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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the Quarterly Period Ended June 30, 2023


☐	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) before

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

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A common stock, $1.00 par value	PFIN	NASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐	Non-accelerated filer ☒	Smaller reporting company ☒

			Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of August 8, 2023, there were 3,194,699 shares of the registrant’s Class A common stock outstanding.

Table of Contents

P&F INDUSTRIES, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2023

TABLE OF CONTENTS


		PAGE
PART I — FINANCIAL INFORMATION		3

Item 1.	Financial Statements	3

	Consolidated Balance Sheets as of June 30, 2023 (unaudited) and December 31, 2022	3

	Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six-month periods ended June 30, 2023 and 2022 (unaudited)	5

	Consolidated Statements of Shareholders’ Equity for the three and six-month periods ended June 30, 2023 and 2022 (unaudited)	6

	Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022 (unaudited)	8

	Notes to Consolidated Financial Statements (unaudited)	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31

Item 4.	Controls and Procedures	31

PART II — OTHER INFORMATION		32

Item 1.	Legal Proceedings	32

Item 1A.	Risk Factors	32

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32

Item 3.	Defaults Upon Senior Securities	32

Item 4.	Mine Safety Disclosures	32

Item 5.	Other Information	32

Item 6.	Exhibits	32

Signature		33

Exhibit Index		34

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

P&F INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	June 30, 2023		December 31, 2022
	(unaudited)		(See Note 1)
ASSETS
CURRENT ASSETS

Cash	$	657,000	$	667,000
Accounts receivable — net		9,885,000		7,370,000
Inventories		21,096,000		24,491,000
Prepaid expenses and other current assets		1,018,000		2,753,000
TOTAL CURRENT ASSETS		32,656,000		35,281,000

PROPERTY AND EQUIPMENT
Land		507,000		507,000
Buildings and improvements		4,007,000		4,087,000
Machinery and equipment		29,445,000		28,057,000
		33,959,000		32,651,000
Less accumulated depreciation and amortization		23,951,000		23,288,000
NET PROPERTY AND EQUIPMENT		10,008,000		9,363,000

GOODWILL		4,829,000		4,822,000

OTHER INTANGIBLE ASSETS — net		4,991,000		5,326,000

DEFERRED INCOME TAXES — net		431,000		629,000

RIGHT-OF-USE ASSETS – OPERATING LEASES		5,103,000		5,521,000

OTHER ASSETS — net		75,000		62,000

TOTAL ASSETS	$	58,093,000	$	61,004,000

See accompanying notes to consolidated financial statements (unaudited).

Table of Contents

P&F INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	June 30, 2023		December 31, 2022
	(unaudited)		(See Note 1)
LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES

Short-term borrowings	$	5,340,000	$	7,570,000
Accounts payable		1,958,000		3,094,000
Accrued compensation and benefits		1,500,000		1,757,000
Accrued other liabilities		1,796,000		1,002,000
Current leased liabilities – operating leases		817,000		1,020,000
TOTAL CURRENT LIABILITIES		11,411,000		14,443,000

Noncurrent leased liabilities – operating leases		4,317,000		4,535,000
Other liabilities		56,000		70,000

TOTAL LIABILITIES		15,784,000		19,048,000

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 – 4,467,000 at June 30, 2023, and December 31, 2022		4,467,000		4,467,000
Class B - $1 par; authorized - 2,000,000 shares; no shares issued		—		—
Additional paid-in capital		14,276,000		14,246,000
Retained earnings		34,505,000		34,251,000
Treasury stock, at cost – 1,273,000 shares at June 30, 2023, and December 31, 2022		(10,213,000)		(10,213,000)
Accumulated other comprehensive loss		(726,000)		(795,000)

TOTAL SHAREHOLDERS’ EQUITY		42,309,000		41,956,000

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	58,093,000	$	61,004,000

See accompanying notes to consolidated financial statements (unaudited).

Table of Contents

P&F INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(unaudited)


	Three months				Six months
	ended June 30,				ended June 30,
	2023		2022		2023		2022
Net revenue	$	16,163,000	$	17,810,000	$	31,906,000	$	31,831,000
Cost of sales		10,328,000		12,174,000		20,328,000		21,684,000
Gross profit		5,835,000		5,636,000		11,578,000		10,147,000
Selling, general and administrative expenses		5,368,000		5,479,000		10,543,000		10,652,000
Operating income (loss)		467,000		157,000		1,035,000		(505,000)
Other (expense) income		(4,000)		(16,000)		31,000		(16,000)
Interest expense		(107,000)		(86,000)		(216,000)		(138,000)
Income (loss) before income tax		356,000		55,000		850,000		(659,000)
Income tax (expense) benefit		(119,000)		(76,000)		(276,000)		20,000
Net income (loss)	$	237,000	$	(21,000)	$	574,000	$	(639,000)

Basic and diluted earnings (loss) per share	$	0.07	$	(0.01)	$	0.18	$	(0.20)

Weighted average common shares outstanding:

Basic and diluted		3,195,000		3,185,000		3,195,000		3,177,000

Net income (loss)	$	237,000	$	(21,000)	$	574,000	$	(639,000)
Other comprehensive income (loss) - foreign currency translation adjustment		35,000		(146,000)		69,000		(196,000)
Total comprehensive income (loss)	$	272,000	$	(167,000)	$	643,000	$	(835,000)

See accompanying notes to consolidated financial statements (unaudited).

Table of Contents

P&F INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)

Three months ended June 30, 2023


													Accumulated
			Class A common			Additional							other
			stock, $1 par			paid-in		Retained		Treasury stock			comprehensive
	Total		Shares	Amount		capital		earnings		Shares	Amount		loss
Balance, April 1, 2023	$	42,184,000	4,467,000	$	4,467,000	$	14,263,000	$	34,428,000	(1,273,000)	$	(10,213,000)	$	(761,000)

Net income		237,000	—		—		—		237,000	—		—		—

Restricted common stock-based compensation		5,000	—		—		5,000		—	—		—		—

Stock-based compensation		8,000	—		—		8,000		—	—		—		—

Dividends		(160,000)	—		—		—		(160,000)	—		—		—

Foreign currency translation adjustment		35,000	—		—		—		—	—		—		35,000

Balance, June 30, 2023	$	42,309,000	4,467,000	$	4,467,000	$	14,276,000	$	34,505,000	(1,273,000)	$	(10,213,000)	$	(726,000)

Three months ended June 30, 2022


													Accumulated
			Class A common			Additional							other
			stock, $1 par			paid-in		Retained		Treasury stock			comprehensive
	Total		Shares	Amount		capital		earnings		Shares	Amount		loss
Balance, April 1, 2022	$	43,181,000	4,453,000	$	4,453,000	$	14,176,000	$	35,428,000	(1,273,000)	$	(10,213,000)	$	(663,000)

Net loss		(21,000)	—		—		—		(21,000)	—		—		—

Exercise of Stock Options		40,000	7,000		7,000		33,000		—	—		—		—

Restricted common stock-based compensation		12,000	7,000		7,000		5,000		—	—		—		—

Foreign currency translation adjustment		(146,000)	—		—		—		—	—		—		(146,000)

Balance, June 30, 2022	$	43,066,000	4,467,000	$	4,467,000	$	14,214,000	$	35,407,000	(1,273,000)	$	(10,213,000)	$	(809,000)

See accompanying notes to consolidated financial statements (unaudited).

Table of Contents

P&F INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)

Six months ended June 30, 2023


													Accumulated
			Class A common			Additional							other
			stock, $1 par			paid-in		Retained		Treasury stock			comprehensive
	Total		Shares	Amount		capital		earnings		Shares	Amount		loss
Balance, January 1, 2023	$	41,956,000	4,467,000	$	4,467,000	$	14,246,000	$	34,251,000	(1,273,000)	$	(10,213,000)	$	(795,000)

Net income		574,000	—		—		—		574,000	—		—		—

Restricted common stock-based compensation		14,000	—		—		14,000		—	—		—		—

Stock-based compensation		16,000	—		—		16,000		—	—		—		—

Dividends		(320,000)	—		—		—		(320,000)	—		—		—

Foreign currency translation adjustment		69,000	—		—		—		—	—		—		69,000

Balance, June 30, 2023	$	42,309,000	4,467,000	$	4,467,000	$	14,276,000	$	34,505,000	(1,273,000)	$	(10,213,000)	$	(726,000)

Six months ended June 30, 2022


													Accumulated
			Class A common			Additional							other
			stock, $1 par			paid-in		Retained		Treasury stock			comprehensive
	Total		Shares	Amount		capital		earnings		Shares	Amount		loss
Balance, January 1, 2022	$	43,840,000	4,453,000	$	4,453,000	$	14,167,000	$	36,046,000	(1,273,000)	$	(10,213,000)	$	(613,000)

Net loss		(639,000)	—		—		—		(639,000)	—		—		—

Exercise of Stock Options		40,000	7,000		7,000		33,000		—	—		—		—

Restricted common stock-based compensation		20,000	7,000		7,000		13,000		—	—		—		—

Stock-based compensation		1,000	—		—		1,000		—	—		—		—

Foreign currency translation adjustment		(196,000)	—		—		—		—	—		—		(196,000)

Balance, June 30, 2022	$	43,066,000	4,467,000	$	4,467,000	$	14,214,000	$	35,407,000	(1,273,000)	$	(10,213,000)	$	(809,000)

See accompanying notes to consolidated financial statements (unaudited).

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P&F INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)


	Six months
	ended June 30,
	2023		2022
Cash Flows from Operating Activities:
Net income (loss)	$	574,000	$	(639,000)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Non-cash and other charges:
Depreciation		1,020,000		881,000
Amortization of other intangible assets		346,000		341,000
Amortization of operating lease assets		474,000		471,000
Amortization of debt issue costs		21,000		8,000
Amortization of consideration payable to a customer		—		135,000
Provision for losses on accounts receivable		47,000		42,000
Stock-based compensation		16,000		1,000
Stock-based compensation-options exercised		—		38,000
Restricted stock-based compensation		14,000		19,000
Deferred income taxes		287,000		(20,000)
Gain on disposal of fixed assets		(16,000)		(5,000)
Changes in operating assets and liabilities:
Accounts receivable		(2,547,000)		(2,276,000)
Inventories		3,445,000		(353,000)
Prepaid expenses and other current assets		1,735,000		1,302,000
Accounts payable		(1,138,000)		(778,000)
Accrued compensation and benefits		(261,000)		681,000
Accrued other liabilities and other current liabilities		708,000		(524,000)
Operating lease liabilities		(477,000)		(461,000)
Other liabilities		(14,000)		(17,000)
Total adjustments		3,660,000		(515,000)
Net cash provided by (used in) operating activities		4,234,000		(1,154,000)

See accompanying notes to consolidated financial statements (unaudited).

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P&F INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)


	Six months
	ended June 30,
	2023		2022
Cash Flows from Investing Activities:
Capital expenditures	$	(1,682,000)	$	(923,000)
Proceeds from the sale of fixed assets		34,000		—
Purchase of net assets of the Jackson Gear Company business		—		(2,300,000)
Net cash used in investing activities		(1,648,000)		(3,223,000)

Cash Flows from Financing Activities:
Dividend payments		(320,000)		—
Net (repayments on) proceeds from short-term borrowings		(2,230,000)		4,304,000
Proceeds from exercise of stock options		—		2,000
Bank financing costs		(35,000)		—
Net cash (used in) provided by financing activities		(2,585,000)		4,306,000

Effect of exchange rate changes on cash		(11,000)		(37,000)
Net decrease in cash		(10,000)		(108,000)
Cash at beginning of period		667,000		539,000
Cash at end of period	$	657,000	$	431,000

Supplemental disclosures of cash flow information:

Cash paid for:
Taxes		10,000		124,000
Interest	$	255,000	$	114,000

Non-cash information:
Right of Use (“ROU”) assets recognized for new operating lease liabilities	$	—	$	987,000

See accompanying notes to consolidated financial statements (unaudited).

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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 (“US 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 consolidated financial statements do not include all the information and footnotes required by US GAAP for complete financial statements. In the opinion of the management of the Company, as defined below, these unaudited consolidated financial statements include all normal, recurring adjustments necessary to present fairly the information set forth therein. 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, 2022, 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, 2022 (“2022 Form 10-K”). The unaudited consolidated financial statements contained herein should be read in conjunction with the 2022 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 income (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.

The Company

P&F, a Delaware corporation incorporated in 1963, conducts its 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”).

Florida Pneumatic

Florida Pneumatic directly, and through its wholly-owned subsidiaries Exhaust Technologies Inc. (“ETI”), Universal Air Tool Company Limited (“UAT”), and Jiffy Air Tool, Inc. (“Jiffy”) imports, manufactures, and markets pneumatic hand tools and related products of its own design, primarily to the retail, industrial, automotive and aerospace markets. Its products include sanders, grinders, drills, saws, and impact wrenches. These tools are similar in appearance and function to electric hand tools, but are powered by compressed air, rather than by electricity or a battery. Air tools, as they are more commonly referred to generally offer a better power-to-weight ratio than their electrical counterparts. Florida Pneumatic imports and/or manufactures approximately 75 types of pneumatic hand tools, most of which are sold at prices ranging from $50 to $1,000, under the names “Florida Pneumatic,” “Universal Tool”, “Jiffy Air Tool”, AIRCAT, NITROCAT, as well as under the trade names or trademarks of several private label customers. These products are sold to retailers, distributors, manufacturers and private label customers through in-house sales personnel and manufacturers’ representatives. The AIRCAT and NITROCAT brands of pneumatic tools are sold primarily to the automotive service and repair market (“automotive market”). Users of Florida Pneumatic’s hand tools include industrial maintenance and production personnel, do-it-yourself mechanics, professional automobile mechanics and auto body personnel. Jiffy manufactures and distributes pneumatic tools and components primarily to aerospace manufacturers.

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P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1 – BUSINESS AND SUMMARY OF ACCOUNTING POLICIES - (Continued)

The Company - Continued

Hy-Tech

Hy-Tech designs, manufactures, and markets industrial tools, systems, gearing, accessories, and a wide variety of replacement parts under various brands including ATP, NUMATX, and Thaxton. Hy-Tech produces and sells heavy-duty pneumatic impact tools, grinders, air motors, hydro-pneumatic riveters, hydrostatic test plugs, impact sockets and custom gears, with prices ranging from $300 to $62,000.

Hy-Tech’s “Engineered Solutions” products are sold directly to Original Equipment Manufacturers (“OEMs”), and industrial branded products are sold through a broad network of specialized industrial distributors serving the power generation, petrochemical, aerospace, construction, railroad, mining, ship building and fabricated metals industries, among others. Hy-Tech works directly with its industrial customers, designing and manufacturing products from finished components to complete turnkey systems to be sold under their own brand names.

Hy-Tech’s “Power Transmission Group”, commonly referred to as “PTG”, produces spiral bevel and straight bevel gears along with a wide variety of other gearing. These products are sold directly to OEMs, end-users and gearbox repair companies. PTG works directly with its customers’ engineering departments to design or redesign gears or gearboxes to optimize a solution for functionality and manufacturability.

Effective January 15, 2022, through a wholly-owned subsidiary of Hy-Tech, we acquired substantially all the non-real estate assets comprising the business of Jackson Gear Company (“JGC”), a Pennsylvania-based corporation that manufactures and distributes custom gears and power transmission gear products. This business was consolidated into PTG and provides added market exposure into the larger gears market.

Nearly all of Hy-Tech brands are manufactured in the United States of America. Hy-Tech markets ATP branded impact sockets, striking wrenches and accessories that are imported from Asia.

COVID-19

The adverse effects of the COVID-19 global pandemic on the Company’s results of operations and financial condition during the three and six-month periods ended June 30, 2023, have decreased significantly, compared to the adverse effects the pandemic caused during the prior two years. The Company, however, continues to encounter intermittent supply-chain issues, most notably shipping and receiving delays of inventory from its Asian suppliers, in turn causing shortages of inventory. While the negative effects that the Company was encountering during the COVID-19 pandemic in general have eased, it is difficult for the Company to be certain that the inventory issue discussed above is in fact COVID-19 related.

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P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1 – BUSINESS AND SUMMARY OF ACCOUNTING POLICIES - (Continued)

Going Concern Assessment

Management assesses going concern uncertainty to determine whether there is sufficient cash on hand and working capital, including available borrowings on loans, to operate for a period of at least one year from the date the consolidated financial statements are issued, which is referred to as the “look-forward period,” as defined in US GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to management, it considers various scenarios, forecasts, projections, estimates and makes certain key assumptions, including the timing and nature of projected cash expenditures, its ability to reduce, delay or curtail cash outflows and its ability to raise additional capital, if necessary, among other factors. Management has prepared estimates of operations covering the look-forward period and believes that sufficient funds will be generated from operations, working capital, and its existing credit facility to fund its operations. The Company has contingency plans in which it would further reduce or defer additional expenses and cash outlays, should operations weaken beyond current forecasts.

As of June 30, 2023, the Company had borrowing availability on its bank facility of $9,324,000. The Company is not in default on any bank covenant and believes its relationship with the bank is good. See Note 8 – Debt, for further discussion.

The accompanying consolidated financial statements have been prepared on a going concern basis under which the Company is expected to be able to realize its assets and satisfy its liabilities in the normal course of business.

Customer Concentration

The Company had one customer that accounted for 24.7% and 24.3% of its consolidated accounts receivable at June 30, 2023, and December 31, 2022, respectively. Further, this customer accounted for 18.1% and 27.1% of the Company’s consolidated revenue during the three-month periods ended June 30, 2023, and 2022, respectively, and 17.1% and 24.6% for the six months ended June 30, 2023, and 2022, respectively. There was no other customer that accounted for more than 10% of our consolidated revenue during these periods.

Management Estimates

The preparation of financial statements and related disclosures in conformity with US 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, deferred taxes. Descriptions of these policies are discussed in the Company’s 2022 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 adjusts 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.

Significant Accounting Policies

The Company’s significant accounting policies are described in “Note 1: Summary of Significant Accounting Policies” to the Company’s 2022 Form 10-K.

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P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1 - BUSINESS AND SUMMARY OF ACCOUNTING POLICIES - (Continued)

Lease Accounting

The Company adheres to the standards set forth in Accounting Standards Codification No. 842, Leases (“ASC Topic 842”). ASC 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.

As permitted under ASC Topic 842, if the rate implicit in the lease is not readily determinable, the Company uses its incremental borrowing rate as the discount rate. The Company uses its best judgement when determining the incremental borrowing rate, which is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term to the lease payments in a similar currency.

The Company’s operating leases include vehicles, office space and the use of real property. The Company has not identified any new material finance leases during the three-month period ended June 30, 2023.

The Company considers any options to extend the term of a lease when measuring the right-of-use lease asset.

For the three and six-month periods ended June 30, 2023, the Company had $237,000 and $474,000, respectively, in operating lease expense, and $240,000 and $471,000, respectively, for the same three and six-month periods in 2022.

The following is a maturity analysis of the annual undiscounted cash flows reconciled to the carrying value of the operating lease liabilities:



2023 (excluding the six months ended June 30, 2023)	$	369,000
2024		923,000
2025		816,000
2026		691,000
2027		719,000
Thereafter		2,727,000
Total operating lease payments		6,245,000
Less imputed interest		(1,111,000)
Total operating lease liabilities	$	5,134,000

Weighted average remaining lease term		7.7	years
Weighted average discount rate		5.02	%

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P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1 - BUSINESS AND SUMMARY OF ACCOUNTING POLICIES - (Continued)

Revenue Recognition

The Company’s revenue recognition policies are detailed in its 2022 Form 10-K. The following tables present the Company’s revenues recognized under ASC Topic 606, “Revenue from Contracts with Customers”, for the three and six-month periods ended June 30, 2023, and 2022.

Florida Pneumatic

Florida Pneumatic markets its air tool products to four primary sectors within the pneumatic tool market: Retail, Automotive, Industrial and Aerospace. It also generates revenue from its Berkley products line, as well as a line of air filters and other OEM parts, which are reported as Other.


	Three months ended June 30,
	2023				2022				Increase (decrease)
			Percent of				Percent of
	Revenue		revenue		Revenue		revenue		$		%
Automotive	$	3,503,000	32.3	%	$	3,853,000	30.4	%	$	(350,000)	(9.1)	%
Retail		2,920,000	26.9			4,826,000	38.1			(1,906,000)	(39.5)
Industrial		1,337,000	12.3			1,705,000	13.5			(368,000)	(21.6)
Aerospace		2,963,000	27.3			2,179,000	17.2			784,000	36.0
Other		122,000	1.2			103,000	0.8			19,000	18.4
Total	$	10,845,000	100.0	%	$	12,666,000	100.0	%	$	(1,821,000)	(14.4)	%


	Six months ended June 30,
	2023				2022				Increase (decrease)
			Percent of				Percent of
	Revenue		revenue		Revenue		revenue		$		%
Automotive	$	6,762,000	32.6	%	$	7,734,000	33.7	%	$	(972,000)	(12.6)	%
Retail		5,470,000	26.3			7,845,000	34.2			(2,375,000)	(30.3)
Industrial		2,914,000	14.0			3,111,000	13.6			(197,000)	(6.3)
Aerospace		5,374,000	25.9			3,994,000	17.4			1,380,000	34.6
Other		249,000	1.2			263,000	1.1			(14,000)	(5.3)
Total	$	20,769,000	100.0	%	$	22,947,000	100.0	%	$	(2,178,000)	(9.5)	%

Hy-Tech

Hy-Tech designs, manufactures, and sells a wide range of industrial products which are categorized as ATP for reporting purposes. In addition to Engineered Solutions, products and components manufactured for other companies under their brands are included in the OEM category in the table below. PTG revenue is comprised of products manufactured and sold by Hy-Tech’s gear business. NUMATX, Thaxton and other peripheral product lines, such as general machining, are reported as Other.


	Three months ended June 30,
	2023				2022				Increase (decrease)
			Percent of				Percent of
	Revenue		revenue		Revenue		revenue		$		%
OEM	$	2,676,000	50.3	%	$	2,542,000	49.4	%	$	134,000	5.3	%
ATP		808,000	15.2			945,000	18.4			(137,000)	(14.5)
PTG		1,742,000	32.8			1,583,000	30.8			159,000	10.0
Other		92,000	1.7			74,000	1.4			18,000	24.3
Total	$	5,318,000	100.0	%	$	5,144,000	100.0	%	$	174,000	3.4	%

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P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1 - BUSINESS AND SUMMARY OF ACCOUNTING POLICIES - (Continued)

Revenue Recognition – Continued

Hy-Tech - Continued


	Six months ended June 30,
	2023				2022				Increase (decrease)
			Percent of				Percent of
	Revenue		revenue		Revenue		revenue		$		%
OEM	$	5,749,000	51.6	%	$	4,507,000	50.7	%	$	1,242,000	27.6	%
ATP		1,505,000	13.5			1,687,000	19.0			(182,000)	(10.8)
PTG		3,674,000	33.0			2,522,000	28.4			1,152,000	45.7
Other		209,000	1.9			168,000	1.9			41,000	24.4
Total	$	11,137,000	100.0	%	$	8,884,000	100.0	%	$	2,253,000	25.4	%

Recently Adopted Accounting Pronouncements

During the three-month period ended June 30, 2023, there were no accounting pronouncements or other authoritative guidance issued or that became effective, that had, or is expected to have, a material impact on the Company’s consolidated financial statements.

NOTE 2 - EARNINGS /(LOSS) PER SHARE

Basic earnings (loss) per common share is based only on the weighted average number of shares of Common Stock outstanding for the periods presented. Diluted earnings (loss) per common share reflects the effect of shares of Common Stock issuable upon the exercise of options unless the effect on earnings is anti-dilutive.

Diluted earnings (loss) 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 earnings (loss) income per common share:


	Three months ended				Six months ended
	June 30,				June 30,
	2023		2022		2023		2022
Numerator for basic and diluted (loss) income per common share:
Net income (loss)	$	237,000	$	(21,000)	$	574,000	$	(639,000)

Denominator:
Denominator for basic income (loss) per share - weighted average common shares outstanding		3,195,000		3,185,000		3,195,000		3,177,000
Dilutive securities (1)		—		—		—		—
Denominator for diluted (loss) income per share - weighted average common shares outstanding		3,195,000		3,185,000		3,195,000		3,177,000

(1)

Dilutive securities consist of the “in the money” stock options. There were no “in the money” stock options at June 30, 2023. In the event of a loss, options are considered anti-dilutive and would therefore not be included in the calculation of diluted loss per share.

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P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 3 – STOCK-BASED COMPENSATION

There were no options or shares of the Company’s common stock granted or issued during the three-month period ended June 30, 2023.

The table below presents stock options for the six-month period ended June 30, 2023.


		Weighted		Weighted average
		average		remaining	Aggregate
		exercise		contractual life	Intrinsic
	Option shares	price		(years)	Value
Outstanding, January 1, 2023	127,600	$	7.41	3.3	$	—
Forfeited	(5,000)		—	—		—
Expired	(43,850)		—	—		—
Outstanding, June 30, 2023	78,750		7.15	4.2	$	—
Vested, June 30, 2023	78,750		7.15	4.2	$	—

Restricted Stock

On May 25, 2022, the Company granted 1,250 restricted shares of its Common Stock to each non-employee member of its Board of Directors, totaling 6,250 restricted shares. The Company determined that the fair value of these shares was $5.50 per share, which was the closing price of the Company’s Common Stock on the date of the grant. These shares could not have been traded earlier than the first anniversary of the grant date. The Company ratably amortized the total non-cash compensation expense of approximately $34,000 to selling, general and administrative expenses during the period beginning May 2022 through May 2023.

NOTE 4 – 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 instrument’s valuation.

The guidance requires the use of observable market data if such data is available without undue cost and effort.

As of June 30, 2023, and December 31, 2022, 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.

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).

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P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 5 – ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

Accounts receivable - net consists of:


	June 30, 2023		December 31, 2022
Accounts receivable	$	10,245,000	$	7,683,000
Allowance for doubtful accounts, sales discounts and chargebacks		(360,000)		(313,000)
	$	9,885,000	$	7,370,000

Net accounts receivable at January 1, 2022, was $ 7,550,000.

NOTE 6 – INVENTORIES

Inventories consist of:


	June 30, 2023		December 31, 2022
Raw material	$	1,579,000	$	2,000,000
Work in process		2,115,000		2,242,000
Finished goods		17,402,000		20,249,000
	$	21,096,000	$	24,491,000

NOTE 7 – GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

Changes in the carrying amount of goodwill are as follows:


Balance, January 1, 2023	$	4,822,000
Currency translation adjustment		7,000
Balance, June 30, 2023	$	4,829,000

Other intangible assets


	June 30, 2023						December 31, 2022
			Accumulated		Net book				Accumulated		Net book
	Cost		amortization		value		Cost		amortization		value
Other intangible assets:
Customer relationships (1)	$	6,932,000	$	4,395,000	$	2,537,000	$	6,921,000	$	4,099,000	$	2,822,000
Trademarks and trade names (1)		2,174,000		—		2,174,000		2,166,000		—		2,166,000
Trademarks and trade names		200,000		93,000		107,000		200,000		86,000		114,000
Engineering drawings		330,000		276,000		54,000		330,000		268,000		62,000
Non-compete agreements (1)		327,000		319,000		8,000		322,000		303,000		19,000
Patents		1,286,000		1,175,000		111,000		1,286,000		1,143,000		143,000
Totals	$	11,249,000	$	6,258,000	$	4,991,000	$	11,225,000	$	5,899,000	$	5,326,000

(1)

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

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P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 7 – GOODWILL AND OTHER INTANGIBLE ASSETS – (Continued)

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


Three months ended June 30,				Six months ended June 30,
2023		2022		2023		2022
$	167,000	$	164,000	$	346,000	$	341,000

Amortization expense for the balance of 2023, and for each of the next four years and thereafter is estimated to be as follows:


July 1 through December 31, 2023	$	341,000
2024		640,000
2025		611,000
2026		412,000
2027		198,000
Thereafter		615,000
	$	2,817,000

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


	June 30, 2023	December 31, 2022
Customer relationships	5.6	5.9
Trademarks and trade names	8.0	8.5
Engineering drawings	3.6	4.1
Non-compete agreements	0.5	1.0
Patents	4.2	4.1

NOTE 8 – 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, as amended and restated in April 2017, and further amended from time-to-time, among other things, provides the ability to borrow funds under a $16,000,000 revolver line (“Revolver”), subject to certain borrowing base criteria. Revolver borrowings are secured by the Company’s accounts receivable, inventory, equipment, and real property, among other things. P&F and certain of its subsidiaries are borrowers under the Credit Agreement, and their obligations are cross guaranteed by certain other subsidiaries.

On March 24, 2023, the Company and the Bank entered into Amendment No. 11 (“Amendment 11”) to the Credit Agreement, which among other things:

●

extended the expiration date to February 8, 2027; and

●

eliminated a $1,600,000 Capex Loan line of credit.

Under the terms of Amendment No. 10, to the Credit Agreement, dated April 12, 2022, the Company began applying Secured Overnight Financing Rate, (“SOFR”) SOFR rates instead of the London Inter-Bank Offered Rate, (LIBOR). The Company will continue to be subject to the number of SOFR borrowings. The change from LIBOR to SOFR did not have a significant effect on the Company’s consolidated financial statements.

At June 30, 2023, short-term or Revolver borrowing was $5,340,000, compared to $7,570,000 at December 31, 2022. The average balance of short-term borrowings during the three and six-month periods ended June 30, 2023, were $7,060,000 and $7,173,000, respectively, compared to $11,544,000 and $10,855,000, respectively, for the same periods in 2022.

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P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 8 – DEBT – (Continued)

The Company provides Capital One with monthly borrowing base certificates, and in certain circumstances, it is required to deliver monthly financial statements and certificates of compliance with various financial covenants. Should an event of default occur the interest rate would increase by two percent per annum during the period of default, in addition to other remedies provided to Capital One.

During the three and six-month periods ended June 30, 2023, and at December 31, 2022, Applicable Margin Rates, as defined in the Credit Agreement were 2.10% and 1.10%, respectively for SOFR and Base Rate borrowings. Additionally, at June 30, 2023, and December 31, 2022, there was approximately $9,324,000 and $7,678,000, respectively, available to the Company under its Revolver arrangement.

NOTE 9 – SUBSEQUENT EVENT

On August 8, 2023, the Company’s Board of Directors declared a quarterly cash dividend in the amount equal to $0.05 per share, which will be payable on August 25, 2023 to all shareholders of record as of the close of business on August 21, 2023. The Company estimates the total cash outlay to be approximately $160,000.

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

Forward Looking Statement

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 shareholders. Generally, the inclusion of the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “will,” “may,” “would,” “could,” “should,” 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 all or part the 2023 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 including, but not limited to:

●

Risks associated with sourcing from overseas;

●

Disruption in the global capital and credit markets;

●

Importation delays;

●

Customer concentration;

●

Unforeseen inventory adjustments or changes in purchasing patterns;

●

Market acceptance of products;

●

Competition;

●

Price reductions;

●

Exposure to fluctuations in energy prices;

●

The strength of the retail economy in the United States and abroad;

●

Risks associated with Brexit;

●

Adverse changes in currency exchange rates;

●

Interest rates;

●

Debt and debt service requirements;

●

Borrowing and compliance with covenants under our credit facility;

●

Impairment of long-lived assets and goodwill;

●

Retention of key personnel;

●

Acquisition of businesses;

●

Regulatory environment;

●

Litigation and insurance;

●

Risks related to the global outbreak of COVID-19 and other public health crises;

●

The threat of terrorism and related political instability and economic uncertainty;

●

Business disruptions or other costs associated with information technology, cyber-attacks, system implementations, data privacy or catastrophic losses;

and those other risks and uncertainties described in the 2022 Form 10-K, its Quarterly Reports on Form 10-Q, and its other reports and statements filed by the Company with the Securities and Exchange Commission. 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. The Company cautions you against relying on any of these forward-looking statements.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

OVERVIEW

During the three-month period ended June 30, 2023, significant factors that impacted our results of operations were the:

●

Significant improvement in gross margin at both Hy-Tech and Florida Pneumatic.

●

Decline in Florida Pneumatic’s Retail revenue.

●

Higher interest rates.

OUR BUSINESS

Florida Pneumatic

Florida Pneumatic directly, and through its wholly-owned subsidiaries Exhaust Technologies Inc. (“ETI”), Universal Air Tool Company Limited (“UAT”), and Jiffy Air Tool, Inc. (“Jiffy”) imports, manufactures, and markets pneumatic hand tools and related products of its own design, primarily to the retail, industrial, automotive, and aerospace markets. Its products include sanders, grinders, drills, saws, and impact wrenches. These tools are similar in appearance and function to electric hand tools, but are powered by compressed air, rather than by electricity or a battery. Air tools, as they are more commonly referred to, generally offer better performance, and weigh less than their electrical counterparts. Florida Pneumatic imports and/or manufactures approximately 75 types of pneumatic hand tools, most of which are sold at prices ranging from $50 to $1,000, under the names “Florida Pneumatic,” “Universal Tool”, “Jiffy Air Tool”, AIRCAT, NITROCAT, as well as under the trade names or trademarks of several private label customers. These products are sold to retailers, distributors, manufacturers and private label customers through in-house sales personnel and manufacturers’ representatives. The AIRCAT and NITROCAT brands of pneumatic tools are sold primarily to the automotive service and repair market (“automotive market”). Users of Florida Pneumatic’s hand tools include industrial maintenance and production personnel, do-it-yourself mechanics, professional automobile mechanics and auto body personnel. Jiffy manufactures and distributes pneumatic tools and components primarily to aerospace manufacturers.

Hy-Tech

Hy-Tech designs, manufactures, and markets industrial tools, systems, gearing, accessories and a wide variety of replacement parts under various brands including ATP, NUMATX, and Thaxton. Hy-Tech produces and sells heavy-duty pneumatic impact tools, grinders, air motors, hydro-pneumatic riveters, hydrostatic test plugs, impact sockets and custom gears, with prices ranging from $300 to $62,000.

Hy-Tech’s “Engineered Solutions” products are sold directly to Original Equipment Manufacturers (“OEM”), and industrial branded products are sold through a broad network of specialized industrial distributors serving the power generation, petrochemical, aerospace, construction, railroad, mining, ship building and fabricated metals industries. Hy-Tech works directly with its industrial customers, designing and manufacturing products from finished components to complete turnkey systems to be sold under their own brand names.

Hy-Tech’s Power Transmission Group, or PTG, is a custom gear, gearbox and power transmission system manufacturer located in Punxsutawney, PA. In addition to manufacturing a broad range of standard and custom gears for manufacturers in a wide variety of industries, PTG reverse engineers existing gears as well as designs new gears, utilizing state-of-the-art technologies, including 3D imaging and Gleason Gear modeling software.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

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. We focus on a wide array of customer types including, but not limited to, large retailers, aerospace manufacturers, large and small resellers of pneumatic tools and parts, and automotive related customers. We tend to track the general economic conditions of the United States, industrial production, and general retail sales.

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 USD; however, if the Chinese currency, the Renminbi (“RMB”), were to be revalued against the USD, there could be a negative impact on the cost of our products. Additionally, 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.

We consider tariffs a key economic measure, as a significant portion of products imported by Florida Pneumatic and to a lesser degree, Hy-Tech, are subject to these tariffs. Further, we monitor transportation costs, specifically ocean freight rates, which has materially fluctuated since the beginning of the COVID-19 pandemic.

Lastly, 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.

OPERATING MEASURES

Key operating measures we use to manage our operations 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.

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; earnings before interest, taxes, depreciation and amortization; 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 to established objectives. To the extent that these measures are relevant, they are discussed in detail below.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). Descriptions of these policies are discussed in the 2022 Form 10-K, and in the notes to these consolidated financial statements. Certain of these accounting policies require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate estimates, including, but not limited to those related to revenue recognition, inventory reserves, goodwill and intangible assets, 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.

The Company’s significant accounting policies are described in “Note 1: Summary of Significant Accounting Policies” to the Company’s 2022 Form 10-K.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations – Continued

TRENDS AND UNCERTAINTIES

INTERNATIONAL SUPPLY CHAIN

Although much less than during the three and six-month periods ended June 30, 2022, we continue to encounter delays in receiving inventory from our Asian suppliers, which leads to intermittent shortages of inventory. Our ocean and domestic freight costs, which had increased significantly during the COVID-19 pandemic, are slowly approaching pre-pandemic levels.

DOMESTIC TRANSPORTATION COSTS

Although domestic transportation costs and associated issues discussed in prior filings have improved, compared to the prior year, they remain above pre-pandemic levels. The availability of port to warehouse transportation services has also improved compared to 2022.

At the present time, we believe that some or all of the above-mentioned uncertainties may continue for some time. While we believe that most of the related costs associated with the issues discussed above have been factored into our selling price, there is no assurance that we will be able to pass through any future additional direct costs or costs incurred related to our international supply chain issues in the future.

IMPACT OF INFLATION/GEOPOLITICAL ISSUES

We believe that the current and projected levels of inflation, as well as a possible economic recession will likely continue to have an effect on our manufacturing and operating costs. At the present time, we are unable to reasonably estimate the impact inflation and geo-political issues will have on our results of operations for the foreseeable future.

We believe that our results of operations and financial condition during the three and six-month periods ended June 30, 2023, have not been impacted by the Russia-Ukraine conflict; however, we cannot predict what impact this conflict may have on our results in the future.

BOEING

Sales of aircraft by Boeing, a Jiffy customer, have been depressed since the two 737 MAX crashes in 2018 and 2019. Further, the Federal Aviation Administration grounded all 737 MAX aircraft for several quarters. These events, coupled with the COVID-19 pandemic, reduced Boeing’s aircraft production levels to well below those prior to the pandemic and the grounding. In 2019, Boeing produced 52 737 MAX aircraft per month. It is currently still producing below that level. Per Boeing, it plans to return to those levels in 2025 and expects to add a fourth 737 MAX production line in 2024. We believe that these stated plans along with the return of the Boeing 787 aircraft shipments, which has also had production delays to full production, will be beneficial to P&F’s aerospace sales in the next several years.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations – Continued

TRENDS AND UNCERTAINTIES – Continued

TECHNOLOGIES

We believe that over time, several newer technologies and features will have a greater effect on the market for our traditional pneumatic tool offerings. So far, the greatest impact has been on the automotive aftermarket with the advent of advanced cordless operated tools. Currently, we do not offer a cordless tool to the automotive aftermarket. However, with respect to the industrial market, we have developed for one of our largest OEM customers a tool mechanism that is incorporated into a major line of their cordless power tools. These tools have been in full production with our supplied system for several years and our sales of these products have continued to grow over that time. We continue to analyze the practicality of developing or incorporating newer technologies in our tool platforms for other markets as well. This includes adding our internally developed mechanisms to existing cordless power sources as well as producing complete cordless tool systems. In addition, we have recently developed a cordless installation tool for the aerospace market. We have begun taking orders for this product and we expect to introduce an additional version later in 2023.

OTHER MATTERS

Other than the trends and uncertainties mentioned above, or matters that may be discussed below, there are no major trends or uncertainties that had, or we could reasonably expect to have a material impact on our revenue and operations, nor was there any unusual or infrequent event, transaction or any significant economic change that materially affected our results of operations.

Unless otherwise discussed elsewhere in the Management’s Discussion and Analysis, we believe that our relationships with our key customers and suppliers remain satisfactory.

RESULTS OF OPERATIONS

REVENUE

The tables below provide an analysis of our net revenue for the three-month periods ended June 30, 2023, and 2022:

Consolidated


	Three months ended June 30,
					Increase (Decrease)
	2023		2022		$		%
Florida Pneumatic	$	10,845,000	$	12,666,000	$	(1,821,000)	(14.4)	%
Hy-Tech		5,318,000		5,144,000		174,000	3.4
Consolidated	$	16,163,000	$	17,810,000	$	(1,647,000)	(9.2)	%


	Six months ended June 30,
					Increase (Decrease)
	2023		2022		$		%
Florida Pneumatic	$	20,769,000	$	22,947,000	$	(2,178,000)	(9.5)	%
Hy-Tech		11,137,000		8,884,000		2,253,000	25.4
Consolidated	$	31,906,000	$	31,831,000	$	75,000	0.2	%

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Management’s Discussion and Analysis of Financial Condition and Results of Operations – (Continued)

RESULTS OF OPERATIONS - (Continued)

REVENUE – Continued

Florida Pneumatic

Florida Pneumatic markets its air tool products to four primary sectors within the pneumatic tool market; Automotive, Retail, Aerospace and Industrial. 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 June 30,
	2023				2022				Increase (decrease)
			Percent of				Percent of
	Revenue		revenue		Revenue		revenue		$		%
Automotive	$	3,503,000	32.3	%	$	3,853,000	30.4	%	$	(350,000)	(9.1)	%
Retail		2,920,000	26.9			4,826,000	38.1			(1,906,000)	(39.5)
Industrial		1,337,000	12.3			1,705,000	13.5			(368,000)	(21.6)
Aerospace		2,963,000	27.3			2,179,000	17.2			784,000	36.0
Other		122,000	1.2			103,000	0.8			19,000	18.4
Total	$	10,845,000	100.0	%	$	12,666,000	100.0	%	$	(1,821,000)	(14.4)	%


	Six months ended June 30,
	2023				2022				Increase (decrease)
			Percent of				Percent of
	Revenue		revenue		Revenue		revenue		$		%
Automotive	$	6,762,000	32.6	%	$	7,734,000	33.7	%	$	(972,000)	(12.6)	%
Retail		5,470,000	26.3			7,845,000	34.2			(2,375,000)	(30.3)
Industrial		2,914,000	14.0			3,111,000	13.6			(197,000)	(6.3)
Aerospace		5,374,000	25.9			3,994,000	17.4			1,380,000	34.6
Other		249,000	1.2			263,000	1.1			(14,000)	(5.3)
Total	$	20,769,000	100.0	%	$	22,947,000	100.0	%	$	(2,178,000)	(9.5)	%

Automotive revenue declined this quarter, compared to the same period in 2022, due primarily to an across-the-board price increase in all distribution channels in order to address rising input costs. This change in pricing strategy led to a decline in the number of unit sales and thus overall revenue in this category. However, Automotive gross margin improved as a result of this change. With respect to our Retail revenue, during the second quarter of 2022 we shipped a stocking rollout, with no such new product rollout occurring during 2023. Additionally, The Home Depot (“THD”) continued its efforts that began earlier this year of: a) reducing the number of individual stock keeping units offered, as well as the quantity of each; b) reducing the display area of their pneumatic tools, and c) increased pressure from on-line distributors, as well as and other “brick and mortar” retailers expanding their presence in this product line. Partially offsetting the above-mentioned declines our Aerospace revenue improved 36.0% when comparing the second quarter of 2023 to the same period in 2022. This improvement was driven by, among other factors, increased demand for new consumable parts, that Jiffy has begun to market, and improved market conditions in both the commercial and military aviation. Lastly, we believe the fall-off in Industrial revenue was driven by economic uncertainty and concerns of rising inflation and concerns of a possible recession.

Florida Pneumatic’s six-month revenue analysis is quite similar to that of its second quarter 2023. When compared to the six-month period ended June 30, 2022, Automotive revenue declined 12.6%, due primarily to our revised pricing and marketing changes put into effect mid-2022. As will be discussed later in this discussion and analysis, this change contributed to an overall improvement in Florida Pneumatic’s gross margin. The significant factors causing the decline in our Retail revenue for the six-month periods ended June 30, 2023, compared to the same period in 2022 was the product rollout that occurred in the second quarter of 2022 with no such event occurring during 2023. This year-over-year decline was also driven by THD’s decisions to lower its inventory of floor display space this year. During the six-month period ended June 30, 2023, Aerospace revenue increased 34.6%, when compared to the same period in the prior year. The improvement was driven by resurgence in both the commercial and military components of the Aerospace sector, and increased demand for the new, consumable parts that Jiffy has begun to market.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations – Continued

RESULTS OF OPERATIONS - (Continued)

REVENUE – Continued

Hy-Tech


	Three months ended June 30,
	2023				2022				Increase (decrease)
			Percent of				Percent of
	Revenue		revenue		Revenue		revenue		$		%
OEM	$	2,676,000	50.3	%	$	2,542,000	49.4	%	$	134,000	5.3	%
ATP		808,000	15.2			945,000	18.4			(137,000)	(14.5)
PTG		1,742,000	32.8			1,583,000	30.8			159,000	10.0
Other		92,000	1.7			74,000	1.4			18,000	24.3
Total	$	5,318,000	100.0	%	$	5,144,000	100.0	%	$	174,000	3.4	%


	Six months ended June 30,
	2023				2022				Increase
			Percent of				Percent of
	Revenue		revenue		Revenue		revenue		$		%
OEM	$	5,749,000	51.6	%	$	4,507,000	50.7	%	$	1,242,000	27.6	%
ATP		1,505,000	13.5			1,687,000	19.0			(182,000)	(10.8)
PTG		3,674,000	33.0			2,522,000	28.4			1,152,000	45.7
Other		209,000	1.9			168,000	1.9			41,000	24.4
Total	$	11,137,000	100.0	%	$	8,884,000	100.0	%	$	2,253,000	25.4	%

The net improvement in Hy-Tech’s revenue this quarter, compared to the same three-month period in 2022, was driven by the 10% growth of PTG’s revenue. This improvement is due to improved manufacturing efficiency and an increase in new business. Additionally, its OEM revenue improved 5.3%, due primarily to improving market conditions. The above improvements were partially offset by a decline in its ATP revenue. This decline in ATP revenue is attributable to our decision to focus our marketing efforts on OEM and PTG product offerings. The increase in Hy-Tech’s Other revenue was due to stronger NUMATX and general machining revenue growth this quarter, compared to the same three-month period in 2022.

The 25.4% year-to-date increase in Hy-Tech’s total revenue was primarily driven by its first quarter results. The approximate $1.2 million increase in OEM revenue was driven by growth in certain markets that are served by a number of Hy-Tech’s OEM customers. The markets served by our customers include multiple industrial applications, as well as the tool rental market. PTG revenue for the six-month period ended June 30, 2023, increased 45.7% when compared to the same period in the prior year. This improvement was driven by the acquisition of the Jackson Gear Company business acquired in January 2022. The increase in Hy-Tech’s Other revenue was due to stronger NUMATX and general machining revenue growth this quarter, compared to the same three-month period in 2022. The modest decline in ATP revenue is attributable to our decision to focus our marketing efforts on OEM and PTG product offerings.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations – Continued

RESULTS OF OPERATIONS - (Continued)

GROSS MARGIN/PROFIT


	Three months ended June 30,						Increase (decrease)
	2023			2022			Amount				%
Florida Pneumatic	$	4,511,000		$	4,771,000		$	(260,000)			(5.4)	%
As percent of respective revenue		41.6	%		37.7	%		3.9	%	pts
Hy-Tech	$	1,325,000		$	865,000		$	460,000			53.2
As percent of respective revenue		24.9	%		16.8	%		8.1	%	pts
Total	$	5,836,000		$	5,636,000		$	200,000			3.5	%
As percent of respective revenue		36.1	%		31.6	%		4.5	%	pts


	Six months ended June 30,						Increase (decrease)
	2023			2022			Amount				%
Florida Pneumatic	$	8,787,000		$	8,721,000		$	66,000			0.8	%
As percent of respective revenue		42.3	%		38.0	%		4.3	%	pts
Hy-Tech	$	2,791,000		$	1,426,000		$	1,365,000			95.7
As percent of respective revenue		25.1	%		16.1	%		9.0	%	pts
Total	$	11,578,000		$	10,147,000		$	1,431,000			14.1	%
As percent of respective revenue		36.3	%		31.9	%		4.4	%	pts

Florida Pneumatic’s gross margin for the three-month period ended June 30, 2023, improved compared to the same period in the prior year principally due to a shift away from their lower margin Retail and Automotive product lines to the higher margin, Industrial and Aerospace categories. Further, during the latter half of 2022, we raised prices in all product categories, which contributed to the improved gross margin.

During the second fiscal quarter of 2023 Hy-Tech’s gross margin increased 8.1 percentage points, when compared to the same period in 2022. This improvement was due primarily to product/customer mix. Additionally, as was the case for our first quarter 2023 results, Hy-Tech continued to pursue cost and expense reductions, and coupled with revisions in pricing structure, enabled Hy-Tech to improve its blended gross margin, thus contributing to the overall gross margin improvement.

As with its results for the quarter, Florida Pneumatic’s gross margin for the six-month period ended June 30, 2023, improved compared to the same period in the prior year principally due to a shift away from their lower margin product lines to the higher margin, categories. Further, during the latter half of 2022, we raised prices in all product categories, which contributed to the improved gross margin. This change in marketing strategy and pricing adjustments led to a 4.3 percentage point year-to-date improvement over the same period in the prior year.

The improvement in Hy-Tech’s six-month gross margin is due primarily to product/customer mix. Further, during this period, Hy-Tech was able to reduce manufacturing costs and expenses. Also as noted above, beginning in 2022, Hy-Tech modified its pricing structure, which enabled Hy-Tech to improve its gross margin. Additionally, Hy-Tech will continue to focus on improving manufacturing overhead absorption, particularly at its PTG facility.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations – Continued

RESULTS OF OPERATIONS - (Continued)

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses (“SG&A”) include salaries and related costs, commissions, travel, administrative facilities costs, 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 second quarter of 2023, our SG&A was $5,368,000 compared to $5,479,000, incurred during the same three-month period in 2022. Significant components to the net change include a) compensation expenses increased $6,000; b) stock-based compensation decreased $38,000; c) professional fees and other expenses (i.e. accounting, legal, consulting, etc.) had net increase of $186,000; and d) variable expenses declined $281,000. Variable expenses include among other items, commissions, freight out, travel, advertising, shipping supplies and warranty costs. Driving this decline was lower advertising and shipping costs at Florida Pneumatic, caused primarily by lower Retail revenue this quarter and a reduction in discretionary Automotive advertising expenses, compared to the same period a year ago.

Our SG&A for the six-month period ended June 30, 2023, was $10,543,000, compared to $10,652,000 for the same six-month period a year ago. Key components of this net decline include among other things a reduction in variable expenses of $315,000, due primarily to lower Retail sales, and lower stock-based compensation of $39,000. The above-mentioned reductions were partially offset by increases in compensation expenses of $112,000, depreciation and amortization expense of $70,000, and $100,000 of professional fees and other expenses.

OTHER EXPENSE (INCOME) - net

During the three-month period ended June 30, 2023, we recognized a net expense of $4,000, which was primarily due to a loss on the disposal of equipment. During the three-month period ended March 31, 2023, we recognized a gain of $21,000 from the sale of fully depreciated equipment. Additionally, as a result of final resolution of our Employee Retention Tax Credit (“ERTC”) filing, we recorded an additional $15,000 as Other Income. The ERTC income is subject to federal and local tax.

Other expense recorded during the three and six-month periods ended June 30, 2022, consisted primarily of adjustments to the fair value of certain assets during the second quarter of 2022.

INTEREST – NET

Three months ended June 30,

(Increase) decrease

2023

2022

Amount

Interest expense attributable to:

P&F INDUSTRIES INC 10-Q