UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from Not Applicable to Not Applicable
Commission file number:
CRAWFORD UNITED CORPORATION
(Exact name of registrant as specified in its charter)
| | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| | |
| (Address of principal executive offices) | (Zip Code) |
Registrant's telephone number (
Securities registered pursuant to Section 12(b) of the Act: None.
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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| | Smaller reporting company |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of May 9, 2023,
PART I
ITEM 1. FINANCIAL STATEMENTS
CRAWFORD UNITED CORPORATION
CONSOLIDATED BALANCE SHEET
| (Unaudited) | ||||||||
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable less allowance for doubtful accounts | ||||||||
| Contract assets | ||||||||
| Inventories less allowance for obsolete inventory | ||||||||
| Investments | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total Current Assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Operating right of use asset, net | ||||||||
| OTHER ASSETS: | ||||||||
| Goodwill | ||||||||
| Intangibles, net of accumulated amortization | ||||||||
| Other non-current assets | ||||||||
| Total Non-Current Other Assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Notes payable – current | $ | $ | ||||||
| Bank debt – current | ||||||||
| Leases payable – current | ||||||||
| Accounts payable | ||||||||
| Unearned revenue | ||||||||
| Accrued income taxes | ||||||||
| Accrued expenses | ||||||||
| Total Current Liabilities | ||||||||
| LONG-TERM LIABILITIES: | ||||||||
| Notes payable | ||||||||
| Bank debt | ||||||||
| Leases payable | ||||||||
| Deferred income taxes | ||||||||
| Total Long-Term Liabilities | ||||||||
| STOCKHOLDERS' EQUITY | ||||||||
| Class A common shares - shares authorized, issued at March 31, 2023 and issued at December 31, 2022 | ||||||||
| Class B common shares - shares authorized, shares issued at March 31, 2023 and December 31, 2022 | ||||||||
| Contributed capital | ||||||||
| Treasury shares | ( | ) | ( | ) | ||||
| Class A common shares – shares held at March 31, 2023 and shares held at December 31, 2022 | ||||||||
| Class B common shares – shares held at March 31, 2023 and December 31, 2022 | ||||||||
| Retained earnings | ||||||||
| Total Stockholders' Equity | ||||||||
| Total Liabilities and Stockholders' Equity | $ | $ | ||||||
| See accompanying notes to consolidated financial statements |
CRAWFORD UNITED CORPORATION
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Total Sales | $ | $ | ||||||
| Cost of Sales | ||||||||
| Gross Profit | ||||||||
| Operating Expenses: | ||||||||
| Selling, general and administrative expenses | ||||||||
| Operating Income | ||||||||
| Other (Income) and Expenses: | ||||||||
| Interest charges | ||||||||
| Unrealized (gain) loss on investments | ( | ) | ||||||
| Other (income) expense, net | ( | ) | ||||||
| Total Other (Income) and Expenses | ( | ) | ||||||
| Income before Provision for Income Taxes | ||||||||
| Provision for Income Taxes | ||||||||
| Net Income | $ | $ | ||||||
| Net Income Per Common Share - Basic | $ | $ | ||||||
| Net Income Per Common Share - Diluted | $ | $ | ||||||
| Weighted Average Shares of Common Stock Outstanding | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
See accompanying notes to consolidated financial statements
CRAWFORD UNITED CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
Three Months Ended March 31, 2023 and 2022
| COMMON SHARES - | ||||||||||||||||||||||||
| NO PAR VALUE | ||||||||||||||||||||||||
| CONTRIBUTED | TREASURY | RETAINED | ||||||||||||||||||||||
| CLASS A | CLASS B | CAPITAL | SHARES | EARNINGS | TOTAL | |||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||
| Share-based compensation expense | ||||||||||||||||||||||||
| Stock awards | ||||||||||||||||||||||||
| Repurchase of shares | ( | ) | ( | ) | ||||||||||||||||||||
| Net Income | ||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||
| COMMON SHARES | COMMON SHARES | |||||||||||||||||||||||
| ISSUED | TREASURY SHARES | OUTSTANDING | ||||||||||||||||||||||
| CLASS A | CLASS B | CLASS A | CLASS B | CLASS A | CLASS B | |||||||||||||||||||
| Balance at December 31, 2022 | ||||||||||||||||||||||||
| Stock awards to directors and officers | ||||||||||||||||||||||||
| Repurchase of shares | ( | ) | ||||||||||||||||||||||
| Balance at March 31, 2023 | ||||||||||||||||||||||||
| COMMON SHARES - | ||||||||||||||||||||||||
| NO PAR VALUE | ||||||||||||||||||||||||
| CONTRIBUTED | TREASURY | RETAINED | ||||||||||||||||||||||
| CLASS A | CLASS B | CAPITAL | SHARES | EARNINGS | TOTAL | |||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||
| Share-based compensation expense | ||||||||||||||||||||||||
| Stock awards | ||||||||||||||||||||||||
| Repurchase of shares | ( | ) | ( | ) | ||||||||||||||||||||
| Net Income | ||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||
| COMMON SHARES | COMMON SHARES | |||||||||||||||||||||||
| ISSUED | TREASURY SHARES | OUTSTANDING | ||||||||||||||||||||||
| CLASS A | CLASS B | CLASS A | CLASS B | CLASS A | CLASS B | |||||||||||||||||||
| Balance at December 31, 2021 | | | | | | | ||||||||||||||||||
| Stock Awards | | - | - | - | | - | ||||||||||||||||||
| Repurchase of shares | - | - | | - | ( | ) | - | |||||||||||||||||
| Balance at March 31, 2022 | | | | | | | ||||||||||||||||||
CRAWFORD UNITED CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOW (Unaudited)
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net Income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Unrealized loss (gain) on investments in equity securities | ( | ) | ||||||
| Amortization of right of use assets | ||||||||
| Loss on disposal of assets | ||||||||
| Non-cash share-based compensation expense | ||||||||
| Changes in assets and liabilities: | ||||||||
| Decrease (Increase) in accounts receivable | ( | ) | ( | ) | ||||
| Decrease (Increase) in inventories | ||||||||
| Decrease (Increase) in contract assets | ( | ) | ( | ) | ||||
| Decrease (Increase) in prepaid expenses & other assets | ( | ) | ||||||
| Increase (Decrease) in accounts payable | ( | ) | ||||||
| Increase (Decrease) in lease liability | ( | ) | ||||||
| Increase (Decrease) in accrued expenses | ( | ) | ||||||
| Increase (Decrease) in unearned revenue | ( | ) | ||||||
| Total adjustments | ||||||||
| Net Cash Provided by Operating Activities | ||||||||
| Cash Flows from Investing Activities | ||||||||
| Cash paid for business acquisitions | ( | ) | ||||||
| Capital expenditures | ( | ) | ( | ) | ||||
| Net Cash (Used in) Investing Activities | ( | ) | ( | ) | ||||
| Cash Flows from Financing Activities | ||||||||
| Payments on notes | ( | ) | ( | ) | ||||
| Payments on bank debt | ( | ) | ( | ) | ||||
| Borrowings on bank debt | ||||||||
| Share repurchase | ( | ) | ( | ) | ||||
| Net Cash (Used in) Provided by Financing Activities | ( | ) | ||||||
| Net Increase (Decrease) in cash and cash equivalents | ||||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental disclosures of cash flow information | ||||||||
| Interest Paid | $ | $ | ||||||
| Supplemental disclosures of noncash financing and investing activity | ||||||||
| Additions to ROU assets obtained from new operating lease liabilities | $ | $ | ||||||
See accompanying notes to consolidated financial statements
CRAWFORD UNITED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2023
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. The consolidated financial statements include the accounts of Crawford United Corporation and its wholly-owned subsidiaries (the “Company”). Significant intercompany transactions and balances have been eliminated in the financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain 2022 financial information has been reclassified to conform to the 2023 presentation. Operating results for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ended December 31, 2023. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
During the three-month period ended March 31, 2023 there have been no changes to the Company's significant accounting policies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company’s Summary of Significant Accounting Policies is provided with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
New Accounting Standards Recently Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses. The standard requires a financial asset (including trade receivables) measured at amortized cost basis to be presented at the net amount expected to be collected. Thus, the income statement will reflect the measurement of credit losses for newly-recognized financial assets as well as the expected increases or decreases of expected credit losses that have taken place during the period. This standard became effective for the Company on January 1, 2023 and did not have a material impact on the Company’s results of operations and internal controls on reporting.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that may affect the reported amounts of certain assets and liabilities and disclosure of contingencies at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
The Company has reclassified the presentation of certain prior-year information to conform to the current presentation.
Fair Value of Financial Instruments
Accounting for "Financial Instruments" requires the Company to disclose estimated fair values of financial instruments. Financial instruments held by the Company include, among others, accounts receivable, accounts payable, and notes payable. The carrying amounts reported in the consolidated balance sheet for assets and liabilities qualifying as financial instruments is a reasonable estimate of fair value.
Fair Value Measurements
As defined in FASB ASC 820, "Fair Value Measurements", fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. In determining fair value, the Company utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable firm inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the examination of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
* Level 1: Quoted market prices in active markets for identical assets or liabilities.
* Level 2: Inputs to the valuation methodology include: * Quoted prices for similar assets or liabilities in active markets;
* Quoted prices for identical assets or similar assets or liabilities in inactive markets;
* Inputs other than quoted prices that are observable for the asset or liability;
* Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
* Level 3: Unobservable inputs that are not corroborated by market data.
A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Following is a description of the valuation methodologies used for instruments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy.
* Stock: The stock market value is based on valuation of market quotes from independent active market sources and is considered a level 1 investment.
3. ACCOUNTS RECEIVABLE
The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. The reserve for doubtful accounts was $
4. INVENTORY
Inventory is valued at the lower of cost (first-in, first-out) or net realizable value and consists of:
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Raw materials and component parts | $ | $ | ||||||
| Work-in-process | ||||||||
| Finished products | ||||||||
| Total inventory | $ | $ | ||||||
| Less: inventory reserves | ||||||||
| Net inventory | $ | $ | ||||||
5. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
For the identified reporting units, impairment testing was performed as of December 31, 2022 using an income approach based on management’s determination of the prospective financial information, with consideration given to the existing uncertainty in the global economy and aerospace and defense industry, particularly the commercial sector. The results of this test indicated the fair value exceeded carrying value for all reporting units tested. As a result of the impairment testing performed as of December 31, 2022, no indefinite-lived intangible assets or goodwill was determined to be impaired. Management updated their assessment during the first three months of 2023 and validated the assumptions used in the analyses performed as of December 31, 2022 and determined that the resulting conclusions remained appropriate as of March 31, 2023.
There was
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Commercial Air Handling Equipment Segment: | ||||||||
| Beginning Balance | $ | $ | ||||||
| Acquisitions | ||||||||
| Adjustments | ||||||||
| Ending Balance | $ | $ | ||||||
| Industrial and Transportation Products Segment: | ||||||||
| Beginning Balance | $ | $ | ||||||
| Acquisitions | ||||||||
| Adjustments | ( | ) | ||||||
| Ending Balance | $ | $ | ||||||
| Total Company: | ||||||||
| Beginning Balance | $ | $ | ||||||
| Acquisitions | ||||||||
| Adjustments | ( | ) | ||||||
| Ending Balance | $ | $ | ||||||
Intangible assets relate to the purchase of businesses. Goodwill represents the excess of cost over the fair value of identifiable assets acquired. Goodwill is not amortized but is reviewed on an annual basis for impairment. Amortization of intangibles is being amortized on a straight-line basis over period ranging from year to
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Customer list intangibles | $ | $ | ||||||
| Non-compete agreements | ||||||||
| Trademarks | ||||||||
| Total intangible assets | ||||||||
| Less: accumulated amortization | ||||||||
| Intangible assets, net | $ | $ | ||||||
Amortization of intangibles assets was: $
6. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment are recorded at cost and depreciated over their useful lives. Maintenance and repair costs are expenses as incurred. Property, plant and equipment are as follows:
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Land | $ | $ | ||||||
| Buildings and improvements | ||||||||
| Machinery & equipment | ||||||||
| Total property, plant & equipment | ||||||||
| Less: accumulated depreciation | ||||||||
| Property plant & equipment, net | $ | $ | ||||||
Depreciation expense was $
7. INVESTMENTS IN EQUITY SECURITIES
Investments in equity securities are summarized in the table below:
| UNREALIZED | REALIZED | |||||||||||||||||||
| BALANCE | ACQUISITIONS, | GAINS | GAINS | BALANCE | ||||||||||||||||
| AT | DISPOSITIONS | (LOSSES) | INCLUDED | AT END | ||||||||||||||||
| BEGINNING | AND | INCLUDED | IN | OF | ||||||||||||||||
| OF YEAR | SETTLEMENTS | IN EARNINGS | EARNINGS | PERIOD | ||||||||||||||||
| December 31, 2022 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||
| Year-to-date March 31, 2023 | ( | ) | ||||||||||||||||||
Investments by fair value level in the hierarchy as of March 31, 2023 and December 31, 2022 are as follows:
| Quoted Market Prices in Attractive Markets (Level 1) | Models with Significant Observable Market Parameters (Level 2) | Unobservable Inputs that are not Corroborated by Market Data (Level 3) | Total Carrying Value in the Balance Sheet | |||||||||||||
| Common stock as of March 31, 2023 | $ | $ | $ | $ | ||||||||||||
| Common stock as of December 31, 2022 | $ | $ | $ | $ | ||||||||||||
8. BANK DEBT
The Company is party to a Credit Agreement with JPMorgan Chase Bank, N.A. as lender (as amended, the “Credit Agreement”). As amended, the Credit Agreement is comprised of a revolving facility in the amount of $
The revolving facility under the Credit Agreement includes a $
Bank debt balances consist of the following:
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Term debt | $ | $ | ||||||
| Revolving debt | ||||||||
| Total Bank debt | ||||||||
| Less: current portion | ||||||||
| Non-current bank debt | ||||||||
| Less: unamortized debt costs | ||||||||
| Net non-current bank debt | $ | $ | ||||||
The Company had $
9. NOTES PAYABLE
Notes Payable – Related Party
The Company had two separate outstanding promissory notes with First Francis Company Inc. (“First Francis”), which were originally issued in July 2016 in connection with the acquisition of Federal Hose Manufacturing (“Federal Hose”) and which were amended in July 2018 in connection with acquisition of CAD Enterprises, Inc. (“CAD”). The first promissory note was issued with original principal in the amount of $
In connection with the Komtek Forge acquisition, on January 15, 2021, the Company refinanced the outstanding First Francis promissory notes in the aggregate amount of $
Notes Payable – Seller Note
Effective July 1, 2018, the Company completed the acquisition of all of the issued and outstanding shares of capital stock of CAD. Upon the closing of the transaction, the CAD shares were transferred and assigned to the Company in consideration of the payment by the Company of an aggregate purchase price of $
Notes payable consists of the following:
| March 31, 2023 | December 31, 2022 | |||||||
| In connection with the Komtek Forge acquisition, the Company refinanced the outstanding First Francis promissory notes, accrued interest payable through the refinance date and the assumed First Francis promissory note into one note on January 15, 2021 for a $ loan due to First Francis Company, payable in quarterly installments beginning April 15, 2021. | $ | $ | ||||||
| In connection with the CAD acquisition, the Company entered into a promissory note on July 1, 2018 for a $ loan due to the seller, payable in quarterly installments beginning September 30, 2018. | ||||||||
| Total notes payable | ||||||||
| Less current portion | ||||||||
| Notes payable – non-current portion | $ | $ | ||||||
10. LEASES
The Company has operating leases for facilities, vehicles and equipment. These leases have remaining terms of
Supplemental balance sheet information related to leases:
| March 31, 2023 | December 31, 2022 | |||||||
| Operating leases: | ||||||||
| Operating lease right-of-use assets, net | $ | $ | ||||||
| Other current liabilities | ||||||||
| Operating lease liabilities | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
| Weighted Average Remaining Lease Term | ||||||||
| Operating Leases (in years) | ||||||||
| Weighted Average Discount Rate | ||||||||
| Operating Leases | % | % | ||||||
11. EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per share.
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Earnings Per Share - Basic | ||||||||
| Net Income | $ | $ | ||||||
| Weighted average shares of common stock outstanding - Basic | ||||||||
| Earnings Per Share - Basic | $ | $ | ||||||
| Earnings Per Share - Diluted | ||||||||
| Weighted average shares of common stock outstanding - Basic | ||||||||
| Warrants, Options and Convertible Notes | ||||||||
| Weighted average shares of common stock -Diluted | ||||||||
| Earnings Per Share - Diluted | $ | $ | ||||||
12. ACQUISITIONS
Effective January 10, 2022, Crawford REV Acquisition Company LLC (name later changed to Reverso Pumps LLC or “Reverso Pumps”), a Delaware limited liability company and indirect wholly-owned subsidiary of Crawford United Corporation (the “Company”), completed the acquisition (the “Reverso Transaction”) of substantially all the assets of Reverso Pumps, Inc., a Florida corporation and developer, designer, manufacturer, seller and distributor of oil change systems, fuel and oil transfer pumps, fuel primers, fuel polishing systems and engine flushing systems (“Reverso”), pursuant to an Asset Purchase Agreement (the “Reverso Asset Purchase Agreement”) entered into and effective January 10, 2022 by and among Reverso Pumps, the Seller, the seller parties named therein and the Seller Parties’ representatives named therein. Upon the closing of the Transaction, the assets were transferred and assigned to Reverso Pumps in exchange for approximately $
Additionally, effective on January 10, 2022, Crawford SEP Acquisition Company LLC (name later changed to Separ America LLC or “Separ America”), a Delaware limited liability company and indirect wholly-owned subsidiary of the Company, completed the acquisition (the “Separ Transaction,” and with the Reverso Transaction, the “Transactions”) of substantially all the assets of Separ of the Americas, LLC, a Florida limited liability company and developer, designer, manufacturer, seller and distributor of oil change systems, fuel and oil transfer pumps, fuel primers, fuel polishing systems and engine flushing systems (“Separ”) pursuant to an Asset Purchase Agreement (the “Separ Asset Purchase Agreement,” and together with the Reverso Asset Purchase Agreement, the “Purchase Agreements”) by and among Separ America, the Seller, the seller parties named therein and the Seller Parties’ representative named therein. Upon the closing of the Transaction, the assets were transferred and assigned to Separ America in exchange for approximately $
| Cash Consideration Transferred | $ | |||
| Seller Transaction Costs | ||||
| Total Consideration | $ | |||
| Accounts Receivable | ||||
| Inventory | ||||
| Fixed Assets | ||||
| Prepaid and Other Assets | ||||
| Intangible Asset: Customer List & Trademark | ||||
| Goodwill | ||||
| Total Assets Acquired | $ | |||
| Accounts Payable | $ | |||
| Accrued Expense | ||||
| Total Liabilities Assumed | $ | |||
| Total Fair Value | $ | |||
| Acquisition transaction costs incurred were: | $ |
Goodwill
Goodwill has an assigned value of $
Effective May 1, 2022, Knitting Machinery Company of America, LLC, a Delaware limited liability company (“Knitting Machinery”) and indirect wholly-owned subsidiary of Crawford United Corporation, completed the acquisition of all of the operating assets of KMC Corp. dba Knitting Machinery Corp., a Delaware corporation and specialist in the manufacture of hose reinforcement machinery for the plastic, rubber and silicone industries pursuant to an Asset Purchase Agreement entered into as of May 1, 2022. The acquired business is strategically important to the Company’s growing industrial hose platform and will expand its offerings and diversify its customer base in this important market segment. The assets were transferred and assigned to Knitting Machinery in exchange for approximately $
| Cash Consideration Transferred | $ | |||
| Fair Value of Stock Consideration | ||||
| Total Consideration | $ | |||
| Cash | $ | |||
| Accounts Receivable | ||||
| Inventory | ||||
| Fixed Assets | ||||
| Intangible Assets | ||||
| Goodwill | ||||
| Total Assets Acquired | $ | |||
| Accounts Payable | $ | |||
| Deferred Revenue | ||||
| Total Liabilities Assumed | $ | |||
| Total Fair Value | ||||
| Acquisition transaction costs incurred were: | $ |
Goodwill and Intangible Assets
Goodwill has an assigned value of $
Sales and Net Income for the Acquired Companies
Sales and net income information for the acquired companies, Reverso Pumps LLC (“Reverso Pumps”), Separ America LLC (“Separ America”) and Knitting Machinery Company of America LLC (“Knitting Machinery”) since the respective acquisition dates for the three months ended March 31, 2023 and 2022 are provided below.
| Three Months ended | Three Months ended | |||||||||||||||
| March 31, 2023 | March 31, 2022 | |||||||||||||||
| Sales | Net Income | Sales | Net Income | |||||||||||||
| Acquired Companies: | ||||||||||||||||
| Reverso Pumps (acquired January 10, 2022) | ||||||||||||||||
| Separ America (acquired January 10, 2022) | ||||||||||||||||
| Knitting Machinery (acquired May 1, 2022) | ||||||||||||||||
| Subtotal Acquired Companies | $ | |||||||||||||||
| All Other Companies | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
13. SEGMENT AND RELATED INFORMATION
The Company reports operations for
Both the Commercial Air Handling Equipment segment and the Industrial and Transportation Products segment engage in business activities from which they may recognize revenues and incur expenses, including revenue and expenses relating to transactions with other components of the Company. The operating results for both the Commercial Air Handling Equipment segment and the Industrial and Transportation Products segment are reviewed regularly by our chief operating decision maker and is considered in making decisions about resources to be allocated to the segment in assessing its performance. Financial information for both segments is available in internal financial statements that are prepared on a monthly basis.
Commercial Air Handling Equipment:
The Commercial Air Handling Equipment segment was added June 1, 2017, when the Company purchased certain assets and assumed certain liabilities of Air Enterprises Acquisition LLC in Akron, Ohio. The acquired business, which operates under the name Air Enterprises, is an industry leader in designing, manufacturing and installing large-scale commercial, institutional, and industrial custom air handling solutions. Its customers are typically in the health care, education, pharmaceutical and industrial manufacturing markets in the United States. This segment also sells to select international markets. The custom air handling units are constructed of non-corrosive aluminum, resulting in sustainable, long-lasting, and energy efficient solutions with life expectancies of 50 years or more. These products are distributed through a network of sales representatives, based on relationships with health care networks, building contractors and engineering firms. The custom air handling equipment is designed, manufactured and installed under the brand names FactoryBilt® and SiteBilt®. FactoryBilt® air handling solutions are designed, fabricated and assembled in a vertically integrated process entirely within the Akron, Ohio facility. SiteBilt® air handling solutions are designed and fabricated in Akron, but are then crated and shipped to the field and assembled on-site.
Industrial and Transportation Products:
The Industrial and Transportation Products segment was added July 1, 2016, when the Company purchased the assets of the Federal Hose Manufacturing, LLC of Painesville, Ohio. This business segment includes the manufacture of flexible interlocking metal hoses and the distribution of silicone and hydraulic hoses. Metal hoses are sold primarily to major heavy-duty truck manufacturers and major aftermarket suppliers in North America. Metal hoses are also sold into the agricultural, industrial and petrochemical markets. Silicone hoses are distributed to a number of industries in North America, including agriculture and general industrial markets. The Company purchased all of the issued and outstanding shares of capital stock of CAD Enterprises, Inc.(“CAD”) in Phoenix, Arizona on July 1, 2018. CAD provides complete end-to-end engineering, machining, grinding, welding, brazing, heat treat and assembly solutions. Utilizing state-of-the-art machining and welding technologies, this segment is an industry leader in providing complex components produced from nickel-based superalloys and stainless steels. CAD’s quality certifications include ISO 9001:2015/AS9100D, as well as Nadcap accreditation for Fluorescent Penetrant Inspection (FPI), Heat Treating/Braze, Non-Conventional Machining EDM, and TIG/E-Beam welding. The Company added the distribution of marine hose to this segment through the acquisition of the assets of MPI Products, Inc. (“MPI”) on January 2, 2020. MPI specializes in rubber and plastic marine hose for the recreational boating industry. MPI offers certified products that meet marine industry standards and regulations. Effective April 19, 2019, the Company, completed the acquisition of substantially all of the assets of Data Genomix, Inc., an Ohio corporation (“DG”). DG is in the business of developing and commercializing marketing and data analytic technology applications. The Company purchased all of the issued and outstanding membership interests of KT Acquisition LLC (name later changed to Komtek Forge LLC), in Worcester, Massachusetts on January 15, 2021. Komtek Forge LLC is a supplier of highly engineered forgings for the aerospace, industrial gas turbine, medical prosthetics, alternative energy, petrochemical and defense industries. The Company purchased all of the membership interests of Global-Tek-Manufacturing LLC (“Global-Tek”), in Ceiba, Puerto Rico and substantially all of the assets of Machining Technology LLC (name later changed to Global-Tek Colorado LLC or “Global-Tek Colorado”) in Longmont, Colorado on March 2, 2021. Global-Tek and Global-Tek Colorado specialize in providing customers with highly engineered manufacturing solutions, including CNC machining, anodizing, electro polishing and laser marking for customers in the defense, aerospace and medical device markets. The Company purchased substantially all of the assets of Emergency Hydraulics LLC (“Emergency Hydraulics”), in Ocala, Florida on July 1, 2021. Emergency Hydraulics provides hydraulic hoses, air tank assemblies and related products to manufacturers of firefighting trucks and other emergency vehicles. The company purchased substantially all of the assets of Crawford REV Acquisition Company LLC (name later changed to Reverso Pumps LLC or “Reverso Pumps”), in Davie, Florida on January 10, 2022. Reverso Pumps develops, designs, manufactures, sells and distributes oil change systems, fuel and oil transfer pumps, fuel primers, fuel polishing systems and engine flushing systems.
The company purchased substantially all of the assets of Crawford SEP Acquisition Company LLC (name later changed to Separ America LLC or “Separ America”), in Davie, Florida on January 10, 2022. Separ America develops, designs, manufactures, sells and distributes oil change systems, fuel and oil transfer pumps, fuel primers, fuel polishing systems and engine flushing systems. The company purchased substantially all of the assets of KMC Corp. dba Knitting Machinery Corp. (“Knitting Machinery”), in Cleveland, Ohio and Greenville, Ohio on May 1, 2022. Knitting Machinery specializes in manufacturing hose reinforcement machinery for the plastic, rubber and silicone industries.
The factors used to determine the Company’s reportable segments follow the guidance of ASC 280-10-50-21 and 50-10-22 and include consideration of the type of products or services delivered, the customers and end markets served, the appliable revenue recognition methodology and the length of time it takes to deliver products or services to customers. The Commercial Air Handling Equipment segment was identified as a reportable segment consisting of Air Enterprises, because Air Enterprises is strategically and operationally different from our other companies in several ways. First, Air Enterprises sells equipment to end customers and our other businesses that fall into the Industrial and Transportation Products segment sell products and components to end customers, not equipment. Second, the Commercial Air Handling Equipment segment delivers custom air handling solutions to customers which is different than the Industrial and Transportation Products segment which delivers manufactured metal, silicone, hydraulic and marine hoses, complex engineered components, highly engineered forgings, highly engineered and machined parts and data analytic technology applications. Third, the Commercial Air Handling Equipment segment serves customers primarily in the health care and education end markets while the Industrial and Transportation Products segment delivers products to customers in the heavy-duty truck manufacturing, agricultural, industrial, petrochemical, aerospace, defense, industrial gas turbine, medical prosthetics, alternative energy and emergency vehicle end markets. Fourth, the Commercial Air Handling Equipment segment recognizes revenue primarily over time while the Industrial and Transportation Products segment recognizes revenue primarily at a point in time. Fifth, the Commercial Air Handling Equipment segment manufactures custom air handling solutions for customers over a period of three to eighteen months from the time the order is received to the time the air handling solution is delivered to the end customer as compared to the Industrial and Transportation Products segment which sells and delivers products to customers much more quickly, often within 30 days or less. For the reasons previously mentioned, Air Enterprises is strategically and operationally different than the other businesses owned by the Company and management finds it useful to include this business in the Commercial Air Handling Segment which is separate and distinct from all of our other businesses that reside in the Industrial and Transportation Products segment.
Corporate and Other:
Corporate costs not allocated to the two primary business segments are aggregated here.
Information by industry segment is set forth below:
| Three Months Ended March 31, 2023 | ||||||||||||||||
| Commercial Air Handling | Industrial And Transportation Products | Corporate and Other | Consolidated | |||||||||||||
| Sales | $ | $ | $ | - | $ | |||||||||||
| Gross Profit | ||||||||||||||||
| Operating Income | ( | ) | ||||||||||||||
| Pretax Income | ( | ) | ||||||||||||||
| Net Income | ( | ) | ||||||||||||||
| Three Months Ended March 31, 2022 | ||||||||||||||||
| Commercial Air Handling | Industrial And Transportation Products | Corporate and Other | Consolidated | |||||||||||||
| Sales | $ | $ | $ | $ | ||||||||||||
| Gross Profit | ||||||||||||||||
| Operating Income | ( | ) | ||||||||||||||
| Pretax Income | ( | ) | ||||||||||||||
| Net Income | ( | ) | ||||||||||||||
14. SUBSEQUENT EVENTS
None.
RESULTS OF OPERATIONS.
The following discussion is intended to assist in the understanding of the Company's financial position at March 31, 2023 and December 31, 2022, results of operations for the three months periods ended March 31, 2023 and 2022, and cash flows for the three months ended March 31, 2023 and 2022, and should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
Items Affecting the Comparability of our Financial Results
The Company purchased substantially all of the operating assets of Reverso Pumps, Inc, (“Reverso Pumps”) and Separ of the Americas, LLC, (“Separ America”), both located in Davie, Florida on January 10, 2022.
The Company purchased substantially all of the operating assets of KMC Corp. dba Knitting Machinery Corp. (“Knitting Machinery”) located in Cleveland, Ohio and Greenville, Ohio on May 1, 2022.
Accordingly, in light of the timing of these transactions, the Company’s results for the three month period ended on March 31, 2023 include the added results of operations of Reverso Pumps, Separ America and Knitting Machinery in the Industrial and Transportation Products segment. Conversely, our results for the three month period ended March 31, 2022 do not include the results of operations of Knitting Machinery and also do not include a full three month results for Reverso Pumps and Separ America in the Industrial and Transportation Products segment.
Results of Operations – Three Months Ended March 31, 2023 and 2022
Sales for the quarter ended March 31, 2023 (“current quarter”) increased to $39.5 million, an increase of approximately $8.5 million or 27.4% from sales of $31.0 million during the same quarter of the prior year. The increase in sales for the quarter ended March 31, 2023 was primarily driven by increased sales from Air Enterprises $4.5 million, Komtek Forge $0.8 million, Global-Tek $0.9 million, Marine Products International $1.0 million, Federal Hose of $0.3 million, CAD Enterprises of $0.3 million and Reverso Pumps of $1.0 million. The increase in sales was partially offset by a decline in sales from Data Genomix of $0.3 million.
Cost of sales for the current quarter was $29.0 million compared to $24.6 million for the same quarter of the prior year, an increase of $4.3 million or 17.6%, which is directly attributable to the sales increase. Gross margin was 26.6% in the current quarter compared to 20.5% for the same quarter of the prior year. The 610-basis point increase is primarily attributable to normalization of inflationary costs incurred in the first quarter of the prior year. Specifically, during the first quarter of 2022, the Company was affected by the rapidly changing macroeconomic environment including supply chain issues leading to higher freight costs, and raw material price increases that could not be passed along to customers without delay. In the first quarter of 2023, the majority of headwinds from the prior year have subsided, raw material price increases have largely subsided or been shared with customers, and direct cost management programs have resulted in savings.
Selling, general and administrative expenses (SG&A) in the current quarter were $5.4 million, or 13.7% of sales, compared to $5.0 million, or 16.0% of sales, in the same quarter of last year. Selling, general and administrative expenses were decreased as a percentage of sales, while costs remained flat, due primarily to expense management efforts and the increased sales amount for the current quarter compared to the same quarter of last year.
Interest charges in the current quarter were approximately $0.4 million compared to $0.3 million in the same quarter of the prior year. Average total debt (including notes) and average interest rates for the current quarter were $22.4 million and 6.25% respectively, compared to $29.0 million and 2.70% in the same period of last year.
Other expense, net was $0.1 million in the current quarter compared to other income, net of $0.5 million in the same quarter of the prior year. The decrease in other income, net was driven by a loss of $0.1 million in the quarter related to investments in marketable securities compared to a gain of $0.2 million in the same quarter of the previous year. The decrease was also driven by a difference in other income, net of $0.3 million resulting from incentives that Global-Tek received from the government of Puerto Rico in the first quarter of 2022 that did not recur in the first quarter of 2023.
Income tax expense in the current quarter was $1.3 million compared to $0.6 million in the same quarter of the prior year. Tax expense is higher compared to the same quarter of the prior year because of higher pre-tax income.
Net income in the current quarter was $3.4 million, or $0.97 per diluted share, as compared to net income of $1.1 million, or $0.31 per diluted share, for the same quarter of the prior year because of the factors noted above.
Commercial Air Handling Segment
Sales in the Commercial Air Handling Equipment segment for the quarter ended March 31, 2023 increased to $16.1 million, an increase of approximately $4.5 million, or 38.8%, from sales of $11.6 million during the same period of the prior year. This increase was primarily attributable to an increase in demand as COVID-19 pandemic-related restrictions were lifted and the on-site access necessary to complete the installation of commercial air handling units was restored for certain hospital and university customers.
Cost of sales in the Commercial Air Handling Equipment segment for the current quarter was $11.6 million compared to $8.9 million in the same quarter of the prior year, an increase of $2.7 million or 30.3%. Gross profit was $4.4 million in the current quarter compared to $2.6 million in the same period of last year, an increase of $1.8 million. Gross margin was 27.7% in the current quarter compared to 22.7% for the same quarter of the prior year. The 500-basis point increase is primarily attributable to lessened input costs, cost management initiatives and efficiencies realized through the larger revenue base.
Selling, general and administrative expenses (SG&A) in the Commercial Air Handling Equipment segment in the current quarter were $1.0 million, or 6.4% of sales, compared to $1.1 million, or 9.1% of sales, in the same period of the prior year.
Income tax expense in the Commercial Air Handling Equipment segment in the current quarter was $1.0 million compared to $0.4 million in the same period of the prior year an increase of $0.6 million that was primarily attributable to an increase in income before taxes.
Net income in the Commercial Air Handling Equipment segment for the current quarter was $2.4 million compared to net income of $1.1 million in the same quarter of the prior year due primarily to the factors noted above.
Industrial and Transportation Products Segment
Sales in the Industrial and Transportation Products segment for the current quarter increased to $23.4 million, an increase of approximately $4.0 million or 20.5%, from sales of $19.4 million during the same quarter of the prior year. The increase in sales for the quarter ended March 31, 2023 was primarily driven by increased sales from Komtek Forge $0.8 million, Global-Tek $0.9 million, Marine Products International $1.0 million, Federal Hose of $0.3 million, CAD Enterprises of $0.3 million and Reverso Pumps of $1.0 million. The increase in sales was partially offset by a decline in sales from Data Genomix of $0.3 million.
Cost of sales in the Industrial and Transportation Products segment for the current quarter was $17.4 million compared to $15.7 million in the same quarter of the prior year, an increase of $1.6 million or 10.5%. Gross profit was $6.1 million in the current quarter compared to $3.7 million in the same period of last year, an increase of $2.3 million. Gross margin was 25.9% in the current quarter compared to 19.2% for the same quarter of the prior year. The 670-basis point increase is primarily attributable to a reduction in raw material and logistics inflation, pass-through of certain ongoing inflationary costs in the form of price increases and strict cost management initiatives.
Selling, general and administrative expenses (SG&A) in the Industrial and Transportation Products segment in the current quarter were $2.9 million, or 12.3% of sales, compared to $2.5 million, or 12.6% of sales, in the same quarter of the prior year. Selling, general and administrative expenses decreased as a percentage of sales, notwithstanding the increased costs, due primarily to expense management efforts.
Other income, net in the Industrial and Transportation Products segment was $0.0 million in the current quarter compared to $0.4 million of other income, net in the same period of the prior year. The decrease in other income, net was driven by incentives that Global-Tek received from the government of Puerto Rico in the quarter ended March 31, 2022 that did not recur in the current quarter ended March 31, 2023.
Income tax expense in the current quarter was $0.9 million compared to $0.5 million in the same quarter of the prior year. Tax expense was higher compared to the same quarter of the prior year primarily driven by the increase in pre-tax income.
Net income in the Industrial and Transportation Products segment for the current quarter was $2.3 million compared to net income of $0.9 million in the same period of the prior year due primarily to the factors noted above.
Liquidity and Capital Resources
As described further in Note 12 to the Company’s consolidated financial statements, effective January 10, 2022, the Company completed the Reverso Pumps and Separ America acquisitions for a purchase price of $4.2 million, subject to certain customary post-closing adjustments based on working capital.
As described further in Note 12 to the Company’s consolidated financial statements, effective May 1, 2022, the Company completed the Knitting Machinery acquisition for a purchase price of $1.3 million, subject to certain customary post-closing adjustments based on working capital.
The Company’s credit agreement, by and between the Company and JPMorgan Chase Bank, N.A. as lender (as amended, the “Credit Agreement”), provides for a revolving credit facility of up to $30.0 million, which provides financial flexibility to fund acquisitions, working capital and other strategic initiatives.
Total current assets at March 31, 2023 increased to $51.2 million from $48.8 million at December 31, 2022, an increase of $2.4 million. The increase in current assets is comprised of the following: an increase of accounts receivable of $1.7 million; an increase in cash of $0.7 million, a decrease in inventory of $0.4 million; a decrease in prepaid expenses and other assets of $0.3 million; a decrease in investments of $0.1 million and an increase in contract assets of $0.9 million. The increase in accounts receivable was driven by an increase in new billings in the Commercial Air Handling segment for certain early-stage projects that have achieved billing milestones in advance of certain production milestones per their individual contract terms. Management estimates that these new projects in the Commercial Air Handling segment will be completed in the next 6 months. The Company is carrying higher cash balances in expectation of future bulk inventory purchases.
Total current liabilities at March 31, 2023 decreased to $25.5 million from $26.1 million at December 31, 2022, a decrease of $0.6 million. The decrease in current liabilities was primarily driven by the following: a decrease in short term notes payable and bank debt of $0.8 million, a decrease in accounts payable of $0.3 million, an increase of $1.2 million in accrued income taxes, and a decrease in unearned revenue of $0.7 million.
Cash provided by operating activities for the three months ended March 31, 2023 was approximately $3.7 million, compared to cash provided by operating activities of $2.0 million in the same period a year ago. Cash provided by operating activities for the three months ended March 31, 2023 is comprised of the following: net income of $3.4 million; cash provided by adjustments for non-cash items of $1.9 million; and cash used in working capital adjustments of $1.5 million. The primary drivers of decreased working capital during the current quarter were an decrease in inventories of $0.4 million and an increase in accounts receivable of $1.7 million, partially offset by a decrease in accounts payable of $0.3 million and a decrease in deferred revenue of $0.7 million. Cash flows from operations were impacted by cash used in working capital adjustments including an increase in accounts receivable of $1.7 million in the first three months of 2023, driven primarily by a decrease of $0.2 million in the Commercial Air Handling Equipment segment and an increase of $1.8 million in the Industrial and Transportation Products segment. The $1.8 million increase in accounts receivable in the Industrial and Transportation products segment was the result of an increase in new sales. Days sales outstanding in the Commercial Air Handling Equipment segment were 61 days in the first three months of 2023 compared 77 days in fiscal year 2022 which management will continue to monitor but does not view as a significant change. The $1.8 million increase in accounts receivable in the Industrial and Transportation Products segment was driven primarily by an increase in sales during the three months ended March 31, 2023, days sales outstanding went from 56 days in fiscal year 2022 to 50 days in the first three months of 2023. The Company added Reverso Pumps, Separ America and Knitting Machinery in 2022 and will closely monitor days sales outstanding for the companies in this segment. The rise in accounts receivable has a negative impact on cashflow and management will continue to monitor the trend in future periods. The Company does not have a history of material failure to collect payment from its customers and believes that it is reasonable to assume that materially all of its outstanding accounts receivable will be collectible barring unforeseen circumstances.
Cash used in investing activities for the three months ended March 31, 2023 was $0.1 million, compared to cash used in investing activities of $4.4 million in the same period a year ago. Cash used in investing activities for the period ended March 31, 2023 was for capital expenditures in the normal course of business. Cash used in investing activities for the period ended March 31, 2022 was for the acquisitions of Reverso Pumps and Separ America in the Industrial and Transportation Products segment and capital expenditures in the normal course of business.
Cash used in financing activities was approximately $2.9 million for the three months ended March 31, 2023, compared to cash provided by financing activities of $4.2 million in the same period a year ago. Cash used in financing activities for the three months ended March 31, 2023 was primarily related to: $2.8 million paydown on bank debt and other debt in the normal course of business. Cash provided by financing activities for the three months ended March 31, 2022 related primarily to the acquisition of Reverso Pumps and Separ America.
The Company is actively managing its business to maintain cash flow and liquidity. We believe that cash and availability on our revolving credit facility to be sufficient to fund working capital needs and service principal and interest payments due related to the bank debt and notes payable for at least the next 12 months. The Company had $12.6 million available to borrow on the revolving credit facility at March 31, 2023. Notwithstanding the Company's expectations, if the Company's operating results decrease as the result of pressures on the business due to, for example, supply chain interruptions or delays, increases in material, freight or labor costs, inflationary pressures, currency or interest rate fluctuations, regulatory issues, a downturn in general economic conditions, or the Company's failure to execute its business plans, the Company may require additional financing, or may be unable to comply with its obligations under the credit facility, and its lenders could demand repayment of any amounts outstanding under the Company’s credit facility. In addition, see Note 8 of the notes to the consolidated financial statements.
Off-Balance Sheet Arrangements
From time to time, the Company enters into performance and payment bonds in the ordinary course of business. These bonds are secured by certain assets of the Company by the surety until the Company’s completion of the requirements of the commercial air handling contract. At March 31, 2023, the Company had secured performance and payment bonds in the amount of $8.2 million as surety on completion of the requirements of certain commercial air handling contracts. The Company has no other off-balance sheet arrangements (as defined in Regulation S-K Item 303 paragraph (a)(4)(ii)) that have or are reasonably likely to have a material current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditure or capital resources.
Critical Accounting Policies
Preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make certain estimates and assumptions which affect amounts reported in our consolidated financial statements. On an ongoing basis, we evaluate the accounting policies and estimates that are used to prepare financial statements. Management has made their best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We do not believe that there is great likelihood that materially different amounts would be reported under different conditions or using different assumptions related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.
Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed below. On a regular basis, critical accounting policies are reviewed with the Audit Committee of the Board of Directors.
Revenue Recognition: We recognize revenue with respect to customer orders when our obligations under the contract terms are satisfied and control of the product transfers to the customer, typically upon shipment. Revenue from certain contracts in the Commercial Air Handling Equipment segment is accounted for over time, when products are manufactured or services are performed, as control transfers under these arrangements. We follow a cost-based input method, since there is no objective output measure that would fairly depict the transfer of control over the life of the performance obligation. Progress on the performance obligation is measured by the proportion of actual costs incurred to the total costs expected to complete the contract. Costs included in the measure of progress include direct labor and third-party. This cost-based method of revenue recognition requires the Company to make estimates of costs to complete its projects on an ongoing basis. Significant judgment is required to evaluate assumptions related to these estimates. The effect of revisions to estimates related to the transaction price or costs to complete a project are recorded on a cumulative catch-up basis. Certain contracts may be terminated by the customer; however, in the event of termination, most contracts require payment for services rendered through the date of termination.
Allowance for Obsolete and Slow-Moving Inventory: Inventories are valued using the first-in, first-out (“FIFO”) method; stated at the lower of cost or net realizable value; and are reduced by an allowance for obsolete and slow-moving inventories. The allowance is estimated based on management’s review of inventories on hand with minimal sales activity, which is compared to estimated future usage and sales. Inventories identified by management as slow-moving or obsolete are reserved for based on estimated selling prices less disposal costs. Though we consider these allowances adequate and proper, changes in economic conditions in specific markets in which we operate could have a material effect on allowances required.
Business Combinations: Business combinations are accounted for using the purchase method of accounting under ASC 805, “Business Combinations.” This method requires the Company to record assets and liabilities of the businesses acquired at their estimated fair values as of the acquisition date. Any excess of the cost of the acquisition over the fair value of the net assets acquired is recorded as goodwill. Determining the fair value requires management to make estimates and assumptions including discount rates, rates of return on assets, and long-term sales growth rates.
Goodwill and Indefinite Lived Intangible Assets: As referenced by ASC 350 “Intangibles- Goodwill and other” (“ASC 350”), management performs its annual impairment test for goodwill and intangible assets at least annually or more frequently, if impairment indicators arise at the reporting unit level. Our reporting units have been identified at the individual company component level, with each individual subsidiary operating company constituting its own reporting unit. For 2022 management performed qualitative and quantitative testing for each individual company with a goodwill balance other than those companies that were newly acquired within one year.
Our goodwill impairment analysis utilizes a qualitative approach comparing carrying amount of the reporting unit to its estimated fair value. To the extent that the qualitative approach indicates that it is more likely than not that the carrying amount is less than its fair value, we apply a quantitative approach as a secondary step. In applying the quantitative approach, we use an income approach to estimate the fair value of the reporting unit. The income approach uses a number of factors, including future business plans and actual and forecasted operating results. The significant assumptions employed under this method include discount rates; revenue growth rates, including assumed terminal growth rates; and operating margins used to project future cash flows for the operating company. The discount rates utilized reflect market-based estimates of capital costs and discount rates adjusted for management’s assessment of a market participant’s view with respect to other risks associated with the projected cash flows of the individual company. Our estimates are based upon assumptions we believe to be reasonable, but which by nature are uncertain and unpredictable. We believe we incorporate reasonable assumptions into our analysis of goodwill impairment testing for a reporting unit, such that actual experience would need to be materially out of the range of expected assumptions in order for an impairment to remain undetected.
In conducting our 2022 annual goodwill impairment analysis, we determined that the goodwill for CAD Enterprises at December 31, 2022 was $7.3 million. In our qualitative assessment of CAD Enterprises, we noted a decline in revenue from $30.1 million in 2019 to $18.9 million in 2020, $18.3 million in 2021 and $15.5 million in 2022 and a decline in after-tax income margin from 5.8% in 2019 to -4.6% in 2020, -0.5% in 2021, and -3.4% in 2022 and thus determined to conduct a quantitative assessment of CAD Enterprises. The quantitative assessment of CAD Enterprises confirmed that the estimated fair value exceeded carrying value by 12.2 percent, and thus no impairment existed at December 31, 2022. The key assumptions used to estimate fair value included discount rates; revenue growth rates, including assumed terminal growth rates; and after-tax income margins used to project future cash flows for CAD Enterprises. The discount rate used to estimate fair value was 10% and was based on estimates of capital costs and management’s assessment of a market participant’s view with respect to other risks associated with the projected cash flows for CAD Enterprises. Our revenue growth rate for the 9-year period in the discounted cash flow model was 10.2% per year, which reflects management’s assessment of estimated future orders for CAD Enterprises based in part on a Long-Term-Agreement (“LTA”) with the company’s largest customer, a new $7.5 million incremental purchase order with this customer, our previous revenue history including actual revenues of $30.1 million in 2019 before the onset of the COVID-19 pandemic, and a continued business rebound in the aerospace industry. The assumed terminal growth rate for CAD Enterprises was 3% based on management’s assessment of long-term growth rates for the Aerospace industry. The after-tax income margins used to project future margins for the company were based on the historical margins for CAD Enterprises prior to the COVID-19 pandemic. In 2019, CAD Enterprises earned a debt-free after-tax income margin of 16.6%. The discounted cash flow model used to estimate fair value assumes a debt-free after-tax income margin of 17.3% in 2027, or year 5 of the forecast period and expanding margins to 17.5% in the terminal year. This is based on management’s assessment of our ability to grow SG&A expenses at a slower rate than revenues as the company achieves more scale. Our estimates are based upon assumptions we believe to be reasonable, but which by nature are uncertain and unpredictable. Potential events and circumstances including global conflicts, materials shortages, inability to increase prices to keep pace with expenses, onset of a global pandemic, departure of key employees and loss of a key customer could negatively affect the key assumptions used for the recent fair value test and are similar to the risk factors noted in Item 1A, Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
In conducting our 2022 annual goodwill impairment analysis, we determined that the goodwill for Global-Tek Manufacturing and Global-Tek Colorado at December 31, 2022 was $1.9 million. In our qualitative assessment of Global-Tek Manufacturing and Global-Tek Colorado, we noted a decline in revenue from $9.2 million in 2021 to $6.5 million in 2022 and a decline in after-tax income margin from 17.3% in 2021 to -3.3% in 2022 and thus determined to conduct a quantitative assessment of Global-Tek Manufacturing and Global-Tek Colorado. The quantitative assessment of Global-Tek Manufacturing and Global-Tek Colorado confirmed that the estimated fair value exceeded carrying value by 23.3%, and thus no impairment existed at December 31, 2022. The key assumptions used to estimate fair value included discount rates; revenue growth rates, including assumed terminal growth rates; and after-tax income margins used to project future cash flows for Global-Tek Manufacturing and Global-Tek Colorado. The discount rate used to estimate fair value was 10% and was based on estimates of capital costs and management’s assessment of a market participant’s view with respect to other risks associated with the projected cash flows for Global-Tek Manufacturing and Global-Tek Colorado. Our revenue growth rate for the 9-year period in the discounted cash flow model was 6.5% per year, which reflects management’s assessment of estimated future orders for Global-Tek Manufacturing and Global-Tek Colorado based on our previous revenue history including actual revenues of $9.2 million in 10 months of operations after the acquisition in 2021 before the untimely passing of the General Manager. The assumed terminal growth rate for Global-Tek Manufacturing and Global-Tek Colorado was 3% based on management’s assessment of long-term growth rates for the Aerospace and Defense industries. The after-tax income margins used to project future margins for the company were based on the historical margins for Global-Tek Manufacturing and Global-Tek Colorado prior to the untimely passing of the General Manager. In 2021, Global-Tek Manufacturing and Global-Tek Colorado earned an debt-free after-tax income margin of 16.4%. The discounted cash flow model used to estimate fair value assumes an after-tax income margin of 6.2% in 2027, or year 5 of the forecast period and expanding margins to 7.8% in the terminal year. This is based on management’s assessment of our ability to grow SG&A expenses at a slower rate than revenues as the company achieves more scale. Our estimates are based upon assumptions we believe to be reasonable, but which by nature are uncertain and unpredictable. Potential events and circumstances including global conflicts, materials shortages, inability to increase prices to keep pace with expenses, onset of a global pandemic, departure of key employees and loss of a key customer could negatively affect the key assumptions used for the recent fair value test and are similar to the risk factors noted in Item 1A, Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
Income Taxes: In accordance with ASC 740, “Income Taxes” (“ASC 740”), we account for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and the tax bases of assets and liabilities and are measured using the currently enacted tax rates. Specifically, we measure gross deferred tax assets for deductible temporary differences and carryforwards, such as operating losses and tax credits, using the applicable enacted tax rates and apply the more likely than not measurement criterion Further, at each interim reporting period, we estimate an effective income tax rate that is expected to be applicable for the full year. Significant judgment is involved regarding the application of income tax laws and regulations and when projecting the jurisdictional mix of income. Additionally, interpretation of tax laws, court decisions or other guidance provided by taxing authorities influences our estimate of the effective income tax rates. As a result, our actual annual effective income tax rates and related income tax liabilities may differ materially from our interim estimated effective tax rates and related income tax liabilities. Any resulting differences are recorded in the period they become known.
Impact of Inflation
Inflationary economic conditions have increased, and may continue to increase, the Company’s costs of producing its products. The Company’s products are manufactured using various metals and other commodity-based materials including steel, aluminum, rubber and silicone. Freight and labor costs also are significant elements of the Company’s production costs. Inflationary economic conditions increase these various costs. If the Company is unable to mitigate inflationary increases through customer pricing actions, alternative supply arrangements or other cost reduction initiatives, its profitability may be adversely affected.
Forward-Looking Statements
The foregoing discussion includes forward-looking statements relating to the business of the Company. Generally, these statements can be identified by the use of words such as “guidance,” “outlook,” “believes,” “estimates,” “anticipates,” “expects,” “forecasts,” “seeks,” “projects,” “intends,” “plans,” “may,” “will,” “should,” “could,” “would” and similar expressions intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements, or other statements made by the Company, are made based on management's expectations and beliefs concerning future events impacting the Company and are subject to uncertainties and factors (including, but not limited to, those specified below) which are difficult to predict and, in many instances, are beyond the control of the Company. As a result, actual results of the Company could differ materially from those expressed in or implied by any such forward-looking statements. These uncertainties and factors include (a) the moderation of the adverse effects of the COVID-19 pandemic, including the resumption of operations by the Company’s customers, loosening of public health restrictions, or any reimposed restrictions or tightening of public health restrictions which could impact the demand for the Company’s products; (b) shortages in supply or increased costs of necessary products, components or raw materials from the Company’s suppliers; (c) availability shortages or increased costs of freight and labor for the Company and/or its suppliers; (d) actions that governments, businesses and individuals take in response to public health crises, such as the COVID-19 pandemic, including mandatory business closures and restrictions on onsite commercial interactions; (e) conditions in the global and regional economies and economic activity, including slow economic growth or recession, inflation, currency and credit market volatility, reduced capital expenditures and changes in government trade, fiscal, tax and monetary policies; (f) adverse effects from evolving geopolitical conditions, such as the military conflict in Ukraine; (g) the Company's ability to effectively integrate acquisitions, and manage the larger operations of the combined businesses, (h) the Company's dependence upon a limited number of customers and the aerospace industry, (i) the highly competitive industry in which the Company operates, which includes several competitors with greater financial resources and larger sales organizations, (j) the Company's ability to capitalize on market opportunities in certain sectors, (k) the Company's ability to obtain cost effective financing and (k) the Company's ability to satisfy obligations under its financing arrangements, and the other risks described in “Item 1A. Risk Factors” in our Annual Report Form 10-K for the year ended December 31, 2022 and the Company’s subsequent filings with the SEC.
ITEM 3. MARKET RISK
This item is not applicable to the Company as a smaller reporting company.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
Under the supervision of and with the participation of our management, including our chief executive officer and chief financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. Based on that evaluation, our chief executive officer and chief financial officer have concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the Company’s quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
At the time of filing this Quarterly Report on Form 10-Q, there were no material legal proceedings pending or threatened against the Company.
ITEM 1A. RISK FACTORS.
There have been no material changes from the risk factors disclosed in Part 1, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2022.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
| 10.1 |
Separation Agreement and Release by and between Crawford United Corporation and John P. Daly (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 4, 2023). | |
| 31.1 |
Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive Officer. |
|
| 31.2 |
Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer. |
|
| 32.1 |
||
| 32.2 |
||
| 101.INS* |
Inline XBRL Instance |
|
| 101.SCH* |
Inline XBRL Taxonomy Extension Schema |
|
| 101.CAL* |
Inline XBRL Taxonomy Extension Calculation |
|
| 101.DEF* |
Inline XBRL Extension Definition |
|
| 101.LAB* |
Inline XBRL Taxonomy Extension Labels |
|
| 101.PRE* |
Inline XBRL Taxonomy Extension Presentation |
|
| 104 |
Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101) |
*XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
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 as of the 9th day of May, 2023, thereunto duly authorized.
| SIGNATURE: |
TITLE |
| /s/ Brian E. Powers |
President and Chief Executive Officer |
| Brian E. Powers |
(Principal Executive Officer) |
| /s/ Jeffrey J. Salay |
Vice President and Chief Financial Officer |
| Jeffrey J. Salay |
(Principal Accounting and Financial Officer) |