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, 2003
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 by check mark whether registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
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. 29,555,698
shares of Common Stock as of July 31, 2003.
FORM 10-Q
CONTENTS
PAGE
PART I - FINANCIAL INFORMATION (Unaudited)
---------------------
Condensed Consolidated Balance Sheets at June 30, 2003
and September 30, 2002............................................1
Condensed Consolidated Statements of Operations for the Three
Months and Nine Months ended June 30, 2003 and 2002...............3
Condensed Consolidated Statements of Cash Flows for the
Nine Months ended June 30, 2003 and 2002 .........................5
Notes to Condensed Consolidated Financial Statements..............6
Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................11
Quantitative and Qualitative Disclosure about Market Risk........16
Controls & Procedures............................................16
PART II - OTHER INFORMATION
-----------------
Item 1: Legal Proceedings .......................................17
Item 2: Changes in Securities ...................................17
Item 3: Defaults upon Senior Securities .........................17
Item 4: Submission of Matters to a Vote of Security Holders......17
Item 5: Other Information .......................................17
Item 6: Exhibits and Reports on Form 8-K ........................17
Signature .......................................................18
GRIFFON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, September 30,
2003 2002
---------- --------
(Unaudited) (Note 1)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 30,625,000 $ 45,749,000
Accounts receivable, less allowance for
doubtful accounts 152,558,000 147,890,000
Contract costs and recognized income not
yet billed 40,335,000 58,440,000
Inventories (Note 2) 111,009,000 104,792,000
Prepaid expenses and other current assets 38,122,000 25,470,000
------------ ------------
Total current assets 372,649,000 382,341,000
------------ ------------
PROPERTY, PLANT AND EQUIPMENT
at cost, less accumulated depreciation
and amortization of $142,679,000 at
June 30, 2003 and $126,560,000 at
September 30, 2002 171,068,000 148,253,000
------------ ------------
OTHER ASSETS:
Costs in excess of fair value of net
assets of businesses acquired (Note 1) 49,312,000 44,978,000
Other 14,106,000 12,122,000
------------ ------------
63,418,000 57,100,000
------------ -----------
$607,135,000 $587,694,000
============ ============
See notes to condensed consolidated financial statements.
1
GRIFFON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, September 30,
2003 2002
----------- ------------
(Unaudited) (Note 1)
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts and notes payable $ 65,309,000 $ 65,832,000
Other current liabilities 105,442,000 123,315,000
------------ ------------
Total current liabilities 170,751,000 189,147,000
------------ ------------
LONG-TERM DEBT (Note 7) 78,257,000 74,640,000
------------ ------------
MINORITY INTEREST AND OTHER 36,410,000 30,938,000
------------ ------------
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 36,528,767 shares at
June 30, 2003 and 36,337,192 shares at
September 30, 2002; 3,919,335 and 3,266,983
shares in treasury at June 30, 2003 and
September 30, 2002, respectively (Note 7) 9,132,000 9,084,000
Other shareholders' equity 312,585,000 283,885,000
------------ ------------
Total shareholders' equity 321,717,000 292,969,000
------------ ------------
$607,135,000 $587,694,000
============ ============
See notes to condensed consolidated financial statements.
2
GRIFFON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED JUNE 30,
--------------------------
2003 2002
---- ----
Net sales $312,547,000 $297,335,000
Cost of sales 225,095,000 212,227,000
------------ ------------
Gross profit 87,452,000 85,108,000
Selling, general and administrative expenses 67,940,000 68,189,000
------------ ------------
Income from operations 19,512,000 16,919,000
------------ ------------
Other income (expense):
Interest expense (952,000) (1,185,000)
Interest income 120,000 311,000
Other, net 503,000 1,063,000
------------ ------------
(329,000) 189,000
------------ ------------
Income before income taxes 19,183,000 17,108,000
Provision for income taxes (Note 6) 5,601,000 3,920,000
------------ ------------
Income before minority interest 13,582,000 13,188,000
Minority interest (2,260,000) (1,751,000)
------------ ------------
Net income $ 11,322,000 $ 11,437,000
============ ============
Basic earnings per share of common stock (Note 3) $ .34 $ .34
============ ============
Diluted earnings per share of common stock (Note 3)$ .33 $ .32
============ ============
See notes to condensed consolidated financial statements.
3
GRIFFON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
NINE MONTHS ENDED JUNE 30,
--------------------------
2003 2002
---- ----
Net sales $892,031,000 $866,545,000
Cost of sales 641,737,000 622,822,000
------------ ------------
Gross profit 250,294,000 243,723,000
Selling, general and administrative expenses 197,131,000 193,849,000
------------ ------------
Income from operations 53,163,000 49,874,000
------------ ------------
Other income (expense):
Interest expense (3,044,000) (3,723,000)
Interest income 585,000 889,000
Other, net 796,000 807,000
------------ ------------
(1,663,000) (2,027,000)
------------ ------------
Income before income taxes 51,500,000 47,847,000
Provision for income taxes (Note 6) 17,881,000 16,215,000
------------ ------------
Income before minority interest and cumulative
effect of a change in accounting principle 33,619,000 31,632,000
Minority interest (6,760,000) (4,798,000)
------------ ------------
Income before cumulative effect of a change in
accounting principle 26,859,000 26,834,000
Cumulative effect of a change in accounting
principle, net of income taxes of $2,457,000 (Note 1) --- (24,118,000)
------------ ------------
Net income $ 26,859,000 $ 2,716,000
============ ============
Basic earnings per share of common stock (Note 3):
Income before cumulative effect of a change in
accounting principle $ .81 $ .81
Cumulative effect of a change in accounting principle -- (.73)
------------ ------------
$ .81 $ .08
============ ============
Diluted earnings per share of common stock (Note 3):
Income before cumulative effect of a change in
accounting principle $ .79 $ .76
Cumulative effect of a change in accounting principle -- (.68)
------------ ------------
$ .79 $ .08
============ ============
<FN>
See notes to condensed consolidated financial statements.
</FN>
4
GRIFFON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED JUNE 30,
-------------------------
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $26,859,000 $ 2,716,000
----------- -----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 19,219,000 16,510,000
Gain on sale of real estate --- (1,974,000)
Minority interest 6,760,000 4,798,000
Cumulative effect of a change in accounting
principle --- 24,118,000
Provision for losses on accounts receivable 895,000 1,996,000
Change in assets and liabilities:
Decrease in accounts receivable and contract
costs and recognized income not yet billed 15,699,000 15,132,000
Increase in inventories (6,947,000) (3,913,000)
(Increase) decrease in prepaid expenses and
other assets (2,576,000) 502,000
Decrease in accounts payable, accrued
liabilities and income taxes (18,096,000) (3,652,000)
Other changes, net (992,000) 3,092,000
----------- -----------
Total adjustments 13,962,000 56,609,000
----------- -----------
Net cash provided by operating activities 40,821,000 59,325,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (35,176,000) (18,681,000)
Acquired business (13,112,000) (4,598,000)
Proceeds from divestiture 3,826,000 ---
Proceeds from sale of real estate --- 2,638,000
Increase in equipment lease deposits (3,769,000) (434,000)
----------- ----------
Net cash used in investing activities (48,231,000) (21,075,000)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury shares (7,334,000) (10,142,000)
Proceeds from issuance of long-term debt 24,944,000 4,000,000
Payments of long-term debt (23,109,000) (31,633,000)
Increase (decrease) in short-term borrowings 1,072,000 (1,271,000)
Distributions to minority interests (5,907,000) (5,501,000)
Exercise of stock options 518,000 6,695,000
----------- ----------
Net cash used in financing activities (9,816,000) (37,852,000)
----------- ----------
Effect of exchange rate changes on cash and cash equivalents 2,102,000 1,282,000
----------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (15,124,000) 1,680,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 45,749,000 40,096,000
----------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $30,625,000 $41,776,000
=========== ===========
<FN>
See notes to condensed consolidated financial statements.
</FN>
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, 2003 are not necessarily indicative of the
results that may be expected for the year ending September 30, 2003. The balance
sheet at September 30, 2002 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, 2002.
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 the recognition and valuation of goodwill. 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. Results for the nine-month period 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.
Recent accounting pronouncements:
The Financial Accounting Standards Board has issued Interpretations
Nos. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees
including Indirect Guarantees of Indebtedness of Others" and 46, "Consolidation
of Variable Interest Entities," and also issued Statements of Financial
Accounting Standards Nos. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" and 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity".
Interpretation No. 45 elaborates on disclosures to be made by a
guarantor in its financial statements about its obligations under certain
guarantees that it has issued. As a part of some transactions, the company may
provide routine indemnifications in which it retains certain environmental, tax
and other liabilities whose terms range in duration and for which the company's
ultimate obligation is not quantifiable. To date, the company has not made any
significant payments in connection with such indemnifications.
Interpretation No. 46 addresses consolidation of variable interest
entities and related disclosure. The interpretation requires that a variable
interest entity be consolidated by the holder of the interest that will receive
the majority of the entity's expected losses, receive a majority of its expected
residual returns, or both.
6
Statement 149 amends and clarifies accounting standards for derivatives.
Statement 150 establishes standards that require certain financial instruments
with the characteristics of both liabilities and equity to be classified as
liabilities.
The company does not anticipate that these pronouncements will have a
material effect on its results of operations or financial condition.
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. The company has elected to continue to account for stock-based
compensation under Opinion No. 25. 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 Nine Months Ended
June 30, June 30,
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
Net income, as reported $11,322,000 $11,437,000 $26,859,000 $ 2,716,000
Deduct total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects (687,000) (729,000) (1,953,000) (1,891,000)
----------- ---------- ---------- ----------
Pro forma net income $10,635,000 $10,708,000 $24,906,000 $ 825,000
=========== =========== =========== ===========
Earnings per share:
Basic - as reported $.34 $.34 $.81 $.08
==== ==== ==== ====
Basic - pro forma $.32 $.32 $.76 $.03
==== ==== ==== ====
Diluted - as reported $.33 $.32 $.79 $.08
==== ==== ==== ====
Diluted - pro forma $.31 $.30 $.73 $.02
==== ==== ==== ====
(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,
2003 2002
----------- ------------
Finished goods......................... $ 48,945,000 $ 45,288,000
Work in process........................ 44,073,000 37,870,000
Raw materials and supplies............. 17,991,000 21,634,000
------------ ------------
$111,009,000 $104,792,000
============ ============
7
(3) Earnings per share (EPS) -
------------------------
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
32,828,000 and 33,428,000 for the three months ended June 30, 2003 and 2002,
respectively, and 32,961,000 and 33,231,000 for the nine months ended June 30,
2003 and 2002, 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
34,163,000 and 35,514,000 for the three months ended June 30, 2003 and 2002,
respectively, and 34,071,000 and 35,121,000 for the nine months ended June 30,
2003 and 2002, respectively, and reflects additional shares issuable in
connection with stock option and other stock based compensation plans.
Options to purchase approximately 373,500 and 1,362,933 shares of
common stock were not included in the computations of diluted earnings per share
for the three and nine months ended June 30, 2003 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, 2003 $100,307,000 $ 71,689,000 $ 98,050,000 $ 42,501,000 $312,547,000
June 30, 2002 103,902,000 70,596,000 74,830,000 48,007,000 297,335,000
Nine months ended
June 30, 2003 $284,998,000 $210,638,000 $277,521,000 $118,874,000 $892,031,000
June 30, 2002 304,738,000 205,094,000 216,344,000 140,369,000 866,545,000
Intersegment revenues -
Three months ended
June 30, 2003 $ 5,987,000 $ 10,000 $ --- $ --- $ 5,997,000
June 30, 2002 6,307,000 50,000 --- --- 6,357,000
Nine months ended
June 30, 2003 $ 17,645,000 $ 53,000 $ --- $ --- $ 17,698,000
June 30, 2002 18,510,000 182,000 --- --- 18,692,000
8
Electronic
Information
Specialty and
Garage Installation Plastic Communication
Doors Services Films Systems Totals
------ ------------ --------- ------------- ------
Segment profit -
Three months ended
June 30, 2003 $ 9,036,000 $ 1,993,000 $ 9,643,000 $ 1,847,000 $ 22,519,000
June 30, 2002 6,420,000 2,181,000 8,722,000 3,433,000 20,756,000
Nine Months ended
June 30, 2003 $ 22,919,000 $ 4,200,000 $ 29,465,000 $ 6,463,000 $ 63,047,000
June 30, 2002 16,001,000 5,286,000 28,606,000 8,959,000 58,852,000
Segment assets -
June 30, 2003 $143,658,000 $ 62,993,000 $191,732,000 $150,949,000 $549,332,000
September 30, 2002 149,844,000 67,066,000 145,458,000 159,516,000 521,884,000
Following is a reconciliation of segment profit to amounts reported in
the consolidated financial statements:
Three Months Ended June 30, Nine Months Ended June 30,
--------------------------- --------------------------
2003 2002 2003 2002
---- ---- ---- ----
Profit for all segments $22,519,000 $20,756,000 $63,047,000 $58,852,000
Unallocated amounts (2,503,000) (2,774,000) (9,087,000) (8,171,000)
Interest expense, net (833,000) (874,000) (2,460,000) (2,834,000)
----------- ----------- ---------- -----------
Income before income taxes $19,183,000 $17,108,000 $51,500,000 $47,847,000
=========== =========== =========== ===========
Goodwill at June 30, 2003 includes $12.9 million attributable to the
garage doors segment, $14.3 million to the electronic information and
communication systems segment and $22.1 million to the specialty plastic films
segment.
(5) Comprehensive income -
--------------------
Comprehensive income, which consists of net income, minimum pension
liability adjustments and foreign currency translation adjustments, was $15.3
million and $13.0 million for the three-month periods and $34.9 and $3.1 million
for the nine-month periods ended June 30, 2003 and 2002, respectively.
(6) Income taxes -
------------
The provision for income taxes for the three and nine month periods
ended June 30, 2003 and 2002 includes $1.7 million in 2003 and $2.0 million in
2002 of tax benefits. These benefits reflect the resolution, in connection with
completed examinations of prior year tax returns by Federal and local
authorities and otherwise, of certain previously recorded tax liabilities and,
in 2003, the finalization of income taxes on foreign earnings and remittances.
(7) Subsequent events -
-----------------
In July 2003, the company completed the sale of $130 million (including
$5 million related to an over-allotment option) of 4% contingent convertible
subordinated notes due 2023 (the "Notes"). Holders may convert the Notes into
shares of the company's common stock at an initial conversion price of $24.13
per share under certain circumstances, including when the market price of the
company's common stock is more than 120% of the conversion price.
The company may redeem the Notes on or after July 26, 2010, for cash,
at their principal amount plus accrued interest. Holders of the Notes may
require the company to repurchase all or a portion of their Notes on July 18,
2010, 2013 and 2018, and upon a change in control.
9
Approximately $50 million of the net proceeds from the sale of the
Notes was used to repurchase 3,067,484 shares of common stock concurrently with
the sale of the Notes. Approximately $49 million of the net proceeds was used to
repay revolving credit debt with the remainder to be used for general corporate
purposes.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003
Operating results (in thousands) by business segment were as follows
for the three-month periods ended June 30:
Segment
Net Sales Operating Profit
------------------- ----------------
2003 2002 2003 2002
---- ---- ---- ----
Garage doors $106,294 $110,209 $ 9,036 $ 6,420
Installation services 71,699 70,646 1,993 2,181
Specialty plastic films 98,050 74,830 9,643 8,722
Electronic information
and communication systems 42,501 48,007 1,847 3,433
Intersegment revenues (5,997) (6,357) - -
------- ------- ------- -------
$312,547 $297,335 $22,519 $20,756
======== ======== ======= =======
Garage Doors
- ------------
Net sales of the garage door segment decreased by $3.9 million or 3.6%.
The decrease was due to the 2002 divestiture of Atlas, an unprofitable
commercial operation ($7.6 million), partly offset by the net effect ($3.7
million) of higher unit sales, and favorable pricing and product mix.
Operating profit of the garage doors segment increased $2.6 million
compared to last year. The Atlas divestiture accounted for $.8 million of the
increase. Gross margin percentage increased to approximately 32.7% in 2003 from
31.6% last year, principally due to the Atlas divestiture and increased
manufacturing efficiencies. Selling, general and administrative expenses
decreased principally due to the Atlas divestiture and as a percentage of sales
was 24.3% compared to 25.8% last year. The increased profitability was due
primarily to the Atlas divestiture and the positive effect of expense control
programs.
Installation Services
- ---------------------
Net sales of the installation services segment increased by $1.1
million or 1.5% compared to last year. The increase was principally due to the
segment's expanded product offering and increased market share.
Operating profit of the installation services segment decreased $.2
million compared to last year. Gross margin percentage decreased to 27.1% from
27.6% last year. Selling, general and administrative expenses were essentially
the same as in the prior year and as a percentage of sales was 24.4% compared to
24.6% last year. The decreased profitability was principally due to competitive
pricing pressure.
Specialty Plastic Films
- -----------------------
Net sales of the specialty plastic films segment increased $23.2
million or 31.0% compared to the prior year. The net effect of higher unit
volume and product mix ($6 million), the effect of a weaker U.S. dollar on
translated foreign sales ($9 million), the addition of the Brazilian operation
in the latter half of fiscal 2002 ($4 million) and selling price adjustments to
pass through raw material (resin) cost increases to customers ($4 million), were
the principal reasons for the increase.
11
Operating profit of the specialty plastic films segment increased $.9
million compared to last year. Gross margin percentage decreased to 22.3% from
24.6% last year, principally due to the effect of selling price adjustments and
costs associated with manufacturing facility expansion for current and new
products, partly offset by the net positive effect of increased volume and
product mix. Selling, general and administrative expenses increased due to
product development costs and the Brazil acquisition, but as a percentage of
sales declined to 12.6% from 13.8% last year, due primarily to the increased
sales.
Electronic Information and Communication Systems
- ------------------------------------------------
Net sales of the electronic information and communication systems
segment decreased $5.5 million or 11.5% compared to last year. The decrease was
primarily due to lower than anticipated awards of new orders.
Operating profit of the electronic information and communication
systems segment decreased $1.6 million due to the sales decrease. Gross margin
percentage increased to 26.3% from 25.2% last year due primarily to
manufacturing efficiencies and operational improvement in certain ongoing
production programs. Selling, general and administrative expenses as a
percentage of sales was 22.2% compared to 18.4% principally due to the sales
decrease and to higher bid and proposal and research and development costs.
Income Tax Expense
- ------------------
The provision for income taxes for the three-month periods ended June 30, 2003
and 2002 includes $1.7 million in 2003 and $2.0 million in 2002 of tax benefits.
These benefits reflect the resolution, principally in connection with completed
examinations of prior year tax returns by Federal and local authorities and
otherwise, of certain previously recorded tax liabilities and, in 2003, the
finalization of income taxes on foreign earnings and remittances.
NINE MONTHS ENDED JUNE 30, 2003
Operating results (in thousands) by business segment were as follows
for the nine-month periods ended June 30:
Segment
Net Sales Operating Profit
--------------------- -------------------
2003 2002 2003 2002
---- ---- ---- ----
Garage doors $302,643 $323,248 $22,919 $16,001
Installation services 210,691 205,276 4,200 5,286
Specialty plastic films 277,521 216,344 29,465 28,606
Electronic information
and communication systems 118,874 140,369 6,463 8,959
Intersegment revenues (17,698) (18,692) - -
-------- -------- ------- -------
$892,031 $866,545 $63,047 $58,852
======== ======== ======= =======
Garage Doors
- ------------
Net sales of the garage doors segment decreased by $20.6 million or
6.4% compared to last year. The decrease was principally due to the Atlas
divestiture ($19.2 million) and the net effect ($1.4 million) of lower unit
volumes attributable to inclement weather in the first half of the year, partly
offset by favorable pricing and product mix.
Operating profit of the garage doors segment increased approximately
$6.9 million compared to last year. The Atlas divestiture accounted for $3.1
million of the increase. Gross margin percentage increased to 32.4% in 2003 from
30.5% last year. The increased margin was due primarily to the Atlas
divestiture, increased manufacturing efficiencies and improved pricing and
product mix. Selling, general and administrative expenses as a percentage of
sales was 24.9% compared to 25.5% last year.
12
Installation Services
- ---------------------
Net sales of the installation services segment increased by $5.4
million or 2.6% compared to last year. The increase was principally due to the
segment's expanded product offering and increased market share.
Operating profit of the installation services segment decreased $1.1
million compared to last year. Gross margin percentage was 27.0% compared to
27.5% last year. Selling, general and administrative expenses as a percentage of
sales was 25.1% compared to 25.0% last year. The decreased profitability was
principally due to costs to adjust inventory levels and make structural changes
in certain locations which have been unprofitable and competitive pricing
pressure.
Specialty Plastic Films
- -----------------------
Net sales of the specialty plastic films segment increased $61.2
million or 28.3% compared to the prior year. The net effect of increased unit
volume and product mix ($22 million), the effect of a weaker U.S. dollar on
translated foreign sales ($22 million), the addition of the Brazilian operation
($10 million) and selling price adjustments to pass raw material cost increases
to customers ($7 million) were the principal reasons for the increase.
Operating profit of the specialty plastic films segment increased $.9
million or 3.0% compared to the prior year. Gross margin percentage decreased to
22.8% from 25.5% last year. The lower margin percentage was principally due to
the excess ($5 million) of raw material (resin) cost increases over related
selling price adjustments. In addition to the effect of resin, segment operating
profit was also affected by costs associated with manufacturing facility
expansion for current and new products, and by the net positive effect of
increased volume and product mix, and exchange rate differences. Selling,
general and administrative expenses increased due to product development
expenditures and higher freight and administrative costs associated with the
segment's European operation, but as percentage of sales was essentially
unchanged at 12.3% compared to 12.4% last year.
Electronic Information and Communication Systems
- ------------------------------------------------
Net sales of the electronic information and communication systems
segment decreased $21.5 million or 15.3% compared to last year. The decrease was
primarily due to lower than anticipated awards of new orders.
Operating profit of the electronic information and communication
systems segment decreased $2.5 million compared to last year. The decrease is
principally attributable to the sales decrease and increased research and
development expenditures. Gross margin percentage increased to 26.3% from 23.5%
last year due primarily to manufacturing efficiencies and lower margins last
year in connection with certain development phase programs. Selling, general and
administrative expenses were substantially the same as in the prior year, but as
a percentage of sales increased to 21.4% from 17.4% last year principally due to
the sales decrease.
Net Interest Expense
- --------------------
Net interest expense decreased by $.4 million compared to last year due
to the effect of debt repayments and lower interest rates, but will increase in
the fourth fiscal quarter and subsequent periods due to the sale in July 2003 of
$130 million of 4% contingent convertible subordinated notes. See "Liquidity and
Capital Resources."
13
Income Tax Expense
- ------------------
The provision for income taxes for the nine month periods ended June 30,
2003 and 2002 includes $1.7 million in 2003 and $2.0 million in 2002 of tax
benefits. These benefits reflect the resolution, principally in connection with
completed examinations of prior year tax returns by Federal and local
authorities and otherwise, of certain previously recorded tax liabilities and,
in 2003, the finalization of income taxes on foreign earning and remittances.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow generated by operations for the nine months ended June 30,
2003 was $40.8 million compared to $59.3 million last year and working capital
was $201.9 million at June 30, 2003. Operating cash flows decreased compared to
last year due primarily to changes in operating assets and current liabilities.
During the nine months ended June 30, 2003, the company paid $13.1
million for the balance of the Brazilian operation's purchase price. The company
also had capital expenditures of approximately $35.2 million, principally by the
specialty plastic films segment made in connection with increasing production
capacity and for capital programs to support new opportunities with its major
customers.
Financing cash flows principally consisted of net bank borrowings of
approximately $2.9 million, treasury stock purchases of $7.3 million and
distributions to minority shareholders of $5.9 million.
In July 2003, the company completed the sale of $130 million (including
$5 million related to an over-allotment option) of 4% contingent convertible
subordinated notes due 2023 (the "Notes"). Holders may convert the Notes into
shares of the company's common stock at an initial conversion price of $24.13
per share under certain circumstances, including when the market price of the
company's common stock is more than 120% of the conversion price.
The company may redeem the Notes on or after July 26, 2010, for cash,
at their principal amount plus accrued interest. Holders of the Notes may
require the company to repurchase all or a portion of their Notes on July 18,
2010, 2013 and 2018, and upon a change in control.
Approximately $50 million of the net proceeds from the sale of the
Notes was used to repurchase 3,067,484 shares of common stock concurrently with
the sale of the Notes. Approximately $49 million of the net proceeds was used to
repay revolving credit debt with the remainder to be used for general corporate
purposes. 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.
At June 30, 2003, 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, adjusted to reflect the sale of the
Notes described above, are as follows (000's omitted):
Operating Debt
Year Leases Repayments Total
---- --------- ---------- -----
2004 $22,700 $ 6,400 $29,100
2005 16,900 15,500 32,400
2006 11,100 2,800 13,900
2007 7,600 9,300 16,900
2008 4,000 1,600 5,600
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 debt as it matures.
14
ACCOUNTING POLICIES AND PRONOUNCEMENTS
Critical Accounting Policies
- ----------------------------
The company's significant accounting policies are set forth in Note 1
of Notes to Consolidated Financial Statements in the company's annual report to
shareholders for the year ended September 30, 2002. The following discussion of
critical accounting policies addresses those policies that require management
judgment and estimates and are most important in determining the company's
operating results and financial condition.
The company recognizes revenues for most of its operations when title
and the risks of ownership pass to its customers. Provisions for estimated
losses resulting from the inability of our customers to remit payments are
recorded in the company's consolidated financial statements. Judgement is
required to estimate the ultimate realization of receivables.
The company's electronic information and communication systems segment
does a significant portion of its business under long-term contracts with
government agencies. This unit generally recognizes contract-related revenue and
profit using the percentage of completion method of accounting, which relies
primarily on estimates of total expected contract costs. The company follows
this method since reasonably dependable estimates of costs applicable to various
elements of a contract can be made. Since the financial reporting of these
contracts depends on estimates, recognized revenues and profit are subject to
revisions as contracts progress to completion. Contract cost estimates are
generally updated quarterly. Revisions in revenue and profit estimates are
reflected in the period in which the circumstances requiring the revision become
known. Provisions are made currently for anticipated losses on uncompleted
contracts.
Inventory is stated at the lower of cost (principally first-in,
first-out) or market. Inventory valuation requires the company to use judgment
to estimate any necessary allowances for excess, slow-moving and obsolete
inventory, which estimates are based on assessments about future demands, market
conditions and management actions.
Recent Accounting Pronouncements
- --------------------------------
The Financial Accounting Standards Board has issued a number of other
Financial Accounting Standards and Interpretations. See Note 1 of Notes to
Condensed Consolidated Financial Statements for a discussion of these
pronouncements. The company does not anticipate that adopting these
pronouncements, where applicable, will have a material effect on results of
operations or financial condition.
FORWARD-LOOKING STATEMENTS
All statements other than statements of historical fact included in
this report, including without limitation statements regarding the company's
financial position, business strategy, and the plans and objectives of the
company's management for future operations, are forward-looking statements. When
used in this report, words such as "anticipate", "believe", "estimate",
"expect", "intend" and similar expressions, as they relate to the company or its
management, identify forward-looking statements. Such forward-looking statements
are based on the beliefs of the company's management, as well as assumptions
made by and information currently available to the company's management. Actual
results could differ materially from those contemplated by the forward-looking
statements as a result of certain factors, including but not limited to,
business and economic conditions, 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
15
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.
CONTROLS AND PROCEDURES
Under the supervision and with the participation of our Chief Executive
Officer ("CEO") and Chief Financial Officer ("CFO"), the company's disclosure
controls and procedures were evaluated as of the end of the period covered by
this report. Based on that evaluation, the company's CEO and CFO concluded that
the company's disclosure controls and procedures were effective.
During the period covered by this report there were no significant
changes in the company's internal control over financial reporting which are
reasonably likely to adversely affect the company's ability to record, process,
summarize and report financial information.
16
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 10.1 - Amendment to Employment Agreement
between Griffon and Harvey R. Blau dated August 8,
2003.
Exhibit 10.2 - Amendment to Employment Agreement
between Griffon and Robert Balemian dated August 8,
2003.
Exhibit 31.1 - Certification pursuant to Rules
13a-14(a) as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 31.2 - Certification pursuant to Rules
13a-14(a) as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32 - Certifications pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Current Report on Form 8-K dated April 30, 2003
covering information reported under Item 9 but
furnished pursuant to Item 12 in accordance with SEC
Release 33-8216.
17
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 8, 2003
18