P&F Industries Inc (PFIN) 2017 Q4 法說會逐字稿

Good day, and welcome to the 2017 earnings call. Today's conference is being recorded. (Operator Instructions) At this time, I'd like to turn the conference over to Richard Goodman. Please go ahead, sir.

Thank you, operator. Good morning, and welcome to P&F Industries 2017 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'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, exposure to fluctuations in energy prices; debt and debt service requirements;] borrowing and compliance with covenants under our credit facility; disruption in the global capital and credit markets; the strength of the retail economy in the United States and abroad; supply chain disruptions; customer concentration; adverse changes in currency exchange rates; impairment of long-lived assets and goodwill; unforeseen inventory adjustments or changes in purchasing patterns; market acceptance of products; competition; price reductions; interest rates; litigation and insurance; retention of key personnel; acquisition of businesses; regulatory environment; threat of terrorism and related political instability and economic uncertainty; and information technology systems failures and attacks; 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 most recent annual report on Form 10-K, our quarterly reports on Form 10-Q and our other 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.

Thank you so much, Rich, and good morning, everybody. Thank you all for joining us this morning for our 2017 year-ending conference call. I will begin today's call with a brief summary of the company's 2017 results and how this data compared to the prior year.

However, I direct you to our release earlier today for more information. The release presented P&F's balance sheet, statement of operations per share data, along with most of our management's discussion and analysis.

I wish to remind you all that the purpose of this call is to discuss and review the company's 2017 results only. As such, I kindly request that you please confine your questions and comments to the topic at hand.

I will then ask Joe Molino to briefly review key cash flow information, provide an update on any key event affecting the company, after which we will move to our Q&A session.

The company's consolidated financial revenue for 2017 was $58,974,000 compared to $57,276,000 in 2016. Florida Pneumatic's 2017 revenue was $46,471,000 compared to $45,282,000 during 2016. The net improvement over the prior year was due to a $6.2 million increase in aerospace revenue, driven by the Jiffy acquisition in April of 2017, and that was partially offset by a $5 million decline in our retail business.

As previously disclosed, we elected not to renew a sales/service agreement with Sears, which expired September 30 of last year. This decision was the primary factor for $4.3 million year-over-year decline in the Sears' revenue. Also, Industrial/catalog revenue improved 14.9% in 2017 compared to the prior year, with automotive revenue down 4.6%.

Hy-Tech's revenue for 2017 was a $12,503,000 compared to $11,994,000 the prior year. The most significant component to the net increase was the growth of the engineered solutions initiative, which now accounts for more than 8.5% of our total revenue at Hy-Tech, up from 2.3% a year ago.

The company's consolidated gross margin for 2017 was 35.8% compared to 33.1% for 2016. An improvement in Hy-Tech's gross margin was the driving force in this improvement. Key factors contributing to Hy-Tech's improved year-over-year gross margin are: firstly, better product mix; secondly, greater overhead absorption; and lastly, a reduction in charges relating to its computation of an allowance for slow-moving inventory. These changes during 2017 contributed to Hy-Tech's overall gross margin, enabling it to rise to 29.2% from 18.8% in 2016. Florida Pneumatic's 2017 gross margin improved to 37.5% from 36.8%, due mostly to customer and product mix.

Our selling, general and administrative expenses for 2017 was $21,034,000 compared to $19,610,000 in the prior year. The most significant factor causing this increase was the addition of Jiffy's operating expenses of approximately $1,673,000.

Further, during 2017, we incurred approximately $503,000 of M&A activity-related expenses, most of which related to the acquisition of the Jiffy business assets.

Additionally, in 2017, we recorded a charge of $158,000 relating to an increase of the fair value of the contingent consideration payable to the sale of Jiffy, which, of course, is good news for our company.

Lastly, the company's interest expense during 2017 was $168,000, down from 2016's total interest cost of $181,000.

Taking the data above into consideration for 2017, we are reporting a pretax loss of $249,000 from continuing operations compared to a pretax loss from continuing operations of $8,638,000 in 2016.

On an after-tax basis for 2017, we're reporting a net loss from continuing operations of $884,000 compared to a net loss of $5,683,000 in 2016.

And lastly, our 2017 basic and diluted loss per share from continuing operations was $0.25 compared to $1.58 for 2016, which was driven by the sale of Nationwide. During 2017, there were no earnings per share related to discontinued operations, whereas, in 2016, we earned $3.50 per share. In total, for 2017, we are reporting a loss per share of $0.25 compared to net income per share of $1.92 in 2016. Again, as a reminder, I refer you to this morning's press release, which gives more color to all of these numbers.

At this time, Joe Molino will discuss our cash flow.

Thank you, Richard. Capital expenditures during 2017 were $910,000 compared to $1,066,000 during 2016. Significant noncash items affecting our cash flows during 2017 were depreciation and amortization of $1,309,000; amortization of other intangible assets of $800,000; increase in estimated fair value of contingent consideration payable to the seller of business assets of Jiffy of $158,000; stock-based compensation of $118,000; amortization of debt issue cost of $64,000; and deferred income taxes of $912,000, driven primarily from the recent changes in the tax code.

Significant components, which impacted cash provided by operating activities of continuing operations during 2017, were increases of $1,384,000 in accounts receivable; decreases of $1,913,000 in inventories; and a decrease of $1,857,000 in prepaid expenses and other current assets.

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

Thank you, Joe. As always, I would like to acknowledge all of our employees and management for their hard work and devotion and dedication to our company. All of us have always believed in our company's products and customers. And with hard work and perseverance, P&F continues to improve. That's the end of our report today, I'll be happy to answer any questions anybody may have. Operator?

(Operator Instructions) And we'll take our first question from Andrew Shapiro with Lawndale Capital Management.

I got a bunch of questions. I'll ask a few and back out into the queue to let others in here. If I could just get a few questions in here right now on the 2 new...

Andrew, could you please speak up a bit? We can't -- having trouble hearing you. I'm sorry.

I'm sorry. I got a -- can you hear me better now?

Yes.

Yes.

Okay. I have several questions as you know well. I'll ask a few and then I'll back out into the queue here. First off, regarding your 2 new acquisitions this year -- few questions on Jiffy and Pneumatics. So after owning Jiffy now for several months, actually a few quarters, almost a year, what type of consolidation cost synergies do you see, if any, which really weren't on the front burner? And more importantly, you should have a decent amount of visibility now on the main focus, which were revenue expansion synergies that you expect to see. Are you getting any of your legacy P&F products into the customers acquired by Jiffy? Is it going the other way around, where some of the Jiffy products are going into your existing customers that Jiffy didn't have? Can you expand?

Sure. I'll just go in reverse orders -- reverse order. At this point, we don't have any of our legacy P&F product that wasn't aerospace-related going into Jiffy. We do have some -- some of our -- some of the aerospace product we used to produce that was not Jiffy, of course, that is now being sold into Jiffy. I don't know that it's particularly material, but it's certainly positive, and where there are somewhat redundant tools in cases where the lean time is shorter or something that was a legacy product in aerospace, we can satisfy the customer a little sooner than we can with Jiffy because we tend to have inventory of the imported product. Secondly, in terms of other revenue expansion opportunities, we are working on getting some other product into Jiffy, but those require some refinement on the development side, but we're pretty optimistic about some of those opportunities. I don't know if we mentioned prior call, but there is some overlap between the Florida Pneumatic, what I'll call, their legacy sales force and the Jiffy sales force. We've somewhat integrated those, and I would say that's gone incredibly well. The folks at Florida Pneumatic that have taken on the Jiffy line seem to be doing very well with it. And I think we've really increased Jiffy's footprint nationally as a result of that expansion. And in terms of the growth of Jiffy, we're optimistic, and it's exceeding our expectations clearly in terms of orders and revenue.

Okay. And then with respect to Pneumatics, what type of cross-selling might you be able to do with Pneumatics? I don't know if you acquired clients as much as I know you brought in, and it was more of an asset purchase and an engineered product. But are there cross-selling cross synergies regarding legacy and P&F and Jiffy tools and with the Pneumatic's clientele and vice versa?

Yes. I don't know if exactly it's related to having Jiffy, but it certainly didn't hurt. We are talking to a couple of large aerospace customers. Some were Jiffy accounts, some weren't Jiffy accounts. And we're working on some of the R&D work in conjunction with these potential accounts. And we were pretty confident we're going to have some success with the Pneumatic's products in some of the largest aircraft manufacturers in the world.

Okay. And could you provide -- you've done this right now in your last answer, but if there's any more color on your experience and opportunity with Pneumatics that gave you comfort to say in your press release that you're excited about its prospects?

Well, as I said, we're in very, very detailed discussions, serious discussions, with major aircraft manufacturers worldwide regarding the Pneumatic's product. So these people don't take these discussions lightly. And given the level of work we're doing, I'm optimistic that it will lead to something.

But Andrew, I'll just caution you in telling you this is essentially a one-product business, and it's not going to be a revelation to -- it's not going to be a $20 million business. It's going to be a very, very nice product line for us with good profitability. It's not going to -- it's going to definitely help the company a lot, but not going to change.

And you didn't pay an arm and a leg for it either. It's...

We paid close to -- yes, very little.

Yes. Okay. Let me back out. I do have obviously lots of other questions but in case there's others.

I don't know if there's anybody else on the call, Andrew, to ask a question.

I'll hold on, but just check.

We'll just check on (inaudible).

So on the corporate side here, (inaudible) Hy-Tech and Florida. Of the $503,000, I guess, was the M&A nonrecurring expense. What was in Q4?

I don't know that there was a great deal in Q4. Most of that, as the Jiffy deal closed in April, we would have had most of that expense probably in the front half of the year. I mean, there were some -- as you know, we have ongoing M&A activity all the time. There were some other things we were working on throughout the year, but I would have to say very little of that expense would have been Q4.

Right. Because your release is just for the full year, and we don't have the 10-K to back out from the queue yet to break this stuff.

Yes.

What -- was the change in the Jiffy contingent obligation estimate fully a Q4 charge?

Yes. Depending on the number we gave you -- just you know how this works. So at the close of the Jiffy transaction, we needed to estimate what we thought the ultimate contingent consideration would be. And then beyond that, that number gets reduced -- I'll call it, time value is money, although it's a little more complex than that. So as the year progressed, we were certainly expecting that number to grow simply through what I'll call time value is money. Having said that, orders have been such and sales have been such and opportunities have been such, we were very comfortable, and so we were obligated to increase that estimate on a go-forward basis. So the bulk of that difference, I think, was -- a bulk of the change for the year, which is $158,000, was in Q4, when we had a little bit of it in Q3 -- Q2 and Q3, not much. I want to say $10,000, $20,000, but the rest -- bulk of it was Q4.

Okay. And then when you say you're evaluating the development of more advanced technologies in P&F tool platforms, I just want to clarify, are you referring to evaluating other's development, and this is your monitoring what others are doing? Or this is your considering P&F doing more development internally versus maybe purchasing it from others?

It's both. It is absolutely both. Depending on the technology, some things we're capable of doing internally, some things we're better off working with someone else. So the answer to your question is both.

Okay. And then can you update us on the timing of the implementation of the 10b5 buyback plan? How many shares to date, I think you've said, have been acquired so far and the average price paid? Can you provide what you did in the fourth quarter? Or -- and is that number through the end of the year that was in the press release? Or is that through the date of the press release?

Your last question, I don't know the answer to, but we can get an answer to in a minute or 2. Just to remind you, all that will be in the K tomorrow. We are -- we had slated for $25,000 every 90 days, beginning at the end of August last year. And I can tell you, we were -- we maxed that out in the first 6 months. I know we hit our $50,000 target. So we had to take a little bit of a break -- 50,000 share targets, excuse me. And then we needed to take a month break before we can start the third 90-day period, which I believe began at the end of February, and we've been out there since then. And I don't have it in front of me, but we've probably purchased 10,000 shares or something.

That's speculation. We don't know.

Well, we do know. We just -- I just don't have that figure. In tomorrow's K, you'll have an exact calculation. But I can say that we've been out there, we've been aggressive. We did max out for the first 6 months.

Right. I mean, when you say aggressive, the price is cheap and then people want to be foolish enough to do it. What I would then follow-up with is, as you found that the shares are coming in pretty easy to you, will or when would the board consider perhaps replenishing and continuing along the pace you're doing?

We'll consider once it expires. We'll talk about it certainly at our next -- in our next board meeting because it will be closer to that time.

It will depend on a number of things as you know: what our borrowing level is, what our acquisition opportunities are, if we bought a company, if we bought what we're looking at and cash flows, of course. So it means everything is still on the table.

All right. And when you're considering the increase in CapEx for 2018, is there a general payback or hurdle rate you're budgeting for or using?

I mean, I generally like to see a 30% internal rate of return, that's my rule of thumb. I can't say that every transaction -- every expenditure's been over that. But I'd say I can't remember one that hasn't been in a very long time.

Okay. Again, I'll give you guys an opportunity. If there's someone in the queue, I'll back out.

Hold on 1 second. We'll let you know.

(Operator Instructions) Mr. Shapiro, you may proceed.

Let's go into Hy-Tech, if we could. Engineered solutions products are now about 8.5% of annual revenue for the year, as you said in your release. Is there a mix in Q4 even higher and then indicative of what would be likely a greater share of the mix in 2018?

Andrew, I'm going to say probably, but I will tell you this: we are expecting that number to cross over into double digits in '18. So I don't know if that -- I think that answers your question.

Yes, it does. And now, when we call it engineered solutions -- it's a really nice name. Does it imply higher margin?

I don't know if that -- I'm not sure that's why we came up with a name. But I would say, yes, the margins are generally higher because there's a lot of engineering time in this, and customers like to pay for custom work that is specific to them.

And through the process, are you adding a bunch of new customers since it is somewhat new, we'll call it...

Yes, obviously. Yes, clearly, yes.

Oh, absolutely. Yes, it is in fact the whole -- that whole line of products is all new accounts. I mean, every time we get a customer, it's somebody new. It's not -- it's typically not somebody that we were selling a standard impact wrench to that wanted a custom solution. It is usually some sort of product-driven company that's got some pneumatic system that's part of their product or tool or application. And we get in there with our expertise, and depending on the situation, we might make a few components, we may make an entire section of a product line. Or in some cases, we might make an entire product for them. It's just -- it obviously depends.

And through this growth -- maybe it's too soon, I don't know, are there any particular industry subsegments that are noticeably gaining traction for you in this area?

Not really. I mean, we're doing it in so many different areas, and we're open to just about any area where they can use our talent. So I wouldn't say there's any one...

Yes, it's pretty broad based, Andrew.

Okay. Now had Hy-Tech had much OEM business in the past, and will these OEM products compete with Hy-Tech internal branded tools? Or it's in a different area?

No, they will not. These engineered solutions products won't compete with anything else we're doing.

Oh, so the engineered solutions products are what you also separately referred to in the release as your OEM business?

Yes. We used those terms interchangeably in this instance. Yes, if -- just so we're clear -- I understand why there's some confusion because in the past -- and I think we probably even still have a few products that are branded with other company's brands that's not a very big part of our business anymore. But here, again, it's not as simple as it's a tool with somebody else's name on it, it's a little more complex than that.

Okay. And then like Jiffy was in aerospace, are there small fragmented competitors in these niches that might prove to be good acquisitions for Hy-Tech? Or are the competitors, the big players, who one day view P&F as its own niche acquisition?

I don't know the answer to that. I think it's possible that it's both or either. Nothing really -- but that's not really on our mind.

Well, certainly, you guys would be a niche acquisition for one of the big boys.

And I guess so, depending on what the product is.

Yes. But I didn't know if there were other small fragmented competitors you would -- you could...

[:p id="294446" name="Richard Horowitz" type="E" />

Yes, there are...

There are and we -- when those are presented to us, we look at them. It obviously depends on the opportunity. Like you said, if we're just making an air motor that's part of a big system, I'd say that's probably not going to be an acquisition for us, but if we're making something that's either major part of a tool or something we could push through our distribution channel, that might be an opportunity. So not all of them, but there's certainly a few situations where that is the case.

On a quarter or 2 -- actually 2 quarters back, I think you moved back to overtime for pretty much the entire group of operators at Hy-Tech and -- which was a very good sign. It showed up in your Q2 results. Has the rate of orders continued? And are you now moved into a multiple shift operation that you mentioned on the last call you were working towards?

I was going to say the rate of orders has maintained itself. It's not gotten bigger. So that's good news. And I think the issue with going to another shift is getting manpower for the most part. So we've been staying -- we've been talking about perhaps going to modify the second shift, but people is the issue, employment.

So than are you finding that it's -- you got to go with the overtime versus a standard rate, but a higher standard rate?

Unfortunately, yes.

Yes. But I would also say that we are finding other ways to increase capacity. We're very close to being up and running with a new MRP system, which was frankly decades overdue. And we have other, what I'll call, manufacturing support personnel that we brought on board that have some level of sophistication that are also improving throughput. So we're finding other ways to increase capacity without just volume and capital. Having said that, we still, I think, given the opportunity, if we were to be able to find a solid supervisor-level person that will work a night shift, I think that would trip us over into bringing on a few people for the night. But right now we're doing okay without that. But we see that in the future.

I guess it's a nice problem to have versus where we were many years ago.

Yes, it's a very nice problem.

Yes. Not even many years ago. Actually very, very recent memory.

Now you also talked about how Hy-Tech was recently developing a new marketing strategy intended to re-energize the gear and hydraulics stopper business. Can you give more color on that strategy now and its success or failure?

Well, I think the strategy was being a little more in tune with the market and hooking up with some much more sophisticated and well-connected distributors, which we have absolutely done and showcasing our capabilities. But again, that is a very small part of our business, and while it's something we're working on, I don't know how much that's really going to move the needle in total. Very high margins, but it's not a million dollar business, nor will it ever be.

Before I move over to Florida Pneumatic questions, let me give you an opportunity to check your queue.

Operator?

We have none at this time. (Operator Instructions)

Florida Pneumatic. Is the new product line for Home Depot expected to generate similar or higher levels of revenues in the present legacy line of tools?

We do not think it will be significantly higher. We like the new look. And we have been pleasantly surprised in the past when the line has been refreshed, that sales have increased beyond the legacy product. And I'm not saying that couldn't happen, but we're not anticipating that.

And how is the phase-in and phase-out contemplated to work?

I don't have a perfect answer, but I can say that we're going to begin shipping...

Into the summer.

Yes, Q3, call it, July. And it's somewhat dependent on their internal schedule. And again, I'm just guessing. But based on prior line refreshments, if that's the right word, it's taken a couple of months to get all the product out there. Sometimes they do a running change, sometimes they don't. We don't really know. But I would say a safe answer would be throughout Q3.

Okay. And what was Home Depot's decision to reduce the number of SKUs that they want to offer related to? Is it giving share to a competitor? Or just downsizing of your segment overall? Or some other reason?

I don't think it was downsizing. I think it was bifurcating. I believe, if I'm not mistaken, they've created a small entry line of tool, and that's where a couple of the tools came from. Frankly, they were probably some of the smaller revenue tools for us. So it wasn't a dramatic impact. And we're working with them. And it wasn't really that big of a deal, frankly.

Okay. And for this -- for the new product you referenced, is the lower margin -- is a lower margin the result of higher cost inputs or lower ASP?

The cost of the inputs hasn't changed dramatically. So it was the latter.

Okay. And when and how will the co-op marketing expenses flow through the income statement? Is it through gross margin? Is it SG&A? And will they -- or will they be expensed or capitalized and amortized?

We don't know the answer to that yet. The answer to that is somewhat varied in A 606 (sic) [ASC 606] which is a new revenue recognition policy. So we're working with our consultants on how that's going to go. But as soon as we have an answer, we'll give it to you.

Okay. And to what do you attribute the increase in Industrial/catalog revenue? And is it a onetime bump or something more sustainable?

No. The market is having a little bit of a resurgence right now. It's not a onetime bump. We're continuing to enjoy it as of now. No idea about the future, but everything seems to be good in that regard.

Okay. And has Q1 -- which is almost over, but you've at least seen January and February, has it already seen the automotive distributors who rebalanced in 2017 either returned to or moved towards a more normal levels?

Yes.

Yes.

Good. AIRCAT. On the previous call, you spoke of a suite of tools targeted towards bodywork, and they had just launched -- you hadn't gotten the inventory in, you didn't really have much feedback on them yet, but you'd have more to talk about on the next call, which is this call. Can you give us an update on that progress and what the feedback's been?

I mean, I think the feedback has been positive. Just to remind you that market is a fraction of the market for maintenance work. So yes, we've got a few tools, and I think we were still even getting some of those tools in towards the end of the year. So it's still little bit early to call that in terms of what's going on. It's been a -- it has not been a material event so far.

Okay. And can you update us on Universal's performance during the fourth quarter? And if the business continued to be strong? The weakness that was seen in Q2 and Q3, you ascribed to being currency but otherwise that the business was pretty steady. Is that still the case? Or if we've gotten the benefit of both currency and strong business?

The underlying business is, I'd say, meeting our expectations right now. And of course, as you've noticed, the pound has strengthened a bit, which is, of course, helping the results as well. I mean, we probably have not seen -- I think I checked the other day, it was $1.4 to a pound, and we haven't seen anything like that in a while. So I'd say the answer is we're doing fine, and the currency is certainly helping.

Okay. And you were said to be developing AIRCAT and other tools and distribution opportunities for Europe. Can you give us an update on those efforts and timing when the inroads might prove a bit more meaningful?

Yes. We're pretty stalled right now in automotive tools on the continent. Having said that, we have some other things we're working on, which I can't get into right now, but I should have more to say about that possibly on the next calls, depending on when that is. But we are working on doing something there. But right now -- what we've done so far has not been particularly successful, but we've got a different approach that we're about to embark on, which I'll talk about next time.

Awesome. And then that large European aircraft -- airframe manufacturer that was referred -- we referred to in the last call, have you already been able to make some inroads and get -- be able to call on them with the Jiffy and other aerospace products?

We are calling on them. We have -- we are having meetings, discussions, visits. So that continues. Nothing to report yet in terms of results or orders, but we're in the middle of it.

Generally, what is the time horizon or cycle time for prospecting to result in a subsequent closing of some business?

In aerospace?

Yes.

Quarters. Minimum 2 quarters, I would say, probably longer. I'd say, start to finish 6 months at least, probably more like 12. That's very long lead time.

Right. Now in the oil and gas side, I understand and you guys provided greater clarity that our oil and gas business for Hy-Tech is heavily biased to the offshore side versus the tide oil shale environments. And it's -- the rig count hasn't really materially grown there, come back from where it declined to, but it's bounced. But moreover, the real issue is, after a certain period of time, presumably, there should be need for replacements that takes place. Have you started to see a stabilization and any type of rebound at all in that area for Hy-Tech?

Again, we have been de-emphasizing that for Hy-Tech, as we've spent many more resources in engineered solutions and some of the other areas. But I'd say the business has been pretty solid. And I don't know if I'd call it a rebound, but we're certainly better off than we were 12 or 18 months ago in the Gulf.

(Operator Instructions) And gentlemen, we have no further questions that have queued up at this time.

Okay. Thank you, everybody, for listening to the call today. I hope everyone is happy enough. And we'll hopefully speak soon in -- at our next quarter -- our first quarter results shortly. Thank you for your time today.

And ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect.