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;

? 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;

? 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.

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Table of Contents

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

OVERVIEW

During the first 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;

Ongoing production slow-down by Boeing of its 737 MAX aircraft, as well as

? significant reductions in activity at other commercial and military aerospace

manufacturing facilities; and

? The acquisition of the Jackson Gear Company business.


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.

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 located in Punxsutawney, PA. 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.

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

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.

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.

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

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

On March 11, 2020, the World Health Organization designated the recent novel
coronavirus, or COVID-19, as a global pandemic. COVID-19 was first detected in
Wuhan City, Hubei Province, China and continued to spread, significantly
impacting various markets around the world, including the United States. Various
policies and initiatives have been implemented to reduce the global transmission
of COVID-19.

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 the Company
during the first quarter of 2022.  Additionally, we believe the on-going
supply-chain crisis is related to a large degree to the pandemic. Beginning in
early 2021, and worsening during the latter half of 2021, we encountered severe
shipping / receiving delays of inventory / containers from our Asian suppliers,
which has caused intermittent shortages of inventory. Further, we believe the
COVID-19 global pandemic has been and continues to be the primary factor in the
exorbitant increases in the cost of international ocean freight. In addition,
the COVID-19 pandemic has caused many of our customers and potential customers
to refuse on-site visits, which is critical to generating revenue. We believe
that until the above issues subside, our business will likely continue to be
adversely affected.

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 customer of 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 onset of the COVID-19 pandemic and the grounding of certain aircraft.

Although the 787 Dreamliner is still in production, albeit at a reduced rate, we
believe that Boeing has not been able to deliver a new aircraft to a customer
for over 1 year. The FAA is in process of evaluating the manufacturing flaws and
subsequent corrective actions put forth by Boeing, but a firm timeline for
customer deliveries of new aircraft has not been announced.

Until these issues are fully resolved, we will likely continue to experience an
adverse effect on our revenue for the foreseeable future. Additionally,
production of military and other commercial aircraft throughout the industry has
slowed as well, which we believe much is due to the ongoing global COVID-19
pandemic. However, we believe when all other commercial and military production
lines throughout the United States come back online, an increase in our revenue
should follow.

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

TRENDS AND UNCERTAINTIES – (Continued)

INTERNATIONAL SUPPLY CHAIN


Beginning in 2021, but magnified during the third and fourth quarters, we
encountered severe delays in receiving inventory from our Asian suppliers, which
led to intermittent shortages of inventory. Further, during this same period and
continuing into 2022, ocean freight costs have greatly increased.  This trend of
higher costs and delayed deliveries has continued into 2022.  We believe the
major reasons for these issues include the following:

? Increased price of fuel;

? 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,
along with increased freight and general domestic transportation costs will
likely continue during the remainder of 2022. While we believe that most of
these costs have been, or will be, passed on to our customers after the first
quarter of 2022, there is no assurance that any additional cost increases can be
passed on in the future.

INVENTORY GROWTH
Our inventory increased to $27,548,000 at March 31, 2022, from $24,021,000 at
December 31, 2021.  This increase, most of which took place at Florida
Pneumatic, was due primarily to two factors; to increase safety stock levels,
and inventory required to fulfill a large retail order that was received in late
2021 that is scheduled to ship during the second quarter of 2022.

We believe it was strategic to bolster our safety stock levels of imported
products due to the significant delays we encountered during the latter portion
of 2021 and early 2022, which in turn had resulted in "out of stock" positions
on several key items. Lastly, it should be noted that inventory levels during
fiscal 2020, were suppressed due primarily to supply chain issues and production
levels being hampered by the pandemic.  As such, a portion of the inventory
increase was designed to raise our inventory at all locations to safer,
pre-pandemic levels, in order to provide necessary inventory for growth.

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


RESULTS OF OPERATIONS

REVENUE

The tables below provide an analysis of our net revenue for the three-month
periods ended March 31, 2022, and 2021:

Consolidated

                                  Three months ended March 31,
                                                       Increase (decrease)
                         2022            2021              $            %
Florida Pneumatic    $ 10,281,000    $ 10,901,000    $    (620,000)    (5.7) %
Hy-Tech                 3,740,000       3,044,000           696,000     22.9
Consolidated         $ 14,021,000    $ 13,945,000    $       76,000      0.5 %


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 March 31,
                         2022                           2021                Increase (decrease)
                              Percent of                     Percent of
                Revenue         revenue        Revenue         revenue          $            %
Automotive    $  3,881,000           37.7 %  $  4,102,000          37.6 %  $  (221,000)     (5.4) %
Retail           3,020,000           29.5       3,790,000          34.8       (770,000)    (20.2)
Industrial       1,444,000           14.0       1,359,000          12.5          85,000       6.3
Aerospace        1,777,000           17.3       1,528,000          14.0         249,000      16.3
Other              159,000            1.5         122,000           1.1          37,000      30.3
Total         $ 10,281,000          100.0 %  $ 10,901,000         100.0 %  $  (620,000)     (5.7) %

When comparing the three-month periods ended March 31, 2022, and 2021, the most
significant change in Florida Pneumatic's revenue occurred within its Retail
sector. The fall-off was due primarily to reduced volume in the sale of "spray
guns" during the first quarter of 2022, compared to the same period in 2021. We
believe that The Home Depot's ("THD"s) purchase level of spray guns during the
COVID-19 pandemic (2020 and 2021) were likely used by their customers to
sanitize large areas. Accordingly, as the pandemic appears to have subsided
somewhat, the need for this tool used to combat the virus has diminished.
Additionally, THD discontinued eight items, which contributed to the decline in
revenue. It should be noted that many of the discontinued items will be replaced
with a "roll-out" scheduled to ship during the second quarter of 2022,
consisting of six new items. Further, we believe revenue from the new six items
should greatly offset the decline from the discontinued items. Although our
Automotive revenue declined this quarter, compared to the same period in 2021,
as the result in a change in a distribution channel strategy, the gross margin
related to our Automotive revenue has increased. Aerospace revenue improved
16.3%, when comparing the first quarter of 2022 and 2021. This improvement was
driven by an overall increase in demand throughout the sector.

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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


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 March 31,
                   2022                         2021                Increase (decrease)
                        Percent of                   Percent of
           Revenue       revenue        Revenue       revenue            $            %
OEM      $ 1,965,000          52.6 %  $ 1,611,000          52.9 %  $     354,000     22.0 %
PTG          940,000          25.1        646,000          21.2          294,000     45.5
ATP          742,000          19.8        713,000          23.4           29,000      4.1
Other         93,000           2.5         74,000           2.5           19,000     25.7
Total    $ 3,740,000         100.0 %  $ 3,044,000         100.0 %  $     696,000     22.9 %


During the first quarter of 2022, Hy-Tech continued to see signs that the ill
effects of the pandemic were beginning to ease. Customer orders for all of its
major product lines improved when compared to the same three-month period a year
ago. Its OEM product line growth was due in large part to a general rebound in
the pneumatic tool sector, with increased shipments to two large customers. The
growth in PTG revenue was due to the acquisition of the Jackson Gear Company
business ("JGC").  (See Note - 2 for further discussion).  Its added revenue was
partially offset by a decline in orders from a large customer. The increase in
Hy-Tech's Other revenue was due to NUMATX growth.

GROSS MARGIN/PROFIT

                                                 Three months ended March 31,              Increase
                                                    2022               2021          Amount             %
Florida Pneumatic                              $     3,949,000     $  4,200,000    $ (251,000)        (6.0) %
As percent of respective revenue                          38.4 %           38.5 %        (0.1) %  pts
Hy-Tech                                        $       562,000     $    436,000    $   126,000         28.9
As percent of respective revenue                          15.0 %           14.3 %          0.7 %  pts
Total                                          $     4,511,000     $  4,636,000    $ (125,000)        (2.7) %
As percent of respective revenue                          32.2 %          

33.2 % (1.0) % pts



The minimal decline in Florida Pneumatic's gross margin this quarter, compared
to the same three-month period in the prior year was due primarily to product
mix. Ocean freight costs continue to adversely affect our gross margin,
particularly at Florida Pneumatic where we are still encountering container
costs that are four to five times greater than a year ago. We are attempting to
pass through most if not all of these increases; however, we may not be able to
fully neutralize the negative effects.

The improvement in Hy-Tech's gross margin is due primarily to its overall
product/customer mix. However, its manufacturing overhead absorption at PTG
suffered during the quarter, as we are in the process of integrating the Jackson
Gear Company acquisition.  We expect that the major integration items should be
resolved during the second half of 2022 and thus improve gross margin as well.

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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

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 first quarter of 2022, our SG&A was $5,173,000, compared to
$4,991,000 incurred during the same three-month period in 2021. There were three
significant factors contributing to the net increase. First, compensation
expense increased $188,000. Compensation expense is comprised of base salaries
and wages, accrued performance-based bonus incentives and associated payroll
taxes and employee benefits.  Several factors contributed 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. Secondly,
professional fees and expenses increased $233,000, due primary to legal,
accounting and other fees incurred in connection with the JGC acquisition. Other
expenses that contributed to this $233,000 increase were cyber security related
costs and recruitment fees. Lastly, partially offsetting the above increases was
a reduction of $273,000 in our variable expenses.  Variable expenses include
among other items, commissions, freight out, travel, advertising, shipping
supplies and warranty costs.  Driving this decline were significantly lower
advertising and shipping costs at Florida Pneumatic, caused by a change in a
distribution channel strategy.

INTEREST

                                                     Three months ended March 31,        Increase (decrease)
                                                       2022                2021           Amount          %
Interest expense attributable to:
Short-term borrowings                             $       48,000      $       10,000    $    38,000      380.0 %
PPP loan                                                       -               8,000        (8,000)    (100.0)
Amortization expense of debt issue costs                   4,000           
   4,000              -          -

Total                                             $       52,000      $       22,000    $    30,000      136.4 %


Our borrowings increased during the three-month period ended March 31, 2022,
compared to the same period in the prior year. This increase was driven
primarily by the decision to increase safety stock levels on inventory and the
acquisition in 2022 of the Jackson Gear Company business.

The average balance of short-term borrowings during the three-month periods
ended March 31, 2022, and 2021, were $10,157,000 and $2,167,000, respectively.

Debt issue costs are associated with an amendment to the Credit Agreement.

There were no amortizable debt issue costs incurred with Amendment No. 9, to
the Credit Agreement.


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-month periods ended March 31, 2022, and 2021, were approximately a tax
benefit of 13.4 %, and 18.6%, respectively. The effective tax rates for all
periods presented were impacted primarily by state taxes, and non-deductible
expenses. Additionally, impacting 2021's net effective tax benefit was the
enactment of the Coronavirus Aid, Relief, and Economic Security Act.

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

RESULTS OF OPERATIONS – (Continued)

LIQUIDITY AND CAPITAL RESOURCES

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:

                         March 31, 2022      December 31, 2021
Working capital         $     22,375,000    $        24,598,000
Current ratio                  2.15 to 1              3.04 to 1
Shareholders' equity    $     43,181,000    $        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.

At March 31, 2022, there was approximately $3,360,000 available to us under its
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 three-month period ended March 31, 2022, cash used by operating
activities was $3,972,000, compared to cash used by operating activities for the
year ended December 31, 2021, of $4,149,000. At March 31, 2022, our consolidated
cash balance was $642,000, compared to $539,000 at December 31, 2021. Cash at
our UAT subsidiary was $190,000 at March 31, 2022 and December 31, 2021,
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) on March 31, 2022, was 22.5%, compared to 11.6% on December 31,
2021.

Our working capital needs will increase due to anticipated growth, and a
roll-out of a new tools program to our Retail customer. As a result, our
Revolver borrowings will likely increase in the first half of 2022 and should
then decline throughout the remainder of 2022.


During the three-month period ended March 31, 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 three-month period ended March 31, 2022, we used $380,000 for capital
expenditures, compared to $68,000 during the same period in the prior year.
Capital expenditures currently planned for the remainder of 2022 are
approximately $800,000, which we expect will be financed through the Credit
Facility.


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

LIQUIDITY AND CAPITAL RESOURCES – Continued

Cash Flows- Continued


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
Jackson Gear (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.

IMPACT OF INFLATION

Increasing prices, most notably in freight/transportation and, to a lesser
extent, the cost of raw materials and labor had a material effect on our results
of operations during the three-month period ended March 31, 2022. We believe
that the current and projected significant increases of inflation, the on-going
volatility of freight/transportation costs, and recent geopolitical unrest will
have an impact on our results of operations during 2022.  At the present time we
are unable to reasonably estimate said impact on our results of operations for
the remainder of 2022 and beyond.

NEW ACCOUNTING PRONOUNCEMENTS

There were no new accounting standards or pronouncements issued during the
three-month period ended March 31, 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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