Richard Goodman – General Counsel Richard Horowitz – Chairman, Chief Executive Officer and President Joseph Molino – Vice President, Chief Operating Officer, and Chief Financial Officer

Andrew Shapiro - Lawndale Capital Management

Good day, everyone. Thank you for holding and welcome to the quarterly earnings conference call with your host, Richard Goodman, P&F General Counsel, and Richard Horowitz, P&F's CEO. Today’s conference will begin with a presentation followed by a question-and-answer session. (Operator Instructions) I would now like to turn the call over to Mr. Goodman. Please go ahead, sir.

Thank you, operator. Good morning and welcome to P&F Industries second quarter 2013 earnings conference call. With us today from management are Richard Horowitz, Chairman, President and CEO; and Joseph Molino, Chief Operating Officer and CFO. Before we get started, I'd like to remind you that any forward-looking statements discussed on today’s call by our management, including those related to the company's future performance and outlook, are based upon the company's historical performance and current plans, estimates and expectations, which are subject to various risks and uncertainties, including but not limited to, the strength of the retail industrial housing and other markets in which we operate, the impact of competition and product demand, supply chain pricing, our debt and debt service requirements, and other risks and uncertainties described in the reports and statements filed by the company with the Securities and Exchange Commission, including among others, as described in our Annual Report on Form 10-K for the fiscal year ended December 31, 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.

Thank you, so much Richard and good morning everybody. Thank you all for joining us this morning. I will begin today's call with a brief summary of the company's results of operations and earnings per share for the three and six month period ended June 30, 2013 and how they compare to the same period in the prior year. After that I will ask Joe Molino to briefly review key cash flow information after which we will move to our Q&A session. However, before I begin, I wish to once again remind all of you that the purpose of this call is only to discuss and review the company's second quarter 2013 results. As such, I request you that you confine all questions and comments to those relating to the company's results for this three month and six-month period. Firstly, the company's consolidated revenue for the three and six-month period ended June 30, 2013, $19,476,000 and $40,185,000, respectively, compared to $15,241,000 and $29,558,000, for the same periods in 2012. Specifically, revenue for our tools segment during the three and six-month periods this year was $13,221,000 and $28,850,000 respectively, compared to $9,673,000 and $19,345,000 for the same periods in 2012. The three and six-month increases in our tool revenues was due in large part to The Home Depot, which we began shipping to in late December of last year. Revenue for the three and six month periods ended June 30 of this year for our hardware segment which consisted Nationwide, was $6,255,000 and $11,335,000 respectively, compared to $5,568,000 and $10,213,000 for the same periods in 2012. An expanded customer base, new product offerings along with organic growth accounted for Nationwide's revenue growth. The company's consolidated gross margins for the three and six-month periods ended June 30, 2013 were 36.5% and 36.9% respectively compared to 37.2% and 38.2% for the same periods in 2012. Specifically for the tool segment, second quarter of 2013 gross margin was 35.9% compared to 36.9% for the same period last year with year-to-date gross margins of 36.6% compared to 38.2% during the six-month periods last year. It should be noted the primary cause for the lower margins is that revenue from our retail customers generated a lower gross margin in our product lines within the tools segments. Accordingly, with the significant increase in retail revenue during 2013 compared to the same periods in the prior year, the tools segment gross margin declined. However, gross profits generated by our tools segment improved by $1,178,000 and $3,164,000 when comparing the second quarter and first six-months of 2013 to 2012. As for the hardware segment, it's three and six-month 2013 gross margin was 37.7% compared to 37.9% and 38.1% respectively for the same periods in 2012. Second quarter of 2013 gross profit at the Hardware segment improved to $2,358,000 from $2,111,000 while the six-month gross profit increased to $4,274,000 in 2013 from $3,890,000 during the same period in 2012. Our selling and G&A administrative expenses for the three and six-months were $5,580,000 and $12,212,000 respectively, compared to $4,721,000 and $9,461,000 respectively, for the same periods in the prior year. Stated as a percentage of revenue, SG&A for the three and six-months periods ended June 30,2013 was 28.7% and 30.4% respectively, down from 31% and 32% during the same periods in the prior year. As you will recall in December 2012, we and our bank, Capital One, entered into a new amendment to our credit facility. The amendment among other things reduced the applicable margin rates that are added to all of our borrowings. Despite an our increase in our revolver borrowings during the first six-months which was necessary to fund the increase in our working capital applicable to The Home Depot, our interest expense during the second quarter of 2013 declined to $118,000 from $133,000 incurred during the second quarter in the prior year. And for the six-month period ended June 30, 2013, our interest expense was $227,000, down from $275,000 incurred during the same period last year. Taking all the above date into consideration, I am pleased to report that our income before income taxes for the three and six-month period ended June 30, 2013 was $1,404,000 and $2,397,000 respectively compared to $822,000 and $1,552,000 for the same periods last year. Our tax expense for the second quarter of 2013 was $529,000 compared to only $27,000 in the second quarter of last year. While the tax expense for the six-month period ended June 30, 2013 and 2012 were $901,000 and $50,000 respectively. I wish to remind you all that in the third quarter of 2012 we eliminated the valuation allowance on our federal deferred tax assets. 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 removed, current and future tax provisions will more significantly impact our after tax earnings as well as our earnings per share. Our basic earnings per share for the three and six-month periods ended June 30 of this year were $0.24 and $0.41 respectively, compared to $0.22 and $0.42 for the same periods in 2012. Diluted earnings per share for the three and six-month periods ended June 30 of this year were $0.23 and $0.39 compared to $0.22 and $0.41 for the same periods in 2012 At this time I’ll ask Joe to provide some insight into our cash flow. Joe?

Thanks, Richard. Just a couple of other items to note. Capital expenditures during the six-month period ended June 30, 2013 were $303,000 compared to $820,000 in the same period in 2012. Significant non-cash items affecting our cash flows from operations during the first six months of 2013 are our depreciation and amortization of $789,000, deferred income taxes of $784,000, amortization of other intangible assets of $134,000, and stock-based compensation expense of $151,000. Significant components of our cash used in operating activities of $3,139,000 include increases in our accounts receivable of $5,288,000 due primarily to the additional retail revenue of Florida Pneumatics and decreases in accounts payable and accrued expenses payable of $1,092,000 and $700,000 respectively. And then finally, a decrease in inventory of $781,000. With that I would like to turn the call back over to Richard. Richard?

Thank you, Joe. Just one clarification from earlier, for the hardware segment, the three and six-month gross margins were 37.7% for both periods compared to 37.9% and 38.1% for the same periods last year. Just wanted to make that one clarification. That’s the end of our report for today. I would be happy to answer any questions anyone has relating to the company's results. Thank you.

(Operator Instructions) Our first question comes from Andrew Shapiro. Your line is live. Andrew Shapiro - Lawndale Capital Management: Few questions on the tools numbers and then we will back out and let others in to the queue but we will have some questions about Nationwide if you wouldn’t mind coming back to us. On Florida Pneumatic, coming out of this recession the economy certainly has headwinds but it is growing slowly. Your industrial catalog segment versus prior year 2012 continues to be weaker than prior year for now a second quarter in a row. In fact by a greater amount than last quarter. So can you expand a little bit on what's going on there and what is being done to address this weakness?

Yeah, Andrew, it's exactly the same story we told you last quarter. If you look at our competitors who are in that same business, they are experiencing significant double-digit decreases in the range of 20% to 25% annually so far. We are experiencing about roughly 10% decreases thus far. So I think we are better than the curve and it's just that in this industry, this industrial catalog industry, the industry is absolutely breathing very very heavy. It's not just... Andrew Shapiro - Lawndale Capital Management: So who are typical customers then?

MSC is one of them. I think that’s a retailer in effect. And then you got CP, which is Chicago Pneumatic Ingersoll Rand, those are the three biggies. Andrew Shapiro - Lawndale Capital Management: No, those are the competitors but who are the customers? Why is everyone's business slowing down?

Who are the customers that we sell in the industrial business? Andrew Shapiro - Lawndale Capital Management: Yeah. Ingersoll Rand and Chicago Pneumatic, if they are all having troubles, we are all breathing gas here.

Yeah. Andrew Shapiro - Lawndale Capital Management: Who are the customers who are not purchasing this kind of equipment?

It would be heavy construction. It would be aerospace manufacturing. You know Boeing alone had a little bit of a hiccup with a couple of projects. There is no one area that’s particularly down, although if I had to pick, aerospace was flying along a couple of years back with 25% to 50% growth and we are heavily into aerospace. That has slowed down. And although not directly affecting us, I think indirectly affecting us, I think that sales into products that ended up in Iran and Iraq was very heavy in '10, '11 and part of '12, and that has slowed down dramatically. We have some in there directly but I would say indirectly this is probably more of an affect. So that’s going on as well.

And just to keep in a perspective, Andrew. We are down in that area 9% for the quarter, which is $175,000. So I am not minimizing it but $175,000 on $19.5 million is fairly -- not very worrisome even though I note your comments.

And just to point out, we have lost no accounts. And the in terms of what we are doing about it, we continue our product development efforts as far in that. Certainly have our pipeline of development continues and we have got projects we are working on and we plan to introduce products into that channel continuously. That hasn’t ended. We haven’t let go of any sale people. Everybody is still on the road and we are just as involved in that industry as we have ever been. But all around there is headwind.

And in Hy-Tech, which is in the same exact industry, we are very close to being flat. So between the two companies, we are very under the curve in terms of what others are doing. Andrew Shapiro - Lawndale Capital Management: Okay. Now is there some figures or some insight you can give us further about what we will call it organic Florida Pneumatic or in the retail side, it's kind of hard with apples to apples. We know the numbers are up huge and it's Home Depot as an incremental customer. But if Home Depot wasn’t a customer, how is the rest of the business doing? In particular your year-over-year sales into Sears.

Well, Sears in general is flat to down for the year. And we continue to expect to Sears to struggle in the long run. We don’t anticipate a lot of growth there going forward. But we also don’t see it going off a cliff or anything like that, but there is no growth that is going to be coming from Sears going forward, in my opinion. Andrew Shapiro - Lawndale Capital Management: Sears as a result of its deleveraging process etcetera has been spinning off and making separate companies. Several entities to which on prior conference calls you have said you also sell to those separate entities. Are those separate entities exhibiting an experiencing growth yet?

They are very small, just so you know, in relation to the total. And those entities I would say are doing better overall but we don’t expect any meaningful growth there to our overall operations. Andrew Shapiro - Lawndale Capital Management: Okay. You mentioned new automotive products were launched. What are some of these new products?

No, I don’t believe I said that. I said we continue to have a pipeline of R&D activities and we certainly plan on launching products as we have been. I mean we introduce products regularly into the market, aerospace and on the industrial side. Andrew Shapiro - Lawndale Capital Management: No, but I think you mentioned in the press release potentially new automotive products. That’s one of the reasons automotive has been clicking along.

I don’t recall automotive products specifically, mentioning that. I don’t have that language in front of me but we do have -- we continue to introduce products across the board. But I think, Andrew, there is nothing here that’s a game changer in terms of production introduction. It's just a continuation of our regular pattern of product introduction.

Andrew, unless I am mistaken, automotive is flat for the three and six months. Andrew Shapiro - Lawndale Capital Management: All right. And within Hy-Tech, can you talk a little bit more about the special order, that is this a seasonal opportunity, that is arrives regularly? How special is special?

Well, one time is special. It's something where we wouldn’t expect to repeat. Andrew Shapiro - Lawndale Capital Management: And the revenue from a major Hy-Tech customer declined year-over-year. It was broken out again in -- this was for the second quarter in a row. You mentioned you thought this was due to global inventory destocking on the last quarterly call. Is the destocking something seasonal, or something else, and is it expected to continue in our current third quarter and also beyond?

We see no changes in their ordering pattern thus far, in the first half and going into the third quarter. We don’t see anything. And they are a public company and their numbers are not very encouraging for themselves. Having said that, we are still doing nicely with them but we are down from last year. Andrew Shapiro - Lawndale Capital Management: Yeah. Last tools question and I will back out into the queue. You mentioned that the gross margin percentage improved due to lower cost of manufacturing in Hy-Tech. What exactly are you doing or did you do to achieve this and is there room for further improvement.

Well, I would say it's probably mostly automation with some improvement in the labor productivity. But I don’t think there is anything particularly special in that. That’s been an underlying theme there for years. I haven’t seen it. I don’t have it in front of me but I would have to say, since we have owned that business, the productivity in general has improved every year. Andrew Shapiro - Lawndale Capital Management: Okay. I will back out in the queue, I have some more questions.

(Operator Instructions) And our next question is from Andrew Shapiro. Your line is live. Andrew Shapiro - Lawndale Capital Management: By the way I am reading this press release over again and I knew I wasn’t crazy. You did specifically say the improvement in Florida Pneumatics automotive products revenue is due in large parts to the release of new products into the market place.

Yeah, but it's in (inaudible), Andrew. Andrew Shapiro - Lawndale Capital Management: Fair enough.

Yeah, you are right. It's.... Andrew Shapiro - Lawndale Capital Management: Okay. I know we (inaudible) crazy.

Technically that’s correct, yeah. Andrew Shapiro - Lawndale Capital Management: I mean I read what you put in the release very carefully. Nationwide, last question you had a kitchen and bath customer that declared bankruptcy. And since it was a public federal filing, on the call you were looking into getting us the name of that customer where you are listed basically as a vendor. You mentioned that you are still providing product to the vendor. Obviously, post filing, that is actually a fairly secured line of sales and receivables for us, so I am not as worried about that. But I am interested in potentially following the re-org and hopefully reemergence of this customer out of bankruptcy. You never got back to us on that. Can you mention now who that customer was?

It's our policy not to mention customers regardless of whether they are involved in some sort of public filing or not. But I will say this, that our understanding is that their situation is improving and that they expect to emerge from bankruptcy in the not too distant to future. And we continue to ship to them.

And, Andrew, we are doing nicely with them. I mean we are not doing what we did before but we are doing much better than what we thought we are going to be doing with them. Andrew Shapiro - Lawndale Capital Management: Right, right.

I don’t if that’s helpful to you but that’s what we can tell you. Andrew Shapiro - Lawndale Capital Management: That’s helpful. It'd be helpful to not have to go scurrying around in the public documents since they are public, and having to figure out and find out where you guys are listed as a vendor because you will be publicly listed as such.

I think, again, Andrew, not to be discourteous about it, but I think it's a relatively small number in the overall scheme of things. So I don’t think it has an impact of major proportions to the company. I apologize, but that’s our policy. Andrew Shapiro - Lawndale Capital Management: Can you update us on where the state and federal net operating loss tax carry forwards are as of the end of the quarter now?

What's the value of the NOLs at the end of the quarter? Andrew Shapiro - Lawndale Capital Management: Yeah. Because you keep on chewing them up each quarter, I was trying to get a handle on when they might be fully used up.

Well in terms of the NOLs, I believe will be mostly used up by the end of the year. Having said that, and I have said this before, still remains I think six year of tax yields related to the original amortization of what I call excess purchase price of the goodwill for tax purposes from the Woodmark acquisition. And that's about $1.4 million per year. So all the NOLs will be gone by year-end, are almost gone. That will continue for some period of time as long as we have profit. Andrew Shapiro - Lawndale Capital Management: Right. That you are able to recognize those as long as you what, you have the kitchen and bath business?

No. Well, the way it works technically is, it's kind of the opposite of that. If we didn’t have the kitchen and bath business. For example if it were no longer a part of the operation, we could actually -- [we think] accelerate those tax yields. But it is part of the business so it can only be absorbed yearly at the tune of $1.4 million a year, as you own the assets. If I no longer own the assets-- Andrew Shapiro - Lawndale Capital Management: You could write it all off?

Yeah. That would have been [deducted] okay. But it's a non-cash -- it's just an intangible asset that you have got sitting up there right now. Andrew Shapiro - Lawndale Capital Management: But it's real in terms of its value to us. Certainly to the extent it shields taxes.

Yes, because you are profitable. But the regular NOLs, the once that are part of your deferred tax assets, that is what we are on the GAAP reporting a 37% tax rate. Our actual cash tax payments are much lower.

Yes, zero effectively. Andrew Shapiro - Lawndale Capital Management: And you anticipate we are going to have that shield at least through the end of the year but it would be used up soon thereafter?

Yeah, that is correct based on our estimates. Andrew Shapiro - Lawndale Capital Management: Acquisition programs or buyback, or dividend here, in terms of capital allocations. Company's debt levels again are down near, frankly, historic lows. You are generating a substantial positive cash flow. You have the foresight without specifically projecting that you are going to be generating a substantial positive cash flow going forward. What are the priorities and the focus of the deployment of this capital and where are you looking to make acquisitions and have you come close? Are you coming close? Alternatively, what is the latest news from the boardroom as well as from you, Richard, personally, with respect to instituting some form of a modest dividend or buying back of shares?

Andres, we talked about this once again at our last meeting which was 60 days ago, after our conference call. And I would say with unanimity the board decided once again we want to save our money for meaningful acquisition or to continue to do our acquisitions search. I will remind you yet again that I being the largest stockholder would be more than happy to have a dividend, you being the second or third. Andrew Shapiro - Lawndale Capital Management: Second.

True, but certainly it's not about me and it's not about you, it's about what's right for the company. And we feel and the board feels that we still want to continue to conserve our money, because you can never be too rich and you can never be too thin. And that’s the old expression. So we want to continue to do that and we, of course we have visited every time we meet and we will continue to do so, because things change. But as of now, there are no plans for dividend and buybacks right now. We feel we want to save our money for that. And in terms of acquisitions, it's an ongoing process and I as you know and we have been down the road a few times with a few people and we get close and then we don’t. But when the time comes and there is something to report, I promise you, we will report it.

I would just like to add one thing. Our borrowings are up $4 million since the end of the year. You said historic lows. Andrew Shapiro - Lawndale Capital Management: No, they are near historic lows, at the end of the year they were also down there. I mean they went way up last -- well, not way up but they did rise last quarter with your working capital needs for Home Depot and now they are coming back down. They are not at the lowest levels but you had hit some of the lowest levels earlier in the year.

Yeah. Andrew Shapiro - Lawndale Capital Management: Yeah. But I have been here and invested in this company in relatively the same size for over a decade so I am using this in comparison to a multi-year history of where this company has been and given the projections of where it's going, what to do with non-interest bearing, really cash, is increasing importance. And as you have lowered the cost, as you become a tax payer and you have lowered the cost of your debt financing, the relative benefits of you have been paying down more debt -- those benefits are not as great. They are becoming similar to the very low benefits of holding a ton of cash.

Yeah, Andrew, again, I am going to remind you, we don’t have millions and millions of dollars sitting in the bank. Andrew Shapiro - Lawndale Capital Management: No....

In order to have the money -- let me speak, Andrew, when we have money in the bank, we have it because we borrowed the money. So when we have no debt whatsoever in this company and we have no prospects for acquisitions and growing our business, which is our main objective, we will absolutely be considering what you are suggesting. Until that time I think it's fair to say that we will continue to visit it. I promise you we will. And by the way we would do without you continuing to bring it up because it is something in the forefront of my mind and something the board knows every time we meet, and so we will continue to do so. More than that, we are beating a dead horse, I don’t know what else to say. And we have board meeting next month and of course as I can assure you, without you bringing it up, we will bring it up yet again. We.... Andrew Shapiro - Lawndale Capital Management: And I can assure you next quarter because we will be till then--

You can bring it up every single.... Andrew Shapiro - Lawndale Capital Management: I will ask what the deliberations turned out next time. So...

Andrew, whatever, whatever -- you are a stockholder and a very important stockholder to us and we are happy to entertain anything you want to talk about. Andrew Shapiro - Lawndale Capital Management: Great.

And when we have some changes, we will certainly let you and everybody else know. Andrew Shapiro - Lawndale Capital Management: Very good.

And thank you for bringing it up. Andrew Shapiro - Lawndale Capital Management: With respect to the import duties penalty, is there any update on the case or change to the previous estimate?

No, there is no change in the estimate. As we have indicated, we have paid the duty and we await the final adjudication. Andrew Shapiro - Lawndale Capital Management: Okay. And that probably won't come for some time but I would like to understand, if there is a large penalty, are there provisions for and will the board be seeking a callback of some executive bonuses as a result of the misstep that took place here.

Well, Andrew, I think I had answered this before, but the bonus programs are quite similar from year-to-year. So in the year we'd actually pay a penalty in excess of our estimates -- by the way the estimate itself affected the bonuses already. But should the estimate be short, in that year, whatever year it would be, this year or next year, that would directly affect the bonuses. So you would be talking about the time value of money only and in this borrowing environment that couldn’t possibly be very much money unless... Andrew Shapiro - Lawndale Capital Management: The time value wouldn’t be the issue, what would be the issues is if the executive compensation programs had some form of clause that excluded something like that rather than included it.

No, there is no exclusion. It's GAAP expense and it will -- our bonus program, while some thought goes into them, profits and losses directly affect them. There are not a lot of adjustments to those numbers. Andrew Shapiro - Lawndale Capital Management: Okay. Very, well, thank you. I got no more questions.

(Operator Instructions) We do have a question from [Alex Luco] Your line is live.

Could you provide some additional color about the Hope Depot business, in terms of how well that business is growing? Are you seeing growth or is it just you laid out the inventory and now they are not ordering off and so on and so forth.

We can't really discuss it (inaudible) you want us to, but we can't really say we are having growth because we just started with them this year. So growth compared to what? So we haven’t -- we can't really -- next year at this time we could tell you if we think they are growing. But this year we can't do that but I can tell you that our expectations -- they are meeting or even exceeding our expectations for what the business is going to be this year with them. Does that help answer your question?

Yes, very much so. And in terms of the marketing expense. That is considered a onetime hit not a....?

Yes. Yes. It was a onetime hit. It was a onetime hit for the year that we took in the first quarter.

Well, just so we are clear, there are continuing marketing expenses for Home Depot that will never go away. But we did discuss a onetime $700,000 expense related to the initiation of the program that was one time, yeah. That will not repeat.

For displays and marketing and things of that nature.

Yeah, it's a number of things. Displays, marketing kicking of the program, helping them....

Get rid of their old inventory. It's a lot of things. Very normal cost to doing business, in that business.

And at this time we have no questions in queue.

Okay. Thank you all for being on our call today and we look forward to speaking to you in a few months with our third quarter results. Thank you and enjoy the rest of your summer.

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