P&F Industries Inc (PFIN) 2008 Q2 法說會逐字稿

Greetings, and welcome to the P&F Industries second quarter earnings conference call. (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. You may begin.

Thank you, Operator. Good morning, and welcome to P&F Industries second quarter 2008 earnings conference call. With us today from management are Richard Horowitz, Chairman, President and CEO; and Joseph Molino, Chief Operating Officer and CFO. Before we get started, I would like to remind you that any forward-looking statements expressed in this call, including those related to the Company's future performance and those contained in the comments of management are based upon the Company's historical performance and 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 and pricing, and those described in the reports and statements filed by the Company with the Securities and Exchange Commission, including, among others, as described in the Company's most recent 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 and 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, I would now like to turn the call over to Richard Horowitz. Good morning, Richard.

Good morning, Rich, and thank you so much, and thank you all for joining us this morning on our second quarter 2008 conference call. Excuse me, our first quarter 2008 -- second quarter 2008 conference call. I would like to start off with a brief overview of our financial results for this quarter. We are reporting earnings from continuing operations for the second quarter of $453,000, a 97% increase compared to the $230,000 for the second quarter of 2007. Additionally, diluted earnings per share from continuing operations for the three months ended June 30, 2008, doubled to $0.12 per share compared to $0.06 per share for the comparable three-month period in 2007. This improvement was achieved, despite a decrease in net revenue to $25,554,000, from $30,608,000 for the three months ended June 30, 2007.

Our earnings from continuing operations were approximately $42,000 and $54,000 respectively, net of taxes for the three and six-month periods ended June 30, 2008, with diluted earnings per share of $0.01 for both the three and six-month period ended June 30, 2008. Earnings for the three and six-month periods ended June 30, 2007, were $3,029,000 and $3,008,000 respectively. It should be noted that during the three-month period ended June 30, 2007, we recognized a gain on the sale of assets from continuing operations of $3,027,000. That was the Embassy building, as you may recall. As a result, diluted earnings per share from discontinued operations for the three and six-month periods ended June 30, 2007, were $0.80 and $0.79 respectively.

As a result, the Company's reporting net earnings of $495,000 for the three-month period ended June 30, of this year compared to $3,260,000 reported in a three-month period last year. Overall, our net diluted earnings per share for the three-month periods ended June 30, 2008, and 2007 were $0.13 and $0.86 respectively.

Since there are few new people on the phone call this morning, I'm going to take you through a little commentary on what our operations do. Firstly, our Continental Tool group consists of our Hy-Tech and Florida Pneumatic wholly owned subsidiaries. Hy-Tech manufactures and distributes pneumatic tools and parts generally for industrial applications. Hy-Tech manufactures approximately 60 types of industrial pneumatic tools, most of which are sold at prices ranging from $300 to $7,000 under various names, such as ATP, Thaxton, THOR and Eureka as well as the trade names and 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 manufacturer's representatives. Users of Hy-Tech's tools include refineries, chemical plants, power generation facilities, the heavy construction industry, oil and mining companies and heavy industry. Hy-Tech's products are sold off the shelves and are also produced to customers of orders.

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

Countrywide, our other division, which is comprised of Nationwide Industries, Woodmark International and Pacific Stairs. Nationwide and Woodmark both import and manufacture 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. And Pacific Stair is a manufacturer and distributor of premium hand rail -- excuse me, premium stair rail products and staircase components from Woodmark to the building industry primarily selling in Southern California and the Southwestern United States.

Now for the second quarter performance. Net revenue reported by our tool segment decreased $1,299,000. Significant factors representing and contributing to this decrease include one, a net reduction in retail revenue of Florida Pneumatic of $1,624,000, of which $471,000 is due to the wind down of the Home Depot business. $651,000, due to the reduced volume of promotional sales and lower sales of basic retail products aggregating $502,000 to a major customer. Additionally, our Franklin hardware line revenue decreased $520,000, primarily the result of a loss of its business with Home Depot. The above declines in product line revenues were somewhat offset by a net increase of $116,000 reported by our Berkeley filters and automotive lines.

The acquisition of Hy-Tech continues to provide a positive impact to P&F. Hy-Tech focuses on the industrial sector of pneumatic tools market, an area which has not been affected by the sluggish economy. When comparing the three-month periods ended June 30, 2008 and 2007, Hy-Tech contributed an increase of $729,000 to the tool segment. This increase is primarily attributable to organic growth.

As a result of the continuing reduction in number of new homes being constructed, which is the principal driver for the hardware segment, revenue for the quarter ended June 30, 2008, decreased an aggregate of $3,755,000 when compared to the three-month period ended June 30, 2007. Our Woodmark subsidiary, which primarily services the Southern tier of the United States, continues to be hard-hit, reporting a net revenue decrease to $5,968,000 for the three-month period ended June 30, 2008, compared to $8,509,000 for the same period last year. Within Woodmark, revenue from the sale of its spare parts and accessories decreased $2,321,000. Additionally, Woodmark's kitchen and bath product lines witnessed a decrease in revenue of $220,000 due to a lagging recreational vehicle market. The loss of a large customer, as well as the weak economic conditions we are all experiencing. Until the downward trend in a number of new housing starts levels and begins to increase, we do not expect to see any real improvements in Woodmark's net revenue.

Pacific Stair's revenue decreased to $557,000 for the three-month period ended June 30, 2008, from $1,031,000 for the second quarter of last year. This was primarily attributable to the continuing decline in the new home construction market in Southern California and Arizona. And Nationwide, which primarily markets fencing and gate hardware hasn't until this quarter been materially affected by the sluggish home building sector, but now has experienced a decrease in net revenue to $4,542,000 for the three months ended June 30, this year from $5,282,000 for the same period last year. Nationwide's net revenue for fencing decreased $237,000. And furthermore, its OEM products and patio product lines decreased as well, by $281,000 and $222,000 respectively.

Gross margins on a consolidated basis increased to 31.5% for the three months ended June 30, 2008, compared to 29.7% for the same period last year. Gross margins in the tool segment increased 6 percentage points to 32.9% reported for the three-month period June 30, 2008, from 26.9% last year. When comparing the three-month periods ended June 30, 2008, and 2007. Specifically, gross margins at Florida Pneumatic increased to 30.4% for the three-month period ended June 30, 2008, from 25.3% reported for the same three-month period in the prior year, primarily the result of a reduction in the fees paid to an overseas trading partner, various cost reductions implemented during the quarter, and product mix. Gross margins increased at Hy-Tech to 36.9% for the three-month period ended June 30, 2008, from 31.6% for the three-month period ended June 30, 2007. This increase is due to the changes in product mix, as well as improved manufacturing efficiencies.

Gross margin for the hardware segment decreased 2.8% to 29.8% for the three-month period ended June 30, 2008, from 32.6% for the same period a year ago. Specifically, gross margins for our stair parts business, as well as our kitchen and bath business at Woodmark decreased 2.7% and 1.1% respectively when comparing the three-month periods June 30, 2008, over 2007. The gross margin decrease in the Stair Parts business was primarily the result of lower absorption and fixed expenses as a result of lower revenue.

Our gross margin at Pacific Stair was severely impacted by the continued weak housing market, decreasing from 13.5% reported for the three-month period ended 20 -- June 30, to a deficit of 11.9% reported for the same period this year. Essentially due to the inability to reduce fixed overhead costs as sales levels decreased. Gross margins at Nationwide for the three-month period ended June 30, 2008, decreased to 38% from 40.6% for the three-month period ended June 30, 2007. Further, the gross margin decrease was primarily due to price increases from overseas suppliers, as well as current competitive conditions, which for certain items necessitated price reductions.

During the three-month period ended June 30, 2008, our SG&A decreased 13.4% to $6,763,000 from $7,814,000 for the three-month period ended last year. The primary factors driving this decrease are our continued cost cutting measures, as well as lower variable costs. Significant components of the reduction of our selling and G&A expenses include a reduction in salaries, benefits and bonuses aggregating approximately $779,000. This reduction is due primarily to a one-time compensation charge incurred during the three-month period last year of approximately $400,000 related to the sale of Embassy's real estate assets, also advertising decreased $136,000. Our stock-based compensation decreased $194,000, and warranty and trade expenses in the aggregate were lower by approximately $96,000. Additionally, certain intangible assets related to our acquisition of Nationwide were fully amortized during 2007, resulting in a reduction of amortization expense of $133,000 when comparing the three-month periods June 30, 2008, and 2007.

Offsetting the above reductions in our operating expenses was an increase in professional services of $122,000, primarily attributable to funds received during the three-month period ended June 30, 2007, resulting from a favorable legal settlement with a former employee. Additionally, as part of the previously disclosed loss of the Home Depot business, we incurred a one-time aggregate charge of $219,000, consisting of severance and other employee-related expenses of $101,000 as a result of reducing our warehouse and manufacturing staff, as well as $118,000 due to writedown in the value of certain machinery and equipment used solely for the Home Depot account.

In conclusion, I would like to state that while our results from continuing operations for the second quarter of this year reflected an improvement over the prior year, we remain guarded for the balance of this year due to the questionable nature of the housing market, which we are tightly tied to. The key to our growth will be the eventual timing of this housing recovery. Until such time that occurs, everyone at P&F remains dedicated to optimizing our efforts and profitability in order to enhance shareholder value. At this time, I would like to turn the call over to Joe. Joe?

Thank you, Richard. Turning to our results for the six months ended June 30, 2008, revenue was $49,879,000 compared to $55,567,000 for the six months ended June 30, 2007. Net revenue for our tool segment for the six-month period ended June 30, 2008, of $27.8 million reflects slight improvement of $400,000 from the $27.4 million reported during the same period in '07. Key factors for this increase are reporting six months of revenue for Hy-Tech compared to approximately 4.5 months in 2007, as well as revenue growth at Hy-Tech during the second quarter, which together generated $2,929,000 of increase over the six-month period ended June 30, 2007. The increase was, however, offset by a decrease on the year-to date revenue reported by Florida Pneumatic of $2,554,000 due essentially to lower than expected retail and promotional sales. I would like to point out that we expect retail revenue in Florida Pneumatic to be weak for some period going forward, as we have been advised by a significant retail customer that they have reduced their expenditures -- have reduced their expenditures on advertising for the foreseeable future. In addition, the Home Depot business is finally concluded. This should be somewhat mitigated by strong industrial revenue, however.

Net revenue for the hardware segment continues to be severely impacted by the ongoing downward trend of new home construction. Revenue at Woodmark and Pacific Stair products, which primary sales driver is new home construction, were down 27.1% and 47.8% respectively for the six-month periods ended June 30, 2008, compared to 2007. Specifically, Woodmark's revenue decreased to $12.4 million from $17 million and Pacific Stair products revenue decreased to $1 million from $1,970,000. It is difficult to predict when the new home starts will begin to improve. Until such time, we'll continue our ongoing efforts to reduce costs and overhead where possible.

When comparing the six-month periods ending June 30, 2008, and 2007, net revenue at Nationwide decreased to $8,672,000 from $9,174,000 primarily due to competitive pressures and cost increases from overseas. The overall gross margins for the tool segment for the six-month period ended June 30, 2008, was higher, 3.9 percentage points than the prior year, specifically Hy-Tech's improved gross margins are due primarily to an improved product mix, as well as lower variable costs. Gross margins at Florida Pneumatic improved as well, primarily due to reduced costs from overseas suppliers and product mix. Gross margins for the six-month period ended June 30, 2008, for the hardware segment are down 1.8 percentage points when compared to the same time period in the prior year. Woodmark's gross margin is down 1.4%, due in part to less efficient absorption of warehouse costs, due to lower revenue. At Pacific Stair products, gross margins for the six-month period ended June 30, 2008, are running at a deficit, principally the result of underutilization of the facilities.

Gross margins for the six-month period at Nationwide were 2.3 percentage points lower than the same period in '07, primarily the result of higher material costs combined with current competitive market conditions. Our SG&A for the six-month period ended June 30, 2008, aggregated $13,274,000, reflecting a reduction of $1,394,000 from the six-month period ended June 30, 2007, total of $14,668,000. Key elements contributing to this reduction include total salaries, payroll taxes, and other employee costs aggregating $484,000, most of which is due to the approximately $400,000 compensation charge in connection with the sale of Embassy's real property, which occurred in the six-month period ended June 30, 2007. Additionally, advertising and promotions decreased $258,000. Commission expense decreased $120,000. Freight costs decreased $122,000. Depreciation and amortization were lower by $220,000. Warranty expense decreased $149,000. Product liability decreased $211,000, and stock-based compensation decreased $154,000. The above items were offset by a one-time severance and equipment writedown of $219,000 incurred as a result of the loss of the Home Depot business. Additionally, we received a payment of $165,000 as reimbursement of fees and expenses incurred related to a legal matter which was settled in our favor.

Our net interest for the six-month period ended June 30, 2008, was lower than the same period in the prior year by $473,000. Key components of this change include interest expense incurred in association with the Hy-Tech term loan, which decreased $216,000. Interest expense associated with the Woodmark acquisition, which decreased $196,000, and interest on long-term debt, which was lower by $95,000. The preceding reductions of interest expense were partially offset by an increase in interest expense incurred on our short-term borrowings, which rose approximately $65,000 incurred -- excuse me, primarily as we paid down long-term debt in January 2008 with short-term borrowings. Total borrowings of approximately $31.3 reflect a decrease of approximately $2.8 million from the $34.1 million outstanding at December 31, 2007, due primarily to a decrease in working capital needs, consistent with lower revenue. Capital expenditures for the six-month period ended June 30, 2008, were $562,000 compared to $959,000 for the same period a year ago. We reported depreciation and amortization of $856,000 and $729,000 for the six-month periods ended June 30, 2008, and 2007 respectively. With that, I would like to turn the call back over to Richard. Richard?

Thank you, Joe. And that's the end of our report for the second quarter of 2008. And of course now we'll be happy to answer any questions any of you may have. Thank you for calling in.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Andrew Shapiro with Lawndale Capital Management. Please state your question.

I have several questions. I'll ask a few and then back out into the queue to allow others to step in here. Could you clarify these items as nonrecurring and which quarter they were? There was this -- and if they came through SG&A or cost of goods sold/ There's the severance of 219, the inventory on machinery writedown of 118 and then this litigation of 122. That sounded like that was from prior year.

That was from prior year. That was 122,000 was to prior year.

Correct.

Okay, and that was reduction of SG&A, I'm assuming in a prior year?

Yes.

And then the inventory machinery of 118, cost of goods sold or SG&A, that was this quarter?

There's no inventory in that number, Andy.

Okay.

It's a writedown of equipment and severance and that was all put through SG&A.

Okay. So the full 337 or so?

No, no, 219, I believe.

And then there was 118 as well.

118--?

Part of the 219. That's what I needed clarified, then.

It was 101 of severance and 118 of equipment writedown.

Okay, all right. So I got that. All right. Last quarter you mentioned you believed the year would be better than last year and you have done a lot of blocking and tackling and the benefits should flow through. I just want to get a feel about where you are in the process of recognizing the benefits of the blocking and tackling, as obviously the margins appear better than this quarter. Are there some additional improvements to be seen in the current quarter we're in, ended September?

Andrew, it's really -- we really don't give guidance like that anymore. And the reason is exactly for these reasons, because there's so much tumultuousness in the world right now, in the economy that we really don't have that crystal ball.

Well, I'm trying to get at the costs and the blocking and tackling part. I understand you can't predict the revenue side or then the net cash flow, but are there some additional blocking and tackling and net benefits that had not yet been seen in the quarter ended June that we might see in the quarter ended--?

Yes, there are -- absolutely a lot of that ongoing in all of our divisions. Price increases getting vendor concessions, freight savings. I mean employee -- employee issues. It's all going on and it's not -- we haven't had -- if you're asking us if it's all in the second quarter, the answer is no.

Yes, basically did the June quarter reflect a full quarter of savings yet?

I would say no.

Okay.

I would say no. But maybe half of it, I would be guessing maybe, maybe something like that, but, no, it will be going forward obviously and there will be others, but we don't know what they and we don't know if they will be offset by things going the other way.

Right. The sequential buildup in inventory, was that planned for future growth? Was that involuntary? What's behind that inventory build?

The -- there was nothing planned about the inventory build. I think part of it relates to a slowdown into revenue that we didn't anticipate. It may also be -- I know in one instance we had to buy ahead of a price increase and then kind of going the other direction, you've got revenue dropping so that would tend to drive inventory down in the longer run.

Well, it was down year-over-year, but we noticed it ticked up from last quarter.

Revenue -- excuse me, Andy. Inventory between the end of the year and '08 actually went down by a couple hundred thousand dollars. Are you talking about--?

Sequentially. I'm talking from March to June.

Oh, excuse me. I don't have that in front of me, but it could be, what, a couple hundred thousand dollars?

No, actually your inventories at the end of March were $30.1 million and they went up to $31.4 for a jump of about $1.3 million.

Yes, that's just timing. I wouldn't draw any conclusions from that increase.

Okay. So do you guys feel you've right-sized for the current environment, or are you having to contemplate, we'll call it a plan B or a plan C here of additional cuts?

I would say each of our companies are different in that regard. I think we have -- Joe, you may not agree, but I think we've right-sized for the most part, but it's a moving target and things change. And if it changes, we'll have to right-size up or down accordingly.

Yes, I would agree actually. I think we are right-sized. However, I think there's probably some more opportunity in, on the hardware side. We're going to take a little harder look at it, even though I think we are right-sized. That doesn't mean we can't get a little skinnier.

Okay. Now, in Pacific Stair, you had sequential gain, meaning it was up from last quarter, your revenue levels certainly down sizably year-over-year.

Yes.

Is this sequential gain a sign of seasonality, a sign of some stabilization in the market?

I would say both. Well, first of all, there is a little bit of seasonality. Q1 is generally not their best quarter. I don't think the market has really stabilized, but I think we have been successful in picking up a couple of decent sized new accounts.

Okay. And so you think you may be gaining some share then?

Yes, absolutely.

Okay, and if I recall Pacific Stair, while we're on that particular segment, I think you had at one point maybe two facilities. There was a carry-every migrating from one to the another.

Yes, we're now one facility.

I was going to say, facilities consolidation available, when did you implement the facilities consolidation?

Very, very recently.

Yes, really right at the end of June, really beginning of July.

So then where Pacific Stair had negative gross margins reflected in the June quarter as a result of not being able to offset fixed facility costs amongst others, there should be some improvement in, at least in that line item in quarter ended September?

Yes.

Great.

Yes, but, again, it's not significant, Andrew, to speak of.

All right.

And maybe it will only be one month or one and a half months out of the three months.

Okay, and Nationwide had also sequential gains June quarter versus the March quarter. Again, is that a sign of seasonality or a sign of stabilization in that business as well?

Extreme seasonality. If you go--.

We have no stabilization yet at all.

If you go back to your previous Q2s, you'll find that pattern. That market is very weak, very weak.

All right. I have more questions. I'll back out in case others have some, but please come back to me.

Okay.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from [Bruce Winter]. Please state your question.

Yes, thank you. I understand your geographical footprint from an historical perspective. I'm wondering if's there's notice more opportunities to rationalize your footprint for the current business that you have.

Are you suggesting that -- well, let me just make sure you're clear. We've got six facilities, four major facilities, two relatively minor facilities. In different businesses, are you asking whether we would go to fewer facilities than that?

Yes. You import from the Far East all the way over to Florida. You have two distribution facilities for tools.

Actually the two, just to be clear, the two tool businesses are -- while there is a fair amount of overlap in those businesses in terms of how they go to market, there is next to no overlap in where they are getting product. Pittsburgh, the product sold by Hy-Tech is all made in Pittsburgh. The product sold by Florida Pneumatic is imported from Asia to Jupiter, Florida, so there really isn't any opportunity to do anything there. Nationwide's business in Tampa has nothing to do with the Stair Parts business, so there's nearly no consolidation available there to us, and the Woodmark business is three operations and frankly, one might argue that we need six. We've got three operations along the Southern tier of the US. It's a very local business in a lot of ways once you get out 300 or 400 miles from the warehouse, you start to be at a severe disadvantage to more local competition. Ironically, despite the market conditions, we're considering more facilities in hardware, not less. So I would say the rationalization doesn't really make sense for us.

I like the idea of six or more and growth in that business. That sounds good to me. How about, how about Long Island?

Which -- I'm sorry.

Long Island for a facility?

Aren't you done doing things in Long Island?

Yes, but you're talking about in terms of having another facility, like a warehouse or something?

No. Shifting your Long Island business to -- your Long Island operation somewhere else.

We don't have any Long Island operations. We just have corporate offices there.

Right. Shift your corporate offices to, closer to your operations.

There's no -- these corporate offices could be anywhere. But that's, that's -- we're counting and banking and all that stuff. These are where our relationships are.

Yes, but that's the most expensive place in -- to do stuff.

Well, we have a very -- we have 5000 square feet of space, so as far as real estate goes across $100 million Company, that's noise. We would have the salaries pretty much wherever we were, in the country. I mean it's nine people. I just don't see how there would be a big savings. The public Company costs would be identical regardless of where we were. We don't really see a big opportunity there.

Okay. Well, I'm looking forward to some expansion with the hardware stuff, though. That sounds good to me. Thank you.

You're welcome.

Thank you. Our next question comes from [David Bove] with Elk Partners. Please state your question.

Hi. I just wanted to ask about your inventories. I think before the Hy-Tech acquisition, you were running inventory turns were about three times a year and since then, they have been a little less than that. I'm wondering if at some point you think that you can get back to the inventory turns at three times.

Sure. Two things going on there. I think the slowdown in the economy is probably hurting our turns. Until that gets to stable point, that would hurt us vis-a-vis prior year. Second, Hy-Tech's business model is one of keeping a great deal of parts on the shelf. They sell -- the business really started as a replacement part business, parts business for name brand air tools. And while they now make entire tools and product lines, that's still a very significant part of their business. If those tools -- excuse me. If those parts are not on the shelf, the sale is lost. So there is a very significant sort of distributor aspect to their business, even though they are actually making the stuff. So their turns are just not going to be that great. And we're okay with that. The return on assets in general is very high, given the margins available to us. So that would be the two reasons that the turns are down from, prior to the acquisition.

Okay. Thanks.

You're welcome.

Our next question comes from Andrew Shapiro with Lawndale Capital Management.

Okay. A few follow-ups if I could. You recently negotiated your credit agreement and in the publicly filed agreement that we have just -- we read through, there was mention of property of something like 9.8 million. Was that 9.8 million number related to an appraisal value, a percentage of appraisal value, and what's the cost basis of the property it's related to?

That figure actually was -- the bank's came up with that number, our current credit facility banks. It is an estimate, a conservative estimate on their part of what the value of our three owned facilities is worth.

So a percent of appraisal value in a sense?

Honestly they didn't tell me how they got to that number. They didn't tell me how that number -- what it represents as a percentage of anything. It's just a number they are using as part of our new borrowing base formula. But, it does bear relation to what the actual value of the businesses is, but they didn't share with me how they got to that figure, other than looking at the recent transactions. We bought the Hy-Tech facility a year ago, so, the purchase price allocation would be a good proxy for the value now. The Tampa facility was bought about five years -- six years ago and the market there hasn't changed a whole lot. And we did have a recent, not appraisal, but something just short of an appraisal done by a market expert on the Jupiter facility to give us a sense of what that market is worth. The book values of those three buildings, and this is really off the top of my head, I would say Hy-Tech's probably over $2 million. Tampa facility, which is Nationwide, is probably, I don't know, $1.75 million and Florida Pneumatic is probably under $1 million. Those are rough estimates.

So roughly $10 million they put on some conservative on about $5 million or so of book value, roughly on both sides?

Yes..

Okay, and the new agreement, does it have share buyback restrictions that prevent you from being in the market now?

Not officially.

Okay. So just emotionally?

We have been in the market supporting the stock. I don't think the bank would entertain us buying large blocks of shares obviously to the extent that that hurts our ability to pay down the debt at these levels. So officially there's no prohibition against it.

Okay, and the duration of the loan through November, that seemed a little odd. Can you comment on that?

Well, frankly, as you know, we have two banks. One of the two banks was not comfortable going out another 12 months. They still like the facility. They would like to take a little bit of time and take a look at our real estate values, which has really not historically been part of the loan, collateral so to speak, and perform some internal audits. And they are going to review it again in November.

I might add that they told us -- one of the banks was totally fine with our new arrangement. The other bank said that their policy within their bank is short-term four-month loans, not just P&F. It's pretty much what they are doing now. That's their own appetite, so one bank had no issue with 12 months and the other one said it's not just P&F. It's their policy going forward with the climate of the world by now.

But your four months loans, you're $100 million public Company, it sounds like you need to upgrade to a little bit bigger bank.

It's a very big bank.

It's a huge bank, it's one of the largest banks in the world.

Yes, it's got nothing to do with--.

Doing four-month loans?

Well, again--.

Everybody in the world -- maybe people in our category, in our market cap, or in our volume, whatever, their internal decisions are--.

Right, yes.

That's their internal decisions, but it's an extremely large bank. It's got nothing to do with size.

Yes. I mean, Richard's absolutely right. I think the fact that we are exposed to housing is just in sort of their internal review is something they want to be careful about and we understand that, but they have, they have assured us that they have no problem entertaining renewing the loan. It's just that they are more comfortable with the shorter term for now.

Okay.

And I might mention, Andrew, in our 8-K, it mentions our two banks, Citibank and HSBC. And HSBC is the second bank and they are the one that had the issue and they are a pretty large bank.

They are a large bank, but you're obviously -- you're in some kind of small business division, where their credit department is a little--?

No. We're absolutely not in a small business division. In fact, we're dealing with a very senior level person there. It is nothing -- there is no small business division. The people that we talk to loan out billions.

On four-month terms, okay.

I didn't say that. I said that in our specific case, given our financials and the markets we serve, that's what they were comfortable with doing.

Okay. The two segments, tools and hardware, they have certain operating expenses and the operating expense as a percent of revenue, do you have -- I'm trying to compare to prior quarters if we've seen some improvement there where these cuts came into which division. The SG&A expense percentages that you provide for the segments, do you have that handy for both tools and hardware?

I do not have it handy. We don't break it out that way for the Qs, but I can tell you that the--.

Well, that's actually where we get it, is out of the 10-Q.

I -- okay -- well, I don't have. Let me just say this. The cuts in SG&A came out of hardware.

All right, and then your 10-Q's going to be filed when?

Thursday, I believe.

All right. Well, you have your segment breakout will have what we're looking for for the comparison?

Yes.

I have more questions. I'll back out in the queue, because we've got some people here asking questions, but please come back to me, please.

Okay.

Our next question comes from Timothy Stobaugh, please state your question.

Good morning, gentlemen.

Good morning.

Boy, I've been involved in this Company, I was surprised to see for 12 years. I first bought stock 12 years ago and have been in and out of the stock, had been out of it for a while but bought 25,000 shares all in the last month. I had no position prior to that, so I'm back in. I can't believe the selloff in the stock, frankly. Let me praise you and then take you to task, okay, and then I'll ask you to comment on this, if you'll allow it. You got a great franchise here in P&F Industries. It's a great Company. You make money. You've made money for 15 years straight. If you strip out the goodwill writeoff in '07, you made money, even in '07, if you strip out the goodwill writeoff. It's a great franchise and with the housing -- you're a housing-related Company and you should be losing money in a housing crisis and you're still making money and I think that's great. So that's the praise.

Now, the concern is your stock is at $2.50. I think part of the reason your stock is at $2.50 is because despite the earnings and the quality of the business, the sophisticated people can understand you're not getting the credit on the Street that you might deserve. And part of the reason for that is, I'm going to be as nice as possible about this, okay, but you're taking out a lot in salaries and it's a great business, but, and I'm going to give you credit for the best years of your life, which is 2002 through 2006, okay, five years, your average blended return on equity post-tax, return on equity is 10%, almost exactly 10%. So, guys, you got a great business and you're excellent managers, but I think your pay is too high for a 10% return on equity Company and it's hurting your credibility on Wall Street. Sure, a part of it's that you're thinly trade and you're not to blame for that, but can we restructure our salary arrangements so that we get more, related to increase in value of the stock or something? Because the fact that you're selling at $2, which is a 13-year low, when you have created all this internal value, is frankly absurd. Can you comment?

I think the only reason we're trading where we are is because we are getting crushed in the housing -- we're in the midst -- throes of a housing market collapse, which we are a very big part of. And when things were better in that regard, the stock was doing better and the salaries and all that stuff were the same. So it's not about that, in our opinion. It's about the market and how we are -- our revenues and our profits and our margins are being crushed with the economy the way it is. And any more than that, I appreciate what you're saying, but any more than that, I can't comment.

Can I make a -- I want to make a suggestion and I'll let it -- go back into queue or whatever. The Board should consider buying out the Company and taking it private at $7, and you could borrow against your future salaries to buy this Company at $7. I don't know if those 10% shareholders, the three of them are going to be interested in that. But you almost have a moral obligation to take this thing private, quite honestly, with the salaries as they are. And please consider that, okay? Please consider that.

Okay, we appreciate it. Thank you.

Our next question comes from David Bove with Elk Partners. Please state your question.

I just want to ask about SOX 404 compliance.

Sure.

Your view of internal controls?

Yes.

Have you guys complied with that yet, or are you in the process of -- I'm not sure what the deadlines are for that?

Yes, as you know, we're a -- well, the term used to be small issuer. The requirements for us to be 404 compliant, which basically means to have our internal controls audited, that has been pushed out once again until 2010, so that would be the first year that we would have to have an external firm audit our internal controls. Having said that, we continue to self certify. We've got a full internal control aspect to our business. In fact, we recently hired a major accounting firm to perform that work for us. We had for some period of time done that internally and have moved to some outside expertise there. So we are as compliant I guess as we can be given the rules we're required to follow at the moment.

And you said the rule actually was pushed out to 2010?

For our size Company.

For our size Company.

Oh, okay.

Larger companies have to be compliant now and have been.

Okay. Excellent. And I think you should stay a public Company, by the way.

Okay, thank you.

It is going to turn around. Thank you.

Thank you.

Our next question comes from Andrew Shapiro with Lawndale Capital Management. Please state your question.

Okay. Some follow-ups if I could. Given the severance and equipment expenses that you have taken now in the Florida Pneumatic area, are we completely out of Home Depot in terms of inventory and associated overhead?

We will be out of Home Depot by the end of July, first part of August.

Right.

Does that mean in the September quarter, there's some additional minor charges, or?

No -- there shouldn't be any more charges.

Minor, minor revenue.

Revenue, some revenue with some associated expenses, but profitable revenue.

And I might remind you, Andrew, and I'll remind anybody else on the call, for us, P&F, it's -- we are better off under these circumstances without Home Depot as our customer.

It was really low margin business.

Very, very low margin business.

Is that part of the reason for the margin improvement?

It is.

Yes, as a matter of fact, and we were, we were able to, knowing that the business was going to be lost, reduced some expenses where we might have kept them around if the business had been ongoing. So we kind of have a little bit of a benefit here the last few months of having that business generating a little more margin than it might have historically.

Okay. Sears is obviously, as an overall firm is having some poor comps, but they unveiled a new strategy we've talked about on prior calls and you still hadn't gotten visibility from it if it would be beneficial, which was to have different brand managers, since you provide a variety of products for their crafts in the segment, which is considered one of their good brands and good segments. Have you gotten any better visibility or clarity as to what they are doing with the brand management and the opportunities that might present for you with the Craftsman brand and the Craftsman products you provide?

No, we have not, Andrew. And I don't think, I don't think they know. So -- we don't know either.

I would agree. It seems even more confusing than it was before that strategy was announced, frankly.

You had said you were ramping up a new volume price arrangement with them. How is that going?

New volume price -- I don't know -- I don't think any of us know what you're talking about.

I thought in the prior calls you had talked about some type of volume price arrangement, that you would be doing some higher volume with them in return for price concessions.

No, no, no.

No.

Maybe that was a couple of quarters ago, but things have changed, I believe, if I'm talking about the same thing you're talking about.

I would just say in general when we get a higher volume at Sears through some sort of promotion, that is the case. We would get a promotional item with some very high volume, but at lower margin. But there's no particular agreement or strategy.

You might recall that there was something going on like that in '07, but their world changed a lot in '08 and it's not -- nothing of any import to us, unfortunately.

Okay. And are you looking at other retailers prospectively to reduce reliance on Sears, or is retail not part of the future and it's more a move to diversify away?

I would say it's the latter.

Okay.

But however, saying that, Sears is definitely a part of our plan in our future, we have a very good arrangement with them. A very good--.

But you're not looking to go at Lowes or someone?

Absolutely not, because we'll be back in the same pot that we were with Home Depot et cetera..

Yes, Sears is a little bit of a different customer than a Home Depot or a Lowe's. We have a different arrangement with them. It's a much more engineering-focused sale. We have some leverage there in that we really promote our knowledge of the product and it's really not quite -- it is retail, but it's really at a higher level than would be--.

That customer, Andrew, as I'm sure you know is more, I'm going to call it more professional in a lot of ways and more handy, where Home Depot and those places they were all selling low price points just to compete against each other. The Craftsman label is a higher end product, better warranties, better quality, so they demand a better price and they get a better product from us.

Yes.

So that's a different -- a little slightly different segment to us.

Now, you've been sourcing from Asia, and you moved some stuff from Japan to Taiwan, more and more into China. How much better is the cost advantage, and do you see yourself moving more there and also in light of their production cutbacks during the Olympic period, is there any Olympic-related impact on your sourcing from that?

There's no Olympic-related sourcing at all in that regard. We're doing more and more with China. I should say we're doing less and less with Japan and sometimes we go -- we still are in Taiwan and we still are in China and we are looking into other areas of the world as well, not necessarily even China.

Okay. Hy-Tech, on the oil and gas markets that you're serving, is this primarily, would you say the end market mix's maintenance or construction of new facilities? And if the -- you get a big fallback on the oil and gas pricing, does that have an impact on the Hy-Tech business?

The short form of the answer is, no, it does not have an impact and -- because there's going to be plenty of drilling going forward at whatever prices the oil is. It's still very, very inflated. As we all know every day when we go to fill up our cars, and it's both -- it's also -- it's both the payers and new exploration, new pumping.

And construction.

And construction, right.

And then you mentioned on a prior call the potential marketing and distribution and product opportunities for Hy-Tech products going in through Florida Pneumatic primarily than the other way around, but they were immaterial last quarter, but you mentioned that Florida took in 15 to 20 tools or so and that in '08 they thought the benefits might grow to be in the 100,000 range. Is that still a thought and what's the timing of that?

It's not a thought. It's an implementation, and that's what they are doing.

Okay.

We are presently -- Florida Pneumatic is having great success with their Hy-Tech products and their business is growing in the hundreds of thousands of dollars annualized as of now.

Okay. And was that the case already in the quarter ended June, or that's a run rate you got going here in the September quarter?

Yes, yes, I would say it was the run rate in the June quarter, but it's increasing, every -- it seems to be increasing every month, but, again, it's lost in the noise. It's not Earth shattering, but it's definitely rising every quarter -- every month.

And hardware, you rolled out a pretty extensive product line overhaul at Nationwide over the last several quarters you had mentioned. What's your new product status at Woodmark or Pacific Stairs, are they due for a product line overhaul, or are new products not part of the mix?

It's an ongoing, it's an ongoing thing at Woodmark. It's an ongoing thing at all of our businesses actually and we didn't really have a total overhaul at Nationwide, but we added many products and eliminated others and I think we're in the midst of that at Woodmark as well. But again, at Woodmark, we could, we could be doing -- we could be selling anything right now. When it's going to the housing market, it really doesn't matter what we're selling.

Yes.

It just -- there's just no customers.

How quickly would a decline in raw material prices feed back to you?

Six months.

Yes, three to six months, I would say.

Okay. And you mentioned that you've been in the market buying stock and you mentioned the phrase supporting the price. I would hope actually it's not a price support, but it's more that this cheap, accretive deployment, the use of your cash or capital.

It's all of the above.

it's all of the above, yes.

Okay, but how many shares did you buy back either during the quarter or what's the outstanding share count now here in August?

We bought back--.

Roughly 9000 shares, I believe.

Starting in the last month, we'll call it around 9000 shares.

There are limitations to what we can buy, Andrew.

Well, you were in the quiet period, I'm sure.

So to gain that -- but our lawyers and brokers are telling us that we have limitations based upon the average daily volume and there are things -- many, many times that we could only sell like 200 -- buy 200 shares when available, which is really not--

Well, 200 shares a day adds up and your daily volume is rising, because some semi institutional holder blew out of your shares and took it from the 3s into the 2s and there was actually a few days of a ton of volume.

There was, and that, and that gave us the opportunity to buy a larger amount of shares at the end of last week. In the second quarter of this year, we bought 1000 shares and in the third quarter, we bought so far 8900 shares. So that was only because the volume last week, as you mentioned, went up, so it gave us the opportunity to do that. We're limited by the SEC, so we can only buy what we can buy, as you know.

I understand that, but obviously as long as there's sellers in and there actually -- and you have uptick rules and things like that, which means frankly, not to be at these prices, whether it's 2, 3 or 4, it would be not to be picky on the price because you're only given downticks so often that you got to take advantage of the downticks when you get them.

Yes, we're not -- with the kind of stock that we're buying, we're really not supporting the stock. It's more about, as you mentioned, just buying it at value.

Yes, buy and retire. These are great allocation of capital and--?

But of course it's a balancing act with our bank and our own cash needs in these very difficult times.

Yes, yes.. Okay. Let's see here, Pacific Stair, obviously the markets you sell into are in duress. Do you feel that there are some developers that you're selling into that for their own reasons they got to complete projects that they keep building to complete, but then will be stopping after they've hit the wall that there's still risk of incremental drops from some of the customer base at Pacific Stair?

I -- I think that we've seen the other shoe fall at Pacific Stair in terms of the larger accounts. I mean we are -- the customers that we have now, for whatever they are doing, this seems to be their level of activity. That's not to say that activity levels couldn't drop again, but I feel reasonably confident that we are at the bottom there.

Okay. One last question, I'll drop back into the queue. The litigation to obtain permanent possession of the escrowed monies on the deposit, on the sale of the Embassy property, where does that stand in terms of the timing of trial discovery, settlement, arbitration?

There have been summary judgment motions filed by both sides. I don't know that the judge has even ruled on those. I don't know that we even have a trial date yet, so it just goes on and on.

And remind me again, and remind us again of the quantity that's in escrow that would be cash to come onto the balance sheet and income to be recognized if you are successful in your endeavors?

Well, I mean we would -- there's $650,000 in escrow.

Okay.

And, remember, any gain would be in discontinued operations, although cash is cash.

Right.

And also there's an expense -- legal expense going with it and--.

You are not capitalizing that legal expense, you're expensing it, is that correct?

That's correct.

Okay. So you bring in 650 in cash, you have a gain below the line in discontinued ops, if you prevail, and obviously a settlement would result in smaller amounts than that, and a loss would not necessarily result in incremental legal because you've been expensing that?

Correct.

Correct. Yes, we really don't have anything to lose.

Right.

But having said that we feel we are, and our lawyers feel we are 100% in the right in the case and we are proceeding all the way down to the end.

When was, when was the summary judgment motion submitted and when do you feel the court might rule on that?

I would say they were submitted in the last 30 to 60 days. We don't have any idea when they are going to rule.

They are probably on summer schedule now and, who knows, but I'm certainly hoping by the end of the year we can get there. But--.

And in this type of -- and in this particular type of litigation, if you were awarded by the court rather than a settled decision, would interest--?

No.

--on the monies be awarded?

No, there's no interest in real estate law in the State of New York, as I understand. And we're not settling. We feel we're right and we're going to--.

No, I understand. But the monies in escrow, do they get invested and grown and accrue some interest income at all or no?

That interest is minimal, it's very minimal.

But I'm not sure it's in a money market account--.

Very, very -- at these rates today, it's very, very -- again, the 650 is the bigger number.

Presently, that's a higher rate of return than our stock price at P&F, so that's not necessarily bad.

For now.

Yes. Very good. I'll back out into the queue in case there's more questions.

Our next question comes from Timothy Stobaugh, please state your question.

Gentlemen, what is your estimate of the annual public Company costs?

$1 million.

$1 million to be public, that much?

$1 million.

Wow. Okay, thanks.

You're welcome.

I'm not seeing any further questions at this time. I will turn the conference back over to management for closing comments.

I thought that Andrew said he had another question, so let's just make double sure that that's not the case.

Mr. Shapiro, if you have a question, please press star-one. Andrew Shapiro, go ahead with your question.

Oh, I was just going to say we're good. Thank you for the thorough answers, and go in there and buyback more shares.

Okay, thank you.

Thank you, Andrew, and thank you, everybody else, and we are dealing with very difficult times, but there's no consolation, but we're not alone in the battles, but we continue to do what we can to maximize shareholder value. So thank you all for calling and thank you all for your patience and indulgence with us at P&F.

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