UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2011
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: 1-06620
GRIFFON CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
11-1893410
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
712 Fifth Ave, 18th Floor, New York, New York
10019
(Address of principal executive offices)
(Zip Code)
(212) 957-5000(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 61,721,963 shares of Common Stock as of January 31, 2012.
Griffon Corporation and Subsidiaries
Page
PART I - FINANCIAL INFORMATION
Item 1 – Financial Statements
Condensed Consolidated Balance Sheets at December 31, 2011 (unaudited) and September 30, 2011
1
Condensed Consolidated Statement of Shareholders’ Equity for the Three Months Ended December 31, 2011 (unaudited)
Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2011 and 2010 (unaudited)
2
Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2011 and 2010 (unaudited)
3
Notes to Condensed Consolidated Financial Statements
4
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
25
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
34
Item 4 - Controls & Procedures
PART II – OTHER INFORMATION
Item 1 – Legal Proceedings
35
Item 1A – Risk Factors
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
Item 3 – Defaults upon Senior Securities
Item 4 – [Removed and Reserved]
Item 5 – Other Information
36
Item 6 – Exhibits
Signatures
37
Exhibit Index
38
Part I – Financial InformationItem 1 – Financial Statements
GRIFFON CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS(in thousands)
(Unaudited)At December 31,2011
At September 30,2011
CURRENT ASSETS
Cash and equivalents
$
177,358
243,029
Accounts receivable, net of allowances of $6,699 and $6,072
270,067
267,471
Contract costs and recognized income not yet billed, net of progress payments of $1,221 and $9,697
62,217
74,737
Inventories, net
296,996
263,809
Prepaid and other current assets
46,350
48,828
Assets of discontinued operations
1,307
1,381
Total Current Assets
854,295
899,255
PROPERTY, PLANT AND EQUIPMENT, net
352,729
350,050
GOODWILL
360,915
357,888
INTANGIBLE ASSETS, net
234,872
223,189
OTHER ASSETS
30,304
31,197
ASSETS OF DISCONTINUED OPERATIONS
3,006
3,675
Total Assets
1,836,121
1,865,254
CURRENT LIABILITIES
Notes payable and current portion of long-term debt
21,302
25,164
Accounts payable
190,280
186,290
Accrued liabilities
80,472
99,631
Liabilities of discontinued operations
3,611
3,794
Total Current Liabilities
295,665
314,879
LONG-TERM DEBT, net of debt discount of $18,949 and $19,693
685,270
688,247
OTHER LIABILITIES
201,008
204,434
LIABILITIES OF DISCONTINUED OPERATIONS
4,979
5,786
Total Liabilities
1,186,922
1,213,346
COMMITMENTS AND CONTINGENCIES - See Note
SHAREHOLDERS’ EQUITY
Total Shareholders’ Equity
649,199
651,908
Total Liabilities and Shareholders’ Equity
GRIFFON CORPORATIONCONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY(Unaudited)
COMMON STOCK
CAPITAL INEXCESS OFPAR VALUE
RETAINEDEARNINGS
TREASURY SHARES
ACCUMULATEDOTHERCOMPREHENSIVEINCOME (LOSS)
DEFERREDESOP & OTHERCOMPENSATION
(in thousands)
SHARES
PAR VALUE
COST
Total
Balance at 9/30/2011
76,184
19,046
471,928
424,153
14,434
(231,699
)
(7,724
(23,796
Net income
—
2,487
Dividend
(1,184
Tax effect from exercise/vesting of equity awards, net
(219
Amortization of deferred compensation
371
Common stock acquired
283
(2,351
Restricted stock awards granted, net
255
64
(64
ESOP allocation of common stock
(22
Stock-based compensation
2,257
Translation of foreign financial statements
(4,566
Pension OCI, net of tax
518
Balance at 12/31/2011
76,439
19,110
473,880
425,456
14,717
(234,050
(11,772
(23,425
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
GRIFFON CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share data)(Unaudited)
Three Months Ended December 31,
2011
2010
Revenue
451,031
414,402
Cost of goods and services
348,323
326,543
Gross profit
102,708
87,859
Selling, general and administrative expenses
83,066
80,445
Restructuring and other related charges
1,795
1,393
Total operating expenses
84,861
81,838
Income from operations
17,847
6,021
Other income (expense)
Interest expense
(13,063
(11,223
Interest income
63
69
Other, net
47
2,085
Total other income (expense)
(12,953
(9,069
Income (loss) before taxes
4,894
(3,048
Provision (benefit) for income taxes
2,407
(1,368
Net income (loss)
(1,680
Basic earnings (loss) per common share
0.04
(0.03
Weighted-average shares outstanding
56,025
59,274
Diluted earnings (loss) per common share
57,082
GRIFFON CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization
15,515
13,825
Fair value write-up of acquired inventory sold
11,364
2,023
Provision for losses on accounts receivable
569
266
Amortization/write-off of deferred financing costs and debt discounts
1,505
1,845
Deferred income taxes
(141
(2,582
Gain on sale/disposal of assets
(44
Change in assets and liabilities, net of assets and liabilities acquired:
Decrease in accounts receivable and contract costs and recognized income not yet billed
8,067
29,952
Increase in inventories
(30,318
(24,316
(Increase) decrease in prepaid and other assets
(3,850
Decrease in accounts payable, accrued liabilities and income taxes payable
(14,582
(50,724
Other changes, net
838
62
Net cash used in operating activities
(13,843
(23,815
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment
(19,892
(17,930
Acquired business, net of cash acquired
(22,432
(855
Change in funds restricted for capital projects
1,283
Change in equipment lease deposits
(1,141
Proceeds from sale of assets
61
Net cash used in investing activities
(42,263
(18,643
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of shares for treasury
Proceeds from issuance of long-term debt
47,974
Payments of long-term debt
(6,826
(35,234
Financing costs
(4
(1,708
Exercise of stock options
20
834
7
(14
(12
Net cash provided by (used in) financing activities
(9,545
11,047
CASH FLOWS FROM DISCONTINUED OPERATIONS:
(277
(367
Net cash used in discontinued operations
Effect of exchange rate changes on cash and equivalents
257
383
NET DECREASE IN CASH AND EQUIVALENTS
(65,671
(31,395
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD
169,802
CASH AND EQUIVALENTS AT END OF PERIOD
138,407
GRIFFON CORPORATION AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(in thousands, except share and per share data)(Unaudited)
(Unless otherwise indicated, references to years or year-end refer to Griffon’s fiscal period ending September 30)
NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
About Griffon Corporation
Griffon Corporation (the “Company” or “Griffon”), is a diversified management and holding company that conducts business through wholly-owned subsidiaries. Griffon oversees the operations of its subsidiaries, allocates resources among them and manages their capital structures. Griffon provides direction and assistance to its subsidiaries in connection with acquisition and growth opportunities as well as in connection with divestitures. In order to further diversify, Griffon also seeks out, evaluates and, when appropriate, will acquire additional businesses that offer potentially attractive returns on capital.
Griffon currently conducts its operations through three segments:
•
Home & Building Products (“HBP”) consists of two companies, Ames True Temper, Inc (“ATT”) and Clopay Building Products (“CBP”):
-
ATT is a global provider of non-powered landscaping products that make work easier for homeowners and professionals.
CBP is a leading manufacturer and marketer of residential, commercial and industrial garage doors to professional installing dealers and major home center retail chains.
Telephonics Corporation (“Telephonics”) designs, develops and manufactures high-technology integrated information, communication and sensor system solutions to military and commercial markets worldwide.
Clopay Plastic Products Company (“Plastics”) is an international leader in the development and production of embossed, laminated and printed specialty plastic films used in a variety of hygienic, health-care and industrial applications.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not include all the information and footnotes required by U.S. GAAP for complete financial statements. As such, they should be read with reference to Griffon’s Annual Report on Form 10-K for the year ended September 30, 2011, which provides a more complete explanation of Griffon’s accounting policies, financial position, operating results, business properties and other matters. In the opinion of management, these financial statements reflect all adjustments considered necessary for a fair statement of interim results. Griffon’s HBP operations are seasonal and the results of any interim period are not necessarily indicative of the results for the full year.
The condensed consolidated balance sheet information at September 30, 2011 was derived from the audited financial statements included in Griffon’s Annual Report on Form 10-K for the year ended September 30, 2011.
The consolidated financial statements include the accounts of Griffon Corporation and all subsidiaries. Intercompany accounts and transactions are eliminated on consolidation.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. These estimates may be adjusted due to changes in economic, industry or customer financial conditions, as well as changes in technology or demand. Significant estimates include allowances for doubtful accounts receivable and returns, net realizable value of inventories, restructuring reserves, valuation of goodwill and intangible assets, percentage of completion method of accounting, pension assumptions, useful lives associated with depreciation and amortization of intangible and fixed assets, warranty reserves, sales incentive accruals, stock based compensation assumptions, income taxes and tax valuation reserves, environmental reserves, legal reserves, insurance reserves and the valuation of discontinued assets and liabilities, and the accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions Griffon may undertake in the future. Actual results may ultimately differ from these estimates.
Certain amounts in the prior year have been reclassified to conform to current year presentation.
NOTE 2 – FAIR VALUE MEASUREMENTS
The carrying values of cash and equivalents, accounts receivable, accounts and notes payable and revolving credit debt approximate fair value due to either the short-term nature of such instruments or the fact that the interest rate of the revolving credit debt is based upon current market rates.
The fair values of Griffon’s 2018 senior notes, 2017 and 2023 4% convertible notes approximated $543,000, $93,000 and $532, respectively, on December 31, 2011. Fair values were based upon quoted market prices (level 1 inputs).
Insurance contracts with a value of $4,290 and trading securities with a value of $697 at December 31, 2011, are measured and recorded at fair value based upon quoted prices in active markets for identical assets (level 1 inputs).
Items Measured at Fair Value on a Recurring Basis
At December 31, 2011, Griffon had $1,000 of Australian dollar contracts at a weighted average rate of $0.94. The contracts, which protect Australia operations from currency fluctuations for U.S. dollar based purchases, do not qualify for hedge accounting and a fair value gain of $44 was recorded in other assets and to other income for the outstanding contracts based on similar contract values (level 2 inputs) for the quarter ended December 31, 2011. All contracts expire in 30 to 90 days.
NOTE 3 – ACQUISITION
On October 17, 2011, Griffon acquired the pots and planters business of Southern Sales & Marketing Group, Inc. (“SSMG”) for $22,432. The acquired business, which markets its products under the Southern Patio brand name (“Southern Patio”), is a leading designer, manufacturer and marketer of landscape accessories. Southern Patio, which was integrated with ATT, had revenue exceeding $40,000 in 2011.
The accounts of the acquired company, after adjustments to reflect fair market values assigned to assets purchased from SSMG, have been included in the consolidated financial statements from date of acquisition; acquired inventory was not significant. Griffon is in the process of finalizing the adjustment to the purchase price, if any, primarily related to working capital; accordingly, management has used their best estimate in the initial purchase price allocation as of the date of these financial statements.
5
The following table summarizes the fair values of the assets acquired as of the date of the acquisition and the amounts assigned to goodwill and intangible asset classifications:
Inventory
3,673
PP&E
416
Goodwill
4,655
Intangibles
13,688
Total assets acquired
22,432
The amounts assigned to goodwill and major intangible asset classifications, all of which are tax deductible, for the Southern Patio acquisition are as follows:
AmortizationPeriod (Years)
N/A
Tradenames
2,611
Indefinite
Customer relationships
11,077
18,343
NOTE 4 – INVENTORIES
Inventories, stated at the lower of cost (first-in, first-out or average) or market, were comprised of the following:
At December 31,2011
Raw materials and supplies
84,317
76,563
Work in process
71,033
66,585
Finished goods
141,646
120,661
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment were comprised of the following:
Land, building and building improvements
125,341
126,340
Machinery and equipment
584,540
571,414
Leasehold improvements
32,533
32,867
742,414
730,621
Accumulated depreciation and amortization
(389,685
(380,571
Depreciation and amortization expense for property, plant and equipment was $13,489 and $11,815 for the quarters ended December 31, 2011 and 2010, respectively.
No event or indicator of impairment occurred during the quarter ended December 31, 2011, which would require additional impairment testing of property, plant and equipment.
6
NOTE 6 – GOODWILL AND OTHER INTANGIBLES
The following table provides the changes in carrying value of goodwill by segment during the quarter ended December 31, 2011.
Goodwill from2011acquisitions
Otheradjustmentsincludingcurrencytranslations
Home & Building Products
265,147
269,802
Telephonics
18,545
Plastics
74,196
(1,628
72,568
The following table provides the gross carrying value and accumulated amortization for each major class of intangible assets:
At December 31, 2011
At September 30, 2011
GrossCarryingAmount
AccumulatedAmortization
AverageLife(Years)
166,348
15,576
155,602
13,862
Unpatented technology
6,525
1,895
11
6,534
1,749
Total amortizable intangible assets
172,873
17,471
162,136
15,611
Trademarks
79,470
76,664
Total intangible assets
252,343
238,800
Amortization expense for intangible assets subject to amortization was $2,026 and $2,010 for the quarters ended December 31, 2011 and 2010, respectively. The amortizable intangibles acquired in the Southern Patio acquisition will increase amortization in 2011 and forward by approximately $440 per year.
No event or indicator of impairment occurred during the quarter ended December 31, 2011, which would require impairment testing of long-lived intangible assets including goodwill. Subsequent to the end of the quarter, there were changes in management at both Plastics and Telephonics. Management performed a qualitative assessment as to whether these changes affected these reporting units’ carrying value and concluded that it was more likely than not that that the fair value of the units are greater than the respective carrying values.
NOTE 7 – INCOME TAXES
The tax rate for the 2011 quarter was a provision of 49.2%, compared to a benefit of 44.9% in the 2010 quarter; the 2010 benefit arose on the pretax loss for the quarter. The 2011 rate reflects the impact of permanent differences, tax reserves and a change in earnings mix; the 2010 rate benefited $320 from the retroactively extended research tax credit signed into law on December 22, 2010. There were no discrete period items in the current quarter.
NOTE 8 – LONG-TERM DEBT
OutstandingBalance
OriginalIssuerDiscount
BalanceSheet
CapitalizedFees &Expenses
CouponInterest Rate
CouponInterestRate
Senior notes due 2018
(a
550,000
10,249
7.125
%
11,337
Revolver due 2016
2,574
n/a
2,937
Convert. debt due 2017
(b
100,000
(18,949
81,051
2,253
4.000
(19,693
80,307
2,474
Real estate mortgages
(c
14,671
336
18,233
379
ESOP Loans
(d
23,942
21
24,348
17
Capital lease - real estate
(e
11,123
251
5.000
11,341
Convert. debt due 2023
(f
532
Term loan due 2013
(g
20,736
173
24,096
201
Revolver due 2012
33
Foreign line of credit
3,759
3,780
Other long term debt
(j
758
774
Totals
725,521
706,572
15,857
733,104
713,411
17,635
less: Current portion
(21,302
(25,164
Long-term debt
704,219
707,940
Three Months Ended December 31, 2011
Three Months Ended December 31, 2010
EffectiveInterestRate
Cash Interest
Amort. DebtDiscount
Amort.Deferred Cost& Other Fees
Total InterestExpense
TotalInterestExpense
7.4
9,797
412
10,209
153
9.1
1,000
744
111
1,855
683
113
1,796
5.6
150
22
172
6.6
133
9
142
2.9
180
181
3.1
23
40
148
162
168
4.0
9.3
282
304
56
10.9
103
Term loan due 2016
(h
8.8
7,485
309
453
8,247
Asset based loan
6.5
497
31
176
704
Revolver due 2013
(i
3.2
48
159
328
Capitalized interest
(451
(41
11,558
761
13,063
9,378
1,023
822
11,223
(a)
On March 17, 2011, in an unregistered offering through a private placement under Rule 144A, Griffon issued, at par, $550,000 of 7.125% Senior Notes due in 2018; interest is payable semi-annually. On August 9, 2011, Griffon exchanged all of the Senior Notes for substantially identical Senior Notes registered under the Securities Act of 1933 (“Senior Notes”), via an exchange offer.
The Senior Notes can be redeemed prior to April 1, 2014 at a price of 100% of principal plus a make-whole premium and accrued interest; on or after April 1, 2014, the Senior Notes can be redeemed at a certain price (declining from 105.344% of principal on or after April 1, 2014 to 100% of principal on or after April 1, 2017), plus accrued interest. Proceeds from the Senior Notes were used to pay down the outstanding borrowings under a senior secured term loan facility and two senior secured revolving credit facilities of certain of the Company’s subsidiaries. The Senior Notes are senior unsecured obligations of Griffon guaranteed by certain domestic subsidiaries, and are subject to certain covenants, limitations and restrictions.
8
On March 18, 2011, Griffon entered into a five-year $200,000 Revolving Credit Facility (“Credit Agreement”), which includes a letter of credit sub-facility with a limit of $50,000, a multi-currency sub-facility of $50,000 and a swingline sub-facility with a limit of $30,000. Borrowings under the Credit Agreement may be repaid and re-borrowed at any time, subject to final maturity of the facility or the occurrence of a default or event of default under the Credit Agreement. Interest is payable on borrowings at either a LIBOR or base rate benchmark rate plus an applicable margin, which will decrease based on financial performance. The margins are 1.50% for base rate loans and 2.50% for LIBOR loans, in each case without a floor. The Credit Agreement has certain financial maintenance tests including a maximum total leverage ratio, a maximum senior secured leverage ratio and a minimum interest coverage ratio as well as customary affirmative and negative covenants and events of default. The Credit Agreement also includes certain restrictions, such as limitations on the incurrence of indebtedness and liens and the making of restricted payments and investments. Borrowings under the Credit Agreement are guaranteed by certain domestic subsidiaries and are secured, on a first priority basis, by substantially all assets of the Company and the guarantors.
At December 31, 2011, there were $19,511 of standby letters of credit outstanding under the Credit Agreement; $180,489 was available for borrowing at that date.
(b)
On December 21, 2009, Griffon issued $100,000 principal of 4% convertible subordinated notes due 2017 (the “2017 Notes”). The initial conversion rate of the 2017 Notes was 67.0799 shares of Griffon’s common stock per $1,000 principal amount of notes, corresponding to an initial conversion price of $14.91 per share, a 23% conversion premium over the $12.12 closing price on December 15, 2009. When a cash dividend is declared that would result in an adjustment to the conversion ratio of less than 1%, any adjustment to the conversion ratio is deferred until the first to occur of (i) actual conversion, (ii) the 42nd trading day prior to maturity of the notes, and (iii) such time as the cumulative adjustment equals or exceeds 1%. As of March 27, 2012, aggregate dividends of $0.04 per share would result in a cumulative change in the conversion rate of 0.5%. Griffon used 8.75% as the nonconvertible debt-borrowing rate to discount the 2017 Notes and will amortize the debt discount through January 2017. At issuance, the debt component of the 2017 Notes was $75,437 and debt discount was $24,563. At December 31, 2011 and September 30, 2011, the 2017 Notes had a capital in excess of par component, net of tax, of $15,720.
(c)
On December 20, 2010, Griffon entered into two second lien real estate mortgages to secure new loans totaling $11,834. The loans mature in February 2016, are collateralized by the related properties and are guaranteed by Griffon. The loans bear interest at a rate of LIBOR plus 3% with the option to swap to a fixed rate.
Griffon has other real estate mortgages, collateralized by real property, which bear interest at 6.3% and mature in 2016. During the quarter, the mortgage at Russia, Ohio was paid in full, on maturity.
(d)
Griffon’s Employee Stock Ownership Plan (“ESOP”) entered into a loan agreement in August 2010 to borrow $20,000 over a one-year period. The proceeds were used to purchase 1,874,737 shares of Griffon common stock in the open market for $19,973. The loan bears interest at a) LIBOR plus 2.5% or b) the lender’s prime rate, at Griffon’s option. In November 2011, Griffon exercised an option to convert the outstanding loan to a five-year term loan; principal is payable in quarterly installments of $250, beginning December 2011, with a balloon payment of $15,223 due at maturity (November 2016). The loan is secured by shares purchased with the proceeds of the loan, and repayment is guaranteed by Griffon. At December 31, 2011, $19,723 was outstanding.
In addition, the ESOP has a loan agreement, guaranteed by Griffon, which requires quarterly principal payments of $156 and interest through the expiration date of September 2012 at which time the $3,900 balance of the loan, and any outstanding interest, will be payable. The primary purpose of this loan was to purchase 547,605 shares of Griffon’s common stock in October 2008. The loan is secured by shares purchased with the proceeds of the loan, and repayment is guaranteed by Griffon. The loan bears interest at rates based upon the prime rate or LIBOR. At December 31, 2011, $4,219 was outstanding.
(e)
In October 2006, CBP entered into a capital lease totaling $14,290 for real estate in Troy, Ohio. The lease matures in 2021, bears interest at a fixed rate of 5.1%, is secured by a mortgage on the real estate and is guaranteed by Griffon.
(f)
At December 31, 2011 and September 30, 2011, Griffon had $532 of 4% convertible subordinated notes due 2023 (the “2023 Notes”) outstanding. Holders of the 2023 Notes may require Griffon to repurchase all or a portion of their 2023 Notes on July 18, 2013 and 2018, if Griffon’s common stock price is below the conversion price of the 2023 Notes, as well as upon a change in control. An adjustment to the conversion rate will be required as the result of payment of a cash dividend only if such adjustment would be greater than 1% (or at such time as the cumulative impact on the conversion rate reaches 1% in the aggregate). As of March 27, 2012, aggregate dividends of $0.04 per share would result in a cumulative change in the conversion rate of 0.5%. At December 31, 2011 and September 30, 2011, the 2023 Notes had no capital in excess of par value component as substantially all of these notes were put to Griffon at par and settled in July 2010.
(g)
In November 2010, Clopay Europe GMBH (“Clopay Europe”) entered into a €10,000 revolving credit facility and a €20,000 term loan. The facility accrues interest at Euribor plus 2.35% per annum, and the term loan accrues interest at Euribor plus 2.45% per annum. The revolving facility matures in November 2012, but is renewable upon mutual agreement with the bank. In July 2011, the full €20,000 was drawn on the Term Loan, with a portion of the proceeds used to repay borrowings under the revolving credit facility. The term loan is payable in ten equal quarterly installments which began in September 2011, with maturity in December 2013. Under the term loan, Clopay Europe is required to maintain a certain minimum equity to assets ratio and keep leverage below a certain level, defined as the ratio of total debt to EBITDA. There were no borrowings outstanding under the revolving facility at December 31, 2011 with €10,000 available for borrowing.
Clopay do Brazil, a subsidiary of Plastics, maintains lines of credit of approximately $4,000. Interest on borrowings accrue at a rate of LIBOR plus 3.8% or CDI plus 5.6%. At December 31, 2011, $3,759 was borrowed under the lines.
(h)
In connection with the ATT acquisition, Clopay Ames True Temper Holding Corp. (“Clopay Ames”), a subsidiary of Griffon, entered into the $375,000 secured term Loan (“Term Loan”) and a $125,000 asset based lending agreement (“ABL”).
On November 30, 2010, Clopay Ames, as required under the Term Loan agreement, entered into an interest rate swap on a notional amount of $200,000 of the Term Loan. The agreement fixed the LIBOR component of the Term Loan interest rate at 2.085% for the notional amount of the swap.
On March 17, 2011, the Term Loan and swap were terminated, and on March 18, 2011, the ABL was terminated, in connection with the issuance of the Senior Notes and Credit Agreement.
(i)
In March 2008, Telephonics entered into a credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto, pursuant to which the lenders agreed to provide a five-year, revolving credit facility of $100,000 (the “TCA”). The TCA terminated in connection with the Credit Agreement.
(j)
Includes capital leases.
At December 31, 2011, Griffon and its subsidiaries were in compliance with the terms and covenants of its credit and loan agreements.
10
NOTE 9 — SHAREHOLDERS’ EQUITY
On November 17, 2011, the Board of Directors approved a quarterly cash dividend of $0.02 per common share, which was paid on December 27, 2011, to holders of common stock as of close of business on November 29, 2011. $1,184 was recorded to retained earnings for the dividend. Dividends paid on allocated shares in the ESOP were used to pay down the ESOP loan and were recorded as a reduction in expense. A dividend payable was established for the holders of restricted shares and will be released upon vesting of the underlying restricted shares.
On January 31, 2012, the Board of Directors declared a second quarterly cash dividend of $0.02 per share, payable on March 27, 2012 to shareholder of record as of the close of business on February 28, 2012.
Griffon expenses the fair value of equity compensation grants over the related vesting period. Compensation cost related to stock-based awards with graded vesting are amortized using the straight-line attribution method.
In February 2011, shareholders approved the Griffon Corporation 2011 Equity Incentive Plan (“Incentive Plan”) under which awards of performance shares, performance units, stock options, stock appreciation rights, restricted shares, deferred shares and other stock-based awards may be granted. Options granted under the Incentive Plan may be either “incentive stock options” or nonqualified stock options, generally expire ten years after the date of grant and are granted at an exercise price of not less than 100% of the fair market value at the date of grant. The maximum number of shares of common stock available for award under the Incentive Plan is 3,000,000 (600,000 of which may be issued as incentive stock options) plus any shares underlying awards outstanding on the effective date of the Incentive Plan under the 2006 Incentive Plan that are subsequently cancelled or forfeited. As of December 31, 2011, 1,865,009 shares were available for grant.
All grants outstanding under the Griffon Corporation 2001 Stock Option Plan, 2006 Equity Incentive Plan and Outside Director Stock Award Plan will continue under their terms; no additional awards will be granted under such plans.
During the first quarter of 2012, Griffon granted 309,500 restricted shares with three-year cliff vesting, 191,000 of which are also subject to certain performance conditions, with a total fair value of $2,881, or a weighted average fair value of $9.31 per share.
During the second quarter of 2011, Griffon granted 590,000 performance shares. Prior to the change in the terms of the grant, the performance shares had a fair value of $7,346, or a weighted average fair value of $12.45 per share, and cliff vested when either Griffon’s common stock closed at or above $16 per share for twenty consecutive trading days or 7 years from the date of grant, whichever came first. In January 2012, the terms of the grant were modified such that the price of Griffon common stock must close at or above $16 per share for thirty consecutive trading days on or prior to January 10, 2016 in order for the shares to vest; otherwise, the shares will be forfeited. The unamortized portion of the original fair value of approximately $6,400 will be expensed over the new service period of 32 months beginning January 2012.
For the quarters ended December 31, 2011 and 2010, stock based compensation expense totaled $2,257 and $2,023, respectively.
In August 2011, Griffon’s Board of Directors authorized the repurchase of up to $50,000 of Griffon’s outstanding common stock. Under this repurchase program, the Company may, from time to time, purchase shares of its common stock, depending upon market conditions, in open market or privately negotiated transactions, including pursuant to a 10b5-1 plan. In the first quarter of 2012, Griffon purchased 283,400 shares of common stock, for a total of $2,351, or $8.29 per share; in total, Griffon has purchased 448,779 shares of common stock, for a total of $3,660, or $8.16 per share, under this repurchase program. $46,340 remains under the $50,000 authorization.
NOTE 10 – EARNINGS PER SHARE (EPS)
Basic EPS was calculated by dividing income available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted EPS was calculated by dividing income available to common shareholders by the weighted average number of shares of common stock outstanding plus additional common shares that could be issued in connection with stock based compensation. The 2023 Notes and the 2017 Notes were anti-dilutive due to the conversion price being greater than the weighted-average stock price during the periods presented. Due to the net loss during the quarter ended December 31, 2010, the incremental shares from stock based compensation are anti-dilutive.
The following table is a reconciliation of the share amounts (in thousands) used in computing earnings per share:
Weighted average shares outstanding - basic
Incremental shares from stock based compensation
1,057
Weighted average shares outstanding - diluted
Anti-dilutive options excluded from diluted EPS computation
1,202
Anti-dilutive restricted stock excluded from diluted EPS computation
900
627
Griffon has the intent and ability to settle the principal amount of the 2017 Notes in cash, as such, the potential issuance of shares related to the principal amount of the 2017 Notes does not affect diluted shares.
NOTE 11 – BUSINESS SEGMENTS
Griffon’s reportable business segments are as follows:
HBP is a leading manufacturer and marketer of residential, commercial and industrial garage doors to professional installing dealers and major home center retail chains, as well as a global provider of non-powered landscaping products that make work easier for homeowners and professionals.
Telephonics develops, designs and manufactures high-technology integrated information, communication and sensor system solutions to military and commercial markets worldwide.
Plastics is an international leader in the development and production of embossed, laminated and printed specialty plastic films used in a variety of hygienic, health-care and industrial applications.
Griffon evaluates performance and allocates resources based on each segments’ operating results before interest income or expense, income taxes, depreciation and amortization, gain (losses) from debt extinguishment, unallocated amounts, restructuring charges and costs related to the fair value of inventory for acquisitions. Griffon believes this information is useful to investors. The following tables provide a reconciliation of Segment profit and Segment profit before depreciation, amortization, restructuring and fair value write-up of acquired inventory sold and acquisition costs to Income before taxes and discontinued operations:
12
For the Three Months EndedDecember 31,
REVENUE
Home & Building Products:
ATT
98,741
94,197
CBP
111,647
104,066
210,388
198,263
104,513
98,279
136,130
117,860
Total consolidated net sales
INCOME (LOSS) BEFORE TAXES
Segment operating profit (loss):
9,834
(1,623
12,515
10,693
1,880
4,142
Total segment operating profit
24,229
13,212
Unallocated amounts
(6,335
(5,106
Net interest expense
(13,000
(11,154
Segment profit before depreciation, amortization, restructuring, fair value write-up of acquired inventory sold and acquisition costs:
17,750
17,534
15,690
12,406
8,180
9,786
Total Segment profit before depreciation, amortization, restructuring, fair value write-up of acquired inventory sold and acquisition costs
41,620
39,726
Unallocated amounts, less acquisition costs
Segment depreciation and amortization
(15,418
(13,757
Restructuring charges
(1,795
(1,393
(11,364
Acquisition costs
(178
Unallocated amounts typically include general corporate expenses not attributable to a reportable segment.
13
DEPRECIATION and AMORTIZATION
Segment:
7,465
6,400
1,653
1,713
6,300
5,644
Total segment depreciation and amortization
15,418
13,757
Corporate
97
68
Total consolidated depreciation and amortization
CAPITAL EXPENDITURES
6,268
6,440
1,230
805
12,328
10,620
Total segment
19,826
17,865
66
65
Total consolidated capital expenditures
19,892
17,930
ASSETS
Segment assets:
952,487
972,714
283,360
288,968
434,834
450,452
Total segment assets
1,670,681
1,712,134
161,127
148,064
Total continuing assets
1,831,808
1,860,198
4,313
5,056
Consolidated total
NOTE 12 – COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) was as follows:
Three Months EndedEnded December 31,
Change in fair value of interest rate swap, net of tax
(48
Foreign currency translation adjustment
(445
Pension other comprehensive income amortization, net of tax
425
Comprehensive loss
(1,561
(1,748
14
NOTE 13 – DEFINED BENEFIT PENSION EXPENSE
Defined benefit pension expense was as follows:
Three Months EndedDecember 31,
Service cost
52
Interest cost
2,670
2,780
Expected return on plan assets
(2,933
(2,755
Amortization:
Prior service cost
83
84
Recognized actuarial loss
718
551
Net periodic expense
590
Effective January 1, 2012, the Clopay Pension Plan merged into the Ames True Temper Inc. Pension Plan. The merged Pension Plan was renamed the Clopay Ames True Temper Plan.
NOTE 14 – RECENT ACCOUNTING PRONOUNCEMENTS
The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
NOTE 15 – DISCONTINUED OPERATIONS
The following amounts related to the Installation Services segment, discontinued in 2008, have been segregated from Griffon’s continuing operations and are reported as assets and liabilities of discontinued operations in the condensed consolidated balance sheets:
Current
Long-term
Assets of discontinued operations:
Other long-term assets
Total assets of discontinued operations
Liabilities of discontinued operations:
Other long-term liabilities
Total liabilities of discontinued operations
There was no Installation Services’ operating unit revenue or income for the quarters ended December 31, 2011 or 2010.
15
NOTE 16 – RESTRUCTURING AND OTHER RELATED CHARGES
In June 2009, Griffon announced plans to consolidate facilities in CBP. These actions were completed in 2011, consistent with the plan. In completing the consolidation plan, CBP incurred total pre-tax exit and restructuring costs approximating $9,031, substantially all of which was cash charges; charges include $1,160 for one-time termination benefits and other personnel costs, $210 for excess facilities and related costs, and $7,661 for other exit costs, primarily in connection with production realignment, and had $10,365 of capital expenditures. The restructuring costs in the quarter ended December 31, 2010 were $1,328.
ATT recognized $273 and $65 in restructuring and other related charges, primarily related to a facility, in the quarters ended December 31, 2011 and 2010, respectively.
Telephonics recognized $1,522 of restructuring and other related charges, primarily for one-time termination benefits and other personnel costs, in the quarter ended December 31, 2011, in conjunction with changes to its organizational structure.
A summary of the restructuring and other related charges included in the line item “Restructuring and other related charges” in the Consolidated Statements of Operations recognized was as follows:
WorkforceReduction
Facilities &Exit Costs
OtherRelatedCosts
Amounts incurred in:
Quarter ended December 31, 2010
239
791
363
Quarter ended December 31, 2011
1,538
At December 31, 2011, the accrued liability for the restructuring and related charges consisted of:
Accrued liability at September 30, 2011
2,657
Charges
Payments
(1,358
(175
(1,533
Accrued liability at December 31, 2011
2,837
82
2,919
NOTE 17 – OTHER INCOME
For the quarters ended December 31, 2011 and 2010, Other income included a loss of $264 and income of $123, respectively, of foreign exchange gains/losses, net, and $65 and $1,139, respectively, of investment income.
NOTE 18 – WARRANTY LIABILITY
Telephonics offers warranties against product defects for periods generally ranging from one to two years, depending on the specific product and terms of the customer purchase agreement. Typical warranties require Telephonics to repair or replace the defective products during the warranty period at no cost to the customer. At the time revenue is recognized, Griffon records a liability for warranty costs, estimated based on historical experience and periodically assesses its warranty obligations and adjusts the liability as necessary. ATT offers an express limited warranty for a period of ninety days on all products unless otherwise stated on the product or packaging from the date of original purchase.
16
Changes in Griffon’s warranty liability, included in Accrued liabilities, were as follows:
Balance, beginning of period
7,963
6,719
Warranties issued and charges in estimated pre-existing warranties
2,030
831
Actual warranty costs incurred
(1,040
(849
Balance, end of period
8,953
6,701
NOTE 19 — COMMITMENTS AND CONTINGENCIES
Legal and environmental
Department of Environmental Conservation of New York State (“DEC”), with ISC Properties, Inc. Lightron Corporation (“Lightron”), a wholly-owned subsidiary of Griffon, once conducted operations at a location in Peekskill in the Town of Cortlandt, New York (the “Peekskill Site”) owned by ISC Properties, Inc. (“ISC”), a wholly-owned subsidiary of Griffon. ISC sold the Peekskill Site in November 1982.
Subsequently, Griffon was advised by the DEC that random sampling at the Peekskill Site and in a creek near the Peekskill Site indicated concentrations of solvents and other chemicals common to Lightron’s prior plating operations. ISC then entered into a consent order with the DEC in 1996 (the “Consent Order”) to perform a remedial investigation and prepare a feasibility study. After completing the initial remedial investigation pursuant to the Consent Order, ISC was required by the DEC, and did conduct accordingly over the next several years, supplemental remedial investigations, including soil vapor investigations, under the Consent Order.
In April 2009, the DEC advised ISC’s representatives that both the DEC and the New York State Department of Health had reviewed and accepted an August 2007 Remedial Investigation Report and an Additional Data Collection Summary Report dated January 30, 2009. With the acceptance of these reports, ISC completed the remedial investigation required under the Consent Order and was authorized, accordingly, by the DEC to conduct the Feasibility Study required by the Consent Order. Pursuant to the requirements of the Consent Order and its obligations thereunder, ISC, without acknowledging any responsibility to perform any remediation at the Site, submitted to the DEC in August 2009, a draft feasibility study which recommended for the soil, groundwater and sediment medias, remediation alternatives having a current net capital cost value, in the aggregate, of approximately $5,000. In February 2011, DEC advised ISC it has accepted and approved the feasibility study. Accordingly, ISC has no further obligations under the consent order.
Upon acceptance of the feasibility study, DEC issued a Proposed Remedial Action Plan (“PRAP”) that sets forth the proposed remedy for the site. The PRAP accepted the recommendation contained in the feasibility study for remediation of the soil and groundwater medias, but selected a different remediation alternative for the sediment medium. The approximate cost and the current net capital cost value of the remedy proposed by DEC in the PRAP is approximately $10,000. After receiving public comments on the PRAP, the DEC issued a Record of Decision (“ROD”) that set forth the specific remedies selected and responded to public comments. The remedies selected by the DEC in the ROD are the same remedies as those set forth in the PRAP.
It is now expected that DEC will enter into negotiations with potentially responsible parties to request they undertake performance of the remedies selected in the ROD, and if such parties do not agree to implement such remedies, then the State may use State Superfund money to remediate the Peekskill site and seek recovery of costs from such parties. Griffon does not acknowledge any responsibility to perform any remediation at the Peekskill Site.
Improper Advertisement Claim involving Union Tools Products. During December 2004, a customer of ATT was named in litigation that involved Union Tools products. The complaint asserted causes of action against the defendant for improper advertisement to the end consumer. The allegation suggests that advertisements led the consumer to believe that the hand tools sold were manufactured within boundaries of the United States. The allegation asserts cause of action against the customer for common law fraud. In the event that an adverse judgment is rendered against the customer, there is a possibility that the customer would seek legal recourse against ATT for an unspecified amount in contributory damages. Presently, ATT cannot estimate the amount of loss, if any, if the customer were to seek legal recourse against ATT.
Department of Environmental Conservation of New York State, regarding Frankfort, NY site. During fiscal 2009, an underground fuel tank with surrounding soil contamination was discovered at the Frankfort, N.Y. site which is the result of historical facility operations prior to ATT’s ownership. While ATT was actively working with the DEC and the New York State Department of Health to define remediation requirements relative to the underground fuel tank, the DEC took the position that ATT was responsible to remediate other types of contamination on the site. After negotiations with the DEC, on August 15, 2011, ATT executed an Order on Consent with the DEC. The Order is without admission or finding of liability or acknowledgement that there has been a release of hazardous substances at the site. Importantly, the Order does not waive any rights that ATT has under a 1991 Consent Judgment entered into between the DEC and a predecessor of ATT relating to the site. On September 26, 2011 ATT submitted a Records Search Report to DEC and on October 24, 2011 filed the draft Remedial Investigation Work Plan completing the first two steps under the Order. The Order requires that ATT identify Areas of Concern at the site, and formulate a strategy to investigate and remedy both on and off site conditions in compliance with applicable environmental law. At the conclusion of the remedy phase of the remediation to the satisfaction of the DEC, the DEC will issue a Certificate of Completion.
U.S. Government investigations and claims
Defense contracts and subcontracts, including Griffon’s contracts and subcontracts, are subject to audit and review by various agencies and instrumentalities of the United States government, including, among others, the Defense Contract Audit Agency (“DCAA”) and the Department of Justice, which has responsibility for asserting claims on behalf of the U.S. government. In addition to ongoing audits, pursuant to an administrative subpoena Griffon is currently providing information to the U.S. Department of Defense Office of the Inspector General. No claim has been asserted against Griffon, and Griffon is unaware of any material financial exposure in connection with the Inspector General’s inquiry.
In general, departments and agencies of the U.S. Government have the authority to investigate various transactions and operations of Griffon, and the results of such investigations may lead to administrative, civil or criminal proceedings, the ultimate outcome of which could be fines, penalties, repayments or compensatory or treble damages. U.S. Government regulations provide that certain findings against a contractor may lead to suspension or debarment from future U.S. Government contracts or the loss of export privileges for a company or an operating division or subdivision. Suspension or debarment could have material adverse effect on Telephonics because of its reliance on government contracts.
General legal
Griffon is a party to legal proceedings arising in the ordinary course of business and is subject to various laws and regulations relating to the protection of the environment. Management believes, based on facts presently known to it, that the resolution of the matters above and such other matters will not have a material adverse effect on Griffon’s consolidated financial position, results of operations or cash flows.
18
NOTE 20 — CONSOLIDATING GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION
Griffon’s Senior Notes are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by the domestic assets of Clopay Building Products Company, Inc., Clopay Plastic Products Company, Inc., Telephonics Corporation and Ames True Temper Inc. In accordance with Rule 3-10 of Regulation S-X promulgated under the Securities Act of 1933, presented below are condensed consolidating financial information as of and for the three month periods ended December 31, 2011 and 2010. The financial information may not necessarily be indicative of results of operations or financial position had the guarantor companies or non-guarantor companies operated as independent entities. The guarantor companies and the non-guarantor companies include the consolidated financial results of their wholly-owned subsidiaries accounted for under the equity method.
CONDENSED CONSOLIDATING BALANCE SHEETSAt December 31, 2011(Unaudited)
($ in thousands)
ParentCompany
GuarantorCompanies
Non-GuarantorCompanies
Elimination
Consolidation
115,354
17,916
44,088
Accounts receivable, net of allowances
187,535
82,532
Contract costs and recognized income not yet billed, net of progress payments
61,188
1,029
223,777
73,219
(1,031
40,397
7,596
(612
114,323
530,813
209,771
1,387
229,315
122,027
283,491
77,424
154,275
80,597
INTERCOMPANY RECEIVABLE
505,848
247,534
112,838
(866,220
EQUITY INVESTMENTS IN SUBSIDIARIES
2,816,497
729,644
2,383,273
(5,929,414
52,029
50,560
8,856
(81,141
3,490,084
2,225,632
2,997,792
(6,877,387
5,219
1,004
15,079
Accounts payable and accrued liabilities
23,951
189,297
58,116
270,752
29,170
190,301
76,806
LONG-TERM DEBT, net of debt discounts
650,306
10,558
24,406
INTERCOMPANY Payables
92,076
774,144
77,778
170,546
33,825
757,254
463,481
914,160
(947,973
2,732,830
1,762,151
2,083,632
19
CONDENSED CONSOLIDATING BALANCE SHEETSAt September 30, 2011
178,448
15,164
49,417
190,986
76,485
73,755
982
194,355
69,454
1,839
40,436
1,913
4,640
180,287
514,696
199,632
1,402
224,193
124,455
74,397
155,242
67,947
449,112
278,344
98,953
(826,409
2,844,527
746,686
2,397,258
(5,988,471
54,354
49,771
14,270
(87,198
3,529,682
2,252,423
2,980,587
(6,897,438
5,375
4,350
15,439
36,765
199,742
44,774
285,921
42,140
204,092
64,007
649,812
10,794
27,641
89,198
737,211
79,655
172,203
39,774
771,607
476,287
874,419
(908,967
2,758,075
1,776,136
2,106,168
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONSFor the Three Months Ended December 31, 2011(Unaudited)
338,062
126,963
(13,994
253,527
109,160
(14,364
84,535
17,803
370
4,616
63,991
14,551
(92
1,779
65,770
14,567
Income (loss) from operations
(4,616
18,765
3,236
462
(3,398
(5,982
(3,620
2,842
(2,398
(462
(3,333
(3,140
(6,018
(7,949
15,625
(2,782
(4,441
6,726
122
Income (loss) before equity in net income of subsidiaries
(3,508
8,899
(2,904
Equity in net income (loss) of subsidiaries
5,995
(2,840
(12,054
6,059
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONSFor the Three Months Ended December 31, 2010(Unaudited)
305,647
108,755
240,604
86,195
(256
65,043
22,560
256
5,082
60,653
14,774
1,329
61,982
14,838
(5,082
3,061
7,722
320
(1,825
(773
(8,556
1,139
(2,142
3,408
(320
(686
(2,915
(5,148
(5,768
146
(2,235
3,146
(2,279
(3,533
(3,000
4,853
1,853
10,625
(9,478
7,625
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWSFor the Three Months Ended December 31, 2011(Unaudited)
Net cash provided by (used in) operating activities
(36,903
2,275
20,785
(66
(15,747
(4,079
Proceeds from sale of investment
(38,158
(4,039
(406
(3,604
(2,816
Intercompany debt
(23,000
23,000
42,667
(42,667
(26,125
39,063
(22,483
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS
(63,094
3,180
(5,757
18,344
43,660
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWSFor the Three Months Ended December 31, 2010(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
(7,009
(3,967
(12,839
(65
(8,519
(9,346
(1,066
211
Intercompany distributions
10,000
(10,000
Funds restricted for capital projects
Net cash provided by (used in) investing activities
9,935
(19,443
(9,135
CASH FLOWS FROM FINANCING ACTIVITIES
(156
(30,283
(4,795
(5
(1,703
Tax benefit from vesting of restricted stock
25,185
(25,185
(146
(5,098
16,291
(28,508
(5,667
CASH AND EQUIVALENTS AT BEGINNING OF YEAR
74,600
57,113
38,089
CASH AND EQUIVALENTS AT END OF YEAR
77,380
28,605
32,422
24
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
BUSINESS OVERVIEW (in thousands, except per share data)
On October 17, 2011, Griffon acquired the pots and planters business of Southern Sales & Marketing Group, Inc. for $22,432. The acquired business, which markets its products under the Southern Patio brand name (“Southern Patio”), is a leading designer, manufacturer and marketer of landscape accessories. Southern Patio, which was integrated with ATT, had revenue exceeding $40,000 in 2011; acquired inventory was not significant.
Southern Patio’s results of operations are not included in the Griffon consolidated balance sheet, statement of operations or cash flows, or footnotes relating thereto prior to October 17, 2011.
OVERVIEW
Revenue for the quarter ended December 31, 2011 was $451,031, compared to $414,402 in the prior year quarter. Net income was $2,487, or $0.04 per diluted share, compared to a loss of $1,680, or $0.03 per share, in the prior year quarter. The current quarter results included:
$1,795 ($1,167, net of tax, or $0.02 per share) of restructuring and related charges; and
$178 ($116, net of tax, or $0.00 per share) of acquisition costs.
The prior year quarter included the following:
$11,364 ($7,387, net of tax, or $0.12 per share) of increased cost of goods related to the sale of inventory recorded at fair value in connection with acquisition accounting for ATT;
Restructuring charges of $1,393 ($905, net of tax, or $0.02 per share); and
Discrete tax benefits of $320, or $0.01 per share.
Excluding these items from both periods, Net income would have been $3,770, or $0.07 per share, compared to $6,292, or $0.11 per share, in the prior year quarter.
Griffon evaluates performance based on Earnings per share and Net income (loss) excluding restructuring charges, gain (loss) from debt extinguishment, discrete tax items, acquisition costs and costs related to the fair value of inventory for acquisitions. Griffon believes this information is useful to investors. The following table provides a reconciliation of Earnings (loss) per share and Net income (loss) to Adjusted earnings per share and Adjusted net income:
GRIFFON CORPORATION AND SUBSIDIARIESRECONCILIATION OF INCOME (LOSS) TO ADJUSTED INCOME (LOSS)(Unaudited)
Adjusting items, net of tax:
7,387
Restructuring and related
1,167
905
116
Discrete tax benefits
Adjusted net income
3,770
6,292
Earnings (loss) per common share
0.12
Restructuring
0.02
0.00
(0.01
Adjusted earnings per common share
0.07
0.11
Weighted-average shares outstanding (in thousands)
Note: Due to rounding, the sum of earnings (loss) per common share and adjusting items, net of tax, may not equal adjusted earnings per common share.
RESULTS OF OPERATIONS
Three months ended December 31, 2011 and 2010
Griffon evaluates performance and allocates resources based on each segments’ operating results before interest income or expense, income taxes, depreciation and amortization, gain (loss) from debt extinguishment, unallocated amounts, restructuring charges, acquisition costs and costs related to the fair value of inventory for acquisitions. Griffon believes this information is useful to investors.
The following table provides a reconciliation of Segment operating profit before depreciation, amortization, acquisition costs, restructuring and fair value write up of acquired inventory sold to Income (loss) before taxes:
26
Revenue:
Segment operating profit (loss)
4.7
NC
273
178
Segment profit before depreciation, amortization, restructuring and acquisition costs
8.4
For the quarter ended December 31, 2011, revenue increased $12,125, or 6%, compared to the prior year quarter driven mainly by the acquisition of Southern Patio, as well as higher volume. For the quarter, ATT and CBP revenue increased 5% and 7%, respectively. Excluding the acquisition of Southern Patio, ATT had a decrease in revenue, which was primarily the result of lower wheelbarrow and striking tool volume. CBP revenue increased mainly due to favorable mix and higher volume.
For the quarter ended December 31, 2011, Segment operating profit was $9,834 compared to a loss of $1,623 in the prior year quarter. Excluding the impact of the fair value write-up of acquired inventory sold, Segment operating profit was in line with the prior year with the inclusion of Southern Patio’s operating profit in the current period’s results, as well as improved production efficiencies, partially offset by somewhat higher material and fuel costs.
Current and prior year restructuring and other related charges were primarily related to facilities and for the prior year related compensation costs. The current year acquisition costs were related to the Southern Patio acquisition.
27
Segment operating profit
12.0
1,522
Segment profit before depreciation, amortization and restructuring
15.0
12.6
For the quarter ended December 31, 2011, Telephonics revenue increased $6,234, or 6%, compared to the prior year quarter. The increase was primarily attributable to Ground Surveillance Radars (“GSR”) ($4,246) and NETCOM ($3,378); these increases were partially offset by a decrease in Air Traffic Management program revenue. For the quarters ended December 31, 2011 and 2010, revenue included $5,944 and $8,050, respectively, related to revenue for the Counter Remote Control Improvised Explosive Device Electronic Warfare 3.1 (“CREW 3.1”) program where Telephonics serves as a subcontractor; excluding CREW 3.1 from both quarters, Telephonics current quarter revenue increased 9% over the prior year quarter.
For the quarter ended December 31, 2011, Segment operating profit increased by $1,822 or 17%, and operating profit margin increased 110 basis points from the prior year quarter primarily due to higher gross profits from increased revenue, and lower selling, general and administrative expenses due to the timing of research and development initiatives, partially offset by the restructuring charge. In the current quarter, Telephonics recognized $1,522 of restructuring and other related charges, primarily for one-time termination benefits and other personnel costs, in conjunction with changes to its organizational structure. The lower SG&A also reflected the benefit of the voluntary early retirement plan and other restructuring initiatives undertaken in the latter stages of the last fiscal year.
During the quarter, Telephonics was awarded several new contracts and received incremental funding on current contracts totaling $68,000. Contract backlog was $380,000 at December 31, 2011 with 78% expected to be realized in the next 12 months. Backlog was $417,000 at September 30, 2011 and $424,000 at December 31, 2010. Backlog is defined as unfilled firm orders for products and services for which funding has been both authorized and appropriated by the customer or congress, in the case of the U.S. government agencies.
Clopay Plastic Products
1.4
3.5
Segment profit before depreciation and amortization
6.0
8.3
For the quarter ended December 31, 2011, Plastics revenue increased $18,270, or 16%, compared to the prior year quarter primarily due to higher unit volumes (15%) in North America and Europe and the pass through of higher resin costs in customer selling prices (2%), offset by the unfavorable impact of foreign exchange translation and product mix.
28
For the quarter ended December 31, 2011, Segment operating profit decreased $2,262, or 55%, compared to the prior year quarter. As discussed in the second half of last year, both Germany and Brazil have experienced a high incidence of start up costs related to expanding capacity and product offerings to meet increased customer demand; such start up costs include higher than normal levels of scrap production. While improvements in operations in the newly expanded locations continues, the Company expects that Plastics will continue to operate at below normal efficiency levels for the first half of fiscal 2012.
Unallocated
For the quarter ended December 31, 2011, unallocated amounts totaled $6,335 compared to $5,106 in the prior year. The increase was primarily due to $1,139 of investment income recorded in the prior year.
Segment Depreciation and Amortization
Segment depreciation and amortization increased $1,661 for the quarter ended December 31, 2011 over the prior year period primarily due to capital spending in 2011.
For the quarter ended December 31, 2011, interest expense increased $1,846 compared to the prior year period, primarily as a result of increased borrowings in 2011.
For the quarters ended December 31, 2011 and 2010, Other income (expense) included a loss of $264 and income of $123, respectively, of foreign exchange gains/losses, net, and $65 and $1,139, respectively, of investment income.
Provision for income taxes
Stock based compensation
For the quarter ended December 31, 2011, stock based compensation expense totaled $2,257 compared to $2,023 for the prior year comparable period.
Discontinued operations – Installation Services
There was no revenue or income from discontinued operations of the Installation Services’ business for the quarters ended December 31, 2011 and 2010.
LIQUIDITY AND CAPITAL RESOURCES
Management assesses Griffon’s liquidity in terms of its ability to generate cash to fund its operating, investing and financing activities. Significant factors affecting liquidity are: cash flows from operating activities, capital expenditures, acquisitions, dispositions, bank lines of credit and the ability to attract long-term capital with satisfactory terms. Griffon remains in a strong financial position with sufficient liquidity available for reinvestment in existing businesses and strategic acquisitions while managing its capital structure on both a short-term and long-term basis.
29
The following table is derived from the Consolidated Statements of Cash Flows:
Cash Flows from Continuing Operations
Net Cash Flows Provided by (Used In):
Operating activities
Investing activities
Financing activities
Cash used in continuing operations for the quarter ended December 31, 2011 were $13,843 compared to $23,815 in the prior year quarter. Current assets net of current liabilities, excluding short-term debt and cash, increased to $402,574 at December 31, 2011 compared to $366,511 at September 30, 2011, primarily as a result of an increase in inventories. Operating cash flows were impacted by an increase in inventories as well as the decrease in accounts payable and accrued liabilities primarily due to normal HBP seasonality.
During the quarter ended December 31, 2011, Griffon used cash for investing activities of $42,263 compared to $18,643 in the prior year period, primarily for the acquisition of Southern Patio as well as for capital expenditures. Griffon expects capital spending to be in the range of $65,000 to $70,000 for 2012.
During the quarter ended December 31, 2011, cash used in financing activities totaled $9,545 compared to cash provided by financing activities of $11,047 in the prior year period. On November 17, 2011, the Board of Directors approved a quarterly cash dividend of $0.02 per common share, which was paid on December 27, 2011, to holders of common stock as of the close of business on November 29, 2011.
Payments related to Telephonics revenue are received in accordance with the terms of development and production subcontracts; certain of such receipts are progress or performance based payments. Plastics customers are generally substantial industrial companies whose payments have been steady, reliable and made in accordance with the terms governing such sales. Plastics sales satisfy orders that are received in advance of production, and where payment terms are established in advance. With respect to HBP, there have been no material adverse impacts on payment for sales.
A small number of customers account for, and are expected to continue to account for, a substantial portion of Griffon’s consolidated revenue. For the quarter ended December 31, 2011:
The United States Government and its agencies, through either prime or subcontractor relationships, represented 18% of Griffon’s consolidated revenue and 80% of Telephonics revenue.
Procter & Gamble represented 14% of Griffon’s consolidated revenue and 46% of Plastics revenue.
The Home Depot represented 11% of Griffon’s consolidated revenue and 23% of Home & Building Products revenue.
No other customers exceed 9% of consolidated revenue. Future operating results will continue to substantially depend on the success of Griffon’s largest customers and Griffon’s relationships with them. Orders from these customers are subject to fluctuation and may be reduced materially. The loss of all or a portion of volume from any one of these customers could have a material adverse impact on Griffon’s liquidity and operations.
30
Cash, Cash Equivalents and Debt(in thousands)
Notes payables and current portion of long-term debt
Long-term debt, net of current maturities
Debt discount
18,949
19,693
Total debt
Net cash and equivalents (debt)
(548,163
(490,075
32
Griffon substantially concluded its remaining disposal activities for the Installation Services business, discontinued in 2008, in the second quarter of 2009 and does not expect to incur significant expense in the future. Future net cash outflows to satisfy liabilities related to disposal activities accrued at December 31, 2011 are estimated to be $3,611. Certain of Griffon’s subsidiaries are also contingently liable for approximately $624 related to certain facility leases with varying terms through 2012 that were assigned to the respective purchasers of certain of the Installation Services businesses. Griffon does not believe it has a material exposure related to these contingencies.
During the quarters ended December 31, 2011 and 2010, Griffon used cash for discontinued operations of $277 and $367, respectively, related to settling remaining Installation Services liabilities.
CRITICAL ACCOUNTING POLICIES
The preparation of Griffon’s consolidated financial statements in conformity with GAAP requires Griffon to make estimates and judgments that affect reported amounts of assets, liabilities, sales and expenses, and the related disclosures of contingent assets and contingent liabilities at the date of the financial statements. Griffon evaluates these estimates and judgments on an ongoing basis and base the estimates on historical experience, current conditions and various other assumptions that are believed to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities, as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Griffon’s actual results may materially differ from these estimates. There have been no changes in Griffon’s critical accounting policies from September 30, 2011.
Griffon’s significant accounting policies and procedures are explained in the Management Discussion and Analysis section in the Annual Report on Form 10-K for the year ended September 30, 2011. In the selection of the critical accounting policies, the objective is to properly reflect the financial position and results of operations for each reporting period in a consistent manner that can be understood by the reader of the financial statements. Griffon considers an estimate to be critical if it is subjective and if changes in the estimate using different assumptions would result in a material impact on the financial position or results of operations of Griffon.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issues, from time to time, new financial accounting standards, staff positions and emerging issues task force consensus. See the Notes to Condensed Consolidated Financial Statements for a discussion of these matters.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements. All statements other than statements of historical fact, including, without limitation, statements regarding Griffon’s financial position, business strategy and the plans and objectives of Griffon’s management for future operations, are forward-looking statements. Without limiting the generality of the foregoing, in some cases you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “would,” “could,” “anticipate,” “believe,” “estimate,” “expect,” “plan,” “intend” or the negative of these expressions or comparable terminology. Such forward-looking statements involve important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ materially from those expressed in any forward-looking statements. These risks and uncertainties include, among others: general domestic and international business, financial market and economic conditions; the credit market; the housing market; results of integrating acquired businesses into existing operations; the results of Griffon’s restructuring and disposal efforts; competitive factors; pricing pressures for resin and steel; capacity and supply constraints; Griffon’s ability to identify and successfully consummate and integrate value-adding acquisition opportunities; the ability of Griffon to remain in compliance with the covenants under its respective credit facilities; and the inherent uncertainties relating to resolution of ongoing legal and environmental matters from time to time. Additional important factors that could cause the statements made in this Quarterly Report on Form 10-Q or the actual results of operations or financial condition of Griffon to differ are discussed under the caption “Item 1A. Risk Factors” and “Special Notes Regarding Forward-Looking Statements” in Griffon’s Annual Report on Form 10-K for the year ended September 30, 2011. Some of the factors are also discussed elsewhere in this Quarterly Report on Form 10-Q and have been or may be discussed from time to time in Griffon’s filings with the U.S. Securities and Exchange Commission. Readers are cautioned not to place undue reliance on Griffon’s forward-looking statements. Griffon does not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect future events or circumstances or to reflect the occurrence of unanticipated events.
Item 3 - Quantitative and Qualitative Disclosure About Market Risk
Interest Rates
Griffon’s exposure to market risk for changes in interest rates relates primarily to variable interest rate debt and investments in cash and cash equivalents.
Certain of Griffon’s credit facilities have a Libor-based variable interest rate. Due to the current and expected level of borrowings under these facilities, a 100 basis point change in Libor would not have a material impact on Griffon’s results of operations or liquidity.
Foreign Exchange
Griffon conducts business in various non-U.S. countries, primarily in Canada, Mexico, Europe, Brazil, Australia and China; therefore, changes in the value of the currencies of these countries affect the financial position and cash flows when translated into U.S. Dollars. Griffon has generally accepted the exposure to exchange rate movements relative to its non-U.S. operations. Griffon may, from time to time, hedge its currency risk exposures. A change of 5% or less in the value of all applicable foreign currencies would not have a material effect on Griffon’s financial position and cash flows.
Item 4 - Controls and Procedures
Under the supervision and with the participation of Griffon’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), Griffon’s disclosure controls and procedures, as defined by Exchange Act Rule 13a-15(e) and 15d-15(e), were evaluated as of the end of the period covered by this report. Based on that evaluation, Griffon’s CEO and CFO concluded that Griffon’s disclosure controls and procedures were effective at the reasonable assurance level.
During the period covered by this report, there were no changes in Griffon’s internal control over financial reporting which materially affected, or are reasonably likely to materially affect, Griffon’s internal control over financial reporting.
Limitations on the Effectiveness of Controls
Griffon believes that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all controls issues and instances of fraud, if any, within a company have been detected. Griffon’s disclosure controls and procedures, as defined by Exchange Act Rule 13a-15(e) and 15d-15(e), are designed to provide reasonable assurance of achieving their objectives.
Item 1
Legal Proceedings
None
Item 1A
Risk Factors
In addition to the other information set forth in this report, carefully consider the factors discussed in Item 1A to Part I in Griffon’s Annual Report on Form 10-K for the year ended September 30, 2011, which could materially affect Griffon’s business, financial condition or future results. The risks described in Griffon’s Annual Report on Form 10-K are not the only risks facing Griffon. Additional risks and uncertainties not currently known to Griffon or that Griffon currently deems to be immaterial also may materially adversely affect Griffon’s business, financial condition and/or operating results.
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
Period
(a) TotalNumber ofShares (orUnits)Purchased
(b) AveragePrice Paid PerShare (or Unit)
(c) Total Numberof Shares (orUnits) Purchasedas Part of PubliclyAnnounced Plansor Programs
(d) MaximumNumber (orApproximateDollar Value) ofShares (or Units)That May Yet BePurchased Underthe Plans orPrograms
October 1 - 31, 2011
253,400
8.30
November 1 - 30, 2011
20,000
8.12
December 1 - 31, 2011
8.46
283,400
8.29
46,339,708
1.
Shares were purchased by the Company in open market purchases pursuant to share repurchase plans authorized by the Company’s Board of Directors.
2.
On August 2, 2011, the Company’s Board of Directors authorized the repurchase of up to an additional $50,000,000 of Griffon common stock; as of December 31, 2011, $46,339,708 remained available for the purchase of Griffon common stock under this program.
Griffon’s revolving credit facility, as well as the indenture governing Griffon’s 7.125% Senior Notes due 2018, each contain limitations regarding the making of restricted payments (which include cash dividends and share repurchases).
Item 3
Defaults upon Senior Securities
Item 4
[Removed and Reserved]
Item 5
Other Information
Submission of Matters to a Vote of Security Holders
On January 31, 2012, Griffon Corporation ("Griffon") held its 2012 Annual Meeting of Stockholders. Of the 61,734,463 shares of common stock outstanding and entitled to vote, 58,666,661 shares, or 95.0%, were represented at the meeting in person or by proxy, and therefore a quorum was present. The final results for each of the matters submitted to a vote of stockholders at the Annual Meeting are as follows:
Item No. 1: All of the Board's nominees for Class II directors were elected to serve until Griffon's 2015 Annual Meeting of Stockholders, by the votes set forth below:
Item No. 2: The stockholders approved, on an advisory basis, the compensation of the named executive officers as disclosed in Griffon's proxy statement, by the votes set forth below:
Item No. 3: The stockholders ratified the appointment of Grant Thornton LLP as Griffon's independent registered public accounting firm for fiscal 2012, by the votes set forth below:
Item 6
Exhibits
10.1
Amended and Restated Restricted Share Award letter made as of January 10, 2012 by and between Griffon Corporation and Ronald J. Kramer (Exhibit 99.1 to Current Report on Form 8-K filed January 10, 2012 (Commission File No. 1-06620)).
10.2
Amended and Restated Restricted Share Award letter made as of January 10, 2012 by and between Griffon Corporation and Douglas J. Wetmore (Exhibit 99.2 to Current Report on Form 8-K filed January 10, 2012 (Commission File No. 1-06620)).
31.1
Certification pursuant to Rule 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certifications pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document*
101.SCH
XBRL Taxonomy Extension Schema Document*
101.CAL
XBRL Taxonomy Extension Calculation Document*
101.DEF
XBRL Taxonomy Extension Definitions Document*
101.LAB
XBRL Taxonomy Extension Labels Document*
101.PRE
XBRL Taxonomy Extension Presentation Document*
*
In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be “furnished” and not “filed.”
SIGNATURES
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 the undersigned thereunto duly authorized.
/s/ Douglas J. Wetmore
Douglas J. Wetmore
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Brian G. Harris
Brian G. Harris
Chief Accounting Officer
(Principal Accounting Officer)
Date: February 2, 2012