Investor Relations
Letters to Shareholders
2006 Letter to Shareholders
In 2006, our revenues increased 3.5% to $111.7 million from $108.0 million in 2005, while earnings from continuing operations decreased 21.4% to $3.8 million, or $1.01 per diluted share, from $4.8 million, or $1.25 per diluted share, for the year ended December 31, 2005.
At Florida Pneumatic, results were negatively impacted by disappointing sales at our two largest retail customers as part of their programs to reduce their overall inventory levels. This was partially offset by several new product introductions, as well as steady, but modest, growth in our non-retail customers. In addition, although not evident in the 2006 results, a great deal of effort during the year was put toward successfully acquiring the business of Hy-Tech Machine, Inc., a manufacturer and distributor of industrial pneumatic tools and parts. This transaction, which closed in February 2007, is consistent with P&F's strategic initiative to emphasize its industrial tool segment.
In looking forward, we expect our tool group to offer interesting opportunities on several fronts. First, Florida Pneumatic's large sales force will have the Hy-Tech product line to offer to its current channels. Second, the combined Florida Pneumatic/Hy-Tech line will provide a unique solution to certain parts of the industrial channel not previously available to either company. Finally, access to P&F's capital should allow Hy-Tech to increase its growth rate on its current business.
Our Countrywide Hardware unit had mixed results for the year. Revenues were up, almost exclusively as the result of the acquisition of Pacific Stair Products, Inc. (PSP) in January 2006. PSP is a niche manufacturer and distributor of premium handrail and other stair parts based in Southern California, principally serving Arizona, Nevada and California. PSP carries the full line of Woodmark stair products as well, and due to its location, essentially functions as the West Coast operation for our Woodmark stair business. The goal of having a local presence in the West is to increase market penetration of stair parts by providing quick delivery and lower shipping costs to customers in this region. This model has proven to be very successful with Woodmark's Stair House division, based in the Atlanta area.
The largest operating unit of Countrywide is Woodmark, which had some modest growth in 2006. This was primarily driven by sales at its Stair House and Kitchen and Bath divisions. Stair House services the Southeastern U.S., while the Kitchen and Bath division primarily markets faucets on a national basis. Woodmark suffered some significant margin compression in 2006, primarily as a result of a shift to direct shipments to larger accounts, which generate lower margins for us. In addition, some price concessions were given to address very stiff regional competition in parts of the country where medium-sized local competitors have offered very aggressive pricing. These two negative trends appeared to stabilize somewhat toward the end of 2006.
Finally, Countrywide's Nationwide subsidiary suffered a sales decline, primarily due to the weakening in the regional housing markets it serves, as well as some new competition in its fencing segment. This new competition is a concern, and has caused Nationwide to reduce some prices in certain areas to retain its market share. However, the bright spots here are a promising pipeline of products under development and an opportunity for geographic expansion. Given the poor outlook for housing starts in 2007, we may not see progress in this subsidiary until after the current downturn ends.
Going forward at our Countrywide subsidiary, we intend to take advantage of select opportunities to grow, while at the same time cutting costs where possible. In addition, we expect to achieve some significant benefits from a new inbound freight carrier relationship in the form of reduced inbound logistics costs, as well as with the installation of a new MRP software system that should generate an improvement in working capital, as we strive to reduce average inventory levels.
With regard to discontinued operations, as noted in press releases throughout 2006, the contract to sell the building that housed the operations of Embassy Industries, Inc. was not consummated in 2006. However, a new contract with a different buyer was entered into in February 2007. After payoff of the mortgage on the building, P&F expects to net approximately $4.4 million on this transaction. The expected after-tax proceeds will go directly to pay down the term loan used to finance the Hy-Tech acquisition.
We were obviously very disappointed in our results for 2006 and have some concern that the economic conditions in 2007 may prove equally as challenging. As a result, we intend to reduce expenses where we can, and will endeavor to push forward on our several strategic initiatives so that we may emerge poised to take advantage of the eventual turnaround.
Finally, I would like to express my gratitude to our customers for their continued partnership, and, as always, I must thank our talented, dedicated and enthusiastic employees. Our achievements on behalf of our shareholders are due to their efforts.
Very truly Yours,
Richard A. Horowitz
Chairman of the Board, President
and Chief Executive Officer