P&F INDUSTRIES, INC. KEY INDICATORS
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, automotive related customers, and many OEM 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 of 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 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.
13
Table of Contents
Management's Discussion and Analysis of Financial Condition and Results of Operations
CRITICAL ACCOUNTING ESTIMATES
We prepare our Consolidated Financial Statements in accordance with accounting principles generally accepted inthe United States of America ("US GAAP"). 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, revenue and expenses. On an ongoing basis, we evaluate our estimates pertaining to such matters as inventory reserves, goodwill and intangible assets, sales discounts, and 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. Actual results may differ from these estimates.
We consider the following policies and estimates to be the most critical in understanding the judgments that are involved in the preparation of the Company's Consolidated Financial Statements and the uncertainties that could impact the Company's financial position, results of operations and cash flows.
Revenue Recognition
Our accounting policy relating to revenue recognition reflects the impact of the
adoption of In accordance with Accounting Standards Codification ("ASC") 606,
Revenue from Contracts with Customers ("ASC 606"), which is discussed further in
our Notes to our Consolidated Financial Statements. We record revenue based on a
five-step model. We sell our goods on terms that transfer title and risk of loss
at a specified location, which may be our warehouse, destination designated by
our customer, port of loading or port of discharge, depending on the final
destination of the goods. Other than standard product warranty provisions, our
sales arrangements provide for no other post-shipment obligations. We offer
rebates and other sales incentives, promotional allowances, or discounts to
certain customers, typically related to purchase volume, and are classified as a
reduction of revenue and recorded at the time of sale, using the most likely
amount approach. We periodically evaluate whether an allowance for sales returns
is necessary. Historically, we have experienced minimal sales returns. If we
believe there are material potential sales returns, we will provide the
necessary provision against sales.
Performance obligations underlying our core revenue are related to the delivery
of finished products to customers and do not require significant judgement or
estimates. Our revenue is generated through the sale of finished products and is
recognized at the point in time when merchandise is transferred to the customer
with a fixed payment due generally within 30 to 90 days, and in an amount that
considers the impacts of estimated allowances. Further, we have made a policy
election to account for shipping and handling activities that occur after the
customer has obtained control of the products as fulfillment costs rather than
as an additional promised service. There are typically no other performance
obligations in our revenue process.
14
Table of Contents
Management's Discussion and Analysis of Financial Condition and Results of Operations
CRITICAL ACCOUNTING ESTIMATES (CONTINUED)
Inventories
Inventories are valued at the lower of cost or net realizable value. Cost is
determined by the first-in, first-out method, or moving weighted average. Our
finished products inventory includes materials, labor, and manufacturing
overhead costs, and is recorded net of an allowance for obsolete or slow-moving
inventory ("OSMI"), as well as any unmarketable inventory. Such allowance is
based upon historical experience and management's understanding of market
conditions and forecasts of future product demand. Specifically, at Florida
Pneumatic and Jiffy we generally place a 100% reserve on inventory that has not
had any sales or usage in more than two years. Hy-Tech's methodology is
primarily based on inventory turns, with inventory items that turn less
frequently, receiving a greater allowance. Changes in our OSMI impact our
consolidated balance sheet, gross profit, and net earnings.
Goodwill is tested for impairment at the reporting unit level on an annual basis. This test is performed as of the last day in November, or more frequently if we believe indicators of impairment might exist. The Company considers its market capitalization and the carrying value of its assets and liabilities, including goodwill, when performing its goodwill impairment test. In evaluating goodwill for impairment, we first assess qualitative factors to determine whether it was more likely than not that the fair value of a reporting unit was less than its carrying amount. Qualitative factors considered included, for example, macroeconomic and industry conditions, overall financial performance, and other relevant entity-specific events. If we bypassed the qualitative assessment or concluded that it was more likely than not that the fair value of a reporting unit was less than its carrying value, we then perform a quantitative goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment to be recognized, if any. If the carrying value of the reporting unit's goodwill exceeded the implied fair value of the goodwill, an impairment loss is recognized in the amount of that excess, not to exceed the carrying amount of goodwill. See Note 1 - Summary of Significant Accounting Policies in Notes to our Consolidated Financial Statements for further information. Intangible assets represent trademarks, customer agreements and patents related to our brands. Finite-lived intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets. Indefinite-lived intangible assets are not amortized, but instead are subject to impairment evaluation. This test is performed as of the last day in November, or more frequently if we believe indicators of impairment might exist through the use of discounted cash flow models. Assumptions used in our discounted cash flow models include: (i) discount rates; (ii) projected annual revenue growth rates; and (iii) projected long-term growth rates. Our estimates also factor in economic conditions and expectations of management, which may change in the future based on period-specific facts and circumstances. Other intangibles with determinable lives, including certain trademarks, customer agreements and patents, are evaluated for the possibility of impairment when certain indicators are present, and are otherwise amortized on a straight-line basis over the estimated useful lives of the assets (currently ranging from 3 to 20 years). When conducting our impairment assessment of indefinite-lived intangible assets, we initially perform a qualitative evaluation of whether it is more likely than not that the asset is impaired. If it is determined by a qualitative evaluation that it is more likely than not that the asset is impaired, we then test the asset for recoverability. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to its future discounted net cash flows. If the carrying amount of such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. 15 Table of Contents
Management's Discussion and Analysis of Financial Condition and Results of Operations
CRITICAL ACCOUNTING ESTIMATES (CONTINUED)
Income Taxes
We account for income taxes using the asset and liability approach. This approach requires the recognition of current tax assets or liabilities for the amounts refundable or payable on tax returns for the current year, as well as the recognition of deferred tax assets or liabilities for the expected future tax consequences of temporary differences that can arise between (a) the amount of taxable income and pretax financial income for a year, such as from net operating loss carryforwards and other tax credits, and (b) the tax bases of assets or liabilities and their reported amounts in the Consolidated Financial Statements. Deferred tax assets and liabilities are measured using enacted tax rates. The impact on deferred tax assets and liabilities of changes in tax rates and laws, if any, is reflected in the Consolidated Financial Statements in the period enacted. Further, we evaluate the likelihood of realizing a benefit from our deferred tax assets by estimating future sources of taxable income and the impact of tax planning strategies. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. The valuation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in our consolidated financial statements or tax returns and future profitability. Changes in estimates, due to unanticipated events or otherwise, could have a material effect on our financial condition and results of operations. We continually evaluate our deferred tax assets to determine if a valuation allowance is required. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while other positions are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the consolidated financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized tax benefits are classified as income taxes in the consolidated statements of operations and comprehensive (loss) income.
OVERVIEW
During 2022, significant factors that impacted our results of operations were the:
?
? Economic uncertainty negatively impacted revenue and income, especially in the
non-industrial sectors.
? Increased raw material costs negatively impacted gross margin, especially
during the first half of 2022.
? Weak customer mix and an increase of obsolete and slow-moving inventory charges
at Hy-Tech, which negatively impacted its gross margin.
16
Table of Contents
Management's Discussion and Analysis of Financial Condition and Results of Operations
TRENDS AND UNCERTAINTIES 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, however, delays begun to ease somewhat during the latter portion of 2022. Our ocean freight costs, which increased in some cases five-fold during the latter half of 2021 and for much of 2022, have also begun to decline, but are still well in excess of pre-pandemic levels. As a result, we incurred higher costs and delayed deliveries for much of 2022. Further, we believe the following factors negatively impacted our 2022 results: ? Increased price of fuel;
? Shortage of shipping containers;
? Congestion at the ports in
At the present time, we believe that some or all of the above-mentioned supply chain disruptions will likely continue for some time in fiscal 2023. While we believe that most of the related costs associated with the issues discussed above have been factored into our selling price, there is no assurance that we will be able to pass through any future additional direct costs or costs incurred related to our international supply chain issues in the future.
DOMESTIC TRANSPORTATION COSTS
For much of fiscal 2022, due to the shortage of vehicle operators in theU.S. , we often encountered difficulty in moving goods from the ports of entry to our facilities, as well as arranging for shipments to deliver to our customers. Additionally, we have encountered increases in the costs for these transportation services. It is unclear when or if this situation will abate. As such, these issues will likely 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 2022. We believe that the current and projected levels of inflation, as well a fear of a possible economic recession 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 foreseeable future.
During 2022, we do not believe we were directly materially impacted by the
BOEING
TheFederal Aviation Administration ("FAA") and theEuropean Union Aviation Safety Agency ("EASA") have lifted the grounding of the 737 MAX, which enabled the aircraft to return to service in 2021.China , a large market for this aircraft, had grounded all 737 MAX aircraft beginning inMarch 2019 , permitted a 737 MAX aircraft to make its first passenger flight inJanuary 2023 . Boeing is currently holding completed 737 MAX aircraft destined for Chinese carriers. However, we believe that in spite of the recent positive developments, 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 for at least the next several quarters. 17
Table of Contents
Management's Discussion and Analysis of Financial Condition and Results of Operations
TRENDS AND UNCERTAINTIES - Continued
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 MATTERS
Other than the trends and uncertainties mentioned above, or matters that may be discussed below, there are no major trends or uncertainties that had, or we could reasonably expect to have a material impact on our revenue and operations, 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 of Financial Condition and Results of Operations, we believe that our relationships with our key customers and suppliers remain satisfactory.
RESULTS OF OPERATIONS 2022 compared to 2021 REVENUE
The tables set forth below provide an analysis of our revenue for the years
ended
Consolidated
Year Ended December 31,
2022 2021 Increase (decrease)
Percent of Percent of
Revenue revenue Revenue revenue $ %Florida Pneumatic$ 41,398,000 70.1 %$ 41,488,000
77.5 %$ (90,000) (0.2) % Hy-Tech 17,643,000 29.9 12,066,000 22.5 5,577,000 46.2 Total$ 59,041,000 100.0 %$ 53,554,000 100.0 %$ 5,487,000 10.2 % 18 Table of Contents
Management's Discussion and Analysis of Financial Condition and Results of Operations
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").
Year Ended December 31,
2022 2021 Increase (decrease)
Percent of Percent of
Revenue revenue Revenue revenue $ %
Automotive $ 13,699,000 33.1 % $ 14,543,000 35.1 % $ (844,000) (5.8) %
Retail 12,523,000 30.3 13,995,000 33.7 (1,472,000) (10.5)
Aerospace 8,658,000 20.9 7,184,000 17.3 1,474,000 20.5
Industrial 5,958,000 14.4 5,289,000 12.7 669,000 12.6
Other 560,000 1.3 477,000 1.2 83,000 17.4
Total $ 41,398,000 100.0 % $ 41,488,000 100.0 % $ (90,000) (0.2) %
19
Table of Contents
Management's Discussion and Analysis of Financial Condition and Results of Operations
RESULTS OF OPERATIONS Continued
REVENUE - (Continued)
Florida Pneumatic's full year 2022 revenue is slightly less ($90,000 ) than the prior year. Its 2022 Retail revenue declined 10.5%, when comparing the fiscal 2022 to the prior year. This decline was driven by several factors, including: a) sluggishness in consumer demand at The Home Depot ("THD"), most notably occurring during the fourth quarter of 2022, as we believe rising interest rates and the general economy softness; b) lower sales of certain tools that enjoyed higher than usual volume during 2021, such as spray guns, which are used to combat the COVID-19 virus, and c) an effort by THD to lower its own inventory levels. 2022 Automotive revenue also declined when compared to 2021. The primary factors for the 5.8% reduction, were weak consumer demand occurring inthe United States and, to a lesser extent, inEurope . Further, we believe this weakness in demand for our AIRCAT line of automotive products similar to the decline in Retail revenue, was driven by global rising interest rates and slowing economies. Both the above product lines are affected by the consumer market. Partially offsetting the above declines was a 20.5% increase inFlorida Pneumatics' higher gross margin, Jiffy product line. The key factor driving this increase throughout the year was stronger demand in 2022 from both the commercial and military sectors. Most of the Aerospace revenue is attributable to Jiffy Air Tool. Lastly, Florida Pneumatic's Industrial revenue continued its growth during 2022 that commenced in the latter half of 2021. Its 2022 revenue increased 12.6% over 2021, which increased 51.9% over 2020. The primary factors driving this growth are an improved supply chain and increased demand in the foundry, metal fabrication, manufacturing, and assembly sectors.
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.
Year Ended December 31,
2022 2021 Increase (decrease)
Percent of Percent of
Revenue revenue Revenue revenue $ %
OEM $ 8,688,000 49.2 % $ 5,842,000 48.4 % $ 2,846,000 48.7 %
PTG 5,602,000 31.8 2,846,000 23.6 2,756,000 96.8
ATP 2,850,000 16.2 3,024,000 25.1 (174,000) (5.8)
Other 503,000 2.8 354,000 2.9 149,000 42.1
Total $ 17,643,000 100.0 % $ 12,066,000 100.0 % $ 5,577,000 46.2 %
20
Table of Contents
Management's Discussion and Analysis of Financial Condition and Results of Operations
RESULTS OF OPERATIONS - Continued
REVENUE - (Continued)
A key factor driving the 46.2% increase in Hy-Tech's fiscal 2022 revenue, compared to the prior year was the acquisition of JGC that occurred inJanuary 2022 , which significantly contributed to the PTG revenue improvement of 96.8%, or more than$2,750,000 . (See Note 2- Acquisition, for further discussion related to this acquisition). Additionally, Hy-Tech's OEM revenue increased 48.7% over the prior year. This improvement is due primarily to increased shipments to a major OEM customer, and to a lesser extent, improved general market conditions in 2022, compared to 2021 during which Hy-Tech was impacted by the slowdown caused by the COVID global pandemic. The gross profit generated from the shipments to this OEM customer is less than historical OEM gross profit. The key factor for the increase in Hy-Tech's Other revenue was a large one-time order for its Thaxton products. The decline (5.8%) in ATP revenue was driven by two factors; first, Hy-Tech's ATP products continue to be price-challenged by off-shore suppliers, and second, the Company's decision in 2021 to focus more of its design and marketing efforts on its OEM suite of
products.
GROSS MARGIN
Year Ended December 31, Increase
2022 2021 Amount %
Florida Pneumatic $ 16,484,000 $ 15,274,000 $ 1,210,000 7.9 %
As percent of respective revenue 39.8 % 36.8 % 3.0 % pts
Hy-Tech $ 2,455,000 $ 2,073,000 $ 382,000 18.4 %
As percent of respective revenue 13.9 % 17.2 % (3.3) % pts
Total Tools $ 18,939,000 $ 17,347,000 $ 1,592,000 9.2 %
As percent of respective revenue 32.1 % 32.4 % (0.3) % pts
Florida Pneumatic's Aerospace revenue generates stronger margins than its other product lines. Aerospace revenue increased as a percentage ofFlorida Pneumatic's revenue, which in turn was a major factor in the improved gross margin. The vast majority of Florida Pneumatic's Aerospace revenue is generated through the sale of the JIFFY product line. Additionally, other factors that contributed to Florida Pneumatic's 300 basis point improvement were, its ability during fiscal 2022 to pass through some of the increases it incurred in ocean and domestic freight costs, as well as favorable foreign exchange rates, mostly related to the Taiwanese dollar. It should be noted that Florida Pneumatic's ocean freight costs, particularly during the second half of 2021 through mid-2022 increased approximately five-fold, when compared to pre-pandemic rates. Our ocean freight costs have declined somewhat during the second half of 2022, but still remain above pre-pandemic levels. These improvements to gross margin were partially offset by increased warranty costs related to The Home Depot. Warranty costs lag in relation to shipments. As such, we believe these costs will decline over time. Hy-Tech manufactures most of its products. Its gross margin is significantly affected by customer/product mix. Specifically, its largest OEM customers generates lower than average gross margin. We are continuing to increase prices and reduce manufacturing costs without jeopardizing the relationship with this major customer. Additionally, factors such as absorption of manufacturing overhead, raw material pricing, third-party costs, and the supply chain issues have affected its overall gross margin. Specifically, during 2022, Hy-Tech has encountered higher raw material, freight, and outside third-party vendor costs, all adversely affecting its gross margin in 2022. Further, during the latter portion of 2022 as Hy-Tech realigned its marketing and sales strategy, it determined that certain customers and products would no longer be serviced. As a result, Hy-Tech incurred an excess charge relating to obsolete, slow-moving inventory ("OSMI"). Further, Hy-Tech's total gross margin was impacted by weak overhead absorption at itsPunxsutawney, PA. facility, due primarily to integration issues of theJackson Gear Company acquisition that occurred during the first quarter of 2022. We believe these issues will be corrected during the second quarter of 2023.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") include salaries and
related costs, commissions, travel, administrative facilities, 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.
21
Table of Contents
Management's Discussion and Analysis of Financial Condition and Results of Operations
RESULTS OF OPERATIONS - Continued
REVENUE - (Continued)
Our SG&A expenses during 2022 were
Compensation expenses increased
base salaries and wages, accrued performance-based bonus incentives and
associated payroll taxes and employee benefits. Several factors contributed to
i) 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 company-wide
bonus/incentive/performance accruals.
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.
Bad debt expense increased
iii) fourth quarter of 2022, we made several attempts to resolve and collect past
due invoices from one customer, to no avail. It is extremely unlikely that
we will be able to collect from this customer.
Our depreciation and amortization increased
iv) additional equipment purchased throughout the year and equipment and
intangible assets acquired in connection with the
acquisition.
v) Temporary labor and stock-based compensation expense increased
Our variable expenses decreased
vi) significantly lower advertising costs at Florida Pneumatic, caused by a
change in a distribution channel strategy.
Our computer-related expenses declined
vii) of 2021, we incurred approximately
ransomware attack at our Florida Pneumatic subsidiary, where no such costs
were incurred during 2022.
IMPAIRMENT OF ASSETS
During 2022 and 2021, we reduced by
22
Table of Contents
Management's Discussion and Analysis of Financial Condition and Results of Operations
RESULTS OF OPERATIONS - Continued
REVENUE - (Continued)
OTHER INCOME
In accordance with current accounting guidance, we recorded a gain of$19,000 during the fourth quarter of 2022 related to the early termination of a real property lease. InDecember 2021 , we completed the process of determining and verifying our eligibility and amount of payroll tax credits known as the Employee Retention Credit ("ERC"). This resulted in filing certain amended payroll tax forms, which, in the aggregate, totaled$2,028,000 of payroll tax credits. During 2022, we received approximately$112,000 of the ERC. InJanuary 2023 , we received approximately$1,677,000 of the ERC. The ERC is subject to federal and local tax. Pursuant to the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), onApril 20, 2020 , we received a Paycheck Protection Program ("PPP") loan, in the amount of$2,929,000 . Under the terms of the CARES Act, as amended, we were eligible to apply for forgiveness for all or a portion of the PPP loan. InFebruary 2021 , we filed an application for forgiveness with the lender, who approved this submission and submitted the application for forgiveness to the SBA. OnJune 9, 2021 , we were advised that the SBA had approved our PPP loan forgiveness application. Accordingly, the lender applied the funds it received from the SBA and paid off PPP loan principal and interest in full. In accordance with accounting guidance, this forgiveness of debt and related accrued interest was accounted for as Other Income and Interest Expense - Net, in 2021, and was not considered as taxable income. INTEREST EXPENSE - NET Year Ended December 31, (increase) decrease 2022 2021 Amount % Interest expense attributable to: Short-term borrowings$ 353,000 $ 47,000 $ (306,000) (651.1) % PPP loan - (18,000) (18,000) (100.0) Amortization expense of debt issue costs 16,000 16,000 - - Other (6,000) - 6,000 NA Total$ 363,000 $ 45,000 $ (318,000) (706.7) % 23 Table of Contents
Management's Discussion and Analysis of Financial Condition and Results of Operations
RESULTS OF OPERATIONS - Continued
The most significant factor causing the increase in our short-term borrowings interest expense was the growth in the prime rate during 2022. The Applicable Margin, as defined in our Credit Agreement during fiscal 2022 ranged from 1.5% to 2.10% applied to LIBOR /SOFR borrowings and from 0.50% to 1.60% applied to Base rate borrowings. The interest charged on Base rate borrowings, (effectively borrowings at Prime rate) before adding Applicable Margin increased from 3.25% inJanuary 2022 to 7.50% atDecember 31, 2022 . Further, the interest rate before the Applicable Margin for LIBOR / SOFR term borrowings increased from an average of 1.61% inJanuary 2022 to an average of 6.20% for borrowing inDecember 2022 . Our average monthly borrowings under the Credit Facility during fiscal 2022 ranged from$7,852,000 to$12,654,000 . The average monthly short-term borrowing during fiscal 2022 was$9,845,000 , compared to$2,686,000 during the prior year. The increase was driven by theJackson Gear Company business acquisition inJanuary 2022 (See Note 2). Additional working capital needs are due to the anticipated growth, and a roll-out of a tools program to our retail customer. Our Revolver borrowings increased significantly in the first half of 2022 and began to decline during the second half of 2022. AtDecember 31, 2022 our borrowing under the Credit Facility was net$7,570,000 . (See Liquidity and Capital Resources for further discussion).
The amortization expense is related to the debt issue costs associated with amendments to our banking facility.
Lastly, Other relates to interest income in connection with Tax refunds received in fiscal 2022.
INCOME TAX EXPENSE The benefit from income taxes was$376,000 in 2022, compared to$2,000 in 2021. Significant factors impacting the 2022 net effective tax benefit rate were non-deductible permanent differences, and state and local taxes. The net effective tax benefit for 2022 was (20.3%). See Note 11- Income Taxes to our Consolidated Financial Statements for further discussion.
LIQUIDITY AND CAPITAL RESOURCES
We monitor such metrics as days sales outstanding, inventory requirements, accounts payable and capital expenditures to project liquidity needs, as well as evaluate return on assets. Our primary source of funds is 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:
December 31,
2022 2021
Working capital $ 20,838,000 $ 24,598,000
Current ratio 2.44 to 1 3.04 to 1
Shareholders' equity $ 41,956,000 $ 43,840,000
24
Table of Contents
Management's Discussion and Analysis of Financial Condition and Results of Operations
Credit Facility
Currently our Credit Facility, which is discussed in detail in Note 7 - Debt, is the primary source of funding our operations. Further, this Credit Facility was amended inMarch 2023 . See Note - 13 - Subsequent events for further discussion.
Additionally, should the need arise whereby the current Credit Facility is insufficient; we could obtain additional funds based on the value of our real property.
Cash Flows For the year endedDecember 31, 2022 , cash provided by operating activities was$3,288,000 , compared to cash used in operating activities for the year endedDecember 31, 2021 , of$4,149,000 . AtDecember 31, 2022 , our consolidated cash balance was$667,000 , compared to$539,000 atDecember 31, 2021 . Cash at our UAT subsidiary onDecember 31, 2022 , and 2021 was$49,500 and$190,000 , respectively. We operate under the terms and conditions of the Credit Agreement. As a result, all domestic cash receipts are remitted to Capital One lockboxes. Our total debt to total book capitalization (total debt divided by total debt plus equity) onDecember 31, 2022 , was 15.3%, compared to 11.6% onDecember 31, 2021 . Capital spending during the year endedDecember 31, 2022 , was$2,374,000 , compared to$642,000 in 2021. Capital expenditures currently planned for 2023 are approximately$2,600,000 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 7 - Debt, to our Consolidated Financial Statements, and cash provided by operations. AtDecember 31, 2022 , we had$7,678,000 available to us from the revolver portion of the credit facility.
For the year ended
Customer concentration
During 2022, we had one customer that accounted for 21.2% of our consolidated revenue, compared to 26.1% in 2021. Further, accounts receivable onDecember 31, 2022 , and 2021 due from this customer were 24.3% and 35.9%, respectively, of total accounts receivable. IMPACT OF INFLATION During 2022, with respect to our cost of inventory, we encountered price increases in raw materials, imported parts and tools, ocean freight and labor. It is difficult to accurately determine what portion of these increases are attributable to inflation. During the latter half of fiscal 2022, we were able to begin to successfully pass through most of the above-mentioned price increases. We intend to continue to actively manage the impact of inflation on our results of operations, however, we cannot reasonably estimate possible future impacts at this time. See ITEM 1A -Risk Factors
Recently Adopted Accounting Pronouncements
Please refer to Note 1, Summary of Significant Accounting Policies, to the Notes
to Consolidated Financial Statements included elsewhere in this report for a
discussion of recently adopted accounting pronouncements and new accounting
pronouncements that may impact us.
25
Table of Contents
© Edgar Online, source
