P&F Industries Inc (PFIN) 2011 Q3 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 a presentation, followed by a question and answer session. Instructions on that feature will follow later in the program.

I'd now like to turn the call over to Richard Goodman. Please go ahead.

Thank you, Operator. Good morning, and welcome to P&F Industries third quarter 2011 earnings conference call.

With us today from Management, as usual, are Richard Horowitz, Chairman, President and CEO, and Joseph Molino, Chief Operating Officer and Chief Financial Officer.

Before we get started, I'd like to remind you that any forward-looking statements 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 service requirements, and those other risks and uncertainties 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 31st, 2010 and our subsequent filings.

These risks could cause the Company's actual results for future periods 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, Richard. And thank you so much. And good morning, everybody. Thank you, all, for joining us today. I will begin today's call with a brief summary of the Company's results from operations and earnings per share for the three and nine-month periods ended September 30th, 2011 and 2010. Then I will ask Joe Molino to briefly review our cash flow information and provide an update on key events that are affecting the Company. After that, of course, we will have our usual Q&A session.

P&F's revenue from continuing operations was $15,050,000 and $42,667,000, respectively, for the three and nine-month periods ended September 30, 2011 compared to $14,267,000 and $38,734,000, respectively, for the same periods in 2010.

Additionally, for the three and nine-month periods ended September 30, 2011 our income from continuing operations before income taxes was $618,000 and $1,925,000, respectively, compared to income from continuing operations before income taxes of $632,000 and $194,000 for the three and nine-month periods ended September 30, 2010.

It should be noted for each of the three and nine-month periods ended September 30, 2011 taxes applicable to income from continuing operations were $57,000, with no tax provision for the same periods in 2010.

During the three-month period ended September 30, 2011 we received a settlement of approximately $702,000 relating to a dispute over the sale in 2006 of the Embassy Industries real property. As a result, for the three and nine-month periods ended September 30 of this year we are reporting income of $680,000 and $652,000, respectively, from discontinued operations before income taxes, compared to a loss from continuing operations of $49,000 for the three-month period ended September 30, 2010 and an income from discontinued operations of $338,000 for the nine-month period ended September 30th of last year.

For each of the three and nine-month periods ended September 30th, 2011 taxes on P&F discontinued operations were $13,000 with no tax provision for the same period last year.

Revenue generated at our Tools Group during third quarter of 2011 was $11,182,000 compared to $10,609,000 in 2010. For the nine-month period ended September 30, 2011 revenue was $30,361,000 compared to $27,124,000 for the same period last year.

Revenue generated at our Hardware Group, which today consists of only Nationwide Industries, for the three and nine-month periods ended September 30th, 2011 were $3,868,000 and $12,306,000 compared to $3,658,000 last year and $11,610,000 for last year's nine months.

The Company's consolidated gross margin for the three and nine-month periods ended September 30th, 2011 were 35.7% and 37.4%, respectively, compared to 33.2% and 34.7% for the same periods in 2010.

Specifically for the Tools Group third quarter and year-to-date 2011 gross margins were 34.9% and 36.7% compared to 32.5% and 33.5% for the same periods last year.

For the Hardware Group third quarter and year-to-date gross margins also improved, as they reported 38% and 39.2%, respectively, for the three and nine-month periods ended September 30, 2011 compared to 35.2% and 37.3% for the same periods in 2010.

Selling, general and administrative expenses for the three and nine-month periods ended September 30th, 2011 were $4,581,000 and $13,458,000, respectively, compared to $3,845,000 and $12,246,000, respectively, for the three and nine-month periods ended September 30th, 2010.

Interest expense incurred during the third quarter of 2011 was $170,000 compared to $264,000 during the third quarter of 2010. For the nine-month period ended September 30th of this year interest expense was $589,000 compared to $990,000 for the same nine-month period last year.

During the three and nine-month periods ended September 30th, 2011 the Company recorded a $57,000 income tax provision for federal alternative minimum tax and various other state taxes.

The above factors contributed to the Company reporting a net after-tax income for the third quarter of 2011 of $1,228,000 compared to $583,000 during the same period last year and a net after-tax income of $2,507,000 for the nine months ended September 30th, 2011 compared to a net after-tax income of $532,000 for the same nine-month period last year.

Basic earnings per share from continuing operations for the three and nine-month periods ended September 30th, 2011 was $0.16 and $0.52 compared to $0.17 and $0.05, respectively, for the same periods in 2010.

Diluted earnings per share from continuing operations for the three and nine-month periods ended September 30th, 2011 were $0.15 and $0.51 compared to $0.17 and $0.05, respectively, for the same periods in 2010.

Basic earnings per share from discontinued operations for the three and nine-month periods ended September 30th, 2011 were $0.18 and $0.17 compared to a loss of $0.01, and for the three-month period ended September 30th of last year an earnings of $0.09 for the nine-month period ended September 30th of last year.

Diluted earnings per share from discontinued operations for the three and nine-month periods ended September 30th, 2011 were $0.18 and $0.17 compared to a loss of $0.01 for the three-month period ended September 30th last year, and earnings of $0.09 for the same nine-month period of last year.

At this time, I will ask Joe to provide some insight into our cash flow. Joe?

Thanks, Richard.

Capital expenditures during the first nine months of 2011 were $570,000 compared to $154,000 during the same period in 2010. Significant items, significant noncash items affecting our cash flows from continuing operations during the nine-month period ended September 30 were depreciation of $1,204,000 and amortization of other intangible assets of $263,000.

Other material components contributing to net cash provided by operating activities of continuing operations were increases in accounts payable of approximately $1,495,000 and reduction of inventories of approximately $689,000.

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

Thank you, Joe.

In conclusion, I cannot minimize and would like to acknowledge all of our employees and management for doing such an outstanding job in these turbulent times. All of us at P&F always believed in our Company's products and customers, and with hard work and perseverance P&F is getting stronger once again.

That's the end of our report for today, and I'll be happy to answer any questions you may have at this time.

(Operator Instructions)

Our first question is from [William Kitsen]. Your line is open.

Good morning, gentlemen, and congratulations on another profitable quarter here. I just have a couple of questions. Obviously, the stock has gotten killed today. I'm just wondering, you know, your gross margins are up substantially year-over-year. You guys missed expectations in my model. SG&A, also, is up 16% year-over-year, where revenue is up 5.5%. I'm wondering if commissions are playing a factor in there, and what's the disconnect between SG&A and revenue increases?

Yes, well, the -- I'll let Joe go further, but the nine-month numbers on SG&A percentage wise are within 0.1% of each other. So it's really a function of increased revenues and commissions and sales and freight, but I'll let Joe expand on it a little bit.

Yes, I just want to remind everybody that going back to 2009 and 2010 we had reduced salaries, compensation Companywide. And on January 1st of 2011 we reinstated across the entire Corporation to every employee the wage cut that was put in place. So you have that in there which, of course, has nothing to do with the growth in revenue. Taxes related to that. In addition to that, in '09 and '10 we had completely reduced to zero, or effectively zero, the pension contribution. We have begun accruing again for that in this year.

In addition to that, the bonus programs, which had been cut as a result of reduced profits, have been reinstated. I mean they're basically driven by formulas, and to the extent profits go up, bonuses are going to go up quite a bit faster than revenue growth because the growth in profits is up so much.

In addition to that, earlier in the year we had issued some stock options, I believe the very end of December of '10, and I think it was March of 2011, so there's stock option expense under FAS123-R, what used to be 123-R. Travel is up, freight is up.

So all those things contributed. It looks like a disconnect, but what you have to recall is we had so severely reduced compensation and benefits to employees in the critical time, we felt we needed to start giving that back as things began to turn around, and that has been very well received by our employees and improved morale considerably.

Yes, and, again, let me just restate that for the nine months the percentage is within 0.1% of what it was last year, so the percentages, though they look disconnected they're basically the same.

Very well. Thanks, guys. I mean that's a very reasonable answer there. Maybe our numbers I was saying year-over-year, but I know you're going to the nine-month number. And I think it is important to reward your employees, and you guys have exhibited quite an effective turnaround and I hope in the future we can see some better results for shareholders, though. But I appreciate the time, guys. Thanks.

Thank you.

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

Hi, a few questions and then I'll back-out into the queue and let others in, and then come back to me. While your gross margin percent was up from prior year, what caused the gross margin percentage to be down sequentially from last quarter when your revenue and presumably your overhead absorption were up from last quarter, that would normally help to improve your margins?

Yes, Andy, again, a little bit of seasonality here. In Q3 typically but not always is a big push at Sears. Sears has much lower margins than the rest of the operation, especially the industrial tools, which have done very well this year. So if you're comparing Q2 to Q3 that's what's going on there primarily.

Although you've mentioned that promotions were down, but just regular order items from Sears are also lower margin?

Yes, Sears in general is lower margin and the promotional product is even lower still.

Okay, and what is the Thaxton product line at Hy-Tech, and what's going on there? I know you highlighted that it's only 2% of the business, but what industries or areas is it serving that have caused its weakness and what are you guys doing about it?

Again, it is a very small product line. Basically, what it is in layman's terms is they are pipe stoppers for testing the pressure on piping. So, for example, if you've built pipe, this would be an industrial application where there's a tremendous amount of pressure that's going to be put through this series of piping. These are specialized stoppers that are put into the end of the pipe. You apply pressure to the system, make sure there aren't any leaks. That's really it. It's quite -- it's a fairly simple product, a very niche product. We don't -- we do not expend a lot of resources in trying to grow that market. There really isn't much to grow, but we have it, we make a nice margin on it, and for the foreseeable future we don't see any reason to discontinue it.

I'm a little bit at a loss, Andrew, what do you mean what are we doing about it? It's a customer of ours, and whatever we get we fulfill. I mean we don't -- we control our business, we can't control other businesses. Whatever business -- we're not losing any of their business, if that's the question you're asking. It's just their business may be down. We don't know.

Well, one can be a proactive manager and one can be a reactive manager. You highlighted and called out that it was, you know, it didn't do well or it was weak, and we just wanted to see what you guys were doing about it if there is anything to do about it.

Okay, absolutely.

It's absolutely relative, Richard.

Okay, no, I'm just asking -- I understand.

I mean you're assuming the call to be defensive.

Yes, I didn't understand the genesis of the question, that's all, no problem.

All right. So at Florida Pneumatic, when you described an increase in the number of orders at Sears, just wanted to understand the timing of revenue recognition. Do orders equal revenues when you talk about it or is it kind of like backlog guiding toward a future -- the next quarter?

Orders absolutely do not equal revenue. Having said that, there is a fairly quick turnaround in general between orders and revenue across all of our Companies with the likely exception of Sears. Sears tends to give us longer term orders. But really the rest of the business the turnaround time from order to shipment could be four hours.

Okay, so when you say in the press release for the quarter ended September, here we are dated in November, that it should be noted that there was an increase in the number of orders for basic items from this customer, Sears, okay? Were those orders that you referred to fulfilled in the September quarter or are they presumably are going to be December quarter revenue numbers?

With respect to that specific comment, those were fulfilled within the quarter.

Within the quarter.

Sorry about the confusion.

That's all right, that's why I wanted to call it out and get it explained. I'll back-out into the question line. I do have many more, so please come back to me.

Go ahead, Mr. Shapiro, I don't have anyone else in queue.

Okay. Thank you. So what do you attribute the rise in Nationwide's product costs? Is this importing and Dollar, Yen, or foreign currency issues, or what type of commodity price increases are you incurring?

Well, we have had some experience with base metal prices going up. I mean that is a product that doesn't have a lot of technology per se in it, so the material content as a percentage of cost is quite large. There is always pressure dealing with China. Right now on currency. And, frankly, there is tremendous demand throughout China on the factories we work with and compete with, and that has been nudging up costs, as well. So all those things are going on. We've kept them in great control, as you can see the margins are actually a little higher at Nationwide this year than last year but that's mostly because of the mix, not so much because of the holding down the base costs of the product.

Presumably your competitors have the same cost increases. Do you have some pricing power?

We have very little pricing power with respect to Nationwide product. There are several competitors that are U.S. based, so as you can imagine they don't have to deal with anything there other than material costs.

Right. To what extent and what segments is foreign currency a headwind or a tailwind for you?

I can't see an area where it's a tailwind anywhere. If you look at the basic few currencies we deal with, which would be new Taiwan Dollar or Taiwan Dollar, that has been a little bit of a headwind this year, although a little better recently. Now while we don't buy anything in the Chinese local currency, the Renminbi, that is always a factor in the pricing given to us by our Chinese vendors for both Nationwide and Florida Pneumatic. Just as a reminder, Hy-Tech doesn't purchase any great amount of product from Asia, at all.

Okay, and you gave us the depreciation and amortization numbers in aggregate, those were nine-month numbers you gave us?

Yes.

Okay, and there was an increase in your stock based compensation, can you discuss this compensation component? Is it new and who does it go to on the stock based comp?

It is not a new program. Over the years we've given out stock based comp. I would say in the last round it was spread across 20 to 30 employees, and Richard was not included in any of that, if that's what you're alluding to.

Okay, well, trying to understand if this is -- okay. Any nonrecurring costs this quarter?

I can't think of any off the top of my head, but if something comes to me before the end of the call I'll shout out.

You had huge unabsorbed overhead as of last quarter. Is it still around 50%?

Again, we don't really measure it exactly, but, yes, I don't think that's changed dramatically in the last three months.

What's left on your NOLs? And is there a valuation reserve that's still being applied? I know you took in some of the deferred tax assets but is there a valuation reserve still being applied?

Well, let me answer the first question first, there's about a $7 million in federal NOLs, and, yes, we still do have a valuation reserve. I think it's around 80% of that.

Okay, and when will be the next time it's tested for recalibration of that reserve, which would be based on assessments of your sustained profitability?

We do look at it every quarter, however, the full documentation of it is really done at the end of the year.

Okay, regarding the escrow litigation, so we've received the first amount, and on the last conference call it was discussed that the Company was going to pursue the appeal to recover what it believes is accrued interest at the higher statutory rates that was initially denied. What's the status of that appeal, if it was made, and the milestones coming up on that appeal?

The appeal was made, Andrew, but there's nothing new to report on it. But let me remind you that as we've said I believe on the last call, the chances of success here are extremely slim. It's -- I think that we've been told by our attorneys that the Court of Appeals, I think it's the Court of Appeals, only grants something like 5% of these cases to get to be reviewed. So we, you know, it was enough money that we felt it was worth the investment to try to pursue that, but and we are hoping and we think we have a very good case, but and we could hopefully be in that 5% but I don't think we're counting on it very favorably. There's nothing new to report.

So the money to pursue the appeal has already been spent?

Yes, essentially, yes.

And the amount to be received does it continue to accrue in the event it is awarded?

No, no, this is that accrual amount, in effect.

So it's a locked down amount, it doesn't increase --

No.

-- the longer the Court delays the decision?

No, sir. No, sir.

Okay, and what is the amount that you're pursuing, is it around $200,000?

That's correct.

Okay.

Roughly, you know, give or take.

Okay.

Except -- yes, yes, that's roughly what it is.

All right, I have a few more questions but, again, let me give an opportunity to back-out of the queue in the event there's someone waiting.

Okay.

No, go ahead -- actually, yes, I'm going to release it and then hit one again.

Thank you.

Our next question is from William Kitsen. Your line is open.

Hey, guys. Can you just comment quickly on any M&A that's in the pipeline? Are you guys exploring any possible acquisitions in this environment?

Yes, we are in the throes of an M&A search, and but there's nothing new to report in that regard yet. But, absolutely, it's a vigorous and focus of our attention here.

And I'll just remind you that even if we were in discussions with companies or various companies it's been our policy not really to comment on anything until we really have gone very fair along in those things. Because as you can --

I was just interested if you guys were looking.

Yes, we absolutely are.

Without question, diligently.

Great, great. Thanks, guys. That's it.

Thank you. And we'll go back to Mr. Shapiro, your line is open.

A follow-on to this last questioner about the idea of looking for some M&A opportunities, with your increased profits and additional debt pay-down -- I noticed you paid-down the sub debt on the Hy-Tech note now -- the Company's debt to capital ratios and its interest coverage ratios are actually now the lowest it's been in years. At what target level of your debt to capital do you look for other activities in addition to M&A which would now be talking again, it's look I've been here with you for many years, we've had these periods when you're buying back shares and when you can't buy-back shares.

I think we're getting to a point where you can buy-back shares, and with the book value this Company over $8 a share, even tangible book over $6 a share, it's hard to believe that there are a lot of acquisitions out there that would offer a greater rate of return than the Company's own stock at these price levels. Do you agree that this is something that is going to be on the agenda and will be looked at equally with M&A?

Yes, Andrew, that would be something we, the Board, will absolutely consider. Having said that, I think our druthers would be if all things are equal to build the Company up with bigger revenue and all that stuff and profits to go with it. But, yes, the answer to your question is yes. Absent that, we will absolutely look at all uses of cash.

Yes, well, I would hope that the acquisition goal wouldn't be revenue but it would be a return on capital.

Yes, of course.

We, obviously, acquisitions in the past, having been here so long, experienced and seen acquisitions that end up not achieving our goals.

Yes, well said.

So owning our own stock at these book value levels is a, oh, I would say a much more risk-free high rate of return deployment of capital than maybe many M&A projects.

Okay, absolutely, we hear you.

All right. I think that's all the questions I have at this time for -- oh, no, one more, sorry. Director and employee stock purchase window opens when, now that the earnings have been announced? And I have expressed it last quarter and I'm just expressing it again, hopefully there's directors listening or reading the transcripts of this call, that we'd like to see them own some more shares. I know Mr. Brownstein has purchased some, but I don't think I saw any, a [form force] for anyone else?

What's the question there?

Yes, I believe if I'm not mistaken I think the window -- we could ask Rich?

Yes, around --

About two days from now, and I don't know what the other Board members' plans are.

Right.

But, of course, they've heard your comments and they've heard my comments actually and others, and it's their choice of what they're going to do. But I believe that -- I do believe that one other Board member either bought stock or is intending to buy stock because he's mentioned it to me.

Good. Well, as long as -- I would rather the Company buy and retire shares, but if they're not going to be buying shares then I want to be seeing the directors increase their ownership at these price levels. There's just no reason they shouldn't. Thank you.

Thank you, Andrew.

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

Okay, so thank you, all, for being on the call today, and we look forward to continuing to report the results. And we will be on the yearend call in March sometime. Thank you for your time today.

That concludes today's conference. Thank you for your participation, everybody. You may disconnect.

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