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 June 30, 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 Avenue, 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).oYes o No
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Smaller reporting companyo
(Do not check if a smaller reporting company)
Griffon Corporation and Subsidiaries
Contents
Page
PART I - FINANCIAL INFORMATION
Item 1 – Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2011 (unaudited) and September 30, 2010
1
Condensed Consolidated Statement of Shareholders’ Equity for the Nine Months Ended June 30, 2011 (unaudited)
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2011 and 2010 (unaudited)
2
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 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
28
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
39
Item 4 - Controls & Procedures
40
PART II – OTHER INFORMATION
Item 1 – Legal Proceedings
Item 1A – Risk Factors
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
Item 3 – Defaults upon Senior Securities
41
Item 4 – [Removed and Reserved]
Item 5 – Other Information
Item 6 – Exhibits
Signatures
42
Exhibit Index
43
Part I – Financial InformationItem 1 – Financial Statements
GRIFFON CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS(in thousands)
(Unaudited)At June 30,2011
At September 30,2010
CURRENT ASSETS
Cash and equivalents
$
246,554
169,802
Accounts receivable, net of allowances of $6,357 and $6,581
253,153
252,029
Contract costs and recognized income not yet billed, net of progress payments of $1,419 and $1,423
64,554
63,155
Inventories, net
276,931
268,801
Prepaid and other current assets
65,200
55,782
Assets of discontinued operations
1,387
1,079
Total Current Assets
907,779
810,648
PROPERTY, PLANT AND EQUIPMENT, net
351,962
314,926
GOODWILL
361,576
356,087
INTANGIBLE ASSETS, net
230,590
233,011
OTHER ASSETS
31,469
27,907
ASSETS OF DISCONTINUED OPERATIONS
3,727
5,803
Total Assets
1,887,103
1,748,382
CURRENT LIABILITIES
Notes payable and current portion of long-term debt
19,307
20,901
Accounts payable
178,592
185,165
Accrued liabilities
92,559
124,687
Liabilities of discontinued operations
4,042
4,289
Total Current Liabilities
294,500
335,042
LONG-TERM DEBT, net of debt discount of $20,426 and $30,650
674,530
503,935
OTHER LIABILITIES
195,019
190,244
LIABILITIES OF DISCONTINUED OPERATIONS
5,729
8,446
Total Liabilities
1,169,778
1,037,667
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY
Total Shareholders’ Equity
717,325
710,715
Total Liabilities and Shareholders’ Equity
GRIFFON CORPORATIONCONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY(Unaudited)
ACCUMULATEDOTHERCOMPREHENSIVEINCOME (LOSS)
COMMON STOCK
CAPITAL INEXCESS OFPAR VALUE
TREASURY SHARES
DEFERREDESOPCOMPENSATION
RETAINEDEARNINGS
(in thousands)
SHARES
PAR VALUE
COST
Total
Balance at 9/30/2010
74,580
18,645
460,955
431,584
12,466
(213,560
)
17,582
(4,491
Net income (loss)
—
(10,809
Common stock issued for options exercised
339
85
2,472
256
(3,402
(845
Tax benefit/credit from the exercise/forfeiture of stock options
2,334
Amortization of deferred compensation
558
Restricted stock awards granted, net
1,267
317
(317
175
(2,328
ESOP purchase of common stock
(15,674
ESOP distribution of common stock
200
Stock-based compensation
6,767
Translation of foreign financial statements
25,130
Pension other comprehensive income amort, net of tax
1,277
Balance at 6/30/2011
76,186
19,047
472,411
420,775
12,897
(219,290
43,989
(19,607
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 June 30,
Nine Months Ended June 30,
2011
2010
Revenue
455,282
327,026
1,345,813
946,160
Cost of goods and services
356,113
252,671
1,057,642
732,454
Gross profit
99,169
74,355
288,171
213,706
Selling, general and administrative expenses
82,045
61,650
246,853
187,666
Restructuring and other related charges
2,118
1,489
4,723
3,720
Total operating expenses
84,163
63,139
251,576
191,386
Income from operations
15,006
11,216
36,595
22,320
Other income (expense)
Interest expense
(12,569
(3,760
(35,111
(10,459
Interest income
106
81
272
335
Loss from debt extinguishment, net
(26,164
(6
Other, net
145
(583
3,407
633
Total other income (expense)
(12,318
(4,262
(57,596
(9,497
Income (loss) before taxes and discontinued operations
2,688
6,954
(21,001
12,823
Provision (benefit) for income taxes
(2,184
1,965
(10,192
1,620
Income (loss) from continuing operations
4,872
4,989
11,203
Discontinued operations:
Income (loss) from operations of the discontinued Installation Services business
(26
143
(5
54
Income (loss) from discontinued operations
(21
89
4,968
11,292
Basic earnings (loss) per common share:
0.08
(0.18
0.19
Income from discontinued operations
0.00
Weighted-average shares outstanding
59,606
59,018
59,387
58,944
Diluted earnings (loss) per common share:
60,525
60,154
59,897
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 (loss).
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 provided by operating activities:
(89
Depreciation and amortization
45,078
29,357
Fair value write-up of acquired inventory sold
15,152
4,447
Provision for losses on accounts receivable
734
1,619
Amortization/write-off of deferred financing costs and debt discounts
5,203
4,317
26,164
6
Deferred income taxes
(3,550
(4,768
Gain on sale/disposal of assets
(240
Change in assets and liabilities, net of assets and liabilities acquired:
(Increase) decrease in accounts receivable and contract costs and recognized income not yet billed
1,243
(5,747
Increase in inventories
(19,994
(11,611
(Increase) decrease in prepaid and other assets
(2,243
1,161
Increase (decrease) in accounts payable, accrued liabilities and income taxes payable
(51,075
17,639
Other changes, net
625
571
Net cash provided by operating activities
13,055
48,194
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment
(64,974
(26,581
Acquired business, net of cash acquired
(855
Funds restricted for capital projects
3,875
(Increase) decrease in equipment lease deposits
(1,040
Proceeds from sale of investment
1,333
Net cash used in investing activities
(60,621
(27,621
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt
640,963
100,000
Payments of long-term debt
(495,209
(81,050
Increase in short-term borrowings
12,730
Financing costs
(21,343
(4,145
Purchase of ESOP shares
Exercise of stock options
20
299
Tax benefit from exercise of options/vesting of restricted stock
99
22
192
Net cash provided by financing activities
123,843
15,395
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Net cash used in operating activities
(829
(449
Net cash used in discontinued operations
Effect of exchange rate changes on cash and equivalents
1,304
(4,719
NET INCREASE IN CASH AND EQUIVALENTS
76,752
30,800
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD
320,833
CASH AND EQUIVALENTS AT END OF PERIOD
351,633
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. Griffon, to further diversify, also seeks out, evaluates and, when appropriate, will acquire additional businesses that offer potentially attractive returns on capital.
Griffon operates through three business segments: Home & Building Products, Telephonics Corporation and Clopay Plastic Products Company.
•
Home & Building Products (“HBP”) consists of:
-
Clopay Building Products Company (“CBP”), a leading manufacturer and marketer of residential, commercial and industrial garage doors to professional installing dealers and major home center retail chains; and
Ames True Temper, Inc. (“ATT”), acquired by Griffon on September 30, 2010, a global provider of non-powered landscaping products that make work easier for homeowners and professionals. Due to the timing of the acquisition, none of ATT’s 2010 results of operations were included in Griffon’s results for the year ended September 30, 2010.
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, 2010, which provides a more complete explanation of Griffon’s accounting policies, financial position, operating results, business properties and other matters and with Griffon’s Current Report on Form 8-K filed on June 24, 2011 updating such Form 10-K for the inclusion of guarantor financial statements in the notes to Consolidated Financial Statements. 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, 2010 was derived from the audited financial statements included in Griffon’s Annual Report on Form 10-K for the year ended September 30, 2010.
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 U.S. GAAP 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 certain revenue of Telephonics recorded using a percentage of completion, allowances for doubtful accounts receivable and returns, net realizable value of inventories, restructuring reserves, valuation of goodwill and intangible assets, 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, fair value of hedges 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.
At June 30, 2011, the fair value of Griffon’s 2017 4% convertible notes and 2018 Senior Notes approximated $99,000 and $553,000, respectively, based upon quoted market prices (level 1 inputs).
Insurance contracts with a value of $4,599 and trading securities with a value of $5,376 at June 30, 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 June 30, 2011, Griffon had $1,500 of Canadian dollar contracts at a weighted average rate of $0.99 and $3,500 of Australian dollar contracts at a weighted average rate of $0.98. The contracts do not qualify for hedge accounting and a fair value loss of $29 and $221, respectively, was recorded in other liabilities and to other income for the outstanding contracts based on similar contract values (level 2 inputs) for the three and nine month periods ended June 30, 2011, respectively.
NOTE 3 — ACQUISITION
On September 30, 2010, Griffon purchased all of the outstanding stock of CHATT Holdings, Inc. (“ATT Holdings”), the parent of ATT, on a cash and debt-free basis, for $542,000 in cash, subject to certain adjustments (the “Purchase Price”). ATT is a global provider of non-powered lawn and garden tools, wheelbarrows, and other outdoor work products to the retail and professional markets. ATT’s brands include Ames®, True Temper®, Ames True Temper®, Garant®, Union Tools®, Razor-back®, Jackson®, Hound Dog® and Dynamic DesignTM. ATT’s brands hold the number one or number two market position in their respective major product categories. The acquisition of ATT expanded Griffon’s position in the home and building products market and provides Griffon the opportunity to recognize synergies with its other businesses.
ATT’s results of operations are not included in Griffon’s consolidated statements of operations or cash flows, or related footnotes for any period presented prior to September 30, 2010, except where explicitly stated as pro forma results. Griffon’s consolidated balance sheet at September 30, 2010 and related
5
footnotes include ATT’s balances at that date. The accounts of the acquired company, after adjustments to reflect fair market values assigned to assets and liabilities, have been included in Griffon’s consolidated financial statements from the date of acquisition.
The following table summarizes estimated fair values of assets acquired and liabilities assumed as of the date of acquisition, and the amounts assigned to goodwill and intangible assets:
Current assets, net of cash acquired
195,214
PP&E
72,918
Goodwill *
259,930
Intangibles
203,290
Other assets
1,124
Total assets acquired
732,476
Total liabilities assumed
(190,476
Net assets acquired
542,000
Amounts assigned to goodwill and major intangible asset classifications are as follows:
AmortizationPeriod (Years)
Goodwill (non-deductible) *
N/A
Tradenames (non-deductible)
76,090
Indefinite
Customer relationships (non-deductible)
127,200
25
463,220
*
During the current quarter, Goodwill was reduced, retrospectively, by $1,134, due to the prospective federal consolidated tax reporting of ATT and GFF, and accounting for the completion of ATT’s 2010 federal tax return.
Pro Forma Information
The following unaudited pro forma information illustrates the effect on Griffon’s revenue and net earnings for the three and nine months ended June 30, 2010, assuming the acquisition of ATT took place on October 1, 2009.
Three MonthsEnded June 30,2010
Nine MonthsEnded June 30,2010
Revenue from continuing operations:
As reported
Pro forma
454,498
1,308,164
Net earnings from continuing operations:
10,783
24,520
Diluted earnings per share from continuing operations:
0.18
0.41
Average shares - Diluted (in thousands)
The pro forma results of operations have been prepared for comparative purposes only and include certain adjustments to actual financial results, such as imputed financing costs, and estimated amortization and depreciation expense as a result of intangibles and fixed assets acquired being measured at fair value. Such pro forma results do not purport to be indicative of the results of operations that would have actually resulted had the acquisition occurred on the date indicated, or that may result in the future.
During the 2011 first quarter, Plastics purchased a manufacturing business in Shanghai, China for $855. The purchase price was primarily allocated to fixed assets.
NOTE 4 – INVENTORIES
Inventories, stated at the lower of cost (first-in, first-out or average) or market, were comprised of the following:
At June 30,2011
Raw materials and supplies
74,745
64,933
Work in process
82,378
69,107
Finished goods
119,808
134,761
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment were comprised of the following:
Land, building and building improvements
130,713
126,785
Machinery and equipment
571,664
498,017
Leasehold improvements
34,828
33,455
737,205
658,257
Accumulated depreciation and amortization
(385,243
(343,331
Depreciation and amortization expense for property, plant and equipment was $15,700 and $9,149 for the quarters ended June 30, 2011 and 2010, respectively, and $45,078 and $29,357 for the nine-month periods ended June 30, 2011 and 2010, respectively.
No event or indicator of impairment occurred during the three and nine months ended June 30, 2011, which would require additional impairment testing of property, plant and equipment.
NOTE 6 – GOODWILL AND OTHER INTANGIBLES
The following table provides the changes in carrying value of goodwill by segment during the nine months ended June 30, 2011.
Otheradjustmentsincludingcurrencytranslations
At June 30, 2011
Home & Building Products**
Telephonics
18,545
Plastics
77,612
5,489
83,101
** As adjusted, see Acquisition note. The following table provides the gross carrying value and accumulated amortization for each major class of intangible assets:
7
At September 30, 2010
GrossCarryingAmount
AccumulatedAmortization
AverageLife(Years)
Customer relationships
160,096
12,556
155,798
6,477
Unpatented technology
7,348
1,845
12
8,154
1,144
Total amortizable intangible assets
167,444
14,401
163,952
7,621
Trademarks
77,547
76,680
Total intangible assets
244,991
240,632
Amortization expense for intangible assets subject to amortization was $1,987 and $481 for the quarters ended June 30, 2011 and 2010, respectively, and $5,905 and $1,506 for the nine-month periods ended June 30, 2011 and 2010, respectively.
During the 2011 first quarter, Griffon reduced the carrying value of unpatented technology, and the related accrual, by approximately $1,400 due to the expiration of contingency agreements for certain past acquisitions.
No event or indicator of impairment occurred during the nine months ended June 30, 2011, which would require impairment testing of long-lived intangible assets including goodwill.
NOTE 7 – INCOME TAXES
Griffon’s effective tax rate for continuing operations for the current quarter was a benefit of 81.3%, compared to a provision of 28.3% in the prior year quarter. The June 30, 2011 quarter effective rate reflected a change in earnings mix between domestic and non-domestic, and the results of ATT, acquired on September 30, 2010. Certain discrete tax benefits impacted the effective rates in both reporting periods. The current quarter included benefits arising on the filing of tax returns in various jurisdictions, and tax planning related to unremitted foreign earnings; the 2010 effective rate reflected benefits arising on the filing of tax returns in various jurisdictions. Excluding these discrete items, the effective rate on continuing operations would have been 77.7% in the current quarter compared to 27.3% in the prior year quarter. The 77.7% tax rate is impacted by the combined effects of the nominal pretax income in the current quarter combined with a forecast full year pretax loss for 2011, as well as fluctuations in the full year expected effective tax rate driven by changes in earnings mix between domestic and non-domestic operations.
Griffon’s effective tax rate for continuing operations for the nine months ended June 30, 2011 was a benefit of 48.5%, compared to a provision of 12.6% in the prior year period. The 2011 effective tax rate reflected a change in earnings mix between domestic and non-domestic and includes the results of ATT, acquired on September 30, 2010. Certain discrete tax benefits impacted the effective tax rates in both reporting periods. The 2011 rate included benefits arising in connection with the retroactively extended research tax credit signed into law on December 22, 2010, the filing of tax returns in various jurisdictions, and tax planning related to unremitted foreign earnings. The 2010 effective rate benefited from resolution of certain non-domestic tax audits resulting in the release of previously established reserves for uncertain tax positions, combined with the benefit of certain tax planning initiatives with respect to non-U.S. operating locations, and a benefit arising on the filing of certain of tax returns in various jurisdictions. Excluding these discrete items, the effective rate on continuing operations for the nine months ended June 30, 2011 would have been a benefit of 27.0% compared to 27.3% in the comparable prior year period.
8
NOTE 8 – LONG-TERM DEBT
Outstanding Balance
OriginalIssuer Discount
BalanceSheet
CapitalizedFees & Expenses
CouponInterest Rate
OutstandingBalance
Senior notes due 2018
(a)
550,000
11,337
7.125
%
n/a
Revolver due 2016
2,937
Convert. debt due 2017
(b)
(20,426
79,574
2,474
4.000
(22,525
77,475
2,807
Real estate mortgages
(c)
18,491
379
7,287
159
ESOP Loans
(d)
20,204
17
5,000
Capital lease - real estate
(e)
11,553
264
5.000
12,182
282
Convert. debt due 2023
(f)
532
Term loan due 2013
(g)
242
Revolver due 2011
10,876
71
Foreign line of credit
2,000
Term loan due 2016
(h)
375,000
(7,500
367,500
9,782
7.800
Asset based lending
25,000
(625
24,375
3,361
4.500
Revolver due 2013
(i)
30,000
476
1.800
Other long term debt
(j)
607
485
Totals
714,263
693,837
17,721
555,486
(30,650
524,836
16,867
less: Current portion
(19,307
(20,901
Long-term debt
694,956
534,585
Three Months Ended June 30, 2011
Three Months Ended June 30, 2010
EffectiveInterest Rate
CashInterest
Amort.Debt Discount
Amort.Deferred Cost & Other Fees
TotalInterest Expense
EffectiveInterestRate
Cash Interest
7.1
9,780
412
10,192
149
9.2
1,000
713
111
1,824
650
1,761
5.2
208
36
244
6.4
121
126
2.9
123
140
1.6
21
5.3
147
153
158
164
4.0
8.8
500
37
1,187
72
44
9
53
3.7
34
7.2
273
101
374
46
186
Capitalized interest
(59
11,044
812
12,569
2,154
1,300
306
3,760
Nine Months Ended June 30, 2011
Nine Months Ended June 30, 2010
Amort.DebtDiscount
7.5
11,436
458
11,894
172
9.3
3,000
2,099
332
5,431
2,100
1,365
221
3,686
5.6
552
64
616
368
14
382
2.5
170
50
220
1.5
63
5.4
457
19
478
497
16
9.0
1,912
2,109
4,164
73
48
102
3.8
9.5
13,405
572
838
14,815
6.2
1,076
58
341
1,475
862
303
1,165
160
79
239
3.0
554
697
91
(551
(195
29,908
2,729
35,111
6,142
3,474
843
10,459
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 (“Senior Notes”); interest on the Senior Notes is payable semi-annually. 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.
On June 24, 2011, Griffon commenced an exchange offer to exchange the original Senior Notes for new 7.125% Senior Notes due in 2018 that will be identical in all material respects to the original Senior Notes, except that the new Senior Notes will be registered under the Securities Act of 1933. The exchange offer will remain open until 5:00 p.m. Eastern Standard Time on August 9, 2011, unless extended.
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 1.75% for base rate loans and 2.75% 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. There was no outstanding balance as of June 30, 2011, and as of such date the Company was in compliance with the terms and covenants of the Credit Agreement.
At June 30, 2011, there were $20,477 of standby letters of credit outstanding under the Credit Agreement; $179,523 was available for borrowing at that date.
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. Griffon used 8.75% as the nonconvertible
10
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 September 30, 2010 and June 30, 2011, the 2017 Notes had a capital in excess of par component, net of tax, of $15,720.
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, that bear interest at rates from 6.3% to 6.6% with maturities extending through 2016.
Griffon’s Employee Stock Ownership Plan (“ESOP”) entered into a loan agreement in August 2010 to borrow $20,000 over a one-year period, to be used to purchase Griffon common stock in the open market. The loan bears interest at a) LIBOR plus 2.5% or b) the lender’s prime rate. After the first year, Griffon has the option to convert all or a portion of the outstanding loan to a five-year term. If converted, principal is payable in quarterly installments of $250, beginning September 2011, with the remainder due at maturity. The loan is secured by shares purchased with the proceeds of the loan, and repayment is guaranteed by Griffon. At June 30, 2011, 1,398,677 shares have been purchased (some of which were purchased pursuant to a 10b5-1 repurchase plan); the outstanding balance was $15,673 and $4,327 was available for borrowing under the agreement. The Company expects to enter into an amendment to this loan agreement shortly that would (i) extend the end date for drawing down the $20,000 borrowing availability from August 2011 to November 2011, (ii) change the starting date for quarterly amortization payments from September 2011 to December 2011, and extend the maturity date of the loan from August 2016 to November 2016.
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 June 30, 2011, $4,532 was outstanding.
In October 2006, CBP entered into a capital lease totaling $14,290 for real estate in Troy, Ohio. Approximately $10,000 was used to acquire the building and the remaining amount was restricted for improvements. 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.
At June 30, 2011 and September 30, 2010, 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. At June 30, 2011 and September 30, 2010, 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.
In January 2010, Griffon purchased $10,100 face value of the 2023 Notes for $10,200 which, after proportionate reduction in related deferred financing costs, resulted in a net pre-tax gain from debt extinguishment of $12. Capital in excess of par was reduced by $300 for the equity portion of the extinguished 2023 Notes, and debt discount was reduced by $200.
In December 2009, Griffon purchased $19,200 face value of the 2023 Notes for $19,400. Including a proportionate reduction in the related deferred financing costs, Griffon recorded an immaterial net pre-tax loss on the extinguishment. 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 $500.
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 2011, but is renewable upon mutual agreement with the bank. The term loan can be drawn until August 2011 and, if drawn, repayment will
11
be in ten equal installments beginning 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 under the term loan at June 30, 2011. Borrowings under the revolving facility at June 30, 2011 were €7,500 and €2,500 was available for borrowing. 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.
Clopay do Brazil, a subsidiary of Plastics, maintains lines of credit of approximately $4,500. Interest on borrowings accrue at a rate of LIBOR plus 3.8% or CDI plus 5.6%. $2,000 was borrowed under the lines and $2,500 was available as of as of June 30, 2011.
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”). The acquisition, including all related transaction costs, was funded by proceeds of the Term Loan, $25,000 drawn under the New ABL, and $168,000 of Griffon cash. ATT’s previous outstanding debt was repaid in connection with the acquisition.
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.
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.
Primarily capital leases.
At June 30, 2011, Griffon and its subsidiaries were in compliance with the terms and covenants of its credit agreements and loan agreements.
During the second quarter, in connection with the termination of the Term Loan, ABL and Telephonics credit agreement, Griffon recorded a $26,164 loss on extinguishment of debt consisting of $21,617 of deferred financing charges and original issuer discounts, a call premium of $3,703 on the Term Loan, and $844 of swap and other breakage costs.
As part of the acquisition of ATT, Griffon acquired interest rate swaps that had fair values totaling $3,845 at September 30, 2010. These swaps were terminated in October 2010 for $4,303, including accrued interest of $458.
NOTE 9 — SHAREHOLDERS’ EQUITY
During 2010, Griffon granted 713,637 restricted shares; 703,845 shares issued to employees, substantially all of which were three to four-year cliff vesting, and a total fair value of $7,989, or a weighted average fair value of $11.35 per share; and 9,792 shares issued to Directors, vesting annually in equal installments over three years with total fair value of $120, or a weighted average fair value of $12.25 per share. In connection with the ATT acquisition, Griffon entered into certain retention arrangements with the ATT senior management team. Under these arrangements, the ATT management team purchased 239,145 shares of common stock and received 239,145 shares of restricted stock that vest in full after four years, subject to the attainment of a specified performance measure. During 2011, 107,509 restricted shares were forfeited which had a weighted average fair value of $11.81 per share.
During the third quarter of 2011, Griffon granted a total of 10,000 shares of restricted stock with three-year cliff vesting and a total fair value of $99, or a weighted average fair value of $9.94 per share.
During the second quarter of 2011, Griffon granted 365,000 restricted shares and 590,000 performance shares. The restricted shares had a total fair value of $4,544, or a weighted average fair value of $12.45 per share with 260,000 shares having a three-year cliff vesting; 30,000 shares, issued to Directors, vesting annually in equal installments over three years; and 75,000 shares vesting annually in equal installments over five years. The performance shares have a fair value of $7,346, or a weighted average fair value of $12.45 per share, and cliff vest when either the stock price of Griffon closes at $16 per share for twenty consecutive trading days or in 7 years, whichever comes first.
During the first quarter of 2011, Griffon granted a total of 450,700 shares of restricted stock with three-year cliff vesting and a total fair value of $5,956, or a weighted average fair value of $13.22 per share.
The fair value of restricted stock and option grants is amortized over the respective vesting periods.
For the three and nine months ended June 30, 2011, stock based compensation expense totaled $2,120 and $6,767, respectively, compared to $1,512 and $4,447, respectively, for the prior year comparable periods.
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 in the nine-month period ended June 30, 2011, 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
919
1,136
953
Weighted average shares outstanding - diluted
Anti-dilutive options excluded from diluted EPS computation
1,200
865
1,037
Anti-dilutive restricted stock excluded from diluted EPS computation
850
86
Griffon has the intent and ability to settle the principal amount of the 2017 Notes in cash; therefore, the potential issuance of shares related to the principal amount of the 2017 Notes is not included in diluted shares.
NOTE 11 – BUSINESS SEGMENTS
Griffon’s reportable business segments are as follows:
Home & Building Products 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.
13
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 for the same reason. 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 to Income before taxes and discontinued operations:
For the Three Months Ended June 30,
For the Nine Months Ended June 30,
REVENUE
Home & Building Products:
ATT
114,144
353,985
CBP
100,099
104,325
290,840
286,051
Home & Building Products
214,243
644,825
103,530
100,413
315,334
320,222
137,509
122,288
385,654
339,887
Total consolidated net sales
INCOME (LOSS) BEFORE TAXES AND DISCONTINUED OPERATIONS
Segment operating profit (loss):
Home & Building Products *
13,512
2,406
18,820
5,553
9,725
9,783
31,643
27,400
(305
6,691
9,007
12,138
Total segment operating profit
22,932
18,880
59,470
45,091
Unallocated amounts
(7,781
(8,247
(19,468
(22,138
Net interest expense
(12,463
(3,679
(34,839
(10,124
Segment profit before depreciation, amortization, restructuring and fair value write-up of acquired inventory sold:
22,487
5,941
59,640
16,502
12,122
11,768
37,457
32,798
6,048
11,718
27,065
28,611
Total Segment profit before depreciation, amortization, restructuring and fair value write-up of acquired inventory sold
40,657
29,427
124,162
77,911
Segment depreciation and amortization
(15,607
(9,058
(44,817
(29,100
Restructuring charges
(2,118
(1,489
(4,723
(3,720
(15,152
* Includes nil and $15,152 of costs related to the sale of inventory that was recorded at fair value in connection with acquisition accounting for ATT for the three and nine months ended June 30, 2011, respectively.
Unallocated amounts typically include general corporate expenses not attributable to reportable segment.
DEPRECIATION and AMORTIZATION
Segment:
7,460
2,046
21,548
7,229
1,794
1,985
5,211
5,398
6,353
5,027
18,058
16,473
Total segment depreciation and amortization
15,607
9,058
44,817
29,100
Corporate
93
261
257
Total consolidated depreciation and amortization
15,700
9,149
CAPITAL EXPENDITURES
4,855
2,428
18,630
8,886
3,854
4,021
5,992
10,388
14,415
2,325
40,031
6,624
Total segment
23,124
8,774
64,653
25,898
113
118
321
683
Total consolidated capital expenditures
23,237
8,892
64,974
26,581
ASSETS
Segment assets:
956,536
918,012
266,024
268,373
465,189
397,470
Total segment assets
1,687,749
1,583,855
194,240
157,645
Total continuing assets
1,881,989
1,741,500
5,114
6,882
Consolidated total
NOTE 12 – COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) was as follows:
Three months EndedJune 30,
Nine Months EndedJune 30,
Foreign currency translation adjustment
8,664
(17,787
(32,223
Pension other comprehensive income amortization, net of tax
426
388
1,164
Comprehensive income (loss)
13,962
(12,431
15,598
(19,767
15
NOTE 13 – DEFINED BENEFIT PENSION EXPENSE
Defined benefit pension expense was as follows:
Three Months EndedJune 30,
Service cost
88
139
263
417
Interest cost
2,792
907
8,370
2,721
Expected return on plan assets
(2,843
(343
(8,524
(1,029
Amortization:
Prior service cost
84
252
Recognized actuarial loss
512
1,713
1,536
Net periodic expense
692
1,299
2,074
3,897
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:
4,281
Other long-term liabilities
Total liabilities of discontinued operations
There was no Installation Services’ operating unit revenue for the three and nine months ended June 30, 2011 and 2010.
NOTE 16 – RESTRUCTURING AND OTHER RELATED CHARGES
The consolidation of the CBP manufacturing facilities plan, announced in June 2009, is substantially complete. For the project to date, CBP incurred pre-tax exit and restructuring costs of $8,857, substantially all of which were cash charges; charges include $1,175 for one-time termination benefits and other personnel costs, $4,933 for excess facilities and related costs, and $2,749 for other exit costs, primarily in connection with production realignment. CBP had $10,297 in capital expenditures in order to effect the restructuring plan.
Telephonics recognized $603 of restructuring charges in the current quarter related to costs incurred in connection with the consolidation of the management of its Electronics Systems and Communication Systems operating units; such charges are all personnel related.
Restructuring and related charges recognized for the three and nine months ended June 30, 2011 and 2010 were follows:
WorkforceReduction
Facilities &Exit Costs
OtherRelatedCosts
Amounts incurred in:
Quarter ended December 31, 2009
279
694
38
1,011
Quarter ended March 31, 2010
124
775
1,220
Quarter ended June 30, 2010
94
819
576
Nine months ended June 30, 2010
2,288
935
Quarter ended December 31, 2010
791
363
1,393
Quarter ended March 31, 2011
61
470
681
1,212
Quarter ended June 30, 2011
1,134
450
534
Nine months ended June 30, 2011
1,434
1,711
1,578
At June 30, 2011, the accrued liability for the restructuring and related charges consisted of:
Accrued liability at September 30, 2010
1,541
Charges
Payments
(1,299
(1,711
(1,578
(4,588
Accrued liability at June 30, 2011
1,676
NOTE 17 – OTHER INCOME
For the quarters ended June 30, 2011 and 2010, Other income included a gain (loss) of $24 and ($610), respectively, of foreign exchange gains/losses, net, and $311 and $419, respectively, of investment expense.
For the nine months ended June 30, 2011 and 2010, Other income included losses of $3 and $776, respectively, of foreign exchange gains/losses, net, and $996 and ($419), respectively, of investment income (expense).
NOTE 18 – WARRANTY LIABILITY
Telephonics offers warranties against product defects for periods ranging from one to two years, with certain products having a limited lifetime warranty, 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. For Home & Building Products and Telephonics, at the time revenue is recognized, a liability is recorded for warranty costs, estimated based on historical experience; the Segment periodically assesses its warranty obligations and adjusts the liability as necessary. ATT offers an express limited warranty for a period of ninety days, from the date of original purchase, on all products unless otherwise stated on the product or packaging.
Changes in Griffon’s warranty liability, included in Accrued liabilities, were as follows:
Balance, beginning of period
5,681
4,760
5,896
5,707
Warranties issued and charges in estimated pre-existing warranties
779
1,235
2,159
2,554
Actual warranty costs incurred
(911
(1,153
(2,506
(3,419
Balance, end of period
5,549
4,842
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 had 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.
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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 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. On June 9, 2011 the DEC advised ATT by letter that it was requesting that ATT enter into an Order on Consent and Administrative Settlement (“Proposed Order”) to investigate and remediate other portions of the site, in addition to the contamination resulting from the underground tank, and for the payment of past costs allegedly incurred by New York State with respect to the site. ATT believes that the scope of its obligations to investigate and remediate other portions of the site, and its obligations to pay past costs, if any, are limited by a prior consent judgment entered into in 1991 by a predecessor company and the DEC. Nevertheless, ATT is in discussions with the DEC with respect to the scope of the Proposed Order. If ATT and the DEC are unable to reach agreement regarding this matter, there is a possibility that the DEC will use state funds to perform certain investigative and remedial actions and then institute a cost recovery action to obtain reimbursement from ATT of the costs expended by the state. ATT believes that it has adequately accrued for reasonably estimable investigation and remediation costs.
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”), the Defense Contract Investigative Service (“DCIS”), 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 subject to various laws and regulations relating to the protection of the environment and is a party to legal proceedings arising in the ordinary course of business. 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.
NOTE 20 — RELATED PARTY
In the second quarter of 2011, Goldman, Sachs & Co. acted as a co-manager and as an initial purchaser in connection with the Senior Notes offering and received customary fees in connection with the rendering of such services.
NOTE 21 — 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 and nine month periods ended June 30, 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 June 30, 2011
($ in thousands)
ParentCompany
GuarantorCompanies
Non-GuarantorCompanies
Elimination
Consolidation
174,739
29,911
41,904
Accounts receivable, net of allowances
178,662
74,491
Contract costs and recognized income not yet billed, net of progress payments
63,536
1,018
203,958
72,973
16,755
48,450
(1,016
191,494
524,517
192,784
1,377
214,845
135,740
278,275
83,301
156,212
74,378
INTERCOMPANY RECEIVABLE
468,372
275,625
25,204
(769,201
EQUITY INVESTMENTS IN SUBSIDIARIES
2,816,629
659,525
2,384,638
(5,860,792
55,554
44,045
13,599
(81,729
3,533,426
2,153,044
2,913,371
(6,712,738
1,125
4,356
13,826
Accounts payable and accrued liabilities
31,033
188,881
52,253
271,151
32,158
193,237
70,121
LONG-TERM DEBT, net of debt discounts
649,185
10,846
14,499
INTERCOMPANY Payables
34,195
735,006
79,746
163,996
33,006
761,089
402,274
858,361
(851,946
2,772,337
1,750,770
2,055,010
2,153,494
CONDENSED CONSOLIDATING BALANCE SHEETSAt September 30, 2010
74,600
57,113
38,089
181,549
70,480
62,681
474
211,920
56,881
5,963
39,843
10,291
(315
80,563
553,106
177,294
205,085
108,574
77,812
91,507
141,504
271,143
218,488
(489,631
3,269,975
1,091,359
2,546,639
(6,907,973
40,586
44,188
11,784
(68,651
3,392,391
2,534,663
3,287,898
(7,466,570
1,135
19,141
24,247
224,069
61,851
309,852
24,872
225,204
85,281
82,382
44,902
376,651
INTERCOMPANY PAYABLES
238,392
251,239
76,821
113,394
68,680
184,075
621,892
790,297
(558,597
3,208,316
1,912,771
2,497,601
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONSFor the Three Months Ended June 30, 2011
344,229
121,993
(10,940
255,237
112,185
(11,309
88,992
9,808
369
6,285
62,190
13,663
(93
2,016
64,206
13,765
Income (loss) from operations
(6,285
24,786
(3,957
462
Interest income (expense), net
(3,600
2,667
(11,530
(1,349
7,139
(5,706
(4,949
9,806
(17,236
(11,234
34,592
(21,193
523
(8,708
10,254
(3,730
Income (loss) before equity in net income of subsidiaries
(2,526
24,338
(17,463
Equity in net income of subsidiaries
6,875
(12,237
(18,976
Loss from operations
4,349
12,101
(18,453
Net loss
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONSFor The Three Months Ended June 30, 2010
249,885
74,832
2,309
186,952
63,666
2,053
62,933
11,166
45,457
9,028
(64
46,946
(7,229
15,987
2,138
320
(2,613
1,101
(2,167
Gain from debt extinguishment, net
(425
2,042
(1,880
(320
(3,038
3,143
(4,047
(10,267
19,130
(1,909
(4,879
6,590
254
(5,388
12,540
(2,163
10,356
(2,275
(20,621
10,265
10,377
Loss from discontinued operations
Net income
23
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONSFor the Nine Months Ended June 30, 2011
1,013,130
361,365
(28,682
778,650
308,669
(29,677
234,480
52,696
995
16,848
187,151
43,103
(249
4,498
225
191,649
43,328
(16,848
42,831
9,368
1,244
(8,997
4,366
(30,208
(397
(25,767
(42
4,908
(738
(721
(9,039
8,877
(56,713
(25,887
51,708
(47,345
(14,594
21,471
(17,069
(11,293
30,237
(30,276
Equity in net income (loss) of subsidiaries
(39
2,122
(32,320
(11,332
32,359
(31,797
24
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONSFor The Nine Months Ended June 30, 2010
720,738
227,842
(2,420
539,936
195,707
(3,189
180,802
32,135
769
20,950
140,396
26,512
(192
144,116
(20,950
36,686
5,623
961
(6,851
3,772
(7,045
3,705
(1,686
(961
(7,282
7,477
(8,731
(28,232
44,163
(3,108
(12,401
15,356
(1,335
(15,831
28,807
(1,773
27,123
(2,048
(53,882
26,759
27,034
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWSFor the Nine Months Ended June 30, 2011
21,279
35,824
(44,048
(321
(36,400
(28,253
(1,066
211
Intercompany distributions
10,000
(10,000
Increase in equipment lease deposits
Net cash provided by (used in) investing activities
9,679
(43,591
(26,709
565,673
75,290
(469
(30,850
(463,890
Decrease in short-term borrowings
Intercompany debt
(468,372
(14,354
(6,989
(15,673
(1
Tax benefit from vesting of restricted stock
11,415
(11,415
69,181
(19,435
74,097
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS
100,139
(27,202
3,815
26
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWSFor The Nine Months Ended June 30, 2010
Net cash provided by (used in) operating activities
(13,129
63,984
(2,661
(683
(21,760
(4,138
7,500
Decrease in equipment lease deposits
6,817
(30,300
(30,144
(50,724
(182
5,047
(5,047
Net cash provided by (used in) financing activities
66,301
(45,677
(5,229
59,989
(11,993
(17,196
223,511
37,865
59,457
283,500
25,872
42,261
NOTE 22 — SUBSEQUENT EVENT
Griffon’s Board of Directors has authorized the repurchase of up to an additional $50,000 of Griffon’s outstanding common stock. Approximately 1,366,000 shares of common stock remain available for repurchase pursuant to an existing buyback program. Under the repurchase programs, 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.
27
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
BUSINESS OVERVIEW (in thousands, expect per share data)
Clopay Building Products Company (“CBP”), a leading manufacturer and marketer of residential, commercial and industrial garage doors to professional installing dealers and major home center retail chains.
Ames True Temper, Inc. (“ATT”), acquired on September 30, 2010, is a global provider of non-powered landscaping products that make work easier for homeowners and professionals. Due to the timing of the acquisition, none of ATT’s 2010 results of operations were included in Griffon’s results for the year ended September 30, 2010.
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.
The purchase of ATT occurred on September 30, 2010. Accordingly, ATT’s results of operations are not included in Griffon’s consolidated statements of operations or cash flows or related footnotes for any period presented prior to September 30, 2010, except where explicitly stated as pro forma results. Griffon’s consolidated balance sheet at September 30, 2010 and related footnotes include ATT’s balances at that date. The accounts of the acquired company, after adjustments to reflect fair market values assigned to assets and liabilities, have been included in Griffon’s consolidated financial statements from the date of acquisition.
OVERVIEW
Revenue for the quarter ended June 30, 2011 was $455,282, compared to $327,026 in the prior year quarter. Income from continuing operations was $4,872, or $0.08 per diluted share, compared to $4,989, or $0.08 per share, in the prior year quarter. The current quarter results included the following:
$2,118 ($1,377, net of tax, or $0.02 per share) of restructuring charges; and
$3,077, or $0.05 per share, of discrete tax items and the quarter impact of changes in the expected annual effective tax rate, net.
The prior year quarter included $1,489 ($968, net of tax, or $0.02 per share) of restructuring charges.
Excluding these items from both periods, income from continuing operations would have been $3,172, or $0.05 per share, compared to $5,957, or $0.10 per share, in the prior year quarter. Income (loss) from discontinued operations for the June 2011 and 2010 third quarters was essentially nil. Net income for the third quarter of 2011 was $4,872, or $0.08 per share, compared to $4,968, or $0.08 per share, in the prior year quarter.
On a pro forma basis, as if ATT was purchased on October 1, 2009, third quarter revenue would have been $455,282, a 0.2% increase in comparison to $454,498 for the prior year quarter. Net income from continuing operations was $4,872, or $0.08 per share, compared to $10,783, or $0.18 per share, in the prior year quarter. Adjusting these results for the same items discussed above, current quarter income from continuing operations would have been $3,172, or $0.05 per share, compared to $12,504, or $0.21 per share, in the prior year quarter.
Revenue for the nine months ended June 30, 2011 was $1,345,813, compared to $946,160 in the prior year period. Loss from continuing operations was $10,809 or $0.18 per diluted share, compared to income of $11,203, or $0.19 per share, in the prior year period. The current year results included the following:
Charges of $26,164 ($16,813, net of tax, or $0.28 per share) related to debt extinguishment;
$15,152 ($9,849, net of tax, or $0.17 per share) of increased cost of goods related to the sale of inventory recorded at fair value in connection with acquisition accounting for ATT;
$4,723 ($3,070, net of tax, or $0.05 per share) of restructuring charges; and
$4,513, or $0.08 per share, of discrete tax benefits, net.
The prior year results included the following:
$3,720 ($2,418, net of tax, or $0.04 per share) related to the restructuring charges; and
$1,881, or $0.03 per share, related to discrete tax benefits, net.
Excluding these items from both reporting periods, income from continuing operations for the nine months ended June 30, 2011 would have been $14,410 or $0.24 per share, compared to $11,740, or $0.20 per share, in the prior year period.
Income from discontinued operations for the June 2011 and 2010 year-to-date periods was essentially nil.
The net loss for the current year period was $10,809 or $0.18 per share, compared to net income of $11,292, or $0.19 per share, in the prior year period.
On a pro forma basis, as if ATT was purchased on October 1, 2009, revenue for the nine months ended June 30, 2011 of $1,345,813 would have increased 3% in comparison to pro forma revenues of $1,308,164 for the comparable 2010 period. The net loss from continuing operations for the nine-month period ended June 30, 2011 was $10,809 or $0.18 per share, compared to pro forma income of $24,520, or $0.41 per share, for the prior year comparable period. Adjusting these results for the same items discussed above, current period income from continuing operations would have been $14,410 or $0.24 per share, compared to pro forma income of $26,171, or $0.44 per share, in the prior year comparable period.
On March 17, 2011, Griffon issued $550,000 aggregate principal amount of senior notes due 2018 (“Senior Notes”), at par, and will pay interest semi-annually at a rate of 7.125% per annum. The Senior Notes are senior unsecured obligations of Griffon and are guaranteed by certain of its domestic subsidiaries. Proceeds from issuance of the Senior Notes were used to repay the balances outstanding under the Clopay Ames True Temper Holding Corp. (“Clopay Ames”) secured term loan (“Term Loan”) and the Clopay Ames asset based lending agreement (“ABL”).
On March 18, 2011, Griffon entered into a $200,000 five-year revolving credit facility that refinanced and replaced the existing revolving credit facilities at each of Telephonics and Clopay Ames.
The Senior Notes, along with the revolving credit facility, completed the refinancing of substantially all of Griffon’s domestic subsidiary debt with new debt at the parent company level.
Griffon also evaluates performance based on Earnings per share and Income (loss) from continuing operations excluding restructuring charges, gain (loss) from debt extinguishment, discrete tax items and costs related to the fair value of inventory for acquisitions. Griffon believes this information is useful to
29
investors for the same reason. The following table provides a reconciliation of Earnings per share and Income (loss) from continuing operations to Adjusted earnings per share and Adjusted income (loss) from continuing operations:
GRIFFON CORPORATION AND SUBSIDIARIESRECONCILIATION OF INCOME (LOSS) TO ADJUSTED INCOME (LOSS)(Unaudited)
For the Three MonthsEnded June 30,
For the Nine Months EndedJune 30,
Adjusting items, net of tax:
16,813
9,849
Restructuring
968
3,070
2,418
Discrete and other tax items, net
(3,077
(4,513
(1,881
Adjusted income from continuing operations
3,172
5,957
14,410
11,740
Diluted earnings (loss) per common share
0.28
0.17
0.02
0.05
0.04
(0.05
(0.08
(0.03
Adjusted diluted earnings per common share
0.10
0.24
0.20
Weighted-average shares outstanding (in thousands)
Note: Due to rounding, the sum of diluted earnings (loss) per common share and adjusting items, net of tax, may not equal adjusted diluted earnings per common share.
RESULTS OF OPERATIONS
Three and nine months ended June 30, 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 (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 for the same reason. The following table provides a reconciliation of Segment profit before depreciation, amortization, restructuring and fair value write up of acquired inventory sold to Income before taxes and discontinued operations:
30
For the Three Months EndedJune 30,
Revenue:
Segment operating profit (loss)
6.3
2.3
1.9
1,515
4,120
Segment profit before depreciation, amortization and restructuring
10.5
5.7
5.8
For the quarter ended June 30, 2011, Segment revenue increased $109,918, or 105%, compared to the prior year quarter primarily due to the inclusion of ATT’s revenue. On a pro forma basis, prepared as if ATT was purchased on October 1, 2009, revenue decreased $17,554, or 8%, compared to the prior year quarter. For the quarter, ATT and CBP revenue decreased 10% and 4%, respectively, driven mainly by lower volume. The decline in ATT revenue was primarily the result of inclement weather in the quarter with a resultant impact on the sell-through of lawn and garden tools. The decline in CBP volume was mainly the result of a difficult comparative with the prior year period when sales benefited from home and energy tax credits; such tax credits are no longer in place.
For the quarter ended June 30, 2011, Segment operating profit was $13,512 compared to $2,406 in the prior year quarter. The increase was primarily driven by the inclusion of ATT’s operating profit in the current period’s results. On a pro forma basis, as if ATT was purchased on October 1, 2009, segment operating profit in the prior year quarter was $19,107 compared to $13,512 in the current year quarter. The decline in segment operating profit was mainly due to the volume declines at both ATT and CBP; increased material costs at both ATT and CBP also contributed to the decline.
For the nine months ended June 30, 2011, segment revenue increased $358,774, or 125%, compared to the prior year period primarily due to the inclusion of ATT’s revenue. On a pro forma basis, prepared as if ATT was purchased on October 1, 2009, revenue decreased $3,230, or 0.5%, compared the prior year period. For the nine month period, ATT revenue decreased 2% driven mainly by volume, primarily lawn tools, while CBP revenue increased 2%, driven mainly by volume.
For the nine months ended June 30, 2011, segment operating profit was $18,820 compared to $5,553 in the prior year. The benefit from the inclusion of ATT in current year segment results was partially offset by $15,152 of increased costs of goods related to the sale of inventory recorded at fair value in connection
31
with acquisition accounting for ATT. On a pro forma basis, as if ATT was purchased on October 1, 2009, segment operating profit in the prior year was $49,401 compared to the segment operating profit of $18,820 in the current year. In addition to the ATT inventory item, the decrease was primarily due to the impact of inclement weather on lawn tool sales, higher material costs for both ATT and CBP, and $2,919 of lower receipts under the Byrd Amendment (anti-dumping compensation from the U.S. Government).
Segment operating profit
9.4
9.7
10.0
8.6
603
Segment profit before depreciation and amortization
11.7
11.9
10.2
For the quarter ended June 30, 2011, Telephonics revenue increased $3,117, or 3%, compared to the prior year quarter. The increase was primarily attributable to an increase in Ground Surveillance Radars (“GSR”) ($6,091) and LAMPS MMR revenue ($7,611); these increases were partially offset by a decrease in CREW 3.1 revenue.
For the quarter ended June 30, 2011, Segment operating profit remained consistent, and operating profit margin declined 30 basis points from the prior year quarter primarily due to the restructuring charge and higher selling, general and administrative expenses due to the timing of proposal activities and research and development initiatives, partially offset by gross profits from increased revenue. Telephonics recognized $603 of restructuring charges in the current quarter in connection with the consolidation of the management of its Electronics Systems and Communication Systems operating units; such charges are all personnel related.
For the nine months ended June 30, 2011, Telephonics revenue decreased $4,888, or 2%, compared to the prior year primarily due to the timing of the transition on the Automatic Radar Periscope Detection and Discrimination (“ARPDD”) program from the development to the production phase , the CREW 3.1 program , and the lower rate of production on the C-17 program; the decreases were partially offset by an increase in GSR and LAMPS MMR revenue.
For the nine months ended June 30, 2011, Segment operating profit increased $4,243, or 15%, and operating profit margin improved 140 basis points from the prior year due to program mix, as well as lower selling, general and administrative expenses due to the timing of proposal activities, and research and development initiatives.
During the quarter, Telephonics was awarded several new contracts and received incremental funding on current contracts totaling $105,000. Contract backlog was $442,000 at June 30, 2011 with 76% expected to be realized in the next 12 months. Backlog was $407,000 at September 30, 2010 and $405,000 at June 30, 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.
NM
5.5
3.6
4.4
9.6
7.0
8.4
32
For the quarter ended June 30, 2011, Plastics revenue increased $15,221, or 12%, compared to the prior year quarter primarily due to the favorable impact of foreign exchange translation (8%), and the pass through of higher resin costs in customer selling prices (5%); product mix accounted for the balance of the variation.
For the quarter ended June 30, 2011, Segment operating profit decreased $6,996 compared to the prior year quarter. The decline was driven by higher than anticipated start up costs in both Germany and Brazil, related to expanding capacity and product offerings to meet increased customer demand; the start up costs include higher than normal levels of scrap production. There were no significant disruptions in customer service in connection with the scaling up of production of newly installed assets. While improvement in operations in the newly expanded locations is occurring, the Company expects that Plastics will continue to operate at below normal efficiency levels for the next three quarters.
For the nine months ended June 30, 2011, Plastics revenue increased $45,767, or 13%, compared to the prior year period primarily due to higher volumes, the benefit from the pass through of higher resin costs in customer selling prices, product mix and the favorable impact of foreign exchange translation.
For the nine months ended June 30, 2011, segment operating profit decreased $3,131 compared to the prior year for the reasons noted above with respect to the third quarter.
Unallocated
For the quarter ended June 30, 2011, unallocated amounts totaled $7,781 compared to $8,247 in the prior year. The decrease was primarily due to higher legal and consulting expenses related to acquisition due diligence in the prior year. For the nine months ended June 30, 2011, unallocated amounts totaled $19,468 compared to $22,138 in the prior year. The decrease was primarily due to the absence of legal and consulting expenses related to acquisition due diligence, which were incurred in the prior year period.
Segment Depreciation and Amortization
Segment depreciation and amortization increased $6,549 and $15,717 for the three and nine month periods ending June 30, 2011 over the prior year periods primarily due to the increased depreciation and amortization related to the ATT acquisition.
For the quarter and nine month period ended June 30, 2011, interest expense increased $8,809 and $24,652, respectively, compared to the prior year periods, primarily as a result of debt incurred for the acquisition of ATT.
During the second quarter, in connection with the termination of the Term Loan, ABL and TCA, Griffon recorded a $26,164 loss on extinguishment of debt consisting of $21,617 of deferred financing charges and original issuer discounts, a call premium of $3,703 on the Term Loan, and $844 of swap and other breakage costs.
For the nine months ended June 30, 2010, Griffon recorded a non-cash, pre-tax loss from debt extinguishment of $6, net of a proportionate write-off of deferred financing costs, which resulted from its purchase of $29,392 of its outstanding convertible notes.
Provision for income taxes
Griffon’s effective tax rate for continuing operations for the current quarter was a benefit of 81.3%, compared to a provision of 28.3% in the prior year quarter. The June 30, 2011 quarter effective rate reflected a change in earnings mix between domestic and non-domestic, and the results of ATT, acquired on
33
September 30, 2010. Certain discrete tax benefits impacted the effective rates in both reporting periods. The current quarter included benefits arising on the filing of tax returns in various jurisdictions, and tax planning related to unremitted foreign earnings; the 2010 effective rate reflected benefits arising on the filing of tax returns in various jurisdictions. Excluding these discrete items, the effective rate on continuing operations would have been 77.7% in the current quarter compared to 27.3% in the prior year quarter. The 77.7% tax rate is impacted by the combined effects of the nominal pretax income in the current quarter combined with a forecast full year pretax loss for 2011, as well as fluctuations in the full year expected effective tax rate driven by changes in earnings mix between domestic and non-domestic operations.
Stock based compensation
Discontinued operations – Installation Services
In 2008, Griffon exited substantially all of the operating activities of its Installation Services segment; this segment sold, installed and serviced garage doors, garage door openers, fireplaces, floor coverings, cabinetry and a range of related building products primarily for the new residential housing market. Operating results of substantially all of the segment has been reported as discontinued operations in the Consolidated Statements of Operations for all periods presented; the Installation Services segment is excluded from segment reporting.
Griffon substantially concluded its remaining disposal activities in the second quarter of 2009. There was no revenue in the three and nine-month periods ended June 30, 2011 and 2010.
Net income from discontinued operations of the Installation Services’ business was nil for the three and nine months ended June 30, 2011, and a loss of $21 and income of $89 for the three and nine months ended June 30, 2010, respectively.
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.
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 flows provided by continuing operations for the nine months ended June 30, 2011 were $13,055 compared to $48,194 in the prior year quarter. Current assets net of current liabilities, excluding short-term debt and cash, increased to $386,032 at June 30, 2011 compared to $326,705 at September 30, 2010, primarily as a result of decreases in accounts payable, accrued liabilities and income taxes payable. Operating cash flows were affected by an increase in inventories as well as the decrease in accounts payable and accrued liabilities.
During the nine months ended June 30, 2011, Griffon used cash for investing activities of $60,621 compared to $27,621 in the prior year period, primarily for capital expenditures. Griffon expects capital spending to be in the range of $85,000 to $90,000 for 2011.
During the nine months ended June 30, 2011, cash provided by financing activities totaled $123,843 compared to $15,395 in the prior year period. Griffon issued $145,754 of debt, net of payments, in 2011, which included issuing $550,000 of 7.125% Senior Notes due in 2018 (“Senior Notes”) and repaying the $375,000 Term Loan, $25,000 under the Clopay Ames ABL and $30,000 under the TCA. In the prior year, Griffon issued $100,000 principal of 4% convertible subordinated notes, due 2017 (the “2017 Notes”).
Payments related to Telephonics revenue are received in accordance with the terms of development and production subcontracts to which Telephonics is a party; certain of these receipts are progress 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 received in advance of production; payment terms are established in advance. With respect to Home & Building Products, 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 nine months ended June 30, 2011:
The United States Government and its agencies, through either prime or subcontractor relationships, represented 17% of Griffon’s consolidated revenue and 74% of Telephonics revenue.
Procter & Gamble represented 14% of Griffon’s consolidated revenue and 48% of Plastics revenue.
The Home Depot represented 13% of Griffon’s consolidated revenue and 26% 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.
35
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
20,426
30,650
Total debt
Net cash and equivalents (debt)
(467,709
(385,684
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 (“Senior Notes”); interest on the Senior Notes is payable semi-annually. Proceeds 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.
On June 24, 2011, Griffon filed a Registration Statement on Form S-4 with the SEC to effect an offer to exchange the original Senior Notes for new 7.125% Senior Notes due in 2018 that will be identical in all material respects to the original Senior Notes, except that the new Senior Notes will be registered under the Securities Act of 1933. On July 11, 2011, Griffon commenced the exchange offer, which will remain open until 5:00 p.m. Eastern Standard Time on August 9, 2011, unless extended.
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 1.75% for base rate loans and 2.75% 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. There was no outstanding balance as of June 30, 2011, and, as of such date the Company was in compliance with the terms and covenants of the Credit Agreement.
In connection with the Senior Notes and Credit Agreement (“New Facilities”), Griffon paid off and terminated the $375,000 term loan and $125,000 asset based lending agreement, both entered into by Clopay Ames on September 30, 2010 in connection with the ATT acquisition, and terminated the Telephonics $100,000 revolving credit agreement. Additionally, in connection with the New Facilities, Clopay Ames terminated the $200,000 interest rate swap that fixed LIBOR to 2.085% for the Clopay Ames term loan.
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. 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 September 30, 2010 and June 30, 2011, the 2017 Notes had a capital in excess of par component, net of tax, of $15,720.
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 in guaranteed by Griffon. The loan bears interest at rates based upon the prime rate or LIBOR. At June 30, 2011, $4,532 was outstanding.
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 2011, but is renewable upon mutual agreement with the bank. The term loan can be drawn until August 2011 and, if drawn, repayment will be in ten equal installments beginning 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 under the term loan at June 30, 2011. Borrowings under the revolving facility at June 30, 2011 were €7,500 and €2,500 was available for borrowing. 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.
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 June 30, 2011 are estimated to be $4,042. Certain of Griffon’s subsidiaries are also contingently liable for approximately $833 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 nine months ended June 30, 2011 and 2010, Griffon used cash for discontinued operations of $829 and $449, 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, 2010.
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, 2010. 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 Form 10-K Annual Report for the year ended September 30, 2010. 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.
PART II - OTHER INFORMATION
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, 2010, 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
ISSUER PURCHASES OF EQUITY SECURITIES
Period
(a) TotalNumber ofShares (orUnits)Purchased
(b) AveragePrice Paid PerShare (or Unit)
(c) Total Numberof Shares (orUnits) Purchasedas Part of PubliclyAnnounced Plansor Programs
Number (orApproximateDollar Value) ofShares (or Units)That May Yet BePurchased Underthe Plans orPrograms
April 1 - 30, 2011
175,000
13.30
May 1 - 31, 2011
323,700
10.38
June 1 - 30, 2011
399,129
9.97
897,829
10.77
722,829
4,369,203
3,4
1. Represents shares acquired by the Company from a holder of restricted stock upon vesting of the restricted stock, to satisfy tax withholding obligations of the holder.
2. Shares were purchased by the Griffon Corporation Employee Stock Ownership Plan (the “ESOP”) in open market transactions (including some purchases pursuant to a 10b5-1 repurchase plan), and are solely for use by the ESOP.
3. Represents the amount that remains available, as of June 30, 2011, for borrowing under the loan agreement entered into by the ESOP on August 6, 2010, which amount can be drawn until August 6, 2011. The proceeds of such loan can be used to purchase shares for the ESOP.
4. Griffon’s Board of Directors has authorized the repurchase of up to an additional $50,000,000 of Griffon’s outstanding common stock. Approximately 1,366,000 shares of common stock remain available for repurchase pursuant to an existing buyback program. Under the repurchase programs, 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.
Item 3
Defaults upon Senior Securities
Item 4
[Removed and Reserved]
Item 5
Other Information
Item 6
Exhibits
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: August 3, 2011
EXHIBIT INDEX