BUSINESS AND SUMMARY OF ACCOUNTING POLICIES (Policies)

6 Months Ended

Jun. 30, 2019

BUSINESS AND SUMMARY OF ACCOUNTING POLICIES

Basis of Financial Statement Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, and with the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, these interim financial statements do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of the management of the Company, as defined below, these unaudited consolidated financial statements include all adjustments necessary to present fairly the information set forth therein. 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, 2018 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, 2018 (“2018 Form 10‑K”). The interim financial statements contained herein should be read in conjunction with the 2018 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.

Reclassification

Certain amounts in the consolidated financial statements of the Company have been reclassified to conform to classifications used in the current year. The reclassifications had no effect on previously reported results of operations or retained earnings.

The Company

P&F is a Delaware corporation incorporated on April 19, 1963. The Company 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”). Exhaust Technologies Inc. (“ETI”), Universal Air Tool Company Limited (“UAT”), and Jiffy Air Tool, Inc. (“Jiffy”) are wholly-owned subsidiaries of Florida Pneumatic. Lastly, the business of Air Tool Service Company (“ATSCO”) operates through a wholly-owned subsidiary of Hy-Tech.

Florida Pneumatic imports, manufactures and sells pneumatic hand tools, which are of the Company’s own design, primarily to the retail, industrial, automotive and aerospace markets.

Hy-Tech designs, manufactures and distributes industrial pneumatic tools, industrial gears, hydrostatic test plugs and a wide variety of parts under the brands ATP, ATSCO, OZAT, NUMATX, Thaxton and Quality Gear. Industries served include power generation, petrochemical, construction, railroad, mining, ship building and fabricated metals. Hy-Tech also manufactures components, assemblies, finished product and systems for various Original Equipment Manufacturers (“OEM”) under their own brand names. The Company's OEM product line is known in the marketplace as "Engineered Solutions".

Sale of real property

Effective June 18, 2019 (the "Jupiter Closing Date"), Florida Pneumatic completed the sale of real property located in Jupiter, Florida in which it conducts its principal operations (the "Jupiter Facility"). The Jupiter Facility was purchased by an unrelated third party for purchase price of $9.2 million. After broker fees and other expenses relating to the sale, the Company received approximately $8.7 million.


Purchase price	$	9,200,000
Selling expenses		451,000
Net proceeds		8,749,000

Land		774,000
Building and improvements		2,956,000
Accumulated depreciation		(2,798,000)
Net book value		932,000
Gain on sale of the Jupiter Facility	$	7,817,000

Effective as of the Jupiter Closing Date, Florida Pneumatic, entered into a lease with respect to an approximately 42,000 square foot portion of the Jupiter Facility. The lease is for a term of five years, with either party able to terminate after four years. The initial monthly base rent under the lease is $32,345 with annual escalations of three percent. Florida Pneumatic will also be responsible for certain other payments of additional rent as set forth in the lease, including certain taxes, assessments and operating expenses. The Company considered the guidance in the current account literature relating to the recognition of the gain and determined that the full amount of $7,817,000 should be recognized as of the date of the transaction.

(See Note 8 and the Liquidity section of Management's Discussion and Analysis for further information.)

Customer concentration

At June 30, 2019 and December 31, 2018, accounts receivable from The Home Depot was 33.2% and 32.6%, respectively, of total accounts receivable. Additionally, revenue from The Home Depot during the three and six-month periods ended June 30, 2019 and 2018 were 23.0% and 20.3%, and 24.8% and 24.2%, respectively, of total revenue. There were no other customers that accounted for more than 10% of consolidated revenue and accounts receivable during the three or six-month periods ended June 30, 2019 or 2018.

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 2018 Form 10‑K. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustments when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from those estimates and assumptions. Significant changes, if any, in those estimates resulting from continuing changes in the economic environment will be reflected in the consolidated financial statements in future periods.

Lease Accounting

On January 1, 2019, the Company adopted Accounting Standards Codification (“ASC”) ASC 842 “Leases” using the initial date of adoption method, whereby the adoption does not impact any periods prior to 2019. 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. The Company recorded an operating Right of Use (“ROU”) asset of $394,000, and an operating lease liability of $418,000 as of January 1, 2019. The difference between the initial operating ROU asset and operating lease liability of $24,000 is accrued rent previously recorded under ASC 840. The Company elected to adopt the package of practical expedients and, accordingly, did not reassess any previously expired or existing arrangements and related classifications under ASC 840.

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 material finance leases as of June 30, 2019.

For the three and six months ended June 30, 2019, the Company had $78,000 and $159,000, respectively, in Operating lease expense.

As of June 30, 2019, the Company had a net ROU asset of $2,327,000 in Other Assets, a current operating lease liability of $647,000 in Other current liabilities, and a long-term operating lease liability of $1,672,000 in Other liabilities.

The following is a maturity analysis of the annual undiscounted cash flows reconciled to the carrying value of the operating lease liabilities as of June 30, 2019:


	As of June 30, 2019
2019 (excluding the six months ended June 30, 2019)	$	371,000
2020		581,000
2021		496,000
2022		459,000
2023		470,000
Thereafter		202,000
Total operating lease payments		2,579,000
Less imputed interest		(260,000)
Total operating lease liabilities	$	2,319,000


Weighted-average remaining lease term	4.5 years
Weighted-average discount rate	5.0	%

Revenue recognition

Florida Pneumatic markets its air tool products to four primary sectors within the pneumatic tool market; Retail, Automotive, Aerospace and Industrial/catalog.


	Three months ended June 30,
	2019				2018				Decrease
			Percent of				Percent of
	Revenue		revenue		Revenue		revenue		$		%
Retail	$	3,427,000	31.8	%	$	4,215,000	33.8	%	$	(788,000)	(18.7)	%
Automotive		3,759,000	34.8			3,774,000	30.3			(15,000)	(0.4)
Industrial/catalog		1,223,000	11.3			1,291,000	10.3			(68,000)	(5.3)
Aerospace		2,231,000	20.7			3,016,000	24.2			(785,000)	(26.0)
Other		146,000	1.4			174,000	1.4			(28,000)	(16.1)
Total	$	10,786,000	100.0	%	$	12,470,000	100.0	%	$	(1,684,000)	(13.5)	%


	Six months ended June 30,
	2019				2018				Decrease
			Percent of				Percent of
	Revenue		revenue		Revenue		revenue		$		%
Retail	$	6,139,000	28.9	%	$	8,305,000	33.6	%	$	(2,166,000)	(26.1)	%
Automotive		7,624,000	35.9			7,710,000	31.2			(86,000)	(1.1)
Industrial/catalog		2,547,000	12.0			2,655,000	10.7			(108,000)	(4.1)
Aerospace		4,591,000	21.6			5,686,000	23.0			(1,095,000)	(19.3)
Other		325,000	1.6			378,000	1.5			(53,000)	(14.0)
Total	$	21,226,000	100.0	%	$	24,734,000	100.0	%	$	(3,508,000)	(14.2)	%

Hy-Tech designs, manufactures and sells a wide range of industrial products under the brands ATP, ATSCO and OZAT, which are categorized as “ATP” for reporting purposes, and include products such as heavy-duty air tools. Hy-Tech's “Engineered Solutions” is in included in the OEM category in the table below. Currently NUMATX, Thaxton and other peripheral product lines are reported as “Other” below.


	Three months ended June 30,
	2019				2018				Increase (decrease)
			Percent of				Percent of
	Revenue		revenue		Revenue		revenue			$	%
ATP	$	1,912,000	47.7	%	$	2,077,000	55.9	%	$	(165,000)	(7.9)	%
OEM		1,754,000	43.7			1,257,000	33.8			497,000	39.5
Other		346,000	8.6			384,000	10.3			(38,000)	(9.9)
Total	$	4,012,000	100.0	%	$	3,718,000	100.0	%	$	294,000	7.9	%


	Six months ended June 30,
	2019				2018				Increase (decrease)
			Percent of				Percent of
	Revenue		revenue		Revenue		revenue		$		%
ATP	$	3,784,000	47.9	%	$	3,978,000	55.3	%	$	(194,000)	(4.9)	%
OEM		3,344,000	42.4			2,379,000	33.1			965,000	40.6	%
Other		766,000	9.7			839,000	11.6			(73,000)	(8.7)
Total	$	7,894,000	100.0	%	$	7,196,000	100.0	%	$	698,000	9.7	%

New Accounting Pronouncements

The Company does not believe that any other recently issued and effective accounting standard would have a material effect on its consolidated financial statements.