Good day, and welcome to the P&F Industries, Inc. 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Richard Goodman. Please go ahead, sir.

Thank you, Operator. Good morning, and welcome to P&F Industries 2018 conference call. With us today from management are Richard Horowitz, Chairman, President and Chief Executive Officer; and Joe 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, supply chain disruptions, 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 SEC, including, among others, as described in our most recent annual report on Form 10-K, our quarterly reports on Form 10-Q and our other filings. These risks could cause the company's actual results for future periods to differ materially from those expressed in any forward-looking statement made by or on behalf of the company. Forward-looking statements speak only as of the date on which they are made and the company undertakes no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future developments or otherwise. With that, I would now like to turn the call over to Richard Horowitz. Good morning, Richard.

Good morning, Rich, and good morning, everybody. Thank you all for joining us this morning for our year-end 2018 conference call. I will begin today's call with a brief summary of our 2018 results and how this data compares to the prior year. However, I direct you to our release earlier today for more information. This morning's release presented P&F's balance sheet, statement of operations, per share data along with most of our management's discussion and analysis. I also wish to emphasize the purpose of today's call as always is solely to discuss and review the company's results for the year ended December 31, 2018. As such, I insist that you please confine your questions to that topic only. I'll then ask Joe Molino to briefly review key cash flow information, provide an update on any key events affecting the company. After which, we will move to our usual Q&A session. The company's 2018 consolidated revenue was $64,995,000 compared to $58,974,000 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 last year, certain expenses that were previously accounted for in our SG&A cost prior to the adoption, now accounted for as a reduction to revenue, gross margin and SG&A. While the adoption of this new accounting standard did not affect our net income, it did cause us to reduce Florida Pneumatic's 2018 revenue, gross profit and our consolidated SG&A each by $1,007,000. Florida Pneumatic's 2018 revenue was $50,720,000, an increase of 2017's revenue of $46,471,000. This net increase of $4,249,000 or 9.1% was driven by increased revenue in our Industrial/catalog lines of nearly $1.5 million and growth in Aerospace of more than $4.1 million. I should note that 2017's Aerospace revenue was for approximately 9 months. However, our average monthly Aerospace revenue during 2018 was greater than that in 2017. Additionally, Florida Pneumatic's automotive revenue improved year-over-year by more than $500,000. These improvements were partially offset by a net decline in its retail revenue, which was adversely affected by a decision in late 2017 to terminate our agreement with Sears. Increased shipments in The Home Depot in 2018 minimized the net reduction of our retail revenue. Hy-Tech's 2018 revenue improved 14.2% over 2017 with revenue of $14,275,000 compared to $12,503,000 reported in the prior year. The primary components to this net increase were greater shipments related to our Engineered Solutions initiative, which continues to strengthen along with increased revenue of ATSCO and Pneumatic's product lines. The company's 2018 consolidated gross margin was 35.7% compared to 35.8% in 2017. I wish to note that on a year-over-year basis, Hy-Tech's gross margin increased 3.3 percentage points. This increase was primarily due to greater absorption of its manufacturing overhead costs, driven by greater throughput through the facility, product mix and price increases on certain of our product lines. Additionally, Hy-Tech has also been able to reduce its obsolete and slow-moving inventory charges this year compared to a year ago. And lastly, as noted earlier, Florida Pneumatic's gross margin was impacted by the adoption of the new revenue recognition standards, which caused a 1.2 percentage point reduction in their gross margin. Our 2018 selling, general and administrative expenses was $21,705,000 compared to $21,034,000 in 2017. As a result of the adoption of the ASC 606, the new recognition -- revenue recognition, I referred to earlier. We now classify certain expenses totaling $1,007,000 as reductions to gross revenue, that in 2017 prior to this adoption were accounted for as variable expenses in our SG&A. During 2018, we recorded a charge of $150,000 relating to the increase in the fair value of the contingent consideration payable to the seller of Jiffy. These charges in 2018 adjusted accounting value of our obligation to $1 million, which in accordance with the terms of the purchase agreement, there's a maximum contingent obligation amount payable to the seller of Jiffy. I should note that we expect to pay this amount sometime during the second quarter of 2019. Lastly, the company's interest expense during 2018 was $223,000 compared to $168,000 incurred during 2017. This increase was primarily due to higher interest rates, increased revolver borrowings and an increase in the amortization of debt issue costs. Taking all the above into consideration, I'm pleased to announce that for the year ended December 31, we were reporting pretax income of $1,109,000 compared to a pretax loss of $249,000 in 2017. On an after-tax basis, we are reporting 2018 net income of $856,000 compared to an after-tax loss in 2017 of $884,000. It should be noted that in December 2017, the Tax Cuts and Jobs Act was enacted, we should note that as the result of that, our 2017 effective tax rate was unusually high. 2018 basic earnings per share was $0.24 compared to basic loss per share of $0.25 for 2017. 2018 diluted earnings per share was $0.23 compared to basic loss per share of $0.25 in the previous year. As a reminder, I refer you to this morning's press release for additional information. At this time, Joe Molino will discuss our cash flows. Joe?

Thank you, Richard. Capital expenditures during 2018 were $2,278,000 compared to $910,000 during 2017. Significant noncash items affecting our 2018 cash flows were depreciation and amortization of $1,383,000, amortization of intangible assets of $702,000, stock-based compensation of $241,000, a change in deferred taxes of $253,000, change in allowance for doubtful accounts of $121,000. An increase in the estimated fair value of contingent consideration payable to the seller of the business assets of Jiffy of $150,000, amortization of debt issue cost of $95,000, and finally, amortization costs for contribution to a customer store reset of $122,000. Additionally, significant components impacted cash provided by operating activities during 2018, where a decrease of $482,000 in accounts receivable, an increase of $901,000 in inventory, an increase of $988,000 in other assets and finally, a change in accounts and accrued liabilities payable in the aggregate of $368,000, that was an increase. With that, I'd like to turn the call back over to Richard. Richard?

Thank you, Joe. As I always like to do, I'd like to acknowledge all of our employees and management for their continued outstanding performance and our customers for their support. We've always believed in our company's products and customers, but our dedicated employees deserves a big thank you for their dedication and commitment to our company and our customers. With that, that's the end of our report today, and we'd be happy to answer anybody's questions at this time.

[Operator Instructions]. And we do have a question from Andrew Shapiro from Lawndale Capital Management.

I have several questions. I'll ask a few and then back out into the queue. In particular, getting to Aerospace, Jiffy and NUMATX and the mix of the business. You had talked about capacity expansion was stated as a major focus for Jiffy in the last call. And you said that you had made significant progress on that front since the acquisition, but there could still be more room for improvement. Can you discuss your progress that has been made and what visible steps or milestones might remain for increasing capacity?

Well, I guess, we're talking about the facility out in Nevada.

Nevada.

Nevada. In addition to that, we have some availability in our Pittsburgh operation to assist with that. So between the two of them, we think that we've got plenty of capacity for what we foresee the revenue opportunities in the next 12 to 24 months.

Okay. And I think, you spoke of on the last call about initiatives beginning to marry up Pittsburgh, Jiffy, Hy-Tech and Florida Pneumatic's resources to go after the market in a bigger way, but you didn't have much insight in November about that. Here we are at the end of March. Can you further discuss those initiatives and any signs of traction or success yet and your thoughts on the upcoming year with these efforts?

I mean, I will say that joint sales calls are being made between the teams, individual salespeople are representing lines of both Jiffy and NUMATX. So we're moving along on that strategy. These lead times for aerospace are quite long. So I would imagine it will be several quarters before I'll be able to report any particular success. But we're happy with how it's going so far.

Okay. And to what extent are your Jiffy or other aerospace tools part of the large Boeing 737 build out and backlog?

We are on that line. Our tools are being used to assemble most of that jet from the [indiscernible] cabin to whatever.

Right. And how about your competitive models either within Boeing or elsewhere that would be considered alternatives to the 737 MAX. Should there be a diminution of Boeing's backlog there?

Well, the direct competitive model is the Airbus 321, I believe, which we do not -- we're not on that line, if that's what you're talking. Other -- to the extent, there are other Boeing jets that people would utilize in addition, other versions of the 737, we're on those lines.

You're expecting on those, okay.

We're expecting on most of Boeing's production, yes.

Okay. And then another big initiative of yours you spoke of on the last call that I want to start of here and get updated on was. I wasn't sure if this was just Florida Pneumatic or both segments. But you were said to be developing AIRCAT and aerospace tools and distribution opportunities for Europe. And we're hoping, I think, to bring on board someone to maybe lead those efforts. Can you give us an update on those European efforts and the timing and when the inroads might prove more meaningful?

Yes. We had someone that began work January 1, and they have been traveling extensively throughout Europe and calling on major players in aerospace and also some industrial distribution as well. We've already seen some early successes, but I don't think they're quite material enough yet that that we can point anything out. But we are definitely having some success in bringing on some business.

Okay. I have obviously other questions, but let me back out in case some others are here in the call and asking.

There is nobody else on the queue, Shapiro.

Okay. I'll continue on. Regarding Hy-Tech, I'm trying to get a handle on the pace of future growth of engineered solutions products, which you've talked about the ramp up, especially in terms of substantial growth that had occurred in year-over-year up through Q3 in open order level. Can you describe or comment about the open order level of engineered solutions products at year-end? And how does that compare to the prior year-end? And what was engineered solution product revenue in Q4 versus the prior year?

We don't break out engineered solution product revenue by itself, but I can tell you that the backlog is up consistent with the growth in that product line in 2018.

Okay. On previous calls, you said you desire to add another Hy-Tech shift, but the problem you were running into was getting supervisory manpower, but you also thought you could improve capacity without a second shift, if necessary. Can you update us on your efforts here?

Yes. We have been able to avoid, if that's the right word, a second shift. We have been able to produce product efficiently with the 1 shift. Now I'd say, 1 shift, mind you, we have some unattended machines that are fairly sophisticated that can run overnight without anyone managing them. So that does help. So I don't know if I can call that a second shift, but I guess, it is in a way, it's just that nobody is there.

Okay. The robots are running the show.

It's not 2050 yet, but yes, yes, yes, we've got some robots.

Okay. On Florida Pneumatic, as of November, you said it was too soon to tell on how The Home Depot consumers would accept a newly refreshed product line, but that you would following year-end have a better sense at the store level, even if not at the tool or SKU level? So how has the new product line performed? How did it fair against the other Home Depot labels that were said to be offered this winter season? And do you feel the new Home Depot tools will generate similar or higher levels of revenues than your legacy line of tools through Home Depot?

Home Depot has told us just recently that our product line is up a bit like that's almost 10% or something to that line from the new -- from the old numbers. So that's number one. Number two, they ordered heavily in the fourth quarter. So it's in their system, it doesn't necessarily result in orders for us yet, but they're telling us that the through sell -- the sell-through is doing well so far. There's also another line that they brought into the -- into their business, a regular name brand. I'm not quite sure what the name is, but it's their own brand, not their own brand, one of the other customer's brands and that brand is also on the line. They told us that we're going to be doing that and that was going to have some sort of an effect in our business going forward. We knew that when we made a new arrangement, and it hasn't really been significant yet, but it's there. So time will tell. You want to add anything?

Yes. The only thing I would add is that other brand that's brought in is at a different point, it's a much higher price point. So it could be if somebody is looking for the entry-level tool, it's unclear that that higher-price point tool is really going to hurt us, but for some people, their brand may drive them in that direction, but it's not directly impacting...

Right. So they offer a -- so it's like a separately advertised brand versus you guys, you make The Home Depots Husky brand?

Correct.

Correct. That's right.

Yes. Okay. And along this line of questions, regarding the estimated 200-basis point reduction in margin is that the new product line was to entail. Was there any greater visibility on whether Home Depot was taking that spread as extra profit or offering the new products at either more competitive pricing or with greater promotion spend from Home Depot behind it?

Yes. We don't get that information. They don't share that with us. It could be all of those.

A combination. And also -- could it also be part of what is absorbing the tariffs?

I don't think so. We'll be getting it, Andrew. It wouldn't...

Okay. All right. Well, then a smart guess. Has or when will your co-op marketing payments to Home Depot take place?

If you're referring to the adjustments for the reset that were made in 2018, those are done, that cash is out the door. There are -- just so we're clear, there was a significant amount of money over $1 million spent last year in resetting the stores. But there are always ongoing, we call, program elements for Home Depot and they're identified as commission, they're identified as rebates, advertising. There is all sorts of things that are deducted from the revenue or charge back to us to cover various things.

Right. But you've talked about one that was going to be a sizable payment that was going to be amortized over, I think, a four year period?

Yes, that's correct. That's done, it's out the door, it happened in 2018, and it will be amortized through 2021 -- 2022.

Okay. So where will the capitalization be placed on the balance sheet?

It's in other assets, and that will be amortized current and it will be other assets current and other assets long term.

All right. And then the amortization of this expense will go -- where will it go through the income statement from the top as a reduction of revenue or lower down starting at SG&A or cost of goods sold?

The reduction of revenue.

Okay. From a reduction of revenue, great. You mentioned -- one last thing here on the, I guess, on these products, which is really where the tariffs are. You discussed how the first round of tariff motivated price increases were put in place and absorbed and that the next 10% tariff that occurred on January 1 was also now absorbed within suppliers and customers, and of course, the final 15% is yet to be determined because it hasn't been implemented yet by the administration. While these price increases have been absorbed, have the products themselves experienced any slowdown in unit sales as a result, or can you tell?

We don't believe there's been any impact at the store level as a result of these tariffs.

No.

Great. You mentioned on the last call that P&F is sourcing some Craftsman product to Stanley Black & Decker. Is it a meaningful amount?

It was more last year, but it was not meaningful, but it's virtually finished at this point.

Okay. All right. So it was more just a, kind of, a transition as Stanley Black & Decker took the products off of Sears. Okay. In the automotive side of the business, you discussed on the last call the disruptions at 2 very large automotive distributors over the past year caused some headwinds to your business in this sector. Has there been some stabilization and what are your prospects for the coming year?

I would say, yes, I think, things have stabilized a bit. We're fairly happy with the introduction we made last fall of our VIBROTHERM line of AIRCAT tools. Those seemed to be received very well in the -- out in the field. In fact, we're backordered on a couple of items. So that's how -- it's a good and a bad thing. It's great that there's much demand. It's bad that we missed our forecast, but rather that then sitting on a lot of inventory. So yes, I would say, things have stabilized to answer your question.

And can you mention since this is behind them now who are these 2 large automotive distributors were?

No. We prefer not to.

Okay. All right. Can you update us on Universal's local currency actual performance during the quarter and the year?

The U.K. operation?

Yes, Universal's in U.K., but you have -- it's subject to some potentially wild currency swings because of Brexit. So I was just wondering on a local currency basis, how they were performing during the quarter and the year?

On a local basis, they were down a little bit in the fourth quarter.

Okay. And for the year?

Also down for the year.

For the quarter and for the year.

On local currency.

And not meaningful for the year as well?

Correct.

Correct.

Okay. I have more, let me back out and give a chance in case someone else is queued up?

I don't see, I don't think we have any.

Why you back out. Well, let the operator check?

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

So you talked on the last call and a few calls that you were spending, if we were looking at where and how the company is going to grow its earnings, obviously, 1 area is in the buyback and retirement of shares accretively, which we'll get to in the second. Another was, perspective product line extensions that you were spending a decent amount of efforts in internal product development and another is on the acquisition. So on the product extension side and the new product introductions, it's been -- November, so it's been about 4 or 5 months, it's been a third of a year. Are there any new product introductions, product extensions that are meaningful that have evolved and are being now introduced or to be introduced since the market even in aerospace, automotive or elsewhere that are worthy of discussing?

Well, as I mentioned earlier, the big launch in the fall of our VIBROTHERM line of AIRCAT tools has been very successful. So that's out there. We have other development activities going on in aerospace, a number of them, nothing I can report on right now. I'm hopeful that in a quarter or 2, we'll have more to talk about. But they're progressing, we're optimistic. On the engineered solutions side, we can -- that product development is continuous. So it's not as if there's any big launch, it's just sort of 1 project after another as I -- we identify these niches. But development is ongoing -- there's probably as much development going on now as there ever has been in the company.

All right. And then in the engineered solutions, variety of different industries, et cetera, nothing has gotten large enough or big enough yet to call out on its own?

Not yet.

Okay. You have some hopes for some that might be big enough to call out on their own in the coming quarters?

Yes. I think there is an opportunity for a -- 1 or 2 to get big enough.

Okay. So then moving on to the next of the triad of growing this company's earnings and cash flow and that is acquisitions. You've had Jiffy for a while that seems to be fully absorbed in pretty well, and you're now really hitting the ground running on the integration. NUMATX was a narrowed and more like specific product line. Are there any particular areas of focus on the acquisition front? What are you -- are you seeing more or less businesses and valuation multiples come in to give you more opportunities to look at? Or are things staying overly pricy and nothing too active on the acquisition side?

I wouldn't say anything is overly pricy. I think there are opportunities out there for us. We're trying to focus on 1 or 2 strategic areas. And so I don't think there was any -- there was no structural reason in the market that we shouldn't be able to get something done.

Andrew, we're only looking -- I don't know if you asked this question, but we're only looking for acquisitions in a narrow range of complementary businesses. We're not going outside of the scope of where we are. Then they'd done that, we're not doing that again. So it's a little more exact thing and it's a little smaller field of potential targets. But having said that, we're continuing it and we work on it pretty much every day actually. And it's been important to note like everybody else will, if we've anything to report down the road.

Right. Yes. Okay. And then going to the last of the triad here. Remarkably, your press release made no mention of any current shares outstanding number or even the one -- I was a little surprised, even the shares outstanding number used for EPS calculations. So all we have to go off of is your Q3 10-Q number. Can you provide us with a more current outstanding share count or fully diluted share count whether it's fiscal year-end or where we are in March after the sizable repurchase of the Fidelity shares?

Approximate.

I can give you an approximate number about 3.2 million is an approximate number, but that will end up -- that will be the number to -- that number will be disclosed in the 10-K in the next day or two.

Okay. So the approximate -- I heard Richard, the lawyer, Goodman, piked in there, the approximate 3.2 million number, that is approximately currently post-Fidelity buyback?

Correct.

Correct, yes.

Okay. Great. Well, that's a nice reduced number. Your detailed breakdown in comparison for the fiscal year was great. However, can you provide some breakdowns in comparisons for the most recent December quarter, including the impact of the new revenue recognition standard adoption for comparing Q4 versus Q4, because we don't know what to really back out to do an apples-to-apples comparison for the fourth quarter?

I mean, as you know, we made the decision a couple of years back to not get into that level of detail for Q4. Having said that, since rev ASC 606 was a special event, I can share with you that that adjustment for the fourth quarter was $278,000. So you would -- I'm sorry, $228,000, excuse me, can't read my own handwriting, $228,000. So that would be the adjustment to revenue, margin and SG&A.

Okay. Good. Because that definitely is needed.

Beginning in Jan, beginning in Q1, everything anniversaries and it will be apples-to-apples.

Great. Okay. And last, but not least, you said previously, if you had something to talk about, perhaps you'd spend some time articulating the investment proposition via IR activity. I know it's -- actually, it's an interesting balance. But to be fair to all shareholders, probably one should balance IR activity with the fact that you're actively looking to buyback and retire shares. And I'd love for you to buyback shares as cheaply as possible. But do you have some thoughts to say what's the feedback from the board as to what type of things you'd be looking for that would be worthwhile IR activity in terms of either Internet, from your office or something even local in terms of conferences and telling your story to, we'll call it, the micro-cap investment population? I don't think there is a large tools investment cadre, but there certainly is a decent population focused on micro-cap companies of your size.

I mean, Andrew, we've -- we had a board meeting 2 weeks ago actually, 2 or 3 weeks ago, and it was fairly -- not fairly unanimous, it was unanimous that nobody on the board felt at this time that Investor Relations was something that we should be focusing on other than how we do it right now. It just so happens we've had 2 firms contact us of late. And 1 actually, I think, I believe you know about them already, but they came in from out of town, and we spent a couple of hours with them. And I don't know if they've -- they left with -- and they went to visit one of our factories. And we don't have any update as to would they buy any stock, they didn't buy any stock, we don't really know. But we did that. So we do it in a targeted basis when approached or somebody comes to us. But I think right now, our board is -- was -- and we'll review it again at the annual meeting as we do every board meeting. But as of now, there was no overriding desire to do anything more than what we do in that regard. I don't know if that's answering your question, but that's...

Well, I guess, I'm wondering what the cons were? Is it a cost effectiveness issue? Is it a -- what is the resource allocation concern of the board, because obviously, a higher valuation on our shares obviously offsets the aggressive buyback activity. But the higher valuation on the shares does lower the company's cost of capital, especially, as one looks to make other strategic acquisitions, et cetera?

What we've been hearing is there's not enough stock to buy, even from the people that call us and want to engage in a conversation, that's the first thing out of their mouth. How can we get some stock? We're obviously not selling any and they have been unhappy, I guess, is the right word with what they would be able to get out there in the open market.

And one step further how they would sell when they would desire so.

Right. So it's unclear what going to a conference is going to accomplish if that problem doesn't go away. And the thing that I have been looking at, and I've been looking at some of these conferences, we are so far on one end of the size range. Even though these are micro-cap conferences, there are companies in there hundreds of millions, $1 billion in valuation, we're just not going to get any air time there.

Right. So just some feedback for the board on that. How these guys are going to buy it is they would pay a fair price, because obviously, our stock is so undervalued. If they pay a fair price, shares emerge. Just like you got a nice block from Fidelity, same thing happens there. In terms of how would someone would sell it, I do think continuing to be a buyer of shares with your 10b5 plan does add to the stock's liquidity, more than it drains the liquidity. And secondly, by having actually a consistent and active IR function or activity that does add to a company's share liquidity. So part of the, we'll call it, the concern some shareholders might have coming into buy your shares would be alleviated if indeed they felt comfortable that you were just having a regular program, a little bit above and beyond your quarterly calls, which I do appreciate, to articulate your story. I guess, they would like to know that you're telling your story to others if they are going to go in and buy your shares, because again, adding to the liquidity concerns. So those are just some feedback to give to the board to consider. There are some smaller or we'll call it nano-cap conferences, Joe, that might be, again, available to you for talking and you should talk -- you guys are paying NASDAQ a bunch of money. They do offer some IR services that might be able to do like a virtual conference for you and things like that. So those are just some ideas, but I appreciate you discussing this and making it part of your board agenda each quarter and perhaps market professionals that you have or would put on your board might provide you some better insight on that. I don't have any other questions guys.

Okay. We will, of course, bring that up again at the meeting, but you'll also -- the board members are on the call now. So you will -- they will hear exactly what you said.

Yes, well, that's why, and I thank you for allowing me the chance to say that, because I knew some would be either listening in on reading the transcripts.

Right, absolutely. Okay. Thank you, Andrew.

Do we have any other questions?

Any other questions, operator?

[Operator Instructions]. And I show no further questions at this time.

Okay. Thank you all for spending time with us today on the call. And we look forward to speaking to you with the Q1 results in May. Have a nice day, everybody.

Once again, that does conclude our conference for today. Thank you for your participation.