P&F Industries, Inc. (NASDAQ:PFIN) is a diversified manufacturer and distributor of pneumatic hand tools and related products. The company operates through two main segments: Florida Pneumatic and Hy-Tech. Florida Pneumatic imports, manufactures, and markets pneumatic hand tools and related products, primarily to the retail, industrial, automotive, and aerospace markets. Hy-Tech designs, manufactures, and markets industrial tools, systems, gearing, accessories, and a wide variety of replacement parts.

For the fiscal year ended December 31, 2023, P&F Industries reported annual revenue of $59,041,000, a slight decrease compared to the prior year. The company's net income for the year was a loss of $1,476,000, while its annual operating cash flow was $3,288,000 and its annual free cash flow was $914,000.

In the third quarter of 2023, the company's revenue was $14,404,000, relatively flat compared to the same period in the prior year. Florida Pneumatic's revenue was $9,682,000, down 2.3% year-over-year, while Hy-Tech's revenue was $4,722,000, up 2.4% year-over-year. The company's gross margin improved slightly to 34.0% in the third quarter, compared to 33.4% in the same period of 2022.

Business Overview

Florida Pneumatic

Florida Pneumatic's third quarter 2023 revenue declined 2.3% year-over-year, primarily due to a decrease in Automotive revenue. The company implemented price increases across all distribution channels in order to address rising input costs, which led to a decline in unit sales and overall revenue in the Automotive category. However, this change in pricing strategy also contributed to an improvement in Automotive gross margin.

Retail revenue for Florida Pneumatic improved modestly by 1.7% in the third quarter, despite The Home Depot's continued efforts to reduce the number of individual stock keeping units offered and the quantity of each, as well as reducing the display area of their pneumatic tools. The company believes that The Home Depot is facing increased pressure from online distributors, as well as other "brick and mortar" retailers that are expanding their presence in this product line.

Aerospace revenue for Florida Pneumatic increased 12.8% in the third quarter, driven by increased demand for new consumable parts that Jiffy had begun to market earlier in the year, as well as improved market conditions in both the commercial and military aviation sectors. Jiffy has also increased its sales in Europe significantly and is seeing initial sales of recently introduced products.

Hy-Tech

Hy-Tech's revenue increased 2.4% in the third quarter, primarily driven by a 19.6% growth in OEM revenue. This improvement was due to an increase in orders during 2023 from a major OEM customer, along with an overall market improvement in this sector.

Hy-Tech's ATP revenue increased 36.9% in the third quarter, primarily due to weak third quarter 2022 orders and shipments. However, this was partially offset by a 23.4% decline in PTG revenue, which was due to product/customer mix, the implementation of new planning and production processes and procedures, and delays in the manufacturing process and associated training.

Gross Margin

P&F Industries' consolidated gross margin improved to 34.0% in the third quarter of 2023, compared to 33.4% in the same period of 2022. Florida Pneumatic's gross margin improved by 0.3 percentage points, primarily due to a shift away from lower margin Retail and Automotive product lines to higher margin Industrial and Aerospace categories. Hy-Tech's gross margin increased by 1.9 percentage points, due primarily to product/customer mix and cost and expense reductions, partially offset by an additional charge to its Obsolete and Slow-Moving Inventory.

Liquidity

As of September 30, 2023, P&F Industries had working capital of $20,422,000 and a current ratio of 3.03 to 1. The company's total debt to total book capitalization was 6.1% at the end of the third quarter.

The company's primary source of liquidity is its $16,000,000 revolving credit facility with Capital One, which had approximately $10,580,000 available as of September 30, 2023. During the nine-month period ended September 30, 2023, the company generated $7,061,000 in cash from operating activities and used $1,909,000 for capital expenditures.

Outlook

The company has not provided any specific financial guidance for the full year 2023. However, management has stated that they continue to encounter intermittent inventory supply-chain delays from their Asian suppliers, which cause shortages of inventory. While the negative effects that the company was encountering during the COVID-19 pandemic in general have eased, it is difficult for the company to be certain that the inventory issue is in fact COVID-19 related.

Risks and Challenges

P&F Industries faces several risks and uncertainties, including: - Continued supply chain disruptions and inventory shortages - Exposure to fluctuations in raw material and transportation costs - Customer concentration, with one customer accounting for 21.0% of accounts receivable and 19.6% of revenue in the third quarter of 2023 - Potential impact of inflation and a possible economic recession on manufacturing and operating costs - Reliance on international suppliers and exposure to foreign currency fluctuations - Competitive pressures and pricing challenges in the pneumatic tool market

Recent Developments

On October 13, 2023, P&F Industries announced that it had entered into a definitive agreement to be acquired by Tools Acquisition Co, LLC, an affiliate of ShoreView Industries, in an all-cash transaction valued at $13.00 per share. The transaction is subject to customary closing conditions, including approval by P&F's shareholders.

Conclusion

P&F Industries has navigated a challenging operating environment in 2023, with supply chain disruptions, inflationary pressures, and customer concentration risks impacting its financial performance. The company's two main segments, Florida Pneumatic and Hy-Tech, have demonstrated mixed results, with Florida Pneumatic facing headwinds in its Automotive and Retail categories, while Hy-Tech has seen growth in its OEM and ATP product lines.

Looking ahead, the company's proposed acquisition by Tools Acquisition Co, LLC presents both opportunities and risks. If the transaction is completed, it will provide P&F's shareholders with a significant premium to the current market price. However, the announcement and pendency of the merger could also cause disruptions and create uncertainty within the business. Investors will need to closely monitor the progress of the proposed acquisition and the company's ability to manage the ongoing operational challenges it faces.