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GFF > SEC Filings for GFF > Form 10-Q on 7-Aug-2013All Recent SEC Filings

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Form 10-Q for GRIFFON CORP


7-Aug-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 $5,388 and $8,385 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 June 30, 2013 was $509,826 compared to $480,246 in the prior year quarter. Net income was $3,603 or $0.06 per share, compared to $9,048 or $0.16 per share, in the prior year quarter.

The current quarter included:

- Restructuring charges of $1,604 ($994, net of tax or $0.02 per share); and
- Discrete tax benefits, net, of $1,495 or $0.03 per share.

The prior year quarter included a discrete tax benefit of $1,626, or $0.03 per share.

Excluding these items from the respective quarter results, net income would have been $3,102 or $0.06 per share in the current quarter compared to $7,422 or $0.13 per share in the prior year quarter.

Revenue for the nine months ended June 30, 2013 was $1,422,318 compared to $1,413,709 in the prior year period. Net income was $3,342 or $0.06 per share, compared to $13,563 or $0.24 per share, in the prior year.

Results for the nine months ended June 30, 2013 included:

- Restructuring charges of $12,048 ($7,502, net of tax or $0.13 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 $1,859 or $0.03 per share.

Results for the nine months ended June 30, 2012 included:

- Restructuring charges of $1,795 ($1,167, net of tax or $0.02 per share);
- Acquisition costs of $178 ($116, net of tax, or $0.00 per share); and
- Discrete tax benefits of $1,626 or $0.03 per share.

Excluding these items from the respective periods, net income would have been $10,377 or $0.18 per share in the nine months ended June 30, 2013 compared to $13,220 or $0.23 per share in the prior year period.


Griffon evaluates performance based on Earnings per share and Net income 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 Nine Months Ended
                                                     June 30,                            June 30,

                                              2013               2012             2013              2012


Net income                              $        3,603    $         9,048    $       3,342    $       13,563

Adjusting items, net of tax:
Restructuring and related                          994                  -            7,502             1,167
Acquisition costs                                    -                  -                -               116
Loss on pension settlement                           -                  -            1,392                 -
Discrete tax benefits                           (1,495 )           (1,626 )         (1,859 )          (1,626 )


Adjusted net income                     $        3,102    $         7,422    $      10,377    $       13,220


Earnings per common share               $         0.06    $          0.16    $        0.06    $         0.24

Adjusting items, net of tax:
Restructuring                                     0.02                  -             0.13              0.02
Acquisition costs                                    -                  -                -              0.00
Loss on pension settlement                           -                  -             0.02                 -
Discrete tax benefits                            (0.03 )            (0.03 )          (0.03 )           (0.03 )

Adjusted earnings per share             $         0.06    $          0.13             0.18    $         0.23


Weighted-average shares outstanding
(in thousands)                                  56,204             57,495           56,735            57,311

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

RESULTS OF OPERATIONS

Three and nine months ended June 30, 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 before taxes:

                                           For the Three Months Ended         For the Nine Months Ended
                                                    June 30,                           June 30,

                                             2013              2012             2013              2012

Segment adjusted EBITDA:
Home & Building Products                $       21,478    $       25,831   $       56,272    $       59,434
Telephonics                                     13,146            15,886           45,015            46,912
Plastics                                        12,161            10,117           33,832            27,462

Total Segment adjusted EBITDA                   46,785            51,834          135,119           133,808
Net interest expense                           (13,137 )         (12,855 )        (39,125 )         (38,775 )
Segment depreciation and amortization          (17,639 )         (16,733 )        (52,467 )         (48,373 )
Unallocated amounts                             (6,573 )          (7,253 )        (22,140 )         (20,041 )
Restructuring charges                           (1,604 )               -          (12,048 )          (1,795 )
Acquisition costs                                    -                 -                -              (178 )
Loss on pension settlement                           -                 -           (2,142 )               -

Income before taxes                     $        7,832    $       14,993   $        7,197    $       24,646

Home & Building Products


                                     Three Months Ended June 30,              Nine Months Ended June 30,

                                      2013                2012                 2013                2012

Revenue:
ATT                             $ 128,332           $ 130,311            $ 341,878           $ 362,374
CBP                               112,285             106,910              314,651             309,825

Home & Building Products        $ 240,617           $ 237,221            $ 656,529           $ 672,199

Segment operating profit        $  11,549   4.8%    $  17,482    7.4%    $  22,655   3.5%    $  35,412   5.3%
Depreciation and amortization       9,075               8,349               27,092              23,571
Restructuring charges                 854                   -                6,525                 273
Acquisition costs                       -                   -                    -                 178

Segment adjusted EBITDA         $  21,478   8.9%    $  25,831   10.9%    $  56,272   8.6%    $  59,434   8.8%

For the quarter ended June 30, 2013, revenue increased $3,396 or 1%, compared to the prior year quarter. ATT revenue decreased 2% in comparison to the prior year quarter primarily due to lower demand, driven by cold and wet weather conditions in North America. For the quarter, CBP revenue increased 5%, primarily due to higher volume and favorable mix.

For the quarter ended June 30, 2013, Segment operating profit was $11,549 compared to $17,482 in the prior year quarter. The decline resulted primarily from the lower ATT revenue, which also affected absorption of manufacturing expenses, partially offset by the benefit of higher volume and favorable mix at CBP. ATT also had manufacturing inefficiencies in connection with its plant consolidation initiative. These inefficiencies are expected to continue until the initiative is completed in 2014. Segment depreciation and amortization increased $726 from the prior year period and the current year quarter included $854 of restructuring charges primarily related to the previously announced manufacturing and operations consolidation initiative at ATT.

For the nine months ended June 30, 2013, revenue decreased $15,670, or 2%, compared to the prior year period. ATT revenue decreased 6%, mainly driven by cold and wet spring weather conditions in North America and 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 nine months ended June 30, 2013, CBP revenue increased 2% from the prior year period, primarily due to somewhat higher volume and favorable mix.


For the nine months ended June 30, 2013, Segment operating profit was $22,655 compared to $35,412 in the prior year period. The current year period included $6,525 of restructuring charges primarily related to the previously announced manufacturing and operations consolidation initiative at ATT. Excluding restructuring charges, current year Segment operating profit was $29,180. The decrease from the prior year resulted from the impact of lower ATT revenue, which also affected absorption of manufacturing expenses and manufacturing inefficiencies arising in connection with the plant consolidation initiative, partially offset by reduced ATT warehouse and distribution costs, other cost control initiatives and $873 in Byrd Amendment receipts (anti-dumping compensation from the U.S. government). CBP higher volume, favorable mix and improved distribution and manufacturing efficiencies contributed to the reported profit. Segment depreciation and amortization increased $3,521 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 $5,388 and $8,385 in restructuring costs and capital expenditures, respectively.

During the second quarter of 2013, BPC completed the consolidation of its Auburn, Washington facility into its Russia, Ohio facility.

HBP recognized $854 and $6,525, respectively, for the three and nine months ended June 30, 2013, and nil and $273, respectively, for the three and nine months ended June 30, 2012, in restructuring and other related exit costs. In 2013, restructuring and other related charges primarily related to one-time termination benefits, facility 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 June 30,              Nine Months Ended June 30,

                                      2013                2012                2013                 2012

Revenue                         $ 129,997           $ 101,116           $ 347,678           $  319,621

Segment operating profit        $  10,592    8.1%   $  14,113   14.0%   $  38,990   11.2%   $   40,171   12.6%
Depreciation and amortization       1,804               1,773               5,275                5,219
Restructuring charges                 750                   -                 750                1,522

Segment adjusted EBITDA         $  13,146   10.1%   $  15,886   15.7%   $  45,015   12.9%   $   46,912   14.7%

For the quarter ended June 30, 2013, revenue increased $28,881 or 29% compared to the prior year quarter. The current and prior year quarters included $20,033 and $2,733 respectively, of revenue related to electronic warfare programs where Telephonics serves as a contract manufacturer; excluding revenue from these programs, current quarter revenue increased 12% from the prior year quarter, primarily due to the timing of work performed on Multi-mode Surveillance Radar ("MMSR") contracts.

For the quarter ended June 30, 2013, Segment operating profit decreased $3,521, or 25%, and operating profit margin decreased 590 basis points compared to the prior year quarter. The decrease in Segment operating profit was primarily due to lower gross profit associated with product mix and a restructuring charge, which were partially offset by lower than anticipated expenditures associated with the timing of research and development ("R&D") initiatives and proposal efforts. The prior year quarter benefitted from higher gross profit and favorable manufacturing efficiencies, both of which were primarily due to an increased level of Light Airborne Multi-purpose Systems Multi Mode Radar ("LAMPS MMR") deliveries.


For the nine months ended June 30, 2013, revenue increased $28,057 or 9% compared to the prior year period. The current and prior year periods included $33,257 and $22,255, respectively, of revenue related to electronic warfare programs where Telephonics serves as a contract manufacturer; excluding revenue from these programs, current period revenue increased 6% from the prior year period, primarily due to the timing of work performed on MMSR contracts.

For the nine months ended June 30, 2013, Segment operating profit decreased $1,181, or 3%. Excluding the current and prior year restructuring charges, segment operating profit decreased 5% and operating margin decreased 160 basis points compared to the prior year period. The decrease was primarily due to lower gross profit associated with product mix, which was partially offset by lower than anticipated expenditures associated with the timing of R&D initiatives and proposal efforts. The prior year period also benefitted from the LAMPS MMR profitability discussed above.

During the third quarter of 2013, Telephonics recognized $750 in restructuring costs in connection with the termination of a facility lease. The facility was vacated as a result of the headcount reductions and changes in organizational structure Telephonics undertook in the past two years. 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 nine months ended June 30, 2012, Telephonics recognized $1,522 of restructuring and other related charges primarily for one-time termination benefits and other personnel costs, in conjunction with changes to its organizational structure.

During the current quarter, Telephonics was awarded several new contracts and incremental funding on existing contracts approximating $93,400. Contract backlog was $440,000 at June 30, 2013 with 67% expected to be realized in the next 12 months. Backlog was $451,000 at September 30, 2012 and $422,000 at June 30, 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 June 30,           Nine Months Ended June 30,

                                      2013               2012               2013               2012

Revenue                         $ 139,212          $ 141,909          $ 418,111          $ 421,889

Segment operating profit        $   5,401   3.9%   $   3,506   2.5%   $   8,959   2.1%   $   7,879   1.9%
Depreciation and amortization       6,760              6,611             20,100             19,583
Restructuring charges                   -                  -              4,773                  -

Segment adjusted EBITDA         $  12,161   8.7%   $  10,117   7.1%   $  33,832   8.1%   $  27,462   6.5%

For the quarter ended June 30, 2013, revenue decreased $2,697, 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, partially offset by favorable mix (2%) and the pass through of higher resin costs in customer selling prices (1%). Plastics adjusts selling prices based on underlying resin costs on a delayed basis.

For the quarter ended June 30, 2013, Segment operating profit increased $1,895 compared to the prior year quarter. The increase was mainly due to product mix, continued efficiency improvements and a $500 favorable resin benefit.

For the nine months ended June 30, 2013, revenue decreased $3,778, or 1%, compared to the prior year period. Excluding the unfavorable impact of foreign exchange translation, revenue increased 1% mainly due to favorable mix (1%) and the pass through of higher resin costs in customer selling prices (1%), partially offset by lower volume (1%), a portion of which was attributable to Plastics exiting certain low margin products.

For the nine months ended June 30, 2013, Segment operating profit increased $1,080 compared to the prior year period. Excluding the restructuring charges, current year Segment operating profit increased $5,853 due to product mix and continued efficiency improvements, partially offset by approximately $4,700 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, to exit low margin products 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. This project is substantially complete.

Unallocated

For the quarter ended June 30, 2013, unallocated amounts totaled $6,573 compared to $7,253 in the prior year; for the nine months ended June 30, 2013, unallocated amounts totaled $22,140 compared to $20,041 in the prior year period. The fluctuations in the current quarter and nine month period compared to the respective prior year periods is primarily related to incentive and stock based compensation costs.

Segment Depreciation and Amortization

Segment depreciation and amortization increased $906 and $4,094, respectively, for the three and nine month periods ended June 30, 2013 in comparison to the comparable prior year periods primarily due to capital spending.

Other income (expense)

For the quarters ended June 30, 2013 and 2012, Other income (expense) included $168 and ($707) respectively, of currency exchange gains (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 $12 and ($39), respectively, of investment income (loss).

For the nine months ended June 30, 2013 and 2012, Other income (expense) included ($299) and ($1,375) respectively, of currency exchange gains (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 $365 and $133, respectively, of investment income (loss).

Provision for income taxes

The effective tax rates for the quarter and nine-month period ended June 30, 2013 were 54.0% and 53.6%, respectively, compared to 39.7% and 45.0% in the comparable prior year periods, respectively. The rates include discrete benefits in the current and prior year quarter of $1,495 and $1,626, respectively, and in the current and prior year nine-month periods of $1,859 and $1,626, respectively, primarily resulting from the release of previously established reserves for uncertain tax positions on conclusion of certain tax audits, and benefits arising on the filing of tax returns in various jurisdictions.

Excluding discrete items, the effective tax rates for the quarter and nine-month period ended June 30, 2013 were 73.1% and 79.4%, respectively, compared to 50.5% and 51.6% in the comparable prior year periods, respectively. Rates in all periods 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.

Stock based compensation

For the three and nine months ended June 30, 2013, stock based compensation expense totaled $3,029 and $9,327, respectively. For the three and nine months ended June 30, 2012, stock based compensation expense totaled $2,691 and $7,599, respectively.

Discontinued operations - Installation Services

There was no revenue or income from discontinued operations of the Installation Services' business for the three and nine months ended June 30, 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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