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 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
? 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;
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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 second quarter of 2022, significant factors that impacted our results of operations were the:
? Ongoing negative impact of the COVID-19 pandemic on revenue, income, and supply
chain.
? The acquisition of the
? A stocking rollout to our largest retail customer.
? Weak customer mix at Hy-Tech.
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. 22
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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 COVID-19 PANDEMIC The COVID-19 virus and the resultant global economic down-turn had a negative impact on our fiscal 2021 results and continues to negatively impact certain sectors of the Company during 2022. Additionally, we believe that, while easing slightly, the on-going supply-chain crisis is related in large part to the pandemic. Further, we believe 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 and related matters. We believe that until the above issues improve, our business will likely continue to be adversely affected
by the COVID-19 global pandemic.BOEING/AEROSPACE
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;
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Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
INTERNATIONAL SUPPLY CHAIN - Continued
? Shortage of shipping containers;
? Congestion at the ports in
? Shortage of truck drivers in
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/GEOPOLITCAL 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 six-month periods endedJune 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 six-month period ended
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. We continue to analyze the practicality of developing or incorporating more advanced technologies in our tool platforms. 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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RESULTS OF OPERATIONS
REVENUE
The tables below provide an analysis of our net revenue for the three and
six-month periods ended
Consolidated
Three months ended June 30,
Increase
2022 2021 $ %
Florida Pneumatic $ 12,666,000 $ 10,712,000 $ 1,954,000 18.2 %
Hy-Tech 5,144,000 2,877,000 2,267,000 78.8
Consolidated $ 17,810,000 $ 13,589,000 $ 4,221,000 31.1 %
Six months ended June 30,
Increase
2022 2021 $ %
Florida Pneumatic $ 22,947,000 $ 21,614,000 $ 1,333,000 6.2 %
Hy-Tech 8,884,000 5,921,000 2,963,000 50.0
Consolidated $ 31,831,000 $ 27,535,000 $ 4,296,000 15.6 %
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 June 30,
2022 2021 Increase (decrease)
Percent of Percent of
Revenue revenue Revenue revenue $ %
Automotive $ 3,853,000 30.4 % $ 3,782,000 35.3 % $ 71,000 1.9 %
Retail 4,826,000 38.1 3,763,000 35.1 1,063,000 28.2
Industrial 1,705,000 13.5 1,303,000 12.3 402,000 30.9
Aerospace 2,179,000 17.2 1,734,000 16.2 445,000 25.7
Other 103,000 0.8 130,000 1.1 (27,000) (20.8)
Total $ 12,666,000 100.0 % $ 10,712,000 100.0 % $ 1,954,000 18.2 %
Six months ended June 30,
2022 2021 Increase (decrease)
Percent of Percent of
Revenue revenue Revenue revenue $ %
Automotive $ 7,734,000 33.7 % $ 7,884,000 36.5 % $ (150,000) (1.9) %
Retail 7,845,000 34.2 7,553,000 34.9 292,000 3.9
Industrial 3,111,000 13.6 2,662,000 12.3 449,000 16.9
Aerospace 3,994,000 17.4 3,262,000 15.1 732,000 22.4
Other 263,000 1.1 253,000 1.2
10,000 4.0
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 - Continued
When comparing the three-month periods endedJune 30, 2022 and 2021, the most significant change in Florida Pneumatic's revenue occurred within its Retail sector. The 28.2% increase was driven primarily by a stocking rollout to The Home Depot ("THD") during the second quarter of 2022. These items effectively replaced certain tools that were discontinued. The increase in Industrial revenue was driven by among other things, slightly improved supply chain conditions, which in turn increased our in-stock inventory, allowing an increase in shipments, price increases that went into effect during the quarter, and better economic conditions this quarter, compared to the second quarter of 2021. Aerospace continued to show year-over-year improvement with revenue increasing 25.7% this quarter, compared to the second quarter of 2021, due primarily to an increase in orders from both our commercial aircraft and defense-related customers. Our Automotive revenue improved a modest 1.9% this quarter, compared to the same period a year ago. However, due to a previously disclosed change in distribution channel strategy, as well as changes in both economic and competitive factors, we believe that Automotive revenue could lessen in the future periods. The 22.4%, or$732,000 increase in Florida Pneumatic's Aerospace revenue during the six-month period endedJune 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 is being driven by increased orders from both the commercial and military markets.Its Industrial revenue for the six-month period endedJune 30, 2022 , grew 16.9% over the same period in 2021, due primarily to slightly improved supply chain conditions and price increases, both occurring during the second quarter of this year, and better economic conditions during most of the six-month period endedJune 30, 2022 , compared to the same period in 2021. Revenue for the Retail sector during the first six months of 2022 is 3.9% higher than the same period in 2021. This year-to-date improvement was driven by a stocking roll-out, which occurred during the second quarter of 2022, partially offset by a decline in the spray gun category. 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 June 30, 2022 2021 Increase (decrease) Percent of Percent of Revenue revenue Revenue revenue $ % OEM$ 2,542,000 49.4 %$ 1,408,000 48.9 %$ 1,134,000 80.5 % ATP 945,000 18.4 779,000 27.1 166,000 21.3 PTG 1,583,000 30.8 604,000 21.0 979,000 162.1 Other 74,000 1.4 86,000 3.0 (12,000) (14.0) Total$ 5,144,000 100.0 %$ 2,877,000 100.0 %$ 2,267,000 78.8 % Six months ended June 30, 2022 2021 Increase Percent of Percent of Revenue revenue Revenue revenue $ % OEM$ 4,507,000 50.7 %$ 3,019,000 51.0 %$ 1,488,000 49.3 % ATP 1,687,000 19.0 1,492,000 25.2 195,000 13.1 PTG 2,522,000 28.4 1,250,000 21.1 1,272,000 101.8 Other 168,000 1.9 160,000 2.7 8,000 5.0 Total$ 8,884,000 100.0 %$ 5,921,000 100.0 %$ 2,963,000 50.0 % 27 Table of Contents
Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
RESULTS OF OPERATIONS - (Continued)
REVENUE - Continued
Hy-Tech - Continued
Key factors driving the 80.5% growth in Hy-tech's OEM product line revenue this quarter, compared to the same three-month period in 2021, were a significant increase in orders from a major customer, the easing of COVID-19 travel and visitation restrictions, and overall improvement in economic conditions this quarter compared to the same period a year ago. Revenue generated from the JGC, which was acquired in early 2022, was the major component of the$979,000 increase in our PTG product line revenue. (See Note 2- Acquisition, for further discussion). Our ATP revenue increased 21.3% this quarter over the same period in the prior year due primarily to improved economic conditions. Hy-Tech's six-month, year-over-year growth was mostly accomplished during the three-month period endedJune 30, 2022 . As such, factors contributing to this growth include increased orders from a major OEM customer, the JGC business acquisition, the easing of COVID-19 restrictions, and slight improvement in
the
general economic conditions.
GROSS MARGIN/PROFIT
Three months ended June 30, Increase (decrease)
2022 2021 Amount %
Florida Pneumatic $ 4,771,000 $ 4,165,000 $ 606,000 14.6 %As percent of respective revenue 37.7 % 38.9 % (1.2) % pts Hy-Tech$ 865,000 $ 683,000 $ 182,000 26.6 As percent of respective revenue 16.8 % 23.7 % (6.9) % pts Total$ 5,636,000 $ 4,848,000 $ 788,000 16.3 % As percent of respective revenue 31.6 % 35.7 %
(4.1) % pts
Although Florida Pneumatic's gross profit increased 14.6%, its consolidated gross margin declined 1.2 percentage points. This net decline was driven primarily due to a higher mix of lower gross margin Retail revenue. Related thereto, Florida Pneumatic continued to encounter higher ocean freight and product costs during the three-month period endedJune 30, 2022 , compared to the same three-month period in 2021. Partially offsetting the above were better than prior year gross margins in its Industrial, Automotive and Aerospace product lines. Hy-Tech's gross profit declined 6.9 percentage points this quarter, compared to the same three-month period in 2021, due primarily to increased revenue attributable to low margin customers during the second quarter of 2022. Additionally, Hy-Tech's PTG product line under absorbed its manufacturing overhead costs during the second quarter of 2022, as it is going through the process of integrating the JGC acquisition. Six months ended June 30, Increase (decrease) 2022 2021 Amount % Florida Pneumatic$ 8,721,000 $ 8,365,000 $ 356,000 4.3 %
As percent of respective revenue 38.0 % 38.7 % (0.7) % pts Hy-Tech$ 1,426,000 $ 1,119,000 $ 307,000 27.4 As percent of respective revenue 16.1 % 18.9 % (2.8) % pts Total$ 10,147,000 $ 9,484,000 $ 663,000 7.0 % As percent of respective revenue 31.9 % 34.4 %
(2.5) % 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 profit improved by 4.3%, when comparing the six-month periods endedJune 30, 2022 and 2021. Its gross margin however, declined by 0.7 percentage point. Primary factors affecting these results were primarily customer and product mix, with greater low margin Retail revenue, being partially offset by stronger gross margin for all other product lines. As discussed above, under absorption of PTG manufacturing overhead and product mix are the primary factors causing the 2.8 percentage points decline in Hy-Tech's six-month gross margin, when compared to the same period a year ago. We are in the process of integrating the JGC business acquisition that occurred during the first quarter of this year. We expect to make significant progress on integration during the second half of 2022 and thus improve gross margin as well.
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 second quarter of 2022, our SG&A was
During the second quarter of 2021, we incurred approximately
i) related to the
where no such costs were incurred during the second quarter of 2022.
Our compensation expense increased $151,000 . Compensation expense is
comprised of base salaries and wages, accrued performance-based bonusincentives and associated payroll taxes and employee benefits. Several
ii) factors contributed 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.
We incurred increases this quarter, compared to the same quarter in 2021 in
iii) professional fees, stock-based compensation, and amortization of
Our six-month 2022 total SG&A was
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.
Professional fees and expenses increased
ii) accounting, and other fees incurred in connection with the JGC acquisition.
Other expenses that contributed to the increase in professional fees were
cyber security related costs and recruitment fees.
Our variable expenses decreased
iii) significantly lower advertising costs at Florida Pneumatic, caused by a
change in a distribution channel strategy.
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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
Our computer-related expenses declined
periods ended
iv) incurred approximately
attack at our Florida Pneumatic subsidiary, where no such costs were incurred
during the second quarter of 2022.
v) Lastly, our general corporate expenses declined
to the same period in 2021.
OTHER EXPENSE (INCOME)
Other expense in 2022 consists primarily of adjustments to the fair value of certain assets.
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 June31, Increase (decrease)
2022 2021 Amount %
Interest expense attributable to:
Short-term borrowings $ 89,000 $ 8,000 $ 81,000 1,012.5 %
PPP loan - (27,000) 27,000 100.0
Amortization expense of debt issue costs 4,000 4,000 - NA Other (7,000) - (7,000) NA Total$ 86,000 $ (15,000) $ 101,000 673.3 % Six months ended June 30, Increase (decrease) 2022 2021 Amount % Interest expense attributable to: Short-term borrowings$ 137,000 $ 18,000 $ 119,000 661.1 % PPP loan - (19,000) 19,000 100.0 Amortization expense of debt issue costs 8,000 8,000 - NA Other (7,000) - (7,000) NA Total$ 138,000 $ 7,000 $ 131,000 1,871.4 % Our average short-term borrowings during the three and six-month periods endedJune 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, increased inventory related to the shipment of the stocking rollout that occurred during the second quarter of 2022, and the purchase and related costs associated with the acquisition in the first quarter of 2022 of the JGC business. 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.
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Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued
RESULTS OF OPERATIONS - Continued
INTEREST EXPENSE (INCOME) - Continued
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 received in connection with federal income tax refunds received.
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 rate for the three and six-month periods endedJune 30, 2022 , were a tax expense of 138.2%, and a tax benefit of 3.0%, compared to a tax benefit of 3.8% and 8.1% for the same three and six-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:
June 30, 2022 December 31, 2021
Working capital $ 22,407,000 $ 24,598,000
Current ratio 2.40 to 1 3.04 to 1
Shareholders' equity $ 43,066,000 $ 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.
At
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 six-month period endedJune 30, 2022 , cash used by operating activities was$1,154,000 , compared to cash provided by operating activities during the six-month period endedJune 30, 2021 , of$1,368,000 . AtJune 30, 2022 , our consolidated cash balance was$431,000 , 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. 31
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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
Our total debt to total book capitalization (total debt divided by total debt
plus equity) on
During the six-month period endedJune 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 six-month period ended
Capital expenditures currently planned for the remainder of 2022 are
approximately
The major portion of these planned capital expenditures will be for new metal cutting equipment, tooling and information technology hardware and software, and the expansion of ourPunxsutawney, PA facility as a result of the acquisition of JGC business (See Note 2).
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 six-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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