UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, 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, 2001 OR ( ) 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: 1-6620 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.) 100 JERICHO QUADRANGLE, JERICHO, NEW YORK 11753 - ----------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (516) 938-5544 -------------------------------------------------- (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, and (2) has been subject to such filing requirements for the past 90 days. X Yes No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 32,870,510 shares of Common Stock as of January 31, 2002.
FORM 10-Q --------- CONTENTS -------- PAGE ---- PART I - FINANCIAL INFORMATION (Unaudited) --------------------- Condensed Consolidated Balance Sheets at December 31, 2001 and September 30, 2001........................................ 1 Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2001 and 2000 ...................... 3 Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2001 and 2000 ................ 4 Notes to Condensed Consolidated Financial Statements.......... 5 Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 8 Quantitative and Qualitative Disclosure about Market Risk..... 10 PART II - OTHER INFORMATION ----------------- Item 1: Legal Proceedings .................................... 11 Item 2: Changes in Securities ................................ 11 Item 3: Defaults upon Senior Securities ...................... 11 Item 4: Submission of Matters to a Vote of Security Holders... 11 Item 5: Other Information .................................... 11 Item 6: Exhibits and Reports on Form 8-K ..................... 11 Signature .................................................... 12
GRIFFON CORPORATION AND SUBSIDIARIES ------------------------------------ CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- <TABLE> <CAPTION> December 31, September 30, 2001 2001 ------------ ------------- (Unaudited) (Note 1) ASSETS - ------ <S> <C> <C> CURRENT ASSETS: Cash and cash equivalents $ 46,313,000 $ 40,096,000 Accounts receivable, less allowance for doubtful accounts 135,340,000 146,425,000 Contract costs and recognized income not yet billed 67,120,000 66,116,000 Inventories (Note 2) 93,453,000 98,044,000 Prepaid expenses and other current assets 15,942,000 18,148,000 ------------ ------------ Total current assets 358,168,000 368,829,000 PROPERTY, PLANT AND EQUIPMENT at cost, less accumulated depreciation and amortization of $108,931,000 at December 31, 2001 and $104,231,000 at September 30, 2001 145,852,000 145,931,000 OTHER ASSETS: Costs in excess of fair value of net assets of businesses acquired (Note 5) 33,600,000 60,232,000 Other 12,530,000 10,901,000 ------------ ------------ 46,130,000 70,233,000 ------------ ------------ $550,150,000 $584,993,000 ============ ============ <FN> See notes to condensed consolidated financial statements. </FN> </TABLE> 1
GRIFFON CORPORATION AND SUBSIDIARIES ------------------------------------ CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- <TABLE> <CAPTION> December 31, September 30, 2001 2001 ----------- ------------ (Unaudited) (Note 1) LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ <S> <C> <C> CURRENT LIABILITIES: Accounts and notes payable $ 54,468,000 $ 63,740,000 Other current liabilities 98,933,000 99,211,000 ------------ ------------ Total current liabilities 153,401,000 162,951,000 ------------ ------------ LONG-TERM DEBT 97,923,000 108,615,000 ------------ ------------ MINORITY INTEREST AND OTHER 17,798,000 19,574,000 ------------ ------------ SHAREHOLDERS' EQUITY: Preferred stock, par value $.25 per share, authorized 3,000,000 shares, no shares issued --- --- Common stock, par value $.25 per share, authorized 85,000,000 shares, issued 35,138,437 shares at December 31, 2001 and 35,023,437 shares at September 30, 2001; 2,286,802 and 2,284,802 shares in treasury at December 31, 2001 and September 30, 2001, respectively 8,785,000 8,756,000 Other shareholders' equity 272,243,000 285,097,000 ------------ ------------ Total shareholders' equity 281,028,000 293,853,000 ------------ ------------ $550,150,000 $584,993,000 ============ ============ <FN> See notes to condensed consolidated financial statements. </FN> </TABLE> 2
GRIFFON CORPORATION AND SUBSIDIARIES ------------------------------------ CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ----------------------------------------------- (Unaudited) <TABLE> <CAPTION> THREE MONTHS ENDED DECEMBER 31, ------------------------------- 2001 2000 ---- ---- <S> <C> <C> Net sales $301,902,000 $288,195,000 Cost of sales 218,062,000 212,994,000 ------------ ------------ Gross profit 83,840,000 75,201,000 Selling, general and administrative expenses 62,412,000 57,336,000 ------------ ------------ Income from operations 21,428,000 17,865,000 ------------ ------------ Other income (expense): Interest expense (1,361,000) (3,465,000) Interest income 300,000 571,000 Other, net (73,000) 16,000 ------------ ------------ (1,134,000) (2,878,000) ------------ ------------ Income before income taxes 20,294,000 14,987,000 Provision for income taxes 8,117,000 6,145,000 ------------ ------------ Income before minority interest and cumulative effect of a change in accounting principle 12,177,000 8,842,000 Minority interest (1,595,000) (1,339,000) ------------ ------------ Income before cumulative effect of a change in accounting principle 10,582,000 7,503,000 Cumulative effect of a change in accounting principle, net of income taxes of $2,457,000 (Note 5) (24,118,000) --- ------------ ------------ Net income (loss) $(13,536,000) $ 7,503,000 ============ ============ Basic earnings (loss) per share of common stock (Note 3): Income before cumulative effect of a change in accounting principle $ .32 $ .23 Cumulative effect of a change in accounting principle (.73) -- ------------ ------------ $ (.41) $ .23 ============ ============ Diluted earnings (loss) per share of common stock (Note 3): Income before cumulative effect of a change in accounting principle $ .31 $ .23 Cumulative effect of a change in accounting principle (.70) -- ------------ ------------ $ (.39) $ .23 ============ ============ <FN> See notes to condensed consolidated financial statements. </FN> </TABLE> 3
GRIFFON CORPORATION AND SUBSIDIARIES ------------------------------------ CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- (Unaudited) <TABLE> <CAPTION> THREE MONTHS ENDED DECEMBER 31, ------------------------------- 2001 2000 ---- ---- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(13,536,000) $ 7,503,000 ------------ ------------ Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 5,329,000 6,007,000 Minority interest 1,595,000 1,339,000 Cumulative effect of a change in accounting principle 24,118,000 --- Provision for losses on accounts receivable 672,000 778,000 Change in assets and liabilities: Decrease in accounts receivable and contract costs and recognized income not yet billed 9,949,000 7,276,000 Decrease in inventories 4,434,000 3,497,000 (Increase) decrease in prepaid expenses and other assets 667,000 (1,342,000) Decrease in accounts payable, accrued liabilities and income taxes (9,183,000) (14,200,000) Other changes, net 712,000 2,790,000 ------------ ------------ Total adjustments 38,293,000 6,145,000 ------------ ------------ Net cash provided by operating activities 24,757,000 13,648,000 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property, plant and equipment (6,029,000) (4,011,000) Decrease in equipment lease deposits 555,000 2,150,000 Other, net --- 22,000 ------------ ------------ Net cash used in investing activities (5,474,000) (1,839,000) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt 2,000,000 1,406,000 Payments of long-term debt (10,503,000) (1,936,000) Decrease in short-term borrowings (1,800,000) --- Other, net (2,763,000) (769,000) ------------ ------------ Net cash used in financing activities (13,066,000) (1,299,000) ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 6,217,000 10,510,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 40,096,000 26,616,000 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 46,313,000 $ 37,126,000 ============ ============ <FN> See notes to condensed consolidated financial statements. </FN> </TABLE> 4
GRIFFON CORPORATION AND SUBSIDIARIES ------------------------------------ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- (Unaudited) (1) Basis of Presentation - --------------------- The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three-month period ended December 31, 2001 are not necessarily indicative of the results that may be expected for the year ending September 30, 2002. The balance sheet at September 30, 2001 has been derived from the audited financial statements at that date. For further information, refer to the consolidated financial statements and footnotes thereto included in the company's annual report to shareholders for the year ended September 30, 2001. (2) Inventories - ----------- Inventories, stated at the lower of cost (first-in, first-out or average) or market, are comprised of the following: <TABLE> <CAPTION> December 31, September 30, 2001 2001 ------------ ------------- <S> <C> <C> Finished goods......................... $53,647,000 $53,613,000 Work in process........................ 25,597,000 27,809,000 Raw materials and supplies............. 14,209,000 16,622,000 ----------- ----------- $93,453,000 $98,044,000 =========== =========== </TABLE> (3) Earnings per share (EPS)- ------------------------ Earnings per share amounts and the weighted average number of shares used in their calculation for the three-month period ended December 31, 2000 have been restated to reflect the effect of a fiscal 2001 10% Common Stock dividend. Basic EPS is calculated by dividing income by the weighted average number of shares of common stock outstanding during the period. The weighted average number of shares of common stock used in determining basic EPS was 33,056,000 for the three months ended December 31, 2001 and 32,968,000 for the three months ended December 31, 2000. 5
Diluted EPS is calculated by dividing income by the weighted average number of shares of common stock outstanding plus additional common shares that could be issued in connection with potentially dilutive securities. The weighted average number of shares of common stock used in determining diluted EPS was 34,573,000 and 33,152,000 for the three months ended December 31, 2001 and 2000, respectively, and reflects additional shares in connection with stock option and other stock-based compensation plans. Options to purchase approximately 1,019,000 and 6,489,000 shares of common stock were not included in the computations of diluted earnings per share for the three months ended December 31, 2001 and 2000, respectively, because the effects would have been antidilutive. (4) Business segments - ----------------- The company's reportable business segments are as follows - Garage Doors (manufacture and sale of residential and commercial/industrial garage doors, and related products); Installation Services (sale and installation of building products primarily for new construction, such as garage doors, garage door openers, manufactured fireplaces and surrounds, and cabinets); Electronic Information and Communication Systems (communication and information systems for government and commercial markets); and Specialty Plastic Films (manufacture and sale of plastic films and film laminates for baby diapers, adult incontinence care products, disposable surgical and patient care products and plastic packaging). Information on the company's business segments is as follows: <TABLE> <CAPTION> Electronic Information Specialty and Garage Installation Plastic Communication Doors Services Films Systems Totals ------ ------------ --------- ------------- ------ <S> <C> <C> <C> <C> <C> Revenues from external customers - Three months ended December 31, 2001 $112,616,000 $ 71,033,000 $ 72,566,000 $ 45,687,000 $301,902,000 Three months ended December 31, 2000 102,916,000 67,807,000 72,710,000 44,762,000 288,195,000 Intersegment revenues - Three months ended December 31, 2001 $ 7,121,000 $ 77,000 $ --- $ --- $ 7,198,000 Three months ended December 31, 2000 6,452,000 55,000 --- --- 6,507,000 Segment profit - Three months ended December 31, 2001 $ 9,245,000 $ 2,384,000 $ 9,820,000 $ 2,440,000 $ 23,889,000 Three months ended December 31, 2000 4,935,000 1,188,000 9,712,000 4,279,000 20,114,000 </TABLE> 6
Following is a reconciliation of segment profit to amounts reported in the consolidated financial statements: <TABLE> <CAPTION> Three Months Ended December 31, ------------------------------- 2001 2000 ---- ---- <S> <C> <C> Profit for all segments $23,889,000 $20,114,000 Unallocated amounts (2,534,000) (2,233,000) Interest expense, net (1,061,000) (2,894,000) ----------- ----------- Income before income taxes $20,294,000 $14,987,000 =========== =========== </TABLE> (5) Changes in accounting principles - -------------------------------- Effective October 1, 2001, the company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," (SFAS 142). SFAS 142 addresses accounting and reporting for acquired goodwill. It eliminates the previous requirement to amortize goodwill and establishes new requirements with respect to the recognition and valuation of goodwill. With the assistance of a third-party valuation expert, the company ascertained the fair value of its reporting units as part of adopting SFAS 142 and determined that goodwill of the installation services segment was impaired pursuant to the new standard. The fair value of the installation services segment used in computing the impairment loss was determined through a combination of market based approaches and present value techniques. Results for the quarter ended December 31, 2001 include the related cumulative effect of a change in accounting principle in the amount of $24,118,000 (net of an income tax benefit of $2,457,000) to reflect the impairment. Had SFAS 142 been in effect for the quarter ended December 31, 2000, the related elimination of goodwill amortization would have increased the company's net income for that quarter by $473,000 to $7,976,000 from $7,503,000. Basic and diluted earnings per share for last year's first quarter would both have increased $.01 from $.23 per share to $.24 per share. The Financial Accounting Standards Board has also issued Statement of Financial Accounting Standards Nos. 143, "Accounting for Asset Retirement Obligations" and 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 143 addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs, and will become effective in fiscal 2003. SFAS 144 addresses accounting and reporting for the impairment or disposal of long-lived assets and also becomes effective in fiscal 2003. The company anticipates that adoption of these new standards will not have a material effect on its financial position and results of operations. 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ----------------------------------------------------------- AND RESULTS OF OPERATIONS ------------------------- RESULTS OF OPERATIONS Operating results (in thousands) by business segment were as follows for the quarters ended December 31: <TABLE> <CAPTION> Segment Net Sales Operating Profit --------- ---------------- 2001 2000 2001 2000 ---- ---- ---- ---- <S> <C> <C> <C> <C> Garage doors $119,737 $109,368 $ 9,245 $ 4,935 Installation services 71,110 67,862 2,384 1,188 Specialty plastic films 72,566 72,710 9,820 9,712 Electronic information and communication systems 45,687 44,762 2,440 4,279 Intersegment revenues (7,198) (6,507) - - -------- -------- ------- ------- $301,902 $288,195 $23,889 $20,114 ======== ======== ======= ======= </TABLE> Garage Doors - ------------ Net sales of the garage door segment increased by $10.4 million or 9.5% compared to last year primarily due to higher unit sales ($7.1 million) and improved product mix ($1.0 million). Service level improvements that began in the latter half of fiscal 2001 continued into the first quarter, driving the unit sales increase. Operating profit of the garage doors segment increased $4.3 million compared to last year. Gross margin percentage increased to approximately 30.5% in 2001 from 26.6% last year. The increased margin was due primarily to the sales growth, increased manufacturing efficiencies and lower raw material costs. Selling, general and administrative expenses increased as a percentage of sales to 22.8% from 22.0% last year. Lower expense levels in fiscal 2002 due to cost reduction programs were offset by the effect of including freight costs billed to customers in net sales; previously such recoverable costs were treated as a reduction of freight expense. This change in classification had no effect on segment net profit. Installation Services - --------------------- Net sales of the installation services segment increased by $3.2 million or 4.8% compared to last year. The increase was principally due to the segment's expanded product offering and stronger new construction markets. Operating profit of the installation services segment increased $1.2 million compared to last year. Gross margin percentage increased to 27.7% from approximately 26.6% last year. The increased margin was due to the sales increase and improved product mix compared to the prior year. Selling, general and administrative expenses as a percentage of sales decreased to approximately 24.4% from 24.9% last year due to the effect of cost reduction programs. Specialty Plastic Films - ----------------------- Net sales of the specialty plastic films segment were approximately the same as in the prior year. Increased domestic and European unit sales and the impact of a weaker U.S. dollar on translated foreign sales were offset by selling price adjustments to pass through raw material cost decreases to customers and lower pricing on certain high volume products. Operating profit of the specialty plastic films segment was approximately the same as last year. Gross margin percentage decreased to 24.6% from 24.9% 8
last year, reflecting the selling price adjustments and costs associated with a production line being installed in one of our European operations, partly offset by the effect of lower raw material costs. Selling, general and administrative expenses as a percentage of sales decreased to approximately 11.0% from 11.4% last year, offsetting the effect of the lower gross margins. Electronic Information and Communication Systems - ------------------------------------------------ Net sales of the electronic information and communication systems segment increased $.9 million compared to last year. The increase was primarily due to increased sales in connection with defense communications and systems integration programs, partly offset by lower sales in the segment's integrated circuit business. Operating profit of the electronic information and communication systems segment decreased $1.8 million compared to last year. The decrease is principally attributable to increased expenditures of approximately $1.7 million associated with its previously announced technology initiatives. These development initiatives are expected to aggregate $5-6 million for 2002 with the objective of generating incremental revenue commencing in 2003. Profitability in the segment's core business was approximately the same as last year. Gross margin percentage decreased to 21.0% from 21.9% last year due primarily to lower margins in connection with certain development phase programs; reduced operating expenses substantially offset the effect of lower gross margins. Net Interest Expense - -------------------- Net interest expense decreased by $1.8 million compared to last year due to the effect of debt repayments and lower interest rates. Debt levels were reduced considerably compared to last year, with outstanding borrowings declining approximately $65 million from December 31, 2000 to December 31, 2001. LIQUIDITY AND CAPITAL RESOURCES Cash flow generated by operations for the quarter was $24.6 million compared to $13.6 million last year and working capital was $204.8 million at December 31, 2001. Operating cash flows increased compared to last year due to increased earnings and improved working capital management. During the quarter, the company had capital expenditures of approximately $6 million, principally made in connection with increasing production capacity. Financing cash flows principally consisted of repayments of bank indebtedness of approximately $12.3 million during the quarter. If the anticipated level of operating cash flows is achieved, debt levels will be further reduced and purchases of the company's Common Stock under its stock buyback program will be made, depending upon market conditions, at prices deemed appropriate by management. At December 31, 2001, future minimum payments under noncancellable operating leases and payments to be made for notes payable and maturities of long-term debt over the next five years are as follows (000's omitted): <TABLE> <CAPTION> Operating Debt Year Leases Repayments Total ---- --------- ---------- ----- <S> <C> <C> <C> 2002 $18,700 $8,400 $27,100 2003 14,300 5,600 19,900 2004 10,900 8,700 19,600 2005 7,700 2,900 10,600 2006 4,400 9,600 14,000 </TABLE> Anticipated cash flows from operations, together with existing cash, bank lines of credit and lease line availability, should be adequate to finance presently anticipated working capital and capital expenditure requirements and to repay long-term debt as it matures. CHANGES IN ACCOUNTING PRINCIPLES See Note 5 of notes to condensed consolidated financial statements for a description of the effect of the company's adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," and two other recently issued accounting standards. 9
FORWARD-LOOKING STATEMENTS All statements other than statements of historical fact included in this report, including without limitation statements regarding the company's financial position, business strategy, and the plans and objectives of the company's management for future operations, are forward-looking statements. When used in this report, words such as "anticipate", "believe", "estimate", "expect", "intend" and similar expressions, as they relate to the company or its management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of the company's management, as well as assumptions made by and information currently available to the company's management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors, including but not limited to, business and economic conditions, competitive factors and pricing pressures, capacity and supply constraints. Such statements reflect the views of the company with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to the operations, results of operations, growth strategy and liquidity of the company. Readers are cautioned not to place undue reliance on these forward-looking statements. The company 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. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Management does not believe that there is any material market risk exposure with respect to derivative or other financial instruments that are required to be disclosed. 10
PART II - OTHER INFORMATION Item 1 Legal Proceedings ----------------- None Item 2 Changes in Securities --------------------- None Item 3 Defaults upon Senior Securities ------------------------------- None Item 4 Submission of Matters to a Vote of Security Holders --------------------------------------------------- (a) The Registrant held its Annual Meeting of Stockholders on February 6, 2002 (b) Not applicable (c) Four directors were elected at the Annual Meeting to serve until the Annual Meeting of Stockholders in 2005. The names of these directors and votes cast in favor of their election and shares withheld are as follows: <TABLE> <CAPTION> Name Votes For Votes Withheld ---- --------- -------------- <S> <C> <C> Bertrand M. Bell 28,742,143 1,378,665 Martin S. Sussman 28,723,347 1,397,461 Joseph J. Whalen 29,004,477 1,116,331 Lester L. Wolff 28,699,565 1,421,243 </TABLE> Item 5 Other Information ----------------- None Item 6 Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits -------- None 11
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 the undersigned thereunto duly authorized. GRIFFON CORPORATION By/s/ Robert Balemian ------------------------------------ Robert Balemian President and Chief Financial Officer (Principal Financial Officer) Date: February 12, 2002 12