Joseph Molino - COO, CFO, Principal Accounting Officer, VP, Treasurer and Secretary Richard Horowitz - Founder, Chairman, CEO, President and Assistant Treasurer Richard Goodman - General Counsel

Andrew Evan Shapiro - Lawndale Capital Management

Good day, and welcome everyone to the first quarter 2018 earnings conference call. Today's conference is being recorded. [Operator Instructions] And at this time, I would like to turn the conference over to Richard Goodman. Please go ahead, sir.

Thank you, operator. Good morning, and welcome to P&F Industries First Quarter 2018 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; risks associated with sourcing from overseas, including tariffs; 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 system failure 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 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. And with that, I would now like to turn the call over to Richard Horowitz. Good morning, Richard.

Thank you, Rich, and good morning, everybody. Thank you all for joining us this morning for our call on Q1. I'll begin today's call with a brief summary of the first quarter of 2018's results and how this data compared to the same period in the prior year. However, I direct you to our release earlier today for more information. The release this morning presented P&F's balance sheet, statement of operations, per share data, along with most of our management's discussions and analysis. I wish to note further that the purpose of this call is to discuss and review the company's first quarter 2018 results only. As such, as always, I kindly request that you please confine your questions and comments to that topic. Afterwards, I will ask Joe Molino to briefly review key cash flow information and provide an update on any key events affecting the company, after which we will go to our normal Q&A. The company's consolidated financial revenue for the three month period ended March 31, 2018 and 2017 were $15,742,000 and $13,216,000, respectively. As discussed in the company's press release earlier today, as a result of our adoption of the new revenue recognition standards, which became effect January 1 of this year, certain expenses that were previously accounted for in our SG&A costs, prior to the adoption, are now accounted for as a reduction to our revenue. While the adoption of this new accounting standard did not affect our net income, it did result in Florida Pneumatic’s revenue, gross profit and SG&A decreasing by $214,000. Florida Pneumatic’s revenue was $12,264,000 compared to $10,509,000 during the first quarter last year. The net improvement was due to nearly $2.6 million increase in aerospace revenue, partially offset by an approximate $1.3 million decline in retail revenue, due primarily to our decision in late 2017 not to renew our sales service agreement with Sears. Industrial catalog and automotive revenue improved 9.6% and 9.0%, respectively, when comparing first quarter 2018 to the same period in the prior year. Hy-Tech's first quarter 2018 revenue increased to $3,478,000 from the first quarter last quarter of $2,707,000. Significant components to the net increase were an increase in shipments to a major customer and to a lesser extent growth of their engineered solutions initiative. The company's first quarter 2018 consolidated gross margin was 34.5% compared to 37.6% for the same period in 2017. Florida Pneumatic’s first quarter gross margin declined 5.1 percentage points compared to the first quarter of 2017. Weaker overhead absorption this quarter was a contributing factor to this decline. I wish to note that this shortfall in overhead absorption should reverse in the coming months. Additionally, as noted earlier, Florida Pneumatic’s gross margin was impacted by the adoption of this new revenue recognition standard, which caused the 1.7% reduction in gross margin. On the other hand, Hy-Tech's gross margin improved 4.5 percentage points this quarter versus the first quarter of last year, due primarily to improved production efficiencies and greater absorption of the manufacturing overhead. While our selling, general and administrative expenses for the first quarter of 2018 was $5,280,000 compared to $5,047,000 for the same period a year ago. As a percentage of revenue, SG&A was 33% compared to 38.2% for the first quarter of last year. This net dollar increase was due primarily to the inclusion of the Jiffy operations this year, being partially offset by the reclassification of certain expenses caused by this new accounting standard previously discussed. Additionally, during the first quarter, we recorded a charge of $29,000 relating to an increase in the fair value of the contingent consideration payable to the seller of Jiffy. Lastly, the company's interest expense during the first quarter of 2018 was $37,000 compared to $10,000 in Q1 of 2017. Taking all the above into consideration for the three month period ended March 31, 2018, we are reporting pre-tax income of $88,000 compared to a pre-tax loss of $84,000 for the first quarter of 2017. On an after-tax basis, we're reporting net income of $65,000 compared to a net loss of $60,000 in Q1 of last year. First quarter of 2018 basic and diluted earnings per share were $0.02 compared to a loss of $0.02 per share for the first quarter of 2017. As a reminder, I refer you to this morning's press release for any other additional information. At this time, I will ask Joe to discuss our cash flow. Joe?

Thank you, Richard. Capital expenditures during the three month period ended March 31, 2018 were $570,000 compared to $231,000 during the first quarter of 2017. Significant non-cash items affecting our cash flows during the first quarter of 2018 were: depreciation and amortization of $335,000; amortization of other intangible assets of $179,000; increase in the estimated fair value of contingent consideration payable to the seller of the business assets of Jiffy of $29,000; stock-based compensation of $60,000; amortization of debt issue cost is $23,000; and deferred income taxes of $21,000. Significant components, which impacted cash used in operating activities during the first quarter were: increases of $603,000 in accounts receivable; decreases of $961,000 in inventories; an increases of $200,000 in prepaid expenses and other current assets; and finally, accounts and accrued liabilities decreased by $1,026,000. 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 our management for doing such an outstanding job during these economic times. That's the end of our report today. And now I'll be happy to answer any questions that anybody may have. Operator?

[Operator Instructions] And we'll go first to Andrew Shapiro of Lawndale Capital Management.

Sorry, it was on mute. Hi, good morning. I have several questions, of course. I'll ask a few then...

Andrew, can I ask you to speak up please. We're having trouble hearing you. I apologize.

Sure. I said good morning. I have several questions, of course, but I'll ask a few and then back out into the queue to give you an opportunity or others.

Thank you.

So just to follow up on the most recent acquisitions that were made: Jiffy and Pneumatic. I know Jiffy is now, I think, anniversarying. First off, when does that acquisition anniversary?

It was purchased April 5, 2017. So we now have a full 12 months of Jiffy.

Going for the second quarter on.

Right. And so with the – a few questions on those two, and then we'll go into your segments here. Capacity expansion was stated as a major focus for the Jiffy opportunity as well as, of course, throwing their aerospace products through a broader distribution channels, and national focus that P&F had versus the family that had owned and run it. Can you discuss the progress made over the course of the year? And what visible steps or milestones remain for increasing capacity there?

With respect to Jiffy, the couple of things, we had identified a couple of major pieces of equipments to install out in Nevada. They have been purchased. They're up and running, not at full usage yet, but we expect I would think by – certainly by the end of the second quarter we'll get full utilization of that equipment at least for the shorter run. There's always be – there's opportunity to put more parts on it, but for the short run, I think we'll be happy with where we are at the end of the second quarter, and there'll be more to come. In addition to that, we have been successful in expanding our second shift a little bit, and then that will grow further as we work our way through the backlog. So those two things are well along in. And I'd say, that's the – for 2018, those – that will be the big two items that will help us increase our capacity there.

Okay. And with respect to Pneumatic’s and their aerospace clients and your legacy P&F and importantly your Jiffy aerospace tools, clients and all that, what type of cross-selling might you be able to do, even though they're in two different divisions? And what type of success have you had with this cross-selling approach or attempt so far?

Well, it's really only been – I don't even think it's been 60 days since the last call. We have not – we have some scheduled meetings with some pretty major customers and major opportunities for pneumatics in the next 60 days. These initial meetings, we will probably not be cross-selling. Having said that, the follow-on meetings, which we expect to have throughout the summer and into Q3, that would be the opportunity where we will start the cross-selling. We're really just getting started, so it's – not a lot has happened in the last 50 days or so. But by the time we speak, again, I'll have a lot more to say about that.

All right. We'll throw that question back in the pile for next time. On the last call – again, it maybe too short of a time passage from Q4 to Q1 here. On the last call, you discussed a couple of large aerospace customers you're working on, some of the R&D in connection with those potential accounts. And we're pretty confident you would have some success with the Pneumatic’s products related to those accounts. Are these the meetings you're referring to or is this something separate?

No, it's the same thing. I mean I can say that we've made a lot of progress on the R&D front. And frankly, that really needed to happen ahead of the next set of meetings. But I think we're just about where we need to be on the tech. And I expect those meetings are getting organized as we speak.

Okay. And lastly, on these two new acquisitions in my questions and I'll back out into the queue. With another quarter owning the product line, can you provide any – is there any additional color on your experience and the opportunity with Pneumatic so far that gives you comfort to be excited about its prospects?

Well, we continue to see a couple of things: one, we've interestingly found that, even the legacy – the legacy aerospace business that we had were – we are a pretty small player. I don't know what to call it, maybe a halo effect or bleed-over effect, but we're actually seeing a little bit of opportunity coming back to us due to the affiliation with Jiffy, which somehow we've – I don't know – for lack of a better word, we've legitimized the older product line due to our association with Jiffy because the brand is so strong. And in addition to that, there've been opportunities where customers have chosen to purchase a very similar tool that might have been available from the old line, if they needed a tighter window to fit that proceed into. So that has happened. As I said, we think we're doing a better job of covering the US, than we were – than what's happening ahead of the acquisition. And we think as a result of that, we're certainly seeing some – a bit of a pickup, especially in the Midwest, where Jiffy maybe wasn't as strong, so that's been pretty exciting as well.

Okay. I will back into the queue. Of course, I have more questions. Just let me know.

Sure.

[Operator Instructions] We'll go next to [Henry Debrow], a private investor.

Thank you. Good morning to all.

Good morning.

I would like to ask two questions relating to your today's release. You talk about the December '17 agreement between Florida Pneumatic and Home Depot. And it looks like a commitment of $1 million for some type of marketing expense. Can you briefly describe that commitment, and what is the purchase commitment by such customer?

Sure. Periodically, Home Depot, in conjunction with their vendors, refreshes the product line. So we collaborate with them on a new line of products that we expect to launch – they expect to launch in the fall. And in conjunction with that, what was negotiated between the parties was a commitment on our part to contribute $1 million to the launch of that product in the stores. It – we don't exactly know where the money goes, but it's a combination of helping to fund new displays, helping people set up the display, helping people move out the old products, helping promote the new product. All of the above. We don't really...

So would you call that a sales allowance or is it a SG&A expense?

It's a – I'll call it a sales allowance. I don't think we used that term, but it is a reduction. It will be a reduction of revenue that – go ahead.

Okay. And is there a commitment that, that customer has to buy X amount over the term of the agreement?

There is no actual commitment for specific quantities. Our experience with Home Depot and Sears after 30 or 40 years is that, these refreshings – these realignments of a line happen every 3, 4, 5 years, and that's usually the period that we spread these costs over, but there is no actual dollar commitment.

Okay, okay. So you're comfortable with the customer based upon your track record.

Yes, we're very comfortable with them.

You're running the company. Okay. My last question relates to your disclosure about you estimate another $1.5 million for Capex for the balance of the year, and you will either fund it from Capital One or externally finance sources. Have you considered or factored in the potential proceeds of $600,000 from – in the money options that the CEO has expiring in June?

Well, certainly, they're in our estimates of cash flow. I'm not sure I'm necessarily following your question, so I'll just explain how I think you meant the question. The $600,000 influx of cash will reduce our need to borrow, if that is what you mean.

Okay, okay. So it's either going to be for general corporate working capital as opposed to for Capex?

Yes, it's not – it just goes into the general fund, and it's not earmarked for anything in particular.

Okay, okay. No I mean – look I just – when I read the proxy, I see that it's expiring in a month. And since it's in the money, I would have to assume that, they will be exercised?

I think that would be a really good assumption, but [indiscernible] for sure.

Thank you. I will go back into the queue.

We'll take a follow-up from Andrew Shapiro of Lawndale Capital Management.

Hi, thank you. Following up on that last question, in light of the upcoming influx of cash and exercise on the options and the increase in shares outstanding, and the fact that the stock price reflects a huge discount to the company's tangible book value, which we know is understated due to the appreciation you got in your Florida real estate amongst other things, and we all agree that the stock is cheap. Has any thought then given, and is there a discussion within the board of increasing your periodic pace and the scale of the buyback? On last quarter's call, you discussed that each quarter you got a plan where you are buying back a certain amount, whether it's dollars or shares. And you're going along a particular pace. And when that's completed, you'll review and then consider reloading. But in light of the fact where we are right now and you guys know the prospects and everything else and you're getting this influx of cash from the issuance of basically new shares for those options. Has any thought been given or might be given to upping the quarterly pace and scale now, while things are cheap rather than waiting until the current buyback plan itself has expired?

The current plan expires in August, I believe. And it's $100,000 – 100,000 shares, excuse me, over the four quarters. And so after that time, we will be examining everything and look into our needs, our cash flows, if we have any acquisitions in the line, whatever it is, we will re-examine it at that point. But you make a good fair point. And obviously, it's something we think about.

Right. I mean, does – why increase it and all that after your stock is up at 9, after all is said and done versus there's any chance to grab a little bit more this quarter and up the pace. And I appreciate you want to do it periodically, that's fine. But you just said, it's a pretty slow pace, while things are cheap, and you are getting this extra – I won't call it unexpected cash, but you're getting this extra cash, and it is from actually the conversion of options into issued shares, so.

Andrew, just – if I could just interject. Looking at the purchases each day, which we go over, I'm not sure we could really do much about the pace. I really think we're buying what we can buy and what's available to us within reason and without moving the market too much, but...

No, you said – Joe, sorry to interrupt to you, but you said on the last call, I believe, that in at least one or two of the quarters, your quarterly limit – your quarterly pace was actually able to be chewed up halfway into each quarter. And I mean I do know that you're limited on a daily basis, although you guys can't grab some blocks if they were to be made available, which we didn't think was even an opportunity given the pace – your limits, but…?

Yes, Andrew – go ahead.

So, if you authorize more in your plan, and you can't get it, you can't get it. But if you can get it, it will just be – it seems to be an opportunity that's being missed.

Yes, I don't disagree. I will say this, what I said is true. We – back last year, we got pretty close. I think, one of the quarters, we did cap out. But my guess is, what happened – there was a lot – a ton of activity towards the end of the year and a little bit at the beginning, and that pace dropped off dramatically. And we're – I don't think we're going to be banging into the limit at the end of this third – three month or 90-day period. We'll get in the ZIP Code, but I don't think we're going to max it. And again, it's a little out of my knowledge phase, but...

Right. Well, as if I'm speaking to you right now, I'm seeing a 12,000-share offering at 8.50. I mean, we all know that's a cheap price. We appreciate their security regulatory issues. You can't be asking all of that. But as we speak right now, a 12,000-share offering is quite sizable. It's a more than [indiscernible].

Right. Well, I'll – Andrew, I will just say this, the parameters that were set are well known by the firm doing the work. And if that's available to them inside of the parameters we set, I'm sure they'll go and try and get it. I don't know – we're not going to try – we're not going to avoid it.

Yes. Can you share what firm you've given this execution to?

UBS.

UBS, all right. Okay. On the last call, you said you were still very actively looking at tool businesses, aerospace, automotive, industrial. Can you update us on the status and the focus of the company's acquisition process? Is there now evolving any area, in particular that you're focusing on or you're finding prospects or you're finding acceptable valuations?

Yes. We are focusing on a particular area. I really don't want to say what it is frankly, but it is the niche that we have identified. And hopefully, we'll have more to say about that. I can't say when, but the answer to your question, yes, we've gotten a little particular about what we're looking at. And it does dovetail nicely with our go-forward strategy. It's kind of all I can say right now. But again, to maybe more to update about you – there'll be more to update you on when we have something concrete to say.

Good. Well, I look forward to that. Can – it seems like the Capex for the coming year, what you've done and what you plan to do is a little bit more sizable than what you've done in years past. Is there – are there any particular major products that are embarked on or to be embarked on? And what's your – the status on that?

Yes, I think there's a couple of things going on. One, just sort of a confluence of the bench. We're having a major upgrade to the corporate software in New York; a brand new installation of a system in Hy-Tech, and a once in a 20-year upgrade to the system in Florida. So that's all going on in 2018. And then, with our real opportunity at Jiffy to take advantage of, what we see is, are exciting growth. We just realized we needed more equipment than we had, and that's the other two – the other piece of it. I think between those two categories, that's got to be 80% of what we're spending.

Okay. And one of those things you referred to at Hy-Tech, you have called out on the past call, so I wanted to just check in on that. And that I think was the MRP system, that was a major piece of trying to enhance the throughput at Hy-Tech, which as we've discussed has – at the last call, you were doing above standard grades on two shifts, because you had – you're still having – you didn't find the right – you don't have the right supervision or senior staff to go with the third shift, even though you might have enough business to do a third shift. So we're kind of paying a little bit more than we should understand it right, because we're short on people and you need to do throughput. So where does – where do we stand on the MRP system improving your throughput?

All right. Let me just clear up something, we do not have a second shift. We certainly don't have a third shift. So that's something we're working on. The MRP system should be up and running very early in Q3. And there are other things we are doing outside of just looking for operators that we think will be very beneficial to throughput that has to do with how we're managing the material, but we can give you the look from people.

All right. I guess, definitely a mistake because I thought we had – we were talking about a third – a second shift and then you were trying to get a supervisor for the night shift. So the night shift would be your second shift?

Yes, correct. And one – just be clear, it's not really the night shift. I mean, we wrap up third shift at like, I want say, 3:30-ish, maybe 4 at the latest, somewhere between 3 and 4. So the second shift would end around midnight. I guess, you can call that night shift, but...

Anyway. But you're not doing that shift yet anyway, because you don't the – personnel yet?

Correct, but it is a priority.

Okay. Then, let me back out and before I go into the two segments and – but I do have more questions.

Yes, I don't think there is anybody else on the call now, Andrew. So you can continue.

Okay. Well, then let's move into – moving into and sticking with Hy-Tech, and then we'll do Florida. But on Hy-Tech engineered solutions was 8.5%. The newer products, the OEMs, et cetera, were 8.5% of Hy-Tech's revenue for 2017. On that call, 60 days ago, you said you're expecting that number to cross into double digits in 2018. And it looks like, as you called out the quantity in this press release, and thank you for that detail, that the new products are now over 11% of Q1 Hy-Tech revenue. Do you feel this faster rate of growth will continue? And thus, the engineered solution products portion of Hy-Tech's business will continue to become more meaningful?

I mean I think, yes, directionally it will. If you're looking for me to tell you when it's going to cross 20% of the business, I don't know. But I would be not surprised if it became – got well into the teens for the year, for 2018.

Will you guys continue to call it out in your press releases, and that will be...

Yes, yes, yes. It is absolutely something we plan on breaking out – I want to say permanently, but as long as it continues at this pace, and we expect – it is a focus of the business. So we want people to understand what we're up to.

Now as this grows, and you're able to call it out or identify it, in some ways you're going to get to anniversary in those product lines, right?

Yes.

Is this accounted for? Is it tracked in some discreet manner that it eventually might evolve to be segment apart from ATP or something that's called out, because at some point, we're going to say, you got engineered solution products, you rolled out in 2017. And here, we are in 2020, where we're really trying to focus on your new product introduction and the success of new products?

Yes, Andrew, that's a good question. We – honestly, we have been having those discussions internally about whether ATP is a single line item and, I believe, other as the second line item is appropriate. We're having those conversations ourselves. And I don't – I'm not going to promise what we're going to do, but we're absolutely having conversations about, perhaps breaking ATP up and making it more meaningful. So just stay tuned on that. It's a good point. And we're absolutely talking about it right now.

Yes. If the engineered solutions product activity, does it involve discreet personnel or discreet machinery or discreet design work, et cetera, anyway?

It's just – right now, I mean, honestly everybody in the plant, even down to the engineers, work on everything. So – but having said that, if we can certainly track it on the revenue side and the cost side. It's not that blurred. But in terms of personnel, it's pretty blurred.

Okay. Now have your – how is your development efforts to open new industry markets in all of – and channels progressed? Is that the engineered solutions? Or is that a separate effort?

That's primary the engineered solutions. The market we're trying to open up at Hy-Tech is aerospace, which is obviously separate from engineered solutions. But it is another market we're going after. The engineered solutions cuts across a number of markets.

And are there – and this is directly for customers, it's not really that – something that's been done via new distributors for you?

Yes, there are no – there are generally no distributors involved in the engineered solutions product line. We're working directly with the end users.

Okay. And further on – see if it's on Hy-Tech or we're moving over to this. You previously said that Hy-Tech was going to begin to develop a new marketing strategy that was intended to re-energize the gear and hydraulic stopper business and all that. Can you give more color on that strategy, and its success or failure?

Well, we've realigned the distribution network and the rep network for both of those. We are looking into enhancing how we go to market with the gear business and looking at – we've identified some people in that space that aren't really competitors, that go at the market in a unique way. And I can't really say what that is right now, but we're contemplating, altering how quality gear goes to market and what we promote as our capability. So I can't really say a whole lot more other than that for right now.

Right. But – and if I recall, on the last call or prior, this is actually a really nice margin business?

Very nice margin and kind of niche. Not a lot of people have our capability, and that has helped us. It's actually helped us quite a bit in the engineered solutions business, having the gear company as a captive sub.

Okay. Now on the – migrating over to Florida Pneumatic, is the new product line for Home Depot expected – do you have any better clarity? Is it going to generate similar or higher levels of revenues? And I guess, before I asked that versus the legacy line, I probably should ask about this marketing co-op expenditure, and the way that it would be accounted for, you have any clarity on that, because if it is accounted for as a reduction of revenue and not done in the SG&A line item, I think that answers my question about the revenue expectations.

Yes, let me answer a couple of questions. At the moment, we are not assuming that the new product line will sell better than the old one. Having said that, our experience has actually been that it does, but I – we're not – we have not projected that. They have not told us their expectation. But – and then, this is just me talking from experience over 20 years here that it seems that when we refresh the line, even if we have the same number of SKUs, we tend to get a little bump. And I'm not just talking about the [line]. We tend to get a little bump in the revenue. But I'd be guessing right now. But for right now, we're assuming it's pretty much the same revenue. You'll have line fill of course in Q4 or 3 or 4 when that shifts. With respect to the co-op as you're calling it, again, I don't know that we have even a name for it. But the $1 million expenditure, we are – due to the new revenue recognition guidance that came out last year, it's gotten a little more complicated in terms of what we do with that $1 million. We are working with our outside – several outside accountants both our auditors and others in reviewing the guidance, and how exactly we are going to account for that. So you're going to have to stay tuned. I don't have a good answer yet. I just can't say. I mean, personally, I think, it's something that should just spread out over some period of time as a reduction of revenue, but we are not done looking at the guidance in getting in all of the inputs from our advisers.

Now will the actual payment of cash be a one-time lump sum?

It'll be in a very short window. Home Depot has not indicated exactly how they're going to take it. But again, history suggests that they take it very quickly after we start shipping the new product, if not in – and I can't remember the last go around with this thing, but I believe they took it as a reduction of their – of the payables to us over some short window. But we have not – they have not told us yet.

Right. And then you have to figure out how you then account for it?

Yes that we're working on.

All right. So a question for a future quarter.

Yes, we'll know better on the next call.

And is the time line for the rollout, it's still in Q3? At the time of last call there wasn't enough visibility to know whether it'd be a running change over or all at once, any visibility now?

I don't know. It certainly not going to be – I think it's going to be something in between. We're going to be shipping that throughout Q3. We don't exactly know what their plan is on – of selling out the old inventory to be honest. So I wouldn't call it a running change exactly. They're just somewhat secretive frankly on how they're going to do it. We have some target shift dates, which we will meet. And it's really up to them on how they roll it out. That's really outside of our preview.

Okay. And regarding the late arrival of overseas shipments, and the impact on the gross margin during the recently completed quarter. And then your expectation that this reverses, but it reverses over the second and third quarters. Can you just expand upon what happened? And to what extent this is within the company's domain and control, and to the extent it's obviously circumstances beyond your control and all of that?

Sure. So let me just to give you a little accounting background. So at Florida Pneumatic, the way we absorb our overhead. Now mind you, it's not a manufacturing operation, but we still have a fair amount of overhead that has to end up in the product costs. The way we do that – and there are a number of ways to do it. The way we choose to do it is with the arrival of containers throughout the year. I'm going to make these numbers up. Let's say that over the course of the year we get 100 containers in, and each has a certain dollar amount of receipts that hit the books, so we'll take our overhead, fixed number and spread it out across those dollars. And that's just our approach. It's been that way for as long as I can remember. So in a month where you're expecting 10 containers, and let's say, for argument sake, you're expecting four of them on the last day. If those four don't show up on the last day, but actually show up on the first day of the next month, that absorption just rolls into the next month. Is that the best way to do it? I don't know. It's the approach we've always used. It tends to even out over a time. And it rarely ends up affecting a quarter. It just so happened that this month – this quarter it did. And again, it's in and out. It doesn't really change the cash flow of the business, of course, but that absorption we fully expect to get back in Q2.

And Andrew, that I'll just help bring back the gross margins to approximately what they were budgeted to be.

Sure. Okay. And in the last call, you attributed a good chunk of the increases in the industrial catalog revenue side. It's just a resurgence in the market. And you thought it would be sustainable, and have you continued to see that?

Yes.

Yes, we have.

Okay. On the previous call, you spoke of a suite of tools targeted towards bodywork. You said the feedback was positive, but you didn't have enough time with it. This is, I think, with the AIRCAT. Is there an update on that progress, and what further feedback you have received?

Again, it is a relatively small line in comparison to the maintenance work in the automotive market. So it won't move the needle dramatically, but it is out there and the feedback is positive. And I don't know that it's so significant you'll necessarily see it pop off the page as a big infusion. We like it. And I think it's just going to take a little bit longer for it to make an impact.

Okay. So it was nice to see that the currency movements, a decline in the dollar, while impacting us with lower margins from Asia-based supply sources, provided a net benefit on the European or universal side. So that was nice to see. But on a constant currency or a local currency basis, universal seemed to be down slightly, is that a sales mix issue? Is that a volume issue? What are you seeing going on over in Europe?

The UK market and it's primarily UK is still struggling a bit. I mean, they're just not as robust as we are here. And one customer – in particular, a very large customer has been struggling a bit. And we're working with them and working in another channels. Actually outside of that customer, things are actually pretty good. But it is a significant account, and the market there is just tougher than it is here. And there is not much else to say.

Right. Now you were developing AIRCAT and other tools for distribution opportunities for Europe. And on the last call, you said you are evaluating and some things you're working on in terms of a new approach in automotive tools for Europe. And I know it's only been 60 days. So the first part of the question would be, has it been rolled out yet? Or if it has been, what are your initial observations and results are from this kind of a new approach to Europe and the continent overall?

It has not been rolled out yet. The rollout is going to be contingent upon us finding a pretty key executive. That search is going on right now, but that person is not in place. So until that person is in place, I really won't have much to say about our European expansion.

Okay. I have one reach back on Hy-Tech, I forgot to ask about because it hadn't been an issue we called out on in the last quarter till we backed off on that, because other avenues of focus. But Hy-Tech suffered even as early as last year and definitely for a few years. From a decline in the energy in oil and gas market area, and you guys are more offshore rig, offshore oil and gas versus shale and tight oil here on land. But in light of sustainability on the energy side, and now I know it's only been recent, but it seems like higher sustainable levels. Are you seeing a comeback in the oil and gas industry segment or portion of the Hy-Tech business?

Yes, we are. Before when you asked about industrial Florida Pneumatic, which serves a lot of the same market, Hy-Tech is also enjoying or strengthening there as well. It's – the tide has definitely risen in petrochem.

Right. It's nowhere near the levels you were at, so there is still a bunch of potential recovery. Is that correct?

I don't know. I didn't check oil this morning, but I think we're in the $70 a barrel...

No, no, no. I didn't mean in terms of oil pricing. I'm talking about the level of business that Hy-Tech had done to the oil and gas sector before that sector dropped off the map for Hy-Tech and really hurt the company for the segment. You have seen a resurgence. But based on the levels you're doing now, are we at 80% of the levels you were doing? Are we already at the levels Hy-Tech was doing in that sector? Or are we at the 50%? Where are you at relatively...

Well, we don't really know. One of the reasons we don't really know, Andrew, is most of our distributors sell lots of things, not just oil and gas – to oil and gas customers. So I can't really answer it perfectly. I mean, we're certainly part of the way back, but we're certainly not where we were five years ago. And I can't tell you that we're going to get back to, even if oil is $100 a barrel. I mean, we're happy about it. But honestly, we've really focused resources on other areas right now, where we can create a little bit of a niche and a name for ourselves. We're just another player in oil and gas, to be honest.

All right. Kind of a corporate question to get a little bit color here. You gave some language in your press release called out, the company's present status regarding the new tax law and the transitional recognition issues, deferred items, et cetera. And I'm just trying to get a clarification, are your estimates being adjusted quarterly? And what is the scope and size of the – what are the scope and size of the deferred items that you have not yet applied the new law to that you are guiding – you are waiting for additional work or analysis on them? Just kind of – I'm trying to get a feel for it, if it's – there's a big lump sum or the catch-up provision would likely be modest?

Yes, Andrew, we actually have adjusted the bulk of what we're going to adjust. There is not another shoot to fall on deferred taxes to my knowledge. We adjust quarterly. And I believe at year-end, we've gotten where we needed to be for the most part going into 2018. So I don't think there's – I don't think you can expect some big change going forward. I think, we're there.

Okay. I mean, there's a lot of shelf space and sentences given in the release to the whole tax thing for the March quarter, so I just...

Well, I understood, but there is a lot going on. And sorry, if it didn't jump off the page that we think we're where we need to be, but we are.

Right. And similarly, the whole tariff issue and all of that. Do you have alternative sources other than China that would avoid the tariff impact? Are we going to be solely dependent on the ability to pass through as much of any tariff cost as any of our other potentially larger competitors are going to do?

There is no short-term alternative source to compete with the Chinese source. I'm not even sure there is a long-term alternative source that can be competitive across the tech, the infrastructure, all that. So really, we would be – if this tariff sticks, and I guess that's an if, we would be solely reliant on being able to pass this through. There is really – there is no – we are already, in our view, working with the cheapest and best source for that product.

And I would say the same that all of our competitors are on the same boat.

And do – our company's competitors is similarly unable to source or manufacture outside of countries that would be subjected to that tariff?

Yes. We don't think anybody is in any better position or even put themselves in a better position than we are. I mean, we are a major player in retail air tools in the US. And we just don't think anybody can do it better than we can. Is it possible somebody could claim such a thing? I suppose. But our experience has been, many years back when Home Depot and we parted ways at one point, they thought they can do better with somebody and that, Andrew, failed miserably, and that's how we got back in there. So it's – it is – the supply chain is what it is. We think we're as well positioned as anybody can be in that supply chain.

But is a real issue. There is no denying it. If it sticks, it's a real issue.

All right. And these products that would – that you source from there, the tariff subjected regions, they are primarily in Florida Pneumatic side. Am I correct? And if so, is it primarily the Home Depot and Husky lines? Or is it across all your catalog lines and everything else?

It's primarily Florida Pneumatic and primarily Home Depot. Frankly, it's immaterial beyond that.

Right. And given that we – a company makes products in your other facilities and all that, is the ability to make these products in our other existing manufacturing operations? Or would it make any sense to do that?

We couldn't begin to match the cost. It's comically different. It's just not possible.

Okay. So then, how does this tariff – so this tariff with respect to these products doesn't bring jobs back on – into America?

No. The tariff would have to be 10x that – I make this up, 10x that number to make a difference.

Right. Now you guys mentioned that there are people writing letters and lobbying with the various governmental regulatory authorities that are working to administer this. Certainly, the big boys are doing their share of lobbying. Is this something that the company is providing comment on? Or doing its own lobbying? Or I don't know, lobbying is probably not the right word, but its own efforts advocating for exemption of the P&F supply products?

It's an industry-wide effort, but it's – I don't know what you – what anybody can do other than voice their objections which they – we will have.

Yes, we have. We have raised our voice to the appropriate people.

Yes, without a question, but it's – it doesn't matter what we think.

But there is a large industry trade group of some sort that's doing it's lobbying to the trade representative?

I can't speak to that. I can only speak to what we know and what we can.

All right. Thank you and my main takeaway other than, of course, you got an acquisition on the horizon that will be eager to see would be...

I don't [indiscernible] to say, but let's be clear, I did not say that. I said...

No, no, no. I said, yes. I said, my main takeaway is that if you have that, that's one thing. If you don't, then my main takeaway is to have you – management and the board consider the opportunity of at least authorizing and scaling up your quarterly pace at – and again, obviously, at higher prices. I think there is greater liquidity and you could satisfy that pace, again, with 12,000 shares offered at 8.50. But if you are not authorized to do that. And it's just a shame to wait until August, where you could do it sooner at least in terms of authorization. And I still appreciate your desire to do things periodically. But again, at higher prices, you probably are able to achieve your current tight limit.

Yes. Well, again, what we be discussing at our next board meeting, [indiscernible] meeting obviously. And – but that's – I don't really know that we're able to do anything much before August, but we certainly will visit it as always.

Well, you got your full quarter's purchasing power worth ready anyway, it's a question if the stock is at 8.50 at 12,000 shares, you can satisfy your target.

Yes, absolutely.

Great.

Thank you, Andrew for your time.

And at this time, we have no further questions in the queue.

Okay. Thank you all for your time today. And we look forward to speaking to you at our Q2 results in August. Thank you all. Have a nice day.

And again, that does conclude today's conference. Ladies and gentlemen, we appreciate everyone's participation today. You may now disconnect.