P&F Industries Inc (PFIN) 2007 Q1 法說會逐字稿

Welcome to the P&F Industries' First Quarter Earnings Conference Call.

At this time, all participants are in a listen-only mode. Following management's prepared remarks, we'll hold a Q&A session. To ask a question, please press star, followed by one on your touchtone phone. If anyone has difficulty hearing the conference, please press star zero for operator assistance.

As a reminder, this conference is being recorded today, May 14, 2007.

I'd now like to turn the conference over to Mr. [Chris Witte]. Please go ahead, sir.

Thank you, Operator.

Good morning, and welcome to P&F Industries' First Quarter Earnings Conference Call. With us today from management are Richard Horowitz, Chairman, President, and CEO, and Joseph Molino, CFO.

Before we get started, I'd like to remind you that any forward-looking statements made during this call, including those related to the Company's performance for the 2007 fiscal year, are based upon the Company's historical performance and current plans, estimates, and expectations. They are subject to various risks and uncertainties, including but not limited to the impact of competition, product demand, and pricing. These risks could cause the Company's actual results for the fiscal year and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company. Forward-looking statements speak only as of the date on which they are made, and the Company undertakes no obligation to update publicly or revise any forward-looking statement, whether s a result of new information, further developments, or otherwise.

With that, I would now like to turn the call over to Richard. Good morning, Richard.

Good morning, and thank you so much, everybody, for joining us today for our 2007 First Quarter Conference Call.

I will start with a brief overview of our financial results for the quarter.

In our first quarter 2007, overall revenues decreased to $25 million from $26.8 million, compared to the first quarter of 2006.

Earnings from continuing operations were $147,000, as compared to $872,000 in the first quarter of last year, and diluted earnings per share from continuing operations were $0.04 per share versus $0.23 per share in the prior period. Earnings from continuing operations declined primarily as a result of legal revenues and lower gross margins in the first quarter of 2007 for the hardware business, partially offset by the results of operations for the newly acquired Hy-Tech Machine Incorporated.

The loss from continued operations -- discontinued operations, excuse me, net of tax benefit for the first quarter of 2007 was approximately $21,000 as compared to earnings of $2,000 for the same period last year.

And net earnings for the first quarter of 2007 were $126,000, or $0.03 per diluted share, as compared to $874,000, or $0.23 per diluted share, for the same period in 2006.

Needless to say, we were extremely disappointed by our performance this past quarter.

With respect to Countrywide Hardware's business, we began to face challenges in the fourth quarter of 2006 as a result of the continuing softness in the national new home construction market, as well as with certain competitive pressures on a regional basis and material cost increases of metals. And to further [exacerbate] the situation, the housing market has worsened considerably in the first quarter of this year and was particularly severe in several of our key markets, most notably in the South and the West. As a result of all this, we are continuing to take steps to maintain our customer base, as well as to reduce our operating costs to minimize margin erosion going forward.

Florida Pneumatic's business, although essentially flat this quarter versus the comparable period last year, is performing as expected and has stabilized somewhat after the volatile 2006 fiscal year, and fortunately, we have been successful in introducing new products to this channel and anticipate benefit from these product sales throughout the coming year.

In February 2007, we acquired Hy-Tech Machine, a subsidiary of the newly formed Continental Tool Group, which has helped to counteract the volatile retail tool sector due to its emphasis on the more stable industrial channel. Although Hy-Tech's results are only included since its February 12 acquisition, they have helped reduce further gross profit erosion in our tool sector.

On another note, with the anticipate sale of Embassy's building in the later part of the second quarter of this year, we would expect to receive additional cash of approximately $4.4 million net of related costs and the satisfaction of an existing mortgage, which will result in a gain of approximately $5 million. The after-tax proceeds of approximately $2.7 million will be used to pay down debt.

Before I take you to a more detailed look at the operations, I'd like to review just briefly what each of our companies does.

Our tool segment now comprises Florida Pneumatic and Hy-Tech Machine. Florida Pneumatic is primarily engaged in importing and manufacturing of approximately 50 types of pneumatic hand tools, and Hy-Tech, which was acquired, of course, on February 12 of this year, is engaged in the manufacture and distribution of pneumatic tools and parts primarily for industrial applications.

The combined product lines offer a unique solution to certain parts of the industrial tool channel that were previously not available to either Hy-Tech or Florida Pneumatic.

Our Countrywide Hardware Group imports and manufactures hardware products, such as doors, windows and fences, staircase components, kitchen and bath hardware, and accessories, as well as all other general hardware products. Countrywide, of course, is comprised of Nationwide Industries, Woodmark International, and our recently acquired Pacific Stair.

Now, for the quarterly performance of each of our units.

Our Countrywide Hardware revenues for the first quarter of this year decreased by $4 million, or 23.2%, to $13.3 million from 17.4 million in the first quarter of last year due to softness in the new construction -- new home construction market as a principal driver for this sector.

Woodmark's revenues decreased by $2.5 million, primarily due to a decrease in revenues from staircase components of approximately $1.7 million.

In addition, revenues from our kitchen and bath products sold into the mobile home and remodeling markets decreased approximately $779,000, or 32.9%.

During the period of sales, the two significant customers, one of which serves the manufactured housing market, have been adversely affected by market conditions.

Nationwide's revenues decreased 851,000, or 17.9%, primarily attributable to a decrease in fencing product revenues of approximately 194,000, attributed to overall weakness in the market and competition, a decrease in OEM revenues of 194,000 from market weakness, and the timing of certain customer orders and a decrease in patio revenues of approximately $463,000, due primarily to market weakness and an uneventful hurricane season last year.

Pacific Stair's revenues decreased by $727,000, or 43%, primarily attributable to significant softness in the new home construction market in the Southern California region.

Gross profit margin at Countrywide increased from 29.8% in the first quarter of 2006 to 30.2% in the first quarter of this year. This increase was primarily driven by a favorable product mix in our kitchen and bath division due to a selling price increase and the effect of lower sales to a significant but lower-margin customer.

These gross margin percentage increases were partially offset by selling price reductions at Nationwide due to competitive pressures and market softness, as well as some cost increases from Asian suppliers that were not fully offset by overall selling price increases; also, the adverse impact from fixed overhead expenses resulting from lower production and revenue decreases at Pacific Stair; and, lastly, due to competitive pricing pressures on stair products in several markets served by Woodmark.

For the three months ended March 31, 2007, revenues at Florida Pneumatic were essentially flat at 9.4 million compared to the first quarter of 2006. Retail revenues increased by approximately $253,000 due primarily to new products shipped of approximately $954,000, an increase in base sales to a significant customer of approximately $203,000 and an increase in certain promotional revenues of approximately $224,000, partially offset by a decrease in base sales of approximately $1.1 million from one significant customer.

Other revenue increases of approximately $70,000 in our Franklin division were partially offset by decreases in revenues of approximately $140,000 in our catalog business, decreases of approximately $82,000 in our [Berkley] division, decreases of approximately 97,000 OEM products, and decreases of approximately 62,000 in our automotive business. Revenues from the newly acquired Hy-Tech were approximately $2.2 million since its acquisition on February 12 of this year.

Gross profit margin for the tool business decreased from 32.4% in the prior-year period to 32% in the first quarter of this year. The decrease in the gross profit margin percentage from this segment was due primarily to a decrease in gross profit margin in Florida Pneumatic as a result of certain price reductions to a significant retail customer and material cost increases of various metals purchased by the Franklin division. This margin decrease was partially offset by certain price increases implemented in the industrial and automotive businesses.

In addition, this segment's gross profit margin was favorably impacted by Hy-Tech, which operates in the industrial tool business at higher margins than Florida Pneumatic's business.

We are excited about the future for our Hy-Tech business and our ability to reap benefits from some synergies in the industrial marketplace as a result of this acquisition. At the same time, we remain cautiously optimistic about Florida Pneumatic's business as we continue to focus our efforts on improving gross margins by reengineering current products to lower cost and developing new higher-margin products. We anticipate a favorable impact on revenues from the new products introduced during 2006 and other products under development that are slated for release this year.

Before I update our guidance for the year, I'd like to turn the phone call over to Joe Molino, who will give you some further insight into our quarter. Joe?

Thank you, Richard.

I wanted to add some additional clarification and background to the results from the press release in the quarter.

We're obviously disappointed with Countrywide so far this year. While Nationwide has taken part in this situation, generally, we're taking some comfort in the fact that most of the weakness has not been in the largest high-margin fencing segment. However, it appears that the best days of the smaller patio [inaudible] segment are likely behind it and that severe competition and shrinking margins are expected to continue. As a result, resources are being directing to fencing and OEM, where we should be able to get a solid return on our investment dollars.

At Woodmark, we're feeling the full brunt of the residential housing slump, as Richard mentioned. In addition, two of our larger customers are beginning to divert some sales to significant competitors. It's unclear whether we will be able to reverse this situation; however, we are directing this by attempting to get to the same end-users through other channels, and they are still major customers at this point. We are not letting up on our marketing efforts as we are seeing some competitors cutting back and are hopeful of gaining some share during the downturn. This has been quite effective in the Southeast region, where Stair House operates. Our slowdown has been much less there than the drop in starts in that region.

However, other parts of the operation have not fared so well, especially the California market, as Richard has mentioned, where our sales drop has been greater than the market average. This is, in part, due to the fact that our operation is much newer out West and that our largest account out there has had limited credit available for purchase of product in the first quarter. This has not, however, slowed our sales effort in the West, which we consider very aggressive in the face of this situation.

Finally, based on our analysis of the market data, it appears that the annualized number of housing starts has stabilized at about 1.5 million residential units. While this is far short of the peak of 2 million units, inventories have been depleted to the point where there is a closer correlation between starts and orders of our products.

Turning to the tools side of the operation, the comparable balance sheets for the quarter will, of course, now include all the balances carried over for Hy-Tech. Major assets purchased include accounts receivable, which was approximately 3.1 million at the closing, and inventory, which was 7.3 million at the closing.

The property and equipment acquired was valued at about 7.4 million, and this left about 3.7 million in intangible assets that were identified and about $80,000 in goodwill. While the allocations to intangibles and goodwill are not completely final, we are pleased with the significance of the hard dollar -- excuse me -- we are pleased with the significance of the hard assets acquired in this transaction.

The Hy-Tech transaction resulted in the smallest amount of purchase price in excess of hard assets acquired in the recent history of P&F. This figure was only 18% of total purchased costs. Also, at $80,000, goodwill represents only 1% of total purchase costs.

In terms of the actual impact on first quarter results, Hy-Tech contributed approximately 471,000 to pretax operating profit. Interest on the acquisition debt was approximately $175,000.

We expect Hy-Tech to be a stabilizing factor for P&F as there is little seasonality to their results. This should improve P&F's results for the first and last quarters relative to the other two going forward.

Beginning in the late second quarter, we expect Hy-Tech to be a manufacturing product for eventual sale through select parts of Florida Pneumatic's sales force and channels. This will begin slowly at first, but we are excited about the potential.

With regard to Florida Pneumatic, their focus on innovation is beginning to pay off as our new industrial drills and screwdrivers, which have been launched, are filling a large void left by some industrial competitors that we appear poised to exploit. We should see some benefits in the second half of the year as we include these tools with the newly available Hy-Tech tools under the Universal Tool brand at Florida Pneumatic.

Florida Pneumatic had an excellent quarter at Sears, and we continue to strengthen this relationship as we are afforded the opportunity to bring new product ideas to Sears and excel at our customer service level with them. In fact, we recently learned that we have again been given the Vendor of the Year Award for 2006 at Sears. This award is given to the top 1% of vendors to Sears. We were also a recipient of this award in 2004. We are extremely pleased that we continue to satisfy Sears' demanding requirements in the face of tough competition.

Other items affecting cash flow were depreciation and amortization, which were 313,000 and $368,000, respectively.

Finally, CapEx was approximately $207,000 for the quarter.

Before I turn the call back over, I wanted to address the delay in making this release and conference call. While we apologize for any inconvenience, the extra time was necessary in order to establish the opening balance sheet for Hy-Tech and have these amounts audited by our outside accounts and, finally, to produce the quarterly data and analysis in such a way that provides P&F management with confidence in the integrity of the figures for dissemination to the public. While the SEC provides for up to one year to finalize opening figures and there may yet be some small adjustments, we wanted to minimize any changes after this first quarter. We fully anticipate that Hy-Tech will be timely and accurately reporting going forward.

With that, I would like to turn the call back over to Richard. Richard?

Thank you, Joe, and let me give you the updated guidance for the balance of the year at this point.

We continue -- we anticipate earnings from continuing operations ending December 31, 2007 to decrease between 20 and 30% as compared to 2006, as the inclusion of the results of the newly acquired Hy-Tech machine are not expected to offset the decline in the results of our hardware business due to the continuing poor housing starts nationally, as well as certain competitive pressures.

We anticipate consolidated revenues to be flat or decrease up to 5%, primarily due to the anticipated revenue decline in Countrywide, which is expected to be partially offset by the results of the newly acquired Hy-Tech machine business.

Housing starts in the regions where Woodmark and Pacific Stair do business are expected to be down by approximately 25%. As a result, we expect Woodmark's [repped] sales to decrease 8 to 15% and sales to Pacific Stair to decrease 25 to 35%.

Nationwide revenues are also expected to decrease between 8 and 15% due primarily to adverse market conditions and new competition in the fencing business.

We anticipate sales of Florida Pneumatic to be flat as the increases in our industrial and [inaudible] businesses are expected to be offset by decreases in our retail sector.

We anticipate revenues at Continental Tool Group, the newly -- the parent company of Hy-Tech Machine, to be between 13 and $15 million.

Gross profit margins are anticipated to range from 29 to 31%. We do not anticipate that such overall revenue increases, planned product cost reductions, and operating efficiencies will offset margin erosion from increased product and related selling costs that are further compounded by the current economic market and competitive pressures.

Selling, general, and administrative expenses are anticipated to range from 24 to 26% as a percentage of sales.

Interest expense is expected to approximate $3.1 million increasing approximately $1.1 million, or 56%, as a result of servicing the debt related to the acquisition of Hy-Tech Machine.

I can assure you that we are, all of P&F, working quite hard to ensure that our future quarterly reports are more encouraging to you, our stockholders.

And that is the end of our report today, and I'd be happy to answer any questions you may have.

[OPERATOR INSTRUCTIONS]

Your first question comes from Andrew Shapiro with Lawndale Capital Management. Please go ahead with your first question.

Hi. Good morning. I have several questions. I'll ask a bunch and then back out into the question queue for others to ask. Please come back to us.

Can you update us a little bit more on the status of the real estate sale? I understand the 45-day due diligence period should be over, and is that the case? And are you then in the process of just closing now or in negotiating any price changes?

No, that's exactly where we are, Andrew. We are just going through the final stages of the closing, but we've passed the 45-day period. The balance of the deposit was given, and there have been no other changes.

So the closing is -- and your escrow documents and all is scheduled for when?

It's [inaudible] sometime -- I think it's June 27, I believe, or something quite around -- around that time. [Inaudible].

Last week of June, not earlier, okay?

You know, barring any unforeseen things, yes.

Right. And the interest expense guidance that you gave, does that include then the basically imminent pay-down of debt from the sale of that real estate or that's -- interest expense guidance is exclusive of that?

No, Andy, actually, it's exclusive of that because GAAP accounting requires that our interest charge for Embassy be included in the discontinued operations section of the income statement. So we don't even disclose interest directly on the income statement anymore for the Embassy building. So it is exclusive.

So then when the sale occurs and the cash is collected and the debt is paid down, that's going to be off of the current balance sheet that you have, right?

That is correct. However, given the fact that the deal has not closed, we did not project the interest savings from the closing. Once the deal is closed, of course, we can do that.

Okay, so I was just -- for my models, if I want to assume this is a done deal, then I ought to -- I can reduce the interest expense down?

Yes. That would be -- I would recommend you do that.

Okay. All right.

Now, Richard gave us some revenue numbers for some of the components in Countrywide from last year's first quarter, but I don't think your release and Richard's script gave us the first quarter of last year revenue numbers for all of the Pacific Stair, Nationwide, and Woodmark. Would you have those readily available? Just give us those numbers so we can properly do the comparison? Because you've given us percentage changes, but we're -- I think we have a few gaps in here.

You're looking for revenue for '06 Q1 for Nationwide, Woodmark, and Pacific Stair?

Yes.

I'll just take a quick look at what I have in front of me and see --

I think Richard read some of them but not all of them.

Just a second.

Okay.

Okay, here we go, Andy. Nationwide sales for Q1 of '06 were 4.7 million.

Yes.

Sales for Pacific Stair products in Q1 of '06 was -- we'll call it 1.7 million.

Yes.

And Q1 for Woodmark of '06 was just shy of 11 million.

Okay. And would you have last quarter's, fourth quarter's Nationwide?

That I don't think I've got in front of me.

[Inaudible] I definitely don't have that with me.

We'll get it from you offline.

I think you've got it. No, I think it's publicly available somewhere. I'm sure it's been disclosed.

Tools business -- so are you having any luck with enhancing the promotional activity at the large retailers? In this instance, one of the disappointing factors of promotions by your retailers was more Home Depot. Have you seen progress there?

I would say really not. They seem to be having a fair amount of turmoil in our sector of the business, and we have not seen -- the short answer is we have not seen any pick-up in that regard.

Okay. And -- but Sears with the new products and all that, seems like Sears business, you guys are back on track now?

Yes, I'm pleased to say that after having a pretty bumpy road there with Sears for a while, Sears -- our relationship there is very strong, and their business with us is very good and growing.

And one reason you hadn't really been into Lowe's in the past was because of the relationships on the Home Depot side and the obvious risk to the business. If Home Depot has been as poor as it's been, are you at the point where the possibility of a Lowe's is not -- is an option or it's not really still an option?

Well, Joe, maybe you could add to this, but I'll just tell you that even Home Depot at its depressed levels is dramatically more than Lowe's does in our sector of the business.

Okay.

That's number one. And, number two, Lowe's just made an arrangement with one of our competitors, I think, in the last year, so they're kind of like in the honeymoon stage. But having said all that, they are really a dramatic difference from the amount of business Home Depot does even at these levels.

Okay.

Joe, do you have any --

Yes. I would just confirm that Home Depot is at least twice the sales that Lowe's would be. We anticipate that our margins there would be similar and that, again, it's really not the direction we're headed. We're focusing on directing resources where the margins are much higher and really have an opportunity to make an impact.

Okay. And at Home Depot, is this activity now, the cutting back of inventory to new restocking lower levels, or what is it that's going on to get a feel for when and if it bottoms?

I think it's a combination of lower -- trying to get to lower levels. I think it's a combination of poor displays and sales coordination at each store level and a lack of commitment from corporate to -- or a lack of direction from corporate as to what to do to stem the tide and fix it. They're still anguishing over what they want to do to increase the business. They're not sure what direction they want to go yet with the whole strategy.

Okay. Regarding this whole Hy-Tech thing -- and then I'll back out into the queue to let people ask questions, but we definitely have more -- how is Hy-Tech integration progressing so far, and have you identified synergies to be gotten here? Or is it just to [beachhead] into the industrial channel?

Well, I'll let Joe do most of the talking in that regard, but I would categorize the acquisition as limited synergies, if that's the right word, good synergies but not company wide, and it's more of a vertical -- excuse me, a horizontal integration in terms of both companies getting more depth to their product line and product offerings and stuff like that. But more than that -- and a little manufacturing but not really a big -- a strong [inaudible]. It's just that it's a very complementary business to us. Joe, you want to add --

Yes, I would second that. On the manufacturing side, there are some limited number of tools that we will shift production from one facility to the other that can -- that has a bigger presence, so we'll save a little money on manufacturing. Engineers are certainly having discussions back and forth about ideas regarding development of similar products, although not identical products, and I think the biggest bang for our buck here is really the channel synergy, and to that end, Hy-Tech is already manufacturing a product for Universal Tool, which is a Florida Tool brand, that Florida sales force will have available to it if not late second quarter, early third quarter, and they're very anxious to have those tools and feel that they can really push them in their channels. And there are a few tools that the Hy-Tech folks are going to use from the Florida Pneumatic suite of products but not nearly the level that the other direction will take.

And what inroads are you making in the equipment rental business that you talked about in the last one or two conference calls?

Well, once we've got the final -- the full suite of products, there are several large tool rental organizations we're going to be approaching, and we've made some preliminary talk discussions already, but we don't have any orders.

Okay. Please come back to me. I will have questions on the hardware and other side. Thanks.

Your next question comes from Steve Raineri with Franklin Advisory Service.

Good morning.

Good morning.

Just a follow-up on the last question. When do you anticipate the product line-up to be finalized so that you can really go to the rental companies?

I believe our catalog is going to be done right around the end of the second quarter, and we should have product, again, right around the end of the second quarter.

Okay. That's when you can really make a [inaudible]?

Yes, which is really not that far away, but --

Yes.

-- that's when.

And just on the guidance here, are you including the gain on the sale of the building in the guidance?

No, we are not.

Okay, so just help me out a little bit. Maybe I'm mathematically challenged. It's possible. If you take the midpoint of your gross profit margin, on the SG&A, it's roughly a 5% operating margin, and --

Right.

Right? And if I say 30% and 25% SG&A --

Okay?

-- last year you recorded a 7.6% operating margin?

Yes.

So that's 35% lower [inaudible] margin, you know, assuming sales are flat, which could be tough, and then we have higher interest expense, which could take -- I'm not including the building sale proceeds, but --

Right.

-- could be another $0.15 or whatever it is -- [15 percent, rather]. So but you're only seeing earnings down 20 to 30%. Am I missing something here or what? The numbers don't really add up for me.

I mean, again, we've tried to take our best understanding of -- let me back up a second.

You can't simply take the average and use that. Knowing what we know about the business, there are scenarios that are more likely, other scenarios that are less likely, and we incorporate all of that into the thinking going forward. So just to take an arithmetic average wouldn't necessarily work. I mean it's just our best guess given everything we know, but the ranges are what they are. That doesn't necessarily mean that I'm more likely to be on the high end of the range, the low end of the range, or exactly in the middle, but we'd like to give a range because we're not -- we don't have a crystal ball here. But we're comfortable with the guidance we've given.

Is it possible that it could be worse? It's possible, but the range is where we feel comfortable.

Okay, well, I was just working [inaudible].

Yes, I understand.

Doesn't work a little bit. D&A -- what do you expect for D&A on the year?

Oh, for the full year --

Yes.

-- depreciation and amortization?

Yes. If you give it to me for the quarter, that'd be great, as well.

I do have it for the quarter, and I apologize if I did not mention it. I thought that I did. Hold on a second.

Depreciation for the quarter was 313,000, and amortization is 368,000, respectively, and CapEx was a little over 200,000 for the quarter. I don't have the year number off the top of my head.

Okay, but the D&A should be a little bit higher given that the deal closed in February?

Yes, absolutely. We've probably got a -- I can tell you that you're probably looking at about $600,000 annualized on depreciation for Hy-Tech and probably another 45 a month in amortization of the intangibles. So you can take that and use 10.5 months and get pretty close --

Sure.

-- if you take P&S, other D&A from last year, the run rate.

Right, and that shouldn't really change that much.

Richard's right. It's probably about 1.5 million on depreciation, probably be pretty close.

Okay. All in, I was figuring something, I think, about 3 million or something [inaudible].

Yes, together?

Total, yes.

It's probably pretty close.

Okay. And the build-in was in discontinued ops anyway, so --

Correct.

-- this should impact it. Okay, covenants. Can you tell me, were you -- I assume you were because you would've mentioned it if you weren't -- were you in compliance with your debt covenants --

Yes, we were [inaudible].

For the quarter?

Excuse me?

Yes, so you were in compliance this quarter?

Yes.

What is the covenant now that we're working on there on a debt-to EBITDA?

Senior debt to EBITDA, 3.5 to 1.

Now, the senior, did that encompass all of your debt, the 46 million of debt you have, or --

No, it did not include subordinated debt, which is a little over 3 million related to Woodmark. It would also not include mortgage debt.

Okay. And the mortgage debt would be how much?

We've got about -- well, it certainly doesn't include the Embassy mortgage debt of 1.2 million.

Okay.

It would not include the Florida Pneumatic mortgage debt. It was probably about 1 million 3 or 1 million 4.

Okay.

And it wouldn't include the mortgage debt on the Countrywide building, which probably also is around 1 million 3.

Okay. Okay, so we're roughly -- of the 46 million, we're roughly taking out one, two, three -- call it 5 million bucks or 6 million, say 40 million of debt?

Let's see. 3.5 -- well, 3.5 because the Embassy's not -- you're not going to see Embassy on the debt line. It's buried in liabilities of [disc op], so it's closer to 3.5.

3.5, okay. So we're looking at roughly 42.5 million of debt?

I'd have to put -- look at it in front of me.

So maybe -- basically, to --

Just to do the math for you, it's about 3.3 to 1, just so you know.

Okay. Well, I'm just trying to get -- so we need at least 12 million of EBITDA or something like that, too, to be in compliance with the senior debt?

A little more than that. Call it 13.

Call it 13. Okay.

Also -- you should note, also, that by mid-year or just about mid-year, our bank agreement renews again, and we've had many conversations with our bankers, and they're well aware of the issues, and they are totally with us in terms of making any adjustments if they need to be at that time, and the numbers are arbitrary and were the best guesses of last year when we renewed our last agreement. And our banking relationship, I would categorize, is extremely good and strong.

Yes, I mean they -- we're in the process of renewing all those figures as we do in the middle of every year, and again, the covenants -- and I don't want to put words in their mouth -- but they're really seen as a guideline, and they understand the business fully. They're very up to speed on our projections and how we see the business. We share with them very intimate knowledge of our operation --

Sure.

-- and they are long-term providers of capital here, and we're very comfortable with our relationship. So we're not concerned at all about where the projections leave us in relation to the covenants.

Okay, so you've already been having these discussions with them?

Absolutely.

Okay, that's good. Well, listen, I really appreciate your time.

Thank you for your call. [Inaudible].

Our next question is a follow-up from Andrew Shapiro with Lawndale Capital Management.

Okay. One follow-up on the Hy-Tech, and then I have some hardware questions.

Hy-Tech's operating margins, in '05, they were very nice. They were around 12%. What are the chances of you consistently being able to get the new combined tool business here, Florida Pneumatic and Hy-Tech, to be a combined operating margin of over 10%? Is that in the realm of possibilities? Is that in the near-term, the long-term?

You know, I think that Hy-Tech will certainly see that 12%. I think they'll do a little bit better than that, actually, you know, a fair amount better than that.

But as you saw in Q1, Florida Pneumatic, we're not going to turn that into an industrial tool business overnight, and to the extent we still have Sears and Home Depot, that will drag down the operating margin. We've got a fair amount of revenue at relatively low margin, but -- so I guess I would say this.

As long as there is a retail component of Florida Pneumatic, it will never have the same operating margins as Hy-Tech. And keep in mind, right now, we've got about a third -- two-thirds retail and one-third industrial. So we've got a ways to go for the industrial segment to be the driver of that margin at Florida Pneumatic.

Right. Okay. On the hardware segment, what opportunities are there in terms of market penetration in the West with Pacific Stair to offset the down market, or is the market just that bad that additional market penetration is a drop in the bucket against the market declines here?

I'm sorry, are you talking about Countrywide or Woodmark?

This would be, I guess, the hardware segment, but call it Countrywide -- I mean call it Woodmark and Pacific Stair.

Right. Well, certainly, everyone is seeing the same market declines, so everyone is -- that can, is pushing as hard as they can to get every piece of business and in some cases dropping prices to get the last sale. So this is what happens in a downturn like this. So while we are getting some customers, I wouldn't say drop in the bucket, but we're not going to recover the lost top line just from the general market decline.

Are there other geographies that you've [gained] or would you expand into where the market stabilizes, or do you need stabilization here first?

Yes. We are selling product throughout the country already. While there are markets we could potentially create a local presence in, which we think would probably improve our competitive position, I don't think we're in a position to jump on any of those investments right now. I think we want to make sure we've hit bottom and probably see the uptick here before we consider anything like that, although it is in the long-term plans, and if we continue to see that opportunity, I suspect that that's what we'll do. But I don't think that will be happening in 2007.

We have a very good model, Andrew, in Atlanta with our Stair House division, and we are trying to duplicate that in some manner, shape, and form in California, and I think that once we see that California turns the corner in terms of housing starts and also in terms of our business model [outfit], then I think we'll go further. I don't think we want to bite off more -- I don't think it would be prudent to bite off more at this point in other areas till we get a good grasp of what we're doing in our California market, as well.

And can you -- what incremental opportunities do you see to grow the revenue and offset contraction in the market through your own internal efforts at Woodmark?

Well, we're continuing to develop new profiles, and a major initiative right now is to develop some of the profiles of our major competitors, especially out in the West Coast, which we had been reluctant to do for some period, but we are now doing. So with that, we'll be able to make some inroads into a fairly large installed base of competitive product out in the West Coast. So that's a major initiative of ours.

And then, lastly, at Stair House, while we've been successful in the Georgia region and North and West, we're really just getting starting in going directly south to Florida with our own truck, and we're pretty excited about the opportunities there. Having said that, Florida's pretty depressed on the start side. That won't last forever, and I think when that turns around, we'll start to see some benefits from that initiative, too.

What new products are you introducing on the hardware side that you've mentioned in [inaudible] press release?

I just said we've got some new -- lots of new profiles from our competitors, primarily out on the West Coast, which is where they're strong, and we have a full-blown product development effort at Nationwide, again, directed at some SKUs that are very, very high profile and, we believe, high margin from the bigger player in that market.

And have you been able to pass on the cost pressures you've cited last quarter that you [inaudible]?

Yes, we certainly passed along some price increases where we can -- we're a little bit more competitive. In areas where the competition is fierce, unfortunately, we're left with eating that -- the choice of eating the margin or losing the sale, and I would say that's primarily the case in patio.

What further actions are there taking the hardware area to offset the margin pressures at all?

Well, we've initiated a major cost-reduction program internally and a reorganization of the staff. We've been pretty successful at carving out a fair amount of cost going forward that will allow us to create the results that we're projecting here. We simply just didn't -- the drop in revenue isn't going to fall completely to the bottom line as a result of us being able to come out -- cut out some fixed costs. So it's a very aggressive program, and it's being put in place beginning in May.

So -- oh, it's in May. And are these changes such that if you were overly conservative in your revenue estimates and the market bottoms out and then actually bounces, that you would not have to put those costs back in place and you would actually benefit the operating leverage from it?

It's possible. I think some of them would go back, but I would not disagree that we may be able to function at a little bit of a leaner -- with a little bit of a leaner staff than we have. I wouldn't disagree with that. But it won't all -- it's always going to come back.

Have you seen any failures yet amongst your weaker competition [inaudible] opportunities?

I don't know that we've seen any outright failures. We've seen some weakness. We've seen some people pulling back on investment. I don't know that I've seen any outright failures but some people definitely in trouble.

Okay.

We're not alone, Andrew, in our -- I mean by any stretch of the imagination, we're not alone in our struggles in this business in our markets, not in the slightest. I think everybody's sharing [inaudible].

Right, but you know, you folks have cash flow coming through the [inaudible] side. Yes, you have a lot of leverage, but you had paid it down pretty good with the Hy-Tech acquisition.

Yes.

But others might have other pressures [inaudible].

Oh, clearly, they do, and maybe vis-à-vis our competitors, we might be among the stronger in terms of our financial health. Certainly, we're not an unhealthy business overall for P&F, and others are probably a little worse off.

Is the kitchen/bath decline due to overbuild in the housing sector or manufacturing side, or is it for the housing crunch?

The kitchen and bath is really mostly due to the manufactured housing, and our biggest customer or two there are really, really, really, really feeling the pain in their business and, therefore, we're feeling it, also. Their business is off dramatically with us, and I would say that the vast majority of our decrease is due to that. We've had some very good encouraging sales in the plumbing wholesale business, which is a new sector for us in the last 12, 18 months, and that's been doing very well. But it's really -- it's really just basically one or two customers, and it's in that manufacturing business [themselves].

And are their problems due to overbuild or, again, from other --

We don't know exactly, but we suspect that's certainly part of the problem.

Okay. Can you discuss the bump in inventories sequentially? That's Hy-Tech. Where does it stem from?

Well, certainly, the bump in inventory from the end of the year is, of course, Hy-Tech. I mean we've got a $7 million, I think I'd mentioned, in inventory there. So that's -- I didn't look at the change in inventory myself before the call, but you can rest assured that $7 million is Hy-Tech.

So if you took the 27 million, which is where it was at year-end and added 7, you're right at 34, and you've got another $0.5 million increase, which is actually fairly modest considering Nationwide typically builds up their inventory from end of the year to the end of the first quarter, and the rest is certainly just variation around an average. So I'm not at all concerned about the change in inventory.

Okay. And I'm assuming, based on where the covenants are in your current operations, that Hy-Tech right now is at -- current excess cash flow would be dedicated to paying down debt?

Yes, that's correct.

Okay. And is there a target debt to equity or debt to total cap ratios that you'd be targeting there, your excess cash, and then kind of focus on other activities with a buyback of stock or another acquisition?

Well, and this is just a -- I wouldn't set this in stone, but certainly, the debt levels would have to be down in the low double digits, you know, 10 to 15 million probably for us to consider any sizeable transaction, I would say.

Okay.

So we're off -- we're sort of off the market right now in terms of looking at acquisitions.

Got it. All right. I'll back out in case someone else has some questions.

[OPERATOR INSTRUCTIONS]

There are no further questions at this time. Please proceed with your presentation or any closing remarks.

I just wanted to make sure that Andrew didn't have any other questions like we had before. So, Operator, please let us know if there are any other call -- any other questions.

You do have another question from Andrew Shapiro with Lawndale Capital Management.

Thank you, Richard, for having her query the -- poll one more time.

In general, I just got the proxy, you know, for the upcoming annual meeting and all, and one of the things that we observed is obviously certain increases in certain compensation levels. We are here as shareholders faced with results that we all agree are disappointing and for factors that are headwinds from various things that are beyond everyone's control.

But one of the observations I had, and I'm a little bit -- I'm increasingly getting concerned about it -- is that the Company strategically has made some acquisitions, and they've made acquisitions in the hydraulic cylinder area, they made acquisitions in Nationwide, then Woodmark, and now Hy-Tech. And each time we look at them, they generally have in your financials, we'll call it, projections of accretion or that it's going to be accretive and that these acquisitions are -- on a pro forma basis provide around $1.20 to $1.40, $1.60 each year in earnings. Yet, we really haven't ever seen that kind of earnings level get generated by the Company because it only seems that one -- not usually one, but within two years of each of the acquisitions, those particular industries turn down. And you haven't seen that in Hy-Tech yet. Just made that acquisition, but we are now experiencing that in Woodmark, and the promise of Woodmark, the promise of these other acquisitions have -- they seem never really to have been fully achieved.

And I'm wondering from a tactical strategic big-picture point of view, what changes, if any, of the Board -- does the Board observe this, as well? Because it seems obvious to us. What changes, if any, is the Board of Directors and management going through with respect to its large strategic allocations of capital in light of the fact that -- again, I'm concerned here that we have an increasing fixed cost base of compensation, yet, the shareholders are not seeing the promise of the high EPS from each acquisition ever delivered. The assets tend to get sold off, and they never really turn down. The only thing I'd point to is Green, but right now, Nationwide and Woodmark, their industries only a year or two after being acquired, you're either experiencing increased competition that either the barriers to entry you guys thought about didn't, you know, or what? What changes, if any, are you and the Board going through towards these big decisions and the compensation policy?

Andrew, in all due respect, I don't think that's a fair or an accurate comment or observation on your part. I would say that the Nationwide acquisition, which is -- how many years ago now, Joe?

2002, so five years.

-- so it's been five years now. That company is still operating at much higher profit levels than when we bought that company, much higher, not even close, much higher profit levels than when we bought that company five years hence.

Okay. Fair enough.

Even -- all right. Let me finish. Since you're asking the question, I'm going to be very direct with you about it.

Okay.

Even five years later, even with this bad economy, this year's numbers are still dramatically better than what we acquired with that company.

The Green Manufacturing, that is a very fair statement on your part, but nobody, us or anybody else in this room, have had a crystal ball to be able to see the capital market sector -- the capital equipment, excuse me, market sector fall apart the way it did, and we got banged pretty good, and we don't have a crystal ball. We're not clairvoyant --

Right.

-- because we're businessmen like you are, but we got banged pretty good.

But having said that, we came out of that acquisition and that divestiture better than great considering where that company was. I don't even think you -- if you stop to think about it and put the numbers down, I think you would be very -- you should be very thankful, and I'll use the word impressed only because I'm lacking in a better word right now, but -- or relieved that we came out of here with that as well as we did because I'm telling you, that was pulling a rabbit of the hat. And the way we sold all three divisions, broken down, broken down the way we did, we maximized there, and basically, for a very bad turn of events, which I -- of course, we have to be held responsible for and accountable for, we came out of there marginally -- marginally hurt. It would've been better if we weren't hurt at all, obviously, but we came out of there as good as we could.

Thirdly, Woodmark, which we now own three years or three-and-a-half years, something to that tune, that's another company that for all this time has been performing at better levels of confidence than when we bought, and, again, last year, significantly better levels of profit than what we bought the company for. And this year, with the housing market, I mean nothing goes up, up, up forever --

Right.

-- and the housing market, of course, we see what's happened there, and we are being affected, and we are making changes there as best we can, but I think we have very good management there. I think we spend an enormous amount of time with them and visiting them and on all subjects regarding this, and we're doing as much as anybody else can. And it's not like we're doing it in a vacuum. Everybody in the same business is feeling the exact same problem we have, and we certainly hope and see no reason that when the housing starts do pick up, that we will thrive again in that business.

And having said that, even one step further, unless I'm mistaken -- and, Joe, you can correct me if I'm wrong -- even at these reduced levels this year, I believe that they are higher than the level when we bought the business.

So if that were the case then, with respect to Woodmark, I was going to ask, do you still feel Woodmark's capable of providing the EPS power pro forma that it had in the financial statements when it was acquired, but if you say that Woodmark, in fact, is performing better than when you bought it, then arguably, it ought to be providing that kind of EPS contribution or more now? Is it [inaudible]?

I mean let me just make a bunch of comments, Andy, and I'll start with Green. Richard hit it right on the nose with Green. The only thing I would add to Green is we got out of that business not -- frankly, not because we didn't think it would turn around, but it just was not a fit where we wanted [to head]. And I had actually had a fair amount of discussions with the owners of that business since it was sold. That market has come back. Had we just stuck it out for another year or two, everything would've turned around for us, as well. There was no magic there other than that industrial -- large-cap industrial market needed to turn around. So you know what? I don't think you'd say anything about Green if we still held it today because it would be a nicely profitable business. But --

[Inaudible] it was a buy high/sell low [inaudible], you know.

That's exactly right. I mean we bought it when the market was sky-high for acquisitions, and we sold it at the low, and had we held on to it longer, we wouldn't be complaining about it. So that's Green.

And, again, what you're forgetting, every acquisition we make now, where -- and this is the market we're in, there's fairly small levels of hard assets and huge intangibles that have now -- that are being forced to be allocated to these deals with very short write-offs, and that's all [whack] in earnings per share. So do not lose sight of that fact.

But those [tend to be] non-cash hits, right?

I know it's non-cash. Well, have we had any trouble with cash? Take a look at cash flow over the last [inaudible]. That's been pretty high.

Okay, yes.

And then, lastly, we have had large increases in staff here just to manage the operation, lots of it Sarbanes-Oxley related, lots of it because business has just gotten more complicated. And given our size, maybe those costs are, unfortunately, I don't want to say out of line isn't the right word, but as a percentage of the total business, are not inconsequential. So I don't think it's just we're paying people more and more money to do the same thing. We just have to keep acquiring more staff to manage the --

[I'm looking] at the staff that might be disclosed in the proxy, so we're really -- I'm a little concerned about the fixed compensation that's been increasing, and, Richard, at the same time that we're talking about -- call it the upper-level strategic capital allocation decision making that's gone on yet, that at the bottom line results have not reaped the promise of each of these acquisitions yet.

One last thing I want to comment on. If you were to look at Florida Pneumatic's profit -- and we inherited this business. It's been in the portfolio for 25 years -- or I should say I inherited it.

Yes.

I believe they contributed something 6 or $7 million to EBIT back in 2000, and now that number is 2.5 or 3. Well, if that number would still be 6 million, we'd be looking at earnings-per-share figures in the $1.50 range. So that has nothing to do with any of the recent acquisitions.

I think, Andrew, if you take a look at the big picture, I think if you take a snapshot of P&F 10 years ago, a snapshot of P&F five years ago, and a snapshot of P&F today, I think you as a stockholder and me as a stockholder, and a much bigger one than you, should be very happy with the results of the Company. Yes, we haven't earned as much money as we did, but we are still at a level -- even with our projected downturn this year, we're still at a higher level, and our acquisitions have been very good for our P&F as a whole, and we are -- we're growing the business which is our mantra, which is our mission. We're growing it as best we can, and we're doing it with what I would consider conservatism and great analysis but with no clairvoyance.

And I mean the [Toll] Brothers -- I mean you've been reading about the Toll Brothers. They're in the housing market pretty good. That's a disaster. This Company is not having a disaster; we're just trying to spread ourselves out to have less dependence on retail, which we are clearly doing. We're trying to have less dependence on housing starts, which we're in the process of doing, as well. I think that we keep our eye on the ball here, and we do what we have to do.

Having said all that, I know that one of your favorite pet peeves is to talk about compensation, especially mine, and I am sorry that you're unhappy with that. Specifically, I didn't take a raise for two years, and my income is a function -- my greatest part of my income is a function of the profits. And if the profits are down, my income is going to be down, and that doesn't make me happy, and it shouldn't make you happy either. If I make more money, that means the Company is making more money, Andrew.

So all of that -- you know, I'm sorry if it doesn't please you, but we are doing as many good things here as we can, and I think if an objective person looked at this company 10 years ago and looked at this company today, with all the other things that are going on in the SEC world and the Sarbanes-Oxley world and all the other things here, I think you would find a good mark for us, responsible -- responsibility and taking this job seriously. We're not sitting on the golf course every day; we're working.

Right. Well, just so you know, it's not black and white. If I was displeased, you would surely know about it in a much more vocal and greater pattern. I'm raising the issue. Proxy's out. I'm looking at the EPS in '98 is $1.07; in '99, it's $1.23; in 2000, it's $1.04. In '01, it went down to $0.50; in '02, it went down to $0.80, okay? And you're projecting 70 to $0.80, and then it went up 1.09, 1.15, 1.25, and 1.01 in '06. We're -- that's a decent timeframe for when a bunch of acquisitions have gone in and out of the portfolio, and we have these new businesses, yet our EPS on a pro forma basis -- when that Woodmark acquisition was acquired, I just remember distinctly how that pro forma earnings was $1.40, and we just haven't seen the -- various things have happened in the industries, but we're shareholders. We don't make the decisions of what industry to go into, where to allocate, how much to pay and all that.

Right.

That's big-picture stuff, and I do like that you own a lot of shares. As you know, I've been here for a long time. I own a lot of shares, as well --

Yes.

-- and we want to have our interests aligned that way, but when fixed salary rises at a pace not commensurate with the earnings, that's a problem. That's all. And I just want to point out --

I appreciate what you're saying. I don't discount what you say. Nobody here on the Board -- I should say everybody on the Board is well aware of your concerns. We do -- we take it seriously. We do it in a responsible manner. And all I can tell you about this business is as a stockholder and a very -- and the largest stockholder in this Company, I'm very happy that with all the things that have happened, that we made the acquisitions we did because the Company, to quote Ronald Reagan, "We're in a better place than we were before," okay? And people plan and God laughs, and we don't have a crystal ball, and we're doing as well, if not better, than others in the same industries, and we will continue to do so. And I really do believe that when the economy comes back, even though Mr. Bush keeps telling us how good things are and the market is flying, we don't find that the case in our industries, and it's a real tooth-pulling time in all of our businesses, I would say, all of our businesses, but we really do feel that when the economy stabilizes and starts to improve that all of these things will work to our benefit, and I'm happy that we've made the acquisitions. And there's only been one acquisition in all my years in this company that we ever divested of, and that was Green.

We sold Embassy, which we inherited the company when we went public, and Embassy was a fabulous -- a fabulous strategic decision for us, if I don't say so myself, on no earnings. The pullout, close to $16 million, out of that business was a bigger miracle than anything we could've ever hoped for, and I think the Company is in a much better place.

So I hope you agree, and we're going to continue to try to do as many good things as we can. Having said that, there are erasers on pencils, and we will be making our share of mistakes along the way but not for lack of good knowledge and good sound business work, and we'll do the best we can. And I hope that you can stay with us and see the fruition of that as time goes on.

Well, we'd certainly like to continue to grow with the Company and see the Company do its growth. Thanks.

And we, of course, want you to do that with us.

Right. Thank you.

Any other questions, Andrew? Okay.

There are no further questions at this time.

Okay. Well, thank you all for being on the call today, and as I said earlier, we look to have -- we look for the year to improve, hopefully, and certainly, we will do everything we can to make our reports now and in the future as good as they possibly can be. Thank you for tuning in today.

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your line.