P&F Industries Inc (PFIN) 2012 Q1 法說會逐字稿

Good day, everyone. Thank you for holding, and welcome to the quarterly earnings conference call with your host, Richard Goodman. 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, sir.

Thank you, Operator. Good morning, and welcome to P&F Industries' first quarter 2012 earnings conference call. With us today from management as usual are Richard Horowitz, Chairman, President and CEO, and Joseph Molino, COO 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 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, 2011, 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 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, and thank you for giving me the call, and good morning to everybody. Thank you all for joining us this morning. I will begin today's call with a brief summary of the Company's results of operations and earnings per share for the first quarter of this year and how they compare to the same period of 2011. I will then ask Joe Molino to briefly review key cash flow information and provide an update on key events affecting the Company, after which we will move to a Q&A session.

However, before I begin, I wish to remind all of you once again that the purpose of this call is to discuss and review the Company's first quarter results. As such, I ask that we remain on point, keeping any questions you wish to present focused on this point. Thank you in advance for your cooperation.

P&F's revenue during the first quarter of 2012 from continuing operations was $14.317 million compared to $13.453 million in the same period of 2011.

During the first quarter of 2012, revenue generated at our Continental Tool segment was $9.672 million, compared to $9.720 million in the same period of 2011. Revenue generated at our Countrywide Hardware segment, which today consists of only Nationwide Industries, was $4.645 million compared to $3.733 million for 2011.

The Company's consolidated gross margin for the first quarter of 2012 was 39.2% compared to 38.1% in the same quarter in 2011. Specifically, when comparing the first quarter of this year versus last year, the Tools group was able to increase its gross margin to 39.6% from 38.2%. Likewise, the Hardware group's gross margin improved, generating 38.3% during the first quarter of 2012 compared to 37.8% for the first quarter of 2011.

Our selling, general and administrative expenses during the first quarter of this year were $4.731 million, compared to $4.423 million in 2011. As a percentage of total revenue, these expenses in 2011 increased slightly to 33% compared to 32.9% during the same period in 2011.

We continued to reduce our interest expense. We are reporting $142,000 in interest expense incurred during the first quarter of 2012 compared to $221,000 during the same period last year. The decline is due primarily to improved cash flows, which in turn generated lower average balances of funds borrowed.

Taking the above data into consideration, I am pleased to report that our income from continuing operations before income tax was $738,000 for the first quarter of 2012 compared to $479,000 in the same period last year. After giving effect income tax expense of $23,000 in 2012 and no tax expense in the first quarter of last year, our first quarter of 2012 income after taxes from continuing operations was $715,000 compared to $479,000 in 2011.

Basic earnings per share for the first quarter of this year was $0.20 compared to $0.13 last year and diluted earnings per share was $0.19 for the first quarter of this year compared to $0.13 in the same period last year.

At this time, I'd ask, I'll have Joe Molino to provide some insight into our cash flow. Joe?

Thank you, Richard. Capital expenditures during the first quarter of 2012 were $620,000, compared to $183,000 in the same period in 2011. Significant non-cash items affecting our cash flows from continuing operations during the first quarter of 2012 were depreciation and amortization of $428,000, amortization of other intangible assets of $100,000, and amortization of debt issue costs of $68,000. Other significant components contributing to the $7,000 of net cash provided by operating activities of continuing operations were increases in accounts receivable of $1.478 million due in part to greater sales, and a decrease in accrued liabilities of $650,000. Offsetting these factors was a decrease in inventory levels of $692,000.

Additionally, we had received a request recently from a shareholder wanting some detail on Q4 for Nationwide. While that information is available through some calculation, we thought we would just briefly provide it so that everybody would have it at the same time. In Q4 of 2011, Nationwide had total revenue of $2.386 million. That was broken down as follows. Fencing, $1.353 million. Kitchen and bath, $559,000. OEM business of $277,000. And finally, our patio operation generated $197,000 in revenue for Q4.

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

Thank you, Joe. I would be remiss if I didn't acknowledge all of our employees and the management for doing the outstanding, continuing to do the outstanding job that they have been doing during these turbulent times. All of us always believe in our companies, products, and customers, and with our hard work and perseverance, P&F is once again getting stronger.

At this point, any questions anybody has we'll be more than happy to answer. Thank you for your time today.

(Operator Instructions). Andrew Shapiro.

Hi, good morning. I have several questions, I'll ask a few and then get back into the question queue, but please come back to us if you wouldn't mind. So first off, I appreciate you giving us the revenue breakdown for the different lines within the segments this quarter and also catching us up for last quarter. Because the subsequent filing of that 10K didn't clear that up so easily. But what I'm asking for in this first question is, given that this is really our only forum to get answers like this, is there any way that either your 10K and 10Qs can come out before the conference call so we know what is missing and what we need to ask for on the concurrent call? And that the information then is timely rather than having to reach back? Because I have a few questions I need to ask you about the 10K that do relate to the coming year anyway. But is there anyway you guys could consider doing that, putting out the Ks and Qs concurrent or ahead of time from these calls?

Andrew, we certainly can consider it. Obviously there are some time constraints in that the Q is much more -- or the K is a much more comprehensive document which requires multiple levels of additional review. But we understand your question and why it would be better for you to have that and we'll take that under consideration.

At least consider the 10Qs. And even if that proves problematic, the one thing that we would like you to add to your press release then, is if you could put the two segments' operating profit and/or EBITDA figures for each quarter in the press release for the quarter in addition to the gross margins. That would prove to be helpful so we can get into some segment questions timely rather than a quarter later, okay?

In the 10K, you said that Hy-Tech raised prices in 2011. What quarter did that take place in so that we might determine when that Hy-Tech increase anniversary is?

Well, there isn't necessarily a fixed date that that occurs. As I think we've mentioned in the past, Hy-Tech is a follower with respect to price increases generally. We look to the bigger players in the market. While many years they do price increases January 1, sometimes it's July, and we don't necessarily follow the same day or month or even quarter. So I don't know that I can give you an answer to that exactly.

Okay, I was wondering in this last year, I understand what you do in every year, you follow. But in this last year in the 10K, Hy-Tech improved its performance. It was referred to that they improved their performance because of higher prices. Did it all take place in Q4, Q3, Q2? We're just trying to get a feel for that in terms of how long we have the wind at our back.

You know, while I don't remember specifically, Andy, I think it was throughout the year. But I can try to get a little more definition on that, but I don't recall it being all at once.

Okay, fine. Per the recent 10K, you mentioned in previous filings you've been investigating various means to protect you're accounts receivable balance with your large, significant customer. And of course this quarter we saw an increase again in the accounts receivables. I'm not sure if it was from that customer or just due to higher business overall, but can you explain to us what the company's various options might be? And what might be optimal in terms of protecting our accounts receivable balances?

Sure. We're still evaluating those, but in no particular order, we've explored credit insurance, we've explored being able to put the A/R, we've been exploring factoring, we've explored credit default swaps, and various other synthetic creations to attempt to protect ourselves. We have not necessarily settled on any one option and those remain open to us. And I would comment that the growth in A/R in Q1 is not driven by Sears in particular.

Great. So I like and I see the revenue growth that's occurred. Can you share, do you have a sense to what extent this quarter's revenue growth was due to overall market rebounds versus market share gains?

Really hard to say. I'm going to say both. Clearly we have added some new products that we didn't have 12 months ago and product we've added throughout the year has grown in terms of revenue. At the same time, we do know that vis-à-vis our competition, we feel we're doing better. So I really think it's both and I couldn't say one is more than the other. But they're both important.

Andrew, you should note that in three different businesses, there could be three different answers. In our Hy-Tech company, I would say that the growth is more a few customers, a few of our bigger customers having better years. And in Florida Pneumatic it's without question more penetration and market share. And Nationwide I would say the same thing. And with Nationwide I would add new products.

Okay, well that's the kind of color and detail we're looking for. One more for now and I'll back out in the queue, but please come back to us. On the SG&A, it grew year over year at a faster pace than your revenues. And if the 2010 salary rollback was reversed at the beginning of 2011 and thus was anniversaried before this quarter, what accounts for the rise in the SG&A as a percent of sales to be up at a higher rate?

Yeah, it would be three things. While you're absolutely right about the reinstatement of the wage reductions, we have moved back to more of a standard cycle of wage increases. And those took place throughout the year for a majority of the employees of the corporation. So that was a big part of the increase. Second, profits were up quite a bit quarter over quarter which drives higher bonuses quarter over quarter. And then lastly, and this is really a little more of a timing issue, bonuses for 2010 were relatively modest. Having said that, they were paid in the first quarter of 2011. While they were accrued, the FICA for them is not. The bonuses for 2011 were quite substantial. Again, accrued for fully, but not the FICA expenses, so what you're seeing as also part of the change is --

A full year's worth of FICA on the full year bonus?

Exactly. So --

So if all things were the same, Joe, next quarter, we would not see a similar rise like this?

Yeah, you wouldn't have that part of the difference, absolutely, that part would not exist. Now that's not to say the other two things wouldn't -- the wages and the profits. Then also, we've got depreciation being up during the period as well.

Okay, let me back out into the queue. I do have other questions, so please come back to me.

(Operator Instructions). Andrew Shapiro.

Okay, well I'm going to ask a few more if you don't mind. So per your most recent 10K there's a significant debt maturity I guess it is in 2014 in addition to a million maturing at the end of 2012. Is that right?

Yes.

Okay. And given where interest rates are now, are any -- are there any options being pursued now to get ahead of the curve? And to extend the maturities?

Yes, but let me go back. I believe that the bank agreement anniversary, or it terminates in 2013, you may have said 2014.

Yeah, actually I -- it's the end of 2013 though, right?

Yes, the end of 2013. And I know this is an item you always, you have mentioned before. We have had a fair amount of conversations with the banks since our last call. We speak to them regularly and it is our opinion that they are ready, willing and able to extend those agreements when we decide to come back to them. So I think we will have those discussions sooner rather than later and the opportunity does exist for us to extend them at what I think will be favorable terms.

Now do you anticipate -- we had to do this last time to get the financing done during times of severe stress for the company. But in light of the low rates, the fact that we have substantial real estate value, and right now our real estate is part and parcel to what is a shorter term kind of instrument, do you anticipate or is it an option being given serious consideration of getting low interest rate long term financing on the portion tied to the company's real estate?

We will -- yes, that's something that we talked about and they'll be considering at that time.

Andrew, just to remind you, I don't know that that option was really available to us when we struck this bank deal.

Oh, I highly doubt it was then.

But yeah, that was what we had at one point. And to the extent that that would be a favorable structure for us, yeah, we're going to look at that.

Okay, great. In addition, in terms of dealing with some of this cleanup, is there any lending prohibition stopping the early redemption of the 8% sub debt notes from Richard that is still outstanding?

No.

Okay, and if there is no lending prohibition, since technically Richard, you're conflicted on this issue, I think we'd like to ask Mr. Goodman to convey our request that the independent committee of the board evaluate and move to get rid of this high rate debt which is no longer needed as soon as practicable. And I don't see any reason -- is there any reason why getting rid of it early is not in the best interest of the company?

I am conflicted by it, so I guess I can't answer the question.

I'll chime in. I think, Andrew, up until recently, I felt that having that capital in the business was a benefit, but I will agree with you that as time goes on and we pay down the debt, that that is less of a necessity.

I still need the independent directors who are above Richard on that, because you're technically subordinate.

Just giving you my opinion.

And Andrew it's not the first time we've discussed it. We've discussed it --

And it's not a lot of money, but it's just the principal to get it out of the way.

It's something that we've discussed before today, I promise you that. And I can assure you it will be discussed --

Good, well hopefully you'll cut the check and get it done after the annual meeting. Per your 10K that inventory reserve as a percent of inventory spiked to levels unseen in many periods, can you explain what's changed or what's going on with that inventory reserve?

Andrew, I don't have it in front of me. As -- inventory reserve as a percentage of total inventory usually spikes --

I think it was a percentage of gross inventory, something we measure every period, but it spiked and we didn't understand what's going on, if you had any particular annual inventory tests, there was some product line that's gone obsolete, or what's going on

Just give us a minute, we're trying --

I'll go onto the next question.

Yes, why don't you -- we'll come back to that.

Okay, per your 10K tax section, you had a $21 million state net operating loss tax carry forward and only a $2 million federal NOL. How is it that your state NOL is so much larger than the fed?

I'll have -- I can have our corporate controller, Bob, who does the tax work, answer that probably a little more succinctly than myself. Hopefully you can hear him.

Bob from accounting? Sure.

Bob is our corporate controller. Just give us a second and he'll come up to the microphone.

Andrew, the basis is that a lot of the losses were with WM Kaufman and they are in states or they were in states that we are no longer in. So we file a consolidated federal return, but individual state returns, so we have used a lot more of the federal NOL than we have on the state.

So is that $21 million state NOL locked in some state we'll not likely ever be able to recover it? Or it is in I guess New York or Delaware or where was the state return where this was buried?

Yeah, Andrew, I would say it's probably pretty locked. I'm going to guess off the top of my head we're talking about Texas and Virginia and maybe Georgia. And we don't have any operations in those states anymore of any consequence. Not to say that we couldn't in the future, but unless we have operations in those states, it's doubtful we'll be able to use much of those NOLs.

So that's buried unless you were to buy a pretax income flowing business in that state?

Yes, I think that's a fair assumption

But having said that, we are in discussions with our tax, outside tax accountant to see if there are ways that we can utilize more of that NOL.

On a separate query but related, if you have a change of control under federal law, if the utilization of NOLS is capped or after constrained, do you know, and I would hope given the size of this NOL and the small size of our company, does that same rule under a change of control apply to the utilization of state NOLs?

I don't know off the top of my head, but I would guess that they're probably the same rules.

Okay, because if you guys don't know, that would be worthwhile because that would mean that there is an advantage for an acquirer of this company with operations in that state to come in and get your $21 million NOL which could value almost equal to your company's market cap.

Right. And again, in the context of things being completely on the upswing, we are looking at ways to best utilize every last penny of any loss carry forwards.

I appreciate that. Can you guys tell if there's people waiting in the queue? I'll back out again, but I have more questions.

Why don't you just finish, Andrew, while you're at it?

Well if there's someone else that has a question --

We don't show anybody in there.

Very good. Seasonality. It's been a warm winter, it's pretty noticeable in the energy markets and otherwise that it was a warm winter. Has there been any positive benefit from this with respect to some of your businesses that were seasonal and low in the winter months?

In our Nationwide company, yes, the answer is yes. We had a mild winter, so people started buying earlier and they actually used product during the winter where they generally wouldn't. But in our other two companies, the answer would be no.

Okay. Property escrow litigation. You're pursuing $200,000. What's the update or the timeframes regarding your appeal?

Rich?

Hi, Andrew. It's still -- excuse me, the briefs were all submitted to the Court of Appeals. We're waiting for the Court of Appeals to tell us when oral argument will be so we don't know yet. We're guessing based on their not telling us yet, it would be sometime in the late summer, early fall, but we obviously will let you know once we hear anything.

But Andrew, let me remind you once again, let's not take our eye off the ball. We won the case, we won $700,000

Oh, I know.

Just let me finish. We won $700,000. This is something that our attorneys felt, was something that we felt strongly about, we have a reasonable shot at, so obviously we're pursuing it. But the bigger picture and the bigger story is we won the case and we got our money, for sure.

No, I understand that and that's already been reflected in our earnings and it was a contingent asset that we counted on and that's why we own 10% of your company. But the last I looked, $200,000 divided by your share count, and I'm assuming you still have an NOL that's shields some of this, is $0.06 a share, so that's --

Yeah. That's why we're pursuing it diligently. But it's in the hands of the lawyers and --

I'm tracking contingent assets that are not otherwise regularly discussed or itemized or highlighted or disclosed.

Totally understand.

And this being my only forum because of your definition of Reg FD, it's my only forum in which to ask.

Okay, we got it.

Okay. With your book value now decently above $8 a share, your debt to equity ratio continues to drop to levels that are on the low end. What is the status between your board's discussion on buying back stock, potentially starting a very small dividend, or the accretive use of capital with a smart and strategic acquisition? Where do you stand on these things?

Well again, we talk about it at every board meeting and we will do it of course after the annual meeting. But our main focus is still acquisition t have the company grow. That's our main focus and our main desire at this point. If we get to a point, and I don't know what that point is, but it's not years out, but if we get to some point that we find that we cannot make an acquisition to grow the business, then obviously we'll look for other sources and other ways of using the cash in our business. But right now our emphasis is still on growing the business. Is that the question you're asking us?

Well, that leads to the follow on question of, okay, so where -- we're three months down the road further, where's the company's focus in terms of acquisitions that you're coming close on in terms of what lines of business or where are you seeing opportunities? Is the hindrance a price multiple? What's the burden and the hurdle to prevent you from getting a deal in here?

Joe can add onto this because we're both working on this pretty regularly, but we have seen lots of opportunities and we've turned down most of them at this point. We're still pursuing a few of them, but we continue to look. We have a firm helping us look, we have our employees and our presidents looking and giving us companies and leads and stuff like going on. It's a process. If you've been in the business long enough you would know that these things don't come out of the woodwork just like that. It takes time and we are, I feel we're making progress. We can get all the way to third base and we can't get to home sometimes, that can happen also. But we are moving -- we are keeping plenty busy in that arena. Just we want to make the right fit, we want it to look like what we call a direct hit, preferable even a bolt on type of an acquisition is what we're really more desirous of doing right now. But it has to certainly be in our areas, we're not going outside of the areas that we know. Joe, do you want to add anything to that?

Yes. We obviously can't comment on anything specific. There is no impediment I don't think. Multiples aren't necessarily an impediment if we find sophisticated sellers and we're looking at acquisitions that would benefit any of our three operations.

Okay. And this because your unabsorbed overhead is still around the 50% level?

Yep.

Okay. Did your shipping costs increase with more sales or where there efficiencies or more concentrated sales that allowed shipping efficiencies this time?

Shipping costs tend to go up and down with revenue. What we are finding however, a dynamic going on in the marketplace, is customers are demanding smaller, more frequent orders. And we don't get to fully charge for those in relation to necessarily what we can charge on other size orders. And that's just the marketplace is kind of dictating that we give up a little bit in the freight area and so you can't necessarily equate greater sales with the same percentage increase in freight. Sometimes it goes in the other direction unfortunately.

And of course you can't deny the fuel impact, the fuel cost impact.

Yeah, I know everyone usually charge you a rate -- they advertise a rate and then of course there's the obnoxious fuel surcharge.

And then lastly, that rate number is probably one of the most volatile pricing structures of anything we buy on a regular basis. So we do our best. I think we do a great job. In fact we've had outside people come and look at what we've done multiple times and give us pretty high marks for what we've been able to negotiate.

Okay. In Q4 your warranty costs were some of the highest you've had, I think it was around $200,000 for the quarter. Your release mentioned warranty costs are the tailwind for this quarter's results. But in general, what were the warranty costs incurred for the quarter? And are there measures to be taken to being these down even further?

Well warranty is really -- the primary warranty expense is related to Sears. It's a contractual warranty arrangement and that number, that percentage doesn't change. The other warranty around the rest of the company is pretty small. We just don't really replace a lot of product for warranty. So as a percentage of revenue, warranties is almost to the point where we're not even really required to disclose it anymore. So I'm not sure necessarily what's driving your saying that it's gone up dramatically. I didn't have that.

No, it was high in Q4, but again, that is us reverse engineering a year's worth off of three quarters, it's not --

Yes, and also keep in mind, I don't have it in front of me, but if Q4 had a substantial amount of Sears revenue, and that is the big driver of warranty, that is what you're going to see.

No, Sears actually was down in Q4 if you recall. It was one of the things that was a headwind that hurt you over your growth. But it sounds like this is primarily warranties especially on the Craftsman product lines. In August it was announced Sears Craftsman would get sold into Costco. You mentioned at least on the last call none of your tools are finding their way into that channel. Is there a way for P&F to help find out, to lobby or to get into this channel? Or are you dependent solely on Sears moving and selling the Craftsman tool line because they own it, they control it, and they are the ones who source Craftsman tools and then they go out and distribute it?

I'm not as familiar with the Costco customer base as our tool people are. It may be entirely the fact that even as big as Costco is, it's not a very good destination for Sears Craftsman air tools. I mean I don't know that specifically. Having said that, there's really nothing P&F can do that I can think of outside of working with our Florida Pneumatic folks to drive those revenues. But I certainly -- if was a big opportunity lost, I'm pretty sure we'd be hearing about it from our team. And we're working on other opportunities in other areas, but we don't consider that a lost opportunity. Remember, we are really focusing on our industrial business where all the margins are. We have gotten out of the business of chasing very low margin retail. If something falls into our lap, that's great, but we just -- it's been our experience that you don't make a lot of margin, you spend a lot of very talented executive time for the care and feeding of those big multibillion dollar companies for not a lot of return. So please bear in mind that's really not our strategy.

Now you are, it is somewhat that new customers are being created by Sears spinning out their home store and their other store channel, they seem to be moving forward on that spinout. Do you have any greater color or clarity as to that spinout and its impact on your sales and distribution channels in relationship? Because last call you mentioned about 10% maybe of your Craftsman business goes into I guess their home stores. Do you have further color or clarity? Are you going to be dealing with different purchasing people? You'll become a different customer relationship and customer risk?

Yes, ultimately the answer is yes to both of those. We will be dealing with a different organization.

All right. New product development, is there anything in particular on the horizon in any of your three kind of big focus areas on the new product side that's more meaningful than just a bunch of small little new products?

No, Andrew. First of all, I don't know that we'd be at liberty to say if we had some big splash. We are much more about hitting singles and doubles in that area and that has served us well the last few years and that seems to be the strategy that we're going to continue to employ, implore.

Is the new equipment you installed at Hy-Tech performing as expected? And what kind of benefits are you seeing? And is the second big piece of that still slated for July?

Yes, the answer is yes. It's still due in July and our people at Hy-Tech are telling us that the first piece of equipment has exceeded their expectations because of more efficiencies, etc., etc.

Okay. Now with the economy having stabilized, starting a very shallow and slow rebound, and you're at the beginning of the current calendar year, do you have any forecast or guidance with respect to any of the line items on your income statements in terms of ranges that can help us and other analysts who are, and investors, interested just to get a -- I guess a range of where you expect to see the company going, whether it's on the cost side or on the revenue or margin side so that at the end of the year we can tally up what you guys though you'd be doing, determine if you got there and understand why or how you underachieved or overachieved?

We appreciate the question. It's the view of the board along with consultation with outside counsel that we just don't provide guidance. We're just not going to do that.

Okay. I think that's all I have for this quarter right now. Thank you.

(Operator Instructions). Sir, at this time I have no other questions in queue.

Okay, so I'd like to thank you all for being on the call today. And we look forward to speaking to you at the Q2 results. Thank you so much.

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