P&F Industries Inc (PFIN) 2007 Q4 法說會逐字稿

Greetings and welcome to this P&F Industries fourth-quarter and year-end 2007 earnings conference call.

At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Richard Goodman, General Counsel for P&F Industries. Thank you. Mr. Goodman, you may begin.

Thank you, operator. Good morning and welcome to the P&F Industries fourth-quarter and year-end 2007 earnings conference call. With us today from management are Richard Horowitz, Chairman, President and CEO, 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 contained herein, including those related to the Company's future performance and those contained in the comments of management, are based on the Company's historical performance and the current plans, estimates and expectations, which are subject to various risks and uncertainties, including but not limited to economic conditions, the impact of competition, product demand, pricing, and those described in reports and statements filed by the Company with the Securities and Exchange Commission, including among others described in the Company's annual report on Form 10-K. These risks could cause the Company's actual results for the 2008 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. The Company undertakes no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future developments or otherwise.

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

Thank you so much, Richard, and good morning to everybody. Thank you all for joining us on our 2007 year-end conference call.

I will start with a brief overview of our financial results for the quarter. Revenues from continuing operations for the fourth quarter of 2007 of $24.9 million reflects an increase of $1.2 million, or 5.1%, when compared to revenue for the fourth quarter of 2006, which was $23.7 million.

Unfortunately, we were required to record a non-cash impairment charge of $23.5 million during the fourth quarter of last year, which resulted in an after-tax loss of $17.9 million for the three-month period ended December 31, 2007, compared to an after-tax profit of $160,000 reported for the same period in the prior year. As a result, for the fourth quarter ended December 31, the Company reported a basic and diluted loss per common share from continuing operations of $4.93, compared to basic and diluted earnings from continuing operations per common share of $0.05 and $0.04, respectively, for the same period in the prior year.

Earnings from discontinued operations, net of tax benefit, for the fourth quarter of 2007 was approximately $300, compared to approximately $76,000 reported for the fourth quarter of 2006.

With respect to our overall result for the fourth quarter of 2007, the Company reported a basic and diluted loss per share of $4.93, compared to basic and diluted earnings per share of $0.07 and $0.06, respectively, for the same period in the prior year.

By far the most significant issue we dealt with this past quarter was a recognition of the $23.5 million of non-cash impairment charges mentioned just briefly before. I wish to make it clear that these charges do not reflect nor impact on the health or prospect of our business. In addition, without this charge, P&F would have reported a pretax net income of approximately $466,000 for the fourth quarter of last year.

Needless to say, the number of new homes constructed, particularly in the southwestern region of the country, which is a key economic factor in our business, continues to decrease. This was compounded by overall sluggishness in other sectors of the economy that affect us, as well as sales degradation and pricing concessions to certain key customers. As a result, certain of our subsidiaries were unable to demonstrate an ability to generate sufficient discounted future cash flows to support the recorded amounts of goodwill, other intangible assets and other long-lived assets related to our subsidiaries, necessitating this impairment charge.

Now, a few words about the full year's results. Revenue for the year ended December 31 of $410.8 million reflects a slight decrease of $908,000 or 0.8%, from $111.7 million reported for the year ended December 31, 2006. As a result of the aforementioned non-cash impairment charges taken in the fourth quarter against goodwill and other intangible assets of $23.5 million, we reported a net loss from continuing operations of $17.2 million or $4.77 per basic and diluted loss per common share, compared to basic and diluted earnings from continuing operations per share of $1.06 and $1.01, respectively, for the year ending December 31, 2006.

Earnings from discontinued operations, net of taxes for fiscal 2007, was approximately $3.1 million, an increase of $3 million from $70,000 reported for the prior year. As a result, both basic and diluted earnings per common share for discontinued operations for the year ended December 31, 2007 were $0.87 compared to $0.02 for the year ended December 31, 2006. The reported pretax gain on the sale of real estate during 2007 of approximately $5.1 million was the fundamental component of the profit reported from discontinued operations.

With respect to our overall results for 2007, the Company reported a basic and diluted loss per common share of $3.90, compared to basic and diluted earnings per share of $1.08 and $1.03, respectively, for fiscal 2006, again due to the non-cash impairment charges.

Before I take you through a more detailed look at the operations of each of our businesses, I'd like to review what each business does, as we generally do with each call. Our Continental Tool Group consists of our Hy-Tech and Florida Pneumatic subsidiaries, which are both wholly-owned. Hy-Tech manufactures and distributes pneumatic tools and parts for industrial applications. Hy-Tech manufactures approximately 60 types of industrial pneumatic tools, most of which are sold in prices ranging from $300 to $7000, under the various names of ATP, Thaxton, THOR, and Eureka, as well as under the trade names or trademarks of other private-label customers. This line of products includes grinders, drills, saws, impact wrenches, and pavement breakers. Hy-Tech's products are sold to distributors and private-label customers through in-house sales personnel and manufacturers' representatives. Use of Hy-Tech's tools include refineries, chemical plants, power-generation facilities, heavy construction industry, oil and mining companies, and just plain heavy industry. Hy-Tech's products are generally sold off the shelf and are also produced to customers' orders.

Florida Pneumatic is primarily engaged in importing and manufacturing of approximately 75 types of pneumatic handtools. Florida Pneumatic also markets, through its Berkley tool division, a line of high cutting and threading tools, wrenches and replacement electrical components for a widely used brand of pipe cutting and threading machines. In addition, through its Franklin manufacturing division, Florida Pneumatic imports a line of door and window hardware.

Countrywide Hardware is comprised of Nationwide industries, Woodmark International and Pacific Stair Products. Countrywide imports and manufactures hardware products for items such as doors, windows and fences, staircase components, kitchen and bath hardware and accessories, as well as other general hardware products. Pacific Stair on the West Coast is a manufacturer of premium [stairway] products, as well as a distributor of staircase components for Woodmark through the building industry, primarily in Southern California and the southwestern United States.

Now I will go briefly over the quarterly performances. Revenue reported by the Continental Tool Group in the fourth quarter of 2007 was $14.8 million, an increase of $4.2 million or 39.8%, compared to revenue of $10.6 million in the fourth quarter of 2006. This increase was primarily due to the inclusion of Hy-Tech Machine which we acquired in February of last year. Hy-Tech's gross margin for the four quarter of 2007 was 35.8%, in line with our expectations.

Florida Pneumatic's revenue for the fourth quarter of 2007 increased approximately $200,000, to $10.8 million from $10.6 million in the fourth quarter of '06. Florida Pneumatic's gross margin for the fourth quarter decreased from 27.3% to 26.3% in '07, primarily as a result of price concessions to a significant customer.

Additionally, we have informed that we will be phased out as a vendor for Home Depot, likely commencing sometime during the second quarter of 2008. However, we do not believe this will have a significant impact on our consolidated earnings for the full year of 2008 or going forward. While the Home Depot business did generate a significant amount of revenue for Florida Pneumatic, in recent years, they have generated very little profit due to the many required marketing and servicing costs associated with maintaining their account.

The acquisition of Hy-Tech in February of last year continues to enhance our overall performance. Hy-Tech focuses on the more predictable industrial sector, thus providing a stabilizing effect on our tool business to counter the unpredictable nature of Florida Pneumatic's retail customers.

With respect to Countrywide Hardware, revenue for the fourth quarter of 2007 decreased by $3 million or 23% to $10.1 million from $13.1 million reported in the fourth quarter of '06. Revenue generated from the sale of our stair products, which includes such sales generated at Woodmark and Pacific Stair, decreased $2.4 million, if primarily due to the significant reduction in newly constructed homes, which we are all quite aware of. In addition, revenue from Woodmark's kitchen and bath products, which are sold primarily into the mobile home and remodeling markets, decreased approximately $474,000 during the period, primarily due to the loss of a very key customer.

Nationwide's revenues decreased $132,000, primarily due to a decrease in patio sales of $270,000, offset by increases in our fencing and OEM product lines of approximately $104,000 and $34,000, respectively.

Clearly, Countrywide Hardware had the most challenging year of our two operating subsidiaries. The continued major slowdown in residential construction has had a direct and significant impact on our stair business. However, we continue to promote our products heavily and have been quite successful in gaining new accounts, as many competitors struggle in this depressed market. These economic factors at Woodmark and Pacific Stair were compounded by the fact that our largest stair customer began receiving direct shipments from a competitor during the year. In addition, a very significant kitchen and bath customer began working with an alternative vendor during the year as well.

The results at Nationwide are more encouraging, however, as the year was close to expectations in an extremely competitive environment. While the situation still remains competitive, we are rolling out an unprecedented number of new products in 2008 that we hope will have a positive effect going forward.

Before I give you any closing comments, I would like to turn my phone call over to Joe Molino, who will review our financial performance for the full year of 2007. Joe?

Thank you, Richard. As Richard discussed specifics for the quarter, I will focus on the year-end trends at the subsidiary level and other details.

Specifically, the Continental Tool Group gross margin percentage at Florida Pneumatics went to 26% for the year ended December 31, '07, a decrease of 3.4% from 29.4% for the year ended December 31, '06. This was principally the result of several factors -- price concessions to a major retail customer, decreased shipments to another retailer which adversely affected fixed manufacturing and warehouse overhead absorption. Further, our mix of products shifted during 2007 compared to 2006.

During 2007, Florida Pneumatic sold more promotional items than in the prior year and this adversely affected gross margins. It should be noted, however, that while we gave major price concessions to a major account, we did generate increased revenue from that customer of $1.3 million for the year. Additionally contributing to the decrease in gross margin were increases in raw materials, raw materials affecting gross margins at our Franklin hardware division.

Hy-Tech's result of operations are from February 12, 2007, the effective date of the acquisition. Its gross margins for the period from that date are 37.3% and are generally in line with its historical results.

Gross margin for stair products sold within Countrywide were 35.9% and reflects an increase of 1.7% from 34.2% for the year ended '06. Gross margin at Pacific Stair for the year ended '07 was 37.3%, down from the prior-year percentage of 39%. This decrease is primarily due to under absorption of fixed costs due to lower volumes.

Stair sales at Woodmark generated a gross margin of 35.7% for the year, up 2.4 points from a year ago. The most significant factor contributing to the gross margin improvement was the proportionate increase in shipments from our warehouses with a corresponding decrease of direct or full container sales. As a reminder, products shipped directly from our warehouses will generate higher gross margin percentages than container drop-shipped orders.

Gross margin for kitchen and bath as a percentage of revenue increased by 1% when comparing the years ended '07 to '06, primarily due to a shift in product mix.

Our gross margin percentage at Nationwide of 38.1% for the year ended '07 reflects a decrease of 3.8 percentage points from the 41.9% reported for the year ended December 31, '06. This decrease is primarily due to increases in the cost of sales. Those cost increases arose early in 2007 in steel, zinc and aluminum products imported from our Pacific Rim vendors. In general, our prices were held constant. However, in some instances, we were required to lower our selling prices in highly competitive situations to key customers.

Consolidated selling, general and administrative expenses were $28.1 million for the year ended December 31, 2007. This was an increase of $2.6 million when compared to the $25.5 million incurred during the year ended December 31, 2006.

Additionally, as a percentage of revenue for the year ended '07, SG&A increased to 25.4% from 22.8% for the prior year. A key factor affecting the fluctuation in SG&A was the acquisition of Hy-Tech in February of '07, which added $2.9 million of SG&A during 2007. Excluding Hy-Tech's impact, our SG&A for the full year ended '07 decreased approximately $272,000 from the prior year.

Items affecting the drop in SG&A include reductions in commissions, travel, professional fees, and depreciation. These were offset by increases in bad debts and salaries. However, excluding Hy-Tech's revenue and SG&A for the year ended '07, our SG&A as a percentage of revenue would have been 26.4% or 3.6% higher than SG&A as a percentage of the '06 revenue. This percentage increase is primarily due to the fact that most of our SG&A expenses are fixed and revenue has been falling.

Net interest expense increased approximately $900,000, or 47.9%, from approximately $2 million incurred during the year end of '06 to approximately $2.9 million for the year ended '07. Interest expense of approximately $986,000 on the borrowings associated with the Hy-Tech acquisition was the primary factor for the increase.

Other items affecting cash flow are capital spending, which was approximately $1.3 million for '07, down slightly from the $1.5 million for '06. Capital expenditures currently planned for '08 are expected to approximate about $1 million.

Finally, the Company reported depreciation and amortization for the full year ended December 31, '07 of $1.6 million and $1.2 million, respectively.

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

Thank you, Joe. We expect 2008 to be a challenging year as housing is still expected to be in a significant slump. However, we have reduced expenses significantly in the Hardware group to partially offset -- to compensate for this, while continuing to provide an extraordinary level of service, coupled with quality products to our customers. We have some level of optimism with regard to the Tool group, as market conditions appear stable and we will enjoy the benefits of substantial cost reductions initiated at the end of 2007, as well as a full year of Hy-Tech's profitable results and synergies with Florida Pneumatic.

That's the end of our report for now, today, and now we would be happy to answer any questions anybody may have.

Thank you. We will now conduct the question-and-answer session. (OPERATOR INSTRUCTIONS). There are no questions at this time. (OPERATOR INSTRUCTIONS). Andrew Shapiro, Lawndale.

It's Andrew Shapiro with Lawndale Capital Management. Good morning, I have a bunch of questions. I'll ask a few and then go back in the queue.

Just comparing the prior conference calls and Q&A and disclosure, I noticed that you haven't provided guidance for the year '08. I know you don't do it quarterly anymore, but why are you not doing the annual guidance or do you expect to do so later?

Andrew, we discussed it at the Board as well as in the office, the executive offices here, and we decided that, with the tumultuous times and the unpredictability of the world right now, there was no real gain and we really couldn't get a great fix on a year-end number other than our own numbers, so we just thought it was beneficial not to do that for now. In the future, we may go back to it, but for now, we're not doing that.

But internally, for your own year-end numbers and bonus calculations and targets, etc., you guys have some numbers that the Board is going off of and that the Board goes back and forth with, with management.

Yes, yes of course we do, but we're not releasing them to the public because, again, it's just too, there are too many unpredictable variables. But the only thing I would tell you is, not being mysteries, we expect a better year than last year but we just don't want to say how much better because we just don't know yet.

Is that a better year than '07 ex the impairment charge?

Yes, of course.

Oh, it is? So you expect a better operating year than '07, even ignoring the impairment charge?

Yes.

Correct.

Well, that's helpful guidance. That would be on the cash flow and profit point of view. Do you expect that similarly on the revenue side, given the Home Depot revenue drop that will occur midyear?

Well, the revenue drop will be clearly because of Home Depot, but you know, we are more keyed into, as I'm sure you are too, we are more keyed into profitability.

Oh yes.

Yes, so we expect, we certainly do expect a better year, but you know, we're just going to leave it there for now.

Can you give a little bit of insight as to why or the factors that lead you to that optimism?

Well, we think we've done a lot of blocking and tackling in our stair component part, and we've gotten several new customers and we have a good reputation that we're doing well with there. We are doing quite well in both of our tool divisions and both of our tool groups, Continental, and we are projecting a very good year with Sears going forward still, and pretty much a lot of that is already committed to by them as the year goes on. So just overall, we think we're doing -- we just think we're doing better than we did last year.

I would also add to that, it doesn't sound like much but we will pick up a month and a half of profits at Hy-Tech. In addition, there were some one-time acquisition amortization charges in '06 -- excuse me, in '07, that were accelerated that won't repeat in '08 for Hy-Tech, so that's thrown in there, too.

Not to mention, not to also mention, Andrew, that of course with the lower interest rates going on in the world, that's going to be -- certainly, the economy is hurting us on one end but on the other side of it, it's helping us that we're saving money on interest costs.

Okay, so to kind of summarize, you've got interest expense reduction expectations; you've got sizable SG&A cuts, year-over-year either from cuts you made or just nonrecurring charges you had last year, and stabilization I guess of the business or growth in the business, plus Hy-Tech?

Yes (inaudible) there plus also when we were doing our cuts during the year, of course your cuts never come quite as quickly as your business drops off. Now, we are at that level that the cuts have been made, and so going forward, it's a better picture, that's all I can say. I don't know if I would say any more than that, but it's a better picture than last year in terms of the operating business.

Okay. You made cuts in both Tools as well as the Hardware side, obviously hoping the hardware side cuts were sufficient for the hardware revenue drops, but in tools, that's more anticipatory and margin enhancing?

I don't know if I would say that, but we made cuts. We looked at all of our companies almost from a zero-based budgeting way, going up from the bottom, starting to zero. We looked at all of our businesses. We tried to streamline them as best we can. Am I answering your question?

I think so. Are you seeing a bottoming and an anniversarying of the large declines you saw in housing side?

I don't know if I would say that we're seeing a bottoming yet. I think it would be fair to say the drops are not as precipitous as they have been, but I don't know if I would say to you that it's either -- you know, that we are seeing a recovery yet.

Well, I think you have to have stabilization before you get recovery in terms of (multiple speakers)

Yes, I don't know if (multiple speakers) yet but I think, from what I've seen the first two months of this year, I think our drops have not been as significant as they were.

Okay, a few items, Joe, if you could help us? You gave us breakouts in Countrywide for Woodmark, Nationwide, Pacific Stair, etc., for the full year (multiple speakers) did not give us such breakouts for Q4. Can you help with that?

Not on the call.

Because you did give the full year and reverse engineering is a little bit difficult, but since you gave the full year then, can you give us that to us off-line?

You know what (multiple speakers) on that. If it's not something we've disclosed -- if it's something that can be backed into, then I have no problem walking through how to do that, but frankly it would have to (multiple speakers).

Or otherwise (multiple speakers) fourth-quarter breakouts?

Excuse me?

Can you give us the fourth-quarter breakouts?

I just said, if what's been disclosed can get us there, yes, that's easy. If not, I would have to check with SEC counsel to find out if it can do that. But I will look into it.

But do you not have it available to give it to us on the call, which it would be Reg FD compliant?

No, we do not have it on the call.

Okay. How about depreciation and amortization for the quarter?

Well, that you can back into. I can do the math for you if you would like. Give me one second.

As I indicated, the full-year --

$1.6 million and $1.2 million.

Yes, so -- someone is going to get it.

The gross margin inside of Countrywide for Q4, do you have that available?

No I do not, not for the quarter. The depreciation for the quarter is $462,000 and the amortization is $239,000.

Now, with this impairment, it was an impairment of both goodwill and intangibles. Intangibles get amortized, goodwill does not?

Not all intangibles get amortized. There are certain intangibles that have what's considered an unlimited life.

So then do you expect for the Q1 that the rate of depreciation and amortization would be approximately the same $700,000 a quarter that Q4 was?

No, I would anticipate amortization to fall somewhat. We haven't made those calculations yet.

Okay. I believe you were renegotiating your covenants and debt lines with the bank group.

Yes.

What is the status of that yet?

Well as you -- we were in violation of one bank covenant at the end of the year, which was a simple one that's required that we have no net loss, which obviously we did as result of the write-off. We got a waiver for that.

We are in the process of reviewing my budget, our budget with the covenants and working with the banks to reset those covenants for '08 so that we are in compliance. So, the banks are very interested in working with us.

There are no issues, Andrew, if that's what you are asking, in terms of the bank and the renegotiating of the credit agreement. They are just working out the final arrangements, final numbers.

And that's in light of the new credit environments that impact all banks, probably including your bank (multiple speakers)?

Yes, that's true.

Yes, they are still quite happy with us as a customer, and they have no real concerns or issues.

I will back out in the queue here after this next question but we do have a bunch more. Is it any reason why you aren't breaking out the hardware business as you did in the past? Is there a new philosophy as to that?

No.

Just the quarterly stuff didn't get broken out this time?

Are you discussing the press release or --?

The press release and your script. You just didn't have the quarterly stuff (multiple speakers).

No, there is no particular reason.

I apologize for that, Andrew. I don't know what you're looking for that we can't give you, but we will try to give it to you if we can.

Okay. Well, let me back out and hope that there's other questions but if not, I have some -- many additional ones on Hy-Tech, Home Depot, etc.

There are no questions in the queue at this time. (OPERATOR INSTRUCTIONS). Andrew Shapiro.

Yes, some follow-up questions -- okay, when did Home Depot make the decision to phase your tools out, and why did they choose to do so?

The decision was made towards the end of last year, towards end of last year, and it was strictly a matter of price I guess is the best way of saying it. We were just in no mood or position or interest in lowering our prices any more. As I said in my comments, the margins have been slim enough and we just -- we have to make a profit here. There's a lot of business and a lot of moving around and doing things and committing capital and inventory for no money. If somebody else wants to do that, well, God bless them.

Just to second that, it was not a unilateral decision on their part. We were in discussions with them about pricing and marketing elements for '08. You know, they asked for pricing concessions that we felt we couldn't really justify, given our costs. In addition to that, the programming elements, specifically the requirement to reset all 2000 stores with new displays, the cost of that was to be borne by us. In that situation, even if we didn't change prices, we would have been in a negative profit mode for 2008. So it just didn't make any sense any more, and we told them that.

Then as well, they were not willing to give anybody, us or anybody else, a long-term commitment, so there would be no recovery, so we just thought it was a prudent thing for us to do. Our business had gone down significantly in '07 versus '06 to begin with, so you know they are not doing a very good job of merchandising in our area. So, the combination of all those factors, we just thought it best to say sayonara.

Right. So in '07, you didn't have losses from the program but in '08, based on their demands, you would have?

Yes, but our '07 profit, incremental profit on the business, was in the low single digits on revenue, so we were really not generating a lot to the bottom line for a lot of work.

(multiple speakers) single digits?

Percentage.

(multiple speakers) percentage, he means. Gross margin he means.

No, operating margin.

Operating margin.

Oh, in operating margins, okay. But that margin would contribute towards the absorption of your (multiple speakers)?

No, I'm talking about actual contribution margin in the low single digital percentages.

Okay.

That's before financing costs.

Before financing costs? And is that with or without the absorption of corporate overhead?

No absorption of corporate overhead. It's just what would be -- what's contributing -- there's no allocations in that figure.

Okay.

The product that they wanted us to offer to their customers was not of the quality, with warranty issues and all those things that we do and we are prepared to do, so we just let it go to somebody else and let them do whatever they have to do.

Okay. How much were their revenues --

This guy is going to talk forever!

(multiple speakers) quarter?

I'm sorry, Andrew. Somebody was speaking in the background; we didn't hear you.

How much were your revenues from Home Depot in the fourth quarter?

I don't know about the fourth quarter, but the full year was a little under $10 million, $9 million.

Okay. The phaseout, is it -- the first quarter is already done. Is the phaseout you already have lower volume from them in Q1, or it's just Q2 you're going to see, then it drops or --?

No, the volume actually in the first quarter has been up from what it has been, but you know, it will be gone soon. You know, we are still doing it. It's still first quarter and we are still shipping them. They've agreed to take our inventory, and it's a program and systematic withdrawal of the business.

They will take out all your inventory?

That's their commitment, yes.

Okay, great. Now is there an ability to take some of this business you were doing elsewhere, in particular Lowe's, given the product development and production abilities you have and that Home Depot didn't want you at Lowe's before?

Strategically, strategically I'm not so sure that we want to continue in the retail business. I wouldn't so much call Sears, even though it is clearly retail. They have a different -- with the Craftsman name, they are a different animal, and Lowe's, though they are in the business, a portion of what Home Depot even was, so they are not a very big factor in that business, and they are also in a very, -- they sell a very, very cheap line of product, again which we wouldn't know (multiple speakers)

Yes, we think we would pretty much be having the same (multiple speakers) with Lowe's, and it is just not a strategic direction of our tool business right now, going more in the industrial end.

Yes, I think you as a stockholder would want us to get more bang for our buck if possible.

I want you to make a high return on capital deployed.

Exactly, that's what we want to do.

Now, is there associated overhead with the Home Depot business? (multiple speakers) cuts or you've already cut?

Yes, we've been making cuts and we are continuing to make cuts.

Some of the final cuts obviously won't be made until (multiple speakers) but yes.

(multiple speakers) but absolutely, we've been making cuts for the last several months.

Now, Sears was -- was and still is having poor overall store comps, and they unveiled a new strategy with different brand managers. How has this impacted your production or your business with them because you make, you know, the Craftsman tool side, and how is it likely to impact you going forward?

Our business is very, very good with Sears. All I can tell you is that it's very good and we haven't found any problems with anything and they are very pleased with us. It's one of the few lines in their department that are increasing.

Yes, no the Craftsman tools brand I think they want to evolve. Has there been any guidance to you from them about the evolution or expansion of distribution of the Craftsman tool line elsewhere?

We've heard rumors, but not from them. We've heard about several places that they may be taking their Craftsman label and their Kenmore label, but they -- it has not been confirmed to us from our buyers. We just do our job everyday with Sears and just give them service and quality product and meet their demands in terms of shipments and whatever they ask us to do, we do. Of course, we are shipping to Kmart to a little degree now as well.

Okay. I have many more questions.

Why don't you stay in and answer them.

Fine, fair enough. I just (multiple speakers).

I appreciate it because I don't want you to get disconnected and not be able to have an opportunity.

Okay, good. Then hopefully these questions are shared by others anyway.

With Hy-Tech -- and recall that you mentioned its potential marketing and distribution as well as product opportunities and synergies with Florida Pneumatic -- they were immaterial in the Q3 call or as of the Q3 call, but you were more hopeful for 2008. Can you expand or go into some detail or your thoughts now as you've had Hy-Tech now for three quarters, what opportunities there are?

Yes. Well, basically what we're doing here is Florida Pneumatic is taking -- I think it's about 15 or 20 Hy-Tech tools, rebranding them and selling them through their channels. You know, we're moving along and it's growing, actually, every month. It's just not a number that is going to be material for a quarter right now. You know, it will be a little more significant obviously for the year. I'm not quite sure where it's going to shake out, but it is actually growing each month. I mean, we're not talking about a seven-figure number or anything like that for '08, but hundreds of thousands of dollars of additional revenue certainly and a lot of upside still. Florida Pneumatic is still sort of learning what works in its channels with that product. So, we are still hopeful.

Now, with the economic slowdown, are you beginning to see any slowing in the industrial area? Because I think sequential revenues -- I don't know if it was at Hy-Tech or in the whole segment, but sequentially things are down. But that could be seasonality. Have you been able to grow with some of the other new product initiatives you are doing I guess that offsets any economic slowdown? But are you seeing the slowdown at all?

We're not really seeing a slowdown on the industrial side. We are expecting growth for this year, and so far, that's what we are seeing.

Is that because of gain in marketshare?

Yes, marketshare, some new products.

A little bit and our customers are doing well.

So they aren't in the typical durable-goods decline area?

No, no. The industrial tool customers -- no, these are power-generation facilities, oil and gas facilities, bulk storage facilities, heavy construction. Those are not seeing a slowdown. I mean, certainly oil isn't.

That's not to say that we're not cautiously optimistic, because our management certainly has been talking to us and telling us that they are concerned that the pace will slow, but we haven't seen it yet. They are concerned about it, but we still have found very robust sales in our Continental Tool Group.

Does the Hy-Tech business end up selling to end-users here where there's an export component that you don't otherwise have?

It doesn't sell to end-users, but we definitely have some opportunities on the export side. We are working with -- we are actually working with our Israeli supplier of sockets and striking wrenches in a kind of a joint effort in Europe to market our air tools there. We just sort of kicked off that program. We also have some opportunities in South America.

Do you have those export opportunities baked into your internal numbers yet, or that would be incremental?

Those would be incremental.

Okay. On the hardware side, or actually this is partially the tools side and your overall financing. With Home Depot coming out of the revenue base, about how much would you say quarterly is in your balance sheet in terms of capital deployed, inventory and receivables, that will come down and thus reduce your financing needs with -- when Home Depot comes off?

A couple of million dollars -- it's not as significant as you might think. We've been really -- when we got the sense about what was happening with the business, we started tightening up the purchasing reins there. Also, so -- I'm sorry. In addition, we sort of tried to keep that working capital somewhat tight. So again, it will be a couple of million dollars adjusted (multiple speakers).

So, it looks like this quarter, net of current maturities, short-term and long-term, you took your debt level down sequentially by $3 million.

It's sounds right. (multiple speakers) always a good order for cash flow.

Okay, then you have the Home Depot, which would been basically a permanent reduction --

That's correct.

-- coming out, and you have interest rate declines. Do you have a feel or an estimate as to what your debt levels are expected to migrate to?

I mean, I would say, at end of the year, again, there's a lot of other factors in here. We are actually growing industrial tools, and those are heavy requirements in inventory. It has to be on the shelf in many situations. So, I don't have it in front of me, but I think we're talking about a $5 million reduction in debt.

That would be from year-end levels?

Yes. Overall debt, total.

Then we have -- and most or all of your debt is floating-rate?

Almost all of it, with the exception of one more mortgage, a small mortgage.

Right. That's floating-rate, what, off of --?

LIBOR.

Off of LIBOR. So it's spread, it hasn't dropped as much as some of the other risk-free indexes (multiple speakers)?

No, it has not, but it is down quite a bit from 12 months ago.

Yes. If the spreads narrow, do you have an option to rotate out of that, or that is going to be the desirable (multiple speakers)?

No, we can go with something that's run off of -- driven off of prime if we want, but the LIBOR is the better deal for us and it always has been.

Okay. On the hardware side, what luck have you had with the improving share and the replacement renovation mix, given the weakness of course in the new build market?

Very little, frankly, on the stair parts side. We have found that it's a completely different channel. When it is the same channel, we are just not having a lot of success, frankly, in jump-starting that. It's just not going particularly well. Part of it is it's a little bit of a different product that would be required. We've made some tweaks to the line to try to address that, and it's just not a market we're yet familiar with. It's very different. The people that we're selling to do not do that.

To get a handle on this goodwill write-down, it was obviously quite sizable, and recognizing the reality of the market for the business has deteriorated significantly for an indefinite period, etc. Unfortunately really never saw the pro forma EPS that was anticipated or contemplated from those acquisitions. But with that said, accounting methodology requires you to do discounted cash flow cuts, etc., etc. Do you feel that, with the accounting principles in this instance, that they have been overtly onerous or that this write-down does indeed reflect the value of the business that you acquired accurately on the books now?

Well, the write-down -- and I'm not sure this ends up getting disclosed fully, but the write-down was in three businesses -- Woodmark, obviously, and PSP is lumped in with Woodmark because it's essentially the same business -- Nationwide and Florida Pneumatic. We believe that, with respect to Woodmark, the write-down has some basis in the realities that exist. This is just my opinion. On the Nationwide write-down where we ended up in terms of the book value of that business was actually -- or the value of that business, excuse me, is well below what we can sell that business for. So there, it does not reflect reality. In addition, at Florida Pneumatic, I have a very similar situation. The book value of the business, or fair value, excuse me, does not reflect what I can sell that business for in the open market.

Meaning that the businesses could be sold for more?

Yes.

For both Woodmark --?

No, Florida Pneumatic and Nationwide, for sure. Woodmark I'm not as certain, but certainly for the other two. So I would say, on the whole, I don't think the write-down was completely -- I don't know if 'fair' is the right word, but it doesn't really reflect (multiple speakers).

(multiple speakers) the accounting principles are --

Onerous.

-- more onerous than --

Than reality.

-- fair market (multiple speakers).

In reality, yes.

Okay. You mentioned that some of the write-down actually relates to goodwill at Florida Pneumatic.

Yes.

Is that from Hy-Tech?

No, no, no. Florida Pneumatic -- and this predates me -- had made several acquisitions in the '80s, early '90s perhaps. At that point in time before FAS 141, you would simply take goodwill of the excess purchase price, call it goodwill, and some companies would amortize it over 20 years, some companies would amortize it over 40 years. So that number had been there for a long time and then when 142 came around, we had to freeze that figure; it could no longer be amortized. You know, the way these calculations work, without going into the detail, even if the new valuation is $1 under the fair value, the book value of the business, you go into the second step where there's a major disconnect between real-world valuations and what's required in terms of a write-down in that second step. That's all I can really say, but you're welcome to look up FAS 142 (multiple speakers).

So how much of this write-down was associated with the Florida Pneumatic?

Probably about $3 million.

Wow!

Excuse me, $2.2 million, I'm corrected.

$2.2 million, and then (multiple speakers)

A vast majority was Woodmark.

And then what was tied to Nationwide and what was tied (multiple speakers)?

Nationwide was probably $7.2 million.

On Nationwide?

Yes, and then the remainder would be Woodmark.

Now, Nationwide was acquired after those goodwill amortization changes you talked about for Florida Pneumatic.

Yes.

What triggered the Nationwide impairment?

Again, the initial calculation showed that it was worth slightly less than the book value of the business, so again, we go into a very complicated, what I will call Phase II calculation. And I can't really --.

No, but so basically the first trigger got hit?

Yes, and then there's a very specific methodology on how things get written off. Again, even speaking to the evaluation experts and the auditors, they fully agree that it starts to separate from reality and you just really have to go through the steps and into the formula and do it. I urge you to look at 142.

So that makes -- if one looks at your intangible book value, that makes then your year-end hard tangible book value, one, very hard but two, that there is some value in the businesses above and beyond that hard tangible book value which is now in the high 5s per share?

Certainly for I would say for Florida Pneumatic and Nationwide, without question.

Okay. If that's the case, given your stock is trading at that level, are you in a position, as you negotiate your covenants and everything else and you're paying down your debt, are you guys in a position to be buying back shares and retiring them, given how accretive the buyback (multiple speakers)?

Well, Andrew, that's a very interesting comment. I mean, certainly the stock -- I don't know where it is this morning.

$6. $6.05.

You know, it is certainly at an attractive price. It may be even more attractive in the coming days when all of this information is fully disseminated.

Unfortunately, I'm certain, when the dust settles on the new bank covenants, they will be certainly achievable but tight and every dollar I spend that doesn't go to paying down debt makes me worse off in terms of the bank covenants. I understand, from a theoretical perspective, we can get the stock price up, but that has (multiple speakers).

Well, buying back shares isn't to get the stock price up; it's the idea that it's an accretive deployment of capital, because it's being offered to you at so low (multiple speakers).

Understood, but it doesn't help; it hurts my bank covenant situation.

(multiple speakers)

Andrew, when the bank agreement is totally finished, we will see how everything plays out with our cash and what our requirements are, and how much room we have to maneuver. But clearly, clearly, clearly, we would be interested in buying stock if we can afford to do that without violating any agreements with our bank. It's clearly a good time to buy stock.

Now, if the bank covenants have you in a restricted mode and the Corporation can't buy back shares, (multiple speakers) well, if the bank covenants are tight and you have not enough cushion and the Board of Directors decides you need a certain amount of cushion before the Corporation would buy back and retire shares, then for members of management and for members of the Board of Directors personally to buy shares at these compelling levels would not the usurping the corporate opportunity and ought to be something that, as a shareholder, I think I would like to see management and the Board show that kind of faith and commitment into the Company, given the low prices, that they would seriously consider it.

I can't --

The board in particular. You, Richard, own a lot. It's not as if you are not committed to the business.

No, but that doesn't mean I would not be interested in buying more stock when permitted to do so.

(inaudible) not committed to the business.

No, but that doesn't mean I wouldn't be interested in buying more stock when permitted to do so.

Right. I wouldn't want you guys doing it and usurping the corporate opportunity, because when you guys buys shares, it ties you and aligns your commitment with me. It doesn't do anything for shareholder value as much as having the Company buying retired shares when they can -- when you are buying basically your businesses at values less than what they really are worth.

Again, Andrew, I can't tell my board members to go out and buy the stock. But when the period is (multiple speakers) --

I'm putting it on the record in this way, that's all. I understand you (multiple speakers).

No (multiple speakers)

If the Company can't buy shares, they ought to consider seriously doing so.

I'm certain that everybody on the Board feels exactly like you do.

(multiple speakers) owns a bunch of shares, but the rest don't really own that many shares.

Right. Well, again, if they feel compelled to do so, they will do so. I mean, they're clearly smart enough to figure it out and to see the value, and if they feel that they want to do that, then they will certainly do that.

Right. On Pacific Stairs, you mentioned your largest competitor was making direct shipments and this was bad. Now, was it bad because of lost market share solely, or was it bad because you had to follow and you're having lower margins to compete and you lost the business altogether?

I think maybe we confused you, and I apologize. I don't think we were talking specifically about Pacific Stair. I believe we were talking about our kitchen and bath business that we lost a significant customer who went direct, who went to another vendor and stuff like that.

Oh, there was mention I think in the script or in the release about losing someone who went to another vendor, and then another large customer who was taking shipments directly.

Yes, that was in our Woodmark division, not Pacific Stair.

Okay, so they are moving (multiple speakers).

You know, the good news is we haven't lost any significant business in Pacific Stair. The bad news is there is no business to be losing out there. The customers that you have are a shadow of themselves with the market and the housing conditions out on the West Coast. There's no big person to lose because there's no big person doing any business, you know, out there. It's really -- I would say Florida, Las Vegas and California are really leading the pack in terms of depressed housing markets.

Yes, no, your (multiple speakers)

(inaudible) in two of them.

You mentioned some of the Nationwide's new products to be rolled out in spring of '08, you've mentioned in the past and now. How are these new products being accepted? Are these the unprecedented number of new products that you mentioned in the release? Were those new products that you called "unprecedented in number" referred to as -- were in the Nationwide sector or are they in a different sector of your business?

They were mostly in the Nationwide sector.

Okay.

They've been rolling out, beginning to roll out, but just kind of starting. But we are very encouraged with everything we've seen so far in Nationwide this year.

Now, you've lost the tools side or you are separating from Home Depot on the tools side. Is it just in tools? Because we do sell to Home Depot, don't we, with regard to some of the Countrywide products?

No, no, no. Franklin -- you are referring to Franklin with Home Depot?

I think so, yes.

Franklin and Home Depot parted company like a year ago or during the year, sometime, you know, during the early part of the year. It's been a while since that but we don't do any more business in the company with Home Depot, whatsoever.

So it's just Home Depot in tools and that's what's going to be separate (multiple speakers)?

That's just going to be discontinued, yes.

You know, you mentioned cost pressures from suppliers in Asia in past calls, and there was no mention in the press release now. Have the cost pressures alleviated, or have you just simply been able to pass on the expenses that it is no longer noteworthy? What's the (multiple speakers)?

No, no, it is noteworthy. The commodity prices have been rising at alarmingly, incredibly alarmingly rates -- steel, copper, aluminum, beyond. We are getting bombarded daily with price increases from our vendors overseas, and we are passing them along where we can. It's been -- it's an anomaly to me, just on a personal level, that an economy could be so bad and commodities can be rising so much. Even with oil, freight coming in from overseas, freight within the country itself, it's just, you know, everything is rising. So in light of everything that is going on in the world, we are also -- we are not alone, but we are also saddled with incredible challenges in terms of that, and we're passing them along as we can.

Now, is your role in the industry, vis-a-vis your competitors, such that you're large enough that you have as much pricing power and negotiating power with your vendors and your customers as your competitors do, or are you at a disadvantage?

I would say we are no more at an advantage or disadvantage than anybody else. I think we are really right in there with all that stuff.

So you're not losing relative ground here?

I don't believe so.

No. I think, if we have an advantage, we might have some at Woodmark. Certainly on the iron ballaster businesses I still think we are the market leader. But I would agree with Richard; really across the board I think we are no worse off throughout the company than (multiple speakers).

Now, Embassy, you had the Embassy sold to a prior customer -- not a prior customer, a prior buyer. They put money in escrow; they reneged on the deal. The money was in escrow and it's a deposit that possibly could come to P&F in terms of having extra cash and debt paydown, as well as mandated arbitration/settlement discussion phase?

Well, I don't know what you're asking, if there's been discussion about settlement. There really hasn't been because of the -- is that what you're asking me?

Well, usually the courts -- and I think this is a New York case?

Yes.

Usually in New York, before they go to trial, the judge usually says, okay, before you do that, to save everyone expense and (multiple speakers) --

Yes, we're not up to that.

-- (multiple speakers) force you to sit down and see if you can't settle this.

Yes. We're not up to that yet, Andrew, because we haven't been instructed to do that, but I can tell you we are really not looking to do that. We really feel we are right, and we are entitled to the money, and we have plenty of damages that were written off in '06 and '07, and we intend to get it back.

So remind us, what is the quantity for which P&F is seeking if you won at all?

$650,000.

That's still held in escrow --

Yes.

-- safety net, accreting (multiple speakers) interest rates?

Yes.

I guess one other question -- it looks like it may be part of your cost-cutting, but I don't know what your plans are going forward, if you would hire them again or someone else. Lippert/Heilshorn used to do your investor relations and introduce these calls, etc. I'm assuming they're part of the cost cut?

That is a fair assumption.

(multiple speakers)

(technical difficulty) no reflection on their job or anything, it's just things that we think we can handle ourselves for our own economic advantage, but they did a good job for us and they very well may do it again. Right now you are correct; it's just a cost-cutting measure.

Okay. What legal expenses are you incurring on this Embassy litigation? Is that in-house or what kind of --?

We have outside counsel. We have (multiple speakers) are in-house counsel, Rich Goodman who is sitting with us if you want to asking any questions, but he is involved in it. But we have outside counsel who are experts in that area of the world.

But I'm assuming the trial is going to occur, what, six months from now or so?

It would be some time at the end of this summer.

Probably later in the year. They haven't set the date yet.

But then you have the trial, all of the pretrial discovery -- it sounds like it's been done.

Yes.

The trial will have a little bit of costs with it, but the discovery usually is like the biggest cost (multiple speakers).

Yes, we expect our money.

So how much money has the company kind of expensed through on its SG&A that I guess -- that's all in '07?

I think it's in disc-op if I'm not mistaken.

Yes, this is all in discontinued operations. (multiple speakers) SG&A.

Great. I think I don't have any -- would you, if you won the case, would you be able to recoup those costs?

Absolutely.

(multiple speakers) get the whole amount.

So the (multiple speakers) that you referred to is just sort of the escrow; that's not the --?

Oh, I'm sorry, Andrew. You're right; We wouldn't get additional legal fees back. That would be part of the (multiple speakers).

It's just part of our damages.

Right, but the $650,000 you referred to -- I think wasn't that the escrow?

Yes.

Yes.

So how much more are we into it in the event you win the case?

I don't know if I follow your question.

In other words, damages would be the $650,000 escrow amount plus --

Oh, no, not the plus.

No, no, no, there is no plus in there. There would be no (multiple speakers) -- you're limited to the escrow (multiple speakers) the recovery.

Liquidated damages.

Liquidated damages. I got it. (multiple speakers)

(multiple speakers) as far as I understand it, we either -- if we go to trial, we either get 0 or we get $650,000, nothing in between unless we settle before, which as I say to you I don't really have much of an appetite to do because we and our legal counsel feel very strongly that we have a good case.

Yes, no, it sounded from the facts that were laid out (multiple speakers) strong. I don't have any other questions.

Right, okay. Well, thank you for all your questions and thank you for your understanding, also.

Gentlemen, there are no more questions at this time. I would like to turn the conference over to you for closing comments.

Okay. I'd like to just thank you all for being on the call today, and we certainly do look forward to a better year in '08 and we hope to be able to report better results as time goes on. Thank you all for your indulgence and for your time.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.