Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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| **x**                                                                                                                                                | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**  |
|------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                           | ** **                                                                                          |
| **For the Quarterly Period Ended March 31, 2009**                                                                                               |
| ** **                                                                                                                                           | ** **                                                                                          |
| **o**                                                                                                                                                | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
| ** **                                                                                                                                           | ** **                                                                                          |
| **For the transition period from                      to** |

 

**Commission File Number 1 - 5332**

 

**P&FINDUSTRIES, INC.**

(Exact name of registrant asspecified in its charter)

 

| **Delaware**                                                  | ** ** | **22-1657413**                          |
|---------------------------------------------------------------|------------|-----------------------------------------|
| (State or other jurisdiction of                               |       | (I.R.S. Employer Identification Number) |
| incorporation or organization)                                |       |                                    |
|                                                          |       |                                    |
| **445 Broadhollow Road, Suite 100, Melville, New  York** | ** ** | **11747**                               |
| (Address of principal executive offices)                      |       | (Zip Code)                              |

 

Registrant’s telephonenumber, including area code: **(631) 694-9800**

 

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Indicate by checkmark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months, and (2) has beensubject to such filing requirements for the past 90 days. Yes  x    No  o

 

Indicate by check mark whether the registrant has submitted electronicallyand posted to its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T(§ 232.405 of this chapter) during the proceeding 12 months (or for suchshorter period the registrant was required to submit and post such files)..  Yes  o    No  o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large  accelerated filer  o               |   | Accelerated  filer  o         |
|------------------------------------------------|--------|------------------------------------|
|                                           |   |                               |
| Non-accelerated  filer  o                 |   | Smaller  reporting company  x |
| (Do not check if  a smaller reporting company) |   |                               |

 

Indicate by checkmark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act). Yes o  No x

 

As of May 10, 2009 there were 3,614,562 shares of the registrant’sClass A Common Stock outstanding.

 

 

 

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**P&F INDUSTRIES, INC.**

 

**FORM 10-Q**

 

**FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2009**

 

**TABLE OF CONTENTS**

 
| ** **                                    | ** **                                                                                                                      | **PAGE** |
|-----------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------|----------|
|                                          |                                                                                                                            |     |
| **PART I  — FINANCIAL INFORMATION** | 1                                                                                                                               |
|                                          |                                                                                                                            |     |
| Item 1.                                       | Financial  Statements                                                                                                           | 1        |
|                                          |                                                                                                                            |     |
|                                          | Consolidated  Condensed Balance Sheets as of March 31, 2009 and December 31, 2008                                     | 1        |
|                                          |                                                                                                                            |     |
|                                          | Consolidated  Condensed Statements of Earnings for the three months ended March 31,  2009 and 2008                         | 3        |
|                                          |                                                                                                                            |     |
|                                          | Consolidated  Condensed Statement of Shareholders’ Equity for the period from  January 1, 2009 to March 31, 2009 | 4        |
|                                          |                                                                                                                            |     |
|                                          | Consolidated  Condensed Statements of Cash Flows for the three months ended March 31,  2009 and 2008                       | 5        |
|                                          |                                                                                                                            |     |
|                                          | Notes to  Consolidated Condensed Financial Statements                                                                           | 7        |
|                                          |                                                                                                                            |     |
| Item 2.                                       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                     | 14       |
|                                          |                                                                                                                            |     |
| Item 3.                                       | Quantitative  and Qualitative Disclosures About Market Risk                                                                     | 20       |
|                                          |                                                                                                                            |     |
| Item 4T.                                      | Controls and  Procedures                                                                                                        | 20       |
|                                          |                                                                                                                            |     |
| **PART II — OTHER  INFORMATION**    | 21                                                                                                                              |
|                                          |                                                                                                                            |     |
| Item 1.                                       | Legal  Proceedings                                                                                                              | 21       |
|                                          |                                                                                                                            |     |
| Item 1A.                                      | Risk  Factors                                                                                                                   | 21       |
|                                          |                                                                                                                            |     |
| Item 2.                                       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                    | 21       |
|                                          |                                                                                                                            |     |
| Item 3.                                       | Defaults Upon  Senior Securities                                                                                                | 21       |
|                                          |                                                                                                                            |     |
| Item 4.                                       | Submission  of Matters to a Vote of Security Holders                                                                            | 21       |
|                                          |                                                                                                                            |     |
| Item 5.                                       | Other  Information                                                                                                              | 21       |
|                                          |                                                                                                                            |     |
| Item 6.                                       | Exhibits                                                                                                                        | 21       |
|                                          |                                                                                                                            |     |
| **Signature**                                 |                                                                                                                            | 22       |
|                                          |                                                                                                                            |     |
| **Exhibit Index**                        |                                                                                                                            | 23       |

 

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**PART I - FINANCIAL INFORMATION**

 

**Item 1.                    Financial Statements**

 

**P&F INDUSTRIES, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED CONDENSED BALANCE SHEETS**

 
| ** **                                     | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                                     | ** ** | **(unaudited)**              | ** ** | **(See Note 1)**      | ** ** |
| **ASSETS**                                     | ** ** | ** **                   | ** ** | ** **                      | ** ** |
| CURRENT                                        | ** ** | ** **                   | ** ** | ** **                      | ** ** |
| ** **                                     | ** ** | ** **                   | ** ** | ** **                      | ** ** |
| Cash and cash equivalents                      |       | $                            | 722,239    |                            | $          | 1,043,235 |   |
| Accounts receivable – net                 |       | 9,390,209                    |       | 8,506,668                       |       |
| Inventories – net                         |       | 29,205,984                   |       | 31,285,821                      |       |
| Deferred income taxes – net               |       | 1,584,000                    |       | 1,584,000                       |       |
| Income tax refund receivables                  |       | 469,369                      |       | 326,974                         |       |
| Prepaid expenses and other current assets      |       | 1,507,630                    |       | 990,230                         |       |
| TOTAL CURRENT ASSETS                           |       | 42,879,431                   |       | 43,736,928                      |       |
|                                           |       |                         |       |                            |       |
| PROPERTY AND EQUIPMENT                         |       |                         |       |                            |       |
| Land                                           |       | 1,549,773                    |       | 1,549,773                       |       |
| Buildings and improvements                     |       | 7,642,009                    |       | 7,636,778                       |       |
| Machinery and equipment                        |       | 16,123,271                   |       | 15,568,025                      |       |
|                                           |       | 25,315,053                   |       | 24,754,576                      |       |
| Less accumulated depreciation and amortization |       | 11,648,717                   |       | 11,232,252                      |       |
| NET PROPERTY AND EQUIPMENT                     |       | 13,666,336                   |       | 13,522,324                      |       |
|                                           |       |                         |       |                            |       |
| GOODWILL                                       |       | 4,183,028                    |       | 4,183,028                       |       |
|                                           |       |                         |       |                            |       |
| OTHER INTANGIBLE ASSETS – net             |       | 3,030,957                    |       | 3,121,072                       |       |
|                                           |       |                         |       |                            |       |
| DEFERRED INCOME TAXES -net                     |       | 5,424,000                    |       | 5,424,000                       |       |
|                                           |       |                         |       |                            |       |
| OTHER ASSETS – net                        |       | 630,643                      |       | 485,133                         |       |
|                                           |       |                         |       |                            |       |
| TOTAL ASSETS                                   |       | $                            | 69,814,395 |                            | $          | 70,472,485 |   |

 

See accompanying notes toconsolidated condensed financial statements (unaudited).

 

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**P&F INDUSTRIES, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED CONDENSED BALANCE SHEETS**

 
| ** **                                                                                                                                | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                | ** ** | **(unaudited)**              | ** ** | **(See Note 1)**      | ** ** |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                            | ** ** | ** **                   | ** ** | ** **                      | ** ** |
| CURRENT LIABILITIES                                                                                                                       | ** ** | ** **                   | ** ** | ** **                      | ** ** |
| ** **                                                                                                                                | ** ** | ** **                   | ** ** | ** **                      | ** ** |
| Short-term borrowings                                                                                                                     |       | $                            | 20,000,000 |                            | $          | 15,000,000 |   |
| Accounts payable                                                                                                                          |       | 2,805,254                    |       | 1,961,531                       |       |
| Other accrued liabilities                                                                                                                 |       | 3,981,631                    |       | 3,768,935                       |       |
| Current maturities of long-term debt                                                                                                      |       | 3,131,546                    |       | 6,515,224                       |       |
| TOTAL CURRENT LIABILITIES                                                                                                                 |       | 29,918,431                   |       | 27,245,690                      |       |
|                                                                                                                                      |       |                         |       |                            |       |
| LONG-TERM DEBT, less current maturities                                                                                                   |       | 6,239,545                    |       | 9,028,924                       |       |
| LIABILITIES OF DISCONTINUED OPERATIONS                                                                                                    |       | 325,148                      |       | 331,071                         |       |
|                                                                                                                                      |       |                         |       |                            |       |
| TOTAL LIABILITIES                                                                                                                         |       | 36,483,124                   |       | 36,605,685                      |       |
|                                                                                                                                      |       |                         |       |                            |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                             |       |                         |       |                            |       |
|                                                                                                                                      |       |                         |       |                            |       |
| SHAREHOLDERS’ EQUITY                                                                                                                 |       |                         |       |                            |       |
| Preferred stock - $10 par; authorized - 2,000,000 shares; no shares  outstanding                                                          |       | —                       |       | —                          |       |
| Common stock                                                                                                                              |       |                         |       |                            |       |
| Class A - $1 par; authorized - 7,000,000 shares; issued -  3,956,431 at March 31, 2009 and December 31, 2008, respectively |       | 3,956,431                    |       | 3,956,431                       |       |
| Class B - $1 par; authorized - 2,000,000 shares; no shares  issued                                                                   |       | —                       |       | —                          |       |
| Additional paid-in capital                                                                                                                |       | 10,477,302                   |       | 10,407,315                      |       |
| Retained earnings                                                                                                                         |       | 21,853,103                   |       | 22,458,619                      |       |
| Treasury stock, at cost – 341,869 shares at March 31, 2009 and  December 31, 2008                                          |       | (2,955,565                   | )          | (2,955,565                      | )          |
|                                                                                                                                      |       |                         |       |                            |       |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                                           |       | 33,331,271                   |       | 33,866,800                      |       |
|                                                                                                                                      |       |                         |       |                            |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                           |       | $                            | 69,814,395 |                            | $          | 70,472,485 |   |

 

See accompanying notes toconsolidated condensed financial statements (unaudited).

 

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**P&F INDUSTRIES, INC. AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (unaudited)**

** **
| ** **                                                                                                                                       | ** ** | **Three months  ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                                                       | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Net revenues                                                                                                                                     |       | $                                                | 15,562,070 |   | $ | 24,324,755 |   |
| Cost of sales                                                                                                                                    |       | 10,930,653                                       |       | 16,652,272 |   |
| Gross profit                                                                                                                                     |       | 4,631,417                                        |       | 7,672,483 |   |
| Selling, general and administrative expenses                                                                                                     |       | 5,040,781                                        |       | 6,510,346 |   |
| Operating (loss) income                                                                                                                          |       | (409,364                                         | )          | 1,162,137 |   |
| Interest expense – net                                                                                                                      |       | 309,353                                          |       | 558,364 |   |
| (Loss) earnings from continuing operations before income taxes                                                                                   |       | (718,717                                         | )          | 603,773 |   |
| Income taxes                                                                                                                                     |       | (122,000                                         | )          | 254,000 |   |
| (Loss) earnings from continuing operations                                                                                                       |       | (596,717                                         | )          | 349,773 |   |
|                                                                                                                                             |       |                                             |       |   |   |
| (Loss) earnings from operation of discontinued operations (net of tax  (benefit) expense of $(5,000) for 2009 and $9,000 for 2008, respectively) |       | (8,799                                           | )          | 12,708 |   |
|                                                                                                                                             |       |                                             |       |   |   |
| Net (loss) earnings                                                                                                                              |       | $                                                | (605,516   | ) | $ | 362,481 |   |
| Basic (loss) earnings per common share:                                                                                                          |       |                                             |       |   |   |
| Continuing operations                                                                                                                            |       | $                                                | (0.17      | ) | $ | 0.10 |   |
| Discontinued operations                                                                                                                          |       | —                                           |       | — |   |
|                                                                                                                                             |       | $                                                | (0.17      | ) | $ | 0.10 |   |
|                                                                                                                                             |       |                                             |       |   |   |
| Diluted (loss) earnings per common share:                                                                                                        |       |                                             |       |   |   |
| Continuing operations                                                                                                                            |       | $                                                | (0.17      | ) | $ | 0.10 |   |
| Discontinued operations                                                                                                                          |       | —                                           |       | — |   |
|                                                                                                                                             |       | $                                                | (0.17      | ) | $ | 0.10 |   |
|                                                                                                                                             |       |                                             |       |   |   |
| Weighted average common shares outstanding:                                                                                                      |       |                                             |       |   |   |
| Basic                                                                                                                                            |       | 3,614,562                                        |       | 3,637,462 |   |
| Diluted                                                                                                                                          |       | 3,614,562                                        |       | 3,675,235 |   |

 

See accompanying notes to consolidatedcondensed financial statements (unaudited).

 

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**P&F INDUSTRIES, INC. ANDSUBSIDIARIES**

 

**CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS’ EQUITY(unaudited)**

 
| ** **                              | ** ** | ** ** | ** ** | **Class A Common  Stock, $1 Par** | ** ** | **Additional  paid-in** | ** ** | **Retained** | ** ** | **Treasury stock** | ** ** |
|-----------------------------------------|------------|------------|------------|-------------------------------------------------------|------------|-------------------------|------------|--------------|------------|-------------------------|------------|
| ** **                              | ** ** | **Total**  | ** ** | **Shares**                                            | ** ** | **Amount**              | ** ** | **capital**  | ** ** | **earnings**            | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| ** **                              | ** ** | ** ** | ** ** | ** **                                            | ** ** | ** **              | ** ** | ** **   | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance, January 1, 2009 |       | $          | 33,866,800 |                                                  | 3,956,431  |                    | $          | 3,956,431    |       | $                       | 10,407,315 |   | $ | 22,458,619 |   | (341,869 | ) | $ | (2,955,565 | ) |
|                                    |       |       |       |                                                  |       |                    |       |         |       |                    |       |   |   |   |   |
| Net loss                           |       | (605,516   | )          |                                                  |       |                    |       |         |       | (605,516                | )          |   |   |   |   |
| Stock-based compensation                |       | 69,987     |       |                                                  |       |                    |       | 69,987       |       |                    |       |   |   |   |   |
|                                    |       |       |       |                                                  |       |                    |       |         |       |                    |       |   |   |   |   |
| Balance, March 31, 2009            |       | $          | 33,331,271 |                                                  | 3,956,431  |                    | $          | 3,956,431    |       | $                       | 10,477,302 |   | $ | 21,853,103 |   | (341,869 | ) | $ | (2,955,565 | ) |

 

See accompanying notes toconsolidated condensed financial statements (unaudited).

 

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**P&FINDUSTRIES, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (unaudited)**

 
| ** **                                                                                                           | ** ** | **Three months  ended March 31** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                                                           | ** ** | **2009**                                        | ** ** | **2008** | ** ** |
| Cash Flows from Operating Activities of Continuing Operations:                                                       |       |                                            |       |   |   |
| Net (loss) earnings                                                                                                  |       | $                                               | (605,516   | ) | $ | 362,481 |   |
| Loss (earnings) loss from discontinued operations – net of taxes                                                |       | 8,799                                           |       | (12,708 | ) |
| Adjustments to reconcile net (Loss) earnings to net cash provided by  operating activities of continuing operations: |       |                                            |       |   |   |
| Non-cash charges:                                                                                                    |       |                                            |       |   |   |
| Depreciation and amortization                                                                                        |       | 422,760                                         |       | 427,402 |   |
| Amortization of other intangible assets                                                                              |       | 90,115                                          |       | 229,116 |   |
| Amortization of other assets                                                                                         |       | 3,393                                           |       | 4,893 |   |
| Provision for losses on accounts receivable - net                                                                    |       | (9,726                                          | )          | (113,194 | ) |
| Stock-based compensation                                                                                             |       | 69,987                                          |       | 46,534 |   |
| Deferred income taxes - net                                                                                          |       | —                                          |       | 186,000 |   |
| Gain on sale of fixed asset                                                                                          |       | (2,076                                          | )          | — |   |
| Changes in operating assets and liabilities                                                                          |       |                                            |       |   |   |
| Accounts receivable                                                                                                  |       | (873,815                                        | )          | (1,895,086 | ) |
| Inventories                                                                                                          |       | 2,079,837                                       |       | 1,578,760 |   |
| Income tax refund receivable                                                                                         |       | (142,395                                        | )          | 35,601 |   |
| Prepaid expenses and other current assets                                                                            |       | (517,349                                        | )          | (56,516 | ) |
| Other assets                                                                                                         |       | (148,903                                        | )          | (54,345 | ) |
| Accounts payable                                                                                                     |       | 843,723                                         |       | (136,567 | ) |
| Accruals and other                                                                                                   |       | 217,796                                         |       | (1,320,657 | ) |
| Income taxes payable                                                                                                 |       | —                                          |       | (463,000 | ) |
| Total adjustments                                                                                                    |       | 2,042,146                                       |       | (1,543,767 | ) |
| Net cash provided by (used in) operating activities of continuing  operations                                        |       | $                                               | 1,436,630  |   | $ | (1,181,286 | ) |

 

See accompanying notes toconsolidated condensed financial statements (unaudited).

 

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**P&FINDUSTRIES, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS(unaudited) (continued)**

 
| ** **                                                                    | ** ** | **Three months  ended March 31** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2009**                                        | ** ** | **2008** | ** ** |
| Cash Flows from Investing Activities of Continuing Operations:                |       |                                            |       |   |   |
| Capital expenditures                                                          |       | $                                               | (567,171   | ) | $ | (189,219 | ) |
| Proceeds from sale of fixed assets                                            |       | 2,475                                           |       | — |   |
| Net cash used in investing activities of continuing Operations                |       | (564,696                                        | )          | (189,219 | ) |
|                                                                          |       |                                            |       |   |   |
| Cash Flows from Financing Activities of Continuing Operations:                |       |                                            |       |   |   |
| Proceeds from short-term borrowings                                           |       | 8,484,000                                       |       | 7,500,000 |   |
| Repayments of short-term borrowings                                           |       | (3,484,000                                      | )          | — |   |
| Repayments of term loan                                                       |       | (6,444,000                                      | )          | (6,310,000 | ) |
| Proceeds from equipment lease financing                                       |       | 348,000                                         |       | — |   |
| Repayments of equipment lease financing                                       |       | (8,801                                          | )          | — |   |
| Principal payments on long-term debt                                          |       | (68,256                                         | )          | (65,764 | ) |
| Net cash (used in) provided by financing activities of continuing  operations |       | (1,173,057                                      | )          | 1,124,236 |   |
|                                                                          |       |                                            |       |   |   |
| Cash Flows from Discontinued Operations:                                      |       |                                            |       |   |   |
| Net cash provided by (used in) operating activities                           |       | (19,873                                         | )          | 1,333 |   |
| Net cash provided by (used in) discontinued operations                        |       | (19,873                                         | )          | 1,333 |   |
|                                                                          |       |                                            |       |   |   |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                                     |       | (320,996                                        | )          | (244,936 | ) |
| Cash and cash equivalents at beginning of period                              |       | 1,043,235                                       |       | 1,334,167 |   |
| Cash and cash equivalents at end of period                                    |       | $                                               | 722,239    |   | $ | 1,089,231 |   |

 

**Supplemental disclosures of cash flow information:**

 
| Cash paid for: |   |   |    |   |   |
|----------------|--------|--------|---------|--------|--------|
| Interest       |   | $      | 325,000 |   | $      | 596,000 |   |
| Income taxes   |   | $      | 15,000  |   | $      | 565,000 |   |

 

See accompanying notes to consolidated condensed financial statements(unaudited).

 

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**P&F INDUSTRIES, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(unaudited)**

 

**NOTE 1 - SUMMARY OF ACCOUNTINGPOLICIES**

 

**Principles of Consolidation**

 

The unaudited consolidated condensed financial statements containedherein include the accounts of P&F Industries, Inc. and itssubsidiaries (“P&F”). All significant intercompany balances andtransactions have been eliminated.

 

P&F conducts its business operations through two of itswholly-owned subsidiaries: Continental Tool Group, Inc. (“Continental”)and Countrywide Hardware, Inc. (“Countrywide”). P&F and itssubsidiaries are herein referred to collectively as the “Company.” In addition,the words “we”, “our” and “us” refer to the Company.

 

Further, P&F operates in two primary lines of business, orsegments: (i) tools and other products (“Tools”) and (ii) hardwareand accessories (“Hardware”).

 

**Tools**

 

Weconduct our Tools business through Continental, which in turn currentlyoperates through its wholly-owned subsidiaries, Florida Pneumatic ManufacturingCorporation (“Florida Pneumatic”) and Hy-Tech Machine, Inc. (“Hy-Tech”).

 

Florida Pneumatic is engaged in the importation, manufacture and saleof pneumatic hand tools, primarily for the industrial, retail and automotivemarkets, and the importation and sale of compressor air filters. FloridaPneumatic also markets, through its Berkley Tool division (“Berkley”), a lineof pipe cutting and threading tools, wrenches and replacement electricalcomponents for a widely-used brand of pipe cutting and threading machines. Inaddition, through its Franklin Manufacturing (“Franklin”) division, FloridaPneumatic imports a line of door and window hardware.  Hy-Tech is primarily engaged in themanufacture and distribution of pneumatic tools and parts for industrialapplications.

 

**Hardware**

 

Weconduct our Hardware business through a wholly-owned subsidiary, CountrywideHardware Inc. (“Countrywide”), which in turn operates through itswholly-owned subsidiaries, Nationwide Industries, Inc. (“Nationwide”),Woodmark International, L.P. (“Woodmark”) and Pacific Stair Products, Inc.(“Pacific Stair”).

 

Nationwide is an importer and manufacturer of door, window and fencinghardware. Woodmark is an importer of builders’ hardware, including staircasecomponents and kitchen and bath hardware and accessories. Pacific Stair, untilmid-2008, manufactured premium stair rail products. Since the closing of itsmill in 2008, it now operates as a distributer of Woodmark’s staircasecomponents to the building industry, primarily in southern California and thesouthwestern region of the United States.

 

**Basis of Financial Statement Presentation**

 

The accompanying unaudited consolidated condensed financial statementshave been prepared in accordance with accounting principles generally acceptedin the United States of America for interim financial information, and with therules and regulations of the Securities and Exchange Commission regardinginterim financial reporting. Accordingly, these interim financial statements donot include all of the information and footnotes required by accountingprinciples generally accepted in the United States of America for completefinancial statements. In the opinion of the Company, these unauditedconsolidated condensed financial statements include all adjustments necessaryto present fairly the information set forth therein. All such adjustments areof a normal recurring nature. Results for interim periods are not necessarilyindicative of results to be expected for a full year.

 

The unaudited consolidated condensed balance sheet information as of March 31,2009 was derived from the audited financial statements included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2008. Theinterim financial statements contained herein should be read in conjunctionwith that Report.

 

In preparing its unaudited consolidated condensed financial statementsin conformity with accounting principles generally accepted in the UnitedStates of America, the Company is required to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and the disclosureof contingent assets and liabilities at the date of the financial statementsand the reported amounts of revenues and expenses during the reporting period.On an ongoing basis, the Company evaluates estimates, including those relatedto bad debts, inventory reserves, goodwill and intangible assets and incometaxes. The Company bases its estimates on historical data 

 

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andexperience, when available, and on various other assumptions that are believedto be reasonable under the circumstances, the combined results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultscould differ from those estimates.

 

**NOTE 2 - (LOSS) EARNINGS PER SHARE**

 

Basic (loss) earnings per common share is based only on the averagenumber of shares of common stock outstanding for the periods. Diluted earningsper common share reflects the effect of shares of common stock issuable uponthe exercise of options, unless the effect on earnings is antidilutive.

 

Diluted earnings per common share is computed using the treasury stockmethod. Under this method, the aggregate number of shares of common stock outstandingreflects the assumed use of proceeds from the hypothetical exercise of anyoutstanding options or warrants to purchase shares of the Company’s Class ACommon Stock. The average market value for the period is used as the assumedpurchase price.

 

The following table sets forth the computation of basic and diluted (loss)earnings per common share:

 
| ** **                                                                                                         | ** ** | **Three months ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                         | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Numerator:                                                                                                         |       |                                             |       |   |   |
| Numerator for basic and diluted earnings per common share:                                                         |       |                                             |       |   |   |
| (Loss) earnings from continuing operations                                                                         |       | $                                                | (597,000   | ) | $ | 350,000 |   |
| Discontinued operations, net of taxes                                                                              |       | (9,000                                           | )          | 12,000 |   |
| Net (loss) earnings                                                                                                |       | $                                                | (606,000   | ) | $ | 362,000 |   |
| Denominator:                                                                                                       |       |                                             |       |   |   |
| Denominator for basic earnings per share – weighted average common  shares outstanding                        |       | 3,614,562                                        |       | 3,637,462 |   |
| Effect of dilutive securities:                                                                                     |       |                                             |       |   |   |
| Stock options                                                                                                      |       | —                                           |       | 37,773 |   |
| Denominator for diluted earnings per share – adjusted weighted  average common shares and assumed conversions |       | 3,614,562                                        |       | 3,675,235 |   |

 

At March 31, 2009 and 2008 and during the three-month period endedMarch 31, 2009 and 2008, there were outstanding stock options whoseexercise prices were higher than the average market values of the underlying Class ACommon Stock for the period. These options are antidilutive and are excludedfrom the computation of earnings per share. The weighted average antidilutivestock options outstanding were as follows:

 
| ** **                                              | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                              | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Weighted average antidilutive stock options outstanding |       | 553,936                                          |       | 271,500 |   |

 

Dilutedloss per share for the three-month period ended March 31, 2009 was thesame as basic loss per share, since the effect of the inclusion of common shareequivalents would be anti-dilutive, because of the reported loss.

 

**NOTE 3 - STOCK-BASED COMPENSATION**

 

Stock-based Compensation

 

TheCompany did not grant any stock options or warrants during the three-monthperiods ended March 31, 2009 and 2008.

 

In accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment”(“Statement 123(R)”), the Company recorded stock-basedcompensation expense for the three-month periods ended March 31, 2009 and2008 of approximately $70,000 and $47,000, respectively. Compensation expenseis recognized in the selling, general and administrative expenses line item ofthe Company’s statements of earnings on a straight-line basis over the vestingperiods. The adoption of Statement 123(R) had no material impact on ourbasic and diluted earnings per common share for the three-month periods ended March 31,2008.    The Company recognizes compensation cost over the requisite serviceperiod. However, the exercisability of the respective non-vested options, which

 

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are atpre-determined dates on a calendar year, do not necessarily correspond to theperiod(s) in which straight-line amortization of compensation cost isrecorded. As of March 31, 2009, the Company had approximately $315,000 oftotal unrecognized compensation cost related to non-vested awards granted underour share-based plans, which we expect to recognize over a weighted-averageperiod of 1.9 years.

 

Stock Option Plan

 

The Company’s 2002 Incentive Stock Option Plan (the “Current Plan”)authorizes the issuance, to employees and directors, of options to purchase amaximum of 1,100,000 shares of Class A Common Stock. These options must beissued within ten years of the effective date of the Current Plan and areexercisable for a ten year period from the date of grant, at prices not lessthan 100% of the market value of the Class A Common Stock on the date theoption is granted. Incentive stock options granted to any 10% stockholder areexercisable for a five year period from the date of grant, at prices not lessthan 110% of the market value of the Class A Common Stock on the date theoption is granted. Pursuant to the Current Plan, the Stock Option Committee hasthe discretion to award non-qualified stock option grants with various vestingparameters. Options have vesting periods of immediate to three years. In theevent options granted contain a vesting schedule over a period of years, theCompany recognizes compensation cost for these awards on a straight-line basisover the service period. The Current Plan, which terminates in 2012, is thesuccessor to the Company’s 1992 Incentive Stock Option Plan (the “Prior Plan”).

 

The following is a summary of the changes in outstanding options forthe three months ended March 31, 2009:

 
| ** **                        | ** ** | **Option Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted Average  Remaining  Contractual Life  (Years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-----------------------------------|------------|------------------------|------------|----------------------------------------|------------|----------------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding, January 1, 2009 |       | 553,936                |       | $                                      | 7.38       |                                                                 | 6.5        |                            | —     |   |
| Granted                           |       | —                 |       |                                   |       |                                                                 |       |                            |       |
| Exercised                         |       | —                 |       |                                   |       |                                                                 |       |                            |       |
| Forfeited                         |       | —                 |       |                                   |       |                                                                 |       |                            |       |
| Expired                           |       | (12,000                | )          |                                   |       |                                                                 |       |                            |       |
| Outstanding, March 31, 2009  |       | 541,936                |       | $                                      | 7.34       |                                                                 | 6.4        |                            | —     |   |
|                              |       |                   |       |                                   |       |                                                                 |       |                            |       |
| Vested, March 31, 2009       |       | 341,936                |       | $                                      | 8.59       |                                                                 | 4.9        |                            | —     |   |

 

The following is a summary of changes innon-vested shares for the three months ended March 31, 2009:

 
| ** **                              | ** ** | **Option Shares** | ** ** | **Weighted Average Grant-Date  Fair Value** | ** ** |
|-----------------------------------------|------------|------------------------|------------|------------------------------------------------------------|------------|
| Non-vested shares, January 1, 2009 |       | 212,406                |       | $                                                          | 3.02       |   |
| Granted                                 |       | —                 |       |                                                       |       |
| Vested                                  |       | (12,406                | )          |                                                       |       |
| Forfeited                               |       | —                 |       |                                                       |       |
| Non-vested shares, March 31, 2009  |       | 200,000                |       | $                                                          | 3.05       |   |

 

The number of shares of Class A common stock reserved for stockoptions available for issuance under the Current Plan as of March 31, 2009was 417,900. Of the options outstanding at March 31, 2009, 539,936 wereissued under the Current Plan and 2,000 were issued under the Prior Plan.

 

**NOTE 4 —RECENT ACCOUNTING PRONOUNCEMENTS**

 

In December 2007, theFinancial Accounting Standards Board (“FASB”) issued SFAS 141 (revised2007), “Business Combinations” (“SFAS 141(R)”) to change how an entityaccounts for the acquisition of a business. When effective, SFAS 141(R) willreplace existing SFAS 141 in its entirety. SFAS 141(R) carriesforward the existing requirements to account for all business combinationsusing the acquisition method (formerly called the purchase method). In general,SFAS 141(R) will require acquisition-date fair value measurement ofidentifiable assets acquired, liabilities assumed, and non-controllinginterests in the acquiree. SFAS 141(R) will eliminate the currentcost based purchase method under SFAS 141. The new measurement requirementswill result in the recognition of the full amount of acquisition-date goodwill,which includes amounts attributable to non-controlling interests. The acquirerwill recognize in income any gain or loss on the remeasurement toacquisition-date fair value of consideration transferred or of previouslyacquired equity interests in the acquiree. Neither the direct costs incurred toeffect a business combination nor the costs the acquirer expects to incur undera plan to restructure an acquired business will be included as part of thebusiness combination 

 

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accounting. As a result, those costs will becharged to expense when incurred, except for debt or equity issuance costs,which will be accounted for in accordance with other generally acceptedaccounting principles. SFAS 141(R) will also change the accountingfor contingent consideration, in process research and development,contingencies, and restructuring costs. In addition, changes in deferred taxasset valuation allowances and acquired income tax uncertainties in a businesscombination that occur after the measurement period will impact income taxesunder SFAS 141(R). SFAS 141(R) is effective for fiscal years andinterim periods within those fiscal years beginning on or after December 15,2008. The adoption of SFAS 141(R) did not have any impact on our condensedconsolidated financial statements.

 

InDecember 2007, (“SFAS 160”), the FASB issued SFAS 160, “Non-controllingInterests in Consolidated Financial Statements”: an amendment of ARB No. 51.(“SFAS 160”) SFAS 160 changes the accounting for, and the financialstatement presentation of, non-controlling equity interests in a consolidatedsubsidiary. SFAS 160 replaces the existing minority-interest provisions ofAccounting Research Bulletin (ARB) 51, *“ConsolidatedFinancial Statements”*, by defining a new term—*non-controlling interests*—to replace whatwere previously called *minority interests*.SFAS 160 establishes non-controlling interests as a component of the equity ofa consolidated entity. The underlying principle of SFAS 160 is that both thecontrolling interest and the non-controlling interests are part of the equityof a single economic entity: the consolidated reporting entity. Classifyingnon-controlling interests as a component of consolidated equity is a changefrom the current practice of treating minority interests as a mezzanine itembetween liabilities and equity or as a liability. The change affects both theaccounting and financial reporting for non-controlling interests in aconsolidated subsidiary. SFAS 160 includes reporting requirements intendedto clearly identify and differentiate the interests of the parent and theinterests of the non-controlling owners. The reporting requirements arerequired to be applied retrospectively. SFAS 160 is effective for fiscalyears and interim periods within those fiscal years beginning on or after December 15,2008. Early adoption is prohibited. The adoption of SFAS 160 did not have amaterial impact on our condensed consolidated financial statements.

 

InMay 2008, the FASB issued SFAS No. 162, “The Hierarchy of GenerallyAccepted Accounting Principles” (“SFAS 162”). SFAS162 identifies thesources of accounting principles and the framework for selecting the principlesto be used in the preparation of financial statements of nongovernmentalentities that are presented in conformity with accounting principles generallyaccepted in the United States of America. It is effective 60 daysfollowing the Security and Exchange Commission’s approval of the Public CompanyAccounting Oversight Board amendments to AU Section 411, “The Meaning ofPresent Fairly in Conformity With Generally Accepted Accounting Principles. Theadoption of SFAS 162 did not have any effect on our condensed consolidatedfinancial position, statement of operations or cash flows.

 

In April 2008, the FASBissued FASB Staff Position (“FSP”) No. FAS 142-3, “Determination of theUseful Life of Intangible Assets,” (“FSP 142-3”). FSP 142-3 amends the factorsthat should be considered in developing renewal or extension assumptions usedto determine the useful life of a recognized intangible asset under SFAS No. 142,“Goodwill and Other Intangible Assets” and also requires expanded disclosurerelated to the determination of intangible asset useful lives. FSP 142-3 iseffective for fiscal years beginning after December 15, 2008. The adoptionof FSP 142-3 did not have a material impact on our condensed consolidatedfinancial statements.

 

Managementdoes not believe that any other recently issued, but not yet effectiveaccounting standards, if currently adopted would have a material effect on ourcondensed consolidated financial statements.

 

**NOTE 5 –DISCONTINUED OPERATIONS**

 

Results of operations forEmbassy and Green and have been segregated from continuing operations andreflected as discontinued operations approximately as follows:

 
| ** **                                                               | ** ** | **Three Months Ended March  31,** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                               | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| (Loss) earnings from operation of discontinued operations, before  taxes |       | $                                                | (14,000    | ) | $ | 21,000 |   |
| Income tax benefit (expense)                                             |       | 5,000                                            |       | (9,000 | ) |
|                                                                     |       |                                             |       |   |   |
| (Loss) earnings from discontinued operations                             |       | $                                                | (9,000     | ) | $ | 12,000 |   |

 

**NOTE 6 - ****ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS******

 

Accounts receivable - net consists of:

 

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| ** **                      | ** ** | **March 31, 2009** | ** **      | **December 31, 2008** | ** ** |
|---------------------------------|------------|------------------------------|-----------------|---------------------------------|------------|
| Trade accounts receivable       |       | $                            | 9,988,000       |                            | $          | 9,114,000 |   |
| Allowance for doubtful accounts |       | (598,000                     | )               | (607,000                        | )          |
|                            |       | $                            |  9,390,000 |                            | $          | 8,507,000 |   |

 

**NOTE 7 – INVENTORIES**

 

Inventories - net consistof:

 
| ** **                                       | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|--------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Raw material                                     |       | $                            | 2,165,000  |                            | $          | 2,019,000 |   |
| Work in process                                  |       | 1,108,000                    |       | 1,606,000                       |       |
| Finished goods                                   |       | 29,988,000                   |       | 31,575,000                      |       |
|                                             |       | 33,261,000                   |       | 35,200,000                      |       |
| Reserve for obsolete and slow-moving inventories |       | (4,055,000                   | )          | (3,914,000                      | )          |
|                                             |       | $                            | 29,206,000 |                            | $          | 31,286,000 |   |

 

**NOTE 8 - GOODWILL AND OTHER INTANGIBLE ASSETS**

 

Duringthe three-month period ended March 31, 2009 there was no change to thecarrying value of goodwill.

 

Other intangible assets were as follows:

 
| ** **                                 | ** ** | **March 31, 2009** | ** ** | **December 31, 2008**    | ** ** |
|--------------------------------------------|------------|-------------------------|------------|-------------------------------|------------|
| ** **                                 | ** ** | **Cost**                | ** ** | **Accumulated  amortization** | ** ** | **Net book  value** | ** ** | **Cost** | ** ** | **Accumulated  amortization** | ** ** | **Net book  value** | ** ** |
| Other intangible assets:                   |       |                    |       |                          |       |   |   |   |   |   |   |   |   |
| Customer relationships                     |       | $                       | 5,070,000  |                          | $          | 2,686,000 |   | $ | 2,384,000 |   | $ | 5,070,000 |   | $ | 2,604,000 |   | $ | 2,466,000 |   |
| Non-compete and Employment agreements |       | 810,000                 |       | 792,000                       |       | 18,000 |   | 810,000 |   | 790,000 |   | 20,000 |   |
| Trademark                                  |       | 299,000                 |       | —                        |       | 299,000 |   | 299,000 |   | — |   | 299,000 |   |
| Drawings                                   |       | 290,000                 |       | 31,000                        |       | 259,000 |   | 290,000 |   | 27,000 |   | 263,000 |   |
| Licensing                                  |       | 105,000                 |       | 34,000                        |       | 71,000 |   | 105,000 |   | 32,000 |   | 73,000 |   |
| Totals                                     |       | $                       | 6,574,000  |                          | $          | 3,543,000 |   | $ | 3,031,000 |   | $ | 6,574,000 |   | $ | 3,453,000 |   | $ | 3,121,000 |   |

 

Amortization expense for intangible assets subject to amortization wasas follows:

 
| ** ** | ** ** | **Three months ended March 31,** | ** **   |
|------------|------------|------------------------------------------------------|--------------|
| ** ** | ** ** | **2009**                                             | ** **   | **2008** | ** ** |
|       |       | $                                                    |  90,000 |   | $ | 299,000 |   |
|            |            |                                                      |              |  |  |  |  |

 

Amortizationexpense for each of the twelve-month periods ending March 31, 2010 throughMarch 31, 2014 is estimated to be as follows: 2010 - $360,000; 2011 -$358,000; 2012 - $351,000; 2013 - $330,000 and 2014 - $185,000. The weightedaverage amortization period for intangible assets was 9.7 years at March 31,2009 and 9.9 years at December 31, 2008.

 

**NOTE 9 - WARRANTY LIABILITY**

 

The Company offers to its customers, warrantiesagainst product defects for periods primarily ranging from one to threeyears.  Certain products carry limitedlifetime warranties, The Company’s typical warranties require it to repair orreplace the defective products during the warranty period at no cost to thecustomer. At the time the product revenue is recognized, the Company records aliability for estimated costs under its warranties, which are estimated basedon historical experience. The Company periodically assesses the adequacy of itsrecorded warranty liability and adjusts the amounts as necessary. While theCompany believes that its estimated liability for product warranties isadequate, the estimated liability for the product warranties could differmaterially from future actual warranty costs.

 

Changes in the Company’s warranty liability,included in other accrued liabilities, were as follows:

 

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| ** **                                                         | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                         | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| Balance, beginning of period                                       |       | $                                                    | 337,000    |   | $ | 552,000 |   |
| Warranties issued and changes in estimated pre-existing warranties |       | 117,000                                              |       | 268,000 |   |
| Actual warranty costs incurred                                     |       | (255,000                                             | )          | (459,000 | ) |
| Balance, end of period                                             |       | $                                                    | 199,000    |   | $ | 361,000 |   |

 

**NOTE 10 — BANK DEBT**

 

The Company and itssubsidiaries as co-borrowers entered into a Credit Agreement, (“CreditAgreement”) as amended, with two banks (“banks”) in 2004.  In March 2009, the banks amended thecredit agreement to, among other things increase the revolving credit loanfacility, to a maximum of $22,000,000 for direct borrowings, with varioussublimits for letters of credit, bankers’ acceptances and equipment loans.There are no commitment fees for any unused portion of this Credit Agreement.The revolving credit loan facility within the Credit Agreement, as amended,expires March 30, 2010 and is subject to annual review by the lendingbanks.  Direct borrowings under therevolving credit loan facility are secured by the Company’s accountsreceivable, inventory and equipment and are cross-guaranteed by each of theCompany’s subsidiaries. These borrowings bear interest at LIBOR (LondonInterBank Offered Rate) plus the currently applicable loan margin, or the primeinterest rate. At March 31, 2009 and December 31, 2008, theapplicable loan margins added to LIBOR was 3.5%.  Further, at March 31, 2009 and December 31,2008, the balances outstanding on the revolving credit loan facility within theCredit Agreement were $20,000,000 and $15,000,000, respectively.

 

Additionally, as part of theamendment entered into in March 2009, the banks agreed to cancel andrefinance two term loans, which, immediately prior to the amendment, aggregatedapproximately $13,200,000. One term loan had a balance of $6,000,000 and wasbeing repaid $950,000 quarterly through June 2010 and the balance of$300,000 payable in September 2010. The second term loan had a balance immediately prior to the amendment of$7,200,000 payable in quarterly installments of $360,000. Both term loansincurred interest at LIBOR plus the applicable loan margin. The amendmentcreated one new term loan in the amount of $7,116,000 with the balance of$6,084,000 added to the revolving credit loan facility. The new term loanexpires March 30, 2012. Further, the new term loan requires theCompany to make monthly principal installment payments, which aggregate toapproximately $1,780,000, annually, compared to the previous installmentpayments which required the Company to make quarterly payments aggregating$5,240,000, annually.  Borrowingsunder the term loan are secured by the Company’s accounts receivable, inventoryand equipment and are cross-guaranteed by each of the Company’s subsidiaries.These borrowings bear interest at LIBOR plus the currently applicable loanmargin, or the prime interest rate. At March 31, 2009 the new term loanbalance was $7,116,000 with applicable loan margin of 3.75% added to LIBOR. At December 31,2008, the two term loans then in existence aggregated approximately$13,560,000, and had applicable loan margin added LIBOR of 3.75%.

 

The amendment referencedabove was not a material modification as defined by the Emerging Issues TaskForce in Issue No. 96-19 and, as a result, no gain or loss has beenrecorded.

 

The Credit Agreement alsoincludes a foreign exchange line, which provides for the availability of up to$10,000,000 in foreign currency forward contracts. These contracts fix theexchange rate on future purchases of foreign currencies needed for payments toforeign suppliers. The total amount of foreign currency forward contractsoutstanding under the foreign exchange line at March 31, 2009, based onthat day’s closing spot rate, was approximately $194,000.

 

Under the terms of thecredit agreement, the Company is required to adhere to certain financialcovenants. At March 31, 2009, the Company was not in compliance with oneof these financial covenants. Subsequent to March 31, 2009, the bankswaived non-compliance with such financial covenant.

 

**NOTE 11—RELATED PARTY TRANSACTIONS**

 

Thepresident of one of our subsidiaries is part owner of one of the subsidiary’svendors. During the three month periods ended March 31, 2009 and 2008, wepurchased approximately $345,000 and $325,000, respectively of product fromthisvendor.

 

**NOTE 12 - BUSINESS SEGMENTS**

 

P&Foperates in two primary lines of business, or segments: (i) tools andother products (“Tools”) and (ii) hardware and accessories (“Hardware”).For reporting purposes, Florida Pneumatic and Hy-Tech are combined in the Toolssegment, while Woodmark, Pacific Stair Products and Nationwide are combined inthe Hardware segment. The Company evaluates segment performance based primarilyon segment operating income. The accounting policies of each of the segmentsare the same as those described in Note 1.

 

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The following presents financial information by segment for thethree-month periods ended March 31, 2009 and 2008. Segment operatingincome excludes general corporate expenses, interest expense and income taxes.Identifiable assets are those assets directly owned or utilized by theparticular business segment.

 
| **Three months ended March 31, 2009** | ** ** | **Consolidated** | ** ** | **Tools** | ** ** | **Hardware** | ** ** |
|----------------------------------------------------------------|------------|------------------|------------|-----------|------------|--------------|------------|
|                                                           |       |             |       |      |       |         |       |
| Revenues from unaffiliated customers                           |       | $                | 15,562,000 |      | $          | 9,145,000    |       | $ | 6,417,000 |   |
|                                                           |       |             |       |      |       |         |       |
| Segment operating income (Loss)                                |       | $                | 792,000    |      | $          | 1,007,000    |       | $ | (215,000 | ) |
| General corporate expense                                      |       | (1,202,000       | )          |      |       |         |       |
| Interest expense — net                                    |       | (309,000         | )          |      |       |         |       |
| Loss from continuing operations before income taxes            |       | $                | (719,000   | )         |       |         |       |   |
|                                                           |       |             |       |      |       |         |       |
| Segment assets                                                 |       | $                | 61,656,000 |      | $          | 41,354,000   |       | $ | 20,302,000 |   |
| Corporate assets                                               |       | 8,158,000        |       |      |       |         |       |
| Total assets                                                   |       | $                | 69,814,000 |      |       |         |       |   |
|                                                                |            |                  |            |           |            |              |            |  |  |  |  |

 
| **Three months ended March 31, 2008** | ** ** | **Consolidated** | ** ** | **Tools** | ** ** | **Hardware** | ** ** |
|----------------------------------------------------------------|------------|------------------|------------|-----------|------------|--------------|------------|
|                                                           |       |             |       |      |       |         |       |
| Revenues from unaffiliated customers                           |       | $                | 24,325,000 |      | $          | 13,286,000   |       | $ | 11,039,000 |   |
|                                                           |       |             |       |      |       |         |       |
| Segment operating income                                       |       | $                | 2,461,000  |      | $          | 1,640,000    |       | $ | 821,000 |   |
| General corporate expense                                      |       | (1,299,000       | )          |      |       |         |       |
| Interest expense — net                                    |       | (558,000         | )          |      |       |         |       |
| Earnings from continuing operations before income taxes        |       | $                | 604,000    |      |       |         |       |   |
|                                                           |       |             |       |      |       |         |       |
| Segment assets                                                 |       | $                | 77,006,000 |      | $          | 45,071,000   |       | $ | 31,935,000 |   |
| Corporate assets                                               |       | 5,866,000        |       |      |       |         |       |
| Total assets                                                   |       | $                | 82,872,000 |      |       |         |       |   |

 

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**P&F INDUSTRIES, INC. AND SUBSIDIARIES**

 

**Item 2.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**General**

 

ThePrivate Securities Litigation Reform Act of 1995 (the “Reform Act”) provides asafe harbor for forward-looking statements made by or on behalf of P&FIndustries, Inc. and subsidiaries (“P&F”, or “the Company”). P&Fand its representatives may, from time to time, make written or verbalforward-looking statements, including statements contained in the Company’sfilings with the Securities and Exchange Commission and in its reports tostockholders. Generally, the inclusion of the words “believe,” “expect,” “intend,”“estimate,” “anticipate,” “will,” and their opposites and similar expressionsidentify statements that constitute “forward-looking statements” within themeaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934 and that are intended to come within thesafe harbor protection provided by those sections. Any forward-lookingstatements contained herein, including those related to the Company’s futureperformance, are based upon the Company’s historical performance and on currentplans, estimates and expectations. All forward-looking statements involve risksand uncertainties. These risks and uncertainties could cause the Company’sactual results for the 2009 fiscal year and beyond to differ materially fromthose expressed in any forward-looking statement made by or on behalf of theCompany for a number of reasons, as previouslydisclosed in the Company’s Annual Report on Form 10-K for the year ended December 31,2008 in response to Item 1A to Part I of Form 10-K. Forward-lookingstatements speak only as of the date on which they are made. The Companyundertakes no obligation to update publicly or revise any forward-lookingstatement, whether as a result of new information, future developments orotherwise.

 

**Business**

 

P&F conducts its business operations through two of itswholly-owned subsidiaries: Continental Tool Group, Inc. (“Continental”)and Countrywide Hardware, Inc. (“Countrywide”).  P&F and its subsidiaries are hereinreferred to collectively as the “Company.” In addition, the words “we”, “our”and “us” refer to the Company.

 

Further,P&F operates in two primary lines of business, or segments: (i) toolsand other products (“Tools”) and (ii) hardware and accessories (“Hardware”).

 

**Tools**

 

Weconduct our Tools business through Continental, which in turn currently operatesthrough its wholly-owned subsidiaries, Florida Pneumatic ManufacturingCorporation (“Florida Pneumatic”) and Hy-Tech Machine, Inc. (“Hy-Tech”).

 

Florida Pneumatic is engaged in the importation, manufacture and saleof pneumatic hand tools, primarily for the industrial, retail and automotivemarkets, and the importation and sale of compressor air filters. FloridaPneumatic also markets, through its Berkley Tool division (“Berkley”), a lineof pipe cutting and threading tools, wrenches and replacement electricalcomponents for a widely-used brand of pipe cutting and threading machines. Inaddition, through its Franklin Manufacturing (“Franklin”) division, FloridaPneumatic imports a line of door and window hardware.  Hy-Tech is primarily engaged in the manufactureand distribution of pneumatic tools and parts for industrial applications.

 

**Hardware**

 

Weconduct our Hardware business through a wholly-owned subsidiary, CountrywideHardware Inc. (“Countrywide”), which in turn operates through itswholly-owned subsidiaries, Nationwide Industries, Inc. (“Nationwide”),Woodmark International, L.P. (“Woodmark”) and Pacific Stair Products, Inc.(“Pacific Stair”).

 

Nationwide is an importer and manufacturer of door, window and fencinghardware. Woodmark is an importer of builders’ hardware, including staircasecomponents and kitchen and bath hardware and accessories. Pacific Stair, untilmid-2008, manufactured premium stair rail products. Since the closing of itsmill in 2008, it now operates as a distributer of Woodmark’s staircasecomponents to the building industry, primarily in southern California and thesouthwestern region of the United States.

 

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**CriticalAccounting Policies and Estimates**

 

We prepare our consolidatedfinancial statements in accordance with accounting principles generallyaccepted in the United States of America. Certain of these accounting policiesrequire us to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and the related disclosure ofcontingent assets and liabilities, revenues and expenses. On an ongoing basis,we evaluate estimates, including those related to bad debts, inventoryreserves, goodwill and intangible assets and warranty reserves. We base ourestimates on historical data and experience, when available, and on variousother assumptions that are believed to be reasonable under the circumstances,the combined results of which form the basis for making judgments about thecarrying values of assets and liabilities that are not readily apparent fromother sources. Actual results may differ from these estimates.

 

There have been no materialchanges in our critical accounting policies and estimates from those discussedin Item 7 of our Annual Report on Form 10-K for the year ended December 31,2008.

 

**RESULTSOF OPERATIONS**

 

**Quartersended March 31, 2009 and 2008**

 

**Revenue**

 

The table below provides ananalysis of our revenue.

 
| ** **        | ** ** | **Three-months Ended March 31,** | ** ** | ** ** | ** ** | ** **   | ** ** |
|-------------------|------------|-------------------------------------------------|------------|------------|------------|--------------|------------|
| ** **        | ** ** | **2009**                                        | ** ** | **2008**   | ** ** | **Variance** | ** ** | **Variance** | ** ** |
| ** **        | ** ** | ** **                                      | ** ** | ** ** | ** ** | **$**        | ** ** | **%** | ** ** |
| Tools             |       |                                            |       |       |       |         |       |   |   |
| Florida Pneumatic |       | $                                               | 4,709,000  |       | $          | 8,907,000    |       | $ | (4,198,000 | ) | (47.1 | )% |
| Hy-Tech           |       | 4,436,000                                       |       | 4,379,000  |       | 57,000       |       | 1.3 |   |
| Tools Total       |       | $                                               | 9,145,000  |       | $          | 13,286,000   |       | $ | (4,141,000 | ) | (31.2 | )% |
|              |       |                                            |       |       |       |         |       |   |   |
| Hardware          |       |                                            |       |       |       |         |       |   |   |
| Woodmark          |       | $                                               | 3,878,000  |       | $          | 6,438,000    |       | $ | (2,560,000 | ) | (39.8 | )% |
| Pacific Stair     |       | 315,000                                         |       | 471,000    |       | (156,000     | )          | (33.1 | ) |
| Nationwide        |       | 2,224,000                                       |       | 4,130,000  |       | (1,906,000   | )          | (46.2 | ) |
| Hardware Total    |       | $                                               | 6,417,000  |       | $          | 11,039,000   |       | $ | (4,622,000 | ) | (41.9 | )% |
|              |       |                                            |       |       |       |         |       |   |   |
| Consolidated      |       | $                                               | 15,562,000 |       | $          | 24,325,000   |       | $ | (8,763,000 | ) | (36.0 | )% |

 

Allrevenues are generated in U.S. dollars and are not impacted by changes inforeign currency exchange rates.

 

***Tools***

 

When comparing the three-month periods ended March 31,2009 and 2008, net revenue reported by our Tools segment decreased $4,141,000.Significant components to the reduction in revenue at Florida Pneumatic includethe loss of The Home Depot business resulting in a decrease in net revenue of$2,647,000 and decreased shipments to its major retail customer of$454,000.  Additionally, revenue from itsindustrial / catalog and OEM product lines were $1,039,000 and $562,000,respectively, compared to sales in the three-month period ended March 31,2008 of $1,336,000 and $847,000, respectively. Lastly, we continue to see weakening sales in our Franklin productsline, which decreased $488,000 when comparing the three-month period ended March 31,2009 revenue of $306,000  to $794,000reported in the same period in the prior year. Other than the loss of revenue from The Home Depot, we believe the keyfactor to the fall-off in revenue at Florida Pneumatic is the result of theslowing overall economy. The Company’s relationships with its customers remainhealthy, given the current economic conditions.

 

Hy-Tech however, continued to provide a positiveimpact to the Tools segment. Hy-Tech focuses on the industrial sector of thepneumatic tools market, an area which thus far has not been as affected by anoverall sluggish economy compared to the retail sector.  However, beginning late in the first quarterof 2009, we began to see indications of a slow down in the industrialsector.  As illustrated in the tableabove, when comparing the three-month periods ended March 31, 2009 and2008, Hy-Tech, reported a modest increase of $57,000.  This increase is primarily attributable toorganic growth.  Hy-Tech’s relationshipswith its customers remain healthy, given the current economic conditions.

 

***Hardware***

 

As a result of the continuing reduction in the numberof new homes being constructed, which is the principal driver for the Hardwaresegment, revenue for the three-month period ended March 31, 2009 decreasedan aggregate of $4,622,000 when compared 

 

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to the three-month period ended March 31, 2008. Specifically, ourWoodmark subsidiary, which primarily markets its stair parts to the southerntier of the United Sates, continues to be hard hit, reporting an aggregate netrevenue decrease of $2,560,000.  Basedupon United States Census Bureau statistics, the average number of singlefamily home starts for the three-month period ended March 31, 2009 was356,000 compared to the average for the three-month period ended March 31,2008 of 728,000, indicating a 51.1% decrease. Within Woodmark, revenue for thethree-month period ended March 31, 2009 for its stair parts andaccessories a product line decreased $1,962,000 to $3,027,000, from $4,989,000reported in the same period in the prior year. This decrease is primarily dueto the diminished number of new housing starts and the loss of a majorcustomer.  Additionally, Woodmark’skitchen and bath products line revenue for the first quarter of fiscal 2009 was$851,000 compared to revenue of $1,449,000 reported during the three-monthperiod ended March 31, 2008. The decrease in its kitchen and bath productline revenue of $598,000 was due primarily to one of its major customers filingfor bankruptcy, a diminishing recreational vehicle market, which is a keycustomer group as well as the weak economic conditions. Until the downwardtrend in the number of new housing starts levels and begins to increase, we donot expect to see improvement in Woodmark’s net revenue.   As illustrated in the table above, PacificStair Products located in Southern California reported a decrease in its netrevenue of $156,000 to $315,000 reported for the three-month period ended March 31,2009 from $471,000 reported for the same period in the prior year. Thiscontinuing fall-off is primarily attributable to continuing decline in the newhome construction market in southern California and Arizona.  Nationwide, which primarily markets fencingand gate hardware, is also feeling the impact of the housing downturn.  Additionally, its results are being impactedby the overall economic sluggishness as well as competitive pressures.  As such, Nationwide reported fiscal 2009first quarter revenue of $2,224,000, compared to $4,130,000 reported in thesame period in the prior year. Within Nationwide, net revenue from its fencing,OEM and Patio product were $1,624,000, $429,000 and $171,000, respectively,compared to $3,048,000, $750,000 and $332,000, respectively for the same periodin the prior year.  We anticipate that wewill likely continue to see the affects of the sluggish economy and lagging newhome starts along with competitive pressures on future revenue for theremainder of 2009.

 

**GrossMargins / Profits**

 

Grossprofits for the three-month periods ended March 31, 2009 and 2008:

 
| **Three months ended March 31,** | ** ** | ** **    | ** ** | **Consolidated** | ** ** | **Tools** | ** ** | **Hardware** | ** ** |
|------------------------------------------------------|------------|---------------|------------|------------------|------------|-----------|------------|--------------|------------|
| 2009                                                 |       | Gross  Profit |       | $                | 4,631,000  |      | $          | 3,200,000    |       | $ | 1,431,000 |   |
|                                                 |       | Gross Margin  |       | 29.8             | %          | 35.0      | %          | 22.3         | %          |
|                                                 |       |          |       |             |       |      |       |         |       |
| 2008                                                 |       | Gross  Profit |       | $                | 7,672,000  |      | $          | 4,411,000    |       | $ | 3,261,000 |   |
|                                                 |       | Gross Margin  |       | 31.5             | %          | 33.2      | %          | 29.5         | %          |

 

***Tools***

 

Gross margins in the Tools segment increased 1.8percentage points to 35.0% for the three-month period ended March 31, 2009from 33.2% for the three-month period ended March 31, 2008. However, grossprofit for this segment decreased $1,211,000 as a result of the decrease inrevenue.  Specifically, Florida Pneumatic’sgross margin decreased 0.8 percentage points and, combined with reducedrevenue, had a decrease in gross margin of $1,389,000. Product mix was theprimary factor contributing to the gross profit slippage.  Both gross margin and gross profit increasedat Hy-Tech when comparing the three-month periods ended March 31, 2009 and2008. Gross margins increased approximately 3.6 percentage points to 45.4% forthe three-month period ended March 31, 2009, from 41.8% reported for thesame period in the prior year. In combination with the increased revenue,Hy-Tech’s gross profit increased approximately $502,000 during the same period.These increases reported in this quarter are primarily due to product mix aswell as improved manufacturing efficiencies. While Hy-Tech’s gross margin for the first quarter of 2009 was favorablein relation to the same period in the prior year, we do not expect theserelative results to continue as a slow down in the industrial sector of ourTools segment began toward the end of the first quarter of 2009.

 

***Hardware***

 

The overall gross margin for the Hardware segmentcontinues to be adversely affected by the downturn in home construction. Forthe three-month period ended March 31, 2009, the aggregate gross marginfor the Hardware segment was 22.3% reflecting a decrease of 7.2 percentagepoints when compared to 29.5% for the same period in the prior year.  Gross profit for the Hardware segmentdecreased $1,830,000 to $1,431,000 reported for the three-month period ended March 31,2009 from $3,261,000 for the same period in 2008. Specifically, gross marginsfor the stair parts business as well as the kitchen and bath business atWoodmark decreased 6.4 and 7.7 percentage points, respectively, when comparingthe three-month periods ended March 31, 2009 and 2008.  Factors affecting Woodmark’s overall grossmargins were increases in inventory reserves and lower absorption of fixedwarehouse costs that resulted from lower revenue, as well as selling priceconcessions. The gross margin decrease, combined with lower revenue, resultedin an aggregate reduction of gross profit at Woodmark of $997,000. Gross marginfor the three-month period ended March 31, 2009 at 

 

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Pacific Stair continuedto decrease primarily the result of under absorption of its fixed manufacturingoverhead costs, which in turn, is due primarily to decreased sales volume. Forthe three-month period ended March 31, 2009, Pacific Stair Productsincurred a gross margin deficit of 23.0% compared to a gross margin deficit of12.0 % reported for the same three-month period in 2008.  As a result, Pacific Stair Products generatedgross deficits of $73,000 and $56,000, respectively for the three-month periodsended March 31, 2009 and 2008. Gross margins at Nationwide decreased 6.4 percentage points to 29.0% forthe three-month period ended March 31, 2009 from 35.4% reported for thesame period in 2008. The gross margin decrease was primarily due to productmix, current competitive conditions and overseas pricing. Combined withdecreased revenue, its gross profit decreased $816,000 to $645,000 for thethree-month period ended March 31, 2009 compared to $1,461,000 for thesame three month period in the prior year.

 

***Selling,General and Administrative Expenses***

 

Selling, general andadministrative expenses, (“SG&A”) include salaries and related costs,commissions, travel, administrative facilities, communications costs andpromotional expenses for our direct sales and marketing staff, administrativeand executive salaries and related benefits, legal, accounting and otherprofessional fees as well as general corporate overhead and certain engineeringexpenses.

 

For thethree-month period ended March 31, 2009, our SG&A was $5,041,000,reflecting a decrease of $1,469,000 or 22.6% when compared to $6,510,000 forthe three-month period ended March 31, 2008.  Significant components of the decreaseinclude reductions in compensation, payroll taxes and benefits of $645,000,depreciation and amortization expenses decreased $139,000 as the result of theimpairment charges taken in 2008. Additionally, the following items alsodecreased; freight by $297,000, commissions by $244,000, promotional expensesby $181,000, warranty by $62,000, and travel and entertainment expenses by$62,000. Offsetting the above reductions in our operating expenses, during thethree-month period ended March 31, 2008 we received $165,000, asreimbursement of legal fees and other costs related to the settlement offormerly outstanding litigation.  Weintend to continue to examine our operating expenses, particularly during thesedifficult times. However, as a significant portion of these expenses are fixed,as a percentage of revenue, SG&A was 32.4% for the three-month period endedMarch 31, 2009 compared to 26.8% for the same period in the prior year.

 

***Interest- Net***

 

Ournet interest expense of $309,000 for the three-month period ended March 31,2009 reflects a decrease of $249,000, or 44.6%, when compared to net interestexpense of $558,000 incurred for the same period in the prior year. Interestexpense decreased $91,000 and $90,000, respectively, on the term loansassociated with the Woodmark and Hy-Tech acquisitions, principally the resultof lower average borrowings during the period due to repayments, as well asslightly lower average interest rates. Interest expense on borrowings under ourrevolving credit loan facility for the three-month period ended March 31,2009 was $138,000, compared to $187,000 for the same period in 2008, a decreaseof $49,000, due primarily to lower interest rates, partially offset by higheraverage loan balances. Our total average debt balances under the terms of ourcredit facilities with our banks for the quarters ended March 31, 2009 and2008 were $27,691,000 and $32,291,000, respectively. The total average interestrate for the quarters ended March 31, 2009 and 2008 were 3.96% and 6.49%,respectively. Interest expense on trade payables financed with overseassuppliers at Florida Pneumatic decreased approximately $12,000, primarily theresult of changes in both certain overseas vendors and, in some cases, vendorpayment terms. Interest paid on two mortgages decreased an aggregate of$14,000.

 

***Income Taxes***

 

The effective tax ratesapplicable to earnings from continuing operations for the quarters ended March 31,2009 and 2008 were 17.0% and 42.1%, respectively.  The primary factor affecting our effectivetax rate applied at March 31, 2009, was state income taxes.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Ourcash flows from operations can be somewhatcyclical, typically with the greatest demand in the second and third quartersfollowed by positive cash flows in the fourth quarter as receivables andinventories trend down.  We monitoraverage days sales outstanding, inventory turns and capital expenditures toproject liquidity needs and evaluate return on assets employed.

 

Wegauge our liquidity and financial stability by various measurements some ofwhich are shown in the following table:

 

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| ** **                | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|---------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Working Capital           |       | $                            | 12,961,000 |                            | 16,491,000 |   |
| Current Ratio             |       | 1.43  to 1                   |       | 1.61  to 1                      |       |
| Shareholders’ Equity |       | $                            | 33,331,000 |                            | $          | 33,867,000 |   |
|                           |            |                              |            |                                 |            |  |  |

 

We entered into a CreditAgreement, (“Credit Agreement”) as amended, with two banks (“banks”) in2004.  In March 2009, the banksamended the Credit Agreement to, among other things; increase the revolvingcredit loan facility, to a maximum of $22,000,000 for direct borrowings, withvarious sublimits for letters of credit, bankers’ acceptances and equipmentloans. There are no commitment fees for any unused portion of this CreditAgreement. The revolving credit loan facility portion of the Credit Agreement,as amended, expires March 30, 2010 and is subject to annual review by thelending banks.  Direct borrowings underthe revolving credit loan facility are secured by our accounts receivable,inventory and equipment and are cross-guaranteed by each of our subsidiaries.These borrowings bear interest at LIBOR (London InterBank Offered Rate) plusthe currently applicable loan margin, or the prime interest rate. At March 31,2009 and December 31, 2008, the applicable loan margins added to LIBOR was3.50%.  Further, at March 31, 2009and December 31, 2008, the balances outstanding on the revolving creditloan facility were $20,000,000 and $15,000,000, respectively.

 

Additionally, as part of theamendment entered into in March 2009, the banks agreed to cancel andrefinance two term loans, which immediately prior to the amendment aggregatedapproximately $13,200,000. One term loan had a balance of $6,000,000 and wasbeing repaid $950,000 quarterly through June 2010 with a final payment of$300,000 payable in September 2010. The second term loan had a balance immediately prior to the amendment ofapproximately $7,200,000 payable in quarterly installments of $360,000 through January 2014.Both term loans incurred interest at LIBOR plus the applicable loan margin. Theamendment created one new term loan in the amount of $7,116,000 with the balanceof $6,084,000 added to the revolving credit loan facility. The new term loanexpires March 30, 2012. Further, the new term loan requires us tomake monthly principal installment payments, which aggregate to approximately$1,780,000, annually, compared to previous installment payments required underthe two cancelled term loans which had required us to make aggregate paymentsof $5,240,000, annually. Borrowings under the new term loan facilityare secured by our accounts receivable, inventory and equipment and arecross-guaranteed by each of our subsidiaries. These borrowings bear interest atLIBOR plus the currently applicable loan margin, or the prime interest rate. AtMarch 31, 2009 the new term loan balance was $7,116,000 with applicableloan margin added to LIBOR of 3.75%. At December 31, 2008, the two termloans then in existence aggregated approximately $13,560,000, and hadapplicable loan margin added LIBOR of 3.75%.

 

The Credit Agreement alsoincludes a foreign exchange line, which provides for the availability of up to$10,000,000 in foreign currency forward contracts. These contracts fix theexchange rate on future purchases of foreign currencies needed for payments toforeign suppliers. The total amount of foreign currency forward contracts outstandingunder the foreign exchange line at March 31, 2009, based on that day’sclosing spot rate, was approximately $194,000.

 

Under the terms of thecredit agreement, we are required to adhere to certain financial covenants. At March 31,2009, we were not in compliance with one of these financial covenants.Subsequent to March 31, 2009, the banks waived non-compliance with suchfinancial covenant.

 

Our cash decreased $321,000,from $1,043,000 as of December 31, 2008 to $722,000 as of March 31,2009. Our debt levels decreased to $29,371,000 at March 31, 2009 from$30,544,000 at December 31, 2008, due primarily to a term loan repaymentand lower inventory purchases during the quarter ended March 31, 2009. Thetotal percent of debt to total book capitalization (total debt divided by totaldebt plus equity) was 46.8% at March 31, 2009 compared to 47.4% at December 31,2008.

 

We had net cash of$1,437,000 provided by operating activities of continuing operations for thethree-month period ended March 31, 2009 compared to net cash of $1,181,000used in operating activities of continuing operations for the three-monthperiod ended March 31, 2008. We believe that cash on hand derived fromoperations and cash available through borrowings under our credit facilitiesshould be sufficient to allow us to meet our foreseeable working capital needs.

 

Inconnection with the acquisition of Hy-Tech, we agreed to make additionalpayments (“Contingent Consideration”) to the sellers. The amount of theContingent Consideration is to be based on a percentage of the average increasein earnings before interest, taxes, depreciation and amortization (“EBITDA”)over a two-year period from the date of acquisition, February 12, 2007,over a base year EBITDA of $4,473,000. In addition, we agreed to make anadditional payment (“Additional Contingent Consideration”), subject to certainconditions related to an exclusive supply agreement with a major customer and,to a certain extent, and subject to certain provisions, the achievement of ContingentConsideration. The maximum amount of Additional Contingent Consideration maynot exceed $1,900,000.  Hy-Tech hassuccessfully achieved the required thresholds necessary to be entitled to boththe Contingent Consideration and the Additional Contingent Consideration. Thetotal amount of the Contingent Consideration and the Additional ContingentConsideration is approximately $2,300,000. According to the agreement, theamounts due the sellers are payable in May 2009. However, we are currentlynegotiating payment terms with the sellers which will permit us to makeinstallment payments commencing in May 2009. Any additional payments madeto the Hy-Tech sellers referred to above will be treated by us as additions togoodwill.

 

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Capital spending wasapproximately $567,000 and $189,000 for the three-month periods ended March 31,2009 and 2008, respectively.  Capital expendituresfor the balance of 2009 are expected to be approximately $500,000, some ofwhich may be financed through our credit facilities or financed throughindependent third party financial institutions. Included in the expected totalfor 2009 are capital expenditures relating to new products, expansion ofexisting product lines and replacement of equipment.

 

A former wholly-ownedsubsidiary participated in a multi employer pension plan until it soldsubstantially all of its operating assets in October 2005. This planprovided defined benefits to all of its union workers. Contributions to thisplan were determined by the union contract. The former wholly-owned subsidiarydoes not administer the plan funds and does not have any control over the planfunds. As a result of former wholly-owned subsidiary’s withdrawal from theplan, it recorded the net present value of a withdrawal liability ofapproximately $369,000, which is payable in quarterly installments ofapproximately $8,200 from May 2006 through February 2026. The balanceat March 31, 2009 and December 31, 2008 was $325,000 and $331,000,respectively and is reported in Liabilities of Discontinued Operations.Further, in connection with our sale of Embassy, we recorded the net presentvalue of a receivable of approximately $90,000, which is scheduled to becollected at approximately $8,200 per quarter from May 2006 through May 2009.

 

**OFF-BALANCESHEET ARRANGEMENTS**

 

Our foreign exchange lineprovides for the availability of up to $10,000,000 in foreign currency forwardcontracts. These contracts fix the exchange rate on future purchases of foreigncurrencies needed for payments to foreign suppliers. We have not purchasedforward contracts on New Taiwan dollars (“TWD”). The total amount of foreigncurrency forward contracts outstanding at March 31, 2009, based on thatday’s closing spot rate, was approximately $194,000.

 

A majority of our productsare manufactured outside the United States, of which a significant amount ispurchased in the local currency. As a result, we are exposed to movements inthe exchange rates of various currencies against the United States dollar whichcould have an adverse effect on our results of operations or financialposition. We believe our most significant foreign currency exposures are theJapanese yen, the Taiwan dollar (“TWD”) and the Chinese Renminbi (“RMB”).Purchases of product from China and Taiwan are made in U.S. dollars. However,if either or both the TWD or RMB, were to strengthen materially in relation tothe U.S. dollar, there could be an adverse effect on our business, results ofoperations or financial position. We are also subject to currency risk withrespect to the Yen; however we generally purchase Yen forward to mitigate theexposure.

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

In December 2007, theFASB issued SFAS 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”)to change how an entity accounts for the acquisition of a business. Wheneffective, SFAS 141(R) will replace existing SFAS 141 in itsentirety. SFAS 141(R) carries forward the existing requirements toaccount for all business combinations using the acquisition method (formerlycalled the purchase method). In general, SFAS 141(R) will requireacquisition-date fair value measurement of identifiable assets acquired,liabilities assumed, and non-controlling interests in the acquiree.SFAS 141(R) will eliminate the current cost based purchase methodunder SFAS 141. The new measurement requirements will result in therecognition of the full amount of acquisition-date goodwill, which includesamounts attributable to non-controlling interests. The acquirer will recognizein income any gain or loss on the remeasurement to acquisition-date fair valueof consideration transferred or of previously acquired equity interests in theacquiree. Neither the direct costs incurred to effect a business combinationnor the costs the acquirer expects to incur under a plan to restructure anacquired business will be included as part of the business combinationaccounting. As a result, those costs will be charged to expense when incurred,except for debt or equity issuance costs, which will be accounted for inaccordance with other generally accepted accounting principles. SFAS 141(R) willalso change the accounting for contingent consideration, in process researchand development, contingencies, and restructuring costs. In addition, changesin deferred tax asset valuation allowances and acquired income taxuncertainties in a business combination that occur after the measurement periodwill impact income taxes under SFAS 141(R). SFAS 141(R) iseffective for fiscal years and interim periods within those fiscal yearsbeginning on or after December 15, 2008. The adoption of SFAS 141(R) didnot have a material impact on our condensed consolidated financial statements.

 

In December 2007, theFASB issued SFAS 160, “Non-controlling Interests in Consolidated FinancialStatements” an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 changes theaccounting for, and the financial statement presentation of, non-controllingequity interests in a consolidated subsidiary. SFAS 160 replaces theexisting minority-interest provisions of Accounting Research Bulletin (ARB) 51,*“Consolidated Financial Statements”*by defining a new term—*non-controlling interests*—toreplace what were previously called *minorityinterests*. SFAS 160 establishes non-controlling interests as acomponent of the equity of a consolidated entity. The underlying principle of SFAS160 is that both the controlling interest and the non-controlling interests arepart of the equity of a single economic entity: the consolidated reportingentity. Classifying non-controlling interests as a component of consolidatedequity is a change from the current practice of treating minority interests as amezzanine item between 

 

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liabilities and equity or as a liability. Thechange affects both the accounting and financial reporting for non-controllinginterests in a consolidated subsidiary. SFAS 160 includes reportingrequirements intended to clearly identify and differentiate the interests ofthe parent and the interests of the non-controlling owners. The reportingrequirements are required to be applied retrospectively. SFAS 160 iseffective for fiscal years and interim periods within those fiscal yearsbeginning on or after December 15, 2008. Early adoption is prohibited. Theadoption of SFAS 160 did not have a material impact on our condensedconsolidated financial statements.

 

InMay 2008, the FASB issued SFAS No. 162, “The Hierarchy of GenerallyAccepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies thesources of accounting principles and the framework for selecting the principlesto be used in the preparation of financial statements of nongovernmentalentities that are presented in conformity with accounting principles generallyaccepted in the United States of America. It is effective 60 days followingthe Security and Exchange Commission’s approval of the Public CompanyAccounting Oversight Board amendments to AU Section 411, “The Meaning ofPresent Fairly in Conformity With Generally Accepted Accounting Principles”.The adoption of SFAS 162 did not have a material effect on our consolidatedfinancial position, statement of operations or cash flows.

 

In April 2008, the FASBissued FASB Staff Position (“FSP”) No. FAS 142-3, “Determination of theUseful Life of Intangible Assets,” (“FSP 142-3”). FSP 142-3 amends the factorsthat should be considered in developing renewal or extension assumptions usedto determine the useful life of a recognized intangible asset under SFAS No. 142,“Goodwill and Other Intangible Assets” and also requires expanded disclosurerelated to the determination of intangible asset useful lives. FSP 142-3 iseffective for fiscal years beginning after December 15, 2008. The adoptionof FSP 142-3 did not have a material impact on our condensed consolidatedfinancial statements.

 

Managementdoes not believe that any other recently issued, but not yet effectiveaccounting standards if currently adopted would have a material effect on theconsolidated financial statements.

 

**Item 3.                Quantitative And Qualitative Disclosures About MarketRisk**

 

Notrequired.

 

**Item 4T.             ****Controls and Procedures**

 

**Evaluation of disclosure controls and procedures**

 

Anevaluation was performed, under the supervision of, and with the participationof, our management including the Principal Executive Officer and PrincipalFinancial Officer, of the effectiveness of the design and operation of ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) to the Securities and Exchange Act of 1934). Based on thatevaluation, our management, including the Principal Executive Officer andPrincipal Financial Officer, concluded that our disclosure controls andprocedures as of March 31, 2009 were effective. Accordingly, managementbelieves that the consolidated condensed financial statements included in thisQuarterly Report on Form 10-Q fairly present, in all material respects,our financial condition, results of operations and cash flows for the periodspresented.

 

P&Fmanagement is responsible for establishing and maintaining effective internalcontrols. Because of our inherent limitations, internal controls may notprevent or detect misstatements. A control system, no matter how well designedand operated, can only provide reasonable, not absolute, assurance that thecontrol system’s objectives will be met. Also, projections of any evaluation ofeffectiveness as to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with policies and procedures may deteriorate.

 

TheCertifications of our Principal Executive Officer and Principal FinancialOfficer included as Exhibits 31.1 and 31.2 to this Quarterly Report on Form 10-Qinclude, in paragraph 4 of such certifications, information concerning ourdisclosure controls and procedures and internal control over financialreporting. Such certifications should be read in conjunction with theinformation contained in this Item 4T - Controls and Procedures for a morecomplete understanding of the matters covered by such certifications.

 

**Changes in Internal Control Over Financial Reporting**

 

Therehave been no significant changes in our internal control over financialreporting during the most recently completed fiscal quarter that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

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**PART II - OTHER INFORMATION**

 
| **Item 1.**  | ** ** | **Legal Proceedings**                                                                                                                                                                                                   |
|--------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **   | ** ** | ** **                                                                                                                                                                                                              |
|         |       | We  are a defendant or co-defendant in various actions brought about in the  ordinary course of conducting our business. We do not believe that any of  these actions are material to our financial condition.          |
|         |       |                                                                                                                                                                                                                    |
| **Item 1A.** | ** ** | **Risk Factors**                                                                                                                                                                                                        |
| ** **   | ** ** | ** **                                                                                                                                                                                                              |
|         |       | There were no material changes from risk factors  previously disclosed in our Annual Report on Form 10-K for the year  ended December 31, 2008 in response to Item 1A. to Part I of such Form 10-K. |
|         |       |                                                                                                                                                                                                                    |
| **Item 2.**  | ** ** | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                                                                                                                                        |
| ** **   | ** ** | ** **                                                                                                                                                                                                              |
|         |       | None.                                                                                                                                                                                                                   |
|         |       |                                                                                                                                                                                                                    |
| **Item 3.**  | ** ** | **Defaults Upon Senior Securities**                                                                                                                                                                                     |
| ** **   | ** ** | ** **                                                                                                                                                                                                              |
|         |       | None.                                                                                                                                                                                                                   |
|         |       |                                                                                                                                                                                                                    |
| **Item 4.**  | ** ** | **Submission of Matters to a Vote of Security Holders**                                                                                                                                                                 |
| ** **   | ** ** | ** **                                                                                                                                                                                                              |
|         |       | None.                                                                                                                                                                                                                   |
|         |       |                                                                                                                                                                                                                    |
| **Item 5.**  | ** ** | **Other Information**                                                                                                                                                                                                   |
| ** **   | ** ** | ** **                                                                                                                                                                                                              |
|         |       | None                                                                                                                                                                                                                    |
|         |       |                                                                                                                                                                                                                    |
| **Item 6.**  | ** ** | **Exhibits**                                                                                                                                                                                                            |
| ** **   | ** ** | ** **                                                                                                                                                                                                              |
|         |       | See  “Exhibit Index” immediately following the signature page.                                                                                                                                           |

 

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**SIGNATURE**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
| ** **               | **P&F INDUSTRIES, INC.**                       |
|--------------------------|----------------------------------------------------|
|                     | (Registrant)                                       |
|                     |                                               |
|                     |                                               |
|                     | By                                                 | /s/  Joseph A. Molino, Jr. |
|                     | Joseph  A. Molino, Jr.                        |
|                     | Chief  Financial Officer                           |
| Dated: May 12, 2009 | (Principal Financial and Chief Accounting Officer) |

 

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**EXHIBITINDEX**

 

Thefollowing exhibits are either included in this report or incorporated herein byreference as indicatedbelow:

 
| **Exhibit  Number** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **3.1**             |       | Amendment  to By-laws of the Registrant, as amended (Incorporated by reference to  Exhibit 3.1 to Registrants Current Report on Form 8-K dated  March 26, 2009).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **4.1**             |       | Amendment  No. 17 to Credit Agreement, dated as of March 27, 2009, by and  among the Registrant, Florida Pneumatic Manufacturing Corporation, Embassy  Industries, Inc., Green Manufacturing, Inc., Countrywide  Hardware, Inc., Nationwide Industries, Inc., Woodmark  International, L.P., Pacific Stair Products, Inc., WILP  Holdings, Inc., Continental Tool Group, Inc., Hy-Tech  Machine, Inc. and Citibank, N.A., as Administrative Agent, and the  lenders party thereto (Incorporated by reference to Exhibit 10.1 to  Registrant’s Current Report on Form 8-K dated March 26, 2009)             |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **4.2**             |       | Amendment  No. 18 and Waiver to Credit Agreement, dated as of March 30, 2009,  by and among the Registrant, Florida Pneumatic Manufacturing Corporation,  Embassy Industries, Inc., Green Manufacturing, Inc., Countrywide  Hardware, Inc., Nationwide Industries, Inc., Woodmark  International, L.P., Pacific Stair Products, Inc., WILP  Holdings, Inc., Continental Tool Group, Inc., Hy-Tech  Machine, Inc. and Citibank, N.A., as Administrative Agent, and the  lenders party thereto (Incorporated by reference to Exhibit 10.2 to  Registrant’s Current Report on Form 8-K dated March 26, 2009). |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **4.3**             |       | Additional  Term Loan Note, dated as March 30, 2009, issued by the Registrant,  Florida Pneumatic Manufacturing Corporation, Embassy Industries, Inc.,  Green Manufacturing, Inc., Countrywide Hardware, Inc., Nationwide  Industries, Inc., Woodmark International, L.P., Pacific Stair  Products, Inc., WILP Holdings, Inc., Continental Tool  Group, Inc. and Hy-Tech Machine, Inc. payable to Citibank, N.A.  (Incorporated by reference to Exhibit 10.3 to Registrant’s Current  Report on Form 8-K dated March 26, 2009)                                                                                  |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **4.4**             |       | Additional  Term Loan Note, dated March 30, 2009, issued by the Registrant, Florida  Pneumatic Manufacturing Corporation, Embassy Industries, Inc., Green  Manufacturing, Inc., Countrywide Hardware, Inc., Nationwide  Industries, Inc., Woodmark International, L.P., Pacific Stair  Products, Inc., WILP Holdings, Inc., Continental Tool  Group, Inc. and Hy-Tech Machine, Inc. payable to HSBC Bank USA,  National Association (Incorporated by reference to Exhibit 10.4 to  Registrant’s Current Report on Form 8-K dated March 26, 2009).                                                               |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **4.5**             |       | Third  Amended and Restated Revolving Credit Note, dated March 30, 2009, issued  by the Registrant, Florida Pneumatic Manufacturing Corporation, Embassy  Industries, Inc., Green Manufacturing, Inc., Countrywide  Hardware, Inc., Nationwide Industries, Inc., Woodmark International,  L.P., Pacific Stair Products, Inc., WILP Holdings, Inc.,  Continental Tool Group, Inc. and Hy-Tech Machine, Inc. payable to  Citibank, N.A. (Incorporated by reference to Exhibit 10.5 to  Registrant’s Current Report on Form 8-K dated March 26, 2009).                                                             |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **4.6**             |       | Third  Amended and Restated Revolving Credit Note, dated March 30, 2009, issued  by the Registrant, Florida Pneumatic Manufacturing Corporation, Embassy  Industries, Inc., Green Manufacturing, Inc., Countrywide  Hardware, Inc., Nationwide Industries, Inc., Woodmark International,  L.P., Pacific Stair Products, Inc., WILP Holdings, Inc.,  Continental Tool Group, Inc., Hy-Tech Machine, Inc. in favor of  HSBC Bank USA, National Association (Incorporated by reference to  Exhibit 10.6 to Registrant’s Current Report on Form 8-K dated March 26,  2009).                                         |
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **31.1**            |       | Certification  of Richard A. Horowitz, Principal Executive Officer of the Registrant,  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **31.2**            |       | Certification of Joseph A. Molino, Jr., Principal Financial Officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **32.1**            |       | Certification  of Richard A. Horowitz, Principal Executive Officer of the Registrant,  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

 

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| ** ** | ** ** | ** **                                                                                                                                                                                                         |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **32.2**   |       | Certification  of Joseph A. Molino, Jr., Principal Financial Officer of the Registrant,  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

 

Acopy of any of the foregoing exhibits to this Quarterly Report on Form 10-Qmay be obtained, upon payment of the Registrant’s reasonable expenses infurnishing such exhibit, by writing to P&F Industries, Inc., 445Broadhollow Road, Suite 100, Melville New York 11747, Attention: CorporateSecretary.

 

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