P&F INDUSTRIES, INC. Forward Looking Statement
The Private Securities Litigation Reform Act of 1995 (the "Reform Act") provides a safe harbor for forward-looking statements made by or on behalf ofP&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 theSecurities and Exchange Commission and in its reports to shareholders. Generally, the inclusion of the words "believe," "expect," "intend," "estimate," "anticipate," "will," "may," "would," "could," "should," 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 all or part the 2021 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 including, but not limited to:
? Risks related to the global outbreak of COVID-19 and other public health
crises;
? Risks associated with sourcing from overseas;
? Disruption in the global capital and credit markets;
? Importation delays; ? Customer concentration;
? Unforeseen inventory adjustments or changes in purchasing patterns;
? Market acceptance of products;
? Competition; ? Price reductions;
? Exposure to fluctuations in energy prices;
? The strength of the retail economy in
? Risks associated with Brexit;
? Adverse changes in currency exchange rates;
? Interest rates;
? Debt and debt service requirements;
? Borrowing and compliance with covenants under our credit facility;
? Impairment of long-lived assets and goodwill;
? Retention of key personnel;
? Acquisition of businesses;
? Regulatory environment;
? Litigation and insurance;
? The threat of terrorism and related political instability and economic
uncertainty; and
? Business disruptions or other costs associated with information technology,
cyber-attacks, system implementations, data privacy or catastrophic losses,
and those other risks and uncertainties described in its Annual Report on Form 10-K for the year endedDecember 31, 2020 ("2020 Form 10-K"), its Quarterly Reports on Form 10-Q, and its other reports and statements filed by the Company with theSecurities and Exchange Commission . 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. The Company cautions you against relying on any of these forward-looking statements. 22 Table of Contents
Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
OVERVIEW
During the third quarter of 2021, significant factors that impacted our results of operations were the:
? Negative impact of the COVID-19 pandemic on revenue and income;
? Supply-chain disruption;
? Significant increases in ocean freight costs; and
While our Aerospace revenue improved, compared to the same three-month period
? in 2020, there exists an ongoing production slow-down at Boeing, as well as
significant reductions in activity at other commercial and military aerospace
manufacturing facilities. OUR BUSINESS Florida Pneumatic Florida Pneumatic directly, and through its wholly-owned subsidiariesExhaust Technologies Inc. ("ETI"),Universal Air Tool Company Limited ("UAT"), andJiffy 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.
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'sPower Transmission Group , or PTG, is a custom gear, gearbox and power transmission system manufacturer located inPunxsutawney, PA. 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 andGleason Gear modeling software. 23 Table of Contents
Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
ECONOMIC MEASURES
Much of our business is driven by the ebbs and flows of the general economic conditions in boththe United States and, to a lesser extent, abroad. We focus on a wide array of customer types including but not limited to large retailers, aerospace manufacturers, large and small resellers of pneumatic tools and parts, and automotive related customers. We tend to track the general economic conditions ofthe United States , industrial production, and general retail sales. A 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 United States Dollar ("USD") in relation to the Taiwanese dollar ("TWD"), as we purchase a significant portion of our products fromTaiwan . Purchases from Chinese sources are made in USD; however, if the Chinese currency, the Renminbi ("RMB"), were to be revalued against the USD, there could be a negative impact on the cost of our products. Additionally, we closely monitor the fluctuation in the Great British Pound ("GBP") to the USD, and the GBP to TWD, both of which can have an impact on the consolidated results. In addition, we monitor both the price of crude oil as well as the number of operating rotary drilling rigs inthe United States , as a means of gauging actual and potential oil production, which is a key factor in our sales into the oil and gas exploration and extraction sector.
We now consider tariffs a key economic measure, as a significant portion of products imported by Florida Pneumatic and to a lesser degree, Hy-Tech, are subject to these tariffs.
Lastly, the cost and availability of a quality labor pool in the countries where products and components are manufactured, both overseas as well as inthe United States , could materially affect our overall results.
OPERATING MEASURES
Key operating measures we use to manage our operations 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 below.
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; earnings before interest, taxes,
depreciation and amortization; 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 to established objectives. To the
extent that these measures are relevant, they are discussed in detail below.
24
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Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our consolidated financial statements in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). Descriptions of these policies are discussed in the 2020 Form 10-K, and in the notes to these consolidated financial statements. 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, but not limited to those related to bad debts, inventory reserves, goodwill and intangible assets, warranty reserves, taxes and deferred taxes. 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. 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. TRENDS AND UNCERTAINTIES COVID-19 PANDEMIC OnMarch 11, 2020 , theWorld Health Organization designated the recent novel coronavirus, or COVID-19, as a global pandemic. COVID-19 was first detected inWuhan City,Hubei Province ,China and continued to spread, significantly impacting various markets around the world, includingthe 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 continues to have a negative impact on our three and nine-month 2021 results. Additionally, we believe the supply-chain crisis, is related to the pandemic. Beginning in early 2021, but magnifying during the third quarter of 2021, we encountered severe shipping / receiving delays of inventory / containers from our Asian suppliers, which has caused intermittent shortages of inventory. Further, the costs of international freight has greatly increased. In addition, the COVID-19 pandemic has caused many of our customers and potential customers to refuse on-site visits, which is critical to generating revenue. We believe that until the above issues subside, our business will likely continue to be adversely affected.
TheFederal Aviation Administration ("FAA") and theEuropean Union Aviation Safety Agency ("EASA") have lifted the grounding of the 737 MAX. Production is still very limited due to the inventory at Boeing and the reluctance of airlines to accept deliveries due to weak air travel demand, as well as the lack of certification byChina . This will likely continue to have an adverse effect on our revenue. In addition, production of military and other commercial aircraft throughout the industry has slowed as well, we believe due to the ongoing global COVID-19 pandemic. However, we believe when all other commercial and military production lines throughoutthe United States come back online, an increase
in
our revenue should follow.
OIL AND GAS
The profitability of crude oil production generally declines when prices fall.
As a result, as prices dropped in 2020, production slowed worldwide. However,
the price of crude oil has begun to improve. As such, orders and activity during
this quarter have begun to strengthen. In addition to the price of crude oil we
monitor the number of active rotary rigs, which is discussed elsewhere. In spite
of the return of crude oil prices to pre-pandemic levels, we believe many oil
drilling companies have forgone the typical maintenance that would utilize our
tools in order to continue cash-flow generating production activities in lieu of
shutting down for required maintenance. We cannot say for certain when the
typical maintenance activity will resume.
25
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Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
TRENDS AND UNCERTAINTIES - (Continued)
TECHNOLOGIES
We believe that over time, several newer technologies, and features will have a greater impact on the market for our traditional pneumatic tool offerings. The impact of this evolution has been felt initially by the advent of advanced cordless operated hand tools in the automotive aftermarket. For certain non-automotive applications, we have begun to develop cordless models of tools and expect to introduce these products in the near future.
OTHER MATTER
InMay 2021 , Florida Pneumatic detected a ransomware attack on its information technology systems that caused data to be encrypted. At the present time, all critical Florida Pneumatic information technology systems have been remediated and are operational. We believe that our corporate office and our other subsidiaries, all of which operate on separate, independent networks, were not affected by this incident. Other than the aforementioned, or matters that may be discussed below, there are no major trends or uncertainties that had, or we could have reasonably expected to have a material impact on our revenue, nor was there any unusual or infrequent event, transaction or any significant economic change that materially affected our results of operations.
Unless otherwise discussed elsewhere in the Management's Discussion and Analysis, we believe that our relationships with our key customers and suppliers remain satisfactory.
RESULTS OF OPERATIONS REVENUE During the three and nine-month period endedSeptember 30, 2021 , various product lines were affected to some degree by the global COVID-19 pandemic, which caused orders and revenue for those product lines for the same periods, to be less than pre-pandemic levels.
The tables below provide an analysis of our net revenue for the three and
nine-month periods ended
Consolidated
Three months ended September 30,
Increase (decrease)
2021 2020 $ %
Florida Pneumatic $ 9,607,000 $ 9,681,000 $ (74,000) (0.8) %
Hy-Tech 3,378,000 2,725,000 653,000 24.0
Consolidated $ 12,985,000 $ 12,406,000 $ 579,000 4.7 %
Nine months ended September 30,
Increase (decrease)
2021 2020 $ %
Florida Pneumatic $ 31,221,000 $ 28,351,000 $ 2,870,000 10.1 %
Hy-Tech 9,299,000 8,925,000 374,000 4.2
Consolidated $ 40,520,000 $ 37,276,000 $ 3,244,000 8.7 %
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Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
RESULTS OF OPERATIONS - (Continued)
REVENUE - Continued
Florida Pneumatic
Florida Pneumatic markets its air tool products to four primary sectors within
the pneumatic tool market; Automotive, Retail, Aerospace and Industrial. It also
generates revenue from its Berkley products line, as well as a line of air
filters and other OEM parts ("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) %
For most of the third quarter of 2021, much of U.S. and global economies were
still feeling the ill effects of the global COVID-19 pandemic. Further, the
negative impact of the world-wide supply-chain crisis adversely affected nearly
all of Florida Pneumatic's product lines. Most seriously affected were its
Retail and Automotive inventory levels, which in turn hampered its ability to
fulfill orders in a timely manner. In an effort to combat future potential
shipping issues, Florida Pneumatic has increased its purchases, which has caused
a temporary up-tick in its inventory levels through at least the first half of
2022. During the third quarter of 2021, Aircat sales relative to the same period
in 2020 decreased by $362,000 . This was primarily caused by two factors. First,
pent up demand for our products that were not generally available through our
largest on-line channel during the second quarter of 2020 caused a surge in
orders during the third quarter of 2020, which did not repeat in 2021. Second,
during the third quarter of 2021, Aircat made a change to its channel
distribution strategy which caused a temporary pause in shipments to the channel
as customer inventory levels were adjusted. We expect shipments to resume to
prior levels in the fourth quarter of 2021. Florida Pneumatic's third quarter
2021 Industrial revenue improved 20.4 percent over the same period a year ago.
This increase, we believe is due in part to a continuation of the recovery than
began during the second quarter occurring in certain sectors from the ill
effects of the pandemic. Most of the Aerospace revenue is attributable to Jiffy
Air Tool. The Boeing Corporation is a major customer of Jiffy. The Boeing 737
MAX aircraft had been grounded by the FAA and the EASA in March 2019 . Earlier
this year both agencies lifted the "No Fly" ruling it imposed on all Boeing 737
MAX aircraft, allowing it to begin flights in the United States , and Europe . As
a result, order activity began to improve, which was a primary factor for the
improvement in Aerospace revenue when comparing the third quarters of 2021 and
2020. However, it is uncertain how long, if ever, it will take for the Boeing
Corporation to increase its manufacturing of its 737 MAX aircraft to a volume
that would be comparable to pre-COVID-19 levels. Lastly, orders from other
aerospace companies and military aircraft manufacturers improved slightly this
quarter.
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
27
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Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
RESULTS OF OPERATIONS - (Continued)
REVENUE - Continued
Despite the impact during the third quarter 2021, relating to the ongoing COVID-19 pandemic and supply chain delays, Florida Pneumatic's Automotive revenue during the nine-month period endedSeptember 30, 2021 , is more than 14 percent greater than the amount reported during the same period in 2020. This improvement is driven by growing demand for its AIRCAT line of pneumatic hand tools, plus stronger sales generated by itsUK operations. Additionally,Florida Pneumatic's Retail revenue improved 12.6 percent during the nine-month period endedSeptember 30, 2021 , compared to the same period in 2020, driven primarily by demand for spray gun-type tools and accessories being sold to The Home Depot, which we believe are being used to apply disinfectant to combat the COVID-19 virus. Further, its Industrial revenue during the nine-month period endedSeptember 30, 2021 , also encountered growth, which we believe is driven primarily by certain sectors beginning to recover from the effects of the pandemic. Partially offsetting the above increases, is the year-to-date decline in Florida Pneumatic's Aerospace revenue. Most of the Aerospace revenue is attributable to Jiffy Air Tool, whose major customer is theBoeing Corporation . We believe however, that as both domestic and international travel restrictions ease, and Boeing and other major aircraft manufacturers begin to produce and deliver new aircraft, we could see a continuation of the improvement we witnessed in the third quarter of this year. However, no assurance can be made, and it is possible that this sector will remain depressed for the foreseeable future. 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 % 28 Table of Contents
Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
RESULTS OF OPERATIONS - (Continued)
REVENUE - Continued
During the third quarter of 2021, Hy-Tech continued to encounter modest signs that the ill effects of the pandemic were beginning to ease. As a result, its total revenue for the three-month period endedSeptember 30, 2021 , increased 24 percent, over the same period a year ago. Customer orders for its OEM and ATP product lines improved when compared to the same three-month period a year ago, driving revenue growth of 91.3 percent and 20.4 percent, respectively. Significant orders from two of its major OEM customers, along with its Engineered Solutions approach, which continues to gain market momentum, provided the impetus for the current quarter growth in OEM. Its ATP revenue improvement was due in large part to a general rebound in the pneumatic tool sector, and an increase in the number of oil and gas rigs. According toBaker Hughes Inc. , the average number of oil and gas rotary rigs in operation during the fiscal third quarter 2021 were 496, compared to 254 during the same three-month period in 2020. Additionally, in an effort to increase market penetration, Hy-Tech has "refreshed" and/or improved a number of its ATP tools, as well as the marketing of its Magnum Force line of large impact wrenches. Hy-Tech believes that the Magnum Force line, a series of super duty industrial impact tools, that are designed specifically for use in demanding environments, such as refinery turnarounds, power generation outages, structural steel erection, mining and other similar bolting applications, is beginning to gain acceptance. The above increases were offset by a quarter over quarter decline in its PTG revenue. PTG continues to encounter delays and disruptions in its outside third-party processors, creating delays in its delivery time to its customers.
Additionally, PTG continues to encounter reluctance to permit face to face visitation, which we believe is critical to completing the sale of PTG products and services, by its current and prospective customers. The decline in Hy-Tech's Other revenue was due to a large order for its Thaxton products shipping during the third quarter in 2020, with no similar order this quarter.
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 %
Hy-Tech's year-to-date revenue improvement over the same nine-month period in 2020 was driven by continued growth in its OEM line, which saw a 33.4 percent increase, the majority of which occurring during the third quarter of 2021. This improvement was partially offset by i) the ongoing negative effects on theU.S. economy caused by the global COVID-19 pandemic, particularly adversely affecting PTG revenue and operations; and ii) delays and disruptions from outside third-party processors. As discussed above, we are beginning to see improvement in the number and size of ATP orders and are optimistic about market acceptance of our Magnum Force line. PTG's nine-month 2021 revenue declined due primarily to the factors discussed earlier. However, as travel restrictions ease and customers begin to accept visitors, we believe order levels should improve. In addition, we are working with vendors and improving internal systems toward the goal of greatly reducing supply chain issues moving forward. 29 Table of Contents
Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
RESULTS OF OPERATIONS - (Continued)
GROSS MARGIN/PROFIT
Three months ended September 30, Increase
2021 2020 Amount %
Florida Pneumatic $ 3,381,000 $ 3,291,000 $ 90,000 2.7 %As percent of respective revenue 35.2 % 34.0 % 1.2 % pts Hy-Tech $ 593,000 $ 232,000$ 361,000 155.6 As percent of respective revenue 17.6 % 8.5 % 9.1 % pts Total$ 3,974,000 $ 3,523,000 $ 451,000 12.8 % As percent of respective revenue 30.6 %
28.4 % 2.2 % pts
The improvement in Florida Pneumatic's gross margin was due primarily to product
mix. Specifically, the increase in Industrial and Aerospace revenue, both of
which generally have stronger gross margin than Florida Pneumatic's other
product lines, contributed to the increase in gross margin. Additionally,
stronger overhead absorption at Jiffy this quarter, compared to the same
three-month period a year ago contributed to the improved gross margin.
However, increased freight costs partially offset the improvement. Florida
Pneumatic's ocean freight costs have increased approximately four-fold when
compared to a year ago. We are attempting to pass through a portion of these
increases; however, we may not be able to fully neutralize the negative effects.
The improvement in Hy-Tech's gross margin is due primarily to its overall
product/customer mix. Additionally, there was a slight improvement in its
manufacturing overhead absorption this quarter, when compared to the same
three-month period in 2020, further contributing to its improved gross margin.
Nine months ended September 30, Increase
2021 2020 Amount %
Florida Pneumatic $ 11,746,000 $ 10,274,000 $ 1,472,000 14.3 %As percent of respective revenue 37.6 % 36.2 % 1.4 % pts Hy-Tech$ 1,712,000 $ 779,000 $ 933,000 119.8 As percent of respective revenue 18.4 % 8.7 % 9.7 % pts Total$ 13,458,000 $ 11,053,000 $ 2,405,000 21.8 % As percent of respective revenue 33.2 %
29.7 % 3.5 % pts Generally, customer and product mix greatly affect Florida Pneumatic's gross margin. As discussed earlier, the increase in Florida Pneumatic's higher margin Industrial revenue contributed to the higher gross margin this quarter, compared to the same nine-month period in 2020. This improvement was partially offset by the significant increases in its ocean freight costs that have been incurred for most of 2021. Additionally, in early 2021, Jiffy was under absorbing its manufacturing overhead, due to the reduction of product being produced. However, with increased production during the third quarter of 2021 this under absorption issue has been reduced. Hy-Tech manufactures most of its products. Its gross margin is impacted by customer/product mix. Factors such as absorption of manufacturing overhead, raw material pricing and third-party costs also affect its gross margin. Hy-Tech's gross margin for the nine months endedSeptember 30, 2021 , improved 9.7 percentage points, when comparing the three-month periods endedSeptember 30, 2021 , and 2020. During the nine-month period endedSeptember 30, 2020 , Hy-Tech recorded additional charges to its OSMI allowance and an adjustment to its physical inventory, both adversely affecting its 2020 gross margin, whereas there were no additional charges incurred during the nine months endedSeptember 30, 2021 . 30 Table of Contents
Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
RESULTS OF OPERATIONS - (Continued)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") include salaries and
related costs, commissions, travel, administrative facilities costs,
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 third quarter of 2021, our SG&A were $4,734,000 , compared to
$4,673,000 incurred during the same three-month period in 2020. The most
significant factors contributing to the net increase were: i) Compensation
expenses increased $74,000 . Compensation expense is comprised of base salaries
and wages, accrued performance-based bonus incentives and associated payroll
taxes and employee benefits; ii) information systems-related expenses increased
$35,000 , driven by increased cyber security costs, and iii) a decline of $31,000
in professional fees and expenses.
Our SG&A expenses for the nine-month period ended September 30, 2021 , were
$15,183,000 , compared to $14,983,000 , during the same nine-month period in 2020.
There were significant factors which contributed to the net change. First,
driven by an increase of more than $3,200,000 in revenue, our variable expenses
increased $487,000 . Variable expenses include among other items, commissions,
freight out, travel, advertising, shipping supplies and warranty costs.
Additionally, we incurred approximately $318,000 in additional information
systems costs during the nine-month period ended September 30, 2021 , which
related to the May 2021 ransomware attack at our Florida Pneumatic subsidiary.
Further, compensation expenses increased $72,000 . Partially offsetting the above
increases was a decline in professional fees of $576,000 , most of which was
driven by expenses in 2020 related to the relocation and set up of the two gear
businesses that were acquired in late 2019, none of the relocation expenses
repeated in 2021. Lastly, when comparing the nine-month periods ended September
30, 2021 , and 2020, depreciation and amortization expenses declined $75,000 , and
corporate expenses and stock-based compensation declined $30,000 and $19,000 ,
respectively.
OTHER INCOME
As discussed in Note 9 - CARES Act, on April 20, 2020 , we received a Paycheck
Protection Program ("PPP") loan, in the amount of $2,929,000 . Under the terms of
the CARES Act, as amended, we were eligible to apply for forgiveness for all or
a portion of the PPP loan. In February 2021 , we filed an application for
forgiveness with the lender, who approved this submission and submitted the
application for forgiveness to the SBA. On June 9, 2021 , we were advised that
the SBA had approved our PPP loan forgiveness application and as such, the PPP
loan and interest were forgiven in its entirety. Accordingly, the lender
applied the funds and paid off PPP loan principal in its entirety and interest
in full. In accordance with current accounting guidance this forgiveness of debt
and related accrued interest is to be accounted for as Other Income and shall
not be considerable as taxable income.
INTEREST
Three months ended September 30, Decrease
2021 2020 Amount %
Interest expense attributable to:
Short-term borrowings $ 10,000 $ 12,000 $ (2,000) (16.7) %
PPP loan - 5,000 (5,000) (100.0)
Amortization expense of debt issue costs 4,000
4,000 - -
Total $ 14,000 $ 21,000 $ (7,000) (33.3) %
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Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
RESULTS OF OPERATIONS - (Continued)
Nine months ended September 30, Decrease
2021 2020 Amount %
Interest expense attributable to:
Short-term borrowings $ 28,000 $ 95,000 $ (67,000) (70.5) %
PPP loan (19,000) 11,000 (30,000) (272.7)
Amortization expense of debt issue costs 12,000
12,000 - -
Total $ 21,000 $ 118,000 $ (97,000) (82.2) %
The Applicable Margin, as defined in our Credit Agreement was the same during
the three-month periods ended September 30, 2021 , and 2020. The average balance
of short-term borrowings during the three-month periods ended September 30,
2021 , and 2020, were $2,050,000 and $2,260,000 , respectively.
As discussed in Note 9 - CARES Act, to the Company's consolidated financial
statements, in late April 2020 , we borrowed approximately $2.9 million from BNB
Bank as provided under the Coronavirus Aid, Relief and Economic Security
("CARES") Act. The PPP Loan, as defined in Note 9, accrued interest at a rate of
1.0% per annum. Pursuant to the Flexibility Act, as defined in Note 9, interest
on any unforgiven amount is deferred until the forgiveness determination is made
by the SBA. On June 9, 2021 , we received notice that the SBA had forgiven our
obligation to repay the PPP loan and related accrued interest. As such, during
the three-month period ended June 30, 2021 , we recorded a reversal of the
accrued interest related to the PPP loan.
Lastly, we and our bank amended the Credit Agreement in
INCOME TAXES
At the end of each interim reporting period, we compute an effective tax rate based upon our estimated full year results. This estimate is used to determine the income tax provision or benefit on a year-to-date basis and may change in subsequent interim periods. Accordingly, our effective tax rates for the three-month and nine-month periods endedSeptember 30, 2021 , were a tax benefit of 12.8% and 23.9%, compared to a tax benefit of 28.2% and 29.3% for the same periods in the prior year. The effective tax rates for all periods presented were impacted primarily by state taxes, and non-deductible expenses. Additionally, for the nine-month period endedSeptember 30, 2021 , the gain resulting from the forgiveness of debt of the PPP loan was not included in the computation of the effective tax rate. 32 Table of Contents
Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
RESULTS OF OPERATIONS - (Continued)
OnMarch 27, 2020 , the CARES Act was signed into law. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitation and technical corrections to tax depreciation methods for qualified improvement property. OnMarch 11, 2021 , the American Rescue Plan Act of 2021 (the "ARP") was signed into law to provide relief as a result of the COVID-19 pandemic. The ARP, among other things, extended and modified the employee retention credit. As ofSeptember 30, 2021 , the Company is evaluating the impact of the ARP on the Company's effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
We monitor such metrics as days' sales outstanding, inventory requirements,
inventory turns, estimated future purchasing requirements and capital
expenditures to project liquidity needs, as well as evaluate return on assets.
Our primary sources of funds are operating cash flows, existing working capital
and our Revolver Loan ("Revolver") with our Bank.
We gauge our liquidity and financial stability by various measurements, some of which are shown in the following table:
September 30, 2021 December 31, 2020
Working capital $ 23,200,000 $ 21,258,000
Current ratio 3.26 to 1 3.57 to 1
Shareholders' equity $ 42,918,000 $ 41,538,000
Credit facility
Our Credit Facility is discussed in Note 8 to the consolidated financial statements.
Cash flows
During the nine-month period endedSeptember 30, 2021 , our net cash decreased to$789,000 from$904,000 onDecember 31, 2020 . Our total bank debt atSeptember 30, 2021 , was$3,295,000 compared to$4,303,000 atDecember 31, 2020 , included borrowings under the CARES Act. The total debt to total book capitalization (total debt divided by total debt plus equity) atSeptember 30, 2021 , was 7.1% compared to 9.4% atDecember 31, 2020 .
At
During the nine-month period endedSeptember 30, 2021 , we used$428,000 for capital expenditures, compared to$956,000 during the same period in the prior year. Capital expenditures for the balance of 2021 is expected to be approximately$381,000 , some of which may be financed through our credit facilities withCapital One Bank or financed through independent third-party financial institutions. The remaining 2021 capital expenditures will likely
be for facility upgrades. Customer concentration
Refer to NOTE 1 - Business and summary of accounting policies - Customer Concentration for a detailed discussion.
33
Table of Contents
Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
RESULTS OF OPERATIONS - (Continued)
NEW ACCOUNTING PRONOUNCEMENTS
Refer to Note 1 to our consolidated financial statements for a discussion of recent accounting standards and pronouncements.
We do not believe that any other recently issued, but not yet effective accounting standard, if adopted, will have a material effect on our consolidated financial statements
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