P&F Industries Inc (PFIN) 2012 Q2 法說會逐字稿

Good day everyone and thank you for holding. And welcome to 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 would now like to turn the call over to Mr. Goodman. Please go ahead.

Thanks, Operator. Good morning and welcome to P&F Industries' second-quarter 2012 earnings conference call. With us today from management are Richard Horowitz, Chairman, President and Chief Executive Officer; and Joseph Molino, Chief Operating Officer and Chief Financial Officer.

Before we get started I would 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 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 Horwitz. Good morning, Richard.

Thank you so much, Richard, 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 both the three and six-month periods ended June 30, 2012, and how they compared to the same period last year.

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 have our usual Q&A session.

However, before I begin I wish to remind you all once again that the purpose of this call is to discuss and review the Company's second-quarter 2012 results, so as such I ask that your questions involve only our second-quarter 2012 results. Thank you for your cooperation.

Firstly, the Company's revenue from continuing operations for the three and six-month periods ended June 30, 2012 were $15.241 million and $29.558 million respectively compared to $14.164 million and $27.617 million respectively for the same periods in 2011.

Revenue from our Tools group during the second quarter of 2012 was $9.673 million compared to $9.459 million in the second quarter of 2011. For the six-month period ended June 30, this year, Tools revenue was $19.345 million compared to $19.179 million for the same period in 2011.

Revenue from the Hardware group, which today consists only of Nationwide Industries, for the three and six-month periods ended June 30, 2012 were $5.568 million and $10.213 million compared to $4.705 million and $8.438 million for the same periods in 2011.

The Company's gross margins for the three and six-month periods ended June 30, 2012 were 37.2% and 38.2% respectively compared to 38.7% and 38.4% for the same periods in 2011. Specifically for the Tools group second-quarter and year-to-date 2012 gross margins were 36.9% and 38.2% respectively compared to 37.4% and 37.8% for the same periods last year.

And for the Hardware group second-quarter and year-to-date gross margins were 37.9% and 38.1% respectively compared to 41.3% and 39.8% respectively for the same periods in 2011.

Our selling and G&A expenses for the three and six-month periods ended June 30, 2012 were $4.705 million and $9.436 million respectively compared to $4.454 million and $8.877 million for the same periods in the prior year.

Stated as a percentage of revenue, SG&A for the three-month period was 30.9% compared to 31.4% during the second quarter of 2011. And for the six-month periods ended June 30, 2012 and 2011, SG&A as a percentage was 31.9% and 32.1% respectively. Primarily the results of improved cash flows, we continued to reduce our interest expense. We are reporting interest expense incurred during the second quarter of this year of $133,000 compared to $198,000 during the second period -- the same period last year. For the six months of 2012 our interest expense was $275,000 compared to $419,000 during the same period last year.

Taking the above data into consideration, I am pleased to report that our income from continuing operations before income taxes for the three and six-month periods this year were $839,000 and $1.577 million respectively compared to $828,000 and $1.307 million respectively for the same periods last year.

After giving effect to income tax expense of $27,000 for the second quarter this year and $50,000 for the first six months of 2012 compared to no tax expense last year, our second-quarter of 2012 income after taxes from continuing operations was $812,000 compared to $828,000 in 2011. Our 2012 year-to-date income after taxes from continuing operations was $1.527 million compared to $1.307 million for the same period in 2011.

Basic earnings per share from continuing operations for the three and six-month periods ended June 30, 2012 were $0.23 and $0.43 respectively compared to $0.23 and $0.36 for the same periods last year.

And, finally, diluted earnings per share from continuing operations for the three and six-month periods ended June 30, 2012 were $0.23 and $0.42 respectively compared to $0.22 and $0.35 for the same periods last year.

At this time I will hand the call over to Joe. Joe.

Thank you, Richard. Capital expenditures during the first six months of 2012 were $820,000 compared to $443,000 in the same period in 2011. Significant non-cash items affecting our cash flows from continuing operations during the first six months of 2012 were depreciation and amortization of $871,000, amortization of other intangible assets of $199,000 and amortization of other assets of $143,000.

Other significant components impacting our cash provided by operating activities of continuing operations of $1.712 million were increases in our accounts receivables of $1.551 million, due primarily to higher sales volume, with an offsetting decrease in inventory levels of $597,000.

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

Thanks, Joe. I would like to also acknowledge all of our employees and management for doing such an outstanding job during this very, very sluggish time in our economy. All of us always believed in our companies, as I said before, our products and our customers, and with the hard work and perseverance of all P&F employees, P&F continues to improve.

That is the end of our report today, and we would be happy to answer any questions anybody may have. Operator.

(Operator Instructions). Andrew Shapiro.

I have got several questions. I will ask a few and then I will get back out in the queue to let others get their questions in. Your current quarter's cost of goods sold includes a $133,000 charge for unpaid import duties going back more than three years. And your release also seems to state there is $167,000 charge in SG&A for the same more than three-year-old items. So can you explain the breakout of this and it is a total of the $300,000 hit that is in this quarter's income statement please?

Sure. The genesis of the charge was an error in a duty rate going back to 2009 that was recently discovered. The $133,000 is the actual underpayment as we have calculated it. That is required to go into SG&A because that is where those duties would have been.

I am sorry I apologize. I apologize. That was required to go into cost of goods sold because that is where those duties would typically go and where they always go.

As far as the penalty goes, the appropriate place for the penalties and interest is in SG&A, and that is in consultation with our outside accountants, so that is why it is split into two.

Okay. And then following up on this, I'm trying to then understand how did this botch up occur with your internal controls for so long, and why won't it occur again in the future?

Well, first of all, in terms of the amount it was a relatively small amount per month, though it is just not going to jump off the page. Second of all, it was just missed. It was a rate that was in place for a number of years, got changed inadvertently, and just did not get picked up until very recently.

And it was approximately 3 or 4 SKUs. And just so you know, we have been -- we have been in correspondence with the U.S. Customs and Border Protection Service relating to this. So there is -- we are cooperating with them in resolving it. And I think, as we said in the release, we have put in some additional controls that this can't happen going forward. And of course we have corrected the duty rates on those three or four SKUs.

So when you say you are cooperating with them, does that mean the investigation and the determination of the fees and penalties and everything is not a closed case yet?

That is correct. The $167,000 is management's, in my view, conservative estimate of what the penalties and interest could be.

So it could be less if they take pity on us.

Typically in these situations our understanding in consultation with several experts that we have engaged is that if you are cooperating with them once the situation is uncovered, yes, they're very reasonable about these sorts of things. But who knows, we're just working with them and continue to try to push through it.

Okay, and so if that is the case, are there provisions in the employment agreements or the possibility for the Board of Directors to claw back on compensation and compensation bonuses that may have been tied to an over-reporting of these issues? I mean, this is -- when you aggregate it, it is not a small charge for a company that this small.

Well, my view of this is that if this expense is booked in 2012, it will be caught up in this -- it will be an adjustment in this year's bonus calculation, because it goes right to profit. So obviously it has been caught up.

Unless there is an exclusion, which I don't think is appropriate or fair to the shareholders if there was an exclusion, it should be taken out. (multiple speakers).

Well, there was no bonus in 2009, so I don't know how you could -- it couldn't be less than a zero bonus, so in some ways there will be an over-adjustment for this to be honest.

Well, I hope the Board is looking into it, because if there is accountability there ought to be so.

To understand what is nonrecurring here, I understand the fines and penalties accrual in SG&A is something that we might consider nonrecurring. To get a handle on the current quarter's cost of goods sold, can you break out of the $133,000 that is in cost of goods sold, what amount related to items and revenue streams prior to this current quarter -- so there is some amount of that $133,000 that is in Q2 and and deserves to be in Q2, but is it $100,000, $110,000, is it $90,000 that relates to Q1 of this year and for the fall more than three years earlier?

It is approximately -- we will say $3,000 a month. And I believe the correction goes through mid-June, so my guess is maybe $10,000 in Q2, $10,000 in Q1. (multiple speakers).

Okay, and then work backwards to --.

Right, exactly.

Okay. One other -- I have more -- but one other question in this margin and cost of goods sold issue here and that I will back out. Last quarter your capacity utilization was only at around 50%. And I am assuming you're still at the same levels.

Yes.

So with such underutilization of capacity can you help reconcile why the gross margins dropped, even when I back out this nonrecurring stuff, which I took a shot at doing and backed out the entire amount -- even when I backed that out, can you reconcile why gross margins dropped and why more of your incremental revenues wouldn't at least fall to the gross profit line since you have such a low capacity utilization and your revenues jumped nicely?

Yes, well, just so we're clear, Nationwide, and I believe this is in the press release, did incur some additional increases in material costs. As you know, much of that product is coming from Southeast Asia. Labor markets are tightening up. The cost of materials are tightening up. And there lots of the cost of that product is material based. It is not an engineered product, as it is in the Tool area, which I believe the Tool area would show an increase in margins over the prior period.

So if you're looking in the total, it is driven by Nationwide's big drop in margin where we are seeing absolutely increased costs. There is no doubt about it.

And the materials, what, this is fencing and metal?

Yes, exactly.

And magnets.

(multiple speakers). Richard makes a very good point.

And other points with the arbor. And, Andrew, too, to ignore the pressures of the economy -- when the economy is breathing heavy like it is in all aspects of the business sectors, pricing for products is a factor in every last business in the world; ours being another one. So nobody can raise prices in this environment, nobody.

Okay.

So whatever we are losing -- you know, I think we're losing very little in the relative scheme of things.

Now, can you discuss Nationwide's need for higher costing airfreight shipment from suppliers, and what will be done differently in the future to improve margins further in this area or is this higher cost method of delivery your new status quo?

No, it is not our new status quo. We frankly were a little surprised by the growth in revenue. We just did not anticipate sales being that robust and we got a little bit behind. We don't try to keep lots of just-in-case inventory around for obvious reasons.

So, no, this should not be the status quo. But if we continue to exceed expectations on revenue, I don't know that we're just going to bring in more inventory and leave it there. I think we would rather play a little bit of catch-up to be honest.

Let me just add (multiple speakers).

(multiple speakers) with higher prices?

Andrew, let me just add onto that a little bit if you don't mind. The China economy is also in a slowdown and they're having their own set of issues, and so all vendors -- and we're finding this again in all of our companies that import from there, they are all slowing down deliveries. They are all -- [Mac] is trying to (inaudible) and maximize their own profitability. And they are not as concerned with our delivery schedules as they are with their own manufacturing schedules.

So it is a factor of the world that they are living in and a factor of the world that we are living in, and we made a value judgment at that time that it was more important for us to spend that $50,000 on airfreight than it was to upset customers that are giving us a lot more business, and we are making the dollars -- dollars, not percentages, dollars -- that we need to that are improving our bottom line. So all that is the factor.

And having said that, we are not looking to throw money out the door by doing this if we don't need to. But when we need to accommodate customers and their needs -- that are good customers, we will do what in selected areas where we need to.

And just to add onto that point, we are picking up some newer customers. We are having very good success at Nationwide. And the last thing we want to do is disappoint brand-new customers with delayed deliveries. So I think it is money well spent for customers that could be with us for years.

I don't know if -- I will just add one other thing -- I don't know if you're -- other companies that you are involved with are doing a lot of importing from China and from other places, but the boats are fewer and further between with the economy and coming across. And there are a multitude of challenges, not only in our own -- in our sales force, but in our being able to get product out of this country. And it's not just us, I am sure you're finding it in your other companies that import as well.

So it is a very big challenge. And it is a balancing act that we have to do and we try to use the best caution and best prudence that we can without giving up too much profits. And with the kind of first six months that Nationwide has been enjoying, it was a very good decision, I think, on our part to do just what we did.

Yes, I guess I don't have the breakouts, because I appreciate your talking about you are looking at dollars rather than margin percentage, but I don't see all that much in a dollar improvement in gross profit dollars.

And then if that is the case, it would seem that there is a balance between reducing your volumes through higher pricing instead of buying all that business that is not as profitable. And, yes, increasing the dollar -- I mean, I think we both have the same goal of having higher gross profit dollars, but when I look at the income statements, I am sorry, I guess I don't see the breakouts where there is a sizable increase in the gross profit dollar. Do you provide that breakout in your 10-Q?

Sure we do.

Yes, the gross profit hard dollars will certainly be in the 10-Q.

Sure, absolutely.

Because I don't think that is in here right now. And you're saying the gross profit dollar out of Nationwide is going to be a meaningful increase.

Yes, absolutely. Absolutely. But I thought it was in -- I believe it is there. It is there.

All right. We will back out in the Q. We will take a look at that. We also have other numbers, so please -- other questions -- so please come back to us.

Sure.

(Operator Instructions). Andrew Shapiro.

All right, well, it is just us today. I will -- have my follow-up questions here. At the end of the year supposedly material reductions in senior compensation were made that would begin showing up in Q1 of this year. However, your explanation on the Q1 conference call of why Q1's SG&A was not lower was that a full-year's 2011 accrued bonuses and payroll taxes got expensed for a larger portion -- got expensed in Q1 of 2012, where you didn't -- when one didn't see that in Q1 of 2011 because there wasn't much activity in 2010 to do that.

So presumably in Q2, this current quarter, we would finally see a meaningful reduction year-over-year. However, Q2's increased compensation isn't even minuscule, it is kind of sizable as you have broken out in your press release. So can you further explain this, Joe or Richard, about year-over-year compensation increases of size like this?

Well, sure. I think what we need to do is take a step back and recall how drastically we reduced reducedcompensation across the board and benefits across the board during what I will call the difficult periods. Really this was the first year of the major return of those compensation levels really across the board, every employee in the Company.

So the improvement in the top line, or the lack of improvement maybe you're talking about on the bottom line or in the SG&A expenses is as a result of that. We just had to return these reductions back to the people. We just felt it was the right thing to do given the improvement in our business.

I'm confused. You imposed and everyone had a 5% pay cut in 2010 and earlier. Okay?

Yes.

All right. In 2011 the 5% pay cut was reversed, and 2011 had the higher compensation to reflect that already.

And in 2012 we now returned to the more appropriate merit increases that we had been doing for years, and have also dramatically increased back to where it used to be almost the 401(k) and pension programs. Those are big dollars, those are very big dollars. And it is masked by how bad things were in 2009. We cut everything to the bone there. And those were large savings that we needed to have to make it through that period.

So we're just bouncing back from that. We are still -- it is just -- it is what it is. We felt it was important to maintain moral and reduce -- keep turnover levels.

So I understood Q1. You understood the nature of my question. Why couldn't you give a little bit of foresight or heads-up that in Q2 we have this coming as well?

And so my query is now when will we see the year-over-year benefits of some of these senior compensation costs reductions falling to the bottom line on approved revenues, assuming you have improved revenues again in the current quarter?

I think it is somewhat dependent on profits. As you know, the senior compensation programs are now driven more variably, so they will move up and down with changes in profit levels.

Not just senior management, but all management in the Company. (multiple speakers).

I guess we're trying to understand if the compensation adjustments were illusory shifting of deck chairs or something that was actually real and meaningful that shareholders, not insider shareholders, would start to enjoy a greater percentage of the upside in the Company as we rebounded here.

Andrew, you're dancing around the campfire. I am only going to tell you that my compensation dropped $300,000 or $325,000 on an annualized basis, and now my compensation is a function of my salary and the profitability of the Company -- so whatever that is that will be -- as well as the rest of the Company where nobody else took a pay cut except for me, obviously. And they got their 5% back raise, which they didn't have last year at this time.

Right.

And they have been getting merit increases along the way, including the 401(k). And it is our judgment that we have to take care of our employees who are working very, very hard to make this Company better and stronger, and that is our judgment. And that is what we are doing. (multiple speakers).

However the numbers show, they show, but we have a couple of hundred employees and so when you increase their salaries and when you increase their benefits, et cetera, et cetera, along the way it is going to probably dwarf my decrease. I don't know how else to say to you.

So far it appears that way, if indeed there isn't some additional catch-up provision that is going into senior executive compensation.

There is nothing (multiple speakers) there is nothing -- no one is hiding behind a cloak year, Andrew. Next question. (multiple speakers)

Well, I don't have any problem with the people getting their (multiple speakers).

Well, I am telling you, Andrew. (multiple speakers). Andrew, I have said it, and when I say it I'm going to stop now. There is nothing else going on other than what we have said to you. Next question please.

Previously we have talked about Hy-Tech raising prices in 2011, and that would anniversary this year. You mentioned in the past you are a price follower of bigger competitors. Can you remind us who those bigger competitors are, and what you are seeing as far as their actions go?

The big competitors would be Ingersoll Rand and Chicago Pneumatic.

Yes, they raised prices. They raise prices, I believe, it is every January 1 -- it might even be and/or July 1. Certainly it is a few percentage points, and we follow them. We don't necessarily match them on every SKU and we don't necessarily match them the instant they do it. So then any benefit there doesn't just jump off the page in one quarter necessarily.

And, again, it is not every single product. So let's be clear that you're just not going to be able to take the topline revenue and multiply it by Ingersoll's price increase and back into what our revenue should do other things being equal. It is just not going to --.

I understand. Previously you mentioned that for Accounts Receivable, especially the main issue being the Accounts Receivable from the Company's largest customer, Sears, and the various covenants you have on your existing lending facilities regarding Sears credit ratings, you said you were exploring credit insurance factoring, CDS', other things. Have you determined that any of these products were attractive from a cost or risk management perspective?

At this point they do not -- we do not see the cost benefit. At this point, given the fact that the Sears Accounts Receivable continues to be current and their business seems to be -- although ultimately a difficult situation not in precipitous decline at the moment, and we have steady orders from them, and it doesn't seem to make a lot of sense to spend a lot of money for this protection at the moment. Now that could change -- that could definitely change, but right now that is where we are.

Okay. And can you update us on where your state and federal net operating loss tax carryforwards stand at the quarter end here since you have got another quarter of some, I guess, profit soaking some of that?

We have about $3 million left in what I will call realistic or usable NOLs.

And why is it -- when you say usable, is there something (multiple speakers)?

Well, we have a lot of NOLs in the state of Virginia, which we no longer operate in, so I don't really use -- I don't consider them as ultimately usable.

Yes. And the property escrow litigation you were pursuing on appeal an incremental 200. You mentioned in the prior calls that you might hear something during this summer. Can you give us a status update on the appellate milestones and the palate process there?

This is Richard Goodman. The oral arguments in this matter are scheduled for October, and then I am told that it could be a month or two after that. We are hoping by the end of Q4 we will have the results of that.

Okay. Now with the Company's book value at around $8 a share, I could understand the Company wanting to buy back stock from -- in the open market here that is available cheaply. I was a little bit dismayed at an offering that was made for Mr. [Stavos'] block, not to retire the block, but that the Company was demanding then that this buyer or prospective buyer of shares in the open market would be prohibited from buying shares for several years. The standstill arrangement was what I am most troubled by.

If his shares were attractive it should mean anyone's shares in the open market ought to be attractive. What is the status of the Company's Board's deliberations over implementing a buyback program here in the open market to acquire and retire shares from shareholders equally and fairly?

I don't know if I'm going to answer your question, Andrew, the way you want to hear it, but I'm going to answer it the best way I can. The Board, every time it meets we discuss the best uses of our funds, and at this time the Board is still at this point -- we have a meeting next month, but at this point is still more committed to growing the Company and looking to buy businesses, et cetera, to grow the business, than it is to buy stock in the open market.

Having said that, that could change next month or the next quarterly Board meeting or whenever it is, but right now that is the collective wisdom of the Board. And I might add Mr. Salvos contacted us, we did not contact him.

Okay.

And he wanted -- I mean, I am not a lawyer, but I will just give you the highlights. He wanted [greenmail]. And so that is what -- he wanted to be purchased over the market. It was to be purchased at the market price we would not have had a standstill.

So it was because there was a premium for which you required him never to come in and buy shares again for three years?

Andrew, I am not going to get into more of a thing about it. What I said as we evaluated the opportunity and began negotiating with him when he brought it up to us, but it didn't result in a mutually acceptable agreement. We do not believe it is appropriate to further discuss these negotiations that led to an agreement, but we are confident the Company's actions were reasonable and appropriate.

And I will just add one thing, that based on the advice of counsel that standstill was reasonable and customary in these situations?

Customary for companies trying to buy away someone who has been critical. I don't begrudge you for a non-disparagement requirement. But I am sharing my views as the Company's second-largest shareholder that I think it is inappropriate for you to put in any purchase transaction, whether you pay a premium or not, which I don't think you should have paid a premium, but any premium or not, I think it is inappropriate for you to add in a clause that bans anyone from coming in and going in the open market and buying your shares. You should want people to buy shares.

Now I understand why Richard doesn't want him to come back and be a shareholder if he had done this deal. But as me as a shareholder, I don't care if it is Tim, Carl Icahn, or someone else. I want people to be able to buy these shares, and you shouldn't put an impediment on them to purchase these shares in the open market. (multiple speakers).

Andrew, Andrew.

And I want that opinion to be known to the Board.

Andrew, your opinion will be known to the Board, but we are not going to discuss this anymore -- to discuss a negotiation that did not lead to an agreement, it is silly to waste the time talking about. We were reasonable and appropriate -- in our opinions, in all our collective wisdom we were. And there's nothing more to say. It didn't result in a transaction. I don't know what else to say. But your feelings will be brought up to the Board. They are listening on the call, and I will bring it up at the Board meeting.

Good. All right, well then in that respect --.

You are entitled to your opinion and it doesn't -- that is all I can say.

Yes, okay. Well, very good. We will -- we are done with our questions today.

Okay, thank you.

(Operator Instructions). At this time there are no further questions in queue.

Okay, so I thank you all for joining us on the call today. And we will be back on the call in the next couple of months with our Q3. Thank you so much.

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