Richard Goodman - General Counsel Richard Horowitz - Chairman, President and CEO Joe Molino - COO and CFO

Adam Kathiriya - Lawndale Capital

Good day everyone and welcome to the P&F Industries' 2016 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Richard Goodman, General Counsel. Please go ahead, sir.

Thank you, operator. Good morning and welcome to P&F Industries’ 2016 earnings conference call. With us today from management are Richard Horowitz, Chairman, President and Chief Executive Officer; and Joseph Molino, Chief Operating Officer and Chief Financial Officer. Before we get started, I would like to remind you that any forward-looking statements discussed on today’s call by our management, including those related to the Company’s future performance and outlook are based upon the Company’s historical performance and current plans, estimates and expectations, which are subject to various risks and uncertainties, including but not limited to 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 disruption; 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; acquisitions of businesses; regulatory environment; the threat of terrorism and related political instability and economic uncertainty and economic; and information technology and systems failures and attacks. And as other risks and uncertainties described in the reports and statements filed by the Company with the SEC 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.

Good morning. Thank you Rich 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 from continuing operations and earnings per share for fiscal year 2016 and that will compare to fiscal 2015. As this earnings call procedure release of our annual report filed on Form-10K, I will incorporate some key fourth quarter 2016 financial guidance and it how compares to the same period in 2015. I will also discuss our 2016 results from discontinued operations and now that compares to 2015. However, I direct you to our release from earlier today for more detailed information. The release this morning presented P&F balance sheet, statements of income and earnings per share data along with most of our management discussion and analysis. Then I will ask Joe Molino to briefly review cash flow information and provide an update on key events affecting the Company. After which, we’ll move to our usual Q&A session. And lastly before I begin, I wish to remind all of you that the purpose of this call is to discuss and review the Company’s fiscal 2016 results. As such, I ask that you kindly -- I ask kindly that questions focus on our 2016 results only. Thank you for cooperation. And also unless otherwise noted, the financial information discussed on today's call refers to our continuing operations, which exclude Nationwide Industries. As most of you know, we sold Nationwide in February 2016 and adjusted -- and as a result, its adjusted results were included in discontinued operations in both 2016 and 2015. The Company's consolidated revenue for 2016 was 57, 276,000 compared to $60,312,000 in 2015. The Company's 2016 net income was 6,901,000 compared to 3,544,000 for 2015 and P&F is reporting net income from discontinuing operations of 12,584,000 of which 12,512,000 is from the gain on the sale of Nationwide Industries compared to net income from discontinued operations 1,688,000 in the prior year. For the year ended December 31, 2016, the Company is reporting a loss from continuing operations before taxes of 8,638,000 compared to income from continuing operations before taxes for the year ended December 31, 2015 of $2,681,000. Significant factors contributing to loss this year were. One, non-cash impairment charges to goodwill and other intangible assets of 9,581,000. Two, a downward adjustment to the carrying value of certain inventory of $1,001,000. And three, partially offsetting the above with recorded gain on the sale of real property that was used by Nationwide of $1,703,000. We are reporting a net loss from continuing operations for 2016 of 5,683,000, compared to net income from continuing operations last year of 1,856,000. For the three month period ended December 31, 2016, our revenue was 12,507,000, compared to 13,771,000 for the same period in 2015. The Company's fourth quarter 2016 net income was $61,000, compared to $401,000 in the same period a year ago. Fourth quarter loss from continuing operations before income taxes was $176,000, compared to income from continuing operations before income taxes of $407,000 in the fourth quarter of 2015. Net loss from continuing operations was $93,000, for the fourth quarter of 2016, compared to income from continuing operations of $346,000 for the same period in the prior year. Net income from discontinued operations during the fourth quarter of 2016 was $154,000, compared to $55,000 a year ago. With respect to P&F consolidated gross margin, it was 31.2% and 33.1% respectively for the three month period and full year ended December 31, 2016, compared to 34.3% and 35.9% respectively for the same period in 2015. Florida Pneumatic's gross margin were relatively flat when comparing the fourth quarter of 2016 for the same period last year, while full year 2016 gross margin improved over 2015 by 128 basis points. With respect to Hy-Tech's gross margin we reported an adjustment of $256,000 for the fair value of this inventory during the fourth quarter of 2016, just $1 million all of 2016. During 2015, there were no inventory fair value adjustments. Further Hy-Tech's 2016 gross margin declined compared to the same period in 2015 due to among other things poor overhead absorption, intern due primarily to less production running through the facility and our decision to comply with certain commitments, and manufactures with a very low gross margin products for major ATSCO customer. Our selling and general administrative expenses for the three month periods ended December 31, 2016 and 2015 were 5,792,000, which includes all impairment charges of 1,270,000 and 4,323,000 respectively. Our SG&A for all of 2016 was 29,191,000, which includes impairment charges of $9,581,000 compared to $19,157,000 in 2015. Our interest expense in 2016 was 181,000 compared to the $116,000. Included in the above, our debt issue cost of $128,000 and $111,000 respectfully in 2016 and 2015. Our interest expense in the fourth quarter of 2016 was $17,000 compared to $30,000, including the above, our debt issue cost of $10,000 and $28,000 respectively in 2016 and 2015. As previously mentioned in November of 2016, we sold the Tampa, Florida facility which resulted in a net gain of approximately $1.7 million. With respect to per share data, 2016 basic and diluted loss per share from continued operations was a $1.58 compared to basic earnings per share from continuing operations of $0.51 in 2015, and diluted earnings per share from continuing operations in 2015 of $0.49. Basic and diluted earnings per share from discontinued operations for 2016 were $3.50, compared to basic earnings per share from discontinued operations in 2015 of $0.47, and diluted earnings per share from discontinued operations in 2015 of $0.45. Lastly, our full-year earnings before interest, taxes, depreciation and impairment charges and depreciation was $3,760,000, compared to the prior year's $5,589, 000. At this time, I'd ask Joe Molino to provide some insight into our cash flow. Joe?

Thank you, Richard. Capital expenditures during the fiscal of 2016 were $1,066,000 compared to $1,261,000 in 2015. Significant non-cash items affecting our cash flows during 2016 were depreciation and amortization of $1,620,000, amortization of other intangible assets of $1,016,000, amortization of debt issue cost of $128,000 and net deferred income tax change of $3,946,000. Additionally, as Richard had mentioned, there was a gain in the sale of fixed assets of 1.7 million. Other significant components that impacted our net cash used in operating activities of continuing operations were a decrease in accounts receivable of $498,000 offset by increases in both inventories and prepaid expenses of $316,000, and $2,006,000 respectively. As a final note, in the aggregate the Company paid $2,335,000 in dividends during the fiscal 2016 and made the $0.05 per common share quarterly dividend payment just recently in February of 2017 of $180,000. With that, I’d like to turn the call back over to Richard. Richard?

Thank you, Joe. With all of these numbers, there are lot of numbers flying back and forth all over the place and me and Joe, we understand that and we're comfortable with this since we live it every day, but I can only imagine with all the numbers flying back-and-forth how confusing this can be to those of you on the call. Let me just give you my 40,000 foot assessment of the Company, so as you will get a better sense and better comfort levels. Last year, we sold our one non-tool company division, and we sold it for a little over $22 million, and we paid -- it was very, very tax sufficient transaction and very little taxes paid. Then we sold the building, the Nationwide, in over -- about $3.5 million. With those two things, our debt was paid down totally to dramatically under $1 million. During the same time, we had a onetime dividend of I believe $0.50 per share and we’ve been continuing quarterly dividend thereafter. The reason we sold the Company Nationwide was because we want to refocus on tools, which is our mission now and that it was and really when you look at our whole company Florida Pneumatic was up very nicely for the year and Hy-Tech was down and the reasons were cited, but with oil and gas et cetera, et cetera. But I will say that Hy-Tech has shown signs of improvement this quarter, and we are very much more optimistic that we have been before. So, I just would like to keep anyhow just about to tell you those things so that you can keep it along a sense of perspective because the numbers you look -- if you look more talking them than the actual condition of the Company is. And in the meantime, I would like acknowledge as always all of our employees and managements are doing such an outstanding jobs during these difficult economic times. And now, that’s the end of our report today, we’d be happy to answer any questions anybody may have. Operator?

Thank you, sir. [Operator Instructions] And we do have a question from James Wendel [ph].

So, firstly could you please tell me what percentage would so say Sears accounted for the total revenue for this fiscal year?

Let's see of top my head, 12% in that range.

Okay, so of the total revenue and not only from the tools?

Well, all of Sears' revenue is -- yes, that’s total revenue of P&F. But keep in mind, in terms of revenue, we reported continuing operations it was only tool revenue. The discontinued operation does not show up as revenue.

Yes, sorry, I meant the Florida Pneumatic yes, sure, got it. So in terms of as you mentioned in the press release that you're looking to non-renew the contract. So, I was thinking what would be the gross margin impact of that discontinuing the Sears?

Yes, but we don’t look into Sears business that the gross margin levels since there are tremendous expenses we're required to outlay in that relationship. But just roughly speaking, if you're comparing the business after we exit the Sears relationship, it’s approximately a change to the EBITDA around a $1 million or so.

Sure. So, the impact regard would be -- got it. And just on general level, do you think that there is any opportunity to cut any overhead cost?

Yes, there will be and that is factored into the number I gave you. People that handle that business do think other than just mange the Sears relationship, but that estimate that I gave you would include reduction of some variable overhead.

Okay sure. And apart from Sears because obviously, I mean, the business is kind of stagnating due to the macro environment. Are you comfortable with the current kind of overhead and the expenses that you guys have there or.

Yes, but have being said that, once we exit that situation we will reevaluate that but it is point more something.

Okay sure. And just lastly, should Hy-Tech revenue continue to underperform, are you thinking of writing off further inventory or is that something that you're happy with right now.

Given the current level of activity, I don’t have a crystal ball but we don’t anticipate any material changes to inventory value.

Okay sure. And also actually could you just give me an approximation or percentage of inventory is tied to the subsidiary. So what percentage is Hy-Tech and would percentages Florida?

It's in near close to 50-50, I mean I think there may be a little more inventory of Florida Pneumatics than Hy-Tech at this point without the Sears relationships it's probably gets closer even, but fairly distributed. I would say this is ballpark 55% to 60% for Pneumatic maybe 40% Hy-Tech in that range, certainly no more.

Sure. And then actually one more, one more follow-up in terms of the automation -- automated revenue are you -- what sort of opportunities are you looking for because you've mentioned some in the press release but it was -- are you looking for some specific used case in terms of that or?

I'm not sure following you automated revenue or automotive revenue?

Automotive, yes.

Okay, sorry about that. So maybe you could ask the question again with respect to automotive revenue.

In the press release, you're mentioning that you're going to focus on expanding the customer base. Do you have any specific used case in mind or is it just that the general, the general business that you've been making?

No, we've stated in the last call and we announced in the fall the release of new suite of tools that are targeted to a slighted different portion of the automotive aftermarkets. These would tools used in body work. The suites of tools we had up in through the fall, was primarily in repair targeted towards car repair. We came up with a suite of tools in the fall and are beginning to promote them now that are targeted towards body work. So, fender benders and working on the exteriors of cars.

[Operator Instruction] We will go next to Adam Kathiriya with Lawndale Capital.

Just with regards to Hy-Tech, what is the status of you redevelopment efforts to open new industry channel for Hy-Tech? And generally what kind of acquisitions might similarly work for Hy-Tech?

With respect to your first question, we are just starting to see orders and some serious negotiations with respect to some of these non-standard lines of tools and expect to have more announcements about that in the next call or two. So, I would say our efforts there are starting to bare some fruits and should have impact -- should begin to impact the top line, probably beginning in earnest Q2 in the more significant way. With respect to acquisitions, the acquisitions such we are doing is with respect to both Florida Pneumatic and Hy-Tech, there are certain aged companies and types of companies we are looking at that would be fits for both. So, we are absolutely not forgetting about Hy-Tech in the acquisition there, it's not just for Florida Pneumatic bolt on. I don't know if that answers your question but…

Yes, that was helpful. And then just looking at your leasing back in September, you guys began shipping new products, utilize the extensive air tool motor manufacturing all it's to new OEM markets and customers. And you guys specifically noted processing, transportation and industrial maintenance. Can you update us on the progress on this front?

Yes, we're -- the markets we are working on that getting into a lot of detail would industrial maintenance that we absolutely made some progress there, we are making more progress in food production, market and then lastly in some transportation markets. So I would say all of three of those are on track, those three is a three new markets to us that will be in full swing on probably by the middle of this year.

And you guys have previously stated that should Hy-Tech's prospects deteriorate or there could be some additional impairment charges and so for. Approximately how much goodwill and intangible asset value remains on the balance sheet that’s associated with Hy-Tech?

That’s a good question give me one second to get to the answer. Goodwill, there is -- we don’t -- I don’t believe there is any goodwill last so we'll be just looking at some intangibles. I mean I am going to speak off the top my head it's less than a $1 million. Does that sound right? Intangible, we are double checking, if you could bear with me and ask another question will get more specific answer.

Yes, that’s works and thanks so much again for taking our questions. Let's see with Florida Pneumatic specifically with AIRCAT, on the last call you guys spoke of additional AIRCAT products that came online. You guys mentioned maybe it's a dozen of them are so. Can you update us on how they are performing and if you think they are doing -- I think you guys described them as sensational as you've stated on the last call?

I think you are referring to the suite of tools being targeted towards with body work. Those are just launched, so I don’t really have a lot of feedback on that, probably have a lot more to say about that in the next couple of calls. And to answer your -- just to answer your question, the remaining intangibles related to Hy-Tech are just under $7,000.

Okay, I have a few more questions and I know there are probably other people on the call who like to ask questions. But you said you had additional geography primarily in Central Europe --sorry this is with regards to Florida Pneumatics developing for AIRCAT another tool with regards to distribution opportunities. Can you provide an update on that?

Not a lot of progress, we're still hopeful, but progress has been kind of slow. We've really never expected back to begin in earnest until Q2. So, we're still hopeful if that would be the case, but there is nothing new to report on that right now.

And with regards to Home Depot what is your current experience and visibility with respect to them? And you had mentioned that you previously had a launch with Home Depot Canada that was quite favorable, yet it is like just a fraction of the U.S. business and if you could just touch on that as well?

Well, with respect to -- not sure what the first part of your question I could answer exactly. Our relationship there continues, I would say that if you put Canada aside, the growth rate there is definitely slowed down and it has gotten to be matured, our line has gotten built until we add other products probably wouldn’t expect a lot of growth there. With respect to Canada, which again is probably less than 10% of the size of the U.S. market and we did launch that last year and we expect that to grow a little bit this year. But again, I'm not sure you're going to notice that growth even though its double digits in Canada, it's just not going to be that material.

Understood, and I'll step back into the queue but we have additional questions as well.

There is nobody else on the queue so you can finish your questions.

Okay, perfect. Just going back to Hy-Tech I know you guys have called, frequently called out the price of crude oil and the resulting reduced rig count as the cause of Hy-Tech's revenue decline. With rig count up, oil trending up until very recently, have you seen any changes they're reporting turn it all over there?

Yes, through the end of the year we had seen very little, but I can report that probably last 45-days we're absolutely seeing some activity. We're hopeful with that we will continue and grow. So, there is some reason for optimism there.

Okay, and then just more on a corporate level. With regards to potential acquisitions and acquisition process, what are you seeing as the most desirable areas from the synergy standpoint as well as from the valuation perspective?

I think the most desirable opportunities would be ones where there would be air-tools that serve the markets that are distinct from markets we've got right now whether that would be a particular application or particular kind of channel or maybe even a different geography than we currently serve. So there would be tools we are familiar with but we don’t really have a brand or a name in that market, so that's what we are looking at those are the types of things that even make the most sense that we are actively pursuing.

Okay, and let's see here. P&F is just like any other company the valuation multiple is going to be directly impacted by the cost, the Company's cost of capital and thus the value that can be added from acquisitions to our other uses of company capital. We know in the past even feel that investor relations efforts for worthwhile from a financial or time perspective. And just with regards to for some pretty high sell off in P&F shares to some crazy levels. Have you given any though increasing the Company's investor communications efforts?

I have not seen any crazy levels of the selling as you are referring to frankly, but we have discussed this many times and we just really -- at this point, we don’t feel if that's the just story that we have much to say right now. We do it through our conference calls and it's been productive and it's successful. I don’t -- we have no plans at this moment to go into any small cap conferences, if that's what you are asking us.

At least not as a presenter?

Not as presenters, we certainly visit those conferences and get a sense of the market in all of that and will be doing and we do it $10 and we continue to do that. But as a presenter I don’t think that we will service well at this point.

Okay and what would I guess change your minds about that? What's specifically during the thought process would change your minds on that?

I mean I am not sure how to answer that. I am not sure how the market is any different than when it was when we used to do this with very little result. Maybe there is some dynamic that I'm not following, but I'm not sure that given our situation it makes a lot of sense unless there is something different about the market than when it was last time we tried it.

When we've done at Florida, it has not been successful at all because people that felt that they can easily get into the stock but they couldn’t as easily get out of stock, and we discussed that and I mentioned that to Andrew [ph] in the past. He doesn't like the answer but that’s what they told us, not our answer. And as I and Joe said, I don’t see any dynamic that’s changed that would make it seem like it's very better now to do than it was -- of course, it was very closely held stock position between a very few people. It’s a greatest preponderance of ownership and there is not that much flowed out there. So, I don’t know when we will benefit from in that regard.

Okay and then can you update us on the Board's process and position with regards adopting a 10b5 plan and a buyback, potential buyback?

Again we discussed that and our recent meeting, which was couple of weeks ago. We've spent considerable amount of time talking about it. And it's the collective wisdom, very unanimously that we want our use our funds for acquisitions which is the refocusing of our company and that’s where we want to spend our funds and our attention right now. So, that’s where them until we will continue to review it, but that’s -- and of course you know remember there we do a dividend, we give you a dividend, we give every stockholder a dividend quarterly and then onetime dividend that was last year I mentioned earlier. So that continuing that, but in terms of anything else that’s our position at this point.

Okay thanks and just couple of more questions for you guys. This is with regards to CapEx, regarding the Hy-Tech CNC machine that was a pretty big CapEx item last quarter you had said it was still running well below your capacity and activity levels where nowhere close to where you would like them to be. Have you guys increased those activity levels? And do you more visibility as whether that expenditure is actually paying off as anticipated?

Well, it will pay off if activity levels continue to rise. I think with respect to efficiencies, the equipment purchases as always have recently improved those, but really to get the full benefit out of these machines, activity levels have to get back to more, closer to where they were.

Okay. And can you discuss some CapEx plan for 2017 and any major projects that are embarked on or expect to be embarked on?

I think for 2017, I would say it's probably going to be a little more of a modest year in terms of capital expenditures. I don’t anticipate any major pieces of equipment of Hy-Tech. But as between Hy-Tech and for Pneumatic certainly we would be expecting the typical tooling capital expenditures that would be come along with new product development. But major large pieces of equipment I would say probably not in 2017.

Okay and just a last question for you guys and this is going back to Florida Pneumatic specifically within the industrial. You called out aerospace as a sub-segment that was to see several new products before year end. You said that I could be a long lag time and there wasn’t great visibility on that front. But can you update us on the progress on that?

We have continued to look at that and evaluate the opportunities in the market. So, right now, we don’t have anything new to announce on aerospace development. We may have more to say about as in next quarter or two, but as if now there is nothing material to discuss, but that could change.

[Operator Instructions] And gentleman with no further questions, I will turn the call back to you for any additional or closing remarks.

Okay. Well, thank you all for being on our call today. I want to take you back to my comments at the end of my presentation about the Company and we look forward to giving you a good report in the next few -- upcoming quarters. Have a good day everybody.

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