BUSINESS AND SUMMARY OF ACCOUNTING POLICIES

6 Months Ended

Jun. 30, 2023

BUSINESS AND SUMMARY OF ACCOUNTING POLICIES

BUSINESS AND SUMMARY OF ACCOUNTING POLICIES

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.

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.

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.

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	%

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	%

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.

P&F INDUSTRIES INC 10-Q