P&F Industries Inc (PFIN) 2009 Q2 法說會逐字稿

Greetings and welcome to the P&F Industries second-quarter 2009 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, Mr. Goodman. You may now begin.

Thank you, operator. Good afternoon and welcome to P&F Industries second- quarter 2009 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 contained herein, 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, the strength of the retail, industrial, housing and other markets in which we operate; the impact of competition, product demand, supply chain pricing and debt service requirements; and those other risks and uncertainties described in the reports and statements filed by the Company with the Securities and Exchange Commission, including among others as described in our annual report on Form 10-K for the fiscal year ended December 31, 2008. These risks could cause the Company's actual results for the 2009 fiscal year and beyond to differ materially from those expressed in any forward-looking statement 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 afternoon, Richard.

Good afternoon, Richard. Thank you so much, everybody, for joining us today on our second-quarter 2009 conference call.

I would like to start off with a brief review of our financial results for this past quarter and for the first half of 2009. We reported revenue of $18,528,000 and $34,090,000 for the three and six-month periods ended June 30, 2009 compared to $25,554,000 and $49,879,000 for the same periods in 2008. The Company reported a loss of $565,000 and $1,171,000 for the three and six-month periods ended June 30, 2009 compared to earnings of $495,000 and $857,000 for the three and six-month periods in the prior year.

I wish to point out that during the three and six-month periods ended June 30 this year, as a result of the adoption of new accounting rules pertaining to business combinations, we recorded $352,000 and $432,000 respectively of expenses incurred in connection with the acquisition of the Coffman Stairs business, which amounts would have been capitalized under the previous rules.

Additionally we recorded expenses of approximately $471,000 in the three-month period ended June 30, 2009 relating to the closeout of certain inventory of our Franklin division and Pacific Stair products operation. The total of these expenses for the three and six-month periods ended June 30, 2009 were $823,000 and $903,000 respectively.

I think you should note that without these charges on the second quarter we would have had a slightly profitable quarter on an ongoing basis in the Company.

We also reported basic and diluted loss per common share for the three and six-month periods ended June 30, 2009 were $0.16 and $0.32 respectively compared to basic earnings per share of $0.14 and $0.24 and diluted earnings per share of $0.13 and $0.23 respectively for the three and six-month periods ended June 30, 2008.

Before I take you to a more detailed look at the operations, I would like to review what each one of our companies does since there has been a slight change. Our Continental Tool group consists of our Hy-Tech and Florida Pneumatic wholly-owned subsidiaries. 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 at prices ranging from $300 to $7000 under the names 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' reps.

Users of Hy-Tech's tools include refineries, chemical plants, power generation facilities, the construction industry, oil and mining companies and heavy industry. Hy-Tech's products are 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 hand tools, primarily for the industrial, retail and automotive markets. 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, Florida Pneumatic imports a line of door and window hardware. Florida Pneumatic's products are sold to distributors and private label customers through in-house sales personnel and manufacturers' representatives.

Countrywide Hardware has changed somewhat since our last quarter. Its operating units are now WM Coffman LLC, which is comprised of the stair parts business formerly within Woodmark, the operations of Pacific Stair products and Coffman Stairs LLC, which we acquired in June of this year. Coffman is engaged in the manufacture and supply of wood and iron stair parts in the US. WM Coffman we believe is now the largest manufacturer and supplier of wood and iron stair parts in the United States.

Nationwide Industries and the kitchen and bath product lines are also part of the Countrywide Hardware group. These business units import hardware products for items such as doors, windows and fences and kitchen and bath hardware and accessories, as well as other general hardware products.

Now let me get to the quarterly performance for each of our units. The key economic driver for our Countrywide segment is new housing starts. Based upon the United States Census Bureau statistics, the annual number of new privately owned housing starts seasonally adjusted for June 2009 is 582,000 units, down 46% from the same figure a year ago. This decrease continues to have a significant impact on the revenue of Countrywide, which decreased to $9,192,000 from $11,067,000 last year when comparing the three-month periods. Stair parts revenue for the three-month period ended June 30, 2009 was $4,461,000, which includes approximately three weeks of revenue generated by the newly acquired assets of Coffman Stairs compared to $5,290,000 reported for the same period in 2008 for our stair parts business.

Revenue at our other hardware businesses are primarily from the sale of fencing and gate hardware, kitchen and bath accessories, OEM products and our line of patio hardware. These product lines are also being affected by the general overall economic sluggishness, as well as a diminishing recreational vehicle and modular home market, the downturn in new home construction and competitive pressures. As such, other hardware revenue during the three-month period ended June 30 was $4,731,000 compared to $5,770,000 during the fiscal year -- fiscal quarter 2008. We expect that the core savings and operational synergies from the formation of WM Coffman to improve its results during the next six to nine months. Further, we are confident that once the number of new housing starts begins to increase, the acquisition of Coffman Stairs, which now provides P&F with captive manufacturing capability and additional distribution capacity to the stair parts industry, will better position us to respond to the service requirements of one and two step distributors, as well as stairs specialists.

We reported second quarter of 2009 revenue of $9,336,000 at our Continental Tool segment compared to $14,487,000 for the same period in 2008. Specifically revenue reported by the Florida Pneumatic subsidiary for the second quarter of 2009 was $6,121,000 compared to $9,415,000 reported for the three-month period ended June 30, 2008. Again, the most significant factor contributing to this revenue decrease was the loss of the Home Depot account, which occurred in mid-2008. Revenue decreased $813,000 and $108,000 respectively from a large customer that is a significant retailer in our Franklin division.

Additionally Florida Pneumatic generated comparative lower revenues through its catalog and OEM product lines of $781,000. Hy-Tech's revenue decreased for the first time since its acquisition in February 2007 to $3,215,000 for the three-month period ended June 30, 2009 compared to $5,037,000 reported in the second quarter of 2008. Until recently the industrial portion of our tools segment had been not materially affected by the sluggish economy.

However, beginning in the first quarter of this year, we began to see indications of a slowdown in this sector as well. However, we believe that performance at our tools group for the remainder of 2009 should remain at or slightly better than current levels, and we are reasonably pleased with the performance of this group given the current economic environment we are all living.

As for gross margins in our segments, gross margins in the tools segment for the three-month period ended June 30, 2009 decreased to 27% from 32.9% for the three-month period ended June 30, 2008. Gross profit for this segment decreased $2,237,000, due primarily to the decrease in revenue, closeout sales and price reductions. Specifically when comparing the three-month periods ended June 30, 2009 and 2008, Florida Pneumatic's gross margin decreased 7.9 percentage points. This decrease in the gross margin combined with reduced revenue closeout sales of certain Franklin products, as well as product mix, resulted in this decrease in Florida Pneumatic's gross profit. Both gross margin and gross profit decreased at Hy-Tech when comparing the three-month periods ended June 30, 2009 and 2008.

The reduction in gross margins combined with a decrease in revenue caused Hy-Tech's gross profit to decrease approximately $742,000. This decrease in gross margin reported this quarter at Hy-Tech is primarily due to a lower overhead absorption, which in turn was due to lower volume through the facility.

During the second quarter of 2009, Hy-Tech has reduced its cost of manufacturing, and we expect to realize the benefits of these costs savings going forward.

Gross margin for our stair parts business for the three-month period ended June 30, 2009, which included approximately one month of the Marion, Virginia facility operations, was 13% compared to a gross margin of 24% in the second quarter of 2008. We believe that as more product that was previously imported is manufactured at our Marion, Virginia facility, our gross margins will improve due to greater capacity utilization.

Another contributing factor to the low gross margin was the cost associated with the inventory consolidation and liquidation at Pacific Stair products during the three-month period ended June 30, 2009, which created a gross deficit of approximately $200,000. Our gross margin at the other hardware product lines for the three-month period ended June 30 decreased to 32.9% during the three-month period ended June 30, 2009 from 37.7% from the same period last year. This decrease is primarily due to product mix, competitive pricing pressures, and under-absorption of warehousing costs.

I would like to just take another moment to discuss our selling and G&A expenses. For the three-month period ended June 30, our SG&A was $5,288,000, reflecting a decrease of $1,414,000 or 21.1% when compared to $6,702,000 for the three-month period last year. Significant components of the decrease include reductions in compensation, payroll taxes and benefits aggregating $794,000 and decreases in depreciation and amortization expenses of $118,000 as the result of the impairment charges taken in 2008. Additionally during the three-month period ended June 30, 2008, we incurred expenses aggregating approximately $219,000, incurred in connection with the wind down of certain product lines at Florida Pneumatic, which were not incurred during the second quarter of 2009.

Offsetting these decreases and in accordance with the newly effective accounting rules pertaining to business combinations, we recorded $352,000 of expenses incurred in connection with the WM Coffman transaction. We intend to continue to examine all operating expenses particularly during these difficult times. However, as a significant portion of these expenses are fixed as a percentage of revenue, SG&A was 28% for the three-month period ended June 30, 2009 compared to 26.2% for the same period last year.

Our net interest expense of $362,000 for the three-month period ended June 30, 2009 decreased from $452,000 incurred for the same period in the prior year, primarily due to reduction in principle and lower interest rates. However, as the result of the WM Coffman transaction, our interest rate expense is expected to increase in future periods as the result of additional bank debt, as well as interest payable on the seller's note payable.

Additionally the interest rate charge on our P&F revolving loan and term note has been raised over 100 basis points by our lenders since the end of the second quarter.

At this point I would like to turn the call over to Joe for some additional financial results. Joe?

Thank you, Richard. As Richard has discussed the second quarter, I would like to focus on the year-to-date figures. Net revenue for the hardware segment for the six-month period ended June 30, 2009 continued to feel the impact of the low number of new homes being constructed compared to prior years, as well as the general sluggishness of the overall economy, both of which are key drivers to the hardware revenue. As such, the hardware segment reported a revenue decrease of $6,497,000 or 29.4% when comparing the six-month period ended June 30, 2009 revenue of $15,609,000 with that reported in the same period last year of $22,106,000. The stair parts revenue continued to decline to $7,803,000 during the six-month period ended June 30, 2009 from $10,754,000 in the same period in the prior year.

We believe it is difficult to predict when the economy, specifically housing starts, will improve. However, as a result of the Woodmark transaction in June discussed previously, which effectively expanded market coverage and penetration, we expect additional stair parts revenue.

During the six-month period ended June 30, 2009, revenue from the other hardware product lines also continued to feel the adverse effects of the sluggish economy, low housing starts and depressed modular and mobile home markets. Its revenue during this period was $7,806,000 compared to $11,352,000 in the same period in the prior year. We believe it is likely that revenue for the remainder of 2009 from our other hardware product lines will be at or slightly below those reported in 2008. However, there can be no assurance this will occur.

Overall conditions in the pneumatic tool market exacerbated by a sluggish economy, the loss of a major customer and inventory reductions occurred throughout our customer base continue to adversely affect net revenue for the tool segments. During the six-month period ended June 30, 2009, net revenue for our tool segment decreased to $18,481,000 from $27,773,000 in the same period a year ago. Until March of this year, many of these factors had not affected performance at Hy-Tech whose revenue for the six-month period ended June 30, 2009 decreased to $7,651,000 from $9,416,000 during the six-month period ended June 30, 2008.

All of the above factors continue to adversely affect revenue at Florida Pneumatic as well. During the latter half of 2008 and early 2009, a number of its major customers reduced or canceled orders.

Key factors contributing to the decrease in hardware segments, year-to-date gross margins include under-absorption of overhead cost throughout the segment, in particular the Pacific Stair facility in Marion, Virginia; inventory write-downs and obsolescence charges during the first six months of 2009 in excess of the same period in 2008; and market-driven price reductions. As such, the gross margin for the hardware segment for the six-month period ended June 30, 2009 was 23.2%, a decrease from 29.7% reported in the same period in '08. Stair parts gross margin for the six months ended June 30, 2009 was 15.9% compared to 24.6% for the same period in the prior year. The gross margin for other hardware for the six-month period ended June 30, 2009 was 26.2% compared to 28.2% for the same period in 2008.

Until the number of new housing starts begins to improve, it is likely that our gross margins in the hardware segment will remain under pressure.

Gross margin and gross profit for the tool segment for the six-month period ended June 30, 2009 decreased 2.0 percentage points and $3,449,000 respectively when comparing the six-month periods ended June 30, 2009 and 2008. Florida Pneumatic during the six-month period ended June 30, 2009 continued to see the ill effects of lower gross margins due to product mix, compounded by closeout sales at Franklin. In 2008 Florida Pneumatic had a greater percentage of industrial sales, along with higher margin products sold to its major retail customer.

Hy-Tech's gross margin and gross profit also reflected a decrease when comparing six-month periods ended June 30, 2009 and 2008. While its gross margins are essentially flat, it is the decrease in the six-month revenue, which is the key factor in the fall-off in its gross margin. Should revenue remain at current levels, it is likely that gross margins when compared to the prior year may decrease as it might be difficult for Hy-Tech to adequately absorb manufacturing overhead.

Our SG&A for the six-month period ended June 30, 2009 aggregated $10,343,000, reflecting a reduction of $2,848,000 or 21.6% from $13,191,000 reported during the same period in the prior year. Key areas that have been reduced when comparing SG&A for the six-month periods ended June 30, 2009 and 2008 include wages, payroll taxes and benefits of $1,436,000, commissions of $444,000, freight of $444,000, advertising of $318,000, depreciation and amortization of $257,000, warranty costs of $190,000 and severance and related costs incurred in connection with the wind down of certain product lines of $219,000 during the three-month period ended June 30, 2008.

In accordance with statement of Financial Accounting Standard 141-R, we expensed approximately $432,000 in connection with the WMC transaction.

Lastly, we increased our use of temporary labor and consultants during the wind down of Woodmark and transition of operations into WM Coffman by $137,000.

During the remainder of 2009, we will likely see increased SG&A as a result of the acquisition of Coffman. We anticipate that our operating expenses will begin to decrease during 2010.

Our net interest for the six-month period ended June 30, 2009 was $671,000, which is lower by $339,000 compared to the same period in the prior year. Interest expense associated with the Woodmark loan increased $197,000 due to lower interest rates, principal reduction through March 31, 2009, and refinancing effective March 31, 2009.

Likewise, interest incurred on the Hy-Tech note decreased $150,000, due in part to principal production and lower average interest rates.

Interest expense in the revolving credit facility increased largely by $6000. As a result of the refinancing that was completed at the end of March, we expect that interest expense for the remainder of 2009 will affect comparative increases in interest expense on the revolving credit facility.

I also wish to remind everyone that at both Woodmark and Hy-Tech, the Woodmark and Hy-Tech notes were replaced with a single smaller note, the difference being added back to revolver. Further, as a result of the WMC transaction, our interest will increase as we have additional bank debt, as well as interest on $3,972,000 promissory note payable to Coffman, the sellers of Coffman.

At June 30, 2009, our borrowings were approximately $34.2 million, reflecting an increase of approximately $3.7 million from the $30.5 million at December 2008. The net year-to-date change is due primarily from the acquisition of Coffman Stairs.

Capital expenditures for the six-month period ended June 30, 2009 were approximately $1.1 million compared to $562,000 for the same period a year ago. We reported depreciation of $472,000 and $895,000 for the three and six-month periods ended June 30, 2009 compared to $429,000 and $856,000 for the same period in the prior year. We also reported amortization of $180,000 for the six-month period as compared to $458,000 for the same six-month period in 2008.

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

Thank you, Joe. I apologize to everybody for giving you so many numbers and throwing everything up against you there. It is a little hard to digest. I can appreciate that.

Before we get to the question-and-answer period, I just wanted to make one more statement addressing the reason for the delay in this conference call. Unfortunately on August 13 last week we publicly announced that we were not in compliance with certain financial covenants with one of our senior lenders, and such bank verbally advised us on August 13 that it did not intend to provide a waiver of such noncompliance. We had expected a waiver based on a dialogue with that bank with both of our banks prior to August 13 and because we have received waivers from these banks in the past and we were not in compliance with certain covenants.

Yesterday afternoon after several further conversations with the bank, the bank proposed that we enter into a waiver in amendment to its credit facility with us, which agreement would among other things conditionally wave the noncompliance and provide for certain changes to the credit facility. We are in discussions with the bank concerning the proposed waiver and amendment, but cannot give assurances that a satisfactory agreement will be entered into and if so when. But we fully intend to work out the final details with the banks in the near future.

So with that statement, I will leave the rest for questions. Thank you.

(Operator Instructions). Andrew Shapiro, Lawndale Capital Management.

I have a few -- I have several questions. I will ask a few and then back out into the question queue for others.

First and foremost, I appreciate your sensitivity to all of the numbers that you and Joe threw at us and you threw at us at a fairly quick pace, so you are probably right now catching your breath. You have the benefit of reading the pre-prepared script. We do not have the benefit of reading the pre-prepared script as we are trying to write down this stuff.

Can I make the request that at a minimum you take the script, if not better yet the transcript of this call, and make it available as an 8-K filing or make it available on your website in some way so that we can catch up and put all the information that you threw at us together in a cogent manner?

Andrew, it is our -- this is a webcast. You can always go back on our website and review this call as often as you would like.

I understand that. I'm making the request is it possible if your pre-prepared script that you guys read through so quickly and I will listen to so quickly on the webcast, if it is possible to make that available through either a filing or on your website? Just a request. That is all.

Well, I mean everything that is basically in here was in the press release.

Well, I wanted the next segue, I don't know (multiple speakers)

Joe, do you want to answer that? Talk louder.

This is George Aronson, VP of Finance. Andrew, the information is on the website generally a day after as the transcript as well. So I will make sure that that transcript is up as quickly as we get it from the hosting service.

Okay. I guess the last few calls we were not sure or were not able to have the transcripts. But if you could put this one, that would be great because there is a lot of new numbers.

And with respect to that press release that you mentioned that you are reading from, I have the press release that was issued today this morning, and we found an error in that press release, and it looks like you guys filed an 8-K that has a different press release that made changes to the cost of sales correcting that line item's error. However, as I'm looking at this 8-K, and I don't know if, Joe, you guys have access to it or if you have access to it, Mr. VP of Finance, but as I look at this 8-K has filed, I'm looking at the three months ended June, and now it has an adjusted cost to sales, it says, $12,817, and it has the gross profit, which has been changed, to be $1 million higher than this morning's press release, and that gross profit is $5,711,000.

We are not in disagreement with that math, but where we have a problem is when you take a look at the next line called SG&A you list it as $5,288,000 SG&A, and then you list an operating loss of $577,000. And the last time I took math, $5,711,000 minus $5,288,000 is a positive number, not a negative number. And obviously with only 3 million shares outstanding, we are dealing with a material difference here of either a loss or a gain. Can you help clarify this glaring (multiple speakers) inconsistency?

George, go ahead. Answer that.

Andrew, the SG&A is -- the operating loss is [$5,077,000] loss. If you add the interest expense to that, you get a loss before taxes of $939,000 --

I'm looking at your press release. I'm looking at your 8-K filing.

Okay. Do you have a copy of the 8-K filing?

Well, someone ought to.

Andrew, I don't have a copy of the 8-K filing in front of me. If you want to come back to that question -- (multiple speakers)

Okay. Well, if you guys go scurry and find that, I've got a lot of other questions, but I'm telling you there is -- I'm really at a loss here. And I've wonder (multiple speakers) if your banks are at a loss as well because of this kind of nonsense.

Andrew, it is not nonsense. We will clarify it for you. Go ahead and ask your next question.

Okay. Can you clarify -- as you were reading through this, your new presentation has spare parts in other hardware as your subsegments of Countrywide Hardware. And they add up in your prior year presentations to the numbers you had provided when you broke things out as Woodmark, Nationwide and Pacific Stair. So they add up and they tie. What I'm trying to understand though is, did a portion of Woodmark or Pacific Stair now find its way into other hardware and then the rest of Pacific Stair and Woodmark goes into what you call stair parts with Coffman?

Yes. Kitchen and bath was part of Woodmark. And so now that is part of (multiple speakers) other, the other.

Okay, that I can understand now. All right. The bank waiver, this bank waiver is what you say conditional and has changes to the facilities, which in a sense implies two separate things. Can you clarify at all at this time what kind of conditions and changes we are likely to see or that they are demanding on you? In addition, it looks like you said you have got another 100 basis point margin hit on your interest expense as a result of things.

It says -- it is basically -- I mean, Joe, you can add what you would like, but it is basically an interest -- it is basically right now an interest rate change is basically what we are talking about.

They are going to bump you because of the waivers and their perceived increased risk?

That is correct. Joe, can you add anything to that? Joe?

Maybe he is looking at the press release and the 8-K correction.

Joe, can you add anything -- can you hear me?

I can hear you. Can you hear me?

Yes, we hear you fine. Did you hear Andrew's question, and can you answer it please?

Andrew, you are exactly right. They simply just -- the perceived risk as a result of doing the waivers, they've bumped the rate up slightly. They did two things actually. The rate went up slightly, and there is a floor now on the LIBOR. So, in other words, LIBOR is probably about, what 0.4 30-day LIBOR. But there is a floor on that now of 1%.

So an extra -- so another extra 0.5% hit to you presently?

It's like -- yeah, it's about 120 basis points in that range.

Okay. And that will narrow as LIBOR rises until that hits the floor?

That is correct.

Okay. You guys made a mention of inventory hit or charge. I wanted to make sure that was through cost of goods sold. And secondly, your phrase was a closeout on Franklin. Can you clarify what that means? Is Franklin itself as a subsegment being closed out?

Yes, let me address that. Any charge to inventory will go through cost of goods sold, first of all, and Franklin, as you probably recall, is part of Florida Pneumatic. And we had -- at one time Home Depot was a customer of Franklin separate and apart from Home Depot as a customer on the tools side. We had a fair amount of Home Depot, what we call Home Depot inventory around at the point where we parted company with them.

Now some of that -- many of those (inaudible) to other customers, but the majority of that volume was driven by Home Depot. And while we attempted to move that for some time after we lost Home Depot, it became evident that we were just not going to be able to move it at fair price. So we had to take some adjustments to get it out, and we did get cash for it. But we had to sell it as a one lump sum and we took a hit.

So Home Depot stuck us with inventory where previously the impression that you guys had led us to believe was that Home Depot was going to take or flush through the inventory and we were not getting stuck with it?

Excuse me, Andrew, if you don't mind me saying so, you're confusing Florida Pneumatic's relationship with Home Depot, which is exactly what happened with the Franklin one, which we never discussed really, because it was not material.

So of the 471, how much of that is the Franklin side?

It is all Franklin; it is all Franklin. But what you're talking about in the past was Florida Pneumatic, and we did not have an issue with Home Depot on Florida Pneumatic inventory whatsoever. Do you understand what I'm trying to say here?

Yes, although I find 471 to be quite a material amount. (multiple speakers). This is a surprise.

It is but we did not expect -- we never -- when we were discussing with you, we never discussed Franklin. We only discussed Florida. That is what we were talking about.

In addition, at that point in time, we were moving some of that product. We were not particularly concerned that we could not move it out. But, frankly, the Franklin product line has been deteriorating, and those sales have been weaker of late in the last 12 months. So it just got to the point where we felt the run-rate was not enough to not justify taking a look at a firm offer for the whole lot of it. So we did.

Okay. And that is what happened is someone bid you for the whole bucket?

All the stuff that we classified as Home Depot, so to speak, yes. Someone bid for the whole lot.

Okay. You had a sizable sequential jump in your accounts receivable and your inventory. Is this all Coffman, or is there some additional issues that have gone into both the A/R and the inventory increase?

Yes, it would be all Coffman. A little bit of history. Generally inventory and A/R do go up in the middle of the year. However, I would say this year in general our inventory has been dropping since December 31 of 2008. We've just gotten very tight on that and kept inventories low. So I think on the inventory side, it is 100% the result of the Coffman acquisition. Accounts Receivable would probably be a little bit of both. It would be some seasonal increase in A/R, as well as the Coffman acquisition.

Okay. I know I have many other questions. I will back out in the queue after this next one, but please come back to us. The status of the real estate lawsuit, the legal costs because the trial I think was held was in the March quarter. When will the judge be back to us following this February trial? It should be soon, shouldn't?

It should be soon. Of course, it is out of our control. It's out of everybody's control. But that is the legal system in this country. But we are expecting an answer by the end of this quarter. Hopefully we will have one. That is what we have been told, but that does not mean we are going to be getting one. That is what we are waiting for.

Alright. I will back out. But please come back to me. I have more questions.

(Operator Instructions). Andrew Shapiro, Lawndale Capital Management.

Alright. I'm not sure if you have got any other people on the call. Can you confirm a few things? First off, the goodwill for Coffman, it is about $7.5 million of goodwill and intangibles that were booked on this transaction. Is that right?

That sounds about right.

Okay. And how much in revenues did Coffman contribute in the three weeks that it was in our numbers?

I'm sorry.

Go ahead, Joe.

I would say approximately about $1 million.

Okay. So the financial statements reflect, of course, the full cost of this and the increased debt, but we only have $1 million in this quarter. And that was about three weeks, so the run-rate of this is $3 million, $4 million a quarter?

Let's see at this point we are shipping -- the numbers have been merged between Woodmark and PSP so that those entities as they exist they don't make sense anymore in terms of Woodmark revenue and PSP revenue. But the run-rate on the business is about $2.5 million in revenue on the stair business a month.

And that is combined with our business or what we acquired?

Everything. That is everything.

Yes, but trying to get a handle on what it is we acquired to compare against the --

Well, what we acquired was a business -- and again, this is in the 8-K somewhere -- but I think they did $27 million in revenue last year. The run-rate probably in the first half of the year was probably close to [$20] million. So I don't know -- I cannot really give you a better number than that.

So about $4 million to $5 million a year in revenue -- I mean excuse me, $4 million to $5 million a quarter in revenue is what was acquired in return for the incremental debt that is on our balance sheet here at June 30?

Of course, the anticipation here of cost reductions to the combination of course -- (multiple speakers)

Yeah, but I wasn't getting at the incremental cash flow that we've gotten for three weeks. When one does an enterprise value calculation, we are using all the debt, but we don't have even a quarter's worth revenue or cash flow to compare it to.

Correct.

Andrew, I'm sorry -- I want to get back -- is that the answer to that question? I want to get back to the other questions --

Yes, so you have got the financial statement issue here?

Yes, so, George, why don't you answer that question for Andrew from before.

Andrew, in the press release where it showed the cost of sales for the three-month period, that number should have been [13 817].

It should have been higher, and the gross profit should be back down to 4,711.

To 4,711, which is in the Form 10-Q.

It is in the 10-Q.

Correct.

Well, the 10-Q is not out. I only know the press release I see in the 8-K, so there was an error in cost of sales disclosed?

That is correct.

The bottom line is correct. The cost of sales should be higher?

Correct.

It was one digit on the -- not that I'm making light -- (multiple speakers)

It is $1 million.

It was $1 million, but it was a typo thing with the digit.

That is fine. I just want to make --

I understand but (multiple speakers)

Don't tie and I only have what I have. (multiple speakers) So now you can go hold someone accountable.

Let's go on on Coffman. So what is it that Coffman brings to us in the sense that why do we -- I'm not saying we don't want to -- but I want to hear from you guys, why do you want to be the biggest stair and hardware maker in the United States?

Well, our sense of it was we already own Woodmark, and Woodmark in the world, the economy and our industry changed dramatically. So now we thought it is a matter of more efficiencies and just we're already in the business. So to make the best return for our stockholders, the way to do it was to go forward to be bigger in the market so that we can get a better return and be a bigger factor in the market. That was our thinking of doing the deal.

Well, an alternative would be that you already were in the business and you could sell Woodmark and get out of the business.

We could have. We would be getting out -- we would have gotten out at a significant loss, and we also liked the business. We think we would have been selling at a low point in the housing world, and we feel that when things come back we will be able to benefit from that in a more geometric way than we would have if we were just with Woodmark. I think it was a very prudent thing for us to do.

Yes, I guess I can appreciate that it is a low point in the business. Unfortunately we bought it at a higher point. And so I appreciate not selling it at the low point of the business.

Also, we had several years of very good profits. Don't forget that. We bought it at a high point, and then we experienced a couple of years of very good numbers. So I mean it was not like it just stopped the day we bought it. We had two years -- (multiple speakers)

No, it was two years, and then it deteriorated, and it raises the question --

Well, we only owned the business four years, Andrew, or maybe five.

Well, it raises the question, we have owned Hy-Tech for two years, and now it is deteriorating. So how much is on our balance sheet and goodwill and intangibles on Hy-Tech?

Joe or George? (multiple speakers) We will get back to you, but I'm going to be very, very specific with you and tell you that their business, Hy-Tech's business is not deteriorating. Hy-Tech's business, when you compare it to last year, any business would be deteriorating. Hy-Tech's business is still a very good, very strong, very good return business even to this day. It's just when you compare it to last year's numbers, which were better than the numbers we bought them at, it has deteriorated. But it is certainly not -- let me say it this way, it is certainly a very good, very good returning business for us, extremely good to this day.

Can I also add that any business at this point in time I would be curious to know what business is doing a lot better than it was in the last three or four or five years. So obviously if we are in the business of making some acquisitions and you are going to just measure them after one or two or three or four years right now, that is what you're going to get. But I don't think that is the proper view. I think you need to take a longer-term view than that.

Well, gentlemen, I have been in this Company and invested for more than a decade. I think I have surpassed and qualified as a long-term view and a long-term shareholder, but I'm looking at $1.60 a share stock price. So I think we are qualified at least to ask the question.

You certainly are, Andrew, and that is fine. But I think Joe's point is that we are not in a vacuum, and we're all living in a world with enormous changes in the business world in the last year to 18 months. And P&F is no different than anybody else in that regard. I'm not saying that we are -- that that is a good thing, but I'm just saying that it would be a whole different set of facts if the world was prospering and everything was doing great and we were not great.

I'm not pushing on the point because we are in the recession and Hy-Tech is down and it was two years ago. I mean I was here for the prior several acquisitions, which seemed to have in only a few years a deterioration each time. We seem to buy it, and we have one or two good years, and then it goes down substantially where the goodwill gets written off, and it is not clear at the end of the day if our allocation of capital has indeed generated a substantial compounded annual long-term return.

Well, I understand what you are saying, but the only other acquisition you could be referring to would be Green Manufacturing. In Green Manufacturing we had that scenario, and we were very fortunate in putting together a game plan to sell that business at basically no loss to our business. We were very, very fortunate to be able to pull that off in the way we sold the business in those three pieces.

So yes, you are correct, but we happen to have gotten hit at that business also with the capital goods industry going down the toilet two years after we bought it. Now they are doing very, very well -- (multiple speakers)

Right. But if you go (inaudible) or Woodmark or Pacific Stair, well, the housing market went down the toilet two years after you bought it.

Well, you know, Andrew, I guess anybody would be a very good Monday morning quarterback. Obviously if we knew that the world was going to be collapsing two years ago or four years ago, we would not have bought Woodmark. If we knew housing was going to be doing this, we would have done that. If we knew that the capital goods market was going to do something two years later, obviously we would not have bought Green. I mean the hindsight of Monday morning quarterbacking is (multiple speakers) it's a good thing, we can do that. But I don't think -- I think we use all the information we had at that time, and we still do -- (multiple speakers)

I'm just concerned that we may have a pattern here of these things, and that maybe our skill set is not the best at deciding which industries to go into and then allocating to because we have a pattern of these issues. I'm concerned and want to know how much goodwill or intangible value might be at risk in our Hy-Tech purchase. (multiple speakers) You guys don't have that off-hand?

I appreciate what you're saying, and do we have that number?

I don't have it available. I will e-mail him or call him --

We will call you back with that number.

Very good. Let me move on then because you did not have anyone else in the queue before, and I will ask some more but then go out in the queue. Can you elaborate on the cost savings that you discussed here and you want to implement in the Hy-Tech area and what we have in this quarter versus what is to come since it sounded as if you already implemented some of the savings in Hy-Tech?

Yeah, Joe, go ahead. You can answer that.

I mean it is really in all areas. We have reduced our production personnel. We have cut wages across the board. We have worked with our suppliers in getting some better pricing. We have cut down on, you know, basically every single line item in the place. There is literally no magic to it.

10%, 9%, 15%? Is there a quantification you guys have done in your board presentation?

A percentage of what?

Revenues, costs. You know, can you give a scope here of what you have yanked out of this thing?

I would say at Hy-Tech it is at least -- it's got to be $0.5 million.

Annualized?

Yes.

Of cost? Great. That is helpful. Is your exposure in Hy-Tech more oil or more gasoline oriented, or it is even across the board?

Do you mean oil versus gas or oil and gas versus everything else?

Well, I think you have always said it was primarily oil and gas. But if you could do what is oil and gas and if that's not as big of a percentage, I don't think I need an oil versus gas breakdown. What is the oil and gas exposure?

Approximately oil and gas together as a percentage of the whole thing might be 25% to 30%.

Okay. And, as you know, the oil and gas markets were really strong around the time you bought this. It got really strong about a year afterwards and then have since weakened but are now strengthening again. What is kind of like the time lag of the oil and gas market impacting your Hy-Tech market?

The time lag would probably only be associated with any inventory that might be in the system somewhere either on-site or a fluid distributor. I don't think there is any particular long time lag otherwise.

And it is oil and gas exploration?

Yes, and maintenance of the facilities.

Okay. And if this is 25%, what are your other big industry exposure areas? This was a move away from somewhat of the housing side. So what would be the other industry exposure areas that are big in Hy-Tech?

You know, heavy industry, heavy production -- excuse me, heavy construction. I don't mean residential construction. Infrastructure construction. General Manufacturing and power generation as separate from oil and gas.

And that would be even solar plants, any kind of turbine work?

Turbine work, solar plants, even coal and oil burning facilities, any sort of infrastructure type activities.

Okay.

Andrew, the goodwill at Hy-Tech is $3.3 million.

Pardon me?

The goodwill at Hy-Tech is $3.3 million.

And what about the intangibles that were also booked in addition to goodwill? Because those would always be subject to impairment or write-down as well.

We will get that for you.

Okay. And then lastly, regarding that same question. Annually one does a test, but it is not necessarily your fiscal year December. When is the annual test done on Hy-Tech?

November 30.

So it would be for your fiscal year-end then, right?

We make it November 30 so that we have that work done well before we need to get the 10-K. Okay.

Okay. I will back out, or do you want me to ask some more questions?

Why don't you finish all your questions, Andrew, and if anybody else wants it, then -- (multiple speakers)

Okay. Coffman, back on Coffman. Can you discuss the integration timeline and quantify the potential synergies on this since -- well, it was three weeks ago before the end of the quarter, but here we are now halfway through the next quarter.

Yes, Joe, why don't you do that?

I mean overall on a run-rate basis, once we are complete, I think you are talking about something closer somewhere between $1.5 million and $2 million in synergies. But it's going to take us some time to get to that, and some of those are also impacted by volume. So to the extent that volume ends up being less than we expected, then those synergies numbers will be smaller.

We are not going to be at that run-rate until next year. It is going to take a few months to get there. We do a little bit each month, but were not going to be at that run-rate until next year sometime.

Absent the revenue growth requirements to get to some of that $1.5 million to $2 million, what are pure cost synergies if any?

Well, we don't need any revenue growth to generate synergies. Let's just be clear. I was talking about if revenue deteriorates. But there is no growth required to get to the $1.5 million to $2 million.

It is just like moving out of one lease combining the facilities --?

Yes, I will give you, the top couple of items would be a), we were importing woods stair parts. Those same wood stair parts can be manufactured in Marion, Virginia at the same hard dollar costs so that the benefit of the difference is all the overhead absorption that that facility would garner. That is the number one savings. The number two savings is the reduction of dual administrative and overhead activities. That is the second biggest one. Then after that --

And then that facility in Texas is a number one.

And there is a whole host --

There is a lot of synergies here.

Yes, we think (multiple speakers)

(multiple speakers) -- million dollars.

I mean $2 million on 3.5 million to 4 million shares outstanding is not small change.

Which is one of the reasons we did this.

Yes, that is one of the reasons we did it.

Okay. Can you discuss the Marion facility and explain the cost benefit of having the manufacturing facility making it ourselves versus the previously, I guess, importation of items?

Well, let's be clear, we still import as did cost in iron stair parts. There is no manufacture of iron stair parts in the United States to my knowledge. If there is, it is insignificant.

Wood stair parts, you know, over time everybody went to China for a while. And the cost in China had gone up over the last few years, and again, this facility out in Virginia is a very low-cost facility. We have a very low monthly rent. We have got very low cost labor although skilled labor and some relatively sophisticated enough equipment. So again, the labor and material cost are quite low.

And I remind you that all the wood of the Chinese imported stair parts is wood that starts in North Carolina or Virginia. It goes to China, is processed and brought back. So that alone gives it a little bit of an advantage by shipping at 100 miles as opposed to shipping it to China and then processing it and shipping it back. Not to mention the savings associated with having lower inventory levels, which would result from that.

So I know the mantra is everything in China must be cheaper, but in this case it is not. It is certainly no better, and we have a lot more control over the process here.

And if it makes sense to make the stair parts in the US, doesn't it make sense to make the tools here in the US?

Tools? Well, as a reminder, all of the Hy-Tech air tools are made in Pittsburgh, and some of the product that Florida Pneumatic sales is purchased from Hy-Tech. So the industrial tools we make a fair amount here in the United States.

Okay. You made mention last quarter of some progress in penetrating large industrial clients. And, of course, this quarter we had the falloff in the overall numbers. Can you give us an update on that particular subsegment, which were these large industrial clients you were making headway in? Did the headway stop? Did it go the other direction because of the economy, or are we still making headway, and it was the other part of the business that weakened?

Well, the one I'm thinking of in particular, which, again, I'm not going to share who it is because it is not done, we are still making progress.

Okay. So there is a potential work there that just has not happened yet?

That is correct.

Okay. On Florida Pneumatic --

But (multiple speakers) to interrupt that, Andrew, I told you that you wanted to know the intangibles, Hy-Tech is $2.7 million.

On top of the $3.3 million? Okay.

Yes.

Alright and we know it is an annual test November?

Yes.

Alright. And can you -- as we are -- let's stick on the building materials. I had two more questions. Can you characterize the competitive landscape, and are there any areas that you see opportunity from weakened players? I'm assuming your acquisition spigot right now is not really wide-open given our relationship with the lenders and all. But are their market share gains to be had? What is happening in the competitive landscape on the building materials subsegment?

Well, again, this was not a marketshare play. We did not put the two companies together because we thought we could gain a lot of share. Although I think that can come as a result of -- we had some customers where we were selling iron but not wood. Coffman had some customers where they were selling wood but not iron. We think we have an opportunity, while not to add a customer name per se, but to get more business out of a particular customer. So I mean there is definitely that opportunity, but it is not the main reason we did this.

How about the rest of the building materials subsegments you have, the competitive landscape? Again, it is an area that is in a trough. It has been hurting for a while. Are there areas you see opportunity from weakened players from the Nationwide or hardware areas?

Yes, I mean there are certainly some people that have gone out of business that Nationwide competes with. But again, there are others that have come into the market as well. I don't know -- nothing comes to mind particularly in terms of any large player that we would have an opportunity with.

Okay. And with housing starts having stabilized, they have certainly not rebounded. Do you feel that your business has stabilized, and all that we have now would be year-over-year declines until the time horizon has anniversaried?

Well, I would like to say the answer to that is yes and I hope so. But it is really being a little clairvoyant. But we seem to think that in the housing area with things -- we seem to have hit a, I would say a plateau, would you say, Joe, a plateau in terms of our WMC group as a whole that we seem to have hit that. We are not going down. We are having some pleasant surprises on the upside. But yet it is still too early. I would not be pounding our chest yet and saying that things are great at all. But certainly to answer your question, I don't think it is getting much worse.

Joe, do you agree with that?

Yes, I would make two comments. One, our revenue track starts fairly closely and has for the last couple of years. And it is clear that the starts are stable if you take a look at the beginning of this year through now and compare that to a year ago. So we think that is not negative. I don't know if again I would characterize it as positive, but it does seem like we have come to the bottom.

And our people are telling us that our customers are all of a sudden in the last couple of weeks talking more, feeling a little more positive about their businesses.

Do you think you have extracted in costs all that you can extract and that it is enough if this trough stays at this level for a while?

Are you asking me -- are you asking us if we are continuing our cost-cutting? Is that what you are asking us, are there more costs to cut?

Are there more costs that one could cut, or are we at the bone? And if we stay at this level of business or we could extract and create greater profits at this level of business outside of the integration and synergies that we've already now discussed on Coffman, but like in the other parts of the business?

We are looking at more cost-cuttings on a very, very regular basis in all of our businesses continuing. I mean, what I would call the low-hanging fruit may be gone, but it is an ongoing thing.

On the tools side, Florida Pneumatic, what are you seeing at your large customer, Sears, in terms of their inventory and promotions and activities? I think you mentioned in the script -- again, it was a lot of script that you went through quickly -- I think you mentioned in the script that there was a portion of lower business from that customer. But I'm trying to get I guess a refresh on that script, and that is issue as well as what you're seeing in terms of the Sears large customer business at Pneumatic.

Sears is not doing as well as last year, but they are doing very well. They are meeting our expectations and our budgets, and we have orders already in-house for their promotions through the end of the year. So we pretty much thing that we know what the year is going to be and we are pleased.

Joe, can you add anything to that?

Yes, what I would add is that we are now on the same page with Sears in terms of what inventory levels they do need to maintain. I think there was a point last year where perhaps they were not keeping enough inventory around. But we have worked with them, and they have a healthy amount of inventory around so they are not losing any revenue from stock-outs.

Okay. Now you guys source and import a bunch of your stuff from Asia, and you have them designed and (inaudible). Are there any opportunities for you to sell your product that is made overseas over there locally in the China and the Asian markets?

Joe, I don't know if you can answer that.

I don't -- not very much of an opportunity. I mean there are players locally that already exist.

Okay.

There is not much of an opportunity. Maybe there may be some opportunity on industrial tools.

But more so in Europe.

All right.

That's right. That is probably a little bit more of our focus.

Now you mentioned the possibility on the last call of about $4 million in inventory reductions by year-end. Sequentially we are up. We've got the Coffman stuff in there. It is kind of hard now for us to discern on our end the progress you have made towards that more leaner efficient inventory extraction. Can you give us -- I mean I'm assuming you are still monitoring and managing it on a subsegment level to know how you are doing on the inventory side outside of the Coffman inventory acquisition.

Well, let me say this. That it has been some time since I was an accountant, but in the cash flow statement -- and George, can correct me if I'm wrong -- typically what is done when you make an acquisition is you bifurcate any change in the balance sheet figures from the old business versus the acquisition -- and George will jump in if I'm not correct. But the inventory reduction that you see here year-to-date 2009 are $4.5 million that I believe is unrelated to the acquisition of WM Coffman.

I don't have the benefit of that statement because I only have the press release -- (multiple speakers)

We will see you tomorrow, and I can confirm that. But I stand by my earlier -- we stand by our earlier statement regarding inventory reduction for the year. It is absolutely on track.

So then your banks ought to be more comfortable with your cash creation, taking in part the issue that you are acquiring other cash flows, etc. with debt. But they should be pleased with that kind of activity. What kind of covenants basically not hid in their expectations did you hit or blow through that caused this hiccup?

Joe, go ahead.

What covenants did we not -- which covenants were violated? Is that your question?

You just reached -- you just cut a new -- you just cut a new loan agreement not all that long ago because it got dragged on and on if you remember. And you cut a new loan agreement, and you had new covenants. And the new covenants had built-in certain expectations and projections, yet here we are this quarter not only blowing a covenant but blowing a covenant in some way that they initially said, hell no, we won't go, and they extracted some more pounds of flesh out of us.

Yes, a couple of things, Andrew. One, some of the acquisition costs that we went through to make the acquisition obviously were one-time costs, and there were some -- a lack of clarity on how much of those expenses ended up in the subsidiary versus the other part of the business. That is one issue. We do not expect to write off as much of the Franklin product as we had predicted earlier in the year. And then lastly, the change in revenue at Hy-Tech was -- came on us fairly quickly. And we had just sort of wrapped up that arrangement, and it was fairly quick shortly after that that the Hy-Tech revenue fell off. So we were not really -- that was not fully expected at that point. So I would have to say those three things, the biggest one being the Hy-Tech change and the covenant that -- the resultant covenant that was not made was senior debt to EBITDA. That would be one.

You put in additional overhead reductions on April 1 (multiple speakers) the ones you announced. Can you confirm this quarterly results reflect the full benefit of those reductions, or are there any lags?

No, if something was put in April 1, then we have full benefit of it.

Yes, but did you have severance or other costs that you had to recognize in this quarter that offset the gain that we would -- the benefit we would see from it in a future quarter?

Yes, a little bit. Not particularly. I don't classify it as very material, but yes, some.

Okay. All right. I will back out into the queue. I don't know if I have any additional questions unless someone else does and I want to follow up on it.

There are no further questions at this time. I would like to turn the floor back over to management for any comments you may have.

We are sure there are no more questions, operator?

There are no further participants in the queue.

Okay. Well, it was a very difficult quarter to try to get a hold of all the numbers. We apologize for that, and we hope to be giving you and expect to be giving you better results as the quarters proceed. Thank you so much for your time and patience and understanding.

Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time, and we thank you for your participation. Have a wonderful day.