P&F INDUSTRIES INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)
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 2022 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;
? Exposure to fluctuations within the cost of raw materials;
? The strength of the retail economy in
? 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;
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Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Continued
? 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, 2021 ("2021 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.
OVERVIEW
During the third quarter of 2022, significant factors that impacted our results
of operations were:
?
? Weak customer mix at Hy-Tech, which negatively impacted its gross margin.
? Recent economic uncertainty negatively impacting revenue and income.
? Continuing global supply chain issues.
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. 23
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Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Continued
OUR BUSINESS - 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'sPower 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 andGleason Gear modeling software. EffectiveJanuary 15, 2022 , through a wholly-owned subsidiary of Hy-Tech, we acquired substantially all the non-real estate assets comprising the business ofJackson Gear Company ("JGC"), aPennsylvania -based corporation that manufactures and distributes custom gears and power transmission gear products. (See Note -2 for additional information). This business was consolidated into PTG. We believe this acquisition will provide added market exposure into the larger gears market.
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. We 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. Further, we monitor transportation costs, specifically ocean freight rates, which since early 2021 have become a key area. 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.
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Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Continued
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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our consolidated financial statements in accordance with accounting principles generally accepted inthe United States of America ("US GAAP"). Descriptions of these policies are discussed in the 2021 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 BOEING
TheFederal Aviation Administration ("FAA") and theEuropean Union Aviation Safety Agency ("EASA") have lifted the grounding of the 737 MAX, however,China , which is a large market for Boeing, has not lifted the grounding on the 737 MAX aircraft. Boeing is currently holding completed 737 MAX aircraft destined for Chinese carriers. As a result of the aforementioned, and airline companies limiting deliveries of new aircraft, we believe production at Boeing of its 737 MAX aircraft is likely to remain below the production levels that existed prior to the grounding of certain Boeing aircraft and the COVID-19 pandemic.
INTERNATIONAL SUPPLY CHAIN
During the third and fourth quarters of 2021, and early 2022, we encountered severe delays in receiving inventory from our Asian suppliers, which led to intermittent shortages of inventory. It should be noted however that the international supply chain crisis has, as of late, begun to ease somewhat. Lastly, our ocean freight costs, which increased in some cases five-fold during the latter half of 2021 and for much of 2022, have begun to decline, but still well in excess of pre-pandemic levels. This trend of higher costs and delayed deliveries has continued for most of 2022. We believe the major factors driving the above include: ? Increased price of fuel;
? Shortage of shipping containers;
? Congestion at the ports in
? Shortage of truck drivers in
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Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Continued
INTERNATIONAL SUPPLY CHAIN – Continued
At the present time, we believe the above-mentioned supply chain disruptions will likely continue during the remainder of 2022. While we believe that most of these related costs associated with the items above have been, or will be, passed on to our customers throughout 2022, there is no assurance that any additional cost increases can be passed on in the future.
DOMESTIC TRANSPORTATION COSTS
Due to the shortage of truckers in theU.S. , there has been both difficulty in moving goods from the ports to our facilities as well as arranging for pickups to deliver to our customers. In addition, we have seen an increase in the costs for these transportation services. It is unclear when or if this situation will abate. As such, these issues will affect the Company for the foreseeable future impacting our overall margins and possibly depressing sales.
IMPACT OF INFLATION/GEOPOLITICAL ISSUES
Increasing prices, most notably in freight/transportation, the cost of raw materials and labor had a material effect on our results of operations during the three and nine-month periods endedSeptember 30, 2022 . We believe that the current and projected significant levels of inflation will continue to adversely impact our operating costs. As such, at the present time, we are unable to reasonably estimate the impact these issues will have on our results of operations for the remainder of 2022 and beyond.
During the three and nine-month periods ended
believe we were directly materially impacted by the
TECHNOLOGIES
We believe that over time, several newer technologies, and features will have a greater effect on the market for our traditional pneumatic tool offerings. So far, the greatest impact has been on the automotive aftermarket with the advent of advanced cordless operated tools. Currently, we do not offer a cordless tool to the automotive aftermarket. However, with respect to the industrial market, we have developed for one of our largest OEM customers a tool mechanism that is incorporated into a major line of their cordless power tools. These tools have been in full production with our supplied system for several years and our sales of this product have continued to grow over that time. We continue to analyze the practicality of developing or incorporating newer technologies in our tool platforms for other markets as well. This includes adding our internally developed mechanisms to existing cordless power sources as well as producing complete cordless tool systems. 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.
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Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Continued
RESULTS OF OPERATIONS REVENUE
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
2022 2021 $ %
Florida Pneumatic $ 9,906,000 $ 9,607,000 $ 299,000 3.1 %
Hy-Tech 4,610,000 3,378,000 1,232,000 36.5
Consolidated $ 14,516,000 $ 12,985,000 $ 1,531,000 11.8 %
Nine months ended September 30,
Increase
2022 2021 $ %
Florida Pneumatic $ 32,853,000 $ 31,221,000 $ 1,632,000 5.2 %
Hy-Tech 13,494,000 9,299,000 4,195,000 45.1
Consolidated $ 46,347,000 $ 40,520,000 $ 5,827,000 14.4 %
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,
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
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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
When comparing the three-month periods endedSeptember 30, 2022 , and 2021, the most significant change in Florida Pneumatic's revenue occurred within its stronger gross margin Aerospace product line, which had a 38.5% increase this quarter over the same three-month period in 2021. This improvement is in both commercial aircraft and defense-related customers. We believe the primary cause for the decline in Retail revenue is the result of recent economic conditions, which has slowed end user demand at the retail level, causing our customer to lower its purchases during the third quarter. Our Automotive revenue declined 1.8% compared to the same period a year ago, due to changes in both economic and competitive factors. Lastly, we believe the automotive sector will continue to be adversely affected by the current sluggish economic market conditions. The 28.2%, or$1,437,000 increase in Florida Pneumatic's Aerospace revenue during the nine-month period endedSeptember 30, 2022 , compared to the same period in the prior year, is the most significant factor in analyzing the overall improvement in Florida Pneumatic's year-to-date revenue. This improvement was being driven by increased orders from both the commercial and military markets.Its Industrial revenue for the nine-month period endedSeptember 30, 2022 , grew 12.7% over the same period in 2021, due primarily to slightly improved supply chain conditions, price increases, and better economic/sector conditions, which occurred during the early part of this year. Our nine-month 2022 Automotive revenue is down slightly, compared to the same period in 2021. As noted above, we believe this sector will continue to be adversely affected by the current sluggish economic market conditions.
Hy-Tech
Hy-Tech designs, manufactures, and sells a wide range of industrial products
including tools, parts, accessories and sockets 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 %
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Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Continued
RESULTS OF OPERATIONS – (Continued)
REVENUE – Continued
Hy-Tech – Continued
A key factor driving the 36.5% increase in Hy-Tech's total fiscal third quarter of 2022, compared to the same period in the prior year was the acquisition of the JGC business that occurred in early 2022, which, contributed significantly to the PTG revenue improvement of$811,000 . (See Note 2- Acquisition, for further discussion related to this acquisition). Additionally, Hy-Tech's OEM revenue continued to strengthen, recording a net 31.1% increase over the prior year. This improvement is due primarily to increased shipments to a major OEM customer. Further, during this quarter, other revenue increased due to a large one-time order for its Thaxton products. Partially offsetting the above its ATP product sales declined. As noted in prior filings, we believe that its ATP products continue to be price-challenged by off-shore suppliers. Hy-Tech's nine-month, year-over-year growth essentially tracks its third quarter results. The JGC business acquisition resulted in PTG revenue growth. Additionally, continued revenue growth in the OEM line was primarily the result of expanded sales opportunities with a major customer. As noted above, the key component to Hy-Tech's other revenue was due to a large one-time order for
its
Thaxton products.
GROSS MARGIN/PROFIT
Three months ended September 30, Increase (decrease)
2022 2021 Amount %
Florida Pneumatic $ 4,113,000 $ 3,381,000 $ 732,000 21.7 %
As percent of respective revenue 41.5 % 35.2 % 6.3 % pts
Hy-Tech $ 734,000 $ 593,000 $ 141,000 23.8
As percent of respective revenue 15.9 % 17.6 % (1.7) % pts
Total $ 4,847,000 $ 3,974,000 $ 873,000 22.0 %
As percent of respective revenue 33.4 %
30.6 % 2.8 % pts
The 6.3 percentage point improvement in Florida Pneumatic's gross margin was due to price increases, which were put in place to partially offset rising material, labor and other costs, as well as an increase in its higher margin Aerospace revenue. Additionally, a decline in ocean freight costs during the third quarter of 2022 and a strongerU.S. Dollar to the TWD contributed to Florida Pneumatic's gross margin improvement this quarter, compared to the same period in 2021.
The
stronger gross margin drove the 21.7% increase in its quarterly gross profit.
Hy-Tech's gross profit declined 1.7 percentage points this quarter, compared to
the same three-month period in 2021, due primarily to increased revenue
attributable to low margin customers and product mix during the third quarter of
2022. Additionally, its PTG product line under absorbed its manufacturing
overhead costs during the third quarter of 2022, as it is going through the
process of integrating the JGC acquisition and its customer base.
Nine months ended September 30, Increase (decrease)
2022 2021 Amount %
Florida Pneumatic $ 12,834,000 $ 11,746,000 $ 1,088,000 9.3 %
As percent of respective revenue 39.1 % 37.6 % 1.5 % pts
Hy-Tech $ 2,160,000 $ 1,712,000 $ 448,000 26.2
As percent of respective revenue 16.0 % 18.4 % (2.4) % pts
Total $ 14,994,000 $ 13,458,000 $ 1,536,000 11.4 %
As percent of respective revenue 32.4 % 33.2 % (0.8) % pts
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Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Continued
RESULTS OF OPERATIONS – Continued
GROSS MARGIN/PROFIT – Continued
Florida Pneumatic's gross margin strengthened by 1.5 percentage points and its gross profit increased nearly$1.1 million , when comparing the nine-month periods endedSeptember 30, 2022 and 2021. Factors affecting these nine-month results were primarily customer and product mix. Similar to the discussion above, the primary causes for the decline in Hy-Tech's nine-month period endedSeptember 30, 2022 , as compared to the gross margin for the same period in the prior year include under-absorption of PTG manufacturing overhead and customer/product mix. In an effort to improve the current year's gross margin, we have increased selling prices, wherever possible, particularly for products that were most significantly impacted by raw material and freight costs that Hy-Tech was forced to absorb throughout the year. Additionally, we are in the process of completing the integration of the JGC business acquisition that occurred during the first quarter of this year. The integration is taking longer than expected and will continue well into 2023. We believe the completion of the integration of the JGC business into the facility inPunxsutawney, PA will result in improved manufacturing productivity. Lastly, combined with recent price increases, we believe Hy-Tech's overall gross margin will begin to improve in 2023.
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 2022, our SG&A was
to the net increase are:
Our compensation expense increased
of base salaries and wages, accrued performance-based bonus incentives and
associated payroll taxes and employee benefits. Several factors contributed
i) to this increase, among them the staffing added in connection with the JGC
acquisition, increased wages primarily related to retention incentives and
annual wage adjustments and a net increase in companywide
bonus/incentive/performance accruals.
ii) We incurred increases this quarter, compared to the same quarter in 2021 in
professional fees of
Our variable expenses, which among other things includes commissions,
iii) freight out, advertising and travel and entertainment expenses declined
Our nine-month 2022 total SG&A was
during the same period in the prior year. Key components to the net change are:
Compensation expenses increased
base salaries and wages, accrued performance-based bonus incentives and
associated payroll taxes and employee benefits. Several factors contributed
i) to this increase, among them the staffing added in connection with the JGC
acquisition, increased wages primarily related to retention incentives and
annual wage adjustments and increases in companywide
bonus/incentive/performance accruals.
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Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Continued
RESULTS OF OPERATIONS – Continued
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES – Continued
Professional fees and expenses increased
accounting, and other fees incurred in connection with the JGC acquisition.
ii) Other expenses that contributed to the increase in professional fees included
ongoing cyber security/prevention costs, recruitment fees and legal fees
associated with regulatory initiatives.
Our variable expenses decreased
iii) significantly lower advertising costs at Florida Pneumatic, caused by a
change in a distribution channel strategy.
Our computer-related expenses declined $293,000 , when comparing the
nine-month periods ended
iv) quarter of 2021, we incurred approximately
costs were incurred during the second quarter of 2022.
v) Lastly, temporary labor and stock-based compensation expense increased
and
OTHER EXPENSE (INCOME)
Other expense (income) consists primarily of adjustments to the fair value of certain assets, partially offset by the gain recognized during the three-month period endedSeptember 30, 2022 , as the result of the early termination of a real property lease. (See Note 1). OnApril 20, 2020 , we received a Paycheck Protection Program ("PPP") loan, in the amount of$2,929,000 . Under the terms of the Coronavirus Aid, Relief, and Economic Security Act, ("CARES Act"), as amended, we were eligible to apply for forgiveness for all or a portion of the PPP loan. InFebruary 2021 , we filed an application for forgiveness with the lender, who approved this submission and submitted the application for forgiveness to the SBA. OnJune 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 was accounted for as Other
Income in 2021.
INTEREST EXPENSE (INCOME)
Three months ended September 31, Increase
2022 2021 Amount %
Interest expense attributable to:
Short-term borrowings $ 102,000 $ 10,000 $ 92,000 920.0 %
Amortization expense of debt issue costs 4,000
4,000 - - Total $ 106,000$ 14,000 $ 92,000 657.1 % Nine months ended September 30, Increase (decrease) 2022 2021 Amount % Interest expense attributable to: Short-term borrowings$ 239,000 $ 28,000$ 211,000 753.6 % PPP loan - (19,000) 19,000 100.0 Amortization expense of debt issue costs 12,000
12,000 - NA Other (7,000) - (7,000) NA Total$ 244,000 $ 21,000$ 223,000 1,061.9 % 31 Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Continued
RESULTS OF OPERATIONS – Continued
INTEREST EXPENSE (INCOME) – Continued
Our average short-term borrowings during the three and nine-month periods endedSeptember 30, 2022 , increased significantly, when compared to the same periods in 2021. This increase was due primarily to our decision to increase safety stock levels of inventory, due primarily to delays and other supply chain issues, and the purchase and related costs associated with the acquisition in the first quarter of 2022 of the JGC business. Further, our borrowings increased to support the working capital needs as a result of significant revenue growth. Additionally, the Applicable Margins, as defined in the Credit Agreement with Capital One bank, NA, also increased. See Note 9-Debt for further discussion.
As discussed earlier, during the second quarter of 2021, we applied for and
received forgiveness of the PPP loan. Accordingly, we recorded the reversal of
associated interest expense.
Debt issue costs are associated with an amendment to the Credit Agreement.
There were no amortizable debt issue costs incurred with Amendment No. 9, or
Amendment No. 10 to the Credit Agreement.
Other interest relates to interest recorded in connection with federal income
tax refunds received during the second quarter of 2022.
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, the effective tax rates for the three and nine-month periods endedSeptember 30, 2022 , were an income tax benefit of 31.5%, and 12.8%, respectively, compared to a tax benefit of 12.8% and of 23.9% for the same three and nine-month periods in 2021. The effective tax rates for all periods presented were impacted primarily by state taxes, and non-deductible expenses. Impacting 2021's effective tax benefit was the enactment of the CARES Act. Under the terms of the CARES Act, we applied for and were approved to treat the gain on the forgiveness of the PPP loan as non-taxable income. Accordingly, the gain resulting from the forgiveness of the PPP loan was not included in the computation of the 2021 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, 2022 December 31, 2021
Working capital $ 22,125,000 $ 24,598,000
Current ratio 2.47 to 1 3.04 to 1
Shareholders' equity $ 42,525,000 $ 43,840,000
Credit facility
Our Credit Facility is discussed in detail in Note 9 to our Consolidated
Financial Statements. Discussed therein, we and the Bank entered into an
amendment that, among other things, increased the Revolver borrowing commitment
by $2,000,000 to $18,000,000 through June 30, 2022 . We believe the return to
the $16,000,000 maximum Revolver borrowing amount will not impact future
operations.
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Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Continued
RESULTS OF OPERATIONS – Continued
LIQUIDITY AND CAPITAL RESOURCES – Continued
At
arrangement.
Should the need arise whereby the current Credit Agreement is insufficient; we believe that the current Agreement could be expanded, and/or we could obtain additional funds based on the value of our real property.
Cash flows
For the nine-month period endedSeptember 30, 2022 , cash provided by operating activities was$1,305,000 , compared to cash used by operating activities during the nine-month period endedSeptember 30, 2021 , of$1,610,000 . AtSeptember 30, 2022 , our consolidated cash balance was$410,000 , compared to$539,000 atDecember 31, 2021 . We operate under the terms and conditions of the Credit Agreement. As a result, all domestic cash receipts are remitted to Capital One lockboxes and therefore does not represent cash on hand. Our total debt to total book capitalization (total debt divided by total debt plus equity) onSeptember 30, 2022 , was 16%, compared to 11.6% onDecember 31, 2021 . During the nine-month period endedSeptember 30, 2022 , we completed the JGC acquisition, with a purchase price of$2,300,000 , plus acquisition expenses that included among other things, legal, accounting, and relocation expenses. (See Note 2). During the nine-month period endedSeptember 30, 2022 , we used$1,222,000 for capital expenditures, compared to$428,000 during the same period in the prior year. Capital expenditures currently planned for the remainder of 2022 are approximately$1,000,000 , which we expect will be financed through the Credit
Facility.
The major portion of these planned capital expenditures will be for new metal
cutting equipment, tooling and information technology hardware and software.
Our liquidity and capital is primarily sourced from our credit facility,
described in Note 9 – Debt, to our Consolidated Financial Statements, and cash
from operations.
Customer concentration
Refer to Note 1 – Business and summary of accounting policies – Customer
Concentration for a detailed discussion.
NEW ACCOUNTING PRONOUNCEMENTS
There were no new accounting standards or pronouncements issued during the three
and nine-month periods ended
We do not believe that any recently issued, but not yet effective accounting standard, if adopted, will have a material effect on our consolidated financial statements.
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