Washington, D.C.  20549

 

 

FORM 10-K

 

ý  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 2003

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 No. 1-6620

 

GRIFFON CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Securities registered pursuant to Section 12(g) of the Act:

 

None

 

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.  Yes ý  No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

 

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

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant.  The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing.  As of December 15, 2003 - approximately $557,000,000.

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.  As of December 15, 2003 - 29,602,208.

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

Part III - (Items 10, 11, 12, 13 and 14).  Registrant’s definitive proxy statement to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934.

 

 

PART I

ITEM 1 - BUSINESS

 

The Company

 

Griffon is a diversified manufacturing company with operations in four business segments: Garage Doors; Installation Services; Specialty Plastic Films; and Electronic Information and Communication Systems.  The company’s Garage Doors segment designs, manufactures and sells garage doors for use in the residential housing and commercial building markets.  The Installation Services segment sells, installs and services garage doors, garage door openers, manufactured fireplaces, floor coverings, cabinetry and a range of related building products primarily for the new residential housing market.  The company’s Specialty Plastic Films segment develops, produces and sells plastic films and film laminates for use in infant diapers, adult incontinence products, feminine hygiene products and disposable surgical and patient care products.  The company’s Electronic Information and Communication Systems segment designs, manufactures, sells and provides logistical support for communications, radar, information, command and control systems and large-scale integrated circuits for defense and commercial markets.

 

The company has made strategic investments in each of its business segments to enhance its market position, expand into new markets and further accelerate growth.  Garage Doors and Installation Services have acquired several manufacturing and installation companies in recent years.  In 1999, Installation Services acquired an operation located in the Southwest that sells and installs a range of specialty products to the new residential construction market, expanding the products and services offered by the company.  In 2000, the company acquired a Michigan garage door wholesale and installation company and a Seattle fireplace and garage door installation business.  In 1998, Specialty Plastic Films acquired a manufacturer of printed plastic packaging and specialty films located in Germany, expanding its markets and technical capabilities, and subsequently added additional production capacity in its European joint venture to enhance its business with a major international consumer products company.  In 2002, Specialty Plastic Films acquired 60% ownership of a Brazilian manufacturer of plastic hygienic and specialty films, further expanding its markets and global supply capabilities.  In fiscal 2003, Specialty Plastic Films commenced a significant capital expansion program designed to increase its overall production capacity and support anticipated growth opportunities with its major customers.  In 2000, the Electronic Information and Communication Systems segment acquired a search and weather radar business.

 

The company was incorporated on May 18, 1959 under the laws of the State of New York.  It was reincorporated in Delaware in 1970 and its name was changed to Griffon Corporation in 1995.  The company makes available, free of charge through its website at www.griffoncorp.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such material is filed with the Securities and Exchange Commission.

 

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Garage Doors

 

The company believes that its wholly-owned subsidiary, Clopay, is the largest manufacturer and marketer of residential garage doors and among the largest manufacturers of commercial sectional doors in the United States.  The company’s building products are sold under Clopay^®, Ideal Door^® and Holmes^® brand names through an extensive distribution network throughout the United States.  The company estimates that the majority of Garage Doors’ net sales are from sales of garage doors to the home remodeling segment of the residential housing market, with the balance from the new residential housing and commercial building markets.  Sales into the home remodeling market are being driven by the continued aging of the housing stock and the conversion by homeowners from wood doors to lighter weight, easier to maintain steel doors.

 

Industry

 

According to industry sources, the residential and commercial sectional garage door market for 2002 was estimated to be $1.6 billion.  Over the past decade there have been several key trends driving the garage door industry, including the shift from wood to steel doors and the growth of the home center channel of distribution.  The company estimates that over 90% of the total garage door market today is steel doors.  Superior strength, reduced weight and low maintenance have favored the steel door.  Other product innovations during this period include insulated double-sided steel doors, new springing systems and residential garage doors with improved safety features.

 

The growth of the home center channel of distribution in the United States has resulted in a shift from traditional channels, including professional installers and wholesalers.  Over the past decade, an increasing number of garage doors have been sold through home center retail chains such as The Home Depot, Inc.  These home centers offer garage doors for the do-it-yourself market and commercial contractors, as well as installation services for other customers.  Distribution through the retail channel requires a different approach than that traditionally utilized by garage door manufacturers.  Factors such as immediately available inventory, national distribution, national installation services, point-of-sale merchandising and special packaging are all important to the retailer.

 

Key Competitive Strengths

 

The company believes that the following strengths will continue to enhance the market position of Garage Doors:

 

National Distribution Network.  The company distributes its building products through a wide range of distribution channels including installing dealers, retailers and wholesalers.  The company owns and operates a national network of 47 distribution centers.  The company’s building products are sold to approximately 2,000 independent professional installing dealers and to major home center retail chains, including The Home Depot, Inc., Menards, Inc. and Lowe’s Companies, Inc.  The company maintains strong relationships with its installing dealers and believes it is the largest supplier of residential garage doors to the retail and professional installing channels.

 

Low-Cost Manufacturing Capabilities.  The company believes it has low-cost manufacturing capabilities as a result of its automated, continuous production manufacturing facilities and its reduced costs for raw materials based on volume purchases.  These manufacturing facilities produce a broad line of high quality garage doors for distribution to professional installer, retail and wholesale channels.

 

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Strong Brand Franchise.  The company’s brand names, particularly Clopay^®, Holmes^® and Ideal Door^®, are widely recognized in the building products industry.  The company believes that it has earned a reputation among installing dealers, retailers and wholesalers for producing a broad range of high-quality doors.  The company’s market leadership and strong brand recognition are key marketing tools for expanding its customer base, leveraging its distribution network and increasing its market share.

 

Strategy

 

The company intends to increase its market share in Garage Doors by capitalizing on what it believes to be its leadership position as the largest manufacturer and marketer of residential garage doors.  Specifically, the company intends to: (i) continue sales growth through its dealer network and the retail market; (ii) increase brand awareness through merchandising programs and advertising; (iii) maintain a leadership position in new product development; and (iv) expand its production and presence nationally through internal investment and strategic acquisitions.

 

Products and Services

 

The company manufactures a broad line of residential and commercial sectional garage doors with a variety of options at varying prices.  The company also sells related products such as garage door openers.  The company offers garage doors made from several materials, including steel and wood.

 

The company generally markets its lines of residential garage doors in three primary product categories: Value, Value Plus and Premium.  The Value series door construction consists of a single layer of steel or wood doors targeting the new construction market and the cost-conscious consumer market.  The Value Plus series consists of insulated steel doors targeting the new construction market and the quality-oriented consumer market.  The Premium series consists of steel doors with a layer of insulation bonded between two sheets of steel targeting consumers who desire exceptional strength, durability, high insulation value, quiet operation, and a finished interior appearance.

 

The company also markets commercial sectional doors.  Commercial sectional doors are similar to residential garage doors, but are designed to meet more demanding performance specifications.

 

In 2002, the company discontinued the Atlas^® brand commercial/industrial product line, which included slatted steel coiling doors, service doors, thermal doors, fire doors and counter shutters, fire shutters and grilles.

 

Sales by Garage Doors have provided approximately 32% of the company’s consolidated revenue in 2003, 35% in 2002 and 35% in 2001.

 

Sales and Marketing

 

The company sells residential and commercial doors for professional installation directly to a national network of professional installing dealers.  We also sell garage doors to retailers such as The Home Depot, Inc., Menards, Inc. and Lowe’s Companies, Inc.  The company is the principal supplier of residential garage doors throughout the United States and Canada to The Home Depot, Inc., with Clopay^® brand doors being sold exclusively to this customer in the retail channel of distribution.  Sales of the Clopay^® brand outside the retail channel of distribution are not restricted.  The segment’s largest customers are The Home Depot, Inc. and Menards, Inc.  The loss of these customers would have a material adverse effect on the company’s business.  The company distributes its garage doors directly to customers from its manufacturing facilities and through its network of 47 company-

 

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owned distribution centers located throughout the United States and in Canada.  These distribution centers allow the company to maintain an inventory of garage doors near installing dealers and provide quick-ship service to retail customers.

 

Manufacturing and Raw Materials

 

The company currently operates four garage door manufacturing facilities.  A key aspect of Garage Doors’ research and development efforts has been the ability to continually improve and streamline its manufacturing process.  The company’s engineering and technological expertise, combined with its capital investment in equipment, generally has enabled the company to efficiently manufacture products in large volume and meet changing customer needs.  The company’s facilities use proprietary manufacturing processes to produce the majority of its products.  Certain of the company’s equipment and machinery are internally modified to achieve its manufacturing objectives.

 

The principal raw material used in the company’s manufacturing operations is galvanized steel.  The company also utilizes certain hardware components as well as wood and insulated foam.  All of these raw materials are generally available from a number of sources.

 

Research and Development

 

The company operates a technical development center where its research engineers work to design, develop and implement new products and technologies and perform durability and performance testing of new and existing products, materials and finishes.  Also at this facility, the company’s process engineering team works to develop new manufacturing processes and production techniques aimed at improving manufacturing efficiencies.

 

Competition

 

The garage door industry is characterized by several large national manufacturers and many smaller regional and local manufacturers.  The company competes on the basis of service, quality, innovative products and services, brand awareness and price.

 

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Installation Services

 

The company has developed a substantial network of specialty building products installation and service operations.  Its network of locations cover many of the key new single family home markets in the United States and offer an increasing variety of building products and services to the residential construction and remodeling industries.  The company believes that it is one of the leading installing dealers of both garage doors and manufactured fireplaces in the United States.

 

Industry

 

The company provides installed specialty building products to residential builders and to consumers.  Builders are increasingly acting as developers and marketers, sub-contracting a substantial portion of the actual construction of a home.  Consumers require professional installation services of the company’s building products due to the skill levels required for installation and/or the lack of time to perform the installation themselves.  Traditionally, the market for installation services has been very fragmented, characterized by small operations offering a single type of building product in a single market.

 

Key Competitive Strengths

 

The company believes that the following strengths will continue to enhance the market position of the Installation Services business:

 

Scale of Operations.  In what has historically been an undercapitalized, fragmented industry, the company has sufficient capital and the scale to attract professional management, achieve operating economies, and serve the needs of even the largest national builders.

 

Multiple product and service offerings.  The company believes it is unique in its offering of products and services in several product categories.  This offering is leveraged over a common customer base, providing efficiencies and convenience for the customer.

 

Selection Centers.  The company operates well-appointed product design centers that facilitate selection of products by the consumer, enhancing customer service and providing an environment conducive to up-selling into higher margin products.

 

Strategy

 

The company believes that Installation Services has distinguished itself in the marketplace as an expert in select building product categories, with a focus on value-added service.

 

Installation Services has targeted geographic markets that have a sizeable population or significant growth demographics.  The company currently serves 14 of the top 100 metropolitan markets based on population and 9 of the top 20 new single-family residential construction markets.  The markets served account for approximately 20% of all new residential housing permits in the United States.  The company seeks to promote the continued growth of the Installation Services business through both internal growth and strategic acquisitions of new operations in high growth construction markets.

 

Installation Services’ multiple product offering is primarily targeted at new construction, wherein products are generally consumed at approximately the same time in the construction process.  Products offered can be selected and upgraded by the end-customer in the company’s design centers.  The company believes that its multi-product offering provides strategic marketing advantages over traditional, single product competitors, and provides the company with operational efficiencies.  The company seeks to increase the cross-selling of its multiple products to its

 

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existing customers.  Additionally, the company plans further growth through the introduction of additional installed building products.  The replacement and remodeling markets are additional markets for the company’s products and professional installation services.

 

Products and Services

 

Installation Services sells and installs a variety of building products:

 

Garage Doors and Openers - - garage doors are distributed, professionally installed and serviced in the new construction and replacement markets.  Installation Services sources most of its garage doors from Garage Doors.

 

Fireplaces - manufactured wood and gas fireplaces and related products such as stone or marble surrounds, wood mantels and gas logs are distributed, professionally installed and serviced primarily to the new construction market.

 

Flooring - flooring products distributed and installed to the new construction market include carpeting, tile and stone, wood and vinyl.

 

Appliances - appliances distributed to the new construction market include refrigerators, stoves, cooktops, ovens and dishwashers.

 

Kitchen and Bath Cabinets - - cabinetry, with options in wood varieties and door styles, are offered for distribution and installation to the new construction market.

 

Other - other products include seamless gutters, closet systems, window coverings, bath enclosures, and architectural hardware.  Tile and stone applications for shower and bath walls, counter tops and fireplace surrounds are also offered.

 

Sales by Installation Services have provided approximately 23% of the company’s consolidated revenue in 2003, 2002 and 2001.

 

Acquisitions

 

The Installation Services business has entered new markets primarily through acquisition.  Once established in a market, the company introduces additional product categories to the acquired company’s product offerings.  From 1993 through 2000, the company completed thirteen acquisitions of building products service and installation operations.

 

Competition

 

The installation services industry is fragmented, consisting primarily of small, single-market companies which have less financial resources than the company.  The company competes on the basis of service, product line diversity, price and brand awareness.

 

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Specialty Plastic Films

 

The company believes that, through Clopay Plastics Products Company, it is a leading developer and producer of specialty plastic films and laminates for a variety of hygienic, health care and industrial uses in domestic and certain international markets.  Specialty Plastic Films’ products include thin gauge embossed and printed films, elastomeric films and laminates of film and non-woven fabrics.  These products are used primarily as moisture barriers in disposable infant diapers, adult incontinence products and feminine hygiene products, as protective barriers in single-use surgical and industrial gowns, drapes, equipment covers, and as packaging for hygienic products.  Specialty Plastic Films’ products are sold through the company’s direct sales force primarily to multinational consumer and medical products companies.

 

The segment’s major customer is Procter & Gamble, with whom the company enjoys a long and growing relationship.  Specialty Plastic Films supplies Procter & Gamble with a variety of products used primarily for its infant diapers, both domestically and internationally, and expects to continue to expand the relationship in the future.  See “Strategy”.

 

Industry

 

The segment of the specialty plastic films industry in which Clopay participates has been affected by several key trends over the past five years.  These trends include the increased use of disposable products in developing countries and favorable demographics, such as the aging of the population, in the major global economies.  Other key trends representing significant opportunities for manufacturers include the continued demand for new advanced products such as cloth-like, breathable, laminated, and printed products and the need of major customers for global supply partners.

 

Key Competitive Strengths

 

The company believes that the following strengths will continue to enhance the market position of Specialty Plastic Films:

 

Technological Expertise and Product Development.  The company believes that, as a result of ongoing research and development activities and continued capital investment, including completion of a new Technical Center in 2003, it is a leader in new product development and commercialization of specialty plastic films and laminates for its markets.  The company has developed technologically advanced embossed films, elastomeric films, breathable films, laminates and cloth-like barrier products for diapers, feminine hygiene products, disposable health care and industrial products.  The company believes that its technical expertise and product development capabilities enhance its market position and customer relationships.

 

Long-Term Customer Relationships and Expanding International Presence.  The company has developed strong, long-term relationships with leading consumer and health care products companies.  The company believes that these relationships, combined with its technological expertise, product development and production capabilities, including global operations, have positioned it to meet changing customer needs, which the company expects will drive growth.  In addition, the company believes its strong, long-term relationships provide it with increasing opportunities to expand and enter new international markets.

 

Strategy

 

The company seeks to expand its market presence for Specialty Plastic Films by capitalizing on its technological and manufacturing expertise and on its relationships with major international consumer products companies.  Specifically, the company believes that it can continue to increase its North American sales and

 

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expand internationally through ongoing product development and enhancement and by marketing its technologically advanced breathable films and laminates for use in all of its markets.  The company believes that its Finotech joint venture, the 1998 acquisition of Böhme (see “European Operations”) and the 2002 acquisition of Clopay do Brasil (see “South American Operations”) provide a strong platform for additional sales growth in certain international markets.

 

This segment started a significant capital expansion program in fiscal 2003 to maintain its technology leadership, support new opportunities with its major customers and to increase capacity throughout its operations.  The segment began a facility-wide program both domestically and internationally to add manufacturing capacity.  In addition, during fiscal 2003, Specialty Plastic Films introduced a product initiative involving the production of high quality, multi-color printing of films and laminates for the baby diaper market in North America and Europe.  Consolidated equipment and plant additions during fiscal 2003 were $44 million, of which $30 million was for specialty plastic films.  It is anticipated that consolidated equipment and plant additions in fiscal 2004 will aggregate $40-50 million, the major portion of which will also be for specialty plastic films’ ongoing capital expansion programs.

 

Products

 

Specialty Plastic Films manufactures a wide variety of embossed and printed specialty films and laminates for the hygienic, healthcare and other markets.  Specialty Plastic Films’ products are used as moisture barriers for disposable infant diapers, adult incontinence and feminine hygiene products and as protective barriers in surgical and industrial gowns and drapes, equipment covers, flexible packaging, house wrap and other products.  A specialty plastic film is a thin-gauge film (typically 0.0005” to 0.003”) that is manufactured from polyolefin resins and engineered to provide certain performance characteristics.  A laminate is the combination of a plastic film and a non-woven fabric.  These products are produced using both cast and blown extrusion and laminating processes.  High speed, multi-color custom printing of films and customized embossing patterns further differentiate the products.  The company’s specialty plastic film products typically provide a unique combination of performance characteristics that meet specific, proprietary customer needs.  Examples of such characteristics include strength, breathability, barrier properties, processibility and aesthetic appeal.

 

Sales by Specialty Plastic Films have provided approximately 30% of the company’s consolidated revenue in 2003, 25% in 2002 and 26% in 2001.

 

Sales and Marketing

 

The company sells its products primarily in the United States and Europe with sales also in Canada, Central and South America and Asia Pacific.  The company utilizes an internal direct sales force, organized by customer accounts.  Senior management actively participates by developing and maintaining close contacts with customers.

 

The company’s largest customer is Procter & Gamble, which has accounted for a substantial portion of Specialty Plastic Films’ sales over the last five years.  The loss of this customer would have a material adverse effect on the company’s business.  Specialty plastic films also are sold to a diverse group of other leading consumer, health care and industrial companies.

 

Research and Development

 

The company believes it is an industry leader in the research, design and development of specialty plastic films and laminate products.  The company operates a technical center where approximately 50 chemists, scientists and engineers work independently and in strategic partnerships with the company’s customers to develop new technologies, products, processes and product applications.  Currently, the company is engaged in several joint efforts with the research and development departments of its customers.

 

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The company’s research and development efforts have resulted in many inventions covering embossing patterns, improved processing methods, product formulations, product applications and other proprietary technology.  Products developed by the company include microporous breathable films and cost-effective cloth-like films and laminates.  Microporous breathability provides for moisture vapor transmission and airflow while maintaining barrier properties resulting in improved comfort and skin care.  Cloth-like films and laminates provide consumers preferred aesthetics such as softness and visual appeal.  In fiscal 2003, the company began multi-color printing of films and laminates for its baby diaper products.  The company holds a number of patents for its current specialty film and laminate products and related manufacturing processes.  The company believes its patents are a less significant factor in its success than its proprietary know-how and the knowledge, ability and experience of its employees.

 

International Operations

 

In 1996, the company formed Finotech, a joint venture with Corovin GmbH, a manufacturer of non-woven fabrics headquartered in Germany and a subsidiary of BBA Group PLC, a publicly owned diversified U.K. manufacturer.  The joint venture was created to develop, manufacture and market specialty plastic film based laminate products for use in the infant diaper, healthcare and other markets.  Finotech, which is 60% owned by the company, focuses on selling its products in Europe.

 

In 1998, the company acquired Böhme Verpackungsfolien GmbH & Co., a German manufacturer of high-quality printed and conventional plastic packaging and specialty films.  The acquisition provides a platform to further expand Specialty Plastic Films’ European operations and the opportunity to broaden the segment’s product line by bringing Böhme technology and products to North American and other international markets.  These products include printed and unprinted film and flexible packaging for hygienic products.

 

In June 2002, the company acquired 60% ownership in Isofilme Ltda., a Brazilian manufacturer of plastic hygienic and specialty films which operates under the name Clopay do Brasil.  The acquisition provides a platform to broaden participation in South American markets and strengthen the company’s position as a global supplier.

 

Manufacturing and Raw Materials

 

The company manufactures its specialty plastic film and laminate products on high-speed equipment designed to meet stringent tolerances.  The manufacturing process consists of melting a mixture of polyolefin resins (primarily polyethylene) and additives, and forcing this mixture through a computer controlled die and rollers to produce embossed films.  In addition, the lamination process involves extruding the melted plastic films directly onto a non-woven fabric and bonding these materials to form a laminate.  Through statistical process control methods, company personnel monitor and control the entire production process.

 

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Plastic resins, such as polyethylene and polypropylene, and non-woven fabrics are the basic raw materials used in the manufacture of substantially all of Specialty Plastic Films’ products.  The company currently purchases its plastic resins in pellet form from several suppliers.  The purchases are made under supply agreements that do not specify fixed pricing terms.  The company’s sources for raw materials are believed to be adequate for its current and anticipated needs.

 

Competition

 

The market for the company’s specialty plastic film and laminate products is highly competitive.  The company has a number of competitors in the specialty plastic films and laminates market, some of which are larger and have greater resources than the company.  The company competes primarily on the basis of technical expertise, quality, service and price.

 

Electronic Information and Communication Systems

 

The company, through its wholly-owned subsidiary, Telephonics Corporation, specializes in advanced electronic information and communication systems for defense, aerospace, civil, industrial, and commercial markets worldwide.  The company designs, manufactures, sells, and provides logistical support for aircraft communication systems, radar, air traffic management systems, identification friend or foe (“IFF”) equipment, transit communications and custom, mixed-signal, application specific integrated circuits.  The company is a leading supplier of airborne maritime surveillance radar and aircraft intercommunication management systems, two of the segment’s largest product lines.  In addition to its traditional defense products used predominantly by the United States Government, in recent years the company has successfully adapted its core technologies to products used in military and commercial applications worldwide and has expanded its presence in both non-defense government and commercial markets.

 

Industry

 

The United States defense electronics procurement budget is expected to grow faster than the overall defense budget.  Growth in this budget area reflects the trend in recent years for the United States’ Department of Defense to opt for the installation of new electronic systems and equipment in existing aircraft rather than develop totally new weapons systems.  Conflicts involving the country’s military have also tended in recent years to require deployment and significant coordination between air, sea and ground forces, often in distant parts of the world, underscoring the evolution and growing importance of electronic systems that provide surveillance, tracking, communication and command and control.  Telephonics’ advanced systems and sub-systems are well positioned to address the needs of an electronic battlefield with emphasis on the generation and dissemination of timely data for use by highly mobile ground, air and naval forces.  It is anticipated that the need for such systems will also increase in connection with the increasingly active role that the military is playing in the war on terrorism, both at home and abroad.

 

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The table below lists some of the major programs the company currently participates in:

 

Customer		Product		Description
The Boeing Company		Intercommunications Management Systems		U.S. Air Force C-17A Cargo Transport
				U.S. Air Force C-130 Hercules Air Transport
				Airborne Warning and Control System (AWACS)
				U.S. Navy F/A-18E/F Fighter/Attack Aircraft
		Identification Friend or Foe System		AWACS
BAE Systems		Intercommunications System Integration		U.K. NIMROD Royal Maritime Patrol Aircraft
Northrop Grumman		Intercommunications Management Systems		Joint-STARS Surveillance Aircraft
		Maritime Surveillance Radar		U.S. Coast Guard HU-25 Aircraft
		Ground Surveillance Radar		U.S. Air Force
Lockheed Martin Corporation		Intercommunications Management Systems		U.S. Navy MH-60S/MH-60R Helicopters U.S. Navy P-3 Aircraft
		Maritime Surveillance Radar and Identification Friend or Foe System		U.S. Navy MH-60R Helicopter
Sikorsky Aircraft Company		Maritime Surveillance Radar		S-70B Maritime Surveillance Helicopter
		Intercommunications Management Systems		SH-60B Maritime Surveillance Helicopter UH-60M Blackhawk Helicopter Upgrade Program

 

Telephonics is generally a first tier supplier to prime contractors in the defense industry such as Boeing, Lockheed Martin, Northrop Grumman and BAE Systems.  With the significant contraction and consolidation that has occurred in the U.S. and international defense industry, major prime contractors worldwide are relying more heavily on smaller, key suppliers to provide advances in technology and greater efficiencies to reduce the cost of major systems and platforms.  We believe that this situation creates an attractive opportunity for established, first tier suppliers to capitalize on existing relationships with major prime contractors and play a larger role in the foreseeable future.

 

In recent years, the segment has also significantly expanded its customer base in international markets.  The company’s international projects include a contract with BAE Systems as part of the United Kingdom’s upgrade of the NIMROD surveillance aircraft and increasing number of contracts with the Civil Aviation Authority of China for air traffic management systems for Mainland China.

 

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In addition to our products for defense programs, we have also applied our technology to produce products for commercial applications such as airborne weather and search radar, air traffic control systems and car-borne and wayside communications and vehicle health monitoring systems for rail cars.

 

Key Competitive Strengths

 

The company believes that the following strengths will continue to enhance Telephonics’ market position:

 

Innovative Design and Engineering Capability.  The company believes that its reputation for innovative product design and engineering capabilities, especially in the areas of voice and data communications, radio frequency (RF) design, digital signal processing, networking systems, inverse synthetic aperture radar and analog, digital and mixed-signal integrated circuits, has enhanced its ability to secure, retain and expand its participation in defense programs and commercial undertakings.  The company is capable of meeting a full range of customer requirements including system requirements definition, product design and development, manufacturing and test, integration and installation, and logistical support.  As a result, the company has been successful in developing a number of relationships as an important strategic partner and first tier supplier to various prime contractors.

 

Broad Base of Long-Life Programs and Incumbent Supplier Status.  The company participates in a range of long-term defense and non-military government programs, both domestically and internationally.  The company has developed a base of installed products in these programs that generate significant recurring revenue and retrofit, spare parts and customer support sales.  Due to the inherent complexity of defense electronics, the company believes that its incumbent status on major platforms gives it a competitive advantage in the selection process for the upgrades and enhancements that have characterized defense electronics procurement.  Furthermore, the company believes that awards such as the U.S. Navy’s MH-60R helicopter program and the recent contract award from Boeing to develop multiple configurations of Telephonics’ Secure Digital Intercommunications System in support of the U.S. Air Force’s C-130 Avionics Modernization Program, provide competitive advantages when such programs transition from development to the production phase.

 

Strategy

 

The company believes that it is a technological leader in its core markets and intends to pursue new growth opportunities by leveraging its systems design and engineering capabilities and incumbent position on key platforms.  For example, during 2000 Telephonics was awarded a contract for the development of the next generation integrated radio management system for the U.S. Air Force’s C-17A air transport.   This program transitioned from development to production in fiscal 2003.  The company also expects substantial sales growth as it transitions from development to the production phase of the MH-60R helicopter radar program, which is expected to commence in 2005.

 

Telephonics’ objective is to anticipate the needs of its core markets and to invest in research and development in an effort to provide solutions well in advance of its competitors.  In an effort to ensure customer satisfaction and loyalty, Telephonics often designs its products to exceed customers’ minimum specifications, providing its customers with greater performance and flexibility.  The company believes that these practices engender increased coordination and communication with its customers at the earliest stages of new program development, thereby increasing the likelihood that Telephonics’ products will be selected and integrated as part of a total system solution.

 

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Products

 

The company manufactures specialized electronic products for a variety of applications.  Electronic Information and Communication Systems’ products include communication systems, radar systems, information and command and control systems, and mixed-signal application specific large-scale integrated circuits used in defense, non-military government, and commercial markets.

 

The company specializes in communication systems and products and is a leading manufacturer of aircraft intercommunication systems with products in digital and analog communication management, digital audio distribution and control, and communication systems integration.  The company’s communication products are used on the U.S. Navy’s MH-60R multi-mission and MH-60S utility helicopters, the United Kingdom’s NIMROD surveillance aircraft, U.S. Air Force C-17A cargo transport, the U.S. Air Force’s Joint Surveillance and Target Acquisition Radar System (Joint-STARS), and AWACS.  The company has also expanded its communications expertise into the mass transit rail market and its communication systems have been selected for installation by several major mass transit authorities.

 

The company’s command and control systems include airborne maritime surveillance, ground surveillance radar, weather and search radar systems, air traffic management systems and tactical instrument landing systems.  The company provides both the expertise and equipment for detecting and tracking targets in a maritime environment and flight path management systems for air traffic control applications.  Its maritime radar systems, which are used in more than 20 countries, are fitted aboard helicopters, fixed-wing aircraft, and aerostats for use at sea.  The company demonstrated its radar expertise with an award from Northrop Grumman to deliver ground surveillance radar to be deployed at U.S. Air Force air bases around the world.  The company also increased its market penetration through an award to develop, manufacture and deliver radar with imaging in both maritime and overland environments for the Canadian Air Force.  The company’s aerospace electronic systems include IFF systems used by the U.S. Air Force and NATO on the AWACS aircraft and tactical microwave landing systems used by the U.S. Navy, NASA and other customers for ground and ship-based applications.

 

The company also manufactures custom and standard, mixed-signal, application specific large-scale integrated circuits for customers in the security, military telecommunications and multi-media industries.

 

Sales by Electronic Information and Communication Systems provided approximately 14% of the company’s consolidated revenue in 2003, 16% in 2002 and 17% in 2001.

 

Backlog

 

The funded backlog for Electronic Information and Communication Systems was approximately $159 million on September 30, 2003, compared to $147 million on September 30, 2002.

 

Sales and Marketing

 

Telephonics has approximately 19 technical business development personnel who act as the focal point for its marketing activities and approximately 40 sales representatives who introduce its products and systems to customers worldwide.

 

Research and Development

 

This segment regularly updates its core technologies through internally funded research and development.  The selection of these R&D projects is based on available opportunities in the marketplace as well as input from the company’s customers.  These projects have generally represented an evolution of existing products rather than entirely new pursuits.  Recent internally funded research and development has resulted in the development of a next generation airborne imaging maritime surveillance radar system and an all digital, totally secure intercommunication management system.

 

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Competition

 

Electronic Information and Communication Systems competes with major manufacturers of electronic information and communication systems that have greater financial resources than the company, and with several smaller manufacturers of similar products.  The company competes on the basis of technology, design, quality, price and program performance.

 

Employees

 

The company has approximately 5,600 employees located throughout the United States, in Europe and Brazil.  Approximately 125 of its employees are covered by a collective bargaining agreement, primarily with an affiliate of the AFL-CIO.  The company believes its relationships with its employees are satisfactory.

 

Seasonality

 

Historically the company’s revenues and earnings are lowest in the second quarter and highest in the fourth quarter.

 

Financial Information About Geographic Areas

 

Revenues, based on the customers’ locations, and property, plant and equipment attributed to the United Sates and all other countries are as follows:

 

2003