Griffon Corporation - 10-Q quarterly report FY

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GRIFFON CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)

Note:  Due to rounding, the sum of earnings per share of Continuing operations and Discontinued operations may not equal earnings per share of Net income.

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

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GRIFFON CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

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other assumptions that the Company believes are reasonable, the combined results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

Certain prior period amounts have been reclassified to conform to the current period presentation.

In May 2008, the Financial Accounting Standards Board (“FASB”) issued new guidance to clarify that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) must be separately accounted for in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized. This guidance, which is applicable to the Company’s 4% convertible subordinated notes due 2023 issued in 2003 (the “2023 Notes”) and 4% convertible subordinated notes due 2017 issued in December 2009 (the “2017 Notes”), became effective for the Company as of October 1, 2009 and is implemented retrospectively, as required, for the 2023 Notes.  For more information, see the Long-Term Debt footnote.

At March 31, 2010, the 2023 Notes had an outstanding balance of $49,998, an unamortized discount of $733, a net carrying value of $49,265 and a capital in excess of par value component balance, net of tax, of $17,061.  At September 30, 2009, the 2023 Notes had an outstanding balance of $79,380, an unamortized discount balance of $2,820, a net carrying value of $76,560 and a capital in excess of par value component balance, net of tax, of $18,094.  The stock price was below the conversion price for all periods presented.  The Company used 8.5% as the nonconvertible debt borrowing rate to discount the 2023 Notes and will amortize the debt discount through July 2010.  For more information, see the Long-Term Debt footnote.

For the 2023 Notes, the effective interest rate and interest expense was as follows:

The cumulative effect of the adjustments prior to September 30, 2009 was recorded in the September 30, 2009 balance sheet as follows:

Balance Sheet

(in thousands)

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The prior year three and six month periods have been adjusted as follows:

Statement of Operations

(in thousands, except per share data)

On December 21, 2009, the Company issued $100,000 aggregate principal amount of the 2017 Notes.  The Company used 8.75% as the nonconvertible debt-borrowing rate to discount the 2017 Notes and will amortize the debt discount through January 2017.  On the date of issuance, the debt component of the 2017 Notes was $75,437 and the debt discount was $24,563.  At March 31, 2010, the 2017 Notes had an outstanding balance of $100,000, an unamortized discount balance of $23,847, a net carrying value of $76,153 and a capital in excess of par component balance, net of tax, of $15,720.

For the 2017 Notes, the effective interest rate and interest expense was as follows:

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NOTE 2 — FAIR VALUE MEASUREMENTS

Items Measured at Fair Value on a Recurring Basis

Each quarter, cash and equivalents and the deferred non-qualified retirement plan assets are measured and recorded at fair value based upon quoted prices in active markets for identical assets and liabilities.  Life insurance contracts were $4,766 at March 31, 2010 and $4,803 at September 30, 2009.  Additionally, accounts receivable and accounts payable approximate fair value due to their short-term nature.  Refer to the Long-Term Debt footnote for discussion on the fair value of long-term debt.

NOTE 3 — INVENTORIES

Inventories, stated at the lower of cost (first-in, first-out or average) or market, were comprised of the following:

NOTE 4 — PROPERTY PLANT AND EQUIPMENT

Property, plant and equipment were comprised of the following:

No event or indicator of impairment occurred during the three and six months ended March 31, 2010, which would require additional impairment testing of property, plant and equipment.

NOTE 5 — GOODWILL AND OTHER INTANGIBLES

The following table provides the changes in carrying value of goodwill by segment during the six months ended March 31, 2010.

No event or indicator of impairment occurred during the three and six months ended March 31, 2010, which would require impairment testing of goodwill.

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The following table provides the gross carrying value and accumulated amortization for each major class of intangible asset:

An unpatented intangible asset with a gross carrying amount of $5,958 at October 1, 2009 was reclassified from indefinite lived to amortizable, as information became available that allowed a useful life to be determined; the intangible asset is being amortized over 10 years, its estimated useful life, with effect from October 1, 2009.

No event or indicator of impairment occurred during the three and six months ended March 31, 2009, which would require additional impairment testing of long-lived intangible assets excluding goodwill.

NOTE 6 — INCOME TAXES

The Company’s effective tax rate for continuing operations for the quarter ended March 31, 2010 was a benefit of 137% of income before taxes, compared to a benefit of 61.2% of the 2009 quarter’s loss before income taxes.  The 2010 quarter benefited from resolution of certain non-domestic tax audits resulting in the release of $1,541 of tax and accrued interest from previously established reserves for uncertain tax positions.  The prior year quarter benefited from tax planning, primarily with respect to foreign tax credits.

The Company’s effective tax rate for continuing operations for the six months ended March 31, 2010 was a benefit of 5.9% of income before taxes, compared to 99% of the prior year period loss before income taxes.  The 2010 period benefited from resolution of certain non-domestic tax audits resulting in the release of $1,541 of tax and accrued interest from previously established reserves for uncertain tax positions.  The prior year period benefited from tax planning, primarily with respect to foreign tax credits.

Excluding the above discrete period items, the effective tax rate on continuing operations for the quarter and six month period ended March 31, 2010 would have been an expense of 26.6% and 25.5%, respectively, of income before taxes.  The effective tax rate for the 2009 quarter and six month period ended March 31, 2009, excluding the tax planning items, would have been a benefit on the loss before income taxes of 30% and 35.1%, respectively.

NOTE 7 — LONG-TERM DEBT

In June 2008, Building Products and Plastics entered into a credit agreement for their domestic operations 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, senior secured revolving credit facility of $100,000 (the “Clopay Credit Agreement”). Borrowings under the Clopay Credit Agreement bear interest (2.9% average during the six months ended March 31, 2010) at rates based upon LIBOR or the prime rate and are collateralized by the U.S. stock and assets of Building Products and Plastics.  At March 31, 2010 and September 30, 2009, $20,708 and $35,925, respectively, were outstanding under the Clopay Credit Agreement; approximately $41,197 was available for borrowing at March 31, 2010. The Company has been in compliance with all financial covenants under the Clopay Credit Agreement since its inception. The balance of the debt approximates its fair value as the interest rates are indexed to current market rates.

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

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facility of $100,000 (the “Telephonics Credit Agreement”). Borrowings under the Telephonics Credit Agreement bear interest (1.8% average during the six months ended March 31, 2010) at rates based upon LIBOR or the prime rate and are collateralized by the stock and assets of Telephonics. At March 31, 2010 and September 30, 2009, $30,000 and $38,000, respectively, was outstanding under the Telephonics Credit Agreement; approximately $64,400 was available for borrowing at March 31, 2010. The Company has been in compliance with all financial covenants under the Telephonics Credit Agreement since its inception. The balance of the debt approximates its fair value as the interest rates are indexed to current market rates.

The Telephonics Credit Agreement and the Clopay Credit Agreement include various sublimits for standby letters of credit. At March 31, 2010, approximately $15,795 of aggregate standby letters of credit were outstanding under these credit facilities.  Additionally, these agreements limit dividends and advances these subsidiaries may pay to the parent.

On December 21, 2009, the Company issued $100,000 of 2017 Notes.  Holders may convert the 2017 Notes at a conversion price of $14.91 per share, which is equal to a conversion rate of 67.0799 shares per $1 principal amount of 2017 Notes. In lieu of delivering shares of its common stock, the Company may settle any conversion of the 2017 Notes through the delivery of cash or a combination of cash and shares of common stock.  On March 31, 2010, the Company had outstanding $100,000 of the 2017 Notes, which had a fair value of approximately $108,000, based upon quoted market prices (level 1 inputs).

The Company had outstanding $49,998 of 2023 Notes at March 31, 2010. Holders may convert the 2023 Notes at a conversion price of $22.41 per share, as adjusted pursuant to the Company’s 2008 common stock rights offering and subject to possible further adjustment, as defined therein, which is equal to a conversion rate of approximately 44.6229 shares per $1 principal amount of 2023 Notes. The Company has irrevocably elected to pay noteholders at least $1 in cash for each $1 principal amount of 2023 Notes presented for conversion. The excess of the value of the Company’s common stock that would have been issuable upon conversion over the cash delivered will be paid to noteholders in shares of the Company’s common stock.  The fair value is approximately $50,000, based upon quoted market price (level 1 inputs). If the stock price remains below the conversion price, it is likely that the 2023 Notes will be put to the Company in July of 2010; as such, they have been classified as a component of Notes payable and current portion of long-term debt at March 31, 2010, and the debt discount on the 2023 Notes is being amortized through July 2010.

In January 2010, the Company purchased $10,145 face value of the 2023 Notes for $10,246.  The Company recorded a pre-tax gain from debt extinguishment of $32, offset by $20 for a proportionate reduction in the related deferred financing costs for a net pre-tax gain of $12 in the second quarter of 2010.  Capital in excess of par was reduced by $332 related to the equity portion of the extinguished 2023 Notes and the debt discount was reduced by $219.

In December 2009, the Company purchased $19,237 face value of the 2023 Notes for $19,429. The Company recorded a $26 pre-tax gain from debt extinguishment, offset by $44 for a proportionate reduction in the related deferred financing costs for a net pre-tax loss of $18 in the first quarter of 2010.  Capital in excess of par value was reduced by $700 related to the equity portion of the extinguished 2023 Notes and the debt discount was reduced by $482.

In April 2009, the Company purchased $15,120 face value of the 2023 Notes for $14,341. The Company recorded a pre-tax gain from debt extinguishment of $252, offset by $75 for a proportionate reduction in the related deferred financing costs for a net pre-tax gain of $177 in the third quarter of 2009.  Capital in excess of par value was reduced by $263 related to the equity portion of the extinguished 2023 Notes and the debt discount was reduced by $789.

In October 2008, the Company purchased $35,500 face value of the 2023 Notes for $28,400. The Company recorded a pre-tax gain from debt extinguishment of $4,549, offset by $245 for a proportionate reduction in the related deferred financing costs for a net pre-tax gain of $4,304 in the first quarter of 2009.  No portion of the extinguishment was attributed to capital in excess in par and the debt discount was reduced by $2,544.

The Company had $79,380 and $130,000 of 2023 Notes outstanding at September 30, 2009 and 2008, respectively.

The Company’s Employee Stock Ownership Plan has a loan agreement, guaranteed by the Company, which requires payment of principal and interest through the expiration date of September 2012 at which time the balance of the loan,

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and any outstanding interest, will be payable.  The primary purpose of this loan and its predecessor loans, which were refinanced by this loan in October 2008, was to purchase 547,605 shares of the Company’s stock in October 2008. The loan bears interest at rates based upon the prime rate or LIBOR. The balance of the loan was $5,313 at March 31, 2010, and the outstanding balance approximates fair value as the interest rates are indexed to current market rates.

NOTE 8 — SHAREHOLDERS’ EQUITY

In accordance with the terms of an employment agreement, in October 2008, the Company’s Chief Executive Officer received a restricted stock grant of 75,000 shares of common stock, which vests in April 2011. The fair value of the restricted stock on the date of grant was $675. In addition, the Company’s Chief Executive Officer received a ten-year option to purchase 350,000 shares of common stock at an exercise price of $20 per share. The closing stock price on date of grant was $9.00 per share and the grant vests in three equal annual installments beginning April 2009. The fair value of the options on the date of grant was $721 or $2.06 per share.

In March 2009, the Company’s Chief Executive Officer received a restricted stock grant of 675,000 shares of common stock, which vests in March 2013. The fair value of the restricted stock on the date of grant was $5,063 or $7.50 per share.

In addition to the above grants, during 2009, the Company granted 446,500 shares of restricted stock, each with four year cliff vesting, with a total fair value of $4,282, or a weighted average fair value of $9.59 per share.

The fair value of the 2009 option grant was estimated as of the grant dates using the Black-Scholes option-pricing model with the following weighted average assumptions: risk-free interest rate of 3.04%; dividend yield of 0.0%; expected life of seven years; volatility of 38.98%; an option exercise price of $20.00 per share; and a fair value of option granted of $2.06 per share.

During the first and second quarters of 2010, the Company granted 299,700 shares of restricted stock, with two to four-year cliff vesting, and a total fair value of $2,914, or a weighted average fair value of $9.72 per share.

The fair value of restricted stock and option grants is amortized over the respective vesting periods.

For the three months ended March 31, 2010 and 2009, stock based compensation expense totaled $1,505 and $1,027, respectively.  For the six months ended March 31, 2010 and 2009, stock based compensation expense totaled $2,935 and $1,841, respectively.

NOTE 9 — 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 potentially dilutive shares.  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.

The following table is a reconciliation of the share amounts (in thousands) used in computing earnings per share:

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Business segment information is as follows:

GRIFFON CORPORATION

REVENUE, INCOME & OTHER DATA BY SEGMENT

*Unallocated amounts typically include general corporate expenses not attributable to reportable segment.

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NOTE 11 — COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) was as follows:

NOTE 12 — DEFINED BENEFIT PENSION EXPENSE

Defined benefit pension expense was recognized as follows:

NOTE 13 — RECENT ACCOUNTING PRONOUNCEMENTS

Newly issued but not yet effective accounting pronouncements

In October 2009, the FASB issued new guidance on accounting for multiple-deliverable arrangements to enable vendors to account for products and services separately rather than as a combined unit.  The guidance addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. The new guidance will be effective as of the beginning of the annual reporting period commencing after June 15, 2010, and will be adopted by the Company as of October 1, 2010. Early adoption is permitted. The Company is evaluating the potential impact, if any, of the adoption of the new guidance on its consolidated financial statements.

Recently issued effective accounting pronouncements

In December 2007, the FASB issued new accounting guidance related to the accounting for business combinations. The purpose of the new guidance is to better represent the economic value of a business combination transaction. The new guidance retains the fundamental requirement of existing guidance where the acquisition method of accounting is to be used for all business combinations and for an acquirer to be identified for each business combination.  In general the new guidance: 1) broadens the existing guidance by extending its applicability to all events where one entity obtains control over one or more businesses; 2) broadens the use of the fair value measurements used to recognize the assets acquired and liabilities assumed; 3) changes the accounting for acquisition related fees and restructuring costs incurred in connection with an acquisition; and 4) increases required disclosures. The Company anticipates that adoption of the new guidance, effective for Griffon for any business combinations that occur after October 1, 2009, will have an impact on the way in which business combinations are accounted for; however, the impact can only be assessed as each acquisition is consummated.

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In December 2007, the FASB issued new accounting guidance related to the accounting for noncontrolling interests in consolidated financial statements. The new guidance was issued to improve the relevance, comparability, and transparency of financial information provided to investors by requiring all entities to report noncontrolling (minority) interests in subsidiaries in the same way, that is, as equity in the consolidated financial statements. Moreover, the new guidance eliminates the diversity then existing in accounting for transactions between an entity and noncontrolling interests by requiring they be treated as equity transactions. This new guidance was effective for the Company as of October 1, 2009 and the adoption had no material effect on the Company’s consolidated financial statements.

In March 2008, the FASB issued new guidance, which enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how: 1) an entity uses derivative instruments; 2) derivative instruments and related hedged items are accounted for; and 3) derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. This new guidance was effective for the Company as of October 1, 2009 and the adoption had no material effect on the Company’s consolidated financial statements.

In April 2008, the FASB issued new guidance, which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset, and requires enhanced related disclosures. The new guidance must be applied prospectively to all intangible assets acquired as of and subsequent to years beginning after December 15, 2008, which for the Company was the fiscal year beginning October 1, 2009. The Company anticipates that adoption of the new guidance will impact the way in which newly acquired intangible assets are accounted for; however, such impact can only be assessed upon the acquisition of intangible assets.

NOTE 14 — DISCONTINUED OPERATIONS

The following amounts related to the Installation Services segment, discontinued in 2008, have been segregated from the Company’s continuing operations and are reported as assets and liabilities of discontinued operations in the condensed consolidated balance sheets:

There was no Installation Services’ operating unit revenue for the three and six months ended March 31, 2010 and 2009.

NOTE 15 — RESTRUCTURING AND OTHER RELATED CHARGES

In June 2009, the Company announced plans to consolidate facilities in its Building Products segment, scheduled to be completed in early 2011.  The Company estimates it will incur pre-tax exit and restructuring costs approximating $12,000, substantially all of which will be cash charges, including $2,000 for one-time termination benefits and other personnel costs, $1,000 for excess facilities and related costs, and $9,000 in other exit costs primarily in connection with production realignment.  These charges will occur primarily in 2010 and 2011.  To date the Company has incurred $3,500 in related charges.

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