BUSINESS AND SUMMARY OF ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2022

BUSINESS AND SUMMARY OF ACCOUNTING POLICIES

BUSINESS AND SUMMARY OF ACCOUNTING POLICIES

NOTE 1 – BUSINESS AND SUMMARY OF ACCOUNTING POLICIES

Basis of Financial Statement Presentation

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

The consolidated balance sheet information as of December 31, 2021, 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, 2021 (“2021 Form 10-K”). The unaudited consolidated financial statements contained herein should be read in conjunction with the 2021 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, among others. Hy-Tech works directly with its industrial customers, designing and manufacturing products from finished components to complete turnkey systems to be sold under their own brand names.

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

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

Please refer to Note 2 for discussion related to the Company’s acquisition of the Jackson Gear Company business (“JGC”).

COVID-19

On March 11, 2020, the World Health Organization designated the recent novel coronavirus, or COVID-19, as a global pandemic. COVID-19 was first detected in Wuhan City, Hubei Province, China and continued to spread, significantly impacting various markets around the world, including the United States. Various policies and initiatives have been implemented to reduce the global transmission of COVID-19.

The COVID-19 virus and the resultant global economic down-turn had a negative impact on our fiscal 2021 results.  The Company believes its year-to-date results during the first half of 2022 were still being negatively impacted by the COVID-19 global pandemic.  The economic slow-down and constraints caused by the pandemic began to ease somewhat mid-year.  However, the Company further believes that the on-going supply-chain crisis is related to the pandemic.  Commencing in mid-2021, although easing somewhat beginning mid-2022, we encountered severe shipping / receiving delays of inventory from our Asian suppliers, which has caused intermittent shortages of product. Further, the Company believes the COVID-19 global pandemic has been and continues to be the primary factor in the significant increases in the cost of international ocean freight, although ocean freight costs have begun to lessen during the third quarter of 2022.  The Company believes that until the above issues subside, its business will likely continue to be adversely affected by difficulties caused by the global pandemic.

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

Going Concern Assessment

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

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

Customer Concentration

The Company had one customer that accounted for 25.9% and 35.9% of its consolidated accounts receivable at September 30, 2022, and December 31, 2021, respectively. Further, this customer accounted for 19.1% and 22.9%, respectively, of the Company’s consolidated revenue during the three and nine-month periods ended September 30, 2022, and 24.8% and 26.6%, respectively, for the same periods in 2021. There was no other customer that accounted for more than 10% of our consolidated revenue or accounts receivable for all periods presented.

Management Estimates

The preparation of financial statements and related disclosures in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses in those financial statements. Certain significant accounting policies that contain subjective management estimates and assumptions include those related to revenue recognition, accounts receivable reserve, inventory, goodwill, intangible assets and other long-lived assets, contingent consideration, income taxes, deferred taxes, and lease liabilities. Descriptions of these policies are discussed in the Company’s 2021 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

There were no changes to the Company's significant accounting policies during the three and nine-month periods ended September 30, 2022. The Company’s significant accounting policies are described in “Note 1: Summary of Significant Accounting Policies” of our 2021 Form 10-K.

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

Lease Accounting

The Company adheres to the standards set forth in Accounting Standards Codification (“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.

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

The Company’s operating leases include vehicles, office space and the use of real property. The Company has not identified any new material finance leases during the three -month period ended September 30, 2022.

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, 2022, the Company had $239,000 and $710,000, respectively, in operating lease expense, and $222,000 and $670,000, respectively, for the same three and nine-month periods in 2021.

Effective March 1, 2022, the Company and the landlord of the facility located in Punxsutawney, PA agreed to modify the lease related to the approximate 42,000 square foot premises that was leased by Hy-Tech. This lease modification among other things, increased the rented space to approximately 62,000 square feet, extended the lease termination date to February 2027, and provided two three-year options to renew. The cost per square foot for the additional space was equal to that of the original lease.

During the third quarter 2022, the Company was advised by the landlord of the property it leases in Jupiter, Florida that it was exercising its right to terminate the lease effective July 1, 2023. This lease, which was entered into in June 2019, had an original expiration date of May 31, 2024. The Company accounted for this notice as a modification in accordance with the guidance prescribed in ASC 842 and reduced the fair value of the associated value of the Right-of-Use asset by $359,000 and reduced both Current and Non-current lease liabilities by $104,000, and $274,000, respectively. Lastly, the Company recognized a $19,000 gain in connection with the lease termination.

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, 2022:

	As of September 30, 2022
2022 (excluding the nine months ended September 30, 2022)	$	237,000
2023		733,000
2024		499,000
2025		383,000
2026		240,000
Thereafter		1,589,000
Total operating lease payments		3,681,000
Less imputed interest		(456,000)
Total operating lease liabilities	$	3,225,000
Weighted average remaining lease term		7.9	years
Weighted average discount rate		3.53	%

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

Revenue Recognition

The Company’s revenue recognition policies are detailed in its 2021 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, 2022 and 2021.

Florida Pneumatic

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

	Three months ended September 30,
	2022				2021				Increase (decrease)
			Percent of				Percent of
	Revenue		revenue		Revenue		revenue		$		%
Automotive	$	3,110,000	31.4	%	$	3,168,000	33.0	%	$	(58,000)	(1.8)	%
Retail		2,779,000	28.0			3,222,000	33.5			(443,000)	(13.7)
Industrial		1,305,000	13.2			1,257,000	13.1			48,000	3.8
Aerospace		2,538,000	25.6			1,832,000	19.1			706,000	38.5
Other		174,000	1.8			128,000	1.3			46,000	35.9
Total	$	9,906,000	100.0	%	$	9,607,000	100.0	%	$	299,000	3.1	%

	Nine months ended September 30,
	2022				2021				Increase (decrease)
			Percent of				Percent of
	Revenue		revenue		Revenue		revenue		$		%
Automotive	$	10,845,000	33.0	%	$	11,053,000	35.4	%	$	(208,000)	(1.9)	%
Retail		10,625,000	32.3			10,775,000	34.5			(150,000)	(1.4)
Industrial		4,416,000	13.5			3,919,000	12.6			497,000	12.7
Aerospace		6,531,000	19.9			5,094,000	16.3			1,437,000	28.2
Other		436,000	1.3			380,000	1.2			56,000	14.7
Total	$	32,853,000	100.0	%	$	31,221,000	100.0	%	$	1,632,000	5.2	%

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

Revenue Recognition - 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,
	2022				2021				Increase (decrease)
			Percent of				Percent of
	Revenue		revenue		Revenue		revenue		$		%
OEM	$	2,187,000	47.4	%	$	1,668,000	49.4	%	$	519,000	31.1	%
ATP		490,000	10.6			751,000	22.2			(261,000)	(34.8)
PTG		1,693,000	36.8			882,000	26.1			811,000	92.0
Other		240,000	5.2			77,000	2.3			163,000	211.7
Total	$	4,610,000	100.0	%	$	3,378,000	100.0	%	$	1,232,000	36.5	%

	Nine months ended September 30,
	2022				2021				Increase (decrease)
			Percent of				Percent of
	Revenue		revenue		Revenue		revenue		$		%
OEM	$	6,693,000	49.6	%	$	4,688,000	50.4	%	$	2,005,000	42.8	%
ATP		2,178,000	16.1			2,242,000	24.1			(64,000)	(2.9)
PTG		4,216,000	31.3			2,132,000	22.9			2,084,000	97.7
Other		407,000	3.0			237,000	2.6			170,000	71.7
Total	$	13,494,000	100.0	%	$	9,299,000	100.0	%	$	4,195,000	45.1	%

Recently Adopted Accounting Pronouncements

During the nine-month period ended September 30, 2022, there were no accounting pronouncements or other authoritative guidance issued that the Company adopted.