P&F Industries Inc (PFIN) 2011 Q1 法說會逐字稿

Good day, everyone. Thank you all for holding and welcome to the quarterly earnings conference call with your host, Richard Goodman, P&F's general counsel. Today's conference will begin with the presentation and then a question and answer session. Instructions on that feature will follow later on in the program.

I would now like to turn the call over to Mr. Goodman. Please go ahead.

Thanks, operator. Good morning, and welcome to P&F Industry's first quarter 2011 conference call. As usual, with us today for management are Richard Horowitz, Chairman, President and CEO and Joseph Molino, Chief Operating Officer and CFO.

Before we get started, I'd like to remind you that any forward-looking statements discussed on today's call by our management, including those related to the Company's future performance and outlook, 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, our debt and debt services requirements, and those other risks and entities described in the reports and statements filed by the Company with the SEC, including, among others, as described in our annual report on Form 10-K for the fiscal year ended December 31, 2010 and any subsequent filings.

These risks could cause the Company's actual results for future periods 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 morning, Richard.

Good morning, Richard. Thank you and good morning to everybody, for joining a this first quarter 2011 conference call. I will begin today's call with a brief summary of the Company's results of operations for the three-month period ended March 31 2011, and compare it to 2010's first quarter. I will then briefly review each cash flow information, and then provide an update on key events affecting the Company, after which we will move to our Q&A session.

First, the company's revenue from continuing operations were up $13.453 million for the three-month period ended March 31, 2011, compared to revenue from continuing operations of $11.147 million for the same period in 2010. Revenue for our two groups during the first quarter of 2011 was $9.720 million, compared to $7.820 million in 2010. Revenue for our hardware group, which today only consists of Nationwide Industries, for the same periods was $3.733 million, compared to $3.327 million last year. The company's gross margins for the three-month period ended March 31, 2011 was 38.1%, compared to 35.9% during the same period last year. Specifically for the tools group, first quarter 2011 gross margin was 38.2%, compared to 34.6%, and for the hardware group of first-quarter gross margin was 37.8%, compared to 38.8% in the same period last year.

We incurred $4.423 million of selling G&A expected in the first quarter of this year, compared to $4.317 million in 2010, but more importantly, stated as a percentage of revenue. These expenses were 32.9% and 38.7%, respectively, for the three-month periods ended March 31 2011 and 2010. Interest expense incurred during the first three months of 2011 was $221,000, reflecting a decrease of $168,000, or 43.2%, from the first quarter 2010's amount of $389,000. This decrease was primarily due to greater positive cash flow and a $3 million tax refund we received in May 2010, most of which was applied to reducing our bank debt. The above contributed to the Company's reporting of $479,000 after-tax profit from continuing operations for the first quarter of 2011, compared to a loss of $707,000 during the same period last year.

Basic and diluted earnings per share from continuing operations for the first quarter this year was $0.13 compared to a loss of $0.20 per share for the same period a year ago. And, with a minimum loss of $17,000 from discontinued operations during the first three months of this year, there was no earnings per share to report for this period. However, during the first quarter of last year, we reported basic and diluted loss per share from discontinued operations of $0.48, all emanating from WM Coffman. Capital expenditures during the first three months of 2011 were $183,000, compared to $46,000 in 2010, and significant non-cash items affecting our cash flows from continuing operations during the first three months of 2011 were depreciation of $398,000 and amortization of other intangible assets of $158,000.

Similarly, material components of net cash provided by operating activities of continuing operations were increases in accounts receivable of approximately $1 million, partially offset by reductions in inventory for approximately $700,000. As indicated in our last call several weeks ago, we will be filing a form 10-Q A for the months ended June 30 and September 30, 2010 shortly. These filings will include an open explanatory note and a footnote which will clarify the line items that were affected by deconsolidating WM Coffman on the originally filed forms 10-Q for those periods.

Lastly, I would like to acknowledge and thank all of our employees and management for doing such an outstanding job in our continuing turbulent economic times, and helping our company get to the point where we are today. All of us always believe in our company's products and customers, and with hard work and continued perseverance, P&F is continuing to get stronger, once again. That's the end of our report today, and we will be happy to answer any questions you have at this time.

(Operator Instructions) Our first question is from Andrew Shapiro. Your line is open.

Hello, good morning. A few questions, if I could, and I will back up into the queue for others if there are any out there. First off, Joe, are there any non-- I don't know if Joe is on the call. Are there any nonrecurring costs of note that were on this first quarter's numbers?

No, not that I'm aware of.

Okay. And, as of last quarter, there was still a huge absorbed overhead, and you described that you are around the same 50% of capacity. With further revenue increases, some new business here, where does your current capacity utilization currently stand? Or, are you still around that kind of unabsorbed overhead and ability to take on new business?

Yes, there has been a marginal change in the overhead absorption. I mean, the revenue increases, while they seem dramatic, I don't think they are making a huge impact on our capacity absorption. We have a long to go.

Actually, this revenue level is not yet back to your peak levels at all.

Right.

Can you guys discuss your new product development and your efforts, and any notable successes also, at reducing customer concentration through new business development?

Well, I mean, we have many different projects going on. We have been fairly successful in the last 12 to 18 months in continuing to expand our industrial tool line, primarily in the aerospace manufacturing area for Florida Pneumatic. That continues to be a big success for us. A part of that, again, may have been mentioned on an earlier call, is that one of the big players there, Ingersoll-Rand, seems to be continuing to struggle with meeting demand. So that is helping both Florida Pneumatic and Hy-Tech. Although, in Hy-Tech's case, I don't know that we have targeted particularly the new products for that market itself, although Hy-Tech has other products under development right now. I can't really say what they are specifically, but we certainly do expect to have a couple of new products being introduced in the next couple of quarters with Hy-Tech as well.

Okay. And regarding Hy-Tech, your Release mentioned a major customer was responsible for a sizable amount of the Hy-Tech revenue increase.

Yes.

Is this a one-time purchase, a once-a-year recurring purchase, or a newly quarterly recurring level of activity that this customer has increased up to?

That customer just continues to grow. They were at a fairly low point last year, and even the year before. It is regular business. There is nothing unique about it. They are just in a better position than they had been.

So this is not the Hy-Tech customer that had been talked about on prior conference calls that had put in a real sizable order and then hadn't come back?

No, correct. It is not that customer.

Okay, a different one. How concentrated has this major customer that we were just discussing, grown to now?

How concentrated?

How concentrated has this customer become to Hy-Tech's business?

I don't want to guess.

Are they 10% revenues, are they 20% of revenues?

I'm guessing around 10%.

I will back out. I do have other questions for the other segments and corporate balance sheet and such. But, in case you're (inaudible), I will back out.

Okay. Thank you. Our next question is from Richard Frank. Your line is open.

All right. I was upset about the last conference call, where Scott [Colbert] was berated by the overpaid Calamity Jane of acquisitions. Is the board going to do anything about the excessive compensation or not, of Calamity Jane of acquisitions?

I don't think I even understand the question. I apologize.

Well, the question is, I am not clear why the chairman has allowed to berate a long-term stockholder on a conference call, when the chairman's performance has been dismal.

All right. I guess that's your opinion. I don't know what the question is.

Well, I don't understand how you can defend your long-term business performance, personally.

Mr. Frank, this is an earnings call, and I'm happy to answer any questions you have on the earnings of the company for the first quarter.

Well, wouldn't earnings be much greater if he resigned? You mention cutting costs.

Frank, again, this is an earnings call. I don't know -- if you want to ask about the endings, we are happy to answer.

I will shut up. Thank you.

Thank you. Our next question is from Andrew Shapiro. Your line is open.

Okay. I have some follow-up questions. Regarding Florida Pneumatic, can you discuss further the scope and size of the revenues associated in your Press Release with the initial roll out of products to this new retail partner of, I guess it is Sears, is the major customer. I am not sure who the new retail partner is, but can you further discuss the scope and size of the revenues associated with this rollout?

Andrew, it is about $500,000 approximately. Again, we are unclear on whether that is all line fill, or where that is going to end up. We just don't really have enough data to know how that is going to shake out for the year. But, we do know that it is about $500,000 so far.

So do you think all of the expected initial stocking was completed by the end of the quarter? It sounds like --

No, we don't know. We just don't know the answer. We are not given that level of detail, because we are just really one more level removed from that account than we normally would be with a customer. We just don't have access to that data.

You obviously won't have any visibility yourself through them, it sounds like.

I don't think we are going to have that information. Possibly after a few quarters, we could possibly have a better educated guess, but right now all we know is what we have shipped.

Can you discuss who this new retail partner of Sears is?

No.

No, we cannot.

Okay. On the hardware side, can you help and provide breakdowns of the four parts of Nationwide that you provided in the past, in terms of their revenue, so we can better identify the sub segment of weaknesses here?

(overlapping speakers)

--really small, yes. You are talking about Fencing and OEM, Patio, and Gate.

How do you guys look at it? It used to be Fencing and Gate, Kitchen and Bath, OEM, and Patio. Do you still look at it that way?

Yes, patio is relatively small. But, if you look at the three months and the $3.7 million of total hardware revenue, that is broken down by -- we will call it Fencing at $2.4 million; Kitchen and Bath, about $750,000; OEM, a little under $400,000; and Patio at about $200,000.

Okay. And he mentioned in the release that you are focusing attention on new product development on fence and gate hardware sub segment, because that was strong. What are your thoughts on these other weak sub segment businesses? Is it to wait things out and hope the market comes back, or what other proactive steps are you guys taking to right size or align those sub segment?

Well, the Patio business is clearly a harvest approach. We are relatively small player. It is a commodity product, for the most part. We certainly work our customers hard, but there is not a lot of R&D going into that. But, we make a nice margin on the product we have, and it's a relatively local market for us and easy to manage, so we just ride that out. The OEM business is very driven by new housing starts. And, while not the focus of R&D, we do have a few products that we provide there. Again, most of the brand-name customers we sell to are not doing particularly well right now. It doesn't seem to be a good return on a lot of R&D dollars at the moment.

We spend a fair amount more on kitchen and bath. Because it's more sizable, not as big as fencing, but larger than the other two. Again, our market position there is relatively moderate. We are not, certainly, a dominant player. We have a couple niches we are fairly successful in. But, really, where we have the most opportunity and we can gain the highest margins, is fencing. And, I think it is the right strategy to put most of our research effort into that product, and it certainly paid big dividends in the last 12 months, as we have introduced products at very nice margins to great success. So, I think that's the right strategy and until things change, I don't know that we are going to do anything any differently.

Okay. I don't think you provided it, but can you give us the depreciation and CapEx numbers for the quarter, please?

Andrew, I believe I gave it in my report. The CapEx--

Well, you read it quickly then.

Okay. I apologize. The CapEx for the first month was $183,000, compared to $46,000 last year.

Yes.

And depreciation was $398,000.

Okay. And does that include amortization items as well, or that is --

The amortization was another $158,000?

Yes.

Okay. So, I'm glad I asked for them again, because it raises a question. So, it seems in the last few quarters that CapEx levels were far less than depreciation, and that's understandable with the cash conservatism the company was going through. When do the depreciation expenses start coming down closer to the CapEx levels, Joe, in terms of your forecasting?

Well, what you have to keep in mind, that the big driver in CapEx and depreciation is Hy-Tech. And, on the eve of the collapse of the market, we spent over $1 million-- I think it was even $1.3 million. In fact, we ended up writing some of those checks while we were in the down cycle. Unfortunately, we had commitments. So, we really are not at the point yet where we need to do any major capital expenditures at Hy-Tech, given what we spent just before the fall off, and where we are right now. I would say we are at least a year away, at least between -- before those numbers start to equalize.

Well actually, I was hoping to know when the fall off or lower depreciation numbers would kick into further aid earnings, and break coming down to catch up to the lower CapEx levels. You seem to imply about how long it will be until CapEx goes back.

Yes, I don't have it in front of me, but the depreciation numbers, many of them are driven from the acquisition of Hy-Tech back in '07. And, we probably used something like an average of seven years depreciation on all those millions of dollars of equipment. And we probably -- again, I am fairly certain we used straight line depreciation, so that's going to be a pretty steady depreciation number for a few more years.

Okay. Now, your deferred financing costs balance is down to what level now, and what is its quarterly non-cash expense? And, would you remind me again, you run this expense through SG&A or through interest expense?

SG&A.

Okay. And what is the balance down to, and what is your quarterly non-cash SG&A expense?

It's about $70,000 for the quarter for those types of items.

Okay. And that just goes to the life of the loan, which is another 2.75 years?

Something like that.

Okay. I will back out again, I do have some more questions, but please come back.

We actually have no other questions in queue.

Okay. Well, tell me if I am back on or not?

Yes, you are still live.

Thank you. Joe, what are the remaining liabilities in discontinued ops, it is about $300,000, what does that relate to and when does that come off?

That relates to the disposal of Embassy back in 2005. Embassy had a union pension plan. It was a defined benefit plan.

Okay. That's the long-term payoff then.

Yes. It's just going to be there. It's a 20-year payout.

Okay. More importantly, the big contingent asset. The property sale escrow litigation; the last call you said that appeal was made in February, and more than 30 to 60 days have now passed. So, what is the latest status of this claim, and what has the claim with interest accrued up to?

Are you talking about our real estate thing, Andrew?

Yes.

Well, last week the appellate court affirmed the decision of the trial court. I don't know if you saw that. There hasn't been a release on that yet.

No. I was wondering here, that's a pretty major deal for the company. The trial court ruled your way? And now the appellate court is affirming it?

Andrew, let me finish, please, okay? The appellate court affirmed the decision of the trial court just the end of last week. We are entitled to the $650,000 down payment, plus approximately $50,000 in interest from the beginning. However, the appellate court did not affirm the trial court's decision that we were entitled to the highest statutory interest amount of over $200,000.

Okay.

Yes, we expect that the trial court will enter the judgment within the next few weeks, at which point both parties have 30 days to request another appeal. As I think I told you back then, there was an avenue for another appeal if either party wants it. We do not know what they plan to do, but we are certainly are considering requesting that the courts grant our own appeal relating to that statutory interest amount of $200,000. So, we plan to make a public announcement once any final non-appealable decisions have been made by the court. At this time, that's the update on that. So, it's promising for us.

So you will put that in your queue?

No.

No, we will not put it in the queue because it is a gained contingency and there is still a significant unknown regarding --

Why wouldn't you put this commentary in the litigation section of your queue?

Okay. We will consider that. I'm sitting with Rich Goodman and he says we will consider that.

Yes.

This has been discussed, and it is a gained contingency. The rule of thumb is that you don't disclose gained contingency.

Again, that's the rule of thumb.

The rule of thumb is you also discuss material litigation, though, don't you?

But it's not really-- it doesn't fit into the rules, generally, as we understand the regs.

In the interest of good transparency, it would be a nice thing for you to provide to all shareholders, but nonetheless, we appreciate the update here on a conference call.

Andrew, we always follow the rules, and if we should do it, we are happy to release good information. So, it's not like we don't want to. It is just that we are told what to do, by our accountant.

Again, I remind you after we won the case the first time, we said nothing because we were anticipating an appeal. There is certainly that opportunity for the other side.

Again, that's the update now. It's a good update. We will review it again with our council and the auditors. Whatever they guide us with is what we will do.

Okay. You said on the last call that director and insider stock purchase window opens what is now next week, on May 15, updated after this earnings report. Have the shareholder concerns and desires regarding increased Director and senior management actual stock ownership, beside yourself, of course, have these been clearly communicated recently? Not just what I conveyed directly a year ago at the annual meeting?

Clearly and succinctly communicated, not just by you, and not just this time. It has been a continuing thing and we have done it many times. And the window does open next weekend. One of two board members have, regardless of what you said, have expressed an interest.

Good.

But that's up to them.

If nothing else, I think they would want to have the piece of this property sale escrow litigation award. That is one reason to put it in the queue right there. Another query about these matters. I have read most of the proxy, although I am working my way through it. Unfortunately, I will not be able to be present at your annual meeting to personally share my reviews and have dialogue with the board, like you allowed me to have last year, which I do appreciate. In light of that, once I finish reading the proxy, I will send the lead independent director, Mr. Utay, in care of the board, a letter regarding my comments and desires after reading the proxy. But, one thing I do want to understand from the proxy, if you could, is that there is a proposal on the proxy item number three regarding a section 162 bonus plan, and the language in the proxy seems to imply that this particular bonus plan is targeted for senior executives and it names Joe and yourself. I just want to understand that this bonus plan requires shareholder approval and it is -- relates to senior management compensation plans. It does not relate to, we will call it the common employee of the company. Is that correct?

It would apply to anybody. Anybody who is at that level of compensation.

Okay. And what level of compensation is it targeted to?

It is the 162 M. It is $1 million

I think it is named executive. The way it works, it is simply named executives, and the only named executives in the corporation are Richard and myself.

Okay. It's just you two, and the bonus plan relates to that, and that requires shareholder approval, and that is what is on the ballot as item three.

Correct.

Well very well. In light of that in my publicly stated comments regarding compensation that the board is obviously going to be considering as your employment contract comes to expiration at the end of this year, I am likely to be voting against that particular proposal until I see the board reconstitute that employment contract. If there is material changes to it that I deem favorable, then I would not be opposed to supporting the 162 plan next year, should it have to come up for a revote. But, at this particular meeting, I am likely to be voting against the approval of that plan for the year.

All right. Okay.

I have no further questions at this time. Thank you.

Thank you, Andrew.

Thank you. And I have no further questions in queue.

Okay. Thank you all for spending the time on our call today, and we look forward to speaking to you again when we have our second quarter earnings release in August. Thank you so much.

That does conclude today's conference. Thank you for your participation. Everybody may disconnect.