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 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

 

 

 

FORM 10-Q

 

 

  

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

 

For the Quarterly Period Ended March 31, 2012

 

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

 

For the transition period from                 to             

 

Commission File Number 1 - 5332

 

P&F INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

 

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

 

Registrant’s telephone number, including area code: (631) 694-9800

  

 

 

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

 

Indicate by check mark whether the registrant has submitted  electronically and posted to its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period the registrant was required to submit and post such files).  Yes  x   No  o

 

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

 

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

 

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

 

As of May 11, 2012 there were 3,616,562 shares of the registrant’s Class A Common Stock outstanding.

 

 
 

P&F INDUSTRIES, INC.

 

FORM 10-Q

 

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012

 

TABLE OF CONTENTS

 

  PAGE
   
PART I — FINANCIAL INFORMATION  
     
Item 1. Financial Statements 1
     
  Consolidated Condensed Balance Sheets as of March 31, 2012 (unaudited) and December 31, 2011 1
     
  Consolidated Condensed Statements of Income for the three months ended March 31, 2012 and 2011 (unaudited) 3
     
  Consolidated Condensed Statement of Shareholders’ Equity for the three months ended March 31, 2012 (unaudited) 4
     
  Consolidated Condensed Statements of Cash Flows for the three months ended March 31, 2012 and 2011 (unaudited) 5
     
  Notes to Consolidated Condensed Financial Statements (unaudited) 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 14
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
     
Item 4 Controls and Procedures 20
     
PART II — OTHER INFORMATION  
     
Item 1. Legal Proceedings 22
     
Item 1A. Risk Factors 22
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22
     
Item 3. Defaults Upon Senior Securities 22
     
Item 4. Mine Safety Disclosures 22
     
Item 5. Other Information 22
     
Item 6. Exhibits 22
     
Signature 23
   
Exhibit Index 24

 

i
 

 

 

PART I - FINANCIAL INFORMATION

 

Item 1.                Financial Statements

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED CONDENSED BALANCE SHEETS

 

   March 31, 2012   December 31, 2011 
   (unaudited)   (See Note 1) 
ASSETS          
CURRENT ASSETS          
           
Cash  $578,000   $443,000 
Accounts receivable — net   7,808,000    6,327,000 
Inventories – net   17,896,000    18,588,000 
Deferred income taxes — net   512,000    512,000 
Prepaid expenses and other current assets   588,000    454,000 
Current assets of discontinued operations   23,000    23,000 
TOTAL CURRENT ASSETS   27,405,000    26,347,000 
           
PROPERTY AND EQUIPMENT          
Land   1,550,000    1,550,000 
Buildings and improvements   7,519,000    7,504,000 
Machinery and equipment   17,408,000    16,803,000 
    26,477,000    25,857,000 
Less accumulated depreciation and amortization   15,521,000    15,091,000 
NET PROPERTY AND EQUIPMENT   10,956,000    10,766,000 
           
GOODWILL   5,150,000    5,150,000 
           
OTHER INTANGIBLE ASSETS — net   2,050,000    1,950,000 
           
DEFERRED INCOME TAXES — net   1,595,000    1,595,000 
           
OTHER ASSETS — net   715,000    778,000 
           
TOTAL ASSETS  $47,871,000   $46,586,000 

 

See accompanying notes to consolidated condensed financial statements (unaudited).

 

 

1
 

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED CONDENSED BALANCE SHEETS

 

   March 31, 2012   December 31, 2011 
   (unaudited)   (See Note 1) 
LIABILITIES AND SHAREHOLDERS’ EQUITY          
CURRENT LIABILITIES          
           
Short-term borrowings  $6,324,000   $5,648,000 
Accounts payable   2,455,000    2,229,000 
Accrued liabilities   2,688,000    3,338,000 
Current liabilities of discontinued operations   24,000    24,000 
Current maturities of long-term debt   1,115,000    1,039,000 
TOTAL CURRENT LIABILITIES   12,606,000    12,278,000 
           
Long–term debt, less current maturities   5,064,000    4,861,000 
Liabilities of discontinued operations   289,000    292,000 
           
TOTAL LIABILITIES   17,959,000    17,431,000 
           
COMMITMENTS AND CONTINGENCIES          
           
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 -
3,958,000 at March 31, 2012 and 3,956,000  at
December 31, 2011
   3,958,000    3,956,000 
Class B - $1 par; authorized - 2,000,000 shares; no shares
issued
        
Additional paid-in capital   10,968,000    10,919,000 
Retained earnings   17,941,000    17,235,000 
Treasury stock, at cost – 342,000 shares at March 31, 2012 and
December 31, 2011
   (2,955,000)   (2,955,000)
           
TOTAL SHAREHOLDERS’ EQUITY   29,912,000    29,155,000 
           
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $47,871,000   $46,586,000 

 

See accompanying notes to consolidated condensed financial statements (unaudited).

 

2
 

 

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF INCOME (unaudited)

 

         
   Three Months Ended March 31, 
   2012   2011 
Net revenue  $14,317,000   $13,453,000 
Cost of sales   8,706,000    8,330,000 
Gross profit   5,611,000    5,123,000 
Selling, general and administrative expenses   4,731,000    4,423,000 
Operating income   880,000    700,000 
Interest expense   142,000    221,000 
Income from continuing operations before income taxes   738,000    479,000 
Income tax expense   23,000    -- 
Net income from continuing operations   715,000    479,000 
           
Loss from discontinued operations (no tax benefits for the three-month periods ended March 31, 2012 and 2011)   (9,000)   (17,000)
           
Net income  $706,000   $462,000 
           
Basic earnings per share          
Continuing operations  $0.20   $0.13 
Discontinued operations   --    -- 
Net income per share  $0.20   $0.13 
           
Diluted earnings per share          
Continuing operations  $0.19   $0.13 
Discontinued operations   --    -- 
Net income per share  $0.19   $0.13 
           
Weighted average common shares outstanding:          
Basic   3,616,000    3,615,000 
Diluted   3,678,000    3,678,000 
           

 

See accompanying notes to consolidated condensed financial statements (unaudited).

 

 

3
 

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS’ EQUITY (unaudited)

 

       Class A Common
Stock, $1 Par
   Additional
paid-in
   Retained   Treasury stock 
   Total   Shares   Amount   capital   earnings   Shares   Amount 
                             
Balance, January 1, 2012  $29,155,000    3,956,000   $3,956,000   $10,919,000   $17,235,000    (342,000)  $(2,955,000)
                                    
Net income   706,000    --    --    --    706,000    --    -- 
                                    
Exercise of 2,000 options   4,000    2,000    2,000    2,000    --    --    -- 
                                    
Stock-based compensation   47,000    --    --    47,000    --    --    -- 
                                    
Balance, March 31, 2012  $29,912,000    3,958,000   $3,958,000   $10,968,000   $17,941,000    (342,000)  $(2,955,000)

 

See accompanying notes to consolidated condensed financial statements (unaudited).

 

 

4
 

 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (unaudited)

 

   Three months
ended March 31,
 
   2012   2011 
Cash Flows from Operating Activities          
Net income  $706,000   $462,000 
           
Adjustments to reconcile net income to net cash  provided by operating activities of continuing operations:          
Loss from discontinued operations   9,000    17,000 
Non-cash charges:          
Depreciation and amortization   428,000    398,000 
Amortization of other intangible assets   100,000    87,000 
Amortization of other assets   68,000    71,000 
(Recovery of) provision for losses on accounts receivable   (2,000)   19,000 
Stock-based compensation   47,000    35,000 
Changes in operating assets and liabilities:          
Accounts receivable   (1,478,000)   (990,000)
Notes and other receivables   (9,000)   45,000 
Inventories   692,000    700,000 
Prepaid expenses and other current assets   (124,000)   (252,000)
Other assets   (6,000)   -- 
Accounts payable   226,000    14,000 
Accrued liabilities   (650,000)   (488,000)
Total adjustments   (699,000)   (344,000)
Net cash  provided by operating activities of continuing operations   7,000    118,000 

  

See accompanying notes to consolidated condensed financial statements (unaudited).

 

 

 

5
 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (unaudited)

 

   Three months
ended March 31,
 
   2012   2011 
Cash Flows from Investing Activities:          
Capital expenditures  $(620,000)  $(183,000)
   Proceeds from disposal of fixed assets   --    1,000 
   Purchase of product license   (200,000)   -- 
Net cash used in investing activities   (820,000)   (182,000)
           
Cash Flows from Financing Activities:          
Proceeds from exercise of stock options   4,000    -- 
Proceeds from short-term borrowings   12,856,000    7,525,000 
Repayments of short-term borrowings   (12,180,000)   (7,318,000)
Proceeds from term loan   381,000    -- 
Repayments of term loan   (101,000)   (101,000)
Net cash provided by financing activities   960,000    106,000 
           
Cash Flows from Discontinued Operations:          
Operating activities   (12,000)   (15,000)
Net cash used in discontinued operations   (12,000)   (15,000)
           
Net increase in cash   135,000    27,000 
Cash at beginning of period   443,000    874,000 
Cash at end of period  $578,000   $901,000 
           
Supplemental disclosures of cash flow information:          
           
Cash paid for:          
Interest  $151,000   $200,000 
Income taxes  $30,000   $ 

 

See accompanying notes to consolidated condensed financial statements (unaudited).

 

 

6
 

 

P&F INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

 

NOTE 1 - SUMMARY OF ACCOUNTING POLICIES

 

Basis of Financial Statement Presentation

 

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, and with the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, these interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the Company, these unaudited consolidated condensed financial statements include all adjustments necessary to present fairly the information set forth therein. All such adjustments are of a normal recurring nature. Results for interim periods are not necessarily indicative of results to be expected for a full year.

 

The unaudited consolidated condensed balance sheet information as of December 31, 2011 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, 2011. The interim financial statements contained herein should be read in conjunction with that Report.

 

Principles of Consolidation

 

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

 

The Company

 

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

 

Tools

 

The Company conducts its Tools business through a wholly-owned subsidiary, Continental Tool Group, Inc. (“Continental”), which in turn currently operates through its wholly-owned subsidiaries, Florida Pneumatic Manufacturing Corporation (“Florida Pneumatic”) and Hy-Tech Machine, Inc. (“Hy-Tech”).

 

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, a line of pipe cutting and threading tools, wrenches 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 over sixty types of tools, which include impact wrenches, grinders, drills, and motors. Further, it also manufactures tools to customer unique specifications. Its customers include refineries, chemical plants, power generation, heavy construction, oil and mining companies. In addition, Hy-Tech manufactures an extensive line of pneumatic tool replacement parts that are sold competitively to the original equipment manufacturer. It also manufactures and distributes high pressure stoppers for hydrostatic testing of fabricated pipe. It also produces a line of siphons. Other than a line of sockets that are imported from Israel, all Hy-Tech products are made in the United States of America.

 

Hardware

 

The Company conducts its Hardware business through a wholly-owned subsidiary, Countrywide Hardware Inc. (“Countrywide”). Countrywide conducts its business operations through its wholly-owned subsidiary, Nationwide Industries, Inc. (“Nationwide”). Nationwide is a developer, importer, and manufacturer of fencing hardware, patio products, and door and window accessories including rollers, hinges, window operators, sash locks, custom zinc castings and door closers. Additionally, Nationwide also markets a line of kitchen and bath fixtures.

 

7
 

 

 

Management Estimates

 

The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses in those financial statements.  Certain significant accounting policies that contain subjective management estimates and assumptions include those related to revenue recognition, inventory, goodwill, intangible assets and other long-lived assets, income taxes and deferred taxes.  Descriptions of these policies are discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.  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.

 

Recently Adopted Accounting Standards

 

During the three-month period ended March 31, 2012, the Company did not adopt any new accounting standards.

 

NOTE 2 — VARIABLE INTEREST ENTITY  

 

The Company’s overall methodology for evaluating transactions and relationships under the variable interest entity (“VIE”)  requirements includes the following: (i) determining whether the entity meets the criteria to qualify as a VIE; and (ii) determining whether the Company is the primary beneficiary of the VIE.

 

If the Company identifies a VIE based on the requirements within Accounting Standards Codification (“ASC”) ASC 810, it then performs the second step to determine whether it is the primary beneficiary of the VIE by considering the following significant factors and judgments, both of which must be met:

 

•           Whether the Company has the power to direct the activities of the VIE that most significantly impact the entity’s economic performance; and

 

•           Whether the Company has the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE.

 

The Company examined the facts and circumstances pertaining to an indirect, wholly-owned subsidiary, WM Coffman LLC (now known as Old Stairs Co (“WMC”)) to determine if it is the primary beneficiary, by considering whether or not it has the power to direct the most significant activities of the entity. The Company has concluded that it does not direct the most significant activities at WMC, nor does it have an obligation to absorb losses or the right to receive benefits from WMC and, therefore, is not considered the primary beneficiary. Accordingly, the Company did not consolidate WMC.

 

The Company will perform an ongoing reassessment of the facts and circumstances pertaining to WMC to determine whether or not WMC continues to be a VIE and if so, whether or not the Company may have become the primary beneficiary.

 

NOTE 3 — EARNINGS PER SHARE

 

Basic earnings per common share is based only on the average number of shares of common stock outstanding for the periods. Diluted earnings per common share reflects the effect of shares of common stock issuable upon the exercise of options, unless the effect on earnings is antidilutive.

 

Diluted earnings per common share is computed using the treasury stock method. Under this method, the aggregate number of shares of common stock outstanding reflects the assumed use of proceeds from the hypothetical exercise of any outstanding options to purchase shares of the Company’s Class A Common Stock. The average market value for the period is used as the assumed purchase price.

 

 

8
 

 

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

 

   Three months ended 
   March 31, 
   2012   2011 
Numerator:          
Numerator for basic and diluted earnings (loss) per common share:          
Earnings from continuing operations  $715,000   $479,000 
(Loss) from discontinued operations   (9,000)   (17,000)
Net income  $706,000   $462,000 
           
Denominator:          
    Denominator for basic earnings per share-weighted average common shares outstanding   3,616,000    3,615,000 
           
    Dilutive securities   62,000    63,000 
           
Denominator for diluted earnings per share-weighted average common shares outstanding   3,678,000    3,678,000 

 

At March 31, 2012 and 2011 and during the three-month periods ended March 31, 2012 and 2011, there were outstanding stock options whose exercise prices were higher than the average market values of the underlying Class A Common Stock for the period. These options are antidilutive and are excluded from the computation of earnings per share. The weighted average antidilutive stock options outstanding were as follows:

 

   Three months ended 
   March 31, 
   2012   2011 
Weighted average antidilutive stock options outstanding   584,000    514,000 

 

NOTE 4 - STOCK-BASED COMPENSATION

 

Stock-based Compensation

 

Total stock-based compensation expense is attributable to the granting of, and the remaining requisite service periods of stock options.  Compensation expense attributable to stock-based compensation was approximately $47,000 and $35,000 during the three-month periods ended March 31, 2012 and 2011, respectively.  The compensation expense is recognized in selling, general and administrative expenses on the Company’s statements of operations on a straight-line basis over the vesting periods.  The Company recognizes compensation cost over the requisite service period. However, the exercisability of the respective non-vested options, which are at pre-determined dates on a calendar year, do not necessarily correspond to the period(s) in which straight-line amortization of compensation cost is recorded. As of March 31, 2012, the Company had approximately $155,000 of total unrecognized compensation cost related to non-vested awards granted under our stock-based plans, which it expects to recognize over a weighted-average period of one year.

 

The expected term was based on historical exercises and terminations. The volatility is determined based on historical stock prices. The dividend yield is 0% as the Company has historically not declared dividends and does not expect to declare any in the future.

 

Stock Option Plan

 

The Company’s 2002 Incentive Stock Option Plan (the “Current Plan”) authorizes the issuance, to employees and directors, of options to purchase a maximum of 1,100,000 shares of Class A Common Stock. These options must be issued within ten years of the effective date of the Current Plan and are exercisable for a ten year period from the date of grant, at prices not less than 100% of the market value of the Class A Common Stock on the date the option is granted. Incentive stock options granted to any 10% stockholder are exercisable for a five year period from the date of grant, at prices not less than 110% of the market value of the Class A Common Stock on the date the option is granted. Pursuant to the Current Plan, the Stock Option Committee has the discretion to award non-qualified stock option grants with various vesting parameters. Options have vesting periods of immediate to three years. In the event options granted contain a vesting schedule over a period of years, the Company recognizes compensation cost for these awards on a straight-line basis over the requisite service period. The Current Plan, which terminates in 2012, is the successor to the Company’s 1992 Incentive Stock Option Plan (the “Prior Plan”).

 

9
 

 

 

The following is a summary of the changes in outstanding options during the three-month period ended March 31, 2012:

 

   Option Shares   Weighted
Average
Exercise
Price
   Weighted Average
Remaining
Contractual Life
(Years)
   Aggregate
Intrinsic
Value
 
Outstanding, January 1, 2012   655,124   $6.50    5.2   $31,000 
Granted                 
Exercised   2,000    2.17           
Forfeited                  
Expired                  
Outstanding, March 31,  2012   653,124   $6.51    5.1   $59,000 
                     
Vested and expected to vest, March 31, 2012   478,457   $7.42    4.0   $20,000 

 

The following is a summary of changes in non-vested shares for the three months ended March 31, 2012:

 

   Option Shares   Weighted Average Grant-
Date Fair Value
 
Non-vested shares, January 1, 2012   174,667   $2.43 
Granted        
Vested        
Forfeited        
Non-vested shares, March 31, 2012   174,667   $2.43 

 

The number of shares of Class A Common Stock reserved for stock options available for issuance under the Current Plan as of March 31, 2012 was 302,712. All of the options outstanding at March 31, 2012 were issued under the Current Plan.

 

NOTE 5 — RECENT ACCOUNTING PRONOUNCEMENTS

 

Management does not believe that any other recently issued, but not yet effective accounting standards, if currently adopted would have a material effect on our consolidated condensed financial statements.

 

NOTE 6 - ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

 

Accounts receivable - net consists of:

   March 31, 2012   December 31, 2011 
Accounts receivable  $8,031,000   $6,553,000 
Allowance for doubtful accounts   (223,000)   (226,000)
   $7,808,000   $6,327,000 

 

NOTE 7 — INVENTORIES

 

Inventories - net consist of:

  

  

 

March 31, 2012

   December 31, 2011 
Raw material
  $2,113,000   $2,301,000 
Work in process
   952,000    979,000 
Finished goods
   17,019,000    17,459,000 
 
   20,084,000    20,739,000 
Reserve for obsolete and slow-moving inventories
   (2,188,000)   (2,151,000)
  $17,896,000   $18,588,000 

 

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NOTE 8 - GOODWILL AND OTHER INTANGIBLE ASSETS

 

During the three-month period ended March 31, 2012 there was no change to the carrying value of goodwill.

 

Other intangible assets were as follows:

 

   March 31, 2012   December 31, 2011 
   Cost   Accumulated
amortization
   Net book
value
   Cost   Accumulated
amortization
   Net book
value
 
Other intangible assets:                              
Customer relationships  $5,070,000   $3,662,000   $1,408,000   $5,070,000   $3,581,000   $1,489,000 
Non-compete and employment agreements   760,000    760,000        760,000    760,000     
Trademarks   199,000        199,000    199,000        199,000 
Drawings   290,000    74,000    216,000    290,000    70,000    220,000 
Licensing   305,000    78,000    227,000    105,000    63,000    42,000 
Totals  $6,624,000   $4,574,000   $2,050,000   $6,424,000   $4,474,000   $1,950,000 

 

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

 

Three months ended March 31, 
2012   2011 
$100,000   $87,000 
        

 

Amortization expense for each of the twelve-month periods ending March 31, 2013 through March 31, 2017 is estimated to be as follows: 2013 - $377,000 ; 2014 - $233,000 ; 2015 - $233,000; 2016 - $230,000 and 2017 - $175,000.  The weighted average amortization period for intangible assets was 7.66 years at March 31, 2012 and 8.16 years at December 31, 2011.

  

NOTE 9 - DEBT

 

P&F, along with Florida Pneumatic, Hy-Tech and Nationwide, as borrowers, entered into a Credit Agreement, (“Credit Agreement”) with Capital One Leverage Finance Corporation, as agent (“COLF”). The Credit Agreement, entered into in October 2010, has a three-year term, with maximum borrowings of $22,000,000 at that time.  The Credit Agreement provides for a Revolving Credit Facility (“Revolver”) with a maximum borrowing of $15,910,000. At March 31, 2012 and December 31, 2011, the balances owing on the Revolver were $6,324,000 and $5,648,000, respectively.  Direct borrowings under the Revolver are secured by the Company’s accounts receivable, mortgages on the Company’s real property located in Cranberry, PA, Jupiter, FL and Tampa, FL (“Real Property”),  inventory and equipment and are cross-guaranteed by certain of the Company’s subsidiaries (the “Subsidiary Guarantors”). Revolver borrowings bear interest at LIBOR (London InterBank Offered Rate) or the Base Rate, as defined in the Credit Agreement, plus the currently applicable margin rates. Beginning April 1, 2011, the loan margins applicable to borrowings on the Revolver are determined based upon the computation of total debt divided by earnings before interest, taxes, depreciation and amortization (“EBITDA”).

 

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On November 21, 2011, the Company and COLF entered into the Second Amendment to Credit Agreement, (the “Amendment”). The Amendment, among other things, (i) reduced the applicable loan margins for Revolver borrowings by 0.25% or 0.50%, depending on the applicable leverage ratio, (ii) increased the maximum aggregate amount of permitted Capital Expenditures (as defined in the Loan Agreement) for 2012 and 2013 from an aggregate of $1,000,000 to an aggregate of $2,500,000 and (iii) established a $2,500,000 Capital Expenditure loan commitment by COLF, pursuant to which COLF may make one or more Capex Loans (as defined in the Amendment) to the Company under the terms set forth in the Amendment, a (“Capex term loan”). As such, pursuant to the Amendment, the total commitment by COLF for the Credit Agreement increased from $22,000,000 to $24,500,000. Further, as a result of the Amendment, the applicable loan margins range from 2.50% to 3.50% for LIBOR borrowings and from 1.50% to 2.50% for borrowings at Base Rate. Loan margins added to Revolver borrowings at March 31, 2012 and December 31, 2011 were 2.75% and 1.75%, respectively, for borrowings at LIBOR and the Base Rate.

 

The Company is required to provide, among other things, monthly financial statements, monthly borrowing base certificates as well as certificates of compliance of various financial covenants. The Company is in compliance with all financial covenants. As part of the Credit Agreement, if an event of default occurs, the interest rate would increase by two percent per annum during the period of default.

 

The Credit Facility also contains a $6,090,000 term loan (the “Term Loan”), which is secured by mortgages on the real property, accounts receivable, inventory and equipment. The Term Loan amortizes approximately $34,000 each month with a balloon payment at maturity of the Credit Agreement. The balance due on the Term Loan at March 31, 2012 and December 31, 2011 was $5,549,000 and $5,650,000, respectively. The Credit Agreement requires the Company to make prepayments, to be applied to the Term Loan, of 25% of excess annual cash flow, as defined in the Credit Agreement, or in the event of a sale of any real estate assets. Based on 2011 excess cash flows, the Company will make a payment of approximately $633,000 in the second quarter of 2012. This amount is included in current maturities of long-term debt on the consolidated condensed balance sheet. Term Loan borrowings bear interest at LIBOR or the prime interest rate plus the currently applicable margin rates, which were 5.75% and 4.75%, respectively, at March 31, 2012 and December 31, 2011.

 

In accordance with the Amendment, the Company, in March 2012, borrowed $380,000 as a Capex term loan. This obligation amortizes approximately $6,000 each month over a five-year period, with a balloon payment at maturity of the Credit Agreement. This Capex term Loan bears interest at LIBOR or the prime interest rate plus the currently applicable margin rates, which were 2.50% and 3.50%, respectively, at March 31, 2012.

 

In April 2010, as part of an amendment to the Company’s prior credit agreement, the Company was required to obtain subordinated loans of $750,000, (the “Subordinated Loans”). These Subordinated Loans bear interest at 8% per annum. The Subordinated Loans were provided by the Company’s Chief Executive Officer (“CEO”), in the amount of $250,000, and an unrelated party, in the amount of $500,000, each with a maturity date of October 25, 2013. During 2011, pursuant to a subordination agreement with COLF, the principal amount owed to the unrelated third party was paid in full from excess cash flows, as defined in such subordination agreement.

 

 

NOTE 10—RELATED PARTY TRANSACTIONS

 

The president of one of the Company’s subsidiaries is part owner of one of the subsidiary’s vendors. During the three-month periods ended March 31, 2012 and 2011, the Company purchased approximately $199,000 and $231,000, respectively of product from this vendor.

 

 

NOTE 11 - BUSINESS SEGMENTS

 

P&F operates in two primary lines of business, or segments: (i) tools and other products (“Tools”) and (ii) hardware and accessories (“Hardware”). For reporting purposes, Florida Pneumatic and Hy-Tech are combined in the Tools segment, while Nationwide is currently the only subsidiary in the Hardware segment. The Company evaluates segment performance based primarily on segment operating income. The accounting policies of each of the segments are the same as those referred to in Note 1.

 

 

 

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Three months ended March 31, 2012  Consolidated   Tools   Hardware 
             
Revenues from unaffiliated customers  $14,317,000   $9,672,000   $4,645,000 
                
Segment operating income  $2,423,000   $1,729,000   $694,000 
General corporate expense   (1,543,000)          
Interest expense – net   (142,000)          
Earnings before income taxes  $738,000           
                
Segment assets  $44,901,000   $32,455,000   $12,446,000 
Corporate assets   2,970,000           
Total assets  $47,871,000           
                
Long-lived assets, including $123,000 at corporate  $18,156,000   $13,387,000   $4,646,000 

  

 

Three months ended March 31, 2011  Consolidated   Tools   Hardware 
             
Revenues from unaffiliated customers  $13,453,000   $9,720,000   $3,733,000 
                
Segment operating income  $2,054,000   $1,617,000   $437,000 
General corporate expense   (1,354,000)          
Interest expense – net   (221,000)          
Earnings before income taxes  $479,000           
                
Segment assets  $45,682,000   $33,705,000   $11,977,000 
Corporate assets   3,344,000           
Total assets  $49,026,000           
                
Long-lived assets, including $331,000 at corporate  $18,918,000   $14,079,000   $4,508,000 

 

 

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P&F INDUSTRIES, INC. AND SUBSIDIARIES

 

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

 

General

 

The Private Securities Litigation Reform Act of 1995 (the “Reform Act”) provides a safe harbor for forward-looking statements made by or on behalf of P&F Industries, Inc. and subsidiaries (“P&F”, or the “Company”). P&F and its representatives may, from time to time, make written or verbal forward-looking statements, including statements contained in the Company’s filings with the Securities and Exchange Commission and in its reports to stockholders. Generally, the inclusion of the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “will,” and their opposites and similar expressions identify statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and that are intended to come within the safe harbor protection provided by those sections. Any forward-looking statements contained herein, including those related to the Company’s future performance, are based upon the Company’s historical performance and on current plans, estimates and expectations. All forward-looking statements involve risks and uncertainties. These risks and uncertainties could cause the Company’s actual results for the 2012 fiscal year and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company for a number of reasons, as previously disclosed in the Company’s public filings, including in its Annual Report on Form 10-K for the year ended December 31, 2011. Forward-looking statements speak only as of the date on which they are made. The Company undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

 

Business

 

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

 

P&F conducts its business operations through two of its wholly-owned subsidiaries: Continental Tool Group, Inc. (“Continental”) and Countrywide Hardware, Inc. (“Countrywide”). P&F and its subsidiaries are herein referred to collectively as the “Company.” In addition, the words “we”, “our” and “us” refer to the Company.  P&F operates in two primary lines of business, or segments: (i) tools and other products (“Tools”) and (ii) hardware and accessories (“Hardware”).

 

Tools

 

Continental operates through its wholly-owned subsidiaries, Florida Pneumatic Manufacturing Corporation (“Florida Pneumatic”) and Hy-Tech Machine, Inc. (“Hy-Tech”).

 

Florida Pneumatic is engaged in the importation 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 line of pipe cutting and threading tools, wrenches and replacement electrical components for a widely-used brand of pipe cutting and threading machines.

 

Hy-Tech manufactures and distributes pneumatic tools and parts for industrial applications. Hy-Tech manufactures approximately sixty types of industrial pneumatic tools, most of which are sold at prices ranging from $300 to $7,000, under the names “ATP”, “Thaxton”, “THOR” and “Eureka”, as well as under the trade names or trademarks of other private label customers. This line of products includes grinders, drills, saws, impact wrenches and pavement breakers. Hy-Tech’s products are sold to distributors and private label customers through in-house sales personnel and manufacturers’ representatives. Users of Hy-Tech’s tools include refineries, chemical plants, power generation facilities, the heavy construction industry, oil and mining companies and heavy industry. Hy-Tech’s products are sold off the shelf, and are also produced to customer’s orders. The business is not seasonal, but it may be subject to significant periodic changes resulting from scheduled shutdowns in refineries, power generation facilities and chemical plants.

 

Hardware

 

We conduct our Hardware business through Countrywide. Countrywide conducts its business operations through its wholly-owned subsidiary, Nationwide Industries, Inc. (“Nationwide”).

 

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Nationwide is an importer and manufacturer of door, window and fencing hardware, and accessories including rollers, hinges, window operators, sash locks, custom zinc castings and door closers. Nationwide’s products are sold through in-house sales personnel and manufacturers’ representatives to distributors, retailers and original equipment manufacturer (“OEM”) customers. End users of Nationwide’s products include contractors, home builders, pool and patio distributors, OEM/private label customers and general consumers. Additionally, Nationwide also markets a kitchen and bath product line. Nationwide currently out-sources the manufacturing of approximately 90% of its product with several overseas factories, while retaining design, quality control, and patent and trademark control. There are redundant sources for most products. Nationwide manufactures approximately 10% of its products sold including rollers, hinges and pool enclosure products at its facility in Tampa, Florida.

  

Overview

 

When comparing the first quarter of 2012 to the same period in 2011, we, among other things:

·increased consolidated revenue more than $864,000 or 6.4%;
·improved consolidated gross margins 1.1 percentage points to 39.2%
·increased net income from continuing operations to $715,000 from $479,000 – an increase of 49.3% and,
·improved diluted earnings per share from continuing operations to $0.19 from $0.13.

 

KEY INDICATORS

 

Economic Measures

 

Much of our business is driven by the ebbs and flows of the general economic conditions in both the United States and, to a lesser extent, abroad.  Our Tools segment focuses on a wide array of customer types; it does not rely as much on specific economic measures or indicators. The Tools segment tends to track the general economic conditions of the United States, industrial production and general retail sales, all of which have, for the most part, only slight improvement during 2012 compared to 2011.  The key economic measures for Hardware group were the general economic conditions of the United States and to a lesser extent the housing market.

 

Another 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 dollar in relation to the Taiwan dollar, as we purchase a significant portion of our products from Taiwan. Purchases from Chinese sources are made in U.S. dollars. However, if the Chinese currency, the Renminbi, were to be revalued against the dollar, there could be a significant negative impact on the cost of our products.

 

Operating Measures

 

Key operating measures we use to manage our operating segments are: 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 for each operating segment.

 

Financial Measures

 

Key financial measures we use to evaluate the results of our business include: various revenue metrics; gross margin; selling, general and administrative expenses; earnings before interest and taxes; operating cash flows and capital expenditures; return on sales; return on assets; days sales outstanding and inventory turns. These measures are reviewed at monthly, quarterly and annual intervals and compared to historical periods as well as established objectives. To the extent that these measures are relevant, they are discussed in the detailed sections for each operating segment.

 

Critical Accounting Policies and Estimates

 

We prepare our consolidated condensed financial statements in accordance with accounting principles generally accepted in the United States of America, (“GAAP”). Certain of these accounting policies require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities, revenues and expenses. On an ongoing basis, we evaluate estimates, including those related to bad debts, inventory reserves, goodwill and intangible assets, deferred tax assets and warranty reserves. We base our estimates on historical data and experience, when available, and on various other assumptions that are believed to be reasonable under the circumstances, the combined results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

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There have been no material changes in our critical accounting policies and estimates from those discussed in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2011.

 

RESULTS OF OPERATIONS

 

The table below provides an analysis of our net revenue for the three-month periods ended March 31, 2012 and 2011:

 

Revenue

 

   Three-months Ended March 31,         
   2012   2011   Variance   Variance 
              $    % 
Tools                    
Florida Pneumatic  $5,417,000   $5,574,000   $(157,000)   (2.8)%
Hy-Tech   4,255,000    4,146,000    109,000    2.6 
Tools Total   9,672,000    9,720,000    (48,000)   (0.5)
                     
Hardware                    
Hardware Total   4,645,000    3,733,000    912,000    24.4 
                     
Consolidated  $14,317,000   $13,453,000   $864,000    6.4%

 

All revenues are generated in U.S. dollars and are not impacted by changes in foreign currency exchange rates. 

Unless otherwise stated below, we believe that our relationships with all our key customers, given the current economic conditions, remain good. There were no major trends or uncertainties that had, or we could reasonably expect could have a material impact on our revenue. There was no unusual or infrequent event, transaction or any significant economic change that materially affected our results of operations.

 

Tools

 

Florida Pneumatic markets its air tool products to two primary sectors within the pneumatic tool market; retail and industrial/catalog. Additionally, Florida Pneumatic also markets, to a much lesser degree, air tools to the automotive market. It also generates revenue from its Berkley products line as well as a line of air filters and other OEM parts. An analysis of Florida Pneumatic revenue for 2012 and 2011 is as follows:

 

   Three-Months Ended March 31, 
   2012   2011 
Revenue analysis – Florida Pneumatic  Revenue   Percent of revenue   Revenue   Percent of revenue 
Retail – major customer  $2,460,000    45.4%  $3,212,000    57.6%
Industrial/catalog   2,009,000    37.1    1,545,000    27.7 
Automotive   305,000    5.6    271,000    4.9 
Other   643,000    11.9    546,000    9.8 
Total  $5,417,000    100.0%  $5,574,000    100.0%

  

During the first quarter of 2012 Florida Pneumatic continued its growth in the higher gross margin, industrial/catalog sector. As a result, it was able to increase revenue in this sector $464,000 or 30.0%, when compared to the first quarter of 2011. We intend to continue to expand our marketing efforts in the industrial/catalog market. Florida Pneumatic also increased revenue at its automotive line $34,000 or 12.5%. Other revenue, which includes revenue from its Berkley, air filters and OEM lines, in the aggregate increased $97,000 or 17.8%. However, when comparing the first quarter of 2012 to the same period in 2011, revenue from its major retail customer declined $752,000 or 23.4%. This decline was due primarily to the initial roll-out of a program during the first quarter of 2011 to a new retail partner of our major customer, which did not repeat during the first quarter of 2012.

 

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Hy-Tech focuses primarily on the industrial sector of the pneumatic tools market.  Hy-Tech creates quality replacement parts for pneumatic tools, markets its own value/added line of air tools as well as distributes a complementary line of sockets (“ATP”).

 

   Three-Months Ended March 31, 
   2012   2011 
Revenue analysis – Hy-Tech   Revenue   Percent of revenue   Revenue   Percent of revenue 
ATP  $2,624,000    61.7%  $2,926,000    70.6%
Hy-Tech Machine   403,000    9.5    512,000    12.3 
Major Customer   1,095,000    25.7    594,000    14.3 
Other   133,000    3.1    114,000    2.8 
Total  $4,255,000    100.0%  $4,146,000    100.0%

  

As noted in the table above, Hy-Tech increased its revenue $109,000 or 2.6% when comparing the first quarter of 2012 to 2011. Hy-Tech’s overall improvement is due primarily to increased product demand from its major customer; resulting in an increase in revenue from this customer of $501,000 or 84.3%, when comparing the first quarter of 2012 to 2011. Partially offsetting this increase was a decline of $302,000 in revenue from sales of our ATP product line. Additionally, Hy-Tech Machine products, which primarily focus on mining, construction and industrial manufacturing markets (“Hy-Tech Machine”) also declined by $109,000 or 21.3% when comparing the first quarter of 2012 to the same period in 2011.

 

Hardware

 

Our Hardware segment, which currently consists of only Nationwide, generates revenue from the sale of fencing and gate hardware, kitchen and bath accessories, OEM products and patio hardware.

 

   Three-Months Ended March 31, 
   2012   2011 
Revenue analysis – Nationwide  Revenue   Percent of revenue   Revenue   Percent of revenue 
Fence and gate hardware  $3,078,000    66.3%  $2,402,000    64.3%
Kitchen and bath   846,000    18.2    760,000    20.4 
OEM   433,000    9.3    367,000    9.8 
Patio   288,000    6.2    204,000    5.5 
Total  $4,645,000    100.0%  $3,733,000    100.0%

 

 

When comparing the first quarter of 2012 to 2011, Nationwide increased its fence and gate hardware product line revenue by $676,000 or 28.1%. This improvement is due primarily to the introduction of new products, as well as expanded marketing efforts, which effectively has increased the size of its customer base.  Nationwide intends to continue its current growth strategy which is to develop new products and accessories, as well as to continue to expand its national market campaign. Revenue generated from its Patio products line, improved $84,000 or 41.2%. Despite the ongoing weak market conditions for its kitchen & bath line, when comparing the first quarter of 2012 and 2011, Nationwide increased kitchen and bath product line revenue $86,000 or 11.3%. Lastly, OEM revenue increased $66,000 or 18.0%. With fence and gate hardware being the primary contributor to Nationwide’s increase in revenue, we will continue to focus more attention on new product development and market expansion to this product. We are also focusing on upgrading our kitchen and bath product line.

 

Gross Margins / Profits

 

 

   March 31,   Change 
   2012   2011   Amount   % 
Tools  $3,832,000   $3,711,000   $121,000    3.3%
As percent of respective revenue   39.6%   38.2%   1.4 pts.        
Hardware  $1,779,000   $1,412,000   $367,000    26.0%
As percent of respective revenue   38.3%   37.8%   0.5 pts.        
Consolidated  $5,611,000   $5,123,000   $488,000    9.5%
As percent of respective revenue   39.2%   38.1%   1.1 pts.        

 

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Tools

 

Gross margins generated by our Tools segment during the first quarter of 2012 increased 1.4 percentage points when compared to the same period in 2011. Specifically, Florida Pneumatic’s gross margin increased 1.5 percentage points, with gross profit improving $29,000, and Hy-Tech’s gross margin improved 1.1 percentage points with gross margin increasing $92,000.  The improvement in gross margin at Florida Pneumatic is primarily due to increased industrial/catalog revenue during the first quarter of 2012 compared to the same period in 2011. The improvement in gross margin at Hy-Tech is the result of product mix as well as improved cost of manufacturing.

 

Hardware

 

Gross margin generated during the first quarter of 2012 by our Hardware segment improved 0.5 percentage point when compared to the same period in 2011. This increase is primarily due to product mix. The increase in gross profit of $367,000 was due primarily to increased revenue during the first quarter of 2012 compared to the same period in 2011.

 

Selling and general and administrative expenses

 

Selling, general and administrative expenses, (“SG&A”) include salaries and related costs, commissions, travel, administrative facilities, communications costs and promotional expenses for our direct sales and marketing staff, administrative and executive salaries and related benefits, legal, accounting and other professional fees as well as general corporate overhead and certain engineering expenses.

 

During the first quarter of 2012, our SG&A was $4,731,000, compared to $4,423,000, for the same three-month period in 2011. Significant line items contributing to the increase include; (i) an increase of $256,000 in compensation, which is comprised of base salaries and wages, accrued performance-based bonus incentives, associated payroll taxes and employee benefits, (ii) primarily the result of improved revenue, our variable expenses, which includes commissions, freight out, travel and entertainment and advertising costs increased an aggregate amount of $88,000, (iii) an increase in our professional fees of $52,000, and (iv) an increase in our depreciation and amortization expense of $28,000. These increases were partially offset by among other things, reductions in warranty, and certain promotional expenses which, in the aggregate were $86,000.

 

Interest

 

Our net interest expense during the first quarter of 2012 was $142,000, compared to $221,000 for the same period in the prior year. The most significant item affecting interest expense this quarter was a reduction in our short term revolver borrowings during the comparative three-month periods ending March 31, 2012 and 2011. The average balance of short term borrowings during the first quarter of 2012 was $6,120,000, compared to $9,996,000 during the same three-month period in 2011. As a result, interest expense attributable to short term borrowing decreased to $47,000 during the first quarter of 2012, from $104,000, incurred in during the first quarter of 2011. In 2011 we repaid the balance owed on our debt obligation to the sellers of Hy-Tech, as a result, there was no interest expense attributable to this debt in the first quarter of 2012, compared to $11,000 in the first quarter of 2011. Further, during 2011, we repaid $500,000 of the Subordinated Loans (see Liquidity and Capital Resources below), resulting in an interest savings of $10,000.

 

Income Taxes

 

We had an effective tax rate of 3.1% applied to our income from continuing operations for the three-month period ended March 31, 2012 due to the utilization of net operations loss carry-forwards that can be applied to current year income. We currently believe that this effective tax rate will be applied for the remainder of 2012, due to the availability of additional net operating loss carry-forwards.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our cash flows from operations can be somewhat cyclical, typically with the greatest demand in the second and third quarters followed by positive cash flows in the first and fourth quarter as receivables and inventories trend down.  We monitor average days sales outstanding, inventory turns, estimated future purchasing requirements and capital expenditures to project liquidity needs and evaluate return on assets employed.

 

 

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We gauge our liquidity and financial stability by various measurements, some of which are shown in the following table:

 

   March 31, 2012   December 31, 2011 
Working Capital of continuing operations  $14,800,000   $14,070,000 
Current Ratio of continuing operations   2.18 to 1.0    2.15 to 1.0 
Shareholders’ Equity  $29,912,000   $29,155,000 

 

We entered into a Credit Agreement, (“Credit Agreement”) with Capital One Leverage Finance Corporation, as agent (“COLF”). The Credit Agreement, entered into in October 2010, has a three-year term, with maximum borrowings of $22,000,000 at that time.  The Credit Agreement provides for a Revolving Credit Facility (“Revolver”) with a maximum borrowing of $15,910,000. At March 31, 2012 and December 31, 2011, the balances owing on the Revolver were $6,324,000 and $5,648,000, respectively.  Direct borrowings under the Revolver are secured by our accounts receivable, mortgages on our real property located in Cranberry, PA, Jupiter, FL and Tampa, FL,  inventory and equipment and are cross-guaranteed by certain of our subsidiaries. Revolver borrowings bear interest at LIBOR (London InterBank Offered Rate) or the Base Rate, as defined in the Credit Agreement, plus the currently applicable margin rates. Beginning April 1, 2011, the loan margins applicable to borrowings on the Revolver are determined based upon the computation of total debt divided by earnings before interest, taxes, depreciation and amortization (“EBITDA”).

 

On November 21, 2011, we and COLF entered into the Second Amendment to Credit Agreement, (the “Amendment”). The Amendment, among other things, (i) reduced the applicable loan margins for Revolver borrowings by 0.25% or 0.50%, depending on the applicable leverage ratio, (ii) increased the maximum aggregate amount of permitted Capital Expenditures (as defined in the Loan Agreement) for 2012 and 2013 from an aggregate of $1,000,000 to an aggregate of $2,500,000 and (iii) established a $2,500,000 Capital Expenditure loan commitment by COLF, pursuant to which COLF may make one or more Capex Loans (as defined in the Amendment) to us under the terms set forth in the Amendment, a (“Capex term loan”). As such, pursuant to the Amendment, the total commitment by COLF for the Credit Agreement increased from $22,000,000 to $24,500,000. Further, as a result of the Amendment, the applicable loan margins range from 2.50% to 3.50% for LIBOR borrowings and from 1.50% to 2.50% for borrowings at Base Rate. Loan margins added to Revolver borrowings at March 31, 2012 and December 31, 2011 were 2.75% and 1.75%, respectively, for borrowings at LIBOR and the Base Rate.

 

The Credit Facility also contains a $6,090,000 term loan (the “Term Loan”), which is secured by mortgages on the real property, accounts receivable, inventory and equipment. The Term Loan amortizes approximately $34,000 each month with a balloon payment at maturity of the Credit Agreement. The balance due on the Term Loan at March 31, 2012 and December 31, 2011 was $5,549,000 and $5,650,000, respectively. The Credit Agreement requires us to make prepayments, to be applied to the Term Loan, of 25% of excess annual cash flow, as defined in the Credit Agreement, or in the event of a sale of any real estate assets. Based on 2011 excess cash flows, we will make a payment of approximately $633,000 in April 2012. This amount is included in current maturities of long-term debt on the consolidated balance sheet. Term Loan borrowings bear interest at LIBOR or the prime interest rate plus the currently applicable margin rates, which were 5.75% and 4.75%, respectively, at March 31, 2012 and December 31, 2011.

 

In March 2012, in accordance with the Second Amendment to the Credit Agreement discussed above, we borrowed $380,000 as a Capex term loan. This obligation amortizes approximately $6,000 each month over a five year period, with a balloon payment at maturity of the Credit Agreement. This Capex term Loan bears interest at LIBOR or the prime interest rate plus the currently applicable margin rates, which were 2.50% and 3.50%, respectively, at March 31, 2012.

 

In April 2010, as part of an amendment to a prior credit agreement, we were required to obtain subordinated loans of $750,000, (the “Subordinated Loans”), of which $250,000 was provided by our Chief Executive Officer. These Subordinated Loans bear interest at 8% per annum. The Subordinated Loans also included $500,000 which was provided by an unrelated party. These Subordinated Loans each mature on October 25, 2013. During 2011, pursuant to a subordination agreement with COLF, the principal amount owed to the unrelated third party was paid in full from excess cash flows, as defined in such subordination agreement.

 

During the three-month period ended March 31, 2012, our cash increased $135,000 to $578,000 from $443,000 at December 31, 2011.  Our total bank debt at March 31, 2012 was $12,253,000, compared to $11,298,000 at December 31, 2011. The increase is due primarily to the Capex term loan of $380,000 plus, as described above, plus an increase in our Revolver borrowings of $674,000. The aforementioned also contributed to the percent of the total debt to total book capitalization (total debt divided by total debt plus equity) increasing slightly to 29.5% at March 31, 2012, compared to 28.4% at December 31, 2011.

 

We had net cash of $7,000 provided by operating activities of continuing operations for the three-month period ended March 31, 2012, compared to $118,000 during the same period in the prior year. Capital spending was approximately $620,000 for the three-month period ended March 31, 2012, compared to $183,000 during the same period in the prior year.  Capital expenditures for the balance of 2012 are expected to be approximately $1,300,000, some of which may be financed through our credit facilities or financed through independent third party financial institutions. The remaining 2012 capital expenditures will primarily be for expansion of existing product lines and replacement of equipment.

 

 

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Significant Customer

 

We have one customer in the Tools segment that accounted for approximately 17.2% of consolidated revenue for the three-month period ended March 31, 2012 and 24.6% of consolidated accounts receivable as of March 31, 2012. The products we sell to this customer are part of a major brand and we believe the brand has extreme value in today’s marketplace. Generally, our revenue from retail customers increases to peak levels during the holiday season shipping period, which is typically during the fourth calendar quarter. During the first quarter of 2012 this customer reduced its December 31, 2011 accounts receivable balance of $2,816,000 to $1,924,000, which, but for special orders or other seasonal promotions, approximates the average accounts receivable balance. To date, this customer continues, with minor exceptions, to be current in its payments.

 

We believe that, should this customer be unable to make any future payments, it would likely negatively impact our working capital, but would not affect our ability to remain a going concern. We are currently investigating various means by which we can protect our accounts receivable balance with this customer.

 

As previously noted, inventory is also a component of the collateral against which we are able to borrow funds under the terms of the Revolver. While we hold inventory in our warehouse for this customer, we believe the vast majority of items can be repackaged and sold to other customers, without significant additional expense. Since this inventory can be sold to others, we do not believe our ability to borrow funds under the terms of the Revolver would be materially adversely affected in the event this customer is unable to purchase such inventory. At March 31, 2012 and December 31, 2011, we had approximately $1,722,000 and $1,700,000, respectively, of inventory for this customer.

 

We and COLF continue to monitor the financial status and creditworthiness of this customer. However, there can be no assurance that COLF will continue to permit borrowings against this customer’s eligible accounts receivable or the inventory we hold for this customer.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

In accordance with Accounting Standards Codification (“ASC”) 810-10-40 (“ASC 810”), as of June 30, 2010, we deconsolidated WMC and therefore do not include its financial position in the Company’s consolidated condensed financial statements. We believe that neither the Company nor any of its subsidiaries other than WMC are legally responsible for any of the liabilities belonging to WMC.  Until such time as these obligations have been resolved, either directly with the creditors, discharged by a court of law, or otherwise eliminated, WMC is required to maintain these obligations on its books, which at March 31, 2012 and December 31, 2011 were approximately $1.4 million.  We will, as required by ASC 810, re-evaluate the facts and circumstances regarding whether or not we should consolidate WMC at each future reporting period.

 

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

Management does not believe that any other recently issued, but not yet effective accounting standards, if currently adopted would have a material effect on our condensed consolidated financial statements.

 

 

 

Item 3.             Quantitative And Qualitative Disclosures About Market Risk

 

Not required.

 

Item 4.             Controls and Procedures

 

Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. As required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this Quarterly Report, with the participation of our principal executive officer and principal financial officer, we evaluated the effectiveness of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2012.

  

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Changes in Internal Control over Financial Reporting

  

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

 

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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

There have been no material changes to the legal proceedings disclosure described in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

Item 1A. Risk Factors

 

There were no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

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

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures
   
  None

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

See “Exhibit Index” immediately following the signature page.

 

 

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  P&F INDUSTRIES, INC.
  (Registrant)
   
  By /s/ Joseph A. Molino, Jr.
    Joseph A. Molino, Jr.
    Chief Financial Officer
Dated: May 11, 2012   (Principal Financial and Chief Accounting Officer)

 

 

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EXHIBIT INDEX

 

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

 

Exhibit

Number

  Description of Exhibit
     
10.1   Executive Employment Agreement, dated as of January 1, 2012, between the Registrant and Richard A. Horowitz (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated December 29, 2011).
     
31.1   Certification of Richard A. Horowitz, Principal Executive Officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2   Certification of Joseph A. Molino, Jr., Principal Financial Officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1   Certification of Richard A. Horowitz, Principal Executive Officer of the Registrant, Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
32.2   Certification of Joseph A. Molino, Jr., Principal Financial Officer of the Registrant, Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

A copy of any of the foregoing exhibits to this Quarterly Report on Form 10-Q may be obtained, upon payment of the Registrant’s reasonable expenses in furnishing such exhibit, by writing to P&F Industries, Inc., 445 Broadhollow Road, Suite 100, Melville New York 11747, Attention: Corporate Secretary.

 

 

 

 

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