, which one of the Company’s subsidiaries leases.
This lease expires in 2021, with rent of approximately $76,000 per annum.
NOTE 12 – SUBSEQUENT EVENTS
On November 1, 2016,
the Company’s Countrywide subsidiary completed the sale (the “Real Estate Sale”) of the Premises to an unrelated
third party for a purchase price of $3,750,000. After broker fees and certain other expenses relating to the Real Estate Sale,
the Company received approximately $3,500,000. The Premises are used by the Company’s former Nationwide subsidiary. As a
result of the Real Estate Sale, Countrywide is no longer a party to the lease relating to the Premises and has no further obligations
relating to the Option and Right of First Refusal Agreement. Additionally, in accordance with the terms set forth in the Stock
Purchase Agreement relating to the sale of Nationwide, Countrywide placed $400,000 of the proceeds from the Real Estate Sale into
the escrow account established with the sale of Nationwide. The full escrow amount is scheduled to be released to the Company in
August 2017, less any permissible claims allowed under the Stock Purchase Agreement. See Note 2 for more information about the
Nationwide sale and the agreements referred to in this Note 12. These assets are classified as Assets held for sale, net of accumulated
depreciation as of September 30, 2016. The net book value of these assets was $1,843,000 at December 31, 2015.
On October 18, 2016, the
Company’s Board of Directors declared a $0.05 per common share dividend to all stockholders of record as of October 28, 2016.
The dividend was paid on or about November 8, 2016. The total amount was approximately $180,000.
P&F INDUSTRIES, INC. AND SUBSIDIARIES