P&F Industries Inc (PFIN) 2007 Q3 法說會逐字稿

Welcome to the P&F Industries third-quarter earnings release conference call.

At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will hold a Q&A session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Tuesday, November 13, 2007.

I would now like to turn the conference over to Jody Burfening. Please go ahead, ma'am.

(technical difficulty) P&F Industries' third-quarter earnings conference call. With us today from management are Richard Horowitz, Chairman, President and Chief Executive Officer, and Joseph Molino, Chief Operating Officer and Chief Financial Officer.

Before we get started, I'd like to remind you that any forward-looking statements made during this call (technical difficulty) for the 2007 fiscal year are based upon the Company's historical performance on 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 actual results for the 2007 fiscal year and beyond to differ materially from those expressed in any forward-looking statements made by, on or 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 as 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, Jody. Thank you so much and good morning to everybody on the call. Thank you all for joining us this morning on our 2007 third-quarter conference call.

Let me start with a brief overview of our financial results for the past quarter. Overall, revenues decreased $30.4 million -- excuse me, to $30.4 million from $$32.3 million in the third quarter of 2006. Earnings from continuing operations decreased to $343,000, as compared to $1.5 million in the third quarter of 2006. Diluted earnings per share from continuing operations were $0.09 per share versus $0.40 per share in the prior-year period. This decline reflects a number of factors, principally the ongoing slowdown in the construction of new homes, which continues to severely effect both revenue and gross margins in our Countrywide Hardware subsidiary, as well as lower sales to key customers in our Continental Tool subsidiary group. The acquisition of Hy-Tech Machine in February of this year helped offset the revenue and losses and operating profit -- offset the revenue losses and operating profit reductions.

Earnings from continuing operations, net of tax expense, for the third quarter of 2007 was $120,000, an increase of $171,000 when compared to a loss of $51,000 reported for the same period last year. Net earnings for the first quarter of 2007 decreased to $463,000 or $0.12 per diluted share, as compared to $1.4 million or $0.39 per diluted share for the same period in 2006.

Needless to say, we were extremely disappointed by our performance this past quarter, as well as the year thus far. However, the ongoing decline in new housing starts continues to adversely impact our business, particularly in the south and west regions of the nation.

In addition to the sluggish economic sector, our overall third-quarter revenue and profits were negatively affected by competitive pressures and dramatically rising raw material prices. We maintain our belief that our hardware business should return to more profitable levels upon a housing market recovery, and we are expecting our tool group to recover next year as well.

The quarterly performance at each of our business unit follows. Revenues for the Continental Tool Group increased to $17.1 million for the third quarter of 2007, as compared to $15 million for the same quarter in 2006, of course due to the addition of Hy-Tech. Within this group, Florida Pneumatic revenues decreased 2.3 -- $2.357 million due primarily to reduced volume of our base products, as well as lower promotional business to one of our major customers, compounded by price reductions to another large customer.

Our industrial distribution, catalog and Berkley products combined were essentially flat compared to the prior year.

Lastly, for the current three-month period, revenue increased $145,000, at Franklin Manufacturing, when compared to the same three months a year ago, as a result of increases in business with a long-time customer. Revenues at Hy-Tech were $4.426 million, which helped offset the decline of Florida Pneumatic.

Acquired during February of this past year, Hy-Tech focuses on the more stable industrial tool channel and generates a slightly higher gross margin than Florida Pneumatic with its significant retail presence. Gross margin percentage in the Tool segment declined 2.2 percentage points to 25.6% for the third quarter of 2007 from 27.8% for the same period last year, due to the price concessions granted to a major retail customer that we agreed to last year, as well as price increases of raw materials. The acquisition in February of 2007 of Hy-Tech favorably impacted this segment's gross profit, as Hy-Tech's gross profit is generally higher than the rest of this segment, as I mentioned earlier.

Our Hardware segment remains directly affected by the downturn in the home construction sector. The loss of a major high gross margin customer adversely affected our gross margin for this segment as well. The gross margin percentage decrease was partially offset by a favorable product mix at Woodmark, as a greater percentage of its sales were from the warehouse, which generates higher margins and a lower percentage of the sales totaled from direct shipments, which generate a lower gross margin. As a result of this sluggish market and further compounded by competitive pressures, we were forced to implement price reductions at Nationwide.

Additionally, we absorbed cost increases from Asian suppliers for which we are not able to pass through to our customers. Our gross margin at Pacific Stair was adversely impacted from the inability to reduce fixed overhead costs as production levels decreased, combined with a decrease in sales.

Revenues at Countrywide Hardware decreased to $13.241 million from $17.276 million last year. As a result of the ongoing downturn in the new home construction market, a key driver of this group, Countrywide encountered decreases in revenue at each of its units. Within Countrywide, we continue to see a sales decline of their products during the third quarter of 2007 compared to 2006.

Combined products sales decreased by approximately $2.327 million. Further, revenues in our kitchen and bath products sold into the mobile home and remodeling markets have decreased by approximately $1.214 million. Sales to one significant customer which serves the manufactured housing market were or adversely impacted by market conditions in sales to another significant customer decreased as they began sourcing products from other vendors.

Nationwide's revenues decreased by approximately $494,000, primarily attributable to a decrease of approximately $256,000 in OEM products essentially from the market weakness, $188,000 in sales of patio products, due primarily to market weakness, competition, and an industry consolidation, and $50,000 in sales to fencing products due to market weakness.

Our overall gross profit percentage for the Hardware group of 30.0% for the third quarter decreased 2 percentage points from the same period last year, due primarily to selling price reductions required as a result of competitive pressures, cost increases from overseas suppliers which we were unable to pass along to our customers, and the inability to reduce fixed expenses to offset the revenue decline as quickly.

During the current quarter, our sales mix at Woodmark helped to offset -- somewhat offset the gross margin reductions as a greater percentage of these current revenues, compared to the same period in the last year, came from a warehouse versus our low-margin direct container shipments, as I've previously mentioned as well.

Consolidated selling, general and administrative expenses increased $229,000 to $6.945 million, which compares to $6.716 million last year. However, if you take Hy-Tech's SG&A of $850,000 out of these numbers, our SG&A decreased by $621,000 during this period. Total SG&A as a percentage of revenue increased from 20.9% to 22.9%.

In the face of the current poor conditions affecting our products, we will continue to focus our efforts on cost-reduction opportunities across all of our business units. These initiatives will include and have included shifting production to lower-cost facilities, securing price reductions from suppliers, and reducing overhead at all operating levels. We are confident that these efforts will allow us to weather the current economic storm. In spite of these cost-reduction measures, we continue to plan new product introductions and pursue additional channel opportunities over the next several quarters.

Before I give you the guidance for the balance of the year, I'd like to turn the call over to Joe Molino, our CFO. Joe?

Thank you, Richard. As Richard discussed specifics for the quarter, I will focus on consolidated items and year-to-date results.

For the first nine months of 2007, revenues were $85.9 million compared to revenue of $88 million for the same period last year. Net income from continuing operations for the nine months ended September 30, 2007 were $720,000 or $0.19 per diluted share, compared to $3.6 million or $0.96 per diluted share for the first nine months ended September 30, 2006.

Revenues at Countrywide decreased 23.3% to $41.4 million for the first nine months of 2007 as compared to the prior year. Revenues decreased at each of the units of our Hardware segment, primarily due to softness in the new home construction market, the principle driver for the group. The aggregate decrease was $12.5 million.

Woodmark had revenues decrease approximately $8.830 million or 26%. Specifically, revenues from the sale of stair products sold through both Woodmark and Pacific Stair products decreased during the nine-month period ended September 30, 2007 when compared to the same period in the prior year by approximately $5.785 million, or 22%, again due primarily to softness in new home construction. Further, revenues in our kitchen and bath products division sold into the mobile home and remodeling markets have decreased by approximately $3.045 million or 40%. Sales to one significant customer, which serves the manufactured housing market, were adversely impacted by market conditions and sales to another significant customer decreased as they began sourcing products from other vendors.

Pacific Stair's revenues decreased by approximately $1.871 million or 38%, primarily attributable to significant softness in the new home construction market in Southern California and Arizona.

Nationwide's revenues decreased by approximately $1.848 million, or 12%, primarily attributable to a decrease of approximately $332,000 or 4% in sales of fencing products, due to market weakness and competition, a decrease of approximately $518,000 or 14% to in OEM products from market weakness and the timing of certain customer orders, and a decrease of approximately $1 million or 45% in sales of patio products, due primarily to market weakness, competition, and industry consolidation.

Gross profit margin in the Hardware segment was 31.0% for the first nine months of 2007 as compared to 31.7% for the same period of 2006. The decrease in this margin percentage from Hardware was due primarily to selling price reductions at Nationwide, from competitive pressures and market softness, as well as some cost increases from Asian suppliers that were not offset by selling price increases, and also the adverse impact from the inability to reduce fixed overhead expenses, as production levels decreased, combined with revenue decreases at Pacific Stair. The gross margin percentage decrease was partially offset by a favorable product mix at Woodmark as a significant portion of revenue decreases were associated with its lower-margin direct container business.

Revenues from the Tools group, Tools and Other Products segment increased $10.440 million, more than 30%. This segment includes revenues from the February 2007 acquisition of Hy-Tech, which on a year-to-date basis contributed $10.9 million in revenues, while revenues from Florida Pneumatic decreased approximately $473,000, from $34.070 million for the nine months ended September 30, '06 to $33.597 million during the same period this year. Significant components of the net decrease in sales at Florida Pneumatic include a reduction of revenues of $1.874 million, due to a decrease in base sales from a significant customer, along with decreases in revenue of approximately $190,000 in both the Berkley division and the automotive product line, and $120,000 in catalog business, respectively. These decreases were partially offset by increases in sales to a major retail customer of approximately $1.849 million due primarily to new products, as well as an increase in sales from our Franklin division of $151,000.

Gross profit from our Tools segment declined 27.7% for the first nine months ended September 30, 2007 from 30.1% for the nine months ended September 30, 2006. The decrease in gross profit percentage from the tools and other products was due primarily to a decrease in gross profit margin at 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 the newly acquired Hy-Tech, which operates in the industrial tool business at higher margins than the overall Florida Pneumatic business.

Consolidated selling SG&A -- excuse me, consolidated SG&A expenses increased $1.849 million or 9.4% when compared to the same nine-month period in 2006. Excluding the impact of Hy-Tech, however, our SG&A for the nine-month period decreased by $291,000 or 1.5%. As a percentage of revenue, SG&A increased to 25.2% from 22.5% for the prior nine-month period.

Consolidated net interest expense increased $714,000, or 47.3%, for approximately $1.5 million to approximately $2.2 million. Interest expense on borrowings under the term loan facility increased by approximately $592,000, due to additional borrowings related to the acquisition of Hy-Tech. Interest expense on borrowings under the revolving credit loan facility increased by $115,000, as higher average borrowings were adversely affected by higher average interest rates.

Other items affecting cash flow for the nine months ended September 30, 2007 were depreciation and amortization, which were approximately $1.138 million and $983,000, respectively.

Finally, CapEx for the first nine months of fiscal 2007 was approximately $1.028 million.

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

Thank you, Joe. Before I open the call to questions, I'd like to update previously issued guidelines.

We are disappointed to report that the results of operations for the second half of fiscal 2007 will be only modestly better than the first half of 2007. We anticipate earnings from continuing operations for the year to decrease 75% to 85%, as compared to 2006, as the inclusion of the results of the newly acquired Hy-Tech are not expected to offset the decline in the results of our Hardware business, due to poor housing starts nationally as well as certain other competitive pressures.

For fiscal 2007, we anticipate our 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 Hy-Tech. As national housing starts continue to be depressed, we expect Woodmark sales to decrease 25% to 35%, and sales at Woodmark Pacific Stair in the California market to decrease 35% to 45%. Nationwide's revenues are also expected to decrease 8% to 15%, due primarily to adverse market conditions and new competition in the fencing and patio businesses.

We anticipate sales of Florida Pneumatic to decrease slightly, as increases in our industrial and catalog businesses are expected to be offset by decreases in our retail business. We anticipate revenues at Hy-Tech Machine to be close to $15 million since acquisition.

Gross profit margins are anticipated to range from 29% to 30%. 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 million, increasing approximately $1 million or 53% as a result of servicing the debt related to the acquisition of Hy-Tech earlier this year.

That concludes our report for today. I will be happy to answer any questions you may have at this time.

(OPERATOR INSTRUCTIONS). Andrew Shapiro, Lawndale Capital Management.

Good morning. I have several questions. I will ask a bunch and then back out in the queue in case others are waiting to come in.

You talk about the Hardware business returning to profitable levels when the housing market recovers. I just want to get clarification if this means recovery or -- which would happen sooner is stabilization. Will you have higher profitability because you haven't made cuts or other efficiencies if the housing market or when the housing market first stabilizes and anniversaries its declines, which is going to have to happen before it ever recovers?

Yes, I would say that just as the cuts that we've been making have not been fully accrued to our benefit, as the sales go down, obviously our cuts have to catch up to that. I think it will have the adverse effect going forward, that when revenue starts going up, we will be more lean and then we will only add people and (technical difficulty) add on as needed, as we grow.

Okay. Do you feel that your cost-cutting initiatives right now are still behind the deterioration in the business, and they are not yet ahead of the issues that you are still behind the eight ball?

No, what I'm saying is that the cost reductions -- you know, when you have severance and other things that go with it, there's a lag effect. We are still a little bit in that, for the most part.

I would also just add, Andy, if, you know, if the top line drops, you know, further, the cuts that we make are little harder to match one-for-one, if you follow what I'm saying. I mean, at some point, you're getting down to fixed costs. You know, I'm not saying we are there yet but another 25% drop in revenue, the next round of cuts won't be as effective as the last round. I'm not saying that's what's going to happen, but I'm just saying if that were the top-line degradation --

But at some point, you are anniversary-ing in the top-line decline and the housing market decline is also coming anniversaries as well.

Right. Just to make it clear, once we anniversary a decline, I suspect that we will -- not suspect -- I'm sure that we will have a better set of metrics, vis-a-vis where we were the first time around. That's absolutely true.

But do you feel that, if you had to, you can make another round of cuts? Are you already planning on doing that?

I would say that, at the level of business that we're doing right now, we are actually -- our cuts have actually gone below where we are presently operating at. If we keep going down, God forbid if things keep going badly, we will be forced to look at other things. But right now, we are where we think we need to be. (multiple speakers) Joe?

Yes.

In terms of your SG&A and the cuts that you've described, then it sounds like what you said is that these are recurring level reductions that will have an ongoing bottom-line savings each quarter and not one-time type of reductions savings. Is that right?

Correct. Yes, that's correct. Further, as Richard said, those cuts are probably a quarter behind the revenue decrease, so I think that the SG&A, as compared to revenue, will look a lot better going forward, assuming the topline stabilizes.

Okay. Then when you gave guidance, that helps me want to clarify this. The guidance that you gave isn't for Q4. It's in fact for the full fiscal year ended this December '07?

That's correct.

When do you plan on providing guidance for '08?

We don't plan on doing -- we do not plan on giving guidance any further. I think we made that announcement a couple of quarters ago, Andrew, that --.

No, no, for the full -- I think you said you're moving from quarterly guidance to full annual guidance, so I was wondering when you will be establishing your guidance for the full year of '08.

I'm not sure that we know when we are going to be doing that yet. I mean, we've got a long way to go until we report the year-end.

Clearly, we need to wait for the budgets of our subs to get in for next year, and then our reviews of those budgets and our own discussions. I wouldn't think -- I would certainly hope that it would be -- I would expect it, I mean it will be before -- at the time of our year-end call, which is in --.

That's not until March.

Yes, that's when we will --.

That's when we always do it!

That's when we always do it, and that's when we will be doing it.

We've never given guidance on the following year in the third-quarter call, to my knowledge.

No, but you won't provide, let's say, '08 guidance after you've internally gone through your budgeting process and all of your approvals and haircutting and all the things that you would do, which would probably occur prior to the full quarter end of March, because it's the 10-K, it's delayed until that time?

Yes. Well, again we've never done it any other time. I mean, it's not, we are not (multiple speakers).

I think you're on new turf, because you stopped giving quarterly guidance only this year, so the idea of when to give annual guidance is kind of like new territory for all of us.

Well, that's true. Let's say we will look into it, but I would say our focus is more to try to get guidance for ourselves for the year.

Oh, no, I'm thinking like February, January, long after you guys have sealed it all down.

Well I could to you it will not be January at any point. We have an enormous amount of work ahead of us in all of our subs. It would most likely be the end of February at best. I would think that we are splitting hairs a couple of weeks. But we will definitely look at it. I promise you we will look at it (technical difficulty) do it earlier, we will certainly do it.

Okay. At this stage in the fourth quarter, given your guidance, it doesn't sound like you are seeing any bottoming going on in your markets as of yet. Is that right?

We're not comfortable that we are at the bottom here, even though we would like to hope and think that we are. There's nothing indicating to us that we're at the bottom yet, though the drops have been less severe.

Just a couple of comments -- I would totally, I mean on the housing market, that goes without saying. I just want to remind everybody that our fourth quarter is usually our weakest quarter everywhere anyway, so it's a little hard to draw a lot out of the fourth-quarter data, even though we are now in the middle of November. I'd don't know that there is talk of a bottom in the other businesses, so to speak, outside of the once driven by home-building. They are what they are, but the fourth quarter is usually the weakest quarter.

Okay. Into your Continental Tool Group, I think you talked about reduced volume on your base products, and then you specifically cited a price reduction by one large customer. On the reduced volume, was it both or which of your series in Home Depot-based customers was the reduced volume from?

The reduced volume is clearly from Home Depot. That's where it has been.

So it's primarily one customer on the reduced volume. Then on the price reductions, that's Sears?

That's right. But we are doing very, very well with Sears. We're doing well volume-wise, but you know, when we made our new arrangement with Sears last year at this time, we had those price reductions in our forecast, in our plan.

No, you told us about those.

Yes, there's nothing new in that department.

Okay. I will back out of the queue. I'd do have a bunch of questions for each of the divisions, so please come back to us.

(OPERATOR INSTRUCTIONS). Andrew Shapiro, Lawndale Capital Management.

Okay, I'm going to ask a bunch more then. In the breakout, this press release, I don't think I thought Woodmark and Pacific broken out and I'm not sure I caught it if it was in your script. It looks like you combine the stair products in your disclosure this quarter. Is that a change or can you give us the breakout-ed numbers between the two?

We actually did that, Andy; it was in the script, so if you played back, it's there. I mean, I can read it back to you but we did it both ways. We talked about stair products in general, and then we also gave you specific numbers for Woodmark revenue and Pacific Stair revenue and Nationwide revenue. So it's all there.

Okay, then we will catch it. You know, there was some mention before and the perception of you guys not being one of the weaker players here in the industry -- have some of the weaker players who have got to be suffering declines such as you have -- have any of them started to hit the wall and have to close up at all? Are you hearing things like that? Is that presenting opportunities?

We have not really seen that yet, to be perfectly frank with you, though we would expect what you expect. But we have not seen that at all.

Okay. I recall you recently hired a strong salesman in the Atlanta area. It was a new sales distribution opportunity for you. How has this worked out? What are your thoughts about investing in other increased sales force opportunities to go into we will call it new territories to help pick up the slack of year-over-year declines in the existing territory?

The sales guy that we hired was not for Atlanta; it was for California. Yes, Atlanta, we had just reshuffled a few people there about a year and a half ago. The Atlanta market is doing very well, considering what's going on down there in that market. We have a good story down there.

In California, we have a new sales guy, but the market is so, so incredibly depressed in California, as you know, coming from out there, that we're making baby steps at best.

Okay. Is the Pacific Stairs likely to pick up business from the Southern California fires and all the new home-building that will have to likely replenish the specific lots that got burned down?

Well, that's certainly something that we talked about here and that's our hope, but we haven't seen anything to indicate that yet. (multiple speakers) position, we are in the right place if that's the case.

Insurance settlements take a while.

Yes, but we are in the market. If that happens, we will be sure to benefit from it.

Yes, now, on the kitchen and bath area, I think you were losing a large customer you had mentioned in prior releases. Was that fully reflected this quarter? (multiple speakers) because you mentioned that management in that company then turned over again or got bought out, and the new company that bought them had a historical relationship with you, so you thought you might get it back.

Yes. Well, that customer is gone and I would say we had virtually no sales at all this past quarter from that customer, and they were bought out. It was Home Depot Supply. They were bought out, and nothing has happened to change anything there yet, though we do know some people there and we are like patiently waiting for them to tell us what to do. But nothing yet has indicated that we're going to be able to get back there. Unfortunately, the longer the time that goes on, the less likely it is. But we discuss it and pursue it often.

Okay. Then there is a second large client in kitchen and bath that hurt you. Can you quantify the size of the decline there, or did you?

I don't know that we quantified it. I know that, at one point, that customer was at least $1 million or $2 million account, and I think $1.5 million comes to mind. It's well down.

It's about half of that, I would say.

Yes.

All right, so it helps quantify. What levels are -- you know, you have this lower-margin container business, and that business is said to have declined, which has helped margins of the remaining business in Woodmark. What levels are you at now in terms of your mix of the lower-margin container side? Has this stopped going against you, or what are the likely drivers to move it -- that are going to either -- what are the trends that would impact it one way or the other?

Well, the big part of that decline was the one kitchen and bath customer, which is almost exclusively direct-container business, which we just talked about, the one that's down significantly. The other was one of the larger if not the largest stair parts customers that has almost stopped buying direct, only buys out of warehouse and they were probably buying direct for half their orders. They have another relationship with another vendor to go direct, although they still use us for out-of-warehouse at the moment. So both shoes have dropped there. I don't see a big change in the mix overall at Woodmark in direct versus warehouse business going forward.

Where it is now, Andrew, is where it looks like it's going to be for awhile.

Okay. You recently upgraded your Tool product line. Where do you stand in similar initiatives in the Hardware side today?

Well, on the Hardware side, breaking it down between, you know, stairs and kitchen and bath, which is really Woodmark and PSP, you know, we make incremental changes in designs and styles. We don't really have anything extraordinary going on other than the typical seasonal and yearly changes in styles that we do, you know, a couple of bells and whistles, what we call our mega program, which is a larger iron ballaster, which is kind of new and some people are starting to replicate it, which is nice to see that some of our competitors are following us. But you know, there isn't anything there that, in this market, I think is going to drive any big increase in revenue.

On the Nationwide front, it's a little bit different. We have quite a host of new and exciting products that are going to be coming out early in 2008.

Okay. I think we already discussed what room there, the room that you have for further cost reductions. Those were companywide. Are they hardware, or tools-focused? Or is there more room in the Hardware side to make cuts?

Well, I think we addressed that. I think we feel that we are at a fixed-cost level to support even a slightly smaller level of revenue than we currently have, so I think we are okay unless we continue to see a fall-off. But yes, there are always more cuts that can be made. As I said earlier, they get less and less effective.

Okay, I will back out again. I have -- that's my Hardware questions. I've got a bunch of Tool questions, so I will come back into the queue if no one else is there.

[Vikram Mendhari], private investor.

Just a couple of questions -- I'm trying to understand, from a cash-flow perspective, with your earnings I guess projected to be down for fiscal '07, continuing operations 75%, 80%, and thinking about sort of the market stabilizing perhaps over the next six months to a year, even if that happens and your (inaudible) year-over-year your cash flows kind of stabilize, you know, how do you make your debt obligations at this point? Should I assume that the additional contribution from Hy-Tech as well as lower SG&A and perhaps working capital reductions will be sufficient to sort of make your interest payments as well as your current maturities I think of about $5.7 million as I see them on the balance sheet? If you could sort of help me understand that, that would be helpful. I just have one follow-up question after that.

Sure. No, that's a good question. Of course, the Q hasn't been filed yet, but if you are following the trend lines, it looks difficult for us to make the bank covenants not only for Q3 but for Q4. The answer is that, for Q3, that we needed to get a waiver for a covenant that we did not clear, which we did, and we're working with the bank. We've had a decade-long relationship with on working through the covenants and the waivers and whatever amendments we need.

The loans are amortizing; they will continue to be amortizing even in this lousy market. I will remind everybody that we had a nice cash-flow pick-up in the year from the sale of a building, which certainly went to pay down some debt, which helped a great deal.

So again, your thought process is correct and we've addressed that with the banks. There really aren't any issues as far as them getting comfortable with the new trajectory of the cash flow for the remainder of this year and really into '08. So I hope that answers your question.

The issue -- there is no issue in terms of meeting our obligations, cash-wise. You know, but it's more about formulas and ratios, as of now.

I got it. So what I'm hearing is basically you think you'll be okay making your interest payments as well as any amortization payments you should be -- given your relationships with the banks. You should be -- you know, it's reasonable to expect that they will give you any relief you need as well as if it comes down to maybe forgiving or pushing back the amortization schedule. That shouldn't be a problem so you guys should be okay surviving the cycle?

Yes, there is no discussion of debt forgiveness or anything like that. I think we are in discussions about the timing of the actual payments and the schedule. So you know, again, we're working with them, and we're going to set the covenants and waivers such that we don't have any interruption in the business. But there isn't any discussion about debt forgiveness. It's just a matter of scheduling the payments where they are comfortable and we are comfortable. We annually meet with them to talk about those things anyway, and we will just go through our regular cycle probably a little bit earlier in '08 than we normally would have. As I said, they are comfortable with where we are and with our ability to pay down the loan.

Great. Thanks, guys.

Andrew Shapiro, Lawndale Capital Management.

Okay, some questions on the Tools group and then a few final, general questions after that.

Could you discuss where you stand now with Sears and Home Depot, in terms of their inventory levels and your new product introductions, where Sears has been doing well, you've had the new products? I don't recall if you've got all the products into the new Home Depot, and have they resolved, we will call it, what you think are marketing issues in terms of the end caps and promotions and presenting your product lines? Is your new product line in there? So can you kind of describe both of those large customers and where you stand?

With respect to Sears, we have gone through a couple of months where they had reduced their inventory levels without really a big effect on the business, so I feel pretty good about where their inventory levels are.

Home Depot is a little less clear, whether they are at the right inventory levels or not, going forward. I mean, they haven't indicated any plan to reduce inventories, but in our looking at their sell-through and levels of product, they could if they wanted to. But they may be perfectly happy with the weeks of supply of inventory they've got right now.

The marketing issues I mean really continue at Home Depot, although I will say this. They have recently made strong indications that they've got a plan of attack there on changing the look and the layout of the products in the stores going into '08. We're actually very happy to finally see that initiative. So, we're working with them on how that is actually going to look. They are actually doing it across a number of product categories and have asked us to be involved in that, a pilot project. Then hopefully that will lead onto a broader roll-out at some point in '08. So they've made some progress there, but it's going to be a few months before I think we see the results.

Then your new product line, I think, is that Sears? But is it also rolled out and now inside of Home Depot but just not yet promo-ed the way you want it?

We had replaced the Home Depot product line sometime in the last 12 months, but again, they are asking us for even a slightly different look going into '08. We're working with them on that look to coincide with the change in the product placement.

Okay. How is the Hy-Tech integration proceeding? Have you been able to gain any synergies by accessing your existing clients in either business with the alternative division's products?

Yes, we absolutely are, although it has been somewhat slower going than we had anticipated. But we are definitely selling product through Florida Pneumatic that's being made by Hy-Tech. Again, that was not available to us before. But the numbers are still relatively immaterial. We expect them to grow in '08. I think I will have a lot more to say about that the next time we talk.

Have you been able to, if at all, offset currency impact in raw material price hikes in this headwind here?

Well, on the Tool side, we have been able to raise prices; we've been able to shift production significantly in some cases. You know, we are little less able to do that on the Hardware side, given the market. But you know, where we can, we do.

On the Tool side where you have done it, are we already enjoying the fruits of that yet, or is there more benefit from those actions taken yet to come?

There's quite a large benefit yet to come. I don't even think we're going to see it in Q4. I think it's going to be Q1 -- not I think. I know it's going to be Q1 of '08.

Okay. Can you explain -- I don't know if it's all working capital -- the increase in your short-term borrowings, sequentially? It looks like long-term debt got paid down; current maturities is a lower-level than last quarter. All of that equals the increase in the short-term debt level. So net/net, your debt levels are the same. But I'm just wondering the machinations in the short-term borrowing from prior quarter.

I think -- well, let me back up. Let me just make some general comments.

Following us for a few years, you'll remember that our Q3 is always the high point of working capital needs as all of our businesses tend to peak in the third quarter. If you're just looking sequentially from 12-31, it looks like we are showing a degradation in working capital, or an increase in working capital requirements. But that tends to reverse itself in Q4. On top of that, we've probably got a little bit of a situation where revenues haven't quite hit where we wanted, so we have a little bit more inventory than we probably like.

One other comment that may not just jump off the page -- at the very end of June, or actually I think it was July 1, and that may be why it wasn't something we talked about in June, we owed $4 million to the seller of Woodmark. That was a contractual obligation that we needed to complete. And we did that actually on July 1. So that's probably what you're seeing the flip-flop between LTD and (multiple speakers).

Yes, that's exactly it. So your intent right now would be, at this level and with the covenants, is that you'll be paying down debt and at some point, given that the value of the businesses you bought are on the books with the various book values, unless you had goodwill impairment, this company's equity is priced at a very big discount to the value of your businesses.

Yes, that's true. Well, let's talk about goodwill impairment for a second. As you know, annually, we are required to analyze our goodwill for impairment. That's a reasonably complicated task that's performed by outside consultants. They compare discounted cash flows and market values for the Company, comparable market values for the various companies that have a goodwill. We have not obviously gone through that test. That will be going on in the next few months. But I think, if you are familiar with how those things go and you take a look at Woodmark and Pacific Stair and the degradation in those businesses and what's happened to the valuation of other public companies that are primarily driven by home new construction, it's clear that there is certainly a possibility of having a goodwill impairment charge at year-end when those tests are completed, for both Woodmark and Pacific Stair. So those do not impact the bank covenants. Those covenants are written around those things because they are non-cash events. But it certainly could impact and would impact earnings from continuing operations and the book value of the business if we have to take a write-down on those things.

Right. Well, the book value presently is at $14 a share, so that leaves a lot of room for a write-down whereby your stock may still be at levels that would reflect a sizable discount to the written-down level.

Yes.

So I guess the theory is what are you and Richard and the Board thinking in terms of you've had a buyback in the past; I think it was renewed. You do have a great relationship with your banks, but you still have some covenant tweaking to do. Is I guess how much debt pay-down do you feel is kind of like the optimal levels you're looking for before obviously the buyback and retirement of discounted shares plays a more prominent role?

Well, clearly, Andrew, the buying back of shares is not the first and foremost thing on our agenda right now, as you said. We have to see how we end up with our banks and all of our things. But at that point, depending on where the stock is, it's almost getting to those attractive levels now, in our opinion. So certainly that would be something that we would consider much more seriously in the months to come if the stock doesn't -- if the market doesn't show what we think the worth of the Company is -- and we have the cash to do that. But we don't have that window yet. We don't have the ability to make that judgment quite yet.

Right. When do you sit down with the banks and finalize the updated covenants?

Well, we will certainly sit down with them before we report our earnings for 2007, but I'm not sure where that leaves us in terms of setting covenants in the out years. But certainly we would clear up anything we would need to deal with for 12-31-07.

Yes, okay. That's all I have. Thank you.

Thank you, Andrew. Any other questions?

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

Okay, well, we look forward to giving you a better picture, a rosier picture at our next conference call, which will be in March. We wish all of our friends and stockholders and everybody on the call a happy and a healthy new year. Thank you for calling in.

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