According to an analysis by Pembroke Consulting, deflation may pose a serious threat to the profits of an estimated 25,000 U.S. industrial distribution companies, including PVF firms. Declining product prices, a flood of imported products and rising employee costs are all squeezing distributor profits.

Yet, "Over the last decade, wholesale prices for industrial products increased a mere 1.4% per year and were actually deflating in early 2002," said Pembroke President Adam Fein, Ph.D.

While product prices are dropping, Pembroke found that distributor personnel costs are growing at 4% per year. In fact, a recent industry study reported health care premium increases for distributors averaged 19% in 2002.

"If this scenario continues over the next three years, we estimate a typical industrial distribution company would experience profit declines ranging from 25% to 50% or more," said Fein. "Imports from Asia are an important force behind price deflation as industrial supplies account for approximately 25% of domestic imports."

Fein also noted, however, that the weakening U.S. dollar "reduces deflationary pressures by making imports more expensive." The entire article can be found at www.pembrokeconsulting.com.

GRAPH:

PVF Public Company Financial Snapshots

1st Quarter 2003

Company Sales (+/- %) Net Income (+/- %)

Flowserve $564 million (+ 26) $8.2 million (- 35.4)

Ipsco $279.9 million (+ 3) $4.4 million (+ 229.4)

Maverick Tube $219 million (+ 111.2) $242,000 (- 99)

Mueller Ind. $232 million (- 6.8) $3.9 million (- 78.2)

Northwest Pipe $57.7 million (- 10.3) - $318,000 (- 117.7)

NS Group $50.5 million (+ 30.2) - $11.2 million (+21.7)

Watts Industries $165.7 million (+ 16) $6.1 million (- 18)

PW Eagle $70.9 million +33.5) - $336,00 (+ 87.2)