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GFF > SEC Filings for GFF > Form 10-Q on 2-May-2014All Recent SEC Filings

Show all filings for GRIFFON CORP

Form 10-Q for GRIFFON CORP


2-May-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, The Ames Companies, Inc. ("Ames") and Clopay Building Products Company, Inc. ("CBP"):

- Ames 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 May 1, 2014, Griffon's Board of Directors authorized the repurchase of up to an additional $50,000 of Griffon's outstanding common stock. Under this repurchase program, the Company may purchase shares, depending upon market conditions, in open market or privately negotiated transactions, including pursuant to a 10b5-1 plan.

On February 27, 2014, in an unregistered offering through a private placement under Rule 144A, Griffon issued, at par, $600,000 of 5.25% Senior Notes due 2022 ("Senior Notes"); interest is payable semi-annually on March 1 and September 1, starting September 1, 2014. Proceeds from the Senior Notes were used to redeem $550,000 of 7.125% senior notes due 2018, to pay a tender offer premium of $31,530 and to make interest payments of $16,716, with the balance used to pay a portion of the related fees and expenses. The Senior Notes are senior unsecured obligations of Griffon guaranteed by certain domestic subsidiaries, and subject to certain covenants, limitations and restrictions.

In connection with these transactions, Griffon capitalized $9,950 of underwriting fees and other expenses incurred related to issuance of the Senior Notes, which will amortize over the term of such notes. Griffon recognized a loss on the early extinguishment of debt on the 7.125% senior notes aggregating $38,890, comprised of the $31,530 tender offer premium, the write-off of $6,574 of remaining deferred financing fees and $786 of prepaid interest on defeased notes.

On February 14, 2014, Griffon amended its $225,000 Revolving Credit Facility ("Credit Agreement"), extending its maturity date from March 28, 2018 to March 28, 2019, amending certain financial maintenance ratio test thresholds and increasing certain baskets for permitted debt, guaranties, liens, asset sales, foreign acquisitions, investments and restricted payments.

On December 31, 2013, Ames acquired Northcote Pottery ("Northcote"), founded in 1897 and a leading brand in the Australian outdoor planter and decor market, for approximately $22,000. Northcote complements Southern Patio, acquired in 2011, and adds to Ames' existing lawn and garden operations in Australia. Northcote, which will be integrated with Ames, 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 August 2011 $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 such shares to the Company.

In January 2013, Ames 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; these savings are consistent with those anticipated at the onset of the initiative.

Ames 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. Ames expects $20,000 in capital expenditures in connection with this initiative and, to date, has incurred $7,583 and $15,269 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 March 31, 2014 was $507,687 compared to $488,743 in the prior year quarter. Net loss was $25,825 or $0.53 per share, compared to a net loss of $819 or $0.02 per share, in the prior year quarter.

The current quarter included:

- Restructuring charges of $692 ($429, net of tax or $0.01 per share);
- Loss from debt extinguishment of $38,890 ($24,964, net of tax or $0.51 per share);
- Discrete tax provisions, net, of $609 or $0.01 per share; and
- Impact of debt extinguishment on full year effective tax rate of $5,848 or $0.12 per share.

The prior year quarter included:

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

Excluding these items from the respective quarterly results, net income would have been $6,025 or $0.12 per share in the current quarter compared to $4,660 or $0.08 per share in the prior year quarter.

Revenue for the six months ended March 31, 2014 was $961,145 compared to $912,492 in the prior year period. Net loss was $22,589 or $0.44 per share, compared to a net loss of $261 or $0.00 per share, in the prior year period.

Results for the six months ended March 31, 2014 included:

- Restructuring charges of $1,534 ($951, net of tax or $0.02 per share);
- Loss from debt extinguishment of $38,890 ($24,964, net of tax or $0.49 per share);
- Acquisition costs of $798 ($495, net of tax or $0.01 per share);
- Discrete tax provisions, net, of $320 or $0.01 per share; and
- Impact of debt extinguishment on full year effective tax rate of $5,848 or $0.12 per share.

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.

Excluding these items from the respective periods, net income would have been $9,989 or $0.20 per share in the six months ended March 31, 2014 compared to $7,275 or $0.13 per share in the six months ended March 31, 2013.

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. The following table provides a reconciliation of Net loss to adjusted net income and Earnings (loss) per share to Adjusted earnings per share:

                      GRIFFON CORPORATION AND SUBSIDIARIES

                           RECONCILIATION OF NET LOSS

                             TO ADJUSTED NET INCOME

                                  (Unaudited)



                                       For the Three Months Ended            For the Six Months Ended March
                                               March 31,                                   31,
                                        2014                2013                2014                  2013

Net loss                           $      (25,825 )     $        (819 )   $        (22,589 )     $         (261 )

Adjusting items, net of tax:
Loss from debt extinguishment,
net                                        24,964                   -               24,964                    -
Restructuring and related                     429               5,788                  951                6,508
Acquisition costs                               -                   -                  495                    -
Loss on pension settlement                      -                   -                    -                1,392
Extinguishment impact on period
tax ratea                                   5,848                   -                5,848                    -
Discrete tax provisions
(benefits)                                    609                (309 )                320                 (364 )

Adjusted net income                $        6,025       $       4,660     $          9,989       $        7,275

Diluted loss per common share      $        (0.53 )     $       (0.02 )   $          (0.44 )     $        (0.00 )

Adjusting items, net of tax:
Loss from debt extinguishment,
net                                          0.51                   -                 0.49                    -
Restructuring                                0.01                0.10                 0.02                 0.11
Acquisition costs                               -                   -                 0.01                    -
Loss on pension settlement                      -                   -                    -                 0.02
Extinguishment impact on period
tax ratea                                    0.12                   -                 0.12                    -
Discrete tax provisions
(benefits)                                   0.01               (0.01 )               0.01                (0.01 )

Adjusted earnings per common
share                              $         0.12       $        0.08     $           0.20       $         0.13

Weighted-average shares
outstanding (in thousands)                 48,990              54,345               50,872               54,749

a) Prior to refinancing the debt and resultant loss on debt extinguishment, the Company anticipated its full year 2014 effective tax rate to approximate 40%. As a result of the loss from debt extinguishment, the Company anticipates it will now incur a pretax loss for the full year 2014, and recognize a corresponding tax benefit at an effective rate approximating 13.0%. In the current quarter, the impact of debt extinguishment on the full year effective tax rate was estimated to be a benefit of $5,848 or $0.12 per share.

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 March 31, 2014 and 2013

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 Loss before taxes:

                             For the Three Months Ended March 31,           For the Six Months Ended March 31,
                                 2014                    2013                  2014                    2013
Segment operating
profit:
Home & Building Products   $           8,818       $           3,835     $          18,211       $          11,106
Telephonics                           10,677                  13,753                21,329                  28,398
Plastics                               9,352                     916                15,177                   3,558
Total segment operating
profit                                28,847                  18,504                54,717                  43,062
Net interest expense                 (12,361 )               (12,909 )             (25,462 )               (25,988 )
Unallocated amounts                   (8,391 )                (7,980 )             (16,374 )               (15,567 )
Loss from debt
extinguishment, net                  (38,890 )                     -               (38,890 )                     -
Loss on pension
settlement                                 -                       -                     -                  (2,142 )
Loss before taxes          $         (30,795 )     $          (2,385 )   $         (26,009 )     $            (635 )

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

                             For the Three Months Ended March 31,           For the Six Months Ended March 31,
                                 2014                    2013                  2014                    2013
Segment adjusted EBITDA:
Home & Building Products   $          17,124       $          17,555     $          36,191       $          34,794
Telephonics                           12,535                  15,505                24,931                  31,869
Plastics                              16,216                  12,352                28,959                  21,671
Total Segment adjusted
EBITDA                                45,875                  45,412                90,081                  88,334
Net interest expense                 (12,361 )               (12,909 )             (25,462 )               (25,988 )
Segment depreciation and
amortization                         (16,336 )               (17,572 )             (33,032 )               (34,828 )
Unallocated amounts                   (8,391 )                (7,980 )             (16,374 )               (15,567 )
Loss from debt
extinguishment, net                  (38,890 )                     -               (38,890 )                     -
Restructuring charges                   (692 )                (9,336 )              (1,534 )               (10,444 )
Acquisition costs                          -                       -                  (798 )                     -
Loss on pension
settlement                                 -                       -                     -                  (2,142 )
Loss before taxes          $         (30,795 )     $          (2,385 )   $         (26,009 )     $            (635 )

Home & Building Products



                           Three Months Ended March 31,                For the Six Months Ended March 31,
                            2014                  2013                     2014                     2013
Revenue:
Ames                  $ 160,705             $ 136,237             $    257,313                $ 213,546
CBP                      90,838                89,499                  212,680                  202,366
Home & Building
Products              $ 251,543             $ 225,736             $    469,993                $ 415,912
Segment operating
profit                $   8,818     3.5 %   $   3,835     1.7 %   $     18,211        3.9 %   $  11,106     2.7 %
Depreciation and
amortization              7,614                 9,157                   15,648                   18,017
Restructuring
charges                     692                 4,563                    1,534                    5,671
Acquisition costs             -                     -                      798                        -
Segment adjusted
EBITDA                $  17,124     6.8 %   $  17,555     7.8 %   $     36,191        7.7 %   $  34,794     8.4 %

For the quarter ended March 31, 2014, revenue increased $25,807 or 11%, compared to the prior year quarter. Ames revenue increased 18% compared to the prior year quarter primarily due to improved U.S. and Canada snow tool and planter sales, and the inclusion of Northcote results, while CBP revenue increased 1%, primarily due to favorable mix, partially offset by lower volume influenced by inclement weather conditions.

For the quarter ended March 31, 2014, Segment operating profit was $8,818 compared to $3,835 in the prior year quarter. Excluding restructuring charges, primarily related to the manufacturing and operations consolidation initiative at Ames, current and prior year Segment operating profit was $9,510 and $8,398, respectively. Excluding restructuring, the increase in Segment operating profit was primarily from improved volume at Ames and favorable product mix at CBP, partially offset by higher distribution and selling costs. Ames also continued to experience manufacturing inefficiencies in connection with its plant consolidation initiative, which are expected to continue until the initiative is completed. The impact of Northcote in the quarter was not significant. Segment depreciation and amortization decreased $1,543 from the prior year period.

For the six months ended March 31, 2014, revenue increased $54,081 or 13%, compared to the prior year period. Ames revenue increased 20% mainly driven by improved US and Canadian snow tool and planter sales, and the inclusion of Northcote results. CBP revenue increased 5% due to higher volume and favorable product mix.

For the six months ended March 31, 2014, Segment operating profit was $18,211 compared to $11,106 in the prior year period. Excluding restructuring charges, primarily related to the consolidation initiative at Ames, and acquisition costs related to the Northcote transaction, current and prior year Segment operating profit was $20,543 and $16,777, respectively. Excluding restructuring and acquisition costs, the increase was primarily from improved volume at Ames and CBP, partially offset by higher distribution costs. Ames also continued to experience manufacturing inefficiencies in connection with its plant consolidation initiative, which are expected to continue until the initiative is completed. The impact of Northcote in the quarter was not significant. The prior year period benefitted from $1,000 in Byrd Amendment receipts (anti-dumping compensation from the government); current period Byrd Amendment receipts were not significant. Segment depreciation and amortization decreased $2,369 from the prior year period.

On December 31, 2013, Ames acquired Northcote, a leading brand in the Australian outdoor planter and decor market, for approximately $22,000. Northcote complements Southern Patio, acquired in 2011, and adds to Ames' existing lawn and garden operations in Australia. Northcote, which will be integrated with Ames, is expected to generate approximately $28,000 of annualized revenue.

In January 2013, Ames 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; these savings are consistent with those anticipated at the onset of the initiative.

Ames 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. Ames expects $20,000 in capital expenditures in connection with this initiative and, to date, has incurred $7,583 and $15,269 in restructuring costs and capital expenditures, respectively.

HBP recognized $692 and $1,534, respectively, for the three and six months ended March 31, 2014, and $4,563 and $5,671, respectively, for the three and six months ended March 31, 2013 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 Ames plant consolidation initiatives. The 2013 period also included charges related to a CBP plant consolidation.

Telephonics



                                            Three Months Ended March 31,                  For the Six Months Ended March 31,
                                             2014                   2013                     2014                     2013
Revenue                               $ 104,185              $ 121,631               $    200,210               $ 217,681
Segment operating profit              $  10,677     10.2 %   $  13,753     11.3 %    $     21,329     10.7 %    $  28,398    13.0 %
Depreciation and amortization             1,858                  1,752                      3,602                   3,471
Segment adjusted EBITDA               $  12,535     12.0 %   $  15,505     12.7 %    $     24,931     12.5 %    $  31,869    14.6 %

For the quarter ended March 31, 2014, revenue decreased $17,446 or 14% compared to the prior year quarter. The 2013 quarter included $13,225 of electronic warfare program revenue where Telephonics serves as a contract manufacturer; there was no such revenue in the current year quarter. Excluding revenue from these programs, current quarter revenue decreased 4% from the 2013 quarter, primarily due to lower mobile surveillance systems sales, partially offset by higher Identification Friend or Foe systems sales.

For the quarter ended March 31, 2014, Segment operating profit decreased $3,076 or 22%, and operating profit margin decreased 110 basis points compared to the prior year quarter; the prior year quarter benefitted from the electronic warfare programs, favorable program mix and manufacturing efficiencies, none of which were repeated in the current quarter.

For the six months ended March 31, 2014, revenue decreased $17,471 or 8%, compared to the prior year period. The prior year period included $13,225 of electronic warfare program revenue where Telephonics serves as a contract manufacturer; there was no such revenue in the current year period. Excluding revenue from these programs, revenue decreased 2% primarily due to reduced airborne intercommunication products and mobile surveillance systems sales, partially offset by higher Identification Friend or Foe products sales.

For the six months ended March 31, 2014, Segment operating profit decreased $7,069 or 25%, and operating margin decreased 230 basis points compared to the prior year period. The prior year period benefitted from the electronic warfare programs, favorable program mix and manufacturing efficiencies, which were not repeated in the current year period.

During the six months ended March 31, 2014, Telephonics was awarded several new contracts and incremental funding on existing contracts approximating $241,800. Contract backlog was $486,000 at March 31, 2014 with 66% expected to be fulfilled in the next 12 months. Backlog was $444,000 at September 30, 2013 and $416,000 at December 31, 2013. 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,                For the Six Months Ended March 31,
                                       2014                  2013                    2014                     2013
Revenue                         $ 151,959              $ 141,376            $    290,942                $ 278,899
Segment operating profit        $   9,352      6.2 %   $     916    0.6 %   $     15,177       5.2 %    $   3,558    1.3 %
Depreciation and amortization       6,864                  6,663                  13,782                   13,340
Restructuring charges                   -                  4,773                       -                    4,773
Segment adjusted EBITDA         $  16,216     10.7 %   $  12,352    8.7 %   $     28,959      10.0 %    $  21,671    7.8 %

For the quarter ended March 31, 2014, revenue increased $10,583, or 7%, compared to the prior year quarter. The increase reflected the benefit of favorable mix (6%), the pass through of higher resin costs in customer selling prices (1%) and higher volume (1%), partially offset by the impact of unfavorable foreign exchange translation (1%); the 1% volume increase was net of volume lost as a result of 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 March 31, 2014, Segment operating profit increased $8,436 compared to the prior year quarter; the prior year quarter included restructuring charges of $4,773. Excluding restructuring charges, Segment operating profit increased $3,663 primarily due to favorable mix, continued efficiency improvements and the positive impact of restructuring initiatives undertaken over the past year. Resin did not have a material impact on profit for the quarter.

For the six months ended March 31, 2014, revenue increased $12,043, or 4%, compared to the prior year quarter. The increase reflected the benefit of favorable mix (5%) and the pass through of higher resin costs in customer selling prices (1%), partially offset by the impact of lower volume (2%), the majority of which was attributable to Plastics exiting certain low margin products in the second half of 2013.

For the six months ended March 31, 2014, Segment operating profit increased $11,619 compared to the prior year period; the prior year period included restructuring charges of $4,773. Excluding restructuring charges, Segment operating profit increased $6,846 primarily due to continued efficiency improvements, favorable mix and an $800 favorable resin benefit, partially offset by the impact of reduced volume.

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

Unallocated

For the quarter ended March 31, 2014, unallocated amounts totaled $8,391 . . .

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