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GFF > SEC Filings for GFF > Form 10-Q on 31-Jan-2014All Recent SEC Filings

Show all filings for GRIFFON CORP

Form 10-Q for GRIFFON CORP


31-Jan-2014

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.

On December 31, 2013, Griffon's subsidiary, ATT acquired Northcote Pottery ("Northcote"), founded in 1897 and a leading brand in the Australian outdoor planter and decor market, for approximately $24,000. The acquisition of Northcote complements Southern Patio, acquired in 2011, and adds to ATT's existing lawn and garden operations in Australia. Northcote, which will be integrated with ATT, is expected to generate approximately $28,000 of annualized revenue. Griffon incurred $798 of acquisition costs related to this transaction in the first quarter of 2014.

On December 10, 2013, Griffon repurchased 4,444,444 shares of its common stock for $50,000 from GS Direct, L.L.C. ("GS Direct"), an affiliate of The Goldman Sachs Group, Inc. The repurchase was effected in a private transaction at a per share price of $11.25, an approximate 9.2% discount to the stock's closing price on November 12, 2013, the day before announcement of the transaction. The transaction was exclusive of the Company's current $50,000 authorized share repurchase program. After closing the transaction, GS Direct continued to hold approximately 5.56 million shares (approximately 10%) of Griffon's common stock. GS Direct also agreed that, subject to certain exceptions, if it intends to sell its remaining shares of Griffon common stock at any time prior to December 31, 2014, it will first negotiate in good faith to sell the shares to the Company.

In January 2013, ATT announced its intention to close certain 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 calendar 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 $2,500 for one-time termination benefits and other personnel-related costs and $1,500 for facility exit costs. ATT expects $20,000 in capital expenditures in connection with this initiative and, to date, has incurred $7,200 and $14,392 in restructuring costs and capital expenditures, respectively.

First quarter 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.

OVERVIEW

Revenue for the quarter ended December 31, 2013 was $453,458 compared to $423,749 in the prior year quarter. Net income was $3,236 or $0.06 per share, compared to $558 or $0.01 per share, in the prior year quarter.

The current quarter included:

- Restructuring charges of $842 ($522, net of tax or $0.01 per share);
- Acquisition costs of $798 ($495, net of tax or $0.01 per share); and
- Discrete tax benefits, net, of $289 or $0.01 per share.

The prior year quarter included:

- Restructuring charges of $1,108 ($720, net of tax or $0.01 per share);

- Loss on pension settlement of $2,142 ($1,392, net of tax of $0.02 per share); and

- Discrete tax benefits, net, of $55 or $0.00 per share.

Excluding these items from the respective quarterly results, net income would have been $3,964 or $0.07 per share in the current quarter compared to $2,615 or $0.05 per share in the prior year quarter.

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 Net income to adjusted net income and Earnings per share to Adjusted earnings per share:

                      GRIFFON CORPORATION AND SUBSIDIARIES
                          RECONCILIATION OF NET INCOME
                             TO ADJUSTED NET INCOME
                                  (Unaudited)



                                                           For the Three Months Ended
                                                                  December 31,
                                                            2013                2012

Net income                                              $       3,236       $         558

Adjusting items, net of tax:
Restructuring and related                                         522                 720
Acquisition costs                                                 495                   -
Loss on pension settlement                                          -               1,392
Discrete tax benefits                                            (289 )               (55 )

Adjusted net income                                     $       3,964       $       2,615

Diluted earnings per common share                       $        0.06       $        0.01

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

Adjusted diluted earnings per common share                       0.07       $        0.05

Weighted-average shares outstanding (in thousands)             54,633              57,265

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

Quarters ended December 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 operating profit to Income before taxes:

                                   For the Three Months Ended
                                          December 31,
                                      2013               2012
Segment operating profit:
Home & Building Products         $        9,393       $    7,271
Telephonics                              10,652           14,645
Plastics                                  5,825            2,642
Total segment operating profit           25,870           24,558
Net interest expense                    (13,101 )        (13,079 )
Unallocated amounts                      (7,983 )         (7,587 )
Loss on pension settlement                    -           (2,142 )
Income before taxes              $        4,786       $    1,750

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

                                          For the Three Months Ended
                                                 December 31,
                                             2013               2012
Segment adjusted EBITDA:
Home & Building Products                $       19,067       $   17,239
Telephonics                                     12,396           16,364
Plastics                                        12,743            9,319

Total Segment adjusted EBITDA                   44,206           42,922
Net interest expense                           (13,101 )        (13,079 )
Segment depreciation and amortization          (16,696 )        (17,256 )
Unallocated amounts                             (7,983 )         (7,587 )
Restructuring charges                             (842 )         (1,108 )
Acquisition costs                                 (798 )              -
Loss on pension settlement                           -           (2,142 )
Income before taxes                     $        4,786       $    1,750

Home & Building Products



                                      For the Three Months Ended December 31,
                                           2013                         2012
Revenue:
ATT                             $      96,608                    $  77,309
CBP                                   121,842                      112,867
Home & Building Products        $     218,450                    $ 190,176
Segment operating profit        $       9,393           4.3 %    $   7,271       3.8 %
Depreciation and amortization           8,034                        8,860
Restructuring charges                     842                        1,108
Acquisition costs                         798                            -
Segment adjusted EBITDA         $      19,067           8.7 %    $  17,239       9.1 %

For the quarter ended December 31, 2013, revenue increased $28,274 or 15%, compared to the prior year quarter. ATT revenue increased 25% compared to the prior year quarter primarily due to improved US and Canada snow tool sales, while CBP revenue increased 8%, primarily due to improved volume.

For the quarter ended December 31, 2013, Segment operating profit was $9,393 compared to $7,271 in the prior year quarter, primarily from improved volume at ATT and CBP. Partially offsetting the benefit of improved volume, ATT continued to experience manufacturing inefficiencies in connection with its plant consolidation initiative, which are expected to continue until the initiative is completed. The prior year quarter also benefitted from $1,000 in Byrd Amendment receipts (anti-dumping compensation from the government); current quarter Byrd Amendment receipts were not significant. Segment depreciation and amortization decreased $826 from the prior year period. The current and prior year restructuring charges primarily related to the previously announced manufacturing and operations consolidation initiative at ATT, and the acquisition costs related to Northcote transaction.

On December 31, 2013, ATT acquired Northcote, a leading brand in the Australian outdoor planter and decor market, for approximately $24,000. The acquisition of Northcote complements Southern Patio, acquired in 2011, and adds to ATT's existing lawn and garden operations in Australia. Northcote, which will be integrated with ATT, is expected to generate approximately $28,000 of annualized revenue.

In January 2013, ATT announced its intention to close certain 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 calendar 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 $2,500 for one-time termination benefits and other personnel-related costs and $1,500 for facility exit costs. ATT expects $20,000 in capital expenditures in connection with this initiative and, to date, has incurred $7,200 and $14,392 in restructuring costs and capital expenditures, respectively.

HBP recognized $842 and $1,108, respectively, for the quarters ended December 31, 2013 and 2012, respectively, in restructuring and other related exit costs; such charges primarily related to one-time termination benefits, facility and other personnel costs, and asset impairment charges related to the ATT plant consolidation initiatives.

Telephonics



                                      For the Three Months Ended December 31,
                                           2013                         2012
Revenue                         $    96,025                      $ 96,050
Segment operating profit        $    10,652            11.1 %    $ 14,645       15.2 %
Depreciation and amortization         1,744                         1,719
Segment adjusted EBITDA         $    12,396            12.9 %    $ 16,364       17.0 %

For the quarter ended December 31, 2013, revenue was comparable with the prior year. The current quarter benefitted from increased international radar program sales, offset by reduced MH-60 Romeo radar sales.

Segment operating profit decreased $3,993, or 27%, and operating profit margin decreased 410 basis points compared to the prior year quarter. The prior year quarter benefitted from a combination of favorable program mix and manufacturing efficiencies.

During the current quarter, Telephonics was awarded several new contracts and incremental funding on existing contracts approximating $68,300. Contract backlog was $416,000 at December 31, 2013 with 68% expected to be fulfilled in the next 12 months. Backlog was $444,000 at September 30, 2013 and $467,000 at December 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



                                      For the Three Months Ended December 31,
                                           2013                         2012
Revenue                         $     138,983                    $ 137,523
Segment operating profit        $       5,825           4.2 %    $   2,642       1.9 %
Depreciation and amortization           6,918                        6,677
Segment adjusted EBITDA         $      12,743           9.2 %    $   9,319       6.8 %

For the quarter ended December 31, 2013, revenue increased $1,460, or 1%, compared to the prior year quarter. The increase reflected the benefit of favorable mix (3%), the pass through of higher resin costs in customer selling prices (2%) and favorable foreign exchange translation (1%), partially offset by the impact of lower volume (5%), a portion of which was attributable to Plastics exiting certain low margin products in the second half of 2013. Plastics adjusts selling prices based on underlying resin costs on a delayed basis.

For the quarter ended December 31, 2013, Segment operating profit increased $3,183 compared to the prior year quarter. The increase was mainly due to continued efficiency improvements and a $600 favorable resin benefit, partially offset by the impact of the reduced volume.

Unallocated

For the quarter ended December 31, 2013, unallocated amounts totaled $7,983 compared to $7,587 in the prior year with the increase in 2013 primarily related to compensation costs.

Segment Depreciation and Amortization

Segment depreciation and amortization decreased $560 for the quarter ended December 31, 2013 compared to the prior year primarily due to assets fully amortizing, partially offset by the onset of depreciation for new assets placed in service in the quarter.

Other Expense

For the quarters ended December 31, 2013 and 2012, Other expense included $242 and $12, respectively, of net currency exchange gains 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 $112 and $32, respectively, of net investment income.

Provision for income taxes

The effective tax rate for the quarter ended December 31, 2013 was 32.4% compared to 68.1% in the prior year quarter. The rates include discrete benefits in the current and prior year quarter of $289 and $55, 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 rate for the quarter ended December 31, 2013 was 38.4% compared to 71.3% in the prior year quarter. Rates in both quarters 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 impact of the permanent differences diminished in the current quarter primarily as a result of the improved pretax result.

Stock based compensation

For the quarters ended December 31, 2013 and 2012, stock based compensation expense totaled $1,675 and $2,960, respectively.

Discontinued operations - Installation Services

There was no revenue or income from the Installation Services' business for the quarters ended December 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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