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GFF > SEC Filings for GFF > Form 10-Q on 8-May-2013All Recent SEC Filings

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Form 10-Q for GRIFFON CORP


8-May-2013

Quarterly Report


Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

BUSINESS OVERVIEW

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 currently conducts its operations through three businesses: Home & Building Products ("HBP"), Telephonics Corporation ("Telephonics") and Clopay Plastic Products Company ("Plastics").

HBP consists of two companies, Ames True Temper, Inc. ("ATT") and Clopay Building Products Company, Inc. ("CBP"):

- ATT is a global provider of non-powered landscaping products that make work easier for homeowners and professionals.

- CBP is a leading manufacturer and marketer of residential, commercial and industrial garage doors to professional installing dealers and major home center retail chains.

Telephonics designs, develops and manufactures high-technology integrated information, communication and sensor system solutions for military and commercial markets worldwide.

Plastics is an international leader in the development and production of embossed, laminated and printed specialty plastic films used in a variety of hygienic, health-care and industrial applications.

In January 2013, ATT announced its intention to close certain of its manufacturing facilities and consolidate affected operations primarily into its Camp Hill and Carlisle, PA locations. The intended actions, to be completed by the end of fiscal 2014, will improve manufacturing and distribution efficiencies, allow for in-sourcing of certain production currently performed by third party suppliers, and improve material flow and absorption of fixed costs. Management estimates that, upon completion, these actions will result in annual cash savings exceeding $10,000, based on current operating levels.

ATT anticipates incurring pre-tax restructuring and related exit costs approximating $8,000, comprised of cash charges of $4,000 and non-cash, asset-related charges of $4,000; the cash charges will include $3,000 for one-time termination benefits and other personnel-related costs and $1,000 for facility exit costs. ATT expects $20,000 in capital expenditures in connection with this initiative and, to date, has incurred $4,699 and $6,269 in restructuring costs and capital expenditures, respectively.

In the first quarter of 2013, Selling, general and administrative expenses included a $2,142, non-cash, pension settlement loss resulting from the lump-sum buyout of certain participant's balances in the Company's defined benefit plan. The buyouts, funded by the pension plan, reduced the Company's net pension liability by $3,472.

On October 17, 2011, Griffon acquired the pots and planters business of Southern Sales & Marketing Group, Inc. for $22,432. The acquired business, which markets its products under the Southern PatioTM brand ("Southern Patio"), is a leading designer, manufacturer and marketer of landscape accessories. Southern Patio's results of operations are not included in the Griffon consolidated statement of operations or cash flows, or footnotes relating thereto prior to October 17, 2011.

OVERVIEW

Revenue for the quarter ended March 31, 2013 was $488,743 compared to $482,431 in the prior year quarter. Net income (loss) was ($819) or ($0.02) per share, compared to $2,027 or $0.04 per share, in the prior year quarter.

The current quarter included:

- Restructuring charges of $9,336 ($5,788, net of tax or $0.10 per share); and
- Discrete tax benefits, net, of $309 or $0.01 per share.

Excluding these items from the current quarter results, net income would have been $4,660 or $0.08 per share in the current quarter compared to $2,027 or $0.04 per share in the prior year quarter.

Revenue for the six months ended March 31, 2013 was $912,492 compared to $933,462 in the prior year period. Net income (loss) was ($261) or ($0.00) per share, compared to $4,513 or $0.08 per share, in the prior year.

Results for the six months ended March 31, 2013 included:

- Restructuring charges of $10,444 ($6,508, net of tax or $0.11 per share);
- Loss on pension settlement of $2,142 ($1,392, net of tax or $0.02 per share); and
- Discrete tax benefits, net, of $364 or $0.01 per share.

Results for the six months ended March 31, 2012 included:

- Restructuring charges of $1,795 ($1,167, net of tax or $0.02 per share); and
- Acquisition costs of $178 ($116, net of tax, or $0.00 per share).

Excluding these items from the respective periods, net income would have been $7,275 or $0.13 per share in the six months ended March 31, 2013 compared to $5,796 or $0.10 per share in the prior year period.

Griffon evaluates performance based on Earnings (loss) per share and Net income
(loss) excluding restructuring charges, acquisition-related expenses, gains (losses) from pension settlement and debt extinguishment, and discrete tax items, as applicable. Griffon believes this information is useful to investors for the same reason. The following table provides a reconciliation of Earnings per share and Net income to Adjusted earnings per share and Adjusted net income:

                      GRIFFON CORPORATION AND SUBSIDIARIES

               RECONCILIATION OF INCOME (LOSS) TO ADJUSTED INCOME

                                  (Unaudited)



                                       For the Three Months Ended             For the Six Months Ended
                                                March 31,                             March 31,
                                        2013                2012               2013               2012

Net income (loss)                   $        (819 )     $       2,027      $       (261 )     $      4,513

Adjusting items, net of tax:
Restructuring and related                   5,788                   -             6,508              1,167
Acquisition costs                               -                   -                 -                116
Loss on pension settlement                      -                   -             1,392                  -
Discrete tax benefits                        (309 )                 -              (364 )                -

Adjusted net income                 $       4,660       $       2,027      $      7,275       $      5,796

Earnings (loss) per common share    $       (0.02 )     $        0.04      $      (0.00 )     $       0.08

Adjusting items, net of tax:
Restructuring                                0.10                   -              0.11               0.02
Acquisition costs                               -                   -                 -               0.00
Loss on pension settlement                      -                   -              0.02                  -
Discrete tax benefits                       (0.01 )                 -             (0.01 )                -

Adjusted earnings per share         $        0.08       $        0.04              0.13       $       0.10

Weighted-average shares
outstanding on loss (in
thousands)                                 54,345                                54,749
Weighted-average shares
outstanding on income (in
thousands)                                 56,766              57,380            57,008             57,228

Note: Due to rounding, the sum of earnings (loss) per common share and adjusting items, net of tax, may not equal adjusted earnings per common share.

RESULTS OF OPERATIONS

Three and six months ended March 31, 2013 and 2012

Griffon evaluates performance and allocates resources based on each segments' operating results before interest income and expense, income taxes, depreciation and amortization, unallocated amounts (mainly corporate overhead), restructuring charges, acquisition-related expenses, and gains (losses) from pension settlement and debt extinguishment, as applicable ("Segment adjusted EBITDA"). Griffon believes this information is useful to investors for the same reason.

The following table provides a reconciliation of Segment adjusted EBITDA to Income (loss) before taxes:

                                            For the Three Months Ended            For the Six Months Ended
                                                    March 31,                            March 31,
                                              2013               2012              2013               2012
Segment adjusted EBITDA:
Home & Building Products                 $       17,555       $    15,853      $      34,794       $   33,603
Telephonics                                      15,505            15,336             31,869           31,024
Plastics                                         12,352             9,164             21,671           17,344
Total Segment adjusted EBITDA                    45,412            40,353             88,334           81,971
Net interest expense                            (12,909 )         (12,919 )          (25,988 )        (25,919 )
Segment depreciation and amortization           (17,572 )         (16,222 )          (34,828 )        (31,640 )
Unallocated amounts                              (7,980 )          (6,453 )          (15,567 )        (12,787 )
Restructuring charges                            (9,336 )               -            (10,444 )         (1,795 )
Acquisition costs                                     -                 -                  -             (178 )
Loss on pension settlement                            -                 -             (2,142 )              -
Income (loss) before taxes               $       (2,385 )     $     4,759      $        (635 )     $    9,652




Home & Building Products

                                             Three Months Ended March 31,                     Six Months Ended March 31,
                                             2013                    2012                    2013                    2012
Revenue:
ATT                                   $ 136,237               $ 133,321               $ 213,546               $ 232,061
CBP                                      89,499                  91,269                 202,366                 202,915
Home & Building Products              $ 225,736               $ 224,590               $ 415,912               $ 434,976

Segment operating profit              $   3,835       1.7 %   $   8,096       3.6 %   $  11,106       2.7 %   $  17,930       4.1 %
Depreciation and amortization             9,157                   7,757                  18,017                  15,222
Restructuring charges                     4,563                       -                   5,671                     273
Acquisition costs                             -                       -                       -                     178
Segment adjusted EBITDA               $  17,555       7.8 %   $  15,853       7.1 %   $  34,794       8.4 %   $  33,603       7.7 %

For the quarter ended March 31, 2013, revenue increased $1,146 or 1%, compared to the prior year quarter. ATT revenue increased 2% in comparison to the prior year quarter. For the quarter, CBP revenue decreased 2%, primarily due to lower volume, partially offset by favorable mix.

For the quarter ended March 31, 2013, Segment operating profit was $3,835 compared to $8,096 in the prior year quarter, primarily due to $4,563 of restructuring charges incurred. Excluding restructuring charges, current year Segment operating profit was $8,398 with improvement from the prior year quarter primarily due to favorable mix and improved manufacturing efficiencies at CBP, as well as reduced warehouse and distribution costs, and other cost control initiatives at ATT. Segment depreciation and amortization increased $1,400 from the prior year quarter.

For the six months ended March 31, 2013, revenue decreased $19,064, or 4%, compared to the prior year period. ATT revenue decreased 8%, mainly driven by reduced snow tool sales. For ATT, both 2012 and 2013 year to date sales were impacted by lack of snow and resultant reduced sales of snow tools; retailers held high levels of snow tool inventory carried over from the prior year, further affecting 2013 snow tool sales. For the six months ended March 31, 2013, CBP revenue was in-line with the prior year as lower volume was offset by favorable mix.

For the six months ended March 31, 2013, Segment operating profit was $11,106 compared to $17,930 in the prior year period, primarily due to $5,671 of restructuring charges incurred in the current year, and the impact of lower snow tool revenue, which also affected ATT absorption of manufacturing expenses. The impact of snow was partially offset by reduced ATT warehouse and distribution costs, other cost control initiatives and an increase of $873 in Byrd Amendment receipts (anti-dumping compensation from the U.S. government); CBP favorable mix and manufacturing efficiencies further contributed to the reported profit. Segment depreciation and amortization increased $2,795 from the prior year period.

In January 2013, ATT announced its intention to close certain of its manufacturing facilities and consolidate affected operations primarily into its Camp Hill and Carlisle, PA locations. The intended actions, to be completed by the end of fiscal 2014, will improve manufacturing and distribution efficiencies, allow for in-sourcing of certain production currently performed by third party suppliers, and improve material flow and absorption of fixed costs.

ATT anticipates incurring pre-tax restructuring and related exit costs approximating $8,000, comprised of cash charges of $4,000 and non-cash, asset-related charges of $4,000; the cash charges will include $3,000 for one-time termination benefits and other personnel-related costs and $1,000 for facility exit costs. ATT expects $20,000 in capital expenditures in connection with this initiative and, to date, has incurred $4,699 and $6,269 in restructuring costs and capital expenditures, respectively.

During the current quarter, BPC completed the consolidation of its Auburn, Washington facility into its Russia, Ohio facility.

HBP recognized $4,563 and $5,671, respectively, for the three and six months ended March 31, 2013, and nil and $273, respectively, for the three and six months ended March 31, 2012, in restructuring and other related exit costs. In 2013, restructuring and other related charges primarily related to one-time termination benefits, facility costs and other personnel costs, and asset impairment charges related to the ATT and BPC plant consolidation initiatives. In 2012, restructuring and other related charges primarily related to one-time termination benefits and other personnel costs at ATT.

Telephonics

                                        Three Months Ended March 31,                       Six Months Ended March 31,
                                        2013                     2012                     2013                     2012
Revenue                         $ 121,631                $ 113,992                $ 217,681                $ 218,506
Segment operating profit        $  13,753       11.3 %   $  13,543       11.9 %   $  28,398       13.0 %   $  26,056       11.9 %
Depreciation and amortization       1,752                    1,793                    3,471                    3,446
Restructuring charges                   -                        -                        -                    1,522
Segment adjusted EBITDA         $  15,505       12.7 %   $  15,336       13.5 %   $  31,869       14.6 %   $  31,024       14.2 %

For the quarter ended March 31, 2013, revenue increased $7,639 compared to the prior year quarter. The current and prior year quarters included $13,225 and $13,578 respectively, of revenue related to electronic warfare programs where Telephonics serves as a contract manufacturer; excluding revenue from these programs, current quarter revenue increased 8% from the prior year quarter, primarily due to work performed on Multi-mode Surveillance Radar Solutions contracts.

For the quarter ended March 31, 2013, Segment operating profit increased $210, or 2%, and operating profit margin decreased 60 basis points compared to the prior year quarter, primarily due to program mix. The increase in Segment operating profit was primarily due to lower expenditures associated with the timing of research and development ("R&D") initiatives and proposal efforts, partially offset by the impact of program mix.

For the six months ended March 31, 2013, revenue decreased $825 compared to the prior year period. The current and prior year periods included $13,225 and $19,522, respectively, of revenue related to electronic warfare programs where Telephonics serves as a contract manufacturer; excluding revenue from these programs, current period revenue increased 3% from the prior year period, primarily due to an increase in revenue recognized on the sale of SDI products and higher Romeo Radar revenue.

For the six months ended March 31, 2013, Segment operating profit increased $2,342, or 9%. Excluding the prior year restructuring charges, segment operating profit increased 3% and operating margin increased 40 basis points compared to the prior year period. The increase was primarily due to increased core sales volume, and lower expenditures associated with the timing of R&D initiatives and proposal efforts.

In 2012 and 2011, Telephonics recognized $3,815 and $3,046 of restructuring charges in connection with two discrete voluntary early retirement plans and other costs related to changes in organizational structure and facilities; such charges were primarily personnel-related, reducing headcount by 185 employees over the two-year period. In the six months ended March 31, 2012, Telephonics recognized $1,522 of restructuring and other related charge primarily for one-time termination benefits and other personnel costs, in conjunction with changes to its organizational structure.

During the current quarter, Telephonics was awarded several new contracts and incremental funding on existing contracts approximating $131,700. Contract backlog was $477,000 at March 31, 2013 with 71% expected to be realized in the next 12 months. Backlog was $451,000 at September 30, 2012 and $434,000 at March 31, 2012. 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.

Plastics

                                       Three Months Ended March 31,                     Six Months Ended March 31,
                                       2013                    2012                    2013                    2012
Revenue                         $ 141,376               $ 143,849               $ 278,899               $ 279,980
Segment operating profit        $     916       0.6 %   $   2,492       1.7 %   $   3,558       1.3 %   $   4,372       1.6 %
Depreciation and amortization       6,663                   6,672                  13,340                  12,972
Restructuring charges               4,773                       -                   4,773                       -
Segment adjusted EBITDA         $  12,352       8.7 %   $   9,164       6.4 %   $  21,671       7.8 %   $  17,344       6.2 %

For the quarter ended March 31, 2013, revenue decreased $2,473, or 2%, compared to the prior year quarter. The decrease reflected lower volume (5%), a portion of which was attributable to Plastics exiting certain low margin products, and the unfavorable impact of foreign exchange translation (2%), partially offset by favorable mix (3%) and the pass through of higher resin costs in customer selling prices (2%). Plastics adjusts selling prices based on underlying resin costs on a delayed basis.

For the quarter ended March 31, 2013, Segment operating profit decreased $1,576 compared to the prior year quarter. The decrease was mainly driven by restructuring charges of $4,773. Excluding the restructuring charges, Segment operating profit increased $3,197 due to product mix and continued efficiency improvements, partially offset by $500 unfavorable impact of higher resin costs, which had not yet been reflected in increased selling prices.

For the six months ended March 31, 2013, revenue decreased $1,081, or less than 1%, compared to the prior year period primarily due to lower volume (4%) and the unfavorable impact of foreign exchange translation (3%), partially offset by favorable mix (5%) and the pass through of higher resin costs in customer selling prices (1%).

For the six months ended March 31, 2013, Segment operating profit decreased $814 compared to the prior year period. The decrease was mainly driven by restructuring charges of $4,773. Excluding the restructuring charges, current year Segment operating profit increased $3,959 due to product mix and continued efficiency improvements, partially offset by approximately $5,200 unfavorable impact of higher resin costs, which had not yet been reflected in increased selling prices.

In February 2013, Plastics announced a restructuring project, primarily in Europe, with plans to exit low margin business and eliminate approximately 80 positions, resulting in the incurrence of restructuring charges of $4,773, primarily related to one-time termination benefits and other personnel costs.

Unallocated

For the quarter ended March 31, 2013, unallocated amounts totaled $7,980 compared to $6,453 in the prior year; for the six months ended March 31, 2013, unallocated amounts totaled $15,567 compared to $12,787 in the prior year. The increases in the current quarter and six month period compared to the respective prior year periods is primarily related to increased incentive and stock based compensation costs.

Segment Depreciation and Amortization

Segment depreciation and amortization increased $1,350 and $3,188, respectively, for the three and six-month periods ended March 31, 2013 in comparison to the comparable prior year periods primarily due to capital spending.

Other income (expense)

For the quarters ended March 31, 2013 and 2012, Other income (expense) included $479 and $172 respectively, of currency exchange losses in connection with the translation of receivables and payables denominated in currencies other than the functional currencies of Griffon and its subsidiaries as well as $321 and $107, respectively, of investment income.

For the six months ended March 31, 2013 and 2012, Other income (expense) included $467 and $668 respectively, of currency exchange losses in connection with the translation of receivables and payables denominated in currencies other than the functional currencies of Griffon and its subsidiaries as well as $353 and $172, respectively, of investment income.

Provision (benefit) for income taxes

The effective tax rates for the quarter and six month period ended March 31, 2013 were benefits, on the pre-tax loss, of 65.7% and 59.0%, respectively, compared to provisions of 57.4% and 53.2% in the comparable prior year periods, respectively. The current year and prior year rates reflect the impact of permanent differences not deductible in determining taxable income, mainly limited deductibility of restricted stock, tax reserves and of changes in earnings mix between domestic and non-domestic operations, all of which are material relative to the level of pretax result. The current quarter and six-month period include $309 and $364, respectively, from discrete items primarily from the retroactively extended R&D credit signed into law January 2, 2013. There were no material discrete items in the prior year periods.

Stock based compensation

For the three and six months ended March 31, 2013, stock based compensation expense totaled $3,338 and $6,298, respectively. For the three and six months ended March 31, 2012, stock based compensation expense totaled $2,651 and $4,908, respectively.

Discontinued operations - Installation Services

There was no revenue or income from discontinued operations of the Installation Services' business for the three and six months ended March 31, 2013 and 2012.

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 include: cash flows from operating activities, capital expenditures, acquisitions, dispositions, bank lines of credit and the ability to attract long-term capital under 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 Condensed Consolidated Statements of Cash Flows:

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