Richard Goodman – General Counsel Richard Horowitz – Chairman, CEO and President Joseph Molino – VP, COO, and CFO

Andrew Shapiro

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

Thank you operator. Good morning and welcome to P&F Industries First Quarter 2013 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'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 in 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, 2012, 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 Rich. Thank you and good morning everybody. Thank you all for joining us this morning for our first quarter 2013 earnings call. I will begin today’s call with a brief summary of the company’s results of operations and earnings per share after three month period ended this March 31, and how they compare 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’ll move to a Q&A session as always. Before I begin I wish to remind all of you that the purpose of this call was to discuss and review the company’s results for the first quarter of 2013. As such, I request that you confine all questions and comments to those relating to the company’s results. Thank you. Firstly, the company’s revenue for the three month period ended March 31, 2013, was $20,709,000 compared to $14,317,000 for the same period in 2012. Revenue from our tool segment during the first quarter of 2013 was $15,629,000 compared to $9,672,000 in the first quarter of 2012. The increase in tool’s revenue was due primarily to the continued roll out by Florida Pneumatic to the Home Depot. Revenue for the three month period ended March 31, 2013, for our hardware segment was today consist of only nationwide industries was $5,080,000 compared to $4,645,000 for the same period last year. As expanded customer base new product offerings along with organic growth accounted for nationwide revenue growth this quarter. The company’s gross margin for the three month period ended March 31 of this year was 37.3% compared to 39.2% for the same period in 2012. Specifically for the tools segment first quarter 2013 gross margin was 37.2% compared to 39.6% for the same period last year. It should be noted that revenue from our retail customers tends to generate a lower than average gross margin and therefore the slight drop in our gross margin percentage for this quarter. However, and more importantly, gross margin dollars generated by our tool segment improved by $1,987,000 when comparing the first quarter of this year to last year. For the hardware segment first quarter 2000 gross margin was 37.7% compared to 38.3% for the same period in 2012. The first quarter 2013 gross profit at our hardware segment improved $136,000 compared to the first quarter of 2012. Our selling, general and administrative expenses for the three month period ended March 31, 2013 was $6,632,000 compared to $4,740,000 for the same period in the prior year. Stated as a percentage of revenue SG&A for the three month period ended March 31 of this year was 32% down from 30.1% during the same period last year. It should also be noted that included in our first quarter of 2013 numbers we recorded a onetime expense of $700,000 in connection with Florida Pneumatics roll out of a new tool line at the Home Depot. As you may recall in December of 2012 we and our bank Capital One entered into an amendment to our credit facility. The amendment among other things reduced the applicable margin rates that are added to all of our borrowings. As a result our interest expense during the first quarter of 2013 declined to $109,000 from $142,000 last year. Taking all the above into consideration I am pleased to report our income before income taxes for the three month period ended March 31, 2013 was $993,000 compared to $729,000 for the same period last year. Our tax expense for the first quarter of 2013 was $372,000 compared to only $23,000 in the first quarter of last year. And here is a little nuance. It should be noted that during the third quarter of 2012 we eliminated the evaluation allowance on our federal deferred tax assets which resulted in effective tax rate of 37.5% for the first quarter of this year compared to 3.1% for the first quarter of last year. Prior to this elimination in lieu of recording the tax expense we adjusted the then in place valuation allowance thus creating minimal effective tax rates that would have been applied to our pre-tax income. With evaluation allowance current and future tax provisions will more significantly impact our after tax earnings as well as our earnings per share. And lastly, our basic earnings per share for the three months period ended March 31 of this year was $0.17 compared to $0.20 for the same period in 2012, and our diluted earnings per share for the three month period this year was $0.16 compared to $0.19 for the same period last year. At this time I’ve asked Joe to please provide insight into our cash flow. Joe?

Thanks Richard. Just a couple of other items. Capital expenditures during the three month period ended March 31, 2013 were $143,000 compared to $620,000 in the same period in 2012. Significant non-cash items affecting our cash flow from operations during the first three months of 2013 or depreciation/amortization of $394,000, deferred income taxes $298,000, amortization of other intangible assets of $76,000, stock based compensation expense of $54,000, and amortization of debt issue cost of $22,000. Significant components of our cash used in operating activities of $7,745,000 include increases in our accounts receivable of $6,702,000 due primarily to Florida Pneumatics roll out to the Home Depot, and decreases in accounts payable and accrued expenses payable of $1,608,000 and $1,211,000 respectively. With that I would like to turn the call back over to Richard. Richard?

Thank you Joe. I would be remissive if I didn’t acknowledge as always our employees and our management for the outstanding job that they are doing in helping grow our company in these extremely unsettling times that continue to engulf us all. Our core value has been and will continue to be to improve our shareholder value. That’s the end of our presentation today and now we’d be happy to answer any questions anyone may have relating to company’s results. Operator?

[Operator Instructions] Our first question is from Andrew Shapiro, your line is live.

Hi, several questions. I’ll ask a few and then back out in line so others could ask a few. Getting straight into the main number that kind of clouds the improved substantial performance this quarter versus prior period, this one time marketing fee that you relate to and you call it for the initial roll out for the Home Depot. So, a few things, can you discuss this one time nature a little bit and in particular, but not limited to, what if the existing region you are in ramps up. Is there a marketing fee that is variable that is attached with it further? And let’s say you were to add another Home Depot geographic region, is there another one-time marketing fee involved. So, can you discuss these please?

Sure. First of all in terms of the fee it relates to a number of things. It relates to assistance in paying for new displays, getting new displays put in place. Assistance in helping subsidized mark downs on old inventory. You know, assistance with advertising, so it’s kind of a bucket of money that’s driven by the expected revenue to be generated from the new business. Just to be clear we are in all regions of Home Depot in the United States at this point, and there is no expectations regarding additional – we do not expect any additional fees for further growth of the business as we are now in all of our stores here in the United States.

So, this is a fee that was actually paid to Home Depot, kind of an entry cost to co-operative, shared roll out expense.

It’s an all out fee for a list of all sorts of things that you have when you transition from one vendor to another.

Okay. But it primarily went to Home Depot not to some third party finder who got it in there.

Yes, it absolutely went to Home Depot.

Well, that’s what I am trying to get clarified. Okay, great. Now, is this 700,000 then within your gross – in your segment reporting is it within your cost of goods sold, is it a operating cost of the segment or you view it as SG&A at the corporate.

It’s an SG&A item in the segment.

In the segment, okay, great, all right. And then connected also with this Home Depot thing, and then I’ll back out into the question queue, but I do have others. With the increased sales and the new business win, okay, that certainly explains, you have the sales and receivables, but your receivables today’s sales jump sizably, year over year and from last quarter to around – 58 days from around 49 and 47 days respectively year over year and quarter over quarter. Should we see this start to decline or will it be at an elevated level due to the terms of your new business with Home Depot whom – since I’ve been here long enough I have witnessed our relationship with them in the past and it wasn’t so lucrative in the past. So, I am just wondering what kind of market clout and power they are able to and are going to exert on our business model going forward?

First of all with respect to our terms with them, they are certainly less favorable to us than on average the rest of our business with the exception of Sears of course. Second, we have been very careful in deciding to go in this direction with our return on our invested assets and we have very strict criteria for what we need to generate there. We do not anticipate being in a situation where the return doesn’t satisfy us and we think our shareholders. Should the situation change then we’ll reevaluate the relationship.

Okay. And with respect to Home Depot vis-à-vis Sears, you know, in order to get the new business and all that are you guys subject to or did you have to provide some kind of most favored nation’s kind of clauses or status where they are looking at these two big players, or you are looking at the terms of the others?

No.

Okay, good. I have other questions. But, in case there is someone else in the queue, I will back out and please come back to me.

You got it.

Go ahead and continue there are no other callers in queue.

Great, thank you. So, with respect to then sticking with Florida Pneumatic initially here. What’s causing the softening within the industrial catalog segment versus prior year and why do you say you expect this to continue?

Andrew, I am sure you live in a vacuum. The economy is not robust, certainly industrially, it’s not robust and that’s what we try to. So that’s why we say that.

Yeah, but this is versus last year, and I didn’t live in the vacuum last year either, and this year is purportedly stronger albeit slowly stronger than last year. So you have a softening versus last year.

We had an extremely good performance last year, getting into new markets and customers and all the stuff with a poor economy, and I don’t know what you are reading, but we are not finding in our industries at all that the economy is robust.

No, there is a difference between – but Richard, there is a difference between being robust and softening. Softening is a decline year over year, robust would be a sizeable increase year over year. So I am trying to get a handle now. Last year was stronger than it would have otherwise been because of initial stocking and that is why they are softening this year versus last year’s initial results of these new customers which you’ve now explained was part of the reason.

We don’t honestly Andrew have a particular specific reason. We talk to our customers, their businesses are down, a couple of public companies that we compete with have publicly said they are down 20, 25%.

20 to 30%.

So this is – and in fact you may look to some of their disclosures to maybe get a little bit more flavor. Nobody seems to know, I mean it’s a business cycle sort of thing and in the absence of some other information, our assumption is things tend to go as things have gone. So, if things are down we expect them to continue. If we felt differently that we knew something was on the horizon that this was one-quarter blip we would say so or at least say that that’s what we think. But, we have no information that there is an imminent turnaround, and our customers aren’t saying the same thing.

I think Joe hit it on the head. Our competitors who are much bigger than us were projecting 20, 30% reductions in their business revenue this year, for whatever the reason. So that’s our industry, that’s what we go by. And so, whatever – certain areas of the economy that are improving – that’s what they are doing, but in our specific industries that’s not the case.

Okay. And you mentioned Joe that there were some public companies for which we might have seen us. Can you tell us what are those public companies you are referring to?

Ingersoll Rand, Atlas Copco, which is the parent of – well, we compete with them directly in a number of areas. But they are a European based company.

Those are the two that you could look at.

Yeah, you could look for their …

And that European one though, you don’t sell in Europe, are there declines Europe related or they break it out and so the US markets are down to.

Atlas Copco want Chicago Pneumatic and that’s American company.

Okay. Now the loss of the large air filter customer, did that occur all before the end of March, was it certain products, they moved to a competitor and you lost share, did they go out of business, what happened on that one?

They did not go out of business, I don’t know if we were replaced exactly or they moved to another competitor. I don’t know that I have that information. It’s a pretty small part of our business and it’s a pretty low margin with respect to the rest of things. We still have them as a customer, it’s just that for a particular line we no longer supply it.

Okay. And with the declining business in this very small segment, is this small sub segment still earnings its fair share of return on capital that it makes sense to stay within the business.

Absolutely.

Yes, it’s a very low capital investment.

Okay. And on Hy-Tech you mentioned revenue from a major Hy-Tech customer declined. You thought this from I think global inventory destocking, is this destocking a seasonal thing, something else and have you seen the light at the end of the tunnel from it?

We have not seen a light in the tunnel, and we ask the questions often to the customer, and they are not giving they don’t really – I don’t know if they know the answer to be frank with you. So, I don’t know if you can add anything to that Joe, but…

Well, we don’t know why they have reduced inventories. I mean we would think that at some point they would get back to typical ordering levels. But we do know for a fact that they are running lower than they have been in recent times.

And I think it’s also a combination of that and the fact that – that the economy in this particular segment is down, and so it’s a combination of their reduced inventory and also that their sales are down as we are experiencing ourselves.

Okay. And an ATP, you mentioned special orders improved weather, what do you mean by – and what are special orders?

I don’t know what you are talking about there. Special orders?

There is a certain sub segment of that business. So, in other words it wasn’t necessarily robust across the board, but a couple of sub segment were the drivers.

I think it’s fair to say Andrew that if our large customer had a good first quarter, Hy-Tech would have done much better since there were other segments.

Okay. Nationwide, remind me again, the kitchen and bath products that we do there, did that come in through Woodmark or where did those products come in?

Yes, it came in through Woodmark.

So those came into Woodmark and that was the balling part of Woodmark pretty much we retained the stairs and everything else a while ago, right?

Yes, exactly.

Okay. So now you had a kitchen and bath customer that declared bankruptcy. Is there visibility on what this customer is doing in the bankruptcy, are they re-orging, they liquidating, and what are the plans to either replace these sales or eventually recover sale rates going forward from them.

The customer is re-orging and I think they may be at that already or momentarily. But that’s within the process of doing.

They continue to order products, they are smaller – they are a fraction of what they were, but they are ordering regularly.

As a VIP obviously.

Yeah, I know I understand.

But there is no necessarily replacing them. They are pretty uniquely positioned entity.

And, in what kind of – line of kitchen and both work, were they just one of the RV players?

No, it’s a retailer.

No it is not one of the RV players.

Well, no, if it’s a retailer and this is a bankruptcy which means it is a publicly filed document and you are publicly listed as a vendor, can you share then who this customer is and which bankruptcy this is.

I don’t really know if we can or not. While we are talking – ask another question we’ll check it.

Yeah. Because I am pretty sure it’s Federal Court, you will be listed as a creditor and…

I don’t know how that affects anything that you would need to know or why be…

Other than the fact that I am your largest independent shareholder and we are thorough and diligent in our research fundamentals. I think it influences research impacts a lot. So we kind of would like to follow these things if we can. It’s out in the public domain and please share it with us.

If we can, if our lawyers releases to do that absolutely we will let you know.

Thank you. Okay. Now, can you remind us what cost increases that you are encountering that you are not able to pass on via Nationwide, is this all commodity price increases, because the commodity pricing has stabilized.

Commodity is also a fair amount of labor. I mean if you have been following what’s going on in China, labor rates have continued to creep up and that will continue to happen. And, that isn’t going anywhere other than up every year. So, you are right it is not the commodities for the most part. Although those two tend to go up and down, it is primarily labor.

And net of quality and transport cost and all that – the request have and increase sufficiently that it makes sense to – I am sure this somewhere into North or South America.

That’s correct.

Okay. Your tax asset, when you guys recognized a portion of the reserve, remind me, what is the full reserve that you have brought under the balance sheet, or there is still some reserve against your NOLs.

Are you talking about NOL, are you talking about the deferred tax asset, or are you talking about the valuation allowance, just so we are clear.

Well, you had evaluation allowance that would be evaluation allowance against the asset.

Which is now gone.

The asset is the function of the NOL, so they are all interrelated.

Yeah.

But is the all of the reserve gone so that basically ones estimate of all of that is now in the balance sheet.

Yeah, there is no more evaluation allowance left.

Okay. And the amount of – when I use the word “state” I don’t mean the Virginia captive NOLs that were not likely ever to be able to recognize. But, in terms of federal and state NOLs where do we stand here at the end of the quarter that is left to shield taxable income?

Probably around $2 million in total NOLs.

Okay. And, I asked more questions. I don’t know if anyone came into the queue. Let me just – I’d be willing to back out, and otherwise I’ll finish up afterwards.

Yeah, we do have another person in queue.

Let me back out and please come back to me.

Yeah. Hit 1 again, when I release you. Our next question is from Henry Dubrough [ph], your line is live.

Okay. I would like to follow up on these one-time marketing costs. What was mentioned was that a portion was for display fixtures. How much of the 700 were displayed pictures. What is the light of the display pictures, and is it ever occasioned with a vendor who would be supply and phoning the fixtures instead of just giving a payment to the customer.

It sounds like you asked a couple of questions in there. We do not know what portion of the 700,000 went to the actual hard cost of fixtures. Two, we don’t own them, and I can’t recall what your third question was, I apologize.

Yes, what’s the life of the light pictures.

Yeah, the light – I mean based on prior experience at least five years, it could be 7 years, 10 years maybe on the far end.

And for any reason the relationship with the customer substantially decreases, the customer owns those fixtures.

Yeah, that’s correct.

Okay, thank you.

Thank you. And we’ll go back to Mr. Shapiro, your line is live.

Thanks. So, with the projection of sustained profits that a company’s – your reinstatement of the deferred tax assets, and your new business with Home Depot, I guess now already having been rolled out nationally, so you kind of diversified your customer concentration a bit, and you are going to be collecting these receivables I am assuming within the current quarter ended June, which will put your cash and net debt situation to even be lower than it was the last quarter which I think was the lowest debt to equity ratio you guys have had in many-many years. Are there thoughts, you mentioned you talk about it at every board meeting, but is there any movement, is there any progress towards or milestones or thresholds you have in terms of a target payout ratio or anything else towards the institution of the dividend or a deployment and authorization of a buyback given the high equity cost to capital reflected in your very low PE stock.

I think it’s the sense of the board thus far that we want to again catch our breath, like I said to you last quarter, and get some assurances of quality of our earning something forward before we leave, entertain a dividend, where a small cap company – and I don’t think too many small cap companies have it, and we don’t want to be in a position of doing it and then not doing it. So, I think we want to have a quality and confidence of stream going forward before we would embark on that. Having said that we do talk about it and of course we will be speaking about it after our annual meeting, in our board meeting and we do talk about it. I don’t know what else to say to you on that regard. What was the other question? I am sorry.

They are jointly connected. Because you just mentioned the idea that the institution of a dividend is one that has to be considered with the idea of a sustainability, and the alternative to that is the idea of a discreet amount of money that’s allocated towards a stock buyback plan to buy and retire shares when Mr. and Mrs. Market choose to offer the shares at such a low PE which inversely means a very high equity cost of capital for the company.

Right, yeah, and I remind you that I am pretty large stockholder myself and dividends certainly would not be – I would not be unhappy receiving it. But it’s – I am thinking about the – we are all thinking about the best interest of the company and a lot of our stockholders not just you and me who are larger stockholders.

Right. Now, with respect to the dividend, some thoughts to pass on to your board, some I know who are listening on to the call and also to you as another large shareholder. One of concepts in the issues of dividend is that you got to – if you are going to institute it – you want to institute it so it’s sustainable. And I don’t have a problem with starting out with baby steps. The idea of instituting a dividend even at a small level and one of the reasons is in terms of the concept in which you’ve mentioned also in the same breath, which is shareholder value. The moment this small cap company becomes a income payer, meaning it establishes any dividend whatsoever, doesn’t even have to be a high rate, the moment that we become a dividend player there is a variety of small cap income funds who cannot buy our company shares at this moment who all of a sudden become eligible and who – this company becomes in the population for which they can and would be owning and buying shares. So, at a minimum the concept would be at least find some small level of sustainable dividend to establish and without any pressure that you have to go out and increase it regularly but to have that as a form of a steady stable return of capital and it expands the shareholder value because we become qualified for the income funds.

Okay. I hear you Andrew, and I absolutely will go back to that. I mention it that weight as you did it.

You know, when things are appropriate and the sustainability of a higher dividend is justified then you can go to that. But, baby steps and get something started would help on an investor – your shareholder value and investor relations point. And you can always supplement the small sustainable dividend with periodic instances of discreet amounts allocated to buybacks were available. With that in mind I am not trying to dissuade you from dividends and buy backs. Can you update on your acquisition…

I hear you. We will discuss it. But let’s get back to the quarter, the first quarter numbers if you don’t mind. Any of the questions regarding that.

I just would try to segue to that, which is the idea that okay, dividend buyback notwithstanding where do you stand on the types of things you are looking at, the progress you are making, the evaluation multiples you are seeing since you talked about not living in the vacuum and the economy is slow. The types of company that you will be looking at would be similarly suffering. What are you seeing in the acquisition front? Have you come close and then someone has outbid you, have you come close and you have decided not to do something through your due diligence, have you not come close at all on anything?

It’s an ongoing thing. We are spending an enormous amount of time on it on a regular basis. We are not – the one thing I will say is though the – in our economy, in our markets things are not robust. The evaluation that the owners and companies are putting on their companies to buy is still a very high level. They haven’t come down to that realistic thing. So we have found either – we have got many, many – discussions with many companies, but we have not gotten to the – we haven’t turned down anything and no one has turned us down. We are still working on it, that’s all I could say.

I will just add that we – as a general rule we don’t chase companies where other companies are looking at them. It’s just – it’s been our experience that you end up paying too much. In general we are talking to single entrepreneurs who typically have a number in their head that they absolutely have to have which doesn’t necessarily – isn’t consistent with multiples that are out there in the M&A market place. Because that’s the size of the businesses we look at. So, on the one hand there is little sophistication in terms of organizing the potential buyers, on the other hand there is unfairly unrealistic or often unrealistic expectations on behalf of the seller. So where you have to go is a situation where it’s generally a bolt on where they will get what I call an unreasonable multiple. But to us it ends up being a reasonable multiple because there are lots of expenses that wouldn’t come along with the business. So, it’s a fairly niche opportunity that we are trying to find. So, yeah, there are businesses to buy that fit lots of the other criteria but given our size and given the kinds of people selling the businesses it’s more difficult, but not impossible.

Yeah, it’s not impossible, and we will get there. I have total confidence that we will. But it’s – I mean we are being very careful about things that we look at and being very careful about what we would consider buying. We certainly – for lack of a – excuse the expression, we don’t want to have another Woodmark, and though we have made many good acquisitions we don’t want to make a bad one that’s going to hurt our company any more at this point. We have been there and done that with the Woodmark thing.

Don’t forget Green and all the others too.

Green was not a bad acquisition Andrew, all right, and if you are going to sit here and criticize don’t ask us the questions about it. But, the Green was not a bad acquisition, Woodmark was. But, anyways, having said all that we are being careful, very careful and we want to do what’s totally right for the company. We want it to be a good fit for the company.

Let me be clear, by asking about acquisitions, I am in no way trying to send a message that I am encouraging this team to make any acquisitions. I am just asking about them because it is another use of your leveragability and built up cash. I want to follow the cash so that it is not misappropriately allocated in the future as there has been issues in the past.

All right. Back to the earnings Andrew.

Your import duties. You have an import duties issue, it’s a contingent liability, is there any update on this case or change to previous estimates?

No there is no update and there is no change to our estimates.

And I have said to you in the past, I’ll say it to you again or to anybody who is on the call it’s a very, very slow process, we are a pimple on the screen of the duty office. So, they’ll get to us and they can get to us. We’ve done everything within our power to – we’ve done everything we’ve been asked to do, so now we are in MRC.

All right. So now, at some point there may be a penalty applied and all that. And I wanted to know will there a claw back in the event that penalty is applied will there a claw back to executive bonuses that have been taken place during this duration and long wait while we are a pimple, will there be a provision for claw back of executive bonuses as a result of being assessed penalties for obviously what were internal disclosure and control issues.

First of all to the extent that the final adjudication is at or less than what we have accrued, the hit to the executive bonuses has already taken place. To the extend – it’s greater than what’s there then it will be a self correcting situation regardless of the fact that it took place in the prior period, our bonus programs are current period calculations, and if there is an additional expense then the bonuses go down.

So, what you are saying then is that the reserve was not excluded from the calculation of bonuses in the first place.

No, absolutely not. I mean there is no – yeah, it’s absolutely fine.

Okay, fine, good. All right, I have no further questions at this time.

Thank you, and I have no further questions in queue.

Okay. Thank you all for being on the call today and we look forward to speaking to you at our Q2 call. Thank you so much, have a good day everybody.

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