Investor Relations
Letters to Shareholders
2005 Letter to Shareholders
As expected, the general economic environment in the U.S. improved in 2005. U.S. retail sales rose over 2004 levels and strong housing starts continued in the Northeast and South, driving an overall increase for the entire country, including the markets served by our Company. However, the two currencies utilized by our Company in making foreign purchases had a mixed impact on our operations for the year, with the value of the U.S. dollar increasing in relation to the Japanese yen and decreasing in relation to the Taiwan dollar. Based on these currency movements and the relative size of our purchases, the impact was immaterial to our consolidated results in 2005.
Within the last year, P&F was successful in streamlining and refocusing our operations into two business segments, Tools and Hardware. Beginning in December of 2004, P&F disposed of the largest part of Green Manufacturing with the sale of the Cylinder Division. Then, in February 2005, we continued the disposition of the remaining assets of Green Manufacturing by selling the Access Division. Finally, in July 2005, we disposed of the last portion of Green, the Agricultural Division. Through March 2006, P&F has received over $9 million from the sale of Green's three divisions. In addition, we expect to receive several million dollars related to amounts due on account of certain deferred and contingent payment obligations over the next few years.
Also, in October 2005, all of the non-real estate assets of Embassy Industries were sold for approximately $8.4 million in cash, and the building that housed Embassy's operations is in contract as of March 2006 to be sold. After payoff of the mortgage on the building, P&F expects to net approximately $5 million on this last transaction. We are very pleased with the results of each of these five transactions as these divestitures will allow management to give greater attention to the business units that we believe have the greatest opportunities for increasing shareholder value.
As for our ongoing business units, Florida Pneumatic had a decrease in revenues of 6.7% compared to 2004. This was due primarily to decreased promotional activity by our two large retail accounts, as well as to a base sales decrease at one of these major customers attributable to an inventory reduction program. In addition, automotive sales were down dramatically, as there were no new accounts obtained in 2005, nor any new product introductions, which are a key driver of overall sales to this channel. However, we do expect to introduce several new automotive products in 2006, which we believe will improve sales going forward. There were, however, several new non-automotive products introduced in 2005 that helped overall sales at Florida Pneumatic. Lastly, margins were down at Florida Pneumatic primarily due to a change in product mix from 2004.
In looking ahead for Florida Pneumatic, we have also reemphasized product development and intend to introduce a completely new look for a large portion of our air tool line, with improved performance, later in 2006 and into early 2007. Finally, we continue to cultivate a new relationship with a national catalog/retail group with a growing nationwide presence that we anticipate will be a significant partnership for Florida Pneumatic in the years to come.
Our Countrywide Hardware subsidiary had an excellent year, with strong revenues and income growth. Most significantly, we enjoyed a full year of revenues in 2005 from Woodmark International, which was purchased on June 30, 2004. Sales of stair products benefited from the housing boom, which was partially offset by some weakness in Woodmark's kitchen and bath products sold into the mobile home and remodeling markets. We continue to employ our national strategy in stairs with the early 2006 acquisition of Pacific Stair Products ("PSP"), a niche manufacturer and distributor of premium handrail and other stair parts based in southern California, principally serving Arizona, Nevada and California. In addition to manufacturing handrail, PSP has become a more significant distribution center for other stair parts and will now carry the full line of Woodmark's stair products, which we believe will make it the most complete distributor of stair parts on the West Coast.
Nationwide Industries, the other unit of our Countrywide subsidiary, saw a 16% increase in revenue over the prior year as it also took advantage of the strong housing market. Sales of fencing products were particularly strong, as were sales of OEM products, as we were able to procure several large accounts during the year. We were especially pleased that gross margins for the year at Countrywide remained unchanged despite the typical competitive pressures. This was primarily due to the fact that Nationwide was successful in moving some production to new, high quality vendors at better prices which offset some price erosion for this subsidiary.
We continue to expect positive results from what is now a four location operation for our hardware group. These locations are able to service every major housing market in the United States, and we plan to further coordinate their activities and to explore other strategic expansion opportunities for this business unit in the years ahead.
During 2005, P&F continued to enhance shareholder value by producing record earnings from continuing operations, as well as by having taken advantage of a unique opportunity to sell our under-performing business units. Our newly refocused Company should allow management the opportunity to develop programs for our healthy businesses and hopefully record even greater results going forward.
We wish to thank all of our employees for their efforts throughout the year, as well as our vendor partners who helped us deliver an excellent product to our many loyal customers. Finally, we thank our shareholders for their continuing interest and belief in our Company. We are confident that our collective dedication will be reflected in positive results in the years to come.
Very truly Yours,
Richard A. Horowitz
Chairman of the Board, President
and Chief Executive Officer