P&F Industries

The past year was a difficult one for P&F Industries, Inc., as the extremely poor economy had a significant impact on our operating results. Throughout the year, however, we worked diligently to reduce operating expenses so that we can become more competitive and more profitable when the economy does recover. By refocusing more intensively on our operations, we believe that P&F will emerge from these demanding economic times stronger and more efficient than ever before.

During 2001, our revenues decreased by 16.9%, from $80,898,674 to $67,195,192. Net income decreased by 52.6%, from $3,824,940 to $1,812,808, resulting in a decrease in diluted earnings per share from $1.04 to $.50.

At Florida Pneumatic, decreased consumer spending in the retail segment of our business contributed to a decision by a major customer to cancel two special promotions during the past year. Moreover, price reductions to another significant retail customer, which were passed through to the end-user, failed to generate the anticipated increase in sales. The industrial segment of our business also felt the effects of decreased spending. On a brighter note, our manufacturing initiatives resulted in substantial improvements in productivity, inventory turns and product quality. Our lean manufacturing program increased the utilization of both space and personnel, and helped to create a sense of teamwork on the manufacturing floor that we believe has fostered a favorable environment for continuing improvement.

At Green Manufacturing, sales were dramatically affected by lower demand for recycled cardboard and large capital goods, which, in turn, reduced demand for cylinders sold to the refuse and aerial lift markets, respectively. Sales were also negatively affected by the discontinuance by one major aerial lift customer of a significant portion of its product line, as well as by vendor consolidation at another major customer. Green had the opportunity to retain its business with the latter customer, although at dramatically reduced margins. However, on balance, we decided that our future prospects were better served by focusing on new accounts with greater margins, rather than by adding manufacturing capacity to accommodate extremely low margin business. As a result of this decision, Green embarked on an aggressive marketing program last year, and has developed many new customers. We expect sales to these new customers in 2002 to somewhat offset the sales to the customers that were lost during 2001. At the same time, during 2001, Green's cost cutting initiatives during the past year have generated a significant improvement in the ratio of production wages to sales, marking the third consecutive year of measurable productivity increases. Primary among the reasons for this improvement were a more efficient factory layout, the adoption of ''best practice'' machining techniques factory-wide, and taking further advantage of the sophisticated manufacturing software system that we implemented over a year ago.

A decrease in housing starts during 2001 and the resulting decrease in sales of baseboard heating products, were the overriding factors in Embassy's disappointing results. During the year, this decrease in sales was partially offset by an increase in sales of both our radiant products and our new Ambassador boiler line. We expect modest growth in 2002, as we broaden these product offerings. During 2001, Embassy also continued to develop a broader line of commercial heating products and radiant panels, which should help to increase sales to our customer base in 2002 and beyond.

Sales at Embassy's Franklin division were down only slightly for the year. We were very encouraged by the addition of several major accounts late in the year, which should go a long way towards returning Franklin's sales to their pre-2001 levels.

Although 2001 was a particularly challenging year overall, we took advantage of our reduced working capital needs to repay approximately $7 million in debt. Also, as mentioned earlier, we refocused on operating expenses and productivity savings to put us in a stronger position when the economic recovery begins.

Going forward, we will continue to pursue strategies that we believe will not only take advantage of our unique product and market knowledge, but will also reflect the many opportunities for growth that we see in our competitive environment. To that end, we will maintain an aggressive posture toward accretive acquisitions, as well as toward the broadening of our product offerings through both product development and alliances. These programs, along with our continuing manufacturing initiatives, should have a positive impact on P&F, regardless of the future economic circumstances.

Finally, during these difficult times, we continue to applaud the hard work of our many dedicated employees. Through their efforts, we look forward to a better year in 2002.

View our 2001 Annual Report (914k PDF)

Very truly Yours,

Richard A. Horowitz
Chairman of the Board, President
and Chief Executive Officer