Richard Goodman - General Counsel Richard Horowitz - Founder, Chairman, CEO, President & Assistant Treasurer Joseph Molino - COO, CFO, VP, Treasurer & Secretary

Timothy Stabosz - Private Investor Andrew Shapiro - Lawndale Capital Management

Good day, everyone, and welcome to the P&F Industries Second Quarter 2018 Earnings Call. Today's conference is being recorded. [Operator Instructions]. 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 second 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, current plans, estimates and expectations, which are subject to various risks and uncertainties, including, but not limited to, risks associated with exposure to fluctuations in energy prices; debt and debt service requirements; borrowing and compliance with covenants under our credit facility; disruptions in the global capital and credit markets; the strength of the retail economy in the United States and abroad; 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; the threat of terrorism and related political instability and economic uncertainty; and information technology system failures and attacks; and those other risks and uncertainties described in the reports and statements filed by the company with the Securities and Exchange Commission, including, among others, as described in our most recent annual report on Form 10-K, our quarterly reports on Form 10-Q and our other filings. These risks could cause the company's actual results for future periods to differ materially from those expressed in any forward-looking statement made by or on behalf of the company. Forward-looking statements speak only as of the date on which they are made, and the company undertakes no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future developments or otherwise. With that, I would now like to turn the call over to Richard Horowitz. Good morning, Richard.

Good morning, Rich. Thank you so much, and good morning, everybody. Thank you all for joining us this morning for our Q2 call. I will begin today's call with a brief summary of our 3- and six month results and how this data compares to the same periods in the prior year. However, I direct you to our release that was released 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 discussion and analysis. And as a reminder, the purpose of this call this morning is to discuss and review the company's results for the three month period ended June 30, 2018, only. As such, I kindly request that you please confine your questions and comments to that topic at hand. I will then 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 move to our usual Q&A session. The company's consolidated revenue for the three month period ended June 30, 2018, was $16,188,000 compared to $15,359,000 for the same period in 2017. As discussed in the company's earnings announcement released earlier today, as a result of our adoption of the new revenue recognition standards, which became effective January 1 of this year, certain expenses that were previously accounted for in our SG&A cost prior to this adoption are now accounted for as a reduction to our revenue, gross margin and SG&A. While the adoption of this new accounting standard did not affect our net income, of course, it did cause Florida Pneumatic's revenue, gross profit and SG&A that decreased each by $243,000 for the three month period ending June 30 of this year. Florida Pneumatic's second quarter revenue was $12,470,000 compared to $12,132,000 during second quarter last year. We increased our automotive and industrial revenue by approximately $384,000 and $172,000, respectively. Further, I am pleased to report that when comparing this quarter to the same three month period last year, aerospace was increased by more than $1 million or 54.9%. Hy-Tech's second quarter 2018 revenue increased to $3,718,000 from the second quarter 2017 revenue of $3,227,000. The primary component to this increase was increased shipments to a major customer. Our engineered solutions initiative continues to strengthen with the backlog of approximately $914,000 at June 30, 2018, compared to $591,000 just a year ago. The company's second quarter of 2018 consolidated gross margin was 36.3% compared to 35.3% for the same period last year. Florida Pneumatic's gross margin 36.4% was the same as prior year, which Hy-Tech's gross margin improved 4.8% to 35.9% from 31.1%. This increase was due primarily to a greater absorption of its manufacturing overhead cost, driven by greater throughput through the facility, product mix and price increases on uncertain product lines. With improving product mix in its inventory, Hy-Tech has also been able to reduce its obsolete and slow-moving inventory charges this quarter compared to the same period a year ago. This early, as noted earlier, Florida Pneumatic's gross margin was impacted by the adoption of the new revenue recognition standards, which caused a 1.3 percentage point reduction in the aerospace margins. While our selling, general and administrative expenses for the second quarter of 2018 was $5,361,000 compared to $5,366,000 in the same period a year ago, as a percentage of revenue, SG&A was 33.1% compared to 34.9% from the second quarter of last year. Additionally, during the second quarter, we recorded a charge of $28,000 relating to an increase in a fair value of the contingent consideration payable to the seller of Jiffy. Lastly, the company's interest expense during second quarter of 2018 was $55,000 compared to $64,000 in the second quarter of last year. This improvement was driven primarily by lower short-term borrowing levels this quarter compared to the same period a year ago, partially offset by an increase in amortization of debt issue cost. Taking all the above into consideration, for the three month period ended June 30 of this year, we are reporting pretax income of $433,000 compared to $16,000 for the second quarter of 2017. On an asset tax basis, we are reporting second quarter 2018 net income of $305,000 compared to $16,000 of Q2 of last year. Second quarter 2018 basic and diluted earnings per share were $0.08 compared to no earnings per share for second quarter of last year. Again, as a reminder, I refer you to this morning's press release for additional detailed information. At this time, Joe Molino will discuss our cash flows. Joe?

Thanks, Richard. Capital expenditures during the six month period ended June 30, 2018, were $1,224,000 compared to $358,000 during the same period of 2017. Significant noncash items affecting our cash flows during the 6 months of 2018 were depreciation and amortization of $660,000; amortization of other intangible assets of $369,000; stock-based compensation of $120,000; changes in deferred taxes of $99,000; allowance for doubtful counts and charge backs of $95,000; increase in the estimated fair value contingent consideration payable to the seller of the business assets of Jiffy of $57,000; and amortization of debt issue cost of $50,000. Additionally, significant components have been impacted cash provided by operating activities during the six month period ended June 30, 2018, were an increase of $250,000 in accounts receivable; an increase of $1,332,000 in inventories; an increase of $267,000 in prepaid expenses and other current assets; and accounts payable on accrued liabilities in the aggregate increased, $856,000. With that, I'd like to turn the call back over to Richard. Richard?

Thank you, Joe. In conclusion, as always, I would like to acknowledge all of our employees and our management and our customers, of course, for doing an outstanding job during these challenging times, as always. That's the end of our report today, and I'd be - we'd be happy to answer any questions anybody asks at this time.

[Operator Instructions]. Our first question will come from Timothy Stabosz, private investor.

I'm back in the stock because I think it's attractive and undervalued. My average is $8. I sold the block back to the company at $7.60 3.5 years ago, and I think the stock is attractive. Let me first give you some praise and say that I really like the way you got out of Sears when the time was right and protected the shareholder base from the risk there. That was prudent and appropriate. And also, the initiation of a dividend and the stock buyback is broadening the shareholder base over time. So these are very good things. We have finally talking about the earnings for the quarter here. We have finally returned to a certain amount of modest profitability. You've had a very impressive strategy here of remaking the company over the years I was out and has since recently got back in. My question for you related to the earning and kind of a broader view picture is simply this. We do have a $13 book value per share. A 10% return on equity would be $1.30 a share in earnings. What kind of return - speaking broadly, I'm not asking for commitments, but what kind of returns do you see eventually? How excited are you about the strategies you've done over the last couple of years since we're finally showing material profits? Do you see returns from all this M&A and this impressive strategizing and remaking the company? And when might it happen? Because please acknowledge that with the $13 book value that we'd like to be at a point where the returns of the company generate some profits, and we're starting to see that this quarter, justify staying public and not simply liquidating or selling the company. I'm impressed by the strategies, but could you give some reassurance and sort of vision for how we're going to be earnings, say, even a low double-digit return on equity? I know it's a long question, but I'm really interested in your answer.

Okay. Thanks, Tim, for the praise and the question. Just to answer the question, I guess, I have to go backwards a little bit. When you alluded to the reorganizing the company, what we've done, as you can see, is consolidated around a tool footprint, primarily the air tool footprint, but not completely an air tool footprint. And we had to do that - we had to take one step back and that was divest Nationwide, which, I think - which was a significant contributor to profits. It hurt to let it go, but it didn't do with the strategy anymore. There wasn't an immediate acquisition available of a company generating $4.5 million or $5 million a year on EBITDA. We purchased a few since then that have got us part of the way back. And at the same time, organically, we have refocused the Hy-Tech operation to - away from less profitable lines, areas where we can generate much higher margins, new revitalized management team. So I think the things we're doing now are going towards areas where the margin is a lot higher and the returns on the investments will be higher than maybe typically we've had on investments in growing the business before. I can't give you a prediction about $1.30 a share and when we're going to hit that number. Do I think it's possible at some point? Sure. But all I can say is I think growth from here and dropping to the bottom line will be - easier isn't the right word, but growing the businesses we've got now, I think, will generate more to the bottom line than having growing the business that existed 4 or five years ago, if that makes any sense. But it's going to...

Richard, do you have anything on that?

No. I would say that Joe said it exactly, as I would say that.

Do you gentlemen have confidence that 3 to 5 years from now that we will see this outside shareholders or we'll see this - or all shareholder will see this as something more than an undervalued collection of assets? I mean, you acknowledge that there's a $13 book value that's probably liquefied - liquidatable at that price and possibly salable at $15 to $20 a share. Do you have confidence that as we look at this long-term impressive strategy, that value can be built and that you are confident that the company can be value at a - is earning and can be earning something? And if it isn't, are you willing to look at alternatives?

When you asked me if we have confidence, if we didn't have confidence, then, I guess, we wouldn't be here. I guess, we wouldn't be working as hard as we do every day and all that stuff. So we have confidence, but we managed - we realize it's a long road. And it's - people planning got less. And we're going to do everything we can do to do exactly what we're looking to do, which is exactly what all stockholders and shareholders would want us to do. And I don't know how - Joe, you can add to that, if you want.

The only thing I would add is I think the business we have, even though with - in some ways, we're concentrated in terms of the technology. I think it's more diversified in terms of the markets we serve. It's a time when we always talk about how mature on gas business we had, and that was a big determinant of sales. And retail sales were a big determinant of profitability. While we still have oil and gas business, we still have retail business. We're now exposed to so many different areas, whether it be aerospace or automotive, which have really no correlation with each other and certainly no correlation with the retail business. And the OEM initiative sends us in dozens of different directions and different markets and applications, which are totally uncorrelated. And then lastly, we've been trying very hard to extend our international footprint, which is yet uncorrelated sales. So I think the idea here is that we are creating a more resilient business. There will be recession coming in some point, but we see us being in so many different things that we will weather that storm when it comes. And I think our growth can be steadier than maybe it had been in the past.

And our acquisition policy that we haven't had acquisition since Jiffy, which is almost 18 months ago now, we have put many - I'm sorry?

We had pneumatics, which is small.

Pneumatics, which is small, not exactly a small one, which hasn't given provision yet. But it will [indiscernible]. But we are looking regularly. We've seen many things and nothing has really hit our sweet spot. And we're not going to buy something just to go up the top line and not the bottom line. That's not where we're going. So we're very cautious. We've had sometimes in the past that we didn't exactly hit the mark, but I think our lesser acquisitions, specifically AIRCAT and Jiffy, had been very accretive and very strategic for our business, and that's what we're looking to continue to do.

Let me squeeze in a couple more, and then I'll get back in the queue. The company lost money, I think, from operations in 2016, 2017. It looks like, with this quarter, we're profitable again. Do you have confidence, I'm not asking for numbers, but that were kind of like back to being a materially profitable company going forward that - do you have a certain amount of satisfaction that, okay, we're going to be generating the cash flow to pay the dividend and fund the stock buyback, that the operations now are materially positive from a cash flow and profitability perspective?

No, I can't, and we don't give projections. I will not going to - we're not going to be able to, unfortunately, give you the assurance that you want. But we feel we're in a good space and a good place. And we're doing all the right things. And we're confident that things continuing on - in this venue.

I would add, I don't think second quarter was an anomaly, being the reasons and explanations why we didn't know, but none of those explanations are completely onetime event. So I feel good about the underlying customer where the revenues are coming from. So I'm not that helpful with your question.

Yes, that gives a little bit of sense. Let me have just one more, if I can, and drill down a little bit on the Florida Pneumatic. The Home Depot deal, $1 million that we need to spend, that will be amortized average at four years or five years. four years?

Four years.

And now can you kind of explain a little bit the 200 basis points lower margin? I mean, that mean ultimately that, that business is just not going to be as profitable as it was historically. And so - well, yes that's the question.

Yes, that's the question and that's the answer, yes. I would say it's a very competitive - if you ever gone through a bidding process with the big boxes, but it's a very competitive process when we do it. And we were lucky to maintain it. And we had to beat them all. We have to be competitive as much as we could be without affecting us to point that we didn't want to just spend anymore. [indiscernible] areas, we took the offer and we're moving forward. But also, now, a tariff, which, I think, we can't forget about, which is Mr. Trump's new things that affects us with Home Depot and other customers as well. So you can't - we can't forget that either.

And then finally, the stock buyback, I believe, when I looked at that, I saw what you bought back in the quarter. That's nice, including private purchases, which, I think, is good, too. Aren't we close to exhausting that? And will the board be talking about possibly increasing that - the authorization?

Yes. It expires, I believe, end of this - end of the month, 24 or 25 or something, I don't [indiscernible]. And we have a meeting next month of the board. And we will be talking about a multitude of things at that point. And we will make a decision as to what to do going forward. We understand - we feel also the shares are undervalued. But as you know, there are several other factors that we need to consider in evaluating when repurchasing stock, including regulatory banking, cash requirements, just us naming a few. So it's on the agenda for our meeting. And we'll address it at that time. [Indiscernible] I think, but that's what we'll do.

Okay. I just have another quickie here. Do you guys have a sense remembering kind of where we are at since not too long ago - maybe it's a long ago, either 10 years ago now. Do you have some type of cap on where you will put leverage on this company, Joe, Richard, whatever, to - considering the hairy situation we had a decade - nearly a decade ago now? With regard to acquisitions, generally, is it really more related to debt in relation to EBITDA or debt in relation to equity? Do we actually have a sense of how levered we're willing to be?

There's no bright line. I will give you my opinion as the Chief Financial Officer. But obviously, it's the board's ultimate decision. I would think, at this point, I don't see a reason to lever up the company beyond a 3x EBITDA figure. I think that's a comfortable number, one that could withstand an upset of some sort. So that's just my internal view. And I'm sure our bank would probably agree that, that's a pretty safe level, as well. But that's just my opinion.

We're growing conservatively. We're not going to put the company at risk. And you know we do.

[Operator Instructions]. We'll go next to Andrew Shapiro with Lawndale Capital Management.

Tim had so many. I have some follow-ups on a variety of topics he touched on. First off, with the Home Depot and the new deal, few things to flesh out. The amortization of the coop marketing expense, wanted to confirm that's going to amortize through SG&A and not cost of goods sold. Or is it going to be part of the cost of goods sold?

Actually, neither. It's going to be reduction of revenue.

Okay. Under the new revenue recognition rule.

Correct.

Okay. And then when you're taking the 200 basis point reduction in your margin, okay, do you feel - or do you - that Home Depot is taking that spread? Is that just for profits or they're going to be offering the new products at either a more competitive pricing or with a greater promotional spend from themselves?

We don't really have the answer to that, Andrew. And there's so many different SKUs. And they're all new now. So they can do whatever they want to do with the pricing. I don't really know the answer to that.

If they haven't communicated to you what they're going to do.

They never do.

They never do. They never do.

So you'll only see it and, I guess, if the units fly off the shelves at a better place than the old line, you know that they're doing something right with that money.

Yes. It's been our experience that refreshing of a line tends to give a little boost to this unit sales.

Okay. And the basis for using four years as your period of amortization, is that tied to any contractual terms of any sort? Or just?

No. There's no contractual terms with the set termination date. It - in our experience with Sears, in the last 30 years or 40 years and Home Depot off and on in last 15, the line tends to get refreshed every 4, 5, maybe even six years. So that was just a conservative number to address what we see as the life of this styling.

Okay. And the product line that you're offering to them, about what percent of those - of that line are Chinese-made and subject to the first round of tariffs and, potentially, subject to the second round of tariffs? Is it, like, all of it, half of it? Is it a small amount?

The first round was a relatively small percentage of the entire Home Depot line. I'm going to say less than10%. With the second round, I don't think it goes over half, but it's getting close to half for the whole Home Depot.

And I'll remind you. it's not just Home Depot. There's other customers as well.

Right.

Right. So the second round, are you referring to - is this the famous $200 million threat or this is the one that is before that, that is pretty soon in being determined?

I think those are the same one, Andrew. I could be wrong about this, but I believe the second $200 million threat, what I'm - we're hearing is, for sure, that 10%, it could be 25% on that. I don't know that, that's been finalized, although we do understand there is a date certain upon which it will begin.

New $16 billion one first. Is the [indiscernible] closed already. Then there's the $16 billion and then there is the big $200 million.

The $16 billion doesn't sound familiar. We had some discussions with Home Depot. I don't know if it's intermediate. If there's an intermediate one, I don't think that - I'm not sure that's affecting us.

Okay. And your release just got to have a first-round tariff motivated price increases that, by and large, you've been able to pass through. Everyone understands it. Your competitors are subjected primarily through it, as well. You have the products experience. Any slowdown in unit sales at all yet?

That's too early to tell, Andrew.

Those products haven't even - I don't think - they're not even in the stores yet. It's a Home Depot to Home Depot. The other is...

It's still far too early.

Yes. You won't know that for months. Maybe before we report our next quarter, we may have something to say about that.

All right. And while I'm on Florida Pneumatic, I only had one more Florida Pneumatic question. On a previous call, you spoke of a suite of tools targeted toward bodywork. And so the feedback was positive, and you weren't able to, at the point, to give us an update. Are you able to give us an update on that progress and what further feedback you've received now? And I think that's it for me.

AIRCAT line, is it maybe?

Yes, it is as. I've said earlier, it's a small line. It's not something we're really tracking as a major initiative. It's a nice thing to have. It's being well received, but it's - I would say, probably going a little more slow than I would have like. I wouldn't say it's relatively immaterial, honestly, at this point.

Okay. A few follow-ups here again on some stuff Tim had asked about. So one of things is you borrowed - you're current authorized buyback, it had a one year time horizon, actually, from exactly one year ago today, according to your press release. So I was just wondering if that is, in fact, the expiration and if you are able still to be buying back shares. And if not, kind of why didn't the board preplanned that and already have something in place to reload it? And what is it the time of reloading and possibly increasing your pace and scale of the buyback?

This is Rich Goodman. For the first part of your question, like, you asked, this is the anniversary of the board announcing they would be doing a buyback program. Under that program, they actually entered into a plan with our bank. And the one year period of that plan began at the end of the month. So we actually will be able to buy to the end of this - I think, it's the 24th of the month. Now over to Joe.

Okay. And then with respect to - the one [indiscernible] couple of questions. We have not exhausted the shares available to us, the purchase - repurchase. I think we'll be very close to getting to that 100,000 number. Of course, that excludes the one-off $18,000 purchase last month - or the month before - excuse me, 18,000 share purchase. I think, as Richard said earlier, we are not at the point yet on making that decision. We've got a board meeting that's very soon after the expiration. There are a number of other initiatives we've got going on. That decision would be premature if we made it today or last week or two weeks ago. So we feel the right time we make is at the next scheduled board meeting, which is almost immediately after that expiration.

Okay. And then you announced in the release a privately negotiated repurchase outside of the 10b5 plan, again, 18,000 shares, a little 18,500, which is a really nice size block. Was that repurchase with any related party?

No, it was not.

Okay. And you said that UBS was running the buyback in the past. Can you say who at UBS one could contact should they want liquidity on a block of shares like that, so others might avail themselves of that and a company might take advantage of some cheap shares?

In that case, they can reach out to the company directly.

I wasn't sure if you guys [indiscernible] well enough transaction.

Okay, but who with UBS should someone contact - that they should contact?

Yes. Start here and then we'll direct them. I'm not even sure who at UBS. We don't deal direct - we don't deal with that person. We deal with someone that reports to us, but that's the person [indiscernible] buyback.

Does anybody want to buy stock?

Okay, because your 10b5 has a certain daily limit. And if someone wants to do a block exemption and all that, they'd still got to use a desk and they've got to be - you ought to be out of the market, otherwise. So that's why...

Let them contact us and then we - I'm sure we can find out who to get them to.

[Operator Instructions]. And we will take a follow-up from Andrew Shapiro with Lawndale Capital Management.

You borrowed $400,000 chunks against the company's CapEx line of credit. Can you expand on this use and your remaining CapEx plans for the year and major projects to be embarked on?

Sure. We have, as part of our facility, I think it's $1.5 million, $1.6 million that's available to us to use as a CapEx line. We term it out over five years. We had a nice - couple of nice pieces of equipment out in Nevada at Jiffy we purchased in the spring, so we chose to use the - that line for that. The rest of the year, we will not keep the pace up that we're - we - the CapEx pace will not be equivalent in the back half of the year as well as the first half of the year. Having said that, we've got a couple of significant software installations that we're undergoing, which is probably going to be the bulk of that along with some tooling for some new - a new products.

Okay. And what's the timing of updating the company's credit lines and moving, obviously, enabling the - moving some current liability presentation to long term?

The current facility terminates in February of 2019. We're in regular contact with our bank, and I'm sure we'll address that well ahead of that. Our relations remain excellent with that bank. And we've got a long list of other banks that would love to have us as a client. So we're not really concerned about it. But at the same time, we'll get it done well ahead of - when it needs to get done.

Okay. Now you had said in the past, capacity expansions was stated as a major focus for Jiffy. I'm assuming these new machines somewhat enabled that. Can you discuss the progress made and what visible steps or milestones remain for increasing capacity there?

Sure. The equipment we purchased was a major step from that direction. We have also had a significant increase in the second shift there. We do have a second shift out the Jiffy. And we've got additional equipment or, call it, purchases and rearrangement and other things that we're going to do inside the facility to increase our capacity that we have. Significantly improved our capacity over where it was when we purchased the company at Nevada.

And what sort of cross-selling might you be able to do or excited to do with the pneumatics clients and legacy P&F aerospace tool clients? And what type of success have you had with this?

We'll, when you say legacy, there really - they're very little of the way of legacy P&F aerospace clients until we had Jiffy. We are working on a program where sales folks will have the pneumatics line and the Jiffy line available to them. But we're not really ready to get into what's going on with that just yet, but it is in the works. And we are - having said that, both the pneumatics efforts and the Jiffy efforts are moving along with some sizable aerospace companies to - we're working on it.

Okay. And with another quarter of owning the product line, can you provide some color on the experience and the opportunity with pneumatics?

Well, as they said, we're maintaining the sales levels that existed before. We did launch a - an initiative and what we call the light aircraft kit building market. This is the equipment people that assemble and fly their own airplanes. There's a very large contingent appropriate to do that. So we put together a kit targeted directly at that and are allowing, for the first time in the company's history, individual consumers to purchase directly online a P&F product. So the pneumatics product or the light aircraft market is available now online for someone to purchase. And In addition to that, as I said that, we've got a lot of technical things we're working on to develop to it to get the pneumatics system on the commercial side to the point where it's going to be pretty attractively, hope, to some major aircraft manufacturers.

The pneumatics acquisition, which was to a relatively small amount of money, it was all what we felt a lot of pioneering had to be done. And the pioneering is taking a little bit longer than we had expected it would, but we're making good progress, and we're expecting good results. But I don't think it's going to really be able to do as much before next year, frankly.

Yes. I mean, the good news is we're talking directly with development folks at the aerospace companies, so we know what they want, and they're telling us what they need. And hopefully, we'll wrap up these engineering initiatives and start talking about deliveries at some point. But Richard is right. It's a very long process. They're tremendously large organizations with multiple layers of approval, and it's just going to take a while.

Pneumatics within Hy-Tech, so I'll segue to the Hy-Tech questions here. is there any reason for the engineered solutions products year-over-year revenues to be flat, while your open order growth surged very nicely?

I'd say there's no reason. I think there - it's just that waxing and waning of revenue. But as we alluded to on the release and in the comments, we see growth - we're going to start to see growth there. If you'll just look at the backlog, it's going to happen. So we have a lot going on and I wouldn't draw to any conclusions from flat year-over-year.

Right. In fact, your open orders were up almost 55% from prior year. What's the time horizon for when an open order is converted into sales, revenues and gross profit?

It depends on every customer and every product. It's - some of them are highly engineered. Some of them are not as highly engineered. It can be anywhere from six months to 18 months, actually. Some things - it's really - it's not getting stuff from the shelves and - because it's engineering thing that we do and then we have to make the buy. I mean, it's isn't about process.

Okay. So when they give you an open order and it's like in 18 months, it's a - it's still a serious commitment [indiscernible] you're making or designing the dye, whatever it is, and think you're going to sell so many units. Are you contracting for this project where you're not going to get stuck holding the bag and an open order really will result, whether it's 18 months or a year...

Yes, yes.

The answer is yes. We're not doing the work, unless we have [indiscernible] firm order.

The hit rate on the OR is going to be close to 100%, and we are not concerned losing on that, either.

Okay. Great. And are you able to update us on the customers to which these new products are being sold at all yet?

The engineered solutions? I don't think any one of them would be [indiscernible] enough to be replaced. But we're not ready to do that. It's - we can [indiscernible] this with our lawyers, but - and none of them [indiscernible] that. In total, it's a meaningful number. But there's really - I would say the backlog growth is your industrial applications, large - applications in large facilities, things like that.

I guess, I'm trying to - what I'm trying to get at and maybe you'll never be able to disclose it or get a feel from when you could, is it - if you could - you're designing these products now where you haven't really been doing that before, right? And you got some Fortune 500 company for which you're designing something for. The prospect of that product could be a sizable quantity and a sizable contract down the road. And one would - as an investor, I'd love to be able to invest in a company that sells its first wonderfully engineered product to some Fortune 500 company that's going to need 500 more units. Do you follow?

No, we didn't. So maybe I can answer the question. I don't think anything we've got back - gotten backlog is going to a Fortune 500 company. They're large organizations. But in some cases, we're dealing with a small part of a large organization. It's a little different than like the pneumatics product where you hit on a - with the nature of space company, its's suddenly approved worldwide. It's not like that. It's usually something very specific for a very specific application and sometimes a very specific location. But that doesn't mean they're insignificant sales. But it's what you've - it's not - I wish it was, what you're relating, it's just not that.

Nonetheless, it will be game changers. But on the aerospace side, the type of products that Jiffy and pneumatics and the company does, could one of those have such an opportunity?

Yes.

Okay. Great. And we'll be happy to hear that when you actually...

I think I will do that.

Yes. Now on a previous call, you said you desired adding another Hy-Tech shift. But the problem you were running into was primarily getting the manpower. We know that unemployment in the United States has dropped even to lower levels. Can you provide us on an update and whether the rate of orders, either support such an expansion? And what is your ability to add another shift? Or how are you going to deal with that?

Right now, it's proving difficult to add another shift, as you alluded to, the manpower shortage. What we have been able to do is a couple of things. We've actually been able to utilize some availability out in Jiffy to help with Hy-Tech. We've actually - we're in the middle of installing a new MRP system that will actually help throughput with the same number of individuals. We've added some other non-production people into the process at Hy-Tech to further expedite the flow of products without the need to increase individuals - operators. We're still hopeful it can add a second shift, but we've been able to avoid it right now because it's still more efficient to increase capacity on the first shift than to add a second one.

Are there community colleges or other training programs that your Hy-Tech subsidiary could get involved with and find maybe a captive supply of up and coming trained manpower?

The answer is yes. I think the big issue with the second shift is finding the second shift supervisor. Once we have that person, then other things tend to fall in line.

Right, right. Your release mentioned part of the sizable gain - margin gain versus prior year on Hy-Tech. Was it the reduction of the charges for obsolete and slow-moving inventory versus prior year? I remember a prior year period when there was a notable hit. Was this year's increase of margin due to that prior year hit? Or was it due to current period potentially reversal and benefiting?

There's no reversal this year. There is a nonrepeating of fairly significant reserves that had to be put on the books. But what we tend to build now is what we need now and in the near future. And the product we have on the shelves is more current. And we seem to be doing a pretty good job of maintaining turns on the stuff that we built and so with that. And the other part is just the nature of the newer business is higher margin in some of the other business we had.

Okay. Final Hy-Tech question. On a previous call, I just don't know if this is a meaningful part of the business, but you've discussed developing a new marketing strategy to reenergize your gear in hydraulic stopper business. You didn't think you were ready to discuss it that much before. I didn't know if you've moved along and you're really ready to discuss your plans or the success of those plans or if this is even meaningful.

I would say the stopper business is not meaningful. It's just a very, very small product line. We're happy with the results, but it's pretty immaterial. We do continue to be aggressive and try to be something with the gear business, but I don't really have much more to say about that right now. Hopefully, at some point, I will - we will.

Okay. Again, I'll back out and let anyone else ask questions. I do have a few more.

If there's actually - there's nobody else in the queue, Andrew. You can ask..

All right. I don't have that many more, but I do have a few more. Regarding the new recognition rule classifying certain expense against top line revenue, when comparing versus prior year, is prior year adjusted for this new rule? Or are we looking at apples and oranges, especially with respect to absolute SG&A dollar spent?

We chose the modified retrospective approach. The prior year has not been adjusted. Having said that, I believe we laid out in the press release the impact of the new approach. I think it was like $245,000.

Yes. I know you specified what this year's adjustment was. But I just didn't know whether I was to - where and how I would compare it to prior year. But now, I think I can.

Yes. Now you can verify. Basically, just taking away the $245 million and then it will be comparable.

Okay. Now lastly, two questions on this, which sounds like your decision regarding the buyback maybe tied to this. You said on a previous call that you were focusing on one particular area for acquisitions, but didn't want to discuss it yet. Is that still the case? Or where is the focus on the acquisitions? Or has the focus kind of changed from the prior call where you thought you might have something down the pipe?

No. There's no change to our strategy. We're in the two businesses. That's where we're staying. And there's nothing to avoid. If there was, you would have seen a press release.

I would just add to that, that whatever we look at is going to be strategic. So it's either going to be a straight-up tool or something related to a tool or for other tool. Or - It's going to be - I don't remember saying - I'm sure I said we were going to be focused, but I don't remember being on one specific area because we don't - we're not looking at - if the one specific area you're talking about is the business we're already in, then I guess it is one specific area. But I'm not sure what you meant by that comment.

Well, I mean, I'm just going off of a previous call answer, so we're - I think we asked about the acquisition strategy, where you're looking in terms of subsectors within the tools. Yes, I think your answer was that, we look at all the subsectors, but there's one particular subsector that we're looking at or looking at something, but we can't discuss it yet.

Yes, I mean, that could have been - I mean, we look at lots of things. I don't know what [indiscernible] in that buyback other than probably something about [indiscernible].

I mean, look, to be honest, what am I trying to get at? Are you three months further along on the same acquisition you were looking at, which would mean it's closer to fruition? Or has your attention gone elsewhere and you're starting at square one with something else?

We're moving down the road on a few things. That's best I can say.

We'll move now to [indiscernible] with SOL Capital Management.

In your release, you have a quick paragraph about new technologies in pneumatic tool offerings. Could you maybe discuss how big a threat you see battery and [indiscernible] tools to pneumatic line?

Sure. There are various battery tools available, really, across almost every product line we compete in. In some cases, they're very well established as - in the automotive market. In other cases, they're specific to very certain application in aerospace or out in the field, let's say, for oil and gas. So yes, I mean, it's certainly a threat. It is - but I don't want to seem like it's not been around. I mean, there have been battery-operated tools in the automotive area for remaining number of years. In fact, I think, the main patents on that tool is almost 20 years old, so it's not a brand-new threat. But certainly, each year that technology improves. But at the same time, we're also improving our technology, and we are well aware of it. We're - we look at that threat and other threats, and that helps us develop our programs and our development initiatives. So yes, it's out there. If I were to say where battery-operated tools have the biggest market share and all the places we deal with, it's certainly automotive, but it has been there for a very long time. So that's really nothing new. but it is out there.

Might some of the acquisitions you are looking at include something with the newer technologies?

Absolutely. If an opportunity came along to acquire a tool business that had its own battery tech, we would absolutely look at that [indiscernible].

We'll go next to Henry Drubrow [ph], Private Investor.

Well, the $1 million marketing expenditure that you disclosed will be made to Home Depot through the balance of the year, could you be a little bit more specific? Do you think it will be in both quarters more weighted towards the third or fourth quarter?

I would - we don't know exactly. History tell us it will be taken in 1 shot or 2 shots. And we typically make payments weekly to Home Depot. I would say probably the third quarter.

And this is a payment to them to reimburse them for marketing expenses, not displays or anything else.

All right. So let's be clear. We don't exactly know what they do with the money. The things they could do with the money are put up new displays, pay people to put up new displays, promote the product on the Internet through paper ads. They could discount product. They could do all the above. They never tell us what they're doing with the money. We don't ask. And even if we did, they wouldn't tell us. Is it possible that they put some of it right in their pocket? Absolutely. So there are 4 or 5 places that money can end up. They just call it a marketing contribution, and that's just about all we really know.

And from your end, you're going to consider it an asset amortizable over, I think, you said four years.

Correct. That is how it's being treated on the accounting side, correct.

So on future balance sheets, we would expect to see that, where, on the current and noncurrent section?

Yes. That is correct. It will be both until it get to less than a year than our current. And then as I said earlier, it will be a reduction in revenue as the - as we amortize it.

Okay. I have one last question relating to trade receivables. What's the largest receivable that you have that you deem uncollectible even at its fully reserved?

Tiny. I mean, I wouldn't even think it would be $10,000. It wasn't that much. We have an incredible history of collection in this company. It's just the industry [indiscernible] we served. The company is - the customers pay the bills, though, [indiscernible] the 20 years I've been here have been incredibly smaller.

And are you ensuring your receivables?

No, we are not.

We do not.

And we will take a follow-up question from Timothy Stabosz.

I just have one more that's going to follow up on the earlier discussion. I appreciate your consideration of this question. 20 years ago, the stock was at $8.50, give or take, and that's where it is today. We got profitability now. The company is starting to show some material profitability with this quarter. Do you think we will reach a day when this company has seen as anything more than an undervalued collection of assets worth more than liquidator sold than alive? And do you knowledge that the pricing of the company and the stock frustrates you greatly?

Tim, I'm speechless. I don't know what - you asked us this question before. I gave you my assessment that I sent to you talking about the valuation of the company. I said that we shared with you that it's undervalued. I mean, what more we can tell you, like, I don't know what else we could say. I don't know what you're really asking us. But we don't have a crystal ball. We don't have to tell you entirely what our strategies and what we believe. And what we believe we're going to do and, of course, it's going to be [indiscernible]. I don't know what else we can tell you.

Can you reassure that you are always and this board is always looking at all options to add value for shareholders, including is it worth more dead than alive - or liquidate it then?

It's our fiduciary responsibility, Tim.

Can we do it?

Of course, we do, every day, all the time. Not every day, It's always there. And the company is worth much more alive than dead.

It will be.

It is, it is.

We can't - we're going to able to give you clairvoyant answers to questions. I'm sorry to say.

It's just what increased faith if we knew there was some embarrassment around the fact that the company is valued at 1/2 and it's liquid in the 2/3 or 1/2 of it [indiscernible]

The stock is undervalued. I don't know what else I can say in my opinion - in our opinion.

We can't dictate what the price of the stock is. We can give our strategy. We can - if there's a strategy, we can report on our strategy and we can give [indiscernible] we can.

That will conclude our question-and-answer session for today. At this time, I would like to turn the conference back to the company for any additional or closing comments.

Thank you all for being on the call today, and we look forward to speaking to you on our third quarter results and later on in the year. Have a good day and a good holiday. Thank you.

Again, that will conclude today's conference. Thank you, all, once again, for your participation, and you may now disconnect.