UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-Q
---------
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1 - 5332
P & F INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 22-1657413
(State of incorporation) (I.R.S. Employer Identification Number)
300 SMITH STREET, FARMINGDALE, NEW YORK 11735
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 694-1800
---------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES |X| NO |_|
As of November 7, 2000, there were outstanding 3,608,433 shares of the
Registrant's Class A Common Stock, par value $1.00 per share.
<PAGE>
P & F INDUSTRIES, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
PAGE
PART I ----
------
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 2000 and December 31, 1999 1 - 2
Consolidated Statements of Income for the
three months and the nine months ended
September 30, 2000 and 1999 3
Consolidated Statement of Shareholders' Equity
for the nine months ended September 30, 2000 4
Consolidated Statements of Cash Flows for the
nine months ended September 30, 2000 and 1999 5 - 6
Notes to Consolidated Financial Statements 7 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 15
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 16
PART II
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
EXHIBIT INDEX 19 - 20
i
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
P & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
=======================================
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
ASSETS
------
CURRENT:
Cash $ 767,532 $ 1,305,351
Accounts receivable, less allowance
for possible losses of $495,123
in 2000 and $767,456 in 1999 14,223,207 12,086,000
Inventories 26,104,842 20,614,501
Deferred income taxes 532,000 532,000
Prepaid expenses and other 907,293 570,914
------------ ------------
TOTAL CURRENT ASSETS 42,534,874 35,108,766
------------ ------------
PROPERTY AND EQUIPMENT:
Land 1,182,938 1,182,939
Buildings and improvements 5,968,893 5,942,838
Machinery and equipment 12,026,225 11,078,539
------------ ------------
19,178,056 18,204,316
Less accumulated depreciation
and amortization 8,267,941 7,200,142
------------ ------------
NET PROPERTY AND EQUIPMENT 10,910,115 11,004,174
------------ ------------
GOODWILL, net of accumulated
amortization of $1,757,803 in
2000 and $1,514,476 in 1999 7,707,155 7,950,482
OTHER ASSETS 166,588 176,937
------------ ------------
TOTAL ASSETS $ 61,318,732 $ 54,240,359
============ ============
1
<PAGE>
P & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(CONTINUED)
=======================================
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Short-term borrowings $ 10,000,000 $ 6,000,000
Accounts payable 6,375,695 5,592,249
Accruals:
Compensation 2,028,259 2,474,519
Other 2,341,617 2,173,516
Current maturities of long-term debt 951,136 947,884
------------ ------------
TOTAL CURRENT LIABILITIES 21,696,707 17,188,168
LONG-TERM DEBT, less current maturities 6,724,315 7,325,661
DEFERRED INCOME TAXES 702,000 702,000
------------ ------------
29,123,022 25,215,829
------------ ------------
SHAREHOLDERS' EQUITY:
Preferred stock - $10 par;
authorized - 2,000,000 shares;
no shares outstanding -- --
Common stock:
Class A - $1 par;
authorized - 7,000,000
shares; issued - 3,652,893 shares
and 3,504,893 shares 3,652,893 3,504,893
Class B - $1 par;
authorized - 2,000,000 shares;
no shares issued or outstanding -- --
Additional paid-in capital 8,451,789 8,282,602
Retained earnings 20,782,028 17,735,535
Treasury stock, at cost
(69,160 shares and 49,235 shares) (691,000) (498,500)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 32,195,710 29,024,530
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 61,318,732 $ 54,240,359
============ ============
2
<PAGE>
P & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
---------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Net sales $ 21,645,406 $ 20,219,270 $ 61,035,604 $ 54,983,995
Other 199,351 139,109 569,848 574,809
------------ ------------ ------------ ------------
21,844,757 20,358,379 61,605,452 55,558,804
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales 15,639,334 14,027,734 42,717,447 38,232,924
Selling, administrative and general 4,262,709 3,987,012 12,910,501 11,603,179
Interest - net 389,897 371,691 1,067,011 973,328
------------ ------------ ------------ ------------
20,291,940 18,386,437 56,694,959 50,809,431
------------ ------------ ------------ ------------
INCOME BEFORE TAXES ON INCOME 1,552,817 1,971,942 4,910,493 4,749,373
TAXES ON INCOME 593,000 738,000 1,864,000 1,800,000
------------ ------------ ------------ ------------
NET INCOME $ 959,817 $ 1,233,942 $ 3,046,493 $ 2,949,373
============ ============ ============ ============
Weighted average common
shares outstanding:
Basic 3,584,324 3,455,208 3,546,203 3,340,868
Diluted 3,699,113 3,718,914 3,691,470 3,727,195
Earnings per share of common stock:
Basic $ .27 $ .35 $ .86 $ .88
Diluted $ .26 $ .33 $ .83 $ .79
</TABLE>
3
<PAGE>
P & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
===============================================
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK
----------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
Balance, January 1, 2000 $ 3,504,893 $ 8,282,602 $ 17,735,535 ($ 498,500)
Net income for the nine months
ended September 30, 2000 -- -- 3,046,493 --
Exercise of stock options,
148,000 shares 148,000 169,187 -- --
Common stock received on
exercise of stock options,
19,925 shares -- -- -- (192,500)
----------- ----------- ------------ ---------
Balance, September 30, 2000 $ 3,652,893 $ 8,451,789 $ 20,782,028 ($ 691,000)
=========== =========== ============ =========
</TABLE>
4
<PAGE>
P & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
========================================
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,046,493 $ 2,949,373
------------ ------------
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation 1,067,799 996,394
Amortization 254,520 239,872
(Gain) on disposal of fixed assets (41,193) --
Provision for losses on
accounts receivable - net 2,655 4,481
Decrease (increase):
Accounts receivable (2,139,862) (5,656,303)
Inventories (5,490,341) (9,433,084)
Prepaid expenses and other (336,379) (297,015)
Other assets (844) 22,721
Increase (decrease):
Accounts payable 783,446 3,955,768
Accruals and other (278,159) 250,588
------------ ------------
Total adjustments (6,178,358) (9,916,578)
------------ ------------
Net cash used in
operating activities (3,131,865) (6,967,205)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (973,741) (1,646,470)
Proceeds from sale of fixed assets 41,194 --
------------ ------------
Net cash used in
investing activities (932,547) (1,646,470)
------------ ------------
5
<PAGE>
P & F INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(UNAUDITED)
---------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
2000 1999
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings 7,000,000 10,500,000
Repayments of short-term borrowings (3,000,000) (1,500,000)
Proceeds from mortgage refinancing -- 1,800,000
Principal payments on long-term debt (598,094) (3,902,830)
Proceeds from exercise of stock options 124,687 29,025
------------ ------------
Net cash provided by
financing activities 3,526,593 6,926,195
------------ ------------
NET (DECREASE) INCREASE IN CASH (537,819) (1,687,480)
CASH AT BEGINNING OF PERIOD 1,305,351 2,280,788
------------ ------------
CASH AT END OF PERIOD $ 767,532 $ 593,308
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Income taxes $ 1,826,470 $ 1,625,300
============ ============
Interest $ 1,064,695 $ 1,010,770
============ ============
During the nine months ended September 30, 2000, the Company received
19,925 shares of common stock in connection with the exercise of stock options.
The value of these shares was recorded at $192,500.
6
<PAGE>
P & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===========================================
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements contained herein include the
accounts of P & F Industries, Inc. and its subsidiaries (the "Company"). All
significant intercompany balances and transactions have been eliminated.
The Company conducts its business operations through three wholly-owned
subsidiaries. Embassy Industries, Inc. ("Embassy") is engaged in the manufacture
and sale of baseboard heating products and the importation and sale of radiant
heating systems. Embassy also imports a line of door and window hardware items
through its Franklin Manufacturing division. Florida Pneumatic Manufacturing
Corporation ("Florida Pneumatic") is engaged in the importation, manufacture and
sale of pneumatic hand tools, primarily for the industrial and retail markets,
and the importation and sale of compressor air filters. Florida Pneumatic also
markets, through its Berkley Tool division, a line of pipe cutting and threading
tools, wrenches and replacement electrical components for a widely used brand of
pipe cutting and threading machines. Green Manufacturing, Inc. ("Green") is
engaged primarily in the manufacture, development and sale of heavy-duty welded
custom designed hydraulic cylinders. Green also manufactures a line of access
equipment for the petro-chemical industry and a line of post hole digging
equipment for the agricultural industry.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the rules and regulations of the Securities and
Exchange Commission regarding interim financial reporting. Accordingly, these
interim financial statements do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of the Company, the unaudited consolidated financial
statements include all adjustments necessary to a fair statement of the results
for the interim periods presented. All such adjustments are of a normal
recurring nature. Results for interim periods are not necessarily indicative of
results to be expected for a full year, since the operations of some of the
Company's subsidiaries are seasonal in nature.
The consolidated balance sheet information for December 31, 1999 was
derived from the audited financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999. These interim
financial statements should be read in conjunction with that Report.
7
<PAGE>
P & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
BASIS OF FINANCIAL STATEMENT PRESENTATION (CONTINUED)
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE 2 - INVENTORIES
Major classes of inventory were as follows:
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
Finished goods $ 21,354,264 $ 15,673,198
Work in process 1,050,680 812,929
Raw materials and supplies 3,699,898 4,128,374
------------ ------------
$ 26,104,842 $ 20,614,501
============ ============
NOTE 3 - CAPITAL STOCK TRANSACTIONS
During the nine months ended September 30, 2000, a director of the Company
surrendered 13,144 shares of Class A Common Stock, with a fair value of
$130,625, in connection with the exercise of options to purchase 50,000 shares
of Class A Common Stock.
Also during the nine months ended September 30, 2000, an employee of the
Company surrendered 6,781 shares of Class A Common Stock, with a fair value of
$61,875, in connection with the exercise of options to purchase 35,000 shares of
Class A Common Stock.
8
<PAGE>
P & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 4 - SEGMENTS OF BUSINESS
The following tables present financial information by segment for the
periods ended September 30, 2000 and 1999. Segment profit excludes general
corporate expenses, interest expense and income taxes. There were no
intersegment revenues.
PNEUMATIC
TOOLS AND
NINE MONTHS ENDED CON- RELATED HYDRAULIC HEATING
SEPTEMBER 30, 2000 SOLIDATED EQUIPMENT CYLINDERS EQUIPMENT HARDWARE
------------------- --------- --------- --------- --------- --------
(In thousands)
Revenues from
external customers $ 61,605 $ 33,575 $ 16,328 $ 7,285 $ 4,417
========= ========= ========= ========= =======
Segment profit $ 8,272 $ 6,376 $ 1,052 $ 539 $ 305
========= ========= ========= ========= =======
PNEUMATIC
TOOLS AND
NINE MONTHS ENDED CON- RELATED HYDRAULIC HEATING
SEPTEMBER 30, 1999 SOLIDATED EQUIPMENT CYLINDERS EQUIPMENT HARDWARE
------------------- --------- --------- --------- --------- --------
(In thousands)
Revenues from
external customers $ 55,559 $ 29,016 $ 15,295 $ 6,841 $ 4,407
========= ========= ========= ========= =======
Segment profit $ 7,982 $ 6,501 $ 729 $ 303 $ 449
========= ========= ========= ========= =======
PNEUMATIC
TOOLS AND
THREE MONTHS ENDED CON- RELATED HYDRAULIC HEATING
SEPTEMBER 30, 2000 SOLIDATED EQUIPMENT CYLINDERS EQUIPMENT HARDWARE
------------------- --------- --------- --------- --------- --------
(In thousands)
Revenues from
external customers $ 21,844 $ 12,543 $ 4,971 $ 2,895 $ 1,435
========= ========= ========= ========= =======
Segment profit $ 2,674 $ 2,035 $ 267 $ 298 $ 74
========= ========= ========= ========= =======
9
<PAGE>
P & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 4 - SEGMENTS OF BUSINESS (CONTINUED)
PNEUMATIC
TOOLS AND
THREE MONTHS ENDED CON- RELATED HYDRAULIC HEATING
SEPTEMBER 30, 1999 SOLIDATED EQUIPMENT CYLINDERS EQUIPMENT HARDWARE
------------------- --------- --------- --------- --------- --------
(In thousands)
Revenues from
external customers $ 20,359 $ 10,856 $ 4,980 $ 2,894 $ 1,629
========= ========= ========= ========= =======
Segment profit $ 3,155 $ 2,652 $ 126 $ 235 $ 142
========= ========= ========= ========= =======
The reconciliation of combined operating profits for reportable segments
to consolidated income before income taxes is as follows:
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2000 1999
---------- ----------
Total profit for reportable segments $8,272,041 $7,981,890
General corporate expenses (2,294,537) (2,259,189)
Interest expense (1,067,011) (973,328)
---------- ----------
Income before income taxes $4,910,493 $4,749,373
========== ==========
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2000 1999
---------- ----------
Total profit for reportable segments $2,673,930 $3,154,893
General corporate expenses (731,216) (811,260)
Interest expense (389,897) (371,691)
---------- ----------
Income before income taxes $1,552,817 $1,971,942
========== ==========
10
<PAGE>
P & F INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 5 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per common share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted
earnings per common share -
income available to common
shareholders $ 959,817 $ 1,233,942 $ 3,046,493 $ 2,949,373
=========== =========== =========== ===========
Denominator:
Denominator for basic earnings
per share - weighted average
common shares outstanding 3,584,324 3,455,208 3,546,203 3,340,868
Effect of dilutive securities:
Common stock options 114,789 263,706 145,267 386,327
----------- ----------- ----------- -----------
Denominator for diluted earnings
per share - adjusted weighted
average common shares and
assumed conversions 3,699,113 3,718,914 3,691,470 3,727,195
=========== =========== =========== ===========
Earnings per common share:
Basic $ .27 $ .35 $ .86 $ .88
===== ===== ===== =====
Diluted $ .26 $ .33 $ .83 $ .79
===== ===== ===== =====
</TABLE>
11
<PAGE>
P & F INDUSTRIES, INC. AND SUBSIDIARIES
=======================================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIRD QUARTER ENDED SEPTEMBER 30, 2000 COMPARED WITH THIRD QUARTER ENDED
SEPTEMBER 30, 1999
Consolidated revenues increased 7.3%, from $20,358,379 to $21,844,757.
Revenues from pneumatic tools and related equipment increased 15.5%, from
$10,856,349 to $12,543,705, due primarily to the addition of a significant new
account obtained in the fourth quarter of 1999. Selling prices of pneumatic
tools and related equipment were unchanged from the prior year. Revenues from
hydraulic cylinders and other equipment were essentially flat, going from
$4,979,176 to $4,970,459. Selling prices of hydraulic cylinders and other
equipment were unchanged from the prior year. Revenues from heating equipment
were virtually unchanged, going from $2,894,313 to $2,895,530. Selling prices of
heating equipment were unchanged from the prior year. Revenues from hardware
decreased 11.9%, from $1,628,541 to 1,435,063, due primarily to the loss of two
significant customers and a decrease in sales to a third customer. Selling
prices of hardware products were unchanged from the prior year.
Consolidated gross profit, as a percentage of revenues, decreased from
31.1% to 28.4%. Gross margins from pneumatic tools and related equipment
decreased from 40.4% to 31.9%, due primarily to decreases in the value of the
U.S. dollar as compared to both the Japanese yen and the New Taiwan dollar,
which raised the cost of imported product. This decrease was partially offset by
a more profitable product mix. Gross margins in the third quarter of 1999 were
also higher because of significantly greater production activity in one-time
preparation for a major product launch, which resulted in less fixed overhead
being associated with each unit produced. Gross margins from hydraulic cylinders
and other equipment increased from 11.5% to 15.9%, due primarily to increased
productivity of direct labor. Gross margins from heating equipment increased
from 34.1% to 35.4%, due primarily to an increase in the value of the U.S.
dollar as compared to the Euro, which lowered the cost of imported product.
Gross margins from hardware increased from 23.9% to 26.9%, due primarily to the
discontinuance of initial order discounts to a significant customer opening new
stores.
Consolidated selling, administrative and general expenses increased 6.9%,
from $3,987,012 to $4,262,709, consistent with the increase in revenues for the
period.
Interest expense increased 4.9%, from $371,691 to $389,897, due primarily
to higher average interest rates.
The effective tax rates for the quarters ended September 30, 2000 and 1999
were 38.2% and 37.4%, respectively.
12
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1999
Consolidated revenues increased 10.9%, from $55,558,804 to $61,605,452.
Revenues from pneumatic tools and related equipment increased 15.7%, from
$29,016,350 to $33,575,538, due primarily to the addition of a significant new
account obtained in the fourth quarter of 1999, which was partially offset by
the non-renewal of a large promotion that was run during the fourth quarter of
1999. Selling prices of pneumatic tools and related equipment were unchanged
from the prior year. Revenues from hydraulic cylinders and other equipment
increased 6.8%, from $15,294,416 to $16,327,893, due primarily to an increase in
sales to the wrecker and refuse markets, which was partially offset by a
decrease in sales to the aerial lift market. Selling prices of hydraulic
cylinders and other equipment were unchanged from the prior year. Revenues from
heating equipment increased 6.5%, from $6,841,390 to $7,285,172, due primarily
to sales to a new customer in the western territory, higher sales in the radiant
area and an increase in sales of commercial products. Selling prices of heating
equipment were unchanged from the prior year. Revenues from hardware were
virtually unchanged, going from $4,406,648 to $4,416,849. Selling prices of
hardware products were unchanged from the prior year.
Consolidated gross profit, as a percentage of revenues, decreased from
31.2% to 30.7%. Gross margins from pneumatic tools and related equipment
decreased from 40.3% to 37.4%, due primarily to decreases in the value of the
U.S. dollar as compared to both the Japanese yen and the New Taiwan dollar,
which raised the cost of imported product. Gross margins from hydraulic
cylinders and other equipment increased from 13.7% to 15.7%, due to increased
productivity of direct labor. Gross margins from heating equipment increased
from 34.5% to 34.8%, due to a more profitable product mix and an increase in the
value of the U.S. dollar as compared to the Euro, which lowered the cost of
imported product. Gross margins from hardware increased from 26.3% to 27.9%, due
to a more favorable product mix and the discontinuance of initial order
discounts to a significant customer opening new stores.
Consolidated selling, administrative and general expenses increased 11.3%
from $11,603,179 to $12,910,501, consistent with the increase in revenues for
the period.
Interest expense increased 9.6%, from $973,328 to $1,067,011, due
primarily to higher average interest rates.
The effective tax rates for the quarters ended September 30, 2000 and 1999
were 38.0% and 37.9%, respectively.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company gauges its liquidity and financial stability by the
measurements shown in the following table (dollar amounts in thousands):
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2000 1999 1999
------------- ------------ --------------
Working Capital $ 20,838 $ 17,921 $ 16,062
Current Ratio 1.96 to 1 2.04 to 1 1.60 to 1
Shareholders' Equity $ 32,196 $ 29,025 $ 27,428
During the nine months ended September 30, 2000, gross accounts receivable
increased by approximately $2,140,000 and inventories increased by approximately
$5,490,000. An increase of approximately $1,325,000 in accounts receivable at
Florida Pneumatic was the result of increased sales to a significant customer
with extended terms, and the timing of cash receipts. An increase of
approximately $700,000 in accounts receivable at Embassy Industries was the
result of greater sales volume at the end of the third quarter of 2000 than at
the end of the fourth quarter of 1999. Florida Pneumatic's inventory increased
by approximately $4,200,000, primarily because sales to two significant
customers for the last six months were well short of forecasts. Green's
inventory increased by approximately $800,000, the result of two factors. First,
year-end inventories are generally reduced in preparation for the taking of a
physical inventory. Second, inventories have increased due to longer production
runs that were initiated to improve profit margins on recurring orders.
Short-term borrowings and accounts payable, combined, increased approximately
$4,800,000 as a result of the increase in inventories discussed above.
Management believes that the inventory is fully saleable.
On July 26, 2000, the Company renewed its Credit Agreement, which provides
the Company with various credit facilities, including revolving credit loans,
term loans for acquisitions and a foreign exchange line. The revolving credit
loan facility provides a total of $12,000,000, with various sublimits, for
direct borrowings, letters of credit, bankers' acceptances and equipment loans.
At September 30, 2000, there was $10,000,000 outstanding against the revolving
credit loan facility. There was also a commitment of approximately $42,000 at
September 30, 2000 for open letters of credit.
The term loan facility provides a commitment of $15,000,000 to finance
acquisitions subject to the lending bank's approval. In September 1998,
$10,000,000 of the term loan facility was used to help finance the acquisition
of Green and there was $3,333,333 still outstanding against this facility at
September 30, 2000. This 7-year term loan bears interest at LIBOR (London
Interbank Offered Rates) plus 1.75%. The Company made payments of interest only
through October 1999, at which time payments of both principal and interest
became due. There was also a standby letter of credit totalling approximately
$821,000 outstanding against this facility at September 30, 2000. This standby
letter of credit was used to secure the Economic Development Revenue Bond
assumed as part of the acquisition of Green.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The foreign exchange line provides for the availability of up to
$10,000,000 in foreign currency forward contracts. These contracts fix the
exchange rate on future purchases of Japanese yen needed for payments to foreign
suppliers. The total amount of foreign currency forward contracts outstanding at
September 30, 2000 was approximately $2,622,000.
The Company's Credit Agreement is subject to annual review by the lending
bank. Under the Credit Agreement, the Company is required to adhere to certain
financial covenants. At September 30, 2000, and for the nine months then ended,
the Company satisfied all of these covenants.
Capital spending for the nine months ended September 30, 2000 was
approximately $974,000. The total amount was provided from working capital.
Capital expenditures for the rest of 2000 are expected to total approximately
$460,000, some of which may be financed under the Company's Credit Agreement.
Included in the expected total for the rest of 2000 are capital expenditures
relating to new products, expansion of existing product lines and replacement of
old equipment.
The Company, through Florida Pneumatic, imports a significant amount of
its purchases from Japan and Taiwan, with payments due in Japanese yen and New
Taiwan dollars, respectively. As a result, the Company is subject to the effects
of foreign currency exchange fluctuations. The Company uses a variety of
techniques to mitigate any adverse effects from these fluctuations, including
increasing its selling prices, obtaining price reductions from its overseas
suppliers, using alternative supplier sources and entering into foreign currency
forward contracts for the purchase of yen. See "Item 3, Quantitative and
Qualitative Disclosures About Market Risk."
The Company believes that cash on hand, cash generated by future
operations and cash available through its credit facilities will be sufficient
to allow the Company to support its capital expenditure program and to meet its
general working capital needs.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 is effective for transactions
entered into after January 1, 2001 and requires that all derivative instruments
be recorded on the balance sheet at fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of the hedge
transaction and the type of hedge transaction. The ineffective portion of all
hedges will be recognized in earnings. The Company is in the process of
reviewing SFAS 133 to determine what impact, if any, the adoption of SFAS 133
will have on its results of operations and its financial position. Based on
current market conditions, the Company does not believe that the impact will be
material.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks, which include changes in U.S. and
international exchange rates, the prices of certain commodities and currency
rates as measured against the U.S. dollar and each other. The Company attempts
to reduce the risks related to foreign currency fluctuation by utilizing
financial instruments.
The value of the U.S. dollar affects the Company's financial results.
Changes in exchange rates may positively or negatively affect the Company's
gross margins and operating expenses. The Company engages in hedging programs
aimed at limiting, in part, the impact of currency fluctuations. Using primarily
forward exchange contracts, the Company hedges some of those transactions that,
when remeasured according to generally accepted accounting principles, impact
the income statement. Factors that could impact the effectiveness of the
Company's programs include volatility of the currency markets and availability
of hedging instruments. All currency contracts that are entered into by the
Company are components of hedging programs and are entered into for the sole
purpose of hedging an existing or anticipated currency exposure, not for
speculation. The Company does not buy or sell financial instruments for trading
purposes. Although the Company maintains these programs to reduce the impact of
changes in currency exchange rates, when the U.S. dollar sustains a weakening
exchange rate against currencies in which the Company incurs costs, the
Company's costs are adversely affected. At September 30, 2000, the Company held
open hedge forward contracts to deliver approximately $2,622,000 of Japanese
Yen. The potential loss in value of the Company's net investment in these
foreign currency forward contracts resulting from a hypothetical 10 percent
adverse change in yen exchange rates at September 30, 2000 is approximately
$291,000.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Registrant is not a party to any litigation that is expected to have a
material adverse effect on its business.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See "Exhibit Index" immediately following the signature page.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the
quarter ended September 30, 2000.
17
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
P & F INDUSTRIES, INC.
(Registrant)
By /s/ Joseph A. Molino, Jr.
-------------------------------------
Joseph A. Molino, Jr.
Vice President
Dated: November 7, 2000 (Principal Financial Officer)
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<PAGE>
EXHIBIT INDEX
EXHIBIT
NO.
2.1 Asset Purchase Agreement, dated as of September 16, 1998, by and between
Green Manufacturing, Inc., an Ohio corporation, and the Registrant
(Incorporated by reference to Exhibit 2.1 of the Registrant's Current
Report on Form 8-K dated September 16, 1998). Pursuant to Item 601(b)(2)
of Regulation S-K, the Registrant agrees to furnish supplementally a copy
of any exhibit or schedule omitted from the Asset Purchase Agreement to
the Commission upon request.
3.1 Restated Certificate of Incorporation of the Registrant (Incorporated by
reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1999).
3.2 Amended By-laws of the Registrant (Incorporated by reference to Exhibit
3.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999).
4.1 Rights Agreement, dated as of August 23, 1994, between the Registrant and
American Stock Transfer & Trust Company, as Rights Agent (Incorporated by
reference to Exhibit 1 to the Registrant's Registration Statement on Form
8-A dated August 24, 1994).
4.2 Amendment to Rights Agreement, dated as of April 11, 1997, between the
Registrant and American Stock Transfer & Trust Company, as Rights Agent
(Incorporated by reference to Exhibit 4.1 to the Registrant's Current
Report on Form 8-K dated April 11, 1997).
4.3 Credit Agreement, dated as of July 23, 1998, by and among the Registrant,
Florida Pneumatic Manufacturing Corporation, a Florida corporation,
Embassy Industries, Inc., a New York corporation, and European American
Bank, a New York banking corporation (Incorporated by reference to Exhibit
4.3 to the Registrant's Annual Report on Form 10-K/A for the fiscal year
ended December 31, 1998).
4.4 Amendment No. 1 to Credit Agreement, dated as of September 16, 1998, by
and among the Registrant, Florida Pneumatic Manufacturing Corporation, a
Florida corporation, Embassy Industries, Inc., a New York corporation,
Green Manufacturing, Inc., a Delaware corporation, and European American
Bank, a New York banking corporation (Incorporated by reference to Exhibit
4.4 to the Registrant's Annual Report on Form 10-K/A for the fiscal year
ended December 31, 1998).
19
<PAGE>
EXHIBIT INDEX
(CONTINUED)
EXHIBIT
NO.
4.5 Amendment No. 2 to Credit Agreement, dated as of July 28, 1999, by and
among the Registrant, Florida Pneumatic Manufacturing Corporation, a
Florida corporation, Embassy Industries, Inc., a New York corporation,
Green Manufacturing, Inc., a Delaware corporation, and European American
Bank, a New York banking corporation (Incorporated by reference to Exhibit
4.5 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999).
4.6 Amendment No. 3 to Credit Agreement, dated as of July 26, 2000, by and
among the Registrant, Florida Pneumatic Manufacturing Corporation, a
Florida corporation, Embassy Industries, Inc., a New York corporation,
Green Manufacturing, Inc., a Delaware corporation, and European American
Bank, a New York banking corporation (Incorporated by reference to Exhibit
4.5 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000).
4.7 Certain instruments defining the rights of holders of the long-term debt
securities of the Registrant are omitted pursuant to Section
(b)(4)(iii)(A) of Item 601 of Regulation S-K. The Registrant agrees to
furnish supplementally copies of these instruments to the Commission upon
request.
10.1 Amended and Restated Employment Agreement, dated as of February 28, 1997,
between the Registrant and Richard A. Horowitz (Incorporated by reference
to Exhibit 10.1 to the Registrant's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1998).
10.2 Consulting Agreement, effective as of November 1, 1998, between the
Registrant and Sidney Horowitz (Incorporated by reference to Exhibit 10.2
to the Registrant's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1998).
10.3 Consulting Agreement, effective as of November 1, 2000, between the
Registrant and Sidney Horowitz.
10.4 1992 Incentive Stock Option Plan of the Registrant, as amended and
restated as of March 13, 1997 (Incorporated by reference to Exhibit 10.3
to the Registrant's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1998).
27 Financial Data Schedules (submitted to the Securities and Exchange
Commission in electronic format).
20
