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, 2002
OR
( ) 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 (I.R.S. Employer
incorporation or organization) 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, and (2) has been subject to such filing requirements
for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 33,188,407 shares of Common
Stock as of July 31, 2002.
FORM 10-Q
---------
CONTENTS
--------
PAGE
----
PART I - FINANCIAL INFORMATION (Unaudited)
---------------------
Condensed Consolidated Balance Sheets at June 30, 2002
and September 30, 2001........................................ 1
Condensed Consolidated Statements of Operations for the Three
Months and Nine Months Ended June 30, 2002 and 2001 .......... 3
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended June 30, 2002 and 2001 ..................... 5
Notes to Condensed Consolidated Financial Statements.......... 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 10
Quantitative and Qualitative Disclosure about Market Risk..... 14
PART II - OTHER INFORMATION
-----------------
Item 1: Legal Proceedings .................................... 15
Item 2: Changes in Securities ................................ 15
Item 3: Defaults upon Senior Securities ...................... 15
Item 4: Submission of Matters to a Vote of Security Holders... 15
Item 5: Other Information .................................... 15
Item 6: Exhibits and Reports on Form 8-K ..................... 15
Signature .................................................... 16
GRIFFON CORPORATION AND SUBSIDIARIES
------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
June 30, September 30,
2002 2001
--------- --------------
(Unaudited) (Note 1)
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 41,776,000 $ 40,096,000
Accounts receivable, less allowance for
doubtful accounts 138,588,000 146,425,000
Contract costs and recognized income not
yet billed 58,681,000 66,116,000
Inventories (Note 2) 102,967,000 98,044,000
Prepaid expenses and other current assets 22,271,000 18,148,000
------------ ------------
Total current assets 364,283,000 368,829,000
------------ ------------
PROPERTY, PLANT AND EQUIPMENT at cost,
less accumulated depreciation and
amortization of $121,082,000 at June 30,
2002 and $104,231,000 at September 30,
2001 152,071,000 145,931,000
------------ ------------
OTHER ASSETS:
Costs in excess of fair value of net
assets of businesses acquired (Note 5) 49,339,000 60,232,000
Other 12,610,000 10,001,000
------------ ------------
61,949,000 70,233,000
------------ ------------
$578,303,000 $584,993,000
============ ============
See notes to condensed consolidated financial statements.
1
GRIFFON CORPORATION AND SUBSIDIARIES
------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
June 30, September 30,
2002 2001
--------- --------------
(Unaudited) (Note 1)
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts and notes payable $ 62,672,000 $ 63,740,000
Other current liabilities 115,323,000 99,211,000
------------ ------------
Total current liabilities 177,995,000 162,951,000
------------ ------------
LONG-TERM DEBT 82,230,000 108,615,000
------------ ------------
MINORITY INTEREST AND OTHER 22,735,000 19,574,000
------------ ------------
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
36,322,842 shares at June 30, 2002 and
35,023,437 shares at September 30,
2001; 3,128,785 shares and 2,284,802
shares in treasury at June 30, 2002
and September 30, 2001, respectively 9,081,000 8,756,000
Other shareholders' equity 286,262,000 285,097,000
------------ ------------
Total shareholders' equity 295,343,000 293,853,000
------------ ------------
$578,303,000 $584,993,000
============ ============
See notes to condensed consolidated financial statements.
2
GRIFFON CORPORATION AND SUBSIDIARIES
------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited)
THREE MONTHS ENDED JUNE 30,
---------------------------
2002 2001
---- ----
Net sales $297,335,000 $289,384,000
Cost of sales 212,227,000 213,468,000
------------ ------------
Gross profit 85,108,000 75,916,000
Selling, general and administrative expenses 68,189,000 58,153,000
------------ ------------
Income from operations 16,919,000 17,763,000
------------ ------------
Other income (expense):
Interest expense (1,185,000) (2,494,000)
Interest income 311,000 434,000
Other, net 1,063,000 (256,000)
------------ ------------
189,000 (2,316,000)
------------ ------------
Income before income taxes 17,108,000 15,447,000
Provision for income taxes (Note 8) 3,920,000 6,333,000
------------ ------------
Income before minority interest 13,188,000 9,114,000
Minority interest (1,751,000) (1,383,000)
------------ ------------
Net income $ 11,437,000 $ 7,731,000
============ ============
Basic earnings per share of common stock (Note 3) $ .34 $ .23
============ ============
Diluted earnings per share of common stock (Note 3)$ .32 $ .23
============ ============
See notes to condensed consolidated financial statements.
3
GRIFFON CORPORATION AND SUBSIDIARIES
------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited)
NINE MONTHS ENDED JUNE 30,
--------------------------
2002 2001
---- ----
Net sales $866,545,000 $841,768,000
Cost of sales 622,822,000 623,332,000
------------ ------------
Gross profit 243,723,000 218,436,000
Selling, general and administrative expenses 193,849,000 172,011,000
------------ ------------
Income from operations (Note 6) 49,874,000 46,425,000
------------ ------------
Other income (expense):
Interest expense (3,723,000) (9,217,000)
Interest income 889,000 1,602,000
Other, net 807,000 (625,000)
------------ ------------
(2,027,000) (8,240,000)
------------ ------------
Income before income taxes 47,847,000 38,185,000
Provision for income taxes (Note 8) 16,215,000 15,656,000
------------ ------------
Income before minority interest and cumulative
effect of a change in accounting principle 31,632,000 22,529,000
Minority interest (4,798,000) (4,318,000)
------------ ------------
Income before cumulative effect of a change in
accounting principle 26,834,000 18,211,000
Cumulative effect of a change in accounting
principle, net of income taxes of $2,457,000
(Note 5) (24,118,000) ---
------------ ------------
Net income $ 2,716,000 $ 18,211,000
============ ============
Basic earnings per share of common stock
(Note 3):
Income before cumulative effect of a change in
accounting principle $ .81 $ .55
Cumulative effect of a change in accounting
principle (.73) ---
------------ ------------
$ .08 $ .55
============ ============
Diluted earnings per share of common stock
(Note 3):
Income before cumulative effect of a change in
accounting principle $ .76 $ .55
Cumulative effect of a change in accounting
principle (.68) ---
------------ ------------
$ .08 $ .55
============ ============
See notes to condensed consolidated financial statements.
4
GRIFFON CORPORATION AND SUBSIDIARIES
------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
NINE MONTHS ENDED JUNE 30,
--------------------------
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,716,000 $18,211,000
------------ ------------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 16,510,000 18,270,000
Gain on sale of real estate (1,974,000) ---
Pension curtailment gain --- (3,156,000)
Minority interest 4,798,000 4,318,000
Cumulative effect of a change in accounting
principle 24,118,000 ---
Provision for losses on accounts receivable 1,996,000 2,469,000
Change in assets and liabilities:
Decrease in accounts receivable and contract
costs and recognized income not yet billed 15,132,000 29,192,000
(Increase) decrease in inventories (3,913,000) 1,581,000
(Increase) decrease in prepaid expenses and
other assets 502,000 (2,274,000)
Decrease in accounts payable, accrued
liabilities and income taxes (3,652,000) (1,131,000)
Other changes, net 3,092,000 5,016,000
------------ ------------
Total adjustments 56,609,000 54,285,000
------------ ------------
Net cash provided by operating activities 59,325,000 72,496,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (18,681,000) (19,560,000)
Acquired business (Note 7) (4,598,000) ---
Proceeds from sale of real estate 2,638,000 ---
(Increase) decrease in equipment lease deposits
and other (434,000) 231,000
------------ ------------
Net cash used in investing activities (21,075,000) (19,329,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury shares (10,142,000) ---
Proceeds from issuance of long-term debt 4,000,000 1,406,000
Payments of long-term debt (31,633,000) (28,665,000)
Decrease in short-term borrowings (1,271,000) (4,260,000)
Exercise of stock options 6,695,000 152,000
Other, net (4,219,000) (4,907,000)
------------ ------------
Net cash used in financing activities (36,570,000) (36,274,000)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,680,000 16,893,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 40,096,000 26,616,000
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $41,776,000 $43,509,000
============ ============
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 presentation
have been included. Operating results for the three-month and nine-month periods
ended June 30, 2002 are not necessarily indicative of the results that may be
expected for the year ending September 30, 2002. The balance sheet at September
30, 2001 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, 2001.
(2) Inventories -
-----------
Inventories, stated at the lower of cost (first-in, first-out or average)
or market, are comprised of the following:
June 30, September 30,
2002 2001
-------- -------------
Finished goods......................... $ 47,623,000 $53,613,000
Work in process........................ 34,555,000 27,809,000
Raw materials and supplies............. 20,789,000 16,622,000
------------ -----------
$102,967,000 $98,044,000
============ ===========
(3) Earnings per share (EPS) -
------------------------
Earnings per share amounts and the weighted average number of shares used
in their calculation for the three-month and nine-month periods ended June 30,
2001 have been restated to reflect the effect of a 10% Common Stock dividend
paid in September 2001.
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 33,428,000
and 33,007,000 for the three months ended June 30, 2002 and 2001, respectively,
and 33,231,000 and 32,988,000 for the nine months ended June 30, 2002 and 2001,
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. The weighted
average number of shares of common stock used in determining diluted EPS was
35,514,000 and 33,505,000 for the three months ended June 30, 2002 and 2001,
respectively, and 35,121,000 and 33,276,000 for the nine months ended June 30,
2002 and 2001, respectively, and reflects additional shares issuable in
connection with stock option and other stock-based compensation plans.
6
Options to purchase approximately 3,296,000 shares of common stock were not
included in the computation of diluted earnings per share for the three months
ended June 30, 2001, and options to purchase approximately 3,806,000 shares of
common stock were not included in the computation of diluted earnings per share
for the nine months ended June 30, 2001, because the effects would have been
antidilutive.
(4) Business segments -
-----------------
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, 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:
Electronic
Information
Specialty and
Garage Installation Plastic Communication
Doors Services Films Systems Totals
------ ------------- ---------- ---------------- ------
Revenues from external
customers -
Three months ended
June 30, 2002 $103,902,000 $ 70,596,000 $ 74,830,000 $ 48,007,000 $297,335,000
June 30, 2001 102,758,000 68,213,000 75,709,000 42,704,000 289,384,000
Nine months ended
June 30, 2002 304,738,000 205,094,000 216,344,000 140,369,000 866,545,000
June 30, 2001 287,735,000 198,419,000 225,463,000 130,151,000 841,768,000
Intersegment revenues -
Three months ended
June 30, 2002 $ 6,307,000 $ 50,000 $ --- $ --- $ 6,357,000
June 30, 2001 6,469,000 78,000 --- --- 6,547,000
Nine months ended
June 30, 2002 18,510,000 182,000 --- --- 18,692,000
June 30, 2001 18,717,000 212,000 --- --- 18,929,000
Segment profit -
Three months ended
June 30, 2002 $ 6,420,000 $ 2,181,000 $ 8,722,000 $ 3,433,000 $ 20,756,000
June 30, 2001 5,766,000 2,030,000 9,076,000 2,931,000 19,803,000
Nine months ended
June 30, 2002 16,001,000 5,286,000 28,606,000 8,959,000 58,852,000
June 30, 2001 9,266,000 3,945,000 30,702,000 9,059,000 52,972,000
7
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,
--------------------------- --------------------------
2002 2001 2002 2001
---- ---- ---- ----
Profit for all
segments $20,756,000 $19,803,000 $58,852,000 $52,972,000
Unallocated amounts (2,774,000) (2,296,000) (8,171,000) (7,172,000)
Interest expense, net (874,000) (2,060,000) (2,834,000) (7,615,000)
----------- ----------- ----------- -----------
Income before
income taxes $17,108,000 $15,447,000 $47,847,000 $38,185,000
=========== =========== =========== ===========
(5) Changes in accounting principles -
--------------------------------
Effective October 1, 2001, the company adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets," (SFAS
142). SFAS 142 addresses accounting and reporting for acquired goodwill. It
eliminates the previous requirement to amortize goodwill and establishes new
requirements with respect to evaluating goodwill for impairment. With the
assistance of a third-party valuation expert, the company ascertained the fair
value of its reporting units as part of adopting SFAS 142 and determined that
goodwill of the installation services segment was impaired pursuant to the new
standard. The fair value of the installation services segment used in computing
the impairment loss was determined through a combination of market based
approaches and present value techniques. Results for the nine months ended June
30, 2002 include the related cumulative effect of a change in accounting
principle in the amount of $24,118,000 (net of an income tax benefit of
$2,457,000) to reflect the impairment.
Had SFAS 142 been in effect for the three and nine months ended June 30,
2001, the related elimination of goodwill amortization would have increased the
company's net income and earnings per share as follows:
For the Three Months Ended For the Nine Months Ended
June 30, 2001 June 30, 2001
-------------------------- --------------------------
As Reported Increase Pro Forma As Reported Increase Pro Forma
----------- -------- --------- ----------- -------- ---------
Net income $ 7,731,000 $414,000 $8,145,000 $18,211,000 $1,364,000 $19,575,000
============ ======== ========== =========== ========== ===========
Basic earnings per
share of common stock $.23 $.25 $.55 $.59
==== ==== ==== ====
Diluted earnings per
share of common stock $.23 $.24 $.55 $.59
==== ==== ==== ====
The Financial Accounting Standards Board has also issued Statement of
Financial Accounting Standards Nos. 143, "Accounting for Asset Retirement
Obligations" and 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." SFAS 143 addresses accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs, and will become effective in fiscal 2003. SFAS 144 addresses
accounting and reporting for the impairment or disposal of long-lived assets and
also becomes effective in fiscal 2003. The company anticipates that adoption of
these new standards will not have a material effect on its financial position
and results of operations.
8
(6) Pension curtailment gain -
------------------------
Pursuant to the provisions of Statement of Financial Accounting Standards
No. 88, "Accounting for Settlements and Curtailments of Defined Benefit Pension
Plans and for Termination Benefits," modifications to certain employee benefits
and related benefit freezes resulted in the recognition of a pretax curtailment
gain of approximately $3,100,000 in the nine months ended June 30, 2001.
(7) Acquisition -
-----------
In June 2002, the company acquired a 60% interest in a Brazilian
manufacturer of plastic hygienic and specialty films. The unpaid balance of the
purchase price, approximately $13 million, is expected to be settled in fiscal
2003. The acquired company's sales in the most recent year were approximately
$15 million.
(8) Income taxes -
------------
The provision for income taxes for the three and nine month periods ended
June 30, 2002 includes a $2.0 million tax benefit to reflect the resolution of
certain previously recorded tax liabilities.
(9) Comprehensive income -
--------------------
Comprehensive income, which consists of net income and foreign currency
translation adjustments, was $13.0 million and $7.3 million for the three month
periods ended June 30, 2002 and 2001, respectively, and $3.1 million and $18.3
million for the nine month periods ended June 30, 2002 and 2001, respectively.
(10) Subsequent event -
----------------
In August 2002 the company adopted a plan to divest a peripheral operation
that sells slatted steel coiling doors and related products for commercial
users. A loss on disposal of this discontinued operation, estimated at $6 - $7
million after income tax effect, will be reflected in fourth quarter results.
This unprofitable operation, which was included in the garage door segment, had
revenues of $21.5 million for the nine months ended June 30, 2002, $28.3 million
in 2001 and $25.9 million in 2000.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
RESULTS OF OPERATIONS
Operating results for the nine month period ended June 30, 2001 included a
pretax pension curtailment gain of approximately $3.1 million, which was evenly
divided between the specialty plastic films and garage doors segments. Prior
year operating results also included goodwill amortization of $.6 million and
$1.8 million for the three and nine month periods.
THREE MONTHS ENDED JUNE 30, 2002
Following are operating results (in thousands) by business segment for the
three-month periods ended June 30:
Segment
Net Sales Operating Profit
--------- ----------------
2002 2001 2002 2001
---- ---- ---- ----
Garage doors $110,209 $109,227 $ 6,420 $ 5,766
Installation services 70,646 68,291 2,181 2,030
Specialty plastic films 74,830 75,709 8,722 9,076
Electronic information
and communication systems 48,007 42,704 3,433 2,931
Intersegment revenues (6,357) (6,547) - -
-------- -------- -------- --------
$297,335 $289,384 $20,756 $19,803
======== ======== ======== ========
Garage Doors
- ------------
Net sales of the garage doors segment increased by $1.0 million compared to
last year. Favorable product mix and improved service levels resulted in the
sales increase.
Operating profit of the garage doors segment increased $0.7 million
compared to last year. Gross margin percentage increased to approximately 31.6%
in 2002 from 27.2% last year. The increased margin was due primarily to lower
raw material costs and increased manufacturing efficiencies. Selling, general
and administrative expenses increased as a percentage of sales to 25.8% from
21.9% last year. Freight costs billed to customers were included in net sales;
previously such recoverable costs were treated as a reduction of freight
expense. This change in classification had no effect on segment operating
profit. Excluding the classification of recoverable freight costs, higher
selling, general and administrative expense levels reflected increased
distribution and product development costs. Steel suppliers to the garage doors
segment have begun to raise prices. It is anticipated that such increases will
not have a significant effect on fiscal 2002 operating profit; at this time, we
cannot predict the impact that raw material price increases and any related
selling price adjustments will have on operating results thereafter.
In August 2002 the company adopted a plan to divest a peripheral operation
that sells slatted steel coiling doors and related products for commercial
users. A loss on disposal of this discontinued operation, estimated at $6 - $7
million after income tax effect, will be reflected in fourth quarter results.
This unprofitable operation, which was included in the garage door segment, had
revenues of $21.5 million for the nine months ended June 30, 2002, $28.3 million
in 2001 and $25.9 million in 2000.
Installation Services
- ---------------------
Net sales of the installation services segment increased by $2.4 million
compared to last year. The increase was principally due to the segment's
expanded product offering and stronger new construction markets.
10
Operating profit of the installation services segment was approximately the
same as last year. Gross margin percentage increased to 27.6% from 26.2% last
year. Selling, general and administrative expenses as a percentage of sales
increased to 24.6% from 23.3% last year to support the sales growth and due to
costs associated with systems upgrades.
Specialty Plastic Films
- -----------------------
Net sales of the specialty plastic films segment decreased $0.9 million
compared to last year. Lower selling prices ($5.0 million), including selling
price adjustments to pass through raw material cost decreases to customers, were
partly offset by higher unit volumes ($1.6 million), the impact of a weaker U.S.
dollar on translated foreign sales ($1.7 million) and sales of an acquired
company ($0.5 million).
Operating profit of the specialty plastic films segment decreased by $0.4
million compared to last year. Gross margin percentage increased to 24.6% from
23.5% last year, reflecting lower raw material costs and the effect of selling
price adjustments. Selling, general and administrative expenses as a percentage
of sales increased to 13.8% from 11.3% last year due to the effect of the sales
decrease, costs associated with settled litigation and increased distribution
and information technology costs. This segment is now experiencing upward
pressure on raw material (resin) costs. The segment is generally able to pass
price increases on to some of its customers. Although there could be some impact
on future operating results due to the extent of raw material price increases
and the timing and amount of resultant selling price adjustments, we do not
expect such impact to be significant.
Electronic Information and Communication Systems
- ------------------------------------------------
Net sales of the electronic information and communication systems segment
increased $5.3 million compared to last year. The increase was primarily due to
increased sales in connection with defense communications and systems
integration programs, partly offset by lower sales in the segment's integrated
circuit business.
Operating profit of the electronic information and communication systems
segment increased $0.5 million compared to last year. The increase is
principally attributable to the effect of higher sales, partly offset by
increased expenditures of approximately $0.5 million associated with its
previously announced technology initiatives. These development initiatives are
expected to aggregate $5-6 million for 2002 with the objective of generating
incremental revenue commencing in the latter part of 2003. Gross margin
percentage increased to 25.2% from 24.1% last year due primarily to higher sales
and margins in connection with certain defense programs.
Net Interest Expense
- --------------------
Net interest expense decreased by $1.2 million compared to last year due to
the effect of debt repayments and lower interest rates. Debt levels were reduced
considerably compared to last year, with outstanding borrowings declining
approximately $48 million from June 30, 2001 to June 30, 2002.
Other Income (Expense)
- ---------------------
Other, net included a $1,974,000 gain on sale of real property,
substantially offset by a $1.6 million charge to reflect estimated liabilities
associated with the bankruptcy of a freight claims administrator.
Income Tax Expense
- ------------------
The company's provision for income taxes in the three months ended June 30,
2002 includes a $2.0 million tax benefit to reflect the resolution of certain
previously recorded tax liabilities.
11
NINE MONTHS ENDED JUNE 30, 2002
Operating results (in thousands) by business segment were as follows for
the nine-month periods ended June 30:
Segment
Net Sales Operating Profit
--------- ----------------
2002 2001 2002 2001
---- ---- ---- ----
Garage doors $323,248 $306,452 $16,001 $ 9,266
Installation services 205,276 198,631 5,286 3,945
Specialty plastic films 216,344 225,463 28,606 30,702
Electronic information
and communication systems 140,369 130,151 8,959 9,059
Intersegment revenues (18,692) (18,929) - -
-------- -------- -------- --------
$866,545 $841,768 $58,852 $52,972
======== ======== ======== ========
Garage Doors
- ------------
Net sales of the garage doors segment increased by $16.8 million compared
to last year primarily due to higher unit sales. The unit sales increase was
attributable to service level improvements and mild weather conditions.
Excluding the fiscal 2001 pension curtailment gain, operating profit of the
garage doors segment increased approximately $8.2 million compared to last year.
Gross margin percentage increased to 30.5% in 2002 from 26.1% last year. The
increased margin was due primarily to the sales growth, lower raw material costs
and increased manufacturing efficiencies. Selling, general and administrative
expenses increased as a percentage of sales to 25.5% from 23.0% last year.
Freight costs billed to customers were included in net sales; previously such
recoverable costs were treated as a reduction of freight expense. This change in
classification had no effect on segment operating profit.
Installation Services
- ---------------------
Net sales of the installation services segment increased by $6.6 million
compared to last year. The increase was principally due to the segment's
expanded product offering, stronger new construction markets and increased
market share.
Operating profit of the installation services segment increased $1.3
million compared to last year. Gross margin percentage increased to 27.5% from
approximately 26.4% last year. The increased margin was due to the sales
increase and improved product mix compared to the prior year. Selling, general
and administrative expenses as a percentage of sales was 24.5%, unchanged from
last year.
Specialty Plastic Films
- -----------------------
Net sales of the specialty plastic films segment were $216.3 million
compared to $225.5 million last year. Lower selling prices ($13.9 million),
including selling price adjustments to pass through raw material cost decreases
to customers, partly offset by higher unit volume ($3.9 million) were the
principal reasons for the decrease.
Excluding the fiscal 2001 pension curtailment gain, operating profit of the
specialty plastic films segment decreased by $0.6 million compared to last year.
Gross margin percentage increased to 25.5% from 24.7%, reflecting lower raw
material costs and manufacturing efficiencies, partly offset by the effect of
selling price adjustments and costs associated with a production line installed
during the first quarter in one of our European operations. Selling, general and
administrative expenses as a percentage of sales increased to approximately
12.4% from 10.8% due to the effect of the sales decrease; selling, general and
administrative expenses were substantially the same as in the prior year.
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Electronic Information and Communication Systems
- ------------------------------------------------
Net sales of the electronic information and communication systems segment
increased $10.2 million compared to last year. The increase was primarily due to
increased sales in connection with defense communications and systems
integration programs, partly offset by lower sales in the segment's integrated
circuit business.
Operating profit of the electronic information and communication systems
segment was approximately the same as last year after increased expenditures of
approximately $3.2 million associated with its previously announced technology
initiatives. Gross margin percentage increased to 23.5% from 22.9% last year due
primarily to higher margins in connection with the sales increase and
manufacturing efficiencies.
Net Interest Expense
- --------------------
Net interest expense decreased by $4.8 million compared to last year due to
the effect of debt repayments and lower interest rates.
Other Income (Expense)
- ---------------------
Other, net included a $1,974,000 gain on sale of real property,
substantially offset by a $1.6 million charge to reflect estimated liabilities
associated with the bankruptcy of a freight claims administrator.
Income Tax Expense
- ------------------
The company's provision for income taxes for the nine months ended June 30,
2002 includes a $2.0 million tax benefit to reflect the resolution of certain
previously recorded tax liabilities.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow generated by operations for the nine months ended June 30, 2002
was $59.3 million compared to $72.5 million last year and working capital was
$186.3 million at June 30, 2002.
During the nine months ended June 30, 2002, the company had capital
expenditures of approximately $18.7 million, principally made in connection with
increasing production capacity. Capital expenditures for fiscal 2002 are
expected to aggregate approximately $25 million; it is anticipated that fiscal
2003 capital expenditures will exceed $40 million. The increased capital
expenditures are primarily in connection with new programs for the specialty
plastic films segment.
As described in Note 7 to the condensed consolidated financial statements,
in June 2002, the company acquired a 60% interest in a Brazilian manufacturer of
plastic hygienic and specialty films. The unpaid balance of the purchase price,
approximately $13 million, is expected to be settled in fiscal 2003.
Financing cash flows principally consisted of reductions of bank
indebtedness of $28.9 million, treasury stock purchases of $10.1 million and
proceeds from stock option exercises of $6.7 million. Additional purchases of
the company's Common Stock under its stock buyback program will be made,
depending upon market conditions, at prices deemed appropriate by management.
13
At June 30, 2002, future minimum payments under noncancellable operating
leases and payments to be made for notes payable and maturities of long-term
debt over the next five years are as follows (000's omitted):
Operating Debt
Year Leases Repayments Total
---- --------- ---------- -----
2003 $20,700 $6,200 $26,900
2004 16,000 5,800 21,800
2005 11,500 6,600 18,100
2006 6,900 2,800 9,700
2007 4,200 9,300 13,500
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.
CHANGES IN ACCOUNTING PRINCIPLES
See Note 5 of notes to condensed consolidated financial statements for a
description of the effect of the company's adoption of Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets," and two
other recently issued accounting standards.
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", "objective" 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, competitive
factors and pricing pressures, 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.
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.
14
PART II - OTHER INFORMATION
---------------------------
Item 1 - Legal Proceedings
-----------------
None
Item 2 - Changes in Securities
---------------------
None
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 and Reports on Form 8-K
--------------------------------
(a) Exhibit 99 - Certifications pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Current report on Form 8-K dated April 30, 2002 reporting a change in
the registrant's certifying accountants.
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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/ Robert Balemian
------------------------------------
Robert Balemian
President and Chief Financial Officer
(Principal Financial Officer)
Date: August 12, 2002
16