GRIFFON CORP - Quarter Report: 2006 June (Form 10-Q)
UNITED
STATES
|
SECURITIES
AND EXCHANGE COMMISSION
|
WASHINGTON,
D.C. 20549
|
FORM
10-Q
|
x
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
For
the quarterly period ended June 30, 2006
|
or
|
o
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
For
the transition period from _______ to
_______
|
Commission
File Number: 1-6620
|
GRIFFON
CORPORATION
|
(Exact
name of registrant as specified in its
charter)
|
DELAWARE
|
11-1893410
|
|
(State
or other jurisdiction of
incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
|
||
100
JERICHO QUADRANGLE, JERICHO, NEW YORK
|
11753
|
|
(Address
of principal executive
offices)
|
(Zip
Code)
|
(516)
938-5544
|
||
(Registrant's
telephone number, including area code)
|
||
Indicate
by check mark whether the registrant (1) has filed all reports required
to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject
to
such filing requirements for the past 90 days.
|
x
Yes o No
|
Indicate
by check mark whether registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the
Exchange Act. (Check one):
|
Large
accelerated filer o Accelerated
filer x Non-accelerated
filer
o
|
Indicate
by check mark whether the registrant is a shell company (as defined
in
Rule 12b-2 of the Exchange Act).
|
o Yes x No
|
Indicate
the number of shares outstanding of each of the issuer's classes
of common
stock, as of the latest practicable date. 29,728,656 shares of Common
Stock as of August 2, 2006.
|
FORM
10-Q
CONTENTS
PAGE
|
|
PART
I - FINANCIAL
INFORMATION
(Unaudited)
|
|
Item
1 - Financial
Statements
|
|
Condensed
Consolidated Balance Sheets at June 30, 2006
|
|
and
September 30, 2005
|
1
|
Condensed
Consolidated Statements of Operations for the Three
|
|
and
Nine Months Ended June 30, 2006 and 2005
|
3
|
Condensed
Consolidated Statements of Cash Flows for the
|
|
Nine
Months ended June 30, 2006 and 2005
|
5
|
Notes
to Condensed Consolidated Financial Statements
|
6
|
Item
2 - Management's Discussion and Analysis of
Financial
|
|
Condition
and Results of Operations
|
12
|
Item
3 - Quantitative and Qualitative Disclosure about Market
Risk
|
17
|
Item
4 - Controls & Procedures
|
17
|
PART
II - OTHER
INFORMATION
|
|
Item
1 - Legal Proceedings
|
18
|
Item
2 - Unregistered Sales of Equity Securities and
|
|
Use
of Proceeds
|
18
|
Item
3 - Defaults upon Senior Securities
|
18
|
Item 4 - Submission of Matters to a Vote of Security Holders
|
18
|
Item
5 - Other Information
|
18
|
Item
6 - Exhibits
|
18
|
Signature
|
19
|
Part
I -
Financial Information
Item
1 -
Financial Statements
GRIFFON
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|||||
June
30,
2006
|
September
30,
2005
|
|||||||||
(Note
1)
|
||||||||||
ASSETS
|
||||||||||
CURRENT
ASSETS:
|
||||||||||
Cash
and cash equivalents
|
$
|
32,101,000
|
$
|
60,663,000
|
||||||
Accounts
receivable, less allowance for
doubtful
accounts
|
204,249,000
|
189,904,000
|
||||||||
Contract
costs and recognized income not
yet
billed
|
54,503,000
|
43,065,000
|
||||||||
Inventories
(Note 2)
|
174,560,000
|
148,350,000
|
||||||||
Prepaid
expenses and other current assets
|
45,609,000
|
41,227,000
|
||||||||
Total
current assets
|
511,022,000
|
483,209,000
|
||||||||
PROPERTY,
PLANT AND EQUIPMENT
at
cost, less accumulated depreciation
and
amortization of $211,349,000 at
June
30, 2006 and $186,982,000 at
September
30, 2005
|
221,805,000
|
216,900,000
|
||||||||
OTHER
ASSETS:
|
||||||||||
Goodwill
|
99,950,000
|
96,098,000
|
||||||||
Intangible
assets and other
|
58,059,000
|
55,220,000
|
||||||||
158,009,000
|
151,318,000
|
|||||||||
$
|
890,836,000
|
$
|
851,427,000
|
|||||||
See
notes to condensed consolidated financial
statements.
|
1
GRIFFON
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|||||||
June
30,
2006
|
September
30,
2005
|
||||||
(Note
1)
|
|||||||
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|||||||
CURRENT
LIABILITIES:
|
|||||||
Accounts
and notes payable
|
$
|
118,899,000
|
$
|
99,159,000
|
|||
Other
current liabilities
|
97,270,000
|
110,884,000
|
|||||
Total
current liabilities
|
216,169,000
|
210,043,000
|
|||||
LONG-TERM
DEBT (Note 2)
|
199,441,000
|
196,540,000
|
|||||
OTHER
LIABILITIES AND DEFERRED CREDITS
|
82,579,000
|
82,890,000
|
|||||
Total
liabilities and deferred credits
|
498,189,000
|
489,473,000
|
|||||
COMMITMENTS
AND CONTINGENCIES
|
|||||||
SHAREHOLDERS'
EQUITY:
|
|||||||
Preferred
stock, par value $.25 per
share,
authorized 3,000,000 shares,
no
shares issued (Note 9)
|
---
|
---
|
|||||
Common
stock, par value $.25 per
share,
authorized 85,000,000
shares,
issued 41,187,759 shares at
June
30, 2006 and 40,741,748 shares at
September 30, 2005; 11,386,803
and
10,502,896
shares in treasury at June
30,
2006
and September 30, 2005, respectively
|
10,297,000
|
10,186,000
|
|||||
Other
shareholders' equity
|
382,350,000
|
351,768,000
|
|||||
Total
shareholders' equity
|
392,647,000
|
361,954,000
|
|||||
$
|
890,836,000
|
$
|
851,427,000
|
||||
See
notes to condensed consolidated financial
statements.
|
2
GRIFFON
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|||||||
(Unaudited)
|
|||||||
|
|||||||
THREE
MONTHS ENDED JUNE 30,
|
|||||||
2006
|
2005
|
||||||
Net
sales
|
$
|
429,071,000
|
$
|
350,904,000
|
|||
Cost
of sales
|
320,793,000
|
259,312,000
|
|||||
Gross
profit
|
108,278,000
|
91,592,000
|
|||||
Selling,
general and administrative expenses
|
80,341,000
|
73,586,000
|
|||||
Income
from operations
|
27,937,000
|
18,006,000
|
|||||
Other
income (expense):
|
|||||||
Interest
expense
|
(2,572,000
|
)
|
(1,603,000
|
)
|
|||
Interest
income
|
423,000
|
372,000
|
|||||
Other,
net (Note 7)
|
1,155,000
|
3,156,000
|
|||||
(994,000
|
)
|
1,925,000
|
|||||
Income
before income taxes
|
26,943,000
|
19,931,000
|
|||||
Provision
for income taxes (Note 8)
|
7,580,000
|
5,655,000
|
|||||
Income
before minority interest
|
19,363,000
|
14,276,000
|
|||||
Minority
interest
|
---
|
(1,422,000
|
)
|
||||
Net
income
|
$
|
19,363,000
|
$
|
12,854,000
|
|||
Basic
earnings per share of common stock (Note 3)
|
$
|
.65
|
$
|
.43
|
|||
Diluted
earnings per share of common stock (Note 3)
|
$
|
.61
|
$
|
.41
|
|||
See
notes to condensed consolidated financial
statements.
|
3
GRIFFON
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|||||||
(Unaudited)
|
|||||||
|
|||||||
|
NINE
MONTHS ENDED JUNE 30,
|
||||||
|
2006
|
2005
|
|||||
Net
sales
|
$
|
1,153,746,000
|
$
|
1,013,551,000
|
|||
Cost
of sales
|
866,046,000
|
756,347,000
|
|||||
Gross
profit
|
287,700,000
|
257,204,000
|
|||||
Selling,
general and administrative expenses
|
234,275,000
|
213,761,000
|
|||||
Income
from operations
|
53,425,000
|
43,443,000
|
|||||
Other
income (expense):
|
|||||||
Interest
expense
|
(7,715,000
|
)
|
(5,768,000
|
)
|
|||
Interest
income
|
1,331,000
|
1,527,000
|
|||||
Other,
net (Note 7)
|
2,163,000
|
4,385,000
|
|||||
(4,221,000
|
)
|
144,000
|
|||||
Income
before income taxes
|
49,204,000
|
43,587,000
|
|||||
Provision
for income taxes (Note 8)
|
15,857,000
|
12,982,000
|
|||||
Income
before minority interest
|
33,347,000
|
30,605,000
|
|||||
Minority
interest
|
---
|
(4,415,000
|
)
|
||||
Net
income
|
$
|
33,347,000
|
$
|
26,190,000
|
|||
Basic
earnings per share of common stock (Note 3)
|
$
|
1.11
|
$
|
.88
|
|||
Diluted
earnings per share of common stock (Note 3)
|
$
|
1.06
|
$
|
.84
|
|||
See
notes to condensed consolidated financial
statements.
|
4
GRIFFON
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|||||||
(Unaudited)
|
|||||||
|
|||||||
NINE
MONTHS ENDED JUNE 30,
|
|||||||
2006
|
2005
|
||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
||||||
Net
income
|
$
|
33,347,000
|
$
|
26,190,000
|
|||
Adjustments
to reconcile net income to net
cash
provided by operating activities:
|
|||||||
Depreciation
and amortization
|
25,778,000
|
23,789,000
|
|||||
Gain
on sale of land and building
|
---
|
(3,744,000
|
)
|
||||
Minority
interest
|
---
|
4,415,000
|
|||||
Provision
for losses on accounts receivable
|
1,435,000
|
804,000
|
|||||
Change
in assets and liabilities:
|
|||||||
Increase
in accounts receivable and contract
costs
and recognized income not yet billed
|
(25,981,000
|
)
|
(1,984,000
|
)
|
|||
Increase
in inventories
|
(24,771,000
|
)
|
(1,545,000
|
)
|
|||
(Increase)
decrease in prepaid expenses and other assets
|
(19,000
|
)
|
482,000
|
||||
Increase
(decrease) in accounts payable, accrued liabilities and income
taxes
|
8,394,000
|
(7,639,000
|
)
|
||||
Other
changes, net
|
1,122,000
|
5,361,000
|
|||||
Total
adjustments
|
(14,042,000
|
)
|
19,939,000
|
||||
Net
cash provided by operating activities
|
19,305,000
|
46,129,000
|
|||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||||||
Acquisition
of property, plant and equipment
|
(22,408,000
|
)
|
(31,994,000
|
)
|
|||
Proceeds
from sale of land & building
|
---
|
6,931,000
|
|||||
Acquisition
of minority interest in subsidiary
|
(1,304,000
|
)
|
(3,883,000
|
)
|
|||
Acquired
businesses
|
---
|
(9,577,000
|
)
|
||||
(Increase)
decrease in equipment lease deposits
|
(5,353,000
|
)
|
3,293,000
|
||||
Net
cash used in investing activities
|
(29,065,000
|
)
|
(35,230,000
|
)
|
|||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||||
Purchase
of shares for treasury
|
(17,218,000
|
)
|
(14,552,000
|
)
|
|||
Proceeds
from borrowings under long-term debt arrangements
|
63,000,000
|
7,778,000
|
|||||
Payments
of long-term debt
|
(68,455,000
|
)
|
(20,853,000
|
)
|
|||
Increase
(decrease) in short-term borrowings
|
(446,000
|
)
|
276,000
|
||||
Distributions
to minority interest
|
(354,000
|
)
|
(1,362,000
|
)
|
|||
Proceeds
from the exercise of stock options
|
2,060,000
|
18,928,000
|
|||||
Tax
benefit from exercise of stock options
|
2,386,000
|
---
|
|||||
Other,
net
|
(363,000
|
)
|
---
|
||||
Net
cash used in financing activities
|
(19,390,000
|
)
|
(9,785,000
|
)
|
|||
Effect
of exchange rates on cash and cash equivalents
|
588,000
|
(680,000
|
)
|
||||
NET
INCREASE (DECREASE) CASH AND CASH EQUIVALENTS
|
(28,562,000
|
)
|
434,000
|
||||
CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
60,663,000
|
88,047,000
|
|||||
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
$
|
32,101,000
|
$
|
88,481,000
|
|||
See
notes to condensed consolidated financial
statements.
|
5
GRIFFON
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
(Unaudited)
|
|
(1)
Basis
of Presentation
-
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair statement
have
been included. Operating results for the three-month and nine-month periods
ended June 30, 2006 are not necessarily indicative of the results that may
be
expected for the year ending September 30, 2006. The balance sheet at September
30, 2005 has been derived from the audited financial statements at that date.
For further information, refer to the consolidated financial statements and
notes thereto included in the company's annual report to shareholders for the
year ended September 30, 2005.
(2)
Inventories
and long-term debt
-
Inventories,
stated at the lower of cost (first-in, first-out or average) or market, are
comprised of the following:
June
30,
|
|
September
30,
|
|
||||
|
|
2006
|
|
2005
|
|||
Finished
goods
|
$
|
61,162,000
|
$
|
52,908,000
|
|||
Work
in process
|
72,862,000
|
58,908,000
|
|||||
Raw
materials and supplies
|
40,536,000
|
36,534,000
|
|||||
$
|
174,560,000
|
$
|
148,350,000
|
In
December 2005 the company and a subsidiary entered into a five-year senior
secured multicurrency revolving credit facility in the amount of up to
$150,000,000. Commitments under the credit agreement may be increased by
$50,000,000 under certain circumstances upon request by the company. Borrowings
under the credit agreement bear interest at rates based upon LIBOR or the prime
rate and are collateralized by stock of a subsidiary of the company.
The
credit agreement replaced a loan agreement dating from October 2001 and
refinanced $60 million of borrowings under such agreement. The proceeds of
additional borrowings under the credit agreement have been used for general
corporate purposes.
(3)
Earnings
per share (EPS) and accounting for stock-based compensation
-
Basic
EPS
is calculated by dividing income by the weighted average number of shares of
common stock outstanding during the period. Diluted EPS is calculated by
dividing income by the weighted average number of shares of common stock
outstanding plus additional common shares that could be issued in connection
with potentially dilutive securities. Holders of the company’s 4% convertible
subordinated notes are entitled to convert their notes into the company’s common
stock upon the occurrence of certain events described in Note 2 of Notes to
Consolidated Financial Statements in the company’s annual report to shareholders
for the year ended September 30, 2005. EPS for the three and nine-month periods
ended June 30, 2006 and 2005, respectively, were determined using the following
information:
6
|
|
Three
Months Ended June 30,
|
|
Nine
Months Ended June 30,
|
|
||||||||
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|||||
Income
available to common
|
|
||||||||||||
stockholders
|
$
|
19,363,000
|
$
|
12,854,000
|
$
|
33,347,000
|
$
|
26,190,000
|
|||||
Weighted-average
shares -
|
|||||||||||||
basic
EPS
|
29,896,000
|
30,241,000
|
29,992,000
|
29,625,000
|
|||||||||
Incremental
shares from stock
|
|||||||||||||
based
compensation
|
1,328,000
|
1,169,000
|
1,284,000
|
1,626,000
|
|||||||||
Incremental
shares from 4%
|
|||||||||||||
convertible
notes
|
494,000
|
-
|
165,000
|
-
|
|||||||||
Weighted
average
|
|||||||||||||
shares
- diluted EPS
|
31,718,000
|
31,410,000
|
31,441,000
|
31,251,000
|
SFAS
123R, “Share-Based
Payment”,
requires
that compensation costs relating to share-based payment transactions be
recognized in the financial statements based upon fair value, eliminates the
option to continue to account for such compensation under APB Opinion No. 25
and, pursuant to SEC Release 33-8568, became effective in the first quarter
of
fiscal 2006. The company adopted this pronouncement using modified prospective
application and previously reported operating results and earnings per share
amounts are unchanged. The adoption of SFAS 123R in fiscal 2006 resulted in
additional compensation cost recognized in the income statement and changed
the
manner of presenting certain tax benefits in the statement of cash
flows. The
effect of the adoption of SFAS 123R was not material to consolidated results
of
operations, cash flows or financial position. See Note 6 for a discussion of
other recent accounting pronouncements.
Operating
results of future periods will be affected by compensation cost attributable
to
the fair value of unvested options at the date of SFAS 123R adoption
(approximately $1,000,000 for unvested options outstanding as of June 30, 2006)
and the fair value of subsequent option grants as determined pursuant to SFAS
123R. During the nine months ended June 30, 2006, the company awarded 127,500
stock options resulting in future stock based compensation expense of
approximately $1,700,000 over four years. Fair value, which was estimated using
the Black-Scholes option valuation model, and related compensation cost for
stock options under SFAS 123R are based upon a number of estimates including
the
expected term of the option, risk-free interest rates for the expected term,
expected dividend-yield of the underlying stock and the expected volatility
in
the price of the underlying stock. Fair value and related compensation cost
estimates for stock options are also dependent on the number of options granted
and the market price of the underlying stock at the date of grant.
7
Had
compensation expense for options granted been determined based on the fair
value
at the date of grant in accordance with Statement No. 123, the company’s net
income and earnings per share for the three and nine months ended June 30,
2005
would have been as follows:
Three
Months
|
Nine
Months
|
||||||
Net
income, as reported
|
$
|
12,854,000
|
$
|
26,190,000
|
|||
Deduct
total stock-based
|
|||||||
employee
compensation expense
|
|||||||
determined
under fair value
|
|||||||
based
method for all awards, net
|
|||||||
of
related tax effects
|
(1,135,000
|
)
|
(3,510,000
|
)
|
|||
Pro
forma net income
|
$
|
11,719,000
|
$
|
22,680,000
|
|||
Earnings
per share:
|
|||||||
Basic
- as reported
|
$
|
.43
|
$
|
.88
|
|||
Basic
- pro forma
|
$
|
.39
|
$
|
.77
|
|||
Diluted
- as reported
|
$
|
.41
|
$
|
.84
|
|||
Diluted
- pro forma
|
$
|
.37
|
$
|
.72
|
(4)
Business
segments and acquisitions -
The
company's reportable business segments are as follows - Garage Doors
(manufacture and sale of residential and commercial/industrial garage doors,
and
related products); Installation Services (sale and installation of building
products primarily for new construction, such as garage doors, garage door
openers, manufactured fireplaces and surrounds, flooring and cabinets);
Specialty Plastic Films (manufacture and sale of plastic films and film
laminates for baby diapers, adult incontinence care products, disposable
surgical and patient care products and plastic packaging) and Electronic
Information and Communication Systems (communication and information systems
for
government and commercial markets).
Information
on the company's business segments is as follows:
Electronic
|
||||||||||||||||
Information
|
||||||||||||||||
Specialty
|
and
|
|||||||||||||||
Garage
|
Installation
|
Plastic
|
Communication
|
|||||||||||||
Doors
|
Services
|
Films
|
Systems
|
Totals
|
||||||||||||
Revenues
from
external
customers -
|
||||||||||||||||
Three
months ended
June
30, 2006
|
$
|
133,982,000
|
$
|
86,439,000
|
$
|
97,246,000
|
$
|
111,404,000
|
$
|
429,071,000
|
||||||
June
30, 2005
|
132,222,000
|
77,071,000
|
90,607,000
|
51,004,000
|
350,904,000
|
|||||||||||
Nine
months ended
June
30, 2006
|
$
|
388,603,000
|
$
|
250,153,000
|
$
|
279,288,000
|
$
|
235,702,000
|
$
|
1,153,746,000
|
||||||
June
30, 2005
|
367,513,000
|
215,807,000
|
276,472,000
|
153,759,000
|
1,013,551,000
|
|||||||||||
8
Intersegment
revenues -
|
||||||||||||||||
Three
months ended
June
30, 2006
|
$
|
5,315,000
|
$
|
15,000
|
$
|
---
|
$
|
---
|
$
|
5,330,000
|
||||||
June
30, 2005
|
5,218,000
|
19,000
|
---
|
---
|
5,237,000
|
|||||||||||
Nine
months ended
|
||||||||||||||||
June
30, 2006
|
$
|
15,108,000
|
$
|
76,000
|
$
|
---
|
$
|
---
|
$
|
15,184,000
|
||||||
June
30, 2005
|
15,808,000
|
80,000
|
---
|
---
|
15,888,000
|
|||||||||||
Segment
profit -
|
||||||||||||||||
Three
months ended
|
||||||||||||||||
June
30, 2006
|
$
|
10,324,000
|
$
|
2,203,000
|
$
|
8,137,000
|
$
|
12,670,000
|
$
|
33,334,000
|
||||||
June
30, 2005
|
10,686,000
|
2,583,000
|
6,040,000
|
2,830,000
|
22,139,000
|
|||||||||||
Nine
months ended
|
||||||||||||||||
June
30, 2006
|
$
|
27,531,000
|
$
|
6,217,000
|
$
|
15,411,000
|
$
|
20,388,000
|
$
|
69,547,000
|
||||||
June
30, 2005
|
22,084,000
|
5,159,000
|
20,858,000
|
8,751,000
|
56,852,000
|
Following
is a reconciliation of segment profit to amounts reported in the consolidated
financial statements:
Three
Months Ended June 30,
|
Nine
Months Ended June 30,
|
||||||||||||
2006
|
2005
|
2006
|
2005
|
||||||||||
Profit
for all segments
|
$
|
33,334,000
|
$
|
22,139,000
|
$
|
69,547,000
|
$
|
56,852,000
|
|||||
Unallocated
amounts
|
(4,242,000
|
)
|
(4,721,000
|
)
|
(13,959,000
|
)
|
(12,768,000
|
)
|
|||||
Interest
and other, net
|
(2,149,000
|
)
|
2,513,000
|
(6,384,000
|
)
|
(497,000
|
)
|
||||||
Income
before income taxes
|
$
|
26,943,000
|
$
|
19,931,000
|
$
|
49,204,000
|
$
|
43,587,000
|
Unallocated
amounts include general corporate expenses not attributable to any reportable
segment. Interest and other, net includes a $3.7 million gain on sale of land
and building as of June 30, 2005 (see Note 7). Goodwill at June 30, 2006
includes $12.9 million attributable to the garage doors segment, $19.4 million
attributable to the electronic information and communication systems segment
and
$67.6 million attributable to the specialty plastic films segment. During the
quarter ended December 31, 2005 the ownership interest in the company’s
subsidiary in Brazil was increased from 90% to 100%. This additional investment
increased goodwill of the specialty plastic films segment by $1.1 million.
The
remainder of the change in goodwill was primarily due to specialty plastic
films
currency translation adjustments.
(5)
Comprehensive
income and defined benefit pension expense
-
Comprehensive
income, which consists of net income and foreign currency translation
adjustments, was $28.5 million and $13.5 million for the three-month periods
and
$43.8 and $30.3 million for the nine-month periods ended June 30, 2006 and
2005,
respectively.
9
Defined
benefit pension expense was recognized as follow:
Three
Months Ended June 30,
|
Nine
Months Ended June 30,
|
||||||||||||
2006
|
2005
|
2006
|
2005
|
||||||||||
Service
cost
|
$
|
339,000
|
$
|
392,000
|
$
|
1,017,000
|
$
|
1,176,000
|
|||||
Interest
cost
|
864,000
|
753,000
|
2,592,000
|
2,259,000
|
|||||||||
Expected
return on plan
assets
|
(374,000
|
)
|
(321,000
|
)
|
(1,122,000
|
)
|
(963,000
|
)
|
|||||
Amortization
of net
actuarial
loss
|
538,000
|
301,000
|
1,614,000
|
903,000
|
|||||||||
Amortization
of prior
service
cost
|
2,000
|
2,000
|
6,000
|
6,000
|
|||||||||
Amortization
of transition
obligation
|
290,000
|
223,000
|
870,000
|
669,000
|
|||||||||
$
|
1,659,000
|
$
|
1,350,000
|
$
|
4,977,000
|
$
|
4,050,000
|
(6)
Recent
accounting pronouncements
-
The
FASB
has issued Statement of Financial Accounting Standards Nos. 151, “Inventory
Costs” 152, “Accounting for Real Estate Time-Sharing Transactions” 153,
“Exchange of Nonmonetary Assets” 154, “Accounting Changes and Error
Corrections” 155, “Accounting for Certain Hybrid Financial Instruments” 156,
“Accounting for Servicing of Financial Assets” Interpretation No. 47,
“Accounting for Conditional Asset Retirement Obligations” and Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes.” SFAS 151 requires that
abnormal amounts of idle facility expense, freight, handling costs and spoilage
be recognized as period charges and became effective in fiscal 2006. SFAS 152
requires that real estate time-sharing transactions be accounted for pursuant
to
the AICPA Statement of Position, “Accounting for Real Estate Time-Sharing
Transactions” rather than SFAS 66 and SFAS 67 and became effective in fiscal
2006. SFAS No. 153 replaces the exception from fair value measurement for
non-monetary exchanges of similar productive assets with an exception for
exchanges that do not have commercial substance and became effective in fiscal
2006. SFAS 154, which becomes effective in fiscal 2007, changes the accounting
for and reporting of a change in accounting principle by generally requiring
that they be retrospectively applied in prior period financial statements.
SFAS
155 establishes the accounting for certain derivatives embedded in other
financial instruments. SFAS 156 amends the accounting for separately recognized
servicing assets and liabilities. Interpretation 47 clarified when certain
asset
retirement obligations should be recognized and became effective in fiscal
2006.
Interpretation 48, which becomes effective in fiscal 2008, clarifies the
accounting for uncertainty in income taxes recognized in the financial
statements. The company does not believe that the adoption of SFAS 151, SFAS
152, SFAS 153, SFAS 154, SFAS 155, SFAS 156 and Interpretation 47 have had
or
will have a material effect on the company’s consolidated financial position,
results of operations or cash flows. The company is currently assessing what
the
effects of Interpretation 48 will be on the financial statements.
(7)
Other
income
-
Other
income included approximately $642,000 and ($576,000) of realized foreign
exchange gains (losses) in connection with the translation of receivables and
payables denominated in currencies other than the functional currencies of
the
company and its subsidiaries for the quarters ended June 30, 2006 and 2005,
respectively. For the nine months ended June 30, 2006 and 2005, respectively,
$1.1 million and $44,000 were recorded as foreign exchange gains. For the three
and nine months ended June 30, 2005, other income included a gain of $3.7
million on the sale of land and building.
10
(8)
Provisions
for income taxes
-
The
provision for income taxes for the three and nine month periods ended June
30,
2006 was favorably impacted by the reversal of approximately $1.4 million of
estimated income tax liabilities in connection with closed tax
years.
(9) Shareholder
rights plan -
As
described in Note 3 of Notes to Consolidated Financial Statements in the
company's annual report to shareholders for the year ended September 30, 2005,
the company had a shareholder rights plan that provided for one right to be
attached to each share of the company's common stock. The plan expired
according to its terms on May 9, 2006, and was not renewed or
replaced.
11
ITEM
2 -
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
OVERVIEW
Net
sales
for the quarter ended June 30, 2006 were $429,071,000, up from $350,904,000
for
the third quarter of fiscal 2005. Income before income taxes was $26,943,000
compared to $19,931,000 last year. Net income was $19,363,000 compared to
$12,854,000 last year.
Operating
results in the third quarter were significantly improved compared to the third
quarter of 2005. The increase was principally driven by the electronic
information and communication systems segment. This segment achieved record
operating results due to the previously discussed program with Syracuse Research
Corporation. Operating profits in the garage doors segment and in the
installation services segment were substantially the same as last year.
As
previously noted, volume with specialty plastic films’ largest customer in North
America has returned to normal levels. Also, the segment’s ongoing sales
development activities continue to yield very encouraging results. In the
quarter volume was up about 5% versus the prior year. The bulk of that growth
came in North America and European hygiene products through successful business
development efforts focused on introducing new products for new customers.
The
outlook is positive for continued volume expansion in this area. Specialty
plastic films’ operating results also reflected relocation and start-up costs in
connection with our new production capacity in Brazil.
The
bulk
of specialty plastic films’ products are custom engineered to meet each
customer’s unique requirements. As new customers and products come on board, the
segment experiences a start-up period that negatively impacts output and
material yields as it ramps-up to commercial volumes. These factors add cost
and
are particularly significant in the current climate of high resin prices. We
expect them to continue to impact margins in the near term as a result of the
segment’s ongoing business development efforts.
Finally,
in addition to our sales development success, growth should also be fostered
by
the introduction of new elastic films and laminates. These products will improve
the fit, comfort and appeal of future baby diaper and adult incontinent
products. It is expected that the segment will begin shipping commercial
quantities of these new products in the fourth quarter of 2006.
The
cost
of resin declined through most of the third quarter but spiked in June 2006.
During the third quarter, resin costs negatively affected specialty plastic
films’ operating income by approximately $1.0 million and additional resin cost
increases are anticipated in the coming months.
During
the third quarter steel prices in the garage door segment remained fairly level
although the segment did experience selective price increases in certain types
of steel. Generally, the steel market that supplies our operations is
tightening. Accordingly, this segment is presently experiencing significant
cost
increases and has announced selling price increases in the fourth quarter to
recover these costs.
The
electronic information and communication systems segment had substantial growth
in sales and improved operating profit compared to last year. The major factor
in the increase is the revenue and profit in connection with fiscal 2006
subcontracts with Syracuse Research Corporation (SRC). To
date,
this segment has received SRC subcontracts in excess of $195 million.
The
SRC
program is somewhat unusual for the segment as it does not have a lengthy
development phase, and therefore had an immediate and significant effect on
the
segment’s operating results. We expect that by year end approximately 70% of the
contract will be complete and that the remainder will be completed by the second
quarter of fiscal 2007. New orders and contract awards were also steady for
Telephonics’ other programs. The segments backlog at June 30, 2006 is at an
all-time high of $390 million. The MH60-R program continues to ramp up as
anticipated and is the primary reason for the increase in backlog.
12
RESULTS
OF OPERATIONS
See
Note
4 of Notes to Condensed Consolidated Financial Statements.
THREE
MONTHS ENDED JUNE 30, 2006
Operating
results (in thousands) by business segment were as follows for the three-month
periods ended June 30:
Segment
|
|||||||||||||
Net
Sales
|
Operating
Profit
|
||||||||||||
2006
|
2005
|
2006
|
2005
|
||||||||||
Garage
doors
|
$
|
139,297
|
$
|
137,440
|
$
|
10,324
|
$
|
10,686
|
|||||
Installation
services
|
86,454
|
77,090
|
2,203
|
2,583
|
|||||||||
Specialty
plastic films
|
97,246
|
90,607
|
8,137
|
6,040
|
|||||||||
Electronic
information
|
|||||||||||||
and
communication systems
|
111,404
|
51,004
|
12,670
|
2,830
|
|||||||||
Intersegment
revenues
|
(5,330
|
)
|
(5,237
|
)
|
-
|
-
|
|||||||
|
$
|
429,071
|
$
|
350,904
|
$
|
33,334
|
$
|
22,139
|
Garage
Doors
Net
sales
of the garage doors segment increased by $1.9 million compared to last year.
The
sales growth was principally due to favorable product mix ($2.9 million) driven
by a shift to premium doors. This revenue growth was partially offset by lower
unit volume ($.8 million).
Operating
profit of the garage doors segment was approximately the same as last year.
Gross margin percentage increased to 30.8% for the quarter compared to 29.5%
last year due to the product mix shift and moderating raw material costs that
positively affected gross margin and operating profit by approximately $2.3
million. Selling, general and administrative expenses increased $2.8 million
compared to last year principally due to higher distribution, freight, marketing
and advertising expenses. As a percentage of sales, selling, general and
administrative expenses increased to 23.5% from 21.7% last year.
Installation
Services
Net
sales
of the installation services segment increased by $9.4 million compared to
last
year. The higher sales primarily resulted from continued higher volume in the
segment’s Las Vegas and Phoenix markets. Although several national builders have
recently experienced and forecasted continuing weakening sales of new
residential housing, we have not yet seen the impact of this slowdown on this
segment. However, we do expect lower sales for this segment in 2007 attributable
to the weaker housing markets and to the loss of key accounts in Las Vegas
due
to increased competition. The combination of lower sales and margin pressure
is
expected to result in lower earnings for the segment in fiscal 2007. Management
is evaluating several cost reduction initiatives to offset the expected profit
decline as well as new sales initiatives. In addition the segment’s management
team has been strengthened by the addition of several industry veterans. New
general managers have been added in the Phoenix and Las Vegas locations and
the
co-founder of the company’s Las Vegas and Phoenix flooring and cabinet business,
has rejoined the company.
Operating
profit of the installation services segment was approximately the same as in
the
prior year. Gross margin percentage decreased to 26.6% from 26.8% last year
principally due to higher raw material costs attributable to sales of cabinet
and flooring products and narrower margins due to competitive market conditions.
Selling, general and administrative expenses increased commensurate with the
sales growth and, as a percentage of sales, was 24.1% compared to 23.5% last
year.
13
Specialty
Plastic Films
Net
sales
of the specialty plastic films segment increased $6.6 million compared to last
year. The increase was principally due to higher selling prices ($2 million)
driven by prior period resin cost increases, increased unit volume ($1 million),
the effect ($1.1 million) of a weaker U.S. Dollar on translated foreign sales
and non-recurring revenue ($2.4 million) associated with the segment’s product
development efforts.
Operating
profit of the specialty plastic films segment increased $2.1 million compared
to
last year. Gross margin percentage increased to 20.6% from 20.4% last year.
The
positive effect ($1 million) of higher unit volume on gross margin and operating
profit was offset by the negative impact ($1 million) of higher raw material
costs. The negative effects on operating profit of relocation and start-up
costs
associated with new manufacturing capacity in Brazil were offset by the revenue
growth and realized foreign exchange gains. Selling, general and administrative
expenses were relatively flat compared to last year and as a percentage of
sales
decreased to 13.1% from 13.3% last year.
Electronic
Information and Communication Systems
Net
sales
of the electronic information and communication systems segment increased $60.4
million compared to last year. The sales increase was primarily attributable
to
the SRC subcontract.
Operating
profit of the electronic information and communication systems segment increased
$9.8 million principally due to the substantial revenue growth attributable
to
the SRC subcontract. Gross margin percentage decreased to 19.9% from 22.8%
last
year, principally due to the SRC sub-contract and other development programs
and
new awards. The effect of the lower gross margin percentage was offset by the
sales increase. Selling, general and administrative expenses increased slightly
compared to last year but as a percentage of sales was 8.7% compared to 17.3%
last year due to the sales increase.
Provision
for income taxes
The
provision for income taxes for the quarter ended June 30, 2006 was favorably
impacted by the reversal of approximately $1.4 million of estimated income
tax
liabilities in connection with closed tax years.
NINE
MONTHS ENDED JUNE 30, 2006
Operating
results (in thousands) by business segment were as follows for the nine-month
periods ended June 30:
Net
Sales
|
Operating
Profit
|
||||||||||||
2006
|
2005
|
2006
|
2005
|
||||||||||
Garage
doors
|
$
|
403,711
|
$
|
383,321
|
$
|
27,531
|
$
|
22,084
|
|||||
Installation
services
|
250,229
|
215,887
|
6,217
|
5,159
|
|||||||||
Specialty
plastic films
|
279,288
|
276,472
|
15,411
|
20,858
|
|||||||||
Electronic
information
|
|||||||||||||
and
communication systems
|
235,702
|
153,759
|
20,388
|
8,751
|
|||||||||
Intersegment
revenues
|
(15,184
|
)
|
(15,888
|
)
|
-
|
-
|
|||||||
$
|
1,153,746
|
$
|
1,013,551
|
$
|
69,547
|
$
|
56,852
|
14
Garage
Doors
Net
sales
of the garage doors segment increased by $20.4 million compared to last year.
The sales growth was principally due to selling price increases ($7 million)
that passed the effect of prior period raw material cost increases to customers,
favorable product mix ($7 million) and increased unit volume ($5 million).
Operating
profit of the garage doors segment increased $5.4 million compared to last
year.
Gross margin percentage in the nine months increased to 30.4% compared to 28.3%
for last year due to the effect of increased selling prices ($6 to $7 million),
increased unit volume ($1 million), improved product mix ($2 to $3 million)
and
raw material cost reductions that positively affected gross margin and operating
profit by approximately $3 million. Selling, general and administrative expenses
increased primarily due to higher marketing and distribution costs compared
to
last year and, as a percentage of sales, was 23.6% compared to 22.5% last
year.
Installation
Services
Net
sales
of the installation services segment increased by $34.3 million compared to
last
year. The higher sales resulted from continued higher volume in the segment’s
Las Vegas and Phoenix markets. Strong sales of flooring and cabinet products
were driven by higher housing starts in those markets.
Operating
profit of the installation services segment increased $1.1 million compared
to
last year. Gross margin was 26.4% in 2006 compared to 26.5% in 2005. Selling,
general and administrative expenses increased primarily due to higher
distribution and selling costs to support the sales growth. As a percentage
of
sales, selling, general and administrative expenses was 24.0% compared to 24.2%
last year due to the sales increase.
Specialty
Plastic Films
Net
sales
of the specialty plastic films segment increased $2.8 million compared to last
year. The increase was primarily due to the net effect ($27 million) of sales
to
new customers and favorable product mix and the effect of higher selling prices
($5 million) driven by resin cost increases, partly offset by lower unit volume
($23 million) principally related to the diaper redesign process that primarily
impacted first quarter unit volumes and the negative effect ($5 million) of
a
stronger U.S. Dollar for most of the nine-months on translated foreign sales.
Operating
profit of the specialty plastic films segment decreased $5.4 million compared
to
last year. Gross margin percentage decreased to 18.5% from 20.6% last year.
The
lower gross margin and operating profit reflected the effect (approximately
$4
million) of lower unit volume and the negative impact ($3 million) of higher
raw
material costs. Selling, general and administrative expenses increased slightly,
and as a percentage of sales was 13.7% compared to 13.2% last year.
Electronic
Information and Communication Systems
Net
sales
of the electronic information and communication systems segment increased $81.9
million compared to last year. The sales increase was principally attributable
to the SRC subcontract and growth in radar program awards.
Operating
profit of the electronic information and communication systems segment increased
$11.6 million compared to last year. Gross margin percentage decreased to 19.7%
from 22.2% last year, principally due to lower margins on the SRC sub-contract
and other development programs and new awards. The effect of the lower gross
margin percentage was offset by the sales increase. Selling, general and
administrative expenses increased slightly compared to last year but as a
percentage of sales was 11.3% compared to 16.8% last year due to the sales
increase.
15
Provision
for income taxes
The
provision for income taxes for the nine-months ended June 30, 2006 was favorably
impacted by the reversal of approximately $1.4 million of estimated income
tax
liabilities in connection with closed tax years.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
flow
generated by operations for the nine-months ended June 30, 2006 was $19.3
million compared to $46.1 million last year and working capital was $294.8
million at June 30, 2006. Operating cash flows decreased compared to last year
due primarily to increased inventory levels, higher contract-related receivables
and the classification of tax benefits from stock option exercises as a
financing activity in 2006, partly offset by increases in current
liabilities.
During
the nine-months ended June 30, 2006 the company had capital expenditures of
approximately $22.4 million. Subsequent to June 30, 2006 the garage door segment
acquired a manufacturing facility in Troy, Ohio. The cost of the facility and
planned improvements are expected to approximate $15 million. The facility
will
be used to expand existing manufacturing capabilities and to add new
manufacturing processes and products to the segment’s garage door line. Capital
expenditure activity for the remainder of the year should continue at levels
consistent with prior years.
Financing
cash flows included treasury stock purchases of $17.2 million to acquire
approximately 703,000 shares of the company’s common stock and $60 million of
debt refinancing. In December 2005, the company and a subsidiary entered into
a
new five-year senior secured multicurrency revolving credit facility in the
amount of up to $150,000,000. Commitments under the credit agreement may be
increased by $50,000,000 under certain circumstances upon request of the
Company. Borrowings under the credit agreement bear interest at rates based
upon
LIBOR or the prime rate and are collateralized by stock of a subsidiary of
the
Company. The credit agreement replaced a loan agreement dating from October
2001
and refinanced $60 million of borrowings under such agreement. The proceeds
of
additional borrowings under the credit agreement have been used for general
corporate purposes.
Approximately
1,700,000 shares of common stock are available for purchase pursuant to the
company’s stock buyback program, and additional purchases under the plan or a
10b5 plan will be made, depending upon market conditions, at prices deemed
appropriate by management.
Anticipated
cash flows from operations, together with existing cash, bank lines of credit
and lease line availability, should be adequate to finance presently anticipated
working capital and capital expenditure requirements and to repay long-term
debt
as it matures.
CRITICAL
ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS
The
company's significant accounting policies are set forth in Note 1 of Notes
to
Consolidated Financial Statements in the company's annual report to shareholders
for the year ended September 30, 2005. A discussion of those policies that
require management judgment and estimates and are most important in determining
the company's operating results and financial condition are discussed in
Management’s Discussion and Analysis of Financial Condition and Results of
Operations contained in the 2005 Annual Report.
The
Financial Accounting Standards Board has issued a number of financial accounting
standards, staff positions and emerging issues task force consensus. See Notes
3
and 6 of Notes to Condensed Consolidated Financial Statements for a discussion
of these matters.
16
FORWARD-LOOKING
STATEMENTS
All
statements other than statements of historical fact included in this report,
including without limitation statements regarding the company's financial
position, business strategy, and the plans and objectives of the company's
management for future operations, are forward-looking statements. When used
in
this report, words such as “anticipate”, “believe”, “estimate”, “expect”,
“intend” and similar expressions, as they relate to the company or its
management, identify forward-looking statements. Such forward-looking statements
are based on the beliefs of the company's management, as well as assumptions
made by and information currently available to the company's management. Actual
results could differ materially from those contemplated by the forward-looking
statements as a result of certain factors, including, but not limited to,
business and economic conditions, results of integrating acquired businesses
into existing operations, competitive factors and pricing pressures for resin
and steel, capacity and supply constraints. Such statements reflect the views
of
the company with respect to future events and are subject to these and other
risks, uncertainties and assumptions relating to the operations, results of
operations, growth strategy and liquidity of the company. Readers are cautioned
not to place undue reliance on these forward-looking statements. The company
does not undertake any obligation to release publicly any revisions to these
forward-looking statements to reflect future events or circumstances or to
reflect the occurrence of unanticipated events.
ITEM
3 -
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Management
does not believe that there is any material market risk exposure with respect
to
derivative or other financial instruments that is required to be
disclosed.
ITEM
4 -
CONTROLS AND PROCEDURES
Under
the
supervision and with the participation of our Chief Executive Officer (“CEO”)
and Chief Financial Officer (“CFO”), the company’s disclosure controls and
procedures were evaluated as of the end of the period covered by this report.
Based on that evaluation, the company’s CEO and CFO concluded that the company’s
disclosure controls and procedures were effective.
During
the period covered by this report there were no changes in the company’s
internal control over financial reporting which materially affected or are
reasonably likely to materially affect, the company's internal control over
financial reporting.
Limitations
on the Effectiveness of Controls
The
company believes that a control system, no matter how well designed and
operated, cannot provide absolute assurance that the objectives of the control
system are met, and no evaluation of controls can provide absolute assurance
that all controls issues and instances of fraud, if any, within a company have
been detected. The company’s disclosure controls and procedures are designed to
provide reasonable assurance of achieving their objectives and the company’s
chief executive officer and chief financial officer have concluded that such
controls and procedures are effective at the “reasonable assurance”
level.
17
PART
II - OTHER INFORMATION
|
|||||
Item
1
|
Legal
Proceedings
|
||||
None
|
|||||
Item
2
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
||||
(c)
|
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
|
||||
Period
|
Total
Number of Shares Purchased(1)
|
Average
Price Paid per
Share
|
Total
Number of Shares Purchased as part of Publicly Announced Plans
or
Programs
|
Maximum
Number of Shares that May Yet Be Purchased Under the Plans or Programs
at
Month
End (2)
|
|||||||||
April
1 - 30
|
-
|
-
|
-
|
1,788,495
|
|||||||||
May
1 - 31
|
44,616
|
27.43
|
35,000
|
1,753,495
|
|||||||||
June
1 - 30
|
27,500
|
25.11
|
27,500
|
1,725,995
|
|||||||||
Total
|
72,116
|
62,500
|
(1)
The company’s stock buyback program has been in effect since 1993, under
which a total of approximately 16.8 million shares have been purchased
for
$226.2 million. The unused authorization is 1.7 million shares. There
is
no time limit on the repurchases to be made under the
plan.
|
|||||
(2)
In November 2005, the company announced that its Board of Directors
approved the entry into a Rule 10b5-1 trading plan with a broker
to
facilitate the repurchase of its shares of common stock under its
stock
buyback program. During June 2006, the company purchased 22,500 shares
under a Rule 10b5-1 plan. Such 10b5-1 plan terminates in August 2006
in
accordance with its terms. Therefore, no additional shares may be
purchased pursuant to that plan. However, under prior authorizations
from
the Board of Directors, management may enter into additional Rule
10b5-1
trading plans to facilitate stock repurchases without further
announcement.
|
|||||
Item
3
|
Defaults
upon Senior Securities
|
||||
None
|
|||||
Item
4
|
Submission
of Matters to a Vote of Security Holders
None
|
||||
Item
5
|
Other
Information
|
||||
None
|
|||||
Item
6
|
Exhibits
|
||||
Exhibit
31.1 - Certification pursuant to Rules 13a-14(a) as adopted pursuant
to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|||||
Exhibit
31.2 - Certification pursuant to Rules 13a-14(a) as adopted pursuant
to
Section 302 of the Sarbanes-Oxley Act 2002.
|
|||||
Exhibit
32 - Certifications pursuant to 18 U.S.C. Section 1350 as adopted
pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|||||
18
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
GRIFFON
CORPORATION
|
|
By/s/Eric
Edelstein
|
|
Eric
Edelstein
|
|
Executive
Vice President
|
|
and
Chief Financial Officer
|
|
(Principal
Financial Officer)
|
Date:
August 9, 2006
19