P&F INDUSTRIES INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

Forward Looking Statement


The Private Securities Litigation Reform Act of 1995 (the "Reform Act") provides
a safe harbor for forward-looking statements made by or on behalf of P&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 the
Securities 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 the United States and abroad;

? 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 ended December 31, 2021 ("2021 Form 10-K"), its Quarterly
Reports on Form 10-Q, and its other reports and statements filed by the Company
with the Securities 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 Jackson Gear Company business.

? 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 subsidiaries Exhaust
Technologies Inc. ("ETI"), Universal Air Tool Company Limited ("UAT"), and Jiffy
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.

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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's Power 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 and Gleason Gear modeling
software.

Effective January 15, 2022, through a wholly-owned subsidiary of Hy-Tech, we
acquired substantially all the non-real estate assets comprising the business of
Jackson Gear Company ("JGC"), a Pennsylvania-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 both the 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 of the 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 from Taiwan. 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 in the 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 in the 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
The Federal Aviation Administration ("FAA") and the European 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 Asia and the United States; and

? Shortage of truck drivers in the United States.



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 the U.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 ended June 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 June 30, 2022, we do not believe we were
directly materially impacted by current geopolitical global events.

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 June 30, 2022 and 2021:

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 $ 22,947,000 100.0 % $ 21,614,000 100.0 % $ 1,333,000 6.2 %


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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 ended June 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 ended June 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 ended June 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 ended June 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 %


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Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Continued

RESULTS OF OPERATIONS – (Continued)

REVENUE – Continued

Hy-Tech – Continued

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 ended June 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 ended June 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 ended June 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 $5,479,000, compared to
$5,458,000 incurred during the same three-month period in 2021. Key components
to the net change are:

During the second quarter of 2021, we incurred approximately $288,000 in costs

i) related to the May 2021 ransomware attack at our Florida Pneumatic subsidiary,

    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 bonus

incentives 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 $47,000,

$37,000, and $23,000, respectively.

Our six-month 2022 total SG&A was $10,652,000, compared to $10,449,000 incurred
during the same period in the prior year. Key components to the net change are:

Compensation expenses increased $316,000. Compensation expense is comprised of

base salaries and wages, accrued performance-based bonus incentives and

associated payroll taxes and employee benefits. Several factors contributed

i) to this increase, among them the staffing added in connection with the JGC

acquisition, increased wages primarily related to retention incentives and

    annual wage adjustments and increases in companywide
    bonus/incentive/performance accruals.

Professional fees and expenses increased $280,000, due primary to legal,

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 $253,000. Driving this decline were

 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 $248,000, when comparing the six-month

periods ended June 30, 2022 and 2021. During the second quarter of 2021 we

iv) incurred approximately $288,000 in costs related to the May 2021 ransomware

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 $61,000 this quarter, compared

to the same period in 2021.

OTHER EXPENSE (INCOME)

Other expense in 2022 consists primarily of adjustments to the fair value of
certain assets.

On April 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.  In February 2021, we filed an
application for forgiveness with the lender, who approved this submission and
submitted the application for forgiveness to the SBA. On June 9, 2021, we were
advised that the SBA had approved our PPP loan forgiveness application and as
such, the PPP loan and interest were forgiven in its entirety.  Accordingly, the
lender applied the funds and paid off PPP loan principal in its entirety and
interest in full. In accordance with current accounting guidance this
forgiveness of debt and related accrued interest was accounted for as Other
Income in 2021.

INTEREST EXPENSE (INCOME)

                                                  Three months ended June

31, 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 ended
June 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.


                                       30

  Table of Contents

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 ended June 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 June 30, 2022, there was $7,000,000 available to us under our Revolver
arrangement.

Should the need arise whereby the current Credit Agreement is insufficient; we
believe that the current Agreement could be expanded, and/or we could obtain
additional funds based on the value of our real property.

Cash flows


For the six-month period ended June 30, 2022, cash used by operating activities
was $1,154,000, compared to cash provided by operating activities during the
six-month period ended June 30, 2021, of $1,368,000.  At June 30, 2022, our
consolidated cash balance was $431,000, compared to $539,000 at December 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

Table of Contents

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 June 30, 2022, was 18.9%, compared to 11.6% on December 31,
2021
.


During the six-month period ended June 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 June 30, 2022, we used $923,000 for capital
expenditures, compared to $247,000 during the same period in the prior year.

Capital expenditures currently planned for the remainder of 2022 are
approximately $700,000, 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, and
the expansion of our Punxsutawney, 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 June 30, 2022 that were applicable to us.


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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