BUSINESS AND SUMMARY OF ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2021

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 (“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 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, 2020, 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, 2020 (“2020 Form 10-K”). The interim consolidated financial statements contained herein should be read in conjunction with the 2020 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 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 staffs, 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 $42,000.

Hy-Tech’s “Engineered Solutions” products are sold directly to Original Equipment Manufacturers (“OEM’s”), 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. 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.

COVID-19

On March 11, 2020, the World Health Organization designated the novel coronavirus (“COVID-19”) as a global pandemic. The Company continues to actively monitor COVID-19 and its continued impact on its operations and financial results. Further, the negative impact of the world-wide supply-chain crisis due primarily to the global pandemic has adversely affected many of the Company’s product lines, particularly its retail and automotive lines. However, the Company continues to incur delays in container shipments from Asia as well as significant increases in inbound ocean freight costs, which the Company believes is due primarily to the global pandemic. We expect this to continue for the foreseeable future. The Company’s corporate office and business units are continuing to work alongside their external business partners and customers to minimize the continued business constraints caused by COVID-19 on its business.

Due in large part to shelter-in-place restrictions that were implemented in late first quarter of 2020, which for many has been lifted during the latter portion of 2020 and early 2021, as well as significant decreases in travel and customer consumption behavior, the Company experienced a reduction in its revenue and earnings per share during 2020 and has continued to a lesser degree during the first nine months of 2021. It is unclear what the financial impacts from COVID-19 will be on the Company’s businesses in the future.

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 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.

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

Going Concern Assessment - Continued

The impact of COVID-19 on the Company’s business has been considered in these assumptions; however, it is unclear what the full impact of COVID-19 will be or when the Company believes a return to more normal operations may occur. Further, as part of the business incentives offered in the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Company, on April 20, 2020, received a $2.9 million Paycheck Protection Program (“PPP”) loan. See Note 9 - CARES Act to the Company’s consolidated financial statements 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

At September 30, 2021, and December 31, 2020, accounts receivable from The Home Depot (“THD”) was 33.8% and 38.0%, respectively, of total accounts receivable. Accounts receivable attributable to Amazon.Com, Inc., (“Amazon”) at September 30, 2021, and December 31, 2020, was 0.1% and 15.8%, respectively, of total net accounts receivable. Revenue from THD, stated as a percentage of the Company’s total revenue during the three and nine-month periods ended September 30, 2021, was 24.8% and 26.6%, respectively, and 30.0% and 25.7%, respectively, for the same periods in 2020. There were no other customers that accounted for more than 10% of consolidated revenue or accounts receivable during the three and nine-month periods ended September 30, 2021, or 2020.

Management Estimates

The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses in those financial statements. Certain significant accounting policies that contain subjective management estimates and assumptions include those related to revenue recognition, inventory, goodwill, intangible assets and other long-lived assets, contingent consideration, income taxes and deferred taxes. Descriptions of these policies are discussed in the Company’s 2020 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” of our 2020 Form 10-K.

Lease Accounting

The Company adheres to the standards set forth in Accounting Standards Codification (“ASC”) 842, “Leases”. 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.

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

Lease Accounting - Continued

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 for the three months ended September 30, 2021.

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

For the three and nine-month periods ended September 30, 2021, and 2020, the Company had $222,000 and $670,000, and $223,000 and  $675,000, respectively, in operating lease expense.

The following is a maturity analysis of the annual undiscounted cash flows reconciled to the carrying value of the operating lease liabilities as of September 30, 2021:

	As of September 30, 2021
2021 (excluding the nine months ended September 30, 2021)	$	217,000
2022		843,000
2023		841,000
2024		566,000
2025		296,000
Thereafter		867,000
Total operating lease payments		3,630,000
Less imputed interest		(553,000)
Total operating lease liabilities	$	3,077,000
Weighted average remaining lease term		5.7	years
Weighted average discount rate		6.87	%

Revenue Recognition

The Company’s revenue recognition policies are detailed in its 2020 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 nine-month periods ended September 30, 2021, and 2020.

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

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 are reported as Other.

	Three months ended September 30,
	2021				2020				Increase (decrease)
			Percent of				Percent of
	Revenue		revenue		Revenue		revenue		$		%
Automotive	$	3,168,000	33.0	%	$	3,530,000	36.5	%	$	(362,000)	(10.3)	%
Retail		3,222,000	33.5			3,718,000	38.4			(496,000)	(13.3)
Industrial		1,257,000	13.1			1,044,000	10.8			213,000	20.4
Aerospace		1,832,000	19.1			1,268,000	13.1			564,000	44.5
Other		128,000	1.3			121,000	1.2			7,000	5.8
Total	$	9,607,000	100.0	%	$	9,681,000	100.0	%	$	(74,000)	(0.8)	%

	Nine months ended September 30,
	2021				2020				Increase (decrease)
			Percent of				Percent of
	Revenue		revenue		Revenue		revenue		$		%
Automotive	$	11,053,000	35.4	%	$	9,690,000	34.2	%	$	1,363,000	14.1	%
Retail		10,775,000	34.5			9,569,000	33.8			1,206,000	12.6
Industrial		3,919,000	12.6			2,383,000	8.4			1,536,000	64.5
Aerospace		5,094,000	16.3			6,341,000	22.4			(1,247,000)	(19.7)
Other		380,000	1.2			368,000	1.2			12,000	3.3
Total	$	31,221,000	100.0	%	$	28,351,000	100.0	%	$	2,870,000	10.1	%

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

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 September 30,
	2021				2020				Increase (decrease)
			Percent of				Percent of
	Revenue		revenue		Revenue		revenue		$		%
OEM	$	1,668,000	49.4	%	$	872,000	32.0	%	$	796,000	91.3	%
ATP		751,000	22.2			624,000	22.9			127,000	20.4
PTG		882,000	26.1			1,027,000	37.7			(145,000)	(14.1)
Other		77,000	2.3			202,000	7.4			(125,000)	(61.9)
Total	$	3,378,000	100.0	%	$	2,725,000	100.0	%	$	653,000	24.0	%

	Nine months ended September 30,
	2021				2020				Increase (decrease)
			Percent of				Percent of
	Revenue		revenue		Revenue		revenue		$		%
OEM	$	4,688,000	50.4	%	$	3,513,000	39.4	%		1,175,000	33.4	%
ATP		2,242,000	24.1			2,254,000	25.2			(12,000)	(0.5)
PTG		2,132,000	22.9			2,783,000	31.2			(651,000)	(23.4)
Other		237,000	2.6			375,000	4.2			(138,000)	(36.8)
Total	$	9,299,000	100.0	%	$	8,925,000	100.0	%		374,000	4.2	%

Recently Adopted Accounting Pronouncements

During the nine-month period ended September 30, 2021, there were no accounting pronouncements or other authoritative guidance issued that the Company adopted. No other new accounting pronouncement issued or effective during the three and nine-month period ended September 30, 2021, has or is expected to have a material impact on our consolidated financial statements or disclosures.