GRIFFON CORP - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
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 (State or other jurisdiction of incorporation or organization)		11-1893410 (I.R.S. Employer Identification No.)
100 JERICHO QUADRANGLE, JERICHO, NEW YORK (Address of principal executive offices)		11753 (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 time that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 29,145,422 shares of Common Stock as of April 30, 2005.

FORM 10-Q

CONTENTS

			Page
Part I —	*Financial Information (Unaudited)*
	Condensed Consolidated Balance Sheets at March 31, 2005 and September 30, 2004		1
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2005 and 2004		3
	Condensed Consolidated Statements of Cash Flows for the Six Months ended March 31, 2005 and 2004		5
	Notes to Condensed Consolidated Financial Statements		6
	Management's Discussion and Analysis of Financial Condition and Results of Operations		11
	Quantitative and Qualitative Disclosures about Market Risk		15
	Controls & Procedures		15
Part II —	*Other Information*
	Item 1:	Legal Proceedings	16
	Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	16
	Item 3:	Defaults upon Senior Securities	16
	Item 4:	Submission of Matters to a Vote of Security Holders	16
	Item 5:	Other Information	17
	Item 6:	Exhibits	17
	Signature		18

GRIFFON CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

				March 31, 2005		September 30, 2004
						(Note 1)
ASSETS
	CURRENT ASSETS:
		Cash and cash equivalents		$	84,655,000	$	88,047,000
		Accounts receivable, less allowance for doubtful accounts			156,001,000		174,938,000
		Contract costs and recognized income not yet billed			34,629,000		32,700,000
		Inventories (Note 2)			138,498,000		141,567,000
		Prepaid expenses and other current assets			40,173,000		43,381,000

			Total current assets		453,956,000		480,633,000

PROPERTY, PLANT AND EQUIPMENT
	at cost, less accumulated depreciation and amortization of $183,167,000 at March 31, 2005 and $170,381,000 at September 30, 2004				210,809,000		203,539,000

OTHER ASSETS:
	Costs in excess of fair value of net assets of businesses acquired				62,016,000		50,554,000
	Other				17,891,000		14,790,000

					79,907,000		65,344,000

				$	744,672,000	$	749,516,000

See notes to condensed consolidated financial statements.

GRIFFON CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

					March 31, 2005		September 30, 2004
							(Note 1)
*LIABILITIES AND SHAREHOLDERS' EQUITY*
	CURRENT LIABILITIES:
		Accounts and notes payable			$	86,515,000	$	91,807,000
		Other current liabilities				100,896,000		118,824,000

			Total current liabilities			187,411,000		210,631,000
	LONG-TERM DEBT					154,534,000		154,445,000
	OTHER LIABILITIES AND DEFERRED CREDITS					42,030,000		40,293,000

			Total liabilities and deferred credits			383,975,000		405,369,000

	MINORITY INTEREST					27,087,000		25,175,000

	SHAREHOLDERS' EQUITY:
			Preferred stock, par value $.25 per share, authorized 3,000,000 shares, no shares issued			—		—
			Common stock, par value $.25 per share, authorized 85,000,000 shares, issued 38,688,023 shares at March 31, 2005 and 38,006,139 shares at September 30, 2004; 9,550,901 and 9,014,509 shares in treasury at March 31, 2005 and September 30, 2004, respectively			9,672,000		9,502,000
			Other shareholders' equity			323,938,000		309,470,000

				Total shareholders' equity		333,610,000		318,972,000

					$	744,672,000	$	749,516,000

See notes to condensed consolidated financial statements.

GRIFFON CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

		Three Months Ended March 31,
		2005			2004
Net sales		$	322,473,000		$	317,636,000
Cost of sales			245,153,000			225,607,000

	Gross profit		77,320,000			92,029,000
Selling, general and administrative expenses			69,717,000			70,841,000

	Income from operations		7,603,000			21,188,000

Other income (expense):
	Interest expense		(2,057,000	)		(2,049,000	)
	Interest income		572,000			290,000
	Other, net		(17,000	)		(81,000	)

			(1,502,000	)		(1,840,000	)

	Income before income taxes		6,101,000			19,348,000
Provision for income taxes (Notes 6 and 7)			832,000			7,159,000

	Income before minority interest		5,269,000			12,189,000
Minority interest			(1,125,000	)		(3,527,000	)

	Net income	$	4,144,000		$	8,662,000

Basic earnings per share of common stock (Note 3)		$	.14		$	.29

Diluted earnings per share of common stock (Notes 3 and 7)		$	.13		$	.27

See notes to condensed consolidated financial statements.

GRIFFON CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

		Six Months Ended March 31,
		2005			2004
Net sales		$	662,647,000		$	656,138,000
Cost of sales			497,035,000			466,489,000

	Gross profit		165,612,000			189,649,000
Selling, general and administrative expenses			140,175,000			141,649,000

	Income from operations		25,437,000			48,000,000

Other income (expense):
	Interest expense		(4,165,000	)		(4,090,000	)
	Interest income		1,155,000			481,000
	Other, net		1,229,000			615,000

			(1,781,000	)		(2,994,000	)

	Income before income taxes		23,656,000			45,006,000
Provision for income taxes (Notes 6 and 7)			7,327,000			16,652,000

	Income before minority interest		16,329,000			28,354,000
Minority interest			(2,993,000	)		(6,577,000	)

	Net income	$	13,336,000		$	21,777,000

Basic earnings per share of common stock (Note 3)		$	.45		$	.73

Diluted earnings per share of common stock (Notes 3 and 7)		$	.43		$	.69

See notes to condensed consolidated financial statements.

GRIFFON CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

				Six Months Ended March 31,
				2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income				$	13,336,000		$	21,777,000

	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization			15,272,000			14,097,000
		Minority interest			2,993,000			6,577,000
		Provision for losses on accounts receivable			867,000			928,000
		Change in assets and liabilities:
			Decrease in accounts receivable and contract costs and recognized income not yet billed		18,537,000			24,211,000
			(Increase) decrease in inventories		4,467,000			(19,339,000	)
			(Increase) decrease in prepaid expenses and other assets		2,497,000			(4,638,000	)
			Decrease in accounts payable, accrued liabilities and income taxes		(27,040,000	)		(3,285,000	)
			Other changes, net		3,586,000			2,789,000

	Total adjustments				21,179,000			21,340,000

		Net cash provided by operating activities			34,515,000			43,117,000

CASH FLOWS FROM INVESTING ACTIVITIES:
	Acquisition of property, plant and equipment				(22,533,000	)		(24,333,000	)
	Acquisition of minority interest in subsidiary				(3,883,000	)		—
	Acquired businesses				(9,235,000	)		—
	(Increase) decrease in equipment lease deposits				3,314,000			(10,831,000	)

		Net cash used in investing activities			(32,337,000	)		(35,164,000	)

CASH FLOWS FROM FINANCING ACTIVITIES:
	Purchase of shares for treasury				(7,946,000	)		(15,211,000	)
	Proceeds from issuance of long-term debt				7,778,000			3,774,000
	Payments of long-term debt				(9,040,000	)		(8,200,000	)
	Decrease in short-term borrowings				(44,000	)		—
	Distributions to minority interest				(988,000	)		(4,992,000	)
	Exercise of stock options				4,137,000			4,610,000
	Other, net				—			(61,000	)

		Net cash used in financing activities			(6,103,000	)		(20,080,000	)

Effect of exchange rates on cash and cash equivalents					533,000			851,000

NET DECREASE IN CASH AND CASH EQUIVALENTS					(3,392,000	)		(11,276,000	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD					88,047,000			69,816,000

CASH AND CASH EQUIVALENTS AT END OF PERIOD				$	84,655,000		$	58,540,000

See notes to condensed consolidated financial statements.

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 six-month periods ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending September 30, 2005. The balance sheet at September 30, 2004 has been derived from the audited financial statements at that date. For further information, refer to the consolidated financial statements and footnotes thereto included in the company's annual report to shareholders for the year ended September 30, 2004.

(2): Inventories—

Inventories, stated at the lower of cost (first-in, first-out or average) or market, are comprised of the following:

	March 31, 2005		September 30, 2004
Finished goods	$	53,663,000	$	57,654,000
Work in process		53,778,000		53,498,000
Raw materials and supplies		31,057,000		30,415,000

	$	138,498,000	$	141,567,000

(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. The weighted average number of shares of common stock used in determining basic EPS was 29,387,000 and 29,900,000 for the three months ended March 31, 2005 and 2004, respectively, and 29,318,000 and 29,860,000 for the six months ended March 31, 2005 and 2004, respectively.

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, 2004.

The weighted average number of shares of common stock used in determining diluted EPS was 31,179,000 and 31,773,000 for the three months ended March 31, 2005 and 2004, respectively, and 31,172,000 and 31,753,000 for the six months ended March 31, 2005 and 2004, respectively, and reflects additional shares issuable in connection with stock option and other stock-based compensation plans. Shares potentially issuable upon conversion of the notes are determined using the "treasury stock" method (see Note 7) and had no effect for the three and six-month periods ended March 31, 2004 and an insignificant effect on the calculation of diluted earnings per share for the three and six-month periods ended March 31, 2005.

Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", as amended by Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure", permits an entity to continue to account for employee stock-based compensation under APB Opinion No. 25, "Accounting for Stock Issued to Employees", or adopt a fair value based method of accounting for such compensation. Prior to the effective date of Statement of Financial Accounting Standards No. 123R, "Share-Based Payment", the company has accounted for stock-based compensation under Opinion No. 25 (see Note 7 for a discussion of the new accounting standard that requires fair value measurement and recognition of compensation cost in connection with stock options). Accordingly, no compensation expense has been recognized in connection with options granted. 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 would have been as follows:

		Three Months Ended March 31,						Six Months Ended March 31,
		2005			2004			2005			2004
Net income, as reported		$	4,144,000		$	8,662,000		$	13,336,000		$	21,777,000
Deduct total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(1,854,000	)		(496,000	)		(2,375,000	)		(1,083,000	)

Pro forma net income		$	2,290,000		$	8,166,000		$	10,961,000		$	20,694,000

Earnings per share:
	Basic—as reported	$	.14		$	.29		$	.45		$	.73

	Basic—pro forma	$	.08		$	.27		$	.37		$	.69

	Diluted—as reported	$	.13		$	.27		$	.43		$	.69

	Diluted—pro forma	$	.07		$	.25		$	.35		$	.65

(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); Electronic Information and Communication Systems (communication and information systems for government and commercial markets) and 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).

Information on the company's business segments is as follows:

		Garage Doors		Installation Services		Specialty Plastic Films		Electronic Information and Communication Systems		Totals
Revenues from external customers—
Three months ended
	March 31, 2005	$	105,104,000	$	66,483,000	$	94,533,000	$	56,353,000	$	322,473,000
	March 31, 2004		91,457,000		72,307,000		106,613,000		47,259,000		317,636,000
Six months ended
	March 31, 2005	$	235,291,000	$	138,736,000	$	185,865,000	$	102,755,000	$	662,647,000
	March 31, 2004		207,650,000		148,975,000		210,614,000		88,899,000		656,138,000
Intersegment revenues—
Three months ended
	March 31, 2005	$	5,070,000	$	25,000	$	—	$	—	$	5,095,000
	March 31, 2004		4,636,000		25,000		—		—		4,661,000
Six months ended
	March 31, 2005	$	10,590,000	$	61,000	$	—	$	—	$	10,651,000
	March 31, 2004		10,303,000		62,000		—		—		10,365,000
Segment profit—
Three months ended
	March 31, 2005	$	749,000	$	1,287,000	$	6,220,000	$	3,397,000	$	11,653,000
	March 31, 2004		3,964,000		1,692,000		15,142,000		3,669,000		24,467,000
Six months ended
	March 31, 2005	$	11,398,000	$	2,576,000	$	14,818,000	$	5,921,000	$	34,713,000
	March 31, 2004		17,224,000		4,698,000		28,082,000		5,699,000		55,703,000

Following is a reconciliation of segment profit to amounts reported in the consolidated financial statements:

	Three Months Ended March 31,						Six Months Ended March 31,
	2005			2004			2005			2004
Profit for all segments	$	11,653,000		$	24,467,000		$	34,713,000		$	55,703,000
Unallocated amounts		(4,067,000	)		(3,360,000	)		(8,047,000	)		(7,088,000	)
Interest expense, net		(1,485,000	)		(1,759,000	)		(3,010,000	)		(3,609,000	)
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