Unassociated Document

 
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 March 31, 2007

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________ to ________
 
Commission File Number:  1-06620

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
x  Yes
o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
 o Yes
x No
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.  29,824,276 shares of Common Stock as of April 30, 2007.
 
 



FORM 10-Q

CONTENTS

   
PAGE
PART I -
FINANCIAL INFORMATION (Unaudited)
 
     
Item 1 -
Financial Statements
 
     
 
Condensed Consolidated Balance Sheets at March 31, 2007 and September 30, 2006
1
     
 
Condensed Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2007 and 2006
3
     
 
Condensed Consolidated Statements of Cash Flows for the Six Months ended March 31, 2007 and 2006
5
     
 
Notes to Condensed Consolidated Financial Statements
6
     
Item 2 -
Management's Discussion and Analysis of Financial Condition and Results of Operations
9
     
Item 3 -
Quantitative and Qualitative Disclosures about Market Risk
13
     
Item 4 -
Controls & Procedures
13
     
PART II -
OTHER INFORMATION
 
     
Item 1 -
Legal Proceedings
14
     
Item 1A -
Risk Factors
14
     
Item 2 -
Unregistered Sales of Equity Securities and Use of Proceeds
14
     
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
15
     
Signature
 
16

 
 


 
Part I - Financial Information
Item 1 - Financial Statements

GRIFFON CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
   
March 31,
 
September 30,
 
   
2007
 
2006
 
       
(Note 1)
 
ASSETS
         
           
 CURRENT ASSETS:
         
               
Cash and cash equivalents
 
$
34,374,000
 
$
22,389,000
 
 
             
Accounts receivable, less allowance for doubtful accounts
   
212,484,000
   
247,172,000
 
 
             
Contract costs and recognized income not yet billed
   
74,312,000
   
68,279,000
 
               
Inventories (Note 2)
   
174,426,000
   
165,089,000
 
               
Prepaid expenses and other current assets
   
46,215,000
   
42,075,000
 
               
Total current assets
   
541,811,000
   
545,004,000
 
               
 PROPERTY, PLANT AND EQUIPMENT
             
               
at cost, less accumulated depreciation and amortization of $231,971,000
at
 March 31, 2007 and $218,090,000 at September 30, 2006
   
235,663,000
   
231,975,000
 
               
 OTHER ASSETS:
             
               
 Goodwill
   
110,286,000
   
99,540,000
 
               
 Intangible assets and other
   
67,894,000
   
51,695,000
 
               
     
178,180,000
   
151,235,000
 
               
   
$
955,654,000
 
$
928,214,000
 
 
 
See notes to condensed consolidated financial statements.
 

1


 
GRIFFON CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

   
March 31,
 
September 30,
 
   
2007
 
2006
 
       
(Note 1)
 
LIABILITIES AND SHAREHOLDERS' EQUITY
         
           
CURRENT LIABILITIES:
         
               
Accounts and notes payable
 
$
109,081,000
 
$
135,300,000
 
               
Other current liabilities
   
85,128,000
   
100,999,000
 
               
Total current liabilities
   
194,209,000
   
236,299,000
 
               
LONG-TERM DEBT (Note 2)
   
251,475,000
   
209,228,000
 
               
OTHER LIABILITIES AND DEFERRED CREDITS
   
77,365,000
   
70,242,000
 
               
Total liabilities and deferred credits
   
523,049,000
   
515,769,000
 
               
COMMITMENTS AND CONTINGENCIES
             
               
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 41,701,238 shares at March 31, 2007 and 41,628,059 shares
at September 30, 2006; 11,876,962 and 11,779,462 shares in treasury
at March 31, 2007 and September 30, 2006, respectively
   
10,425,000
   
10,407,000
 
               
Other shareholders' equity
   
422,180,000
   
402,038,000
 
               
Total shareholders' equity
   
432,605,000
   
412,445,000
 
               
   
$
955,654,000
 
$
928,214,000
 
 
 
See notes to condensed consolidated financial statements.

 
2

 

 
GRIFFON CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
     
THREE MONTHS ENDED MARCH 31,
 
       
2007
 
 2006
 
                     
Net sales
       
$
387,371,000
 
$
366,151,000
 
                     
Cost of sales
         
305,853,000
   
275,898,000
 
                     
Gross profit
         
81,518,000
   
90,253,000
 
                     
Selling, general and administrative expenses
         
79,103,000
   
78,710,000
 
                     
Income from operations
         
2,415,000
   
11,543,000
 
                     
Other income (expense):
                   
Interest expense
         
(3,052,000
)
 
(2,565,000
)
Interest income
         
752,000
   
418,000
 
Other, net (Note 6)
         
582,000
   
2,072,000
 
           
(1,718,000
)
 
(75,000
)
Income before income taxes
         
697,000
   
11,468,000
 
                     
Provision for income taxes (Note 7)
         
442,000
   
4,260,000
 
                     
Net income
       
$
255,000
 
$
7,208,000
 
                     
Basic earnings per share of common stock (Note 3)
       
$
.01
 
$
.24
 
                     
Diluted earnings per share of common stock (Note 3)
       
$
.01
 
$
.23
 
 

See notes to condensed consolidated financial statements.
 
 
3

 
 
GRIFFON CORPORATION AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 
   
 SIX MONTHS ENDED MARCH 31, 
   
2007
 
2006
 
           
Net sales
 
$
821,686,000
 
$
724,675,000
 
               
Cost of sales
   
646,964,000
   
545,253,000
 
               
Gross profit
   
174,722,000
   
179,422,000
 
               
Selling, general and administrative expenses
   
156,243,000
   
153,934,000
 
               
Income from operations
   
18,479,000
   
25,488,000
 
               
Other income (expense):
             
Interest expense
   
(5,996,000
)
 
(5,143,000
)
Interest income
   
1,372,000
   
908,000
 
Other, net (Note 6)
   
1,200,000
   
1,008,000
 
     
(3,424,000
)
 
(3,227,000
)
               
Income before income taxes
   
15,055,000
   
22,261,000
 
               
Provision for income taxes (Note 7)
   
6,335,000
   
8,277,000
 
               
Net income
 
$
8,720,000
 
$
13,984,000
 
               
Basic earnings per share of common stock (Note 3)
 
$
.29
 
$
.47
 
               
Diluted earnings per share of common stock (Note 3)
 
$
.28
 
$
.45
 
 
 
See notes to condensed consolidated financial statements.
 
 
4

 

GRIFFON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
   
SIX MONTHS ENDED MARCH 31,
 
   
2007
 
 2006
 
CASH FLOWS FROM OPERATING ACTIVITIES:
          
               
Net income
 
$
8,720,000
 
$
13,984,000
 
Adjustments to reconcile net income to net cash provided by operating activities:
             
Depreciation and amortization
   
19,765,000
   
16,951,000
 
Stock based compensation
   
1,303,000
   
870,000
 
Provision for losses on accounts receivable
   
734,000
   
816,000
 
Change in assets and liabilities, net of assets acquired and liabilities assumed:
             
Decrease in accounts receivable and contract costs and recognized income not yet billed
   
32,828,000
   
812,000
 
Increase in inventories
   
(6,658,000
)
 
(8,003,000
)
(Increase) decrease in prepaid expenses and other assets
   
(1,217,000
)
 
257,000
 
Decrease in accounts payable, accrued liabilities and income taxes payable
   
(36,989,000
)
 
(17,121,000
)
Other changes, net
   
861,000
   
(32,000
) 
     
10,627,000
   
(5,450,000
)
Net cash provided by operating activities
   
19,347,000
   
8,534,000
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
             
               
Acquisition of property, plant and equipment
   
(19,477,000
)
 
(13,442,000
)
Acquisition of minority interest in subsidiary
   
---
   
(1,304,000
)
Acquired businesses
   
(17,167,000
)
 
---
 
Increase in equipment lease deposits
   
(1,473,000
)
 
(4,463,000
)
Funds restricted for capital projects
   
(4,421,000
)
 
---
 
Net cash used in investing activities
   
(42,538,000
)
 
(19,209,000
)
               
CASH FLOWS FROM FINANCING ACTIVITIES:
             
               
Purchase of shares for treasury
   
(2,300,000
)
 
(15,573,000
)
Proceeds from issuance of long-term debt
   
42,891,000
   
60,000,000
 
Payments of long-term debt
   
(482,000
)
 
(62,982,000
)
Decrease in short-term borrowings
   
(5,625,000
)
 
(1,181,000
)
Exercise of stock options
   
1,111,000
   
649,000
 
Tax benefit from exercise of stock options
   
278,000
   
1,863,000
 
Distributions to minority interest
   
---
   
(354,000
)
Other, net
   
(1,238,000
)
 
(607,000
)
               
Net cash provided by (used in) financing activities
   
34,635,000
   
(18,185,000
)
               
Effect of exchange rate changes on cash and cash equivalents
   
541,000
   
68,000
 
               
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
   
11,985,000
   
(28,792,000
)
               
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
   
22,389,000
   
60,663,000
 
               
CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
34,374,000
 
$
31,871,000
 
 
 
See notes to condensed consolidated financial statements.
 
 
5

 
 
GRIFFON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
(1) Basis of presentation -
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement have been included. Operating results for the three-month and six-month periods ended March 31, 2007 are not necessarily indicative of the results that may be expected for the year ending September 30, 2007. The balance sheet at September 30, 2006 has been derived from the audited financial statements at that date. For further information, refer to the consolidated financial statements and notes thereto included in the company's Annual Report on Form 10-K for the year ended September 30, 2006.

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

   
March 31,
 
September 30,
 
   
2007
 
2006
 
               
Finished goods
 
$
70,578,000
 
$
67,230,000
 
               
Work in process
   
67,169,000
   
54,590,000
 
               
Raw materials and supplies
   
36,679,000
   
43,269,000
 
               
   
$
174,426,000
 
$
165,089,000
 

In December 2006 the company and a subsidiary modified their existing senior secured multicurrency revolving credit facility, executed in December 2005, increasing the facility to provide up to $175,000,000 and extending its remaining term to five years. Commitments under the credit agreement may be increased by $50,000,000 under certain circumstances upon request by the company. Borrowings under the credit agreement bear interest at rates based upon LIBOR or the prime rate and are collateralized by stock of a subsidiary of the company.

(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. Diluted EPS is calculated by dividing income by the weighted average number of shares of common stock outstanding plus additional common shares that could be issued in connection with potentially dilutive securities. Holders of the company’s 4% convertible subordinated notes are entitled to convert their notes into the company’s common stock upon the occurrence of certain events described in Note 2 of Notes to Consolidated Financial Statements in the company’s Annual Report on Form 10-K for the year ended September 30, 2006. Basic and diluted EPS for the three-month and six-month periods ended March 31, 2007 were determined using the following information:
 
 
6


 
 
   
Three Months Ended March 31,
 
Six Months Ended March 31,
 
   
2007
 
2006
 
2007
 
2006
 
 
                 
Income available to common stockholders
 
$
255,000
 
$
7,208,000
 
$
8,720,000
 
$
13,984,000
 
 
                         
Weighted-average shares outstanding - basic EPS
   
29,948,000
   
29,874,000
   
29,950,000
   
30,039,000
 
Incremental shares from stock-based compensation
   
1,136,000
   
1,229,000
   
1,123,000
   
1,263,000
 
Incremental shares from 4% convertible notes
   
82,000
   
---
   
44,000
   
---
 
Weighted average shares outstanding - diluted EPS
   
31,166,000
   
31,103,000
   
31,117,000
   
31,302,000
 
 
 
(4) Business segments and acquisition -
 
The company's reportable business segments are as follows - Garage Doors (manufacture and sale of residential and commercial/industrial garage doors, and related products); Installation Services (sale and installation of building products primarily for new construction, such as garage doors, garage door openers, manufactured fireplaces and surrounds, flooring and cabinets); Specialty Plastic Films (manufacture and sale of plastic films and film laminates for baby diapers, adult incontinence care products, disposable surgical and patient care products and plastic packaging) and Electronic Information and Communication Systems (communication and information systems for government and commercial markets).

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

               
Electronic
     
               
Information
     
           
Specialty
 
and
     
   
Garage
 
Installation
 
Plastic
 
Communication
     
   
  Doors  
 
  Services  
 
  Films  
 
   Systems   
 
  Totals  
 
Revenues from external customers -
                     
                       
Three months ended                                 
March 31, 2007
 
$
101,216,000
 
$
62,261,000
 
$
99,730,000
 
$
124,164,000
 
$
387,371,000
 
March 31, 2006
   
117,062,000
   
81,603,000
   
95,869,000
   
71,617,000
   
366,151,000
 
                                 
Six months ended                                
March 31, 2007
 
$
225,105,000
 
$
139,182,000
 
$
203,385,000
 
$
254,014,000
 
$
821,686,000
 
March 31, 2006
   
254,621,000
   
163,714,000
   
182,042,000
   
124,298,000
   
724,675,000
 
                                 
Intersegment revenues -
                               
                                 
Three months ended                                
March 31, 2007
 
$
4,039,000
 
$
15,000
 
$
---
 
$
---
 
$
4,054,000
 
March 31, 2006
   
4,525,000
   
18,000
   
---
   
---
   
4,543,000
 
                                 
Six months ended                                
March 31, 2007
 
$
8,790,000
 
$
29,000
 
$
---
 
$
---
 
$
8,819,000
 
March 31, 2006
   
9,793,000
   
61,000
   
---
   
---
 
$
9,854,000
 
                                 
Segment profit (loss) -
                               
                                 
Three months ended                                
March 31, 2007
 
$
(4,556,000
)
$
(4,848,000
)
$
4,939,000
 
$
12,430,000
 
$
7,965,000
 
March 31, 2006
   
3,637,000
   
1,204,000
   
8,910,000
   
4,751,000
   
18,502,000
 
                                 
Six months ended                                
March 31, 2007
 
$
(543,000
)
$
(5,741,000
)
$
9,277,000
 
$
25,351,000
 
$
28,344,000
 
March 31, 2006
   
17,207,000
   
4,014,000
   
7,274,000
   
7,718,000
   
36,213,000
 
 
 
7

 
 
Following is a reconciliation of segment profit to amounts reported in the consolidated financial statements:
 
   
 Three Months Ended March 31,
 
 Six Months Ended March 31,
 
   
2007
 
 2006
 
 2007
 
 2006
 
Profit for all segments
 
$
7,965,000
 
$
18,502,000
 
$
28,344,000
 
$
36,213,000
 
Unallocated amounts
   
(4,968,000
)
 
(4,887,000
)
 
(8,665,000
)
 
(9,717,000
)
Interest and other, net
   
(2,300,000
)
 
(2,147,000
)
 
(4,624,000
)
 
(4,235,000
)
                           
Income before income taxes
 
$
697,000
 
$
11,468,000
 
$
15,055,000
 
$
22,261,000
 

Unallocated amounts include general corporate expenses not attributable to any reportable segment. Goodwill at March 31, 2007 includes $12.9 million attributable to the garage doors segment, $19.5 million attributable to the electronic information and communication systems segment, $6.3 million attributable to the installation services segment and $71.6 million attributable to the specialty plastic films segment. The change in goodwill from September 30, 2006 was primarily due to specialty plastic films currency translation adjustments and the goodwill recorded from the January 2007 installation services segment acquisition of a kitchen cabinet installation business. The acquisition was a cash transaction plus performance based cash payments determined over a three year period. Annual revenues for the acquired company are approximately $30,000,000.

(5) Comprehensive income and defined benefit pension expense -

Comprehensive income, which consists of net income and foreign currency translation adjustments, was $4.1 million and $11.6 million for the three-month periods and $19.4 million and $15.3 million for the six-month periods ended March 31, 2007 and 2006, respectively.

Defined benefit pension expense was recognized as follows:
 
   
Three Months Ended March 31,
 
 Six Months Ended March 31,
 
   
2007
 
 2006
 
2007
 
 2006
 
Service cost
 
$
312,000
 
$
339,000
 
$
624,000
 
$
678,000
 
Interest cost
   
932,000
   
864,000
   
1,864,000
   
1,728,000
 
Expected return on plan assets
   
(449,000
)
 
(374,000
)
 
(898,000
)
 
(748,000
)
Amortization of net actuarial loss
   
628,000
   
750,000
   
1,256,000
   
1,500,000
 
Amortization of prior service cost
   
80,000
   
80,000
   
160,000
   
160,000
 
                           
   
$
1,503,000
 
$
1,659,000
 
$
3,006,000
 
$
3,318,000
 
 
 
(6) Other income-
 
Other income included approximately $180,000 and $1,740,000 for the three-month periods and $569,000 and $499,000 for the six-month periods ended March 31, 2007 and 2006, respectively, of foreign exchange gains in connection with the translation of receivables and payables denominated in currencies other than the functional currencies of the company and its subsidiaries.

(7) Provision for income taxes -
 
The company’s effective tax rate increased in the first and second quarters of fiscal 2007 to 42% principally due to differences in the mix of foreign earnings and related taxes included in the calculation of the estimated annual effective tax rate for fiscal 2007 compared to the prior year. Additionally, the company is currently assessing what the effects will be upon adoption of Financial Accounting Standards Board Interpretation No. 48, which clarifies the accounting for uncertainty in income taxes recognized in the financial statements.
 
 
8

 

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Net sales for the quarter ended March 31, 2007 were $387,371,000, up from $366,151,000 for the second quarter of fiscal 2006. Income before income taxes was $697,000 compared to $11,468,000 last year. Net income was $255,000 compared to $7,208,000 last year.

The increase in sales for the second quarter of fiscal 2007 was primarily attributable to the electronic information and communication systems segment offset by a decline in sales in the garage doors and installation services segments. Operating results declined for the second quarter of 2007. Higher operating profit in the electronic information and communication systems segment was offset by losses in the garage doors and installation services segments and lower operating results in the plastic films segment.

The substantial growth in the electronic information and communication systems segment is primarily attributable to the contracts with Syracuse Research Corporation (SRC). The segment has received approximately $309 million of funding for turnkey production of a Counter Improvised Explosive Device, and when all awards are definitized they are expected to reach over $345 million. The segment anticipates that shipments for these awards will be completed through the remainder of this fiscal year. Unless there are significant new orders with SRC or in respect of other projects, we anticipate that sales in the segment will be lower in fiscal 2008 than in fiscal 2007.

Higher sales in the specialty plastic films segment primarily reflects higher unit volume in Europe and the impact of foreign exchange partially offset by lower selling prices to a major customer and an unfavorable product mix. The decrease in operating income for specialty plastic films is primarily attributable to the selling price concessions made to a major customer.

The decline in sales and operating income in our garage door and installation services segments was principally due to declines in sales volume. The company believes the sales volume decline is principally a result of the slowdown in the new home construction and home resale markets. We did not anticipate the severity of the decline in new home construction in certain markets and we did not foresee the slowdown in our repair and renovate business. As these conditions have had a significant impact on operating results, we have taken steps subsequent to March 31, 2007 to resize operations for lower volumes, including a substantial work force reduction. A decline in installation services’ operating results was anticipated, but it has been greater than expected. Weakness in the new home construction market has been greater than anticipated and we have not been successful in replacing lost business in our Las Vegas market. In January 2007, the segment acquired an installer of kitchen cabinets in the Las Vegas market, expanding the segment’s offering in this market and creating opportunities for synergy with the segment’s existing cabinet installation business.

RESULTS OF OPERATIONS
 
See Note 4 of Notes to Condensed Consolidated Financial Statements.

THREE MONTHS ENDED MARCH 31, 2007
 
Operating results (in thousands) by business segment were as follows for the three-month periods ended March 31:
 
 
9


 
 
            
Segment  
 
            
Operating  
 
   
Net Sales
 
Profit (loss)
 
   
2007
 
 2006
 
 2007
 
  2006
 
Garage Doors
 
$
105,255
 
$
121,587
 
$
(4,556
)
$
3,637
 
Installation services
   
62,276
   
81,621
   
(4,848
)
 
1,204
 
Specialty plastic films
   
99,730
   
95,869
   
4,939
   
8,910
 
Electronic information and communication systems
   
124,164
   
71,617
   
12,430
   
4,751
 
Intersegment revenues
   
(4,054
)
 
(4,543
)
 
---
   
---
 
   
$
387,371
 
$
366,151
 
$
7,965
 
$
18,502
 
 
 
Garage Doors
 
Net sales of the garage doors segment decreased by $16.3 million compared to last year. The sales decline was principally due to reduced unit volume (approximately $22 million) partially offset by the effect of higher selling prices associated with the recovery of increased costs (approximately $4 million) and favorable product mix and decreased customer deductions (approximately $2 million). The decline in unit volume is primarily due to the effects of the weak housing market.

Operating profit of the garage doors segment decreased by $8.2 million compared to last year, resulting in an operating loss for the second quarter of 2007. Gross margin percentage decreased to 24.2% for the quarter compared to 28.5% last year primarily due to the reduced unit sales and resultant underabsorbed overhead. Selling, general and administrative expenses decreased approximately $1 million from last year, and as a percentage of sales, was 28.4% compared to 25.5% last year due to the sales decrease.

Installation Services
 
Net sales of the installation services segment decreased by $19.3 million compared to last year. The sales decrease was primarily due to the severe slowdown in the new home construction market and the loss of a major customer in the Las Vegas market. Approximately 60% of the sales decline is in the flooring installation business, with approximately 15% each, attributable to fireplace and garage door sales. Cabinet sales declined approximately 25% which was primarily offset by sales of the recently acquired cabinet installation company.

Operating profit of the installation services segment decreased by $6.1 million compared to last year, resulting in an operating loss for the second quarter of 2007. Gross margin percentage increased to 26.4% from 25.8% last year principally due to the kitchen cabinet installation business acquired in January 2007 offset by operational inefficiencies and competitive pressures in certain of the segment’s markets. Selling, general and administrative expenses were approximately the same as last year, but as a percentage of sales, increased to 34.3% from 24.4% last year due to the sales decrease.

Specialty Plastic Films
 
Net sales of the specialty plastic films segment increased $3.9 million compared to last year. The increase was principally due to the effect of unit volume increases ($9 million), the positive effect on selling prices of resin volatility compared to last year ($2-3 million) and the impact of exchange rates on translated foreign sales ($5 million). These increases were offset by the effect ($12 million) of lower selling prices to the segment’s major customer and less favorable product mix.

Operating profit of the specialty plastic films segment decreased $4 million compared to last year. Gross margin percentage decreased to 16.4% from 21.1% last year. The effect of lower resin costs positively affected margins by $3 million. This gain was offset by the effect of lower margins with the segment’s major customer and less favorable product mix. Selling, general and administrative expenses were approximately the same as last year but as a percentage of sales decreased to 11.8% from 13.9% last year due to sales increase.
 
 
10


 
Electronic Information and Communication Systems 

Net sales of the electronic information and communication systems segment increased $52.5 million compared to last year. The sales increase was primarily attributable to the SRC contracts ($36 million) and the MH-60 helicopter program ($11 million).

Operating profit of the electronic information and communication systems segment increased $7.7 million, principally due to the substantial revenue growth attributable to the SRC contracts. Gross margin percentage decreased to 18.5% from 19.5% last year, principally due to lower margins on the SRC contracts. The effect of the lower gross margin percentage was offset by the sales increase. Selling, general and administrative expenses were approximately the same as last year, but as a percentage of sales decreased to 8.7% from 13.3% last year due to the sales increase.

Provision for income taxes
 
The company’s effective tax rate increased in the second quarter of fiscal 2007 principally due to differences in the mix of foreign earnings and related taxes included in the calculation of the estimated annual effective tax rate for fiscal 2007 compared to the prior year.

SIX MONTHS ENDED MARCH 31, 2007
 
Operating results (in thousands) by business segment were as follows for the six-month periods ended March 31:

            
 Segment  
 
            
 Operating  
 
   
Net Sales
 
  Profit (loss)
 
   
2007
 
 2006
 
 2007
 
  2006
 
Garage Doors
 
$
233,895
 
$
264,414
 
$
(543
)
$
17,207
 
Installation services
   
139,211
   
163,775
   
(5,741
)
 
4,014
 
Specialty plastic films
   
203,385
   
182,042
   
9,277
   
7,274
 
Electronic information and communication systems
   
254,014
   
124,298
   
25,351
   
7,718
 
Intersegment revenues
   
(8,819
)
 
(9,854
)
 
---
   
---
 
   
$
821,686
 
$
724,675
 
$
28,344
 
$
36,213
 
 
 
Garage Doors
 
Net sales of the garage doors segment decreased by $30.5 million compared to last year. The sales decline was principally due to reduced sales volume (approximately $45 million) partially offset by selling price increases associated with the recovery of increased costs (approximately $10 million) and favorable product mix and decreased customer deductions (approximately $5 million).

Operating profit of the garage doors segment decreased $17.8 million compared to last year, resulting in an operating loss for the first half of 2007. Gross margin percentage in the first six months of fiscal 2007 decreased to 26.1% compared to 30.1% for last year’s first half principally due to the effect of reduced sales volume and associated plant efficiency losses. Selling, general and administrative expenses decreased by approximately $1 million compared to last year and, as a percentage of sales, was 26.2% compared to 23.6% last year.
 
 
11


 
Installation Services 

Net sales of the installation services segment decreased by $24.6 million compared to last year. The sales decrease was primarily due to the severe slowdown in the new home construction market and the loss of a major customer in the Las Vegas market. Approximately 65% of the sales decline is in the flooring installation business, with approximately 20% each, attributable to fireplace and garage door sales. Cabinet sales increased approximately 11% which was primarily due to the sales of the recently acquired cabinet installation company.

Operating profit of the installation services segment decreased $9.8 million compared to last year, resulting in an operating loss for the first half of 2007. Gross margin was 25.7% in the first six months of 2007 and 26.3% in the first half of 2006. Selling, general and administrative expenses increased $2.4 million compared to last year and, as a percentage of sales was 29.8% compared to 23.9% last year.

Specialty Plastic Films
 
Net sales of the specialty plastic films segment increased $21.3 million compared to last year. The increase was due to higher unit volumes (approximately $22 million), the partial pass-through of resin costs (approximately $9 million) and the impact of foreign exchange rates (approximately $10 million), partially offset by lower selling prices to a major customer and unfavorable product mix (approximately $20 million).

Operating profit of the specialty plastic films segment increased $2 million compared to last year. Gross margin percentage decreased to 16% from 17.4% last year. The lower gross margin primarily reflected the effect of lower selling prices to a major customer. Selling, general and administrative expenses decreased as a percentage of sales to 12% from 14% last year.

Electronic Information and Communication Systems 

Net sales of the electronic information and communication systems segment increased $129.7 million compared to last year. The sales increase was principally attributable to the SRC subcontract ($102 million) and growth in the MH-60 helicopter program ($20 million).

Operating profit of the electronic information and communication systems segment increased $17.6 million compared to last year. Gross margin percentage decreased to 17.6% from 19.6% last year, principally due to lower margins on the SRC contracts. The effect of the lower gross margin percentage was offset by the sales increase. Selling, general and administrative expenses increased $2.9 million compared to last year and, as a percentage of sales, was 7.8% compared to 13.7% last year due to the sales increase.

Provision for income taxes
 
The company’s effective tax rate increased to 42% in the six-month period ended March 31, 2007 principally due to differences in the mix of foreign earnings and related taxes included in the calculation of the estimated annual effective tax rate for fiscal 2007 compared to the prior year.

LIQUIDITY AND CAPITAL RESOURCES
 
Cash flow generated by operations for the six-months ended March 31, 2007 was $19.3 million compared to $8.5 million last year and working capital was $347.6 million at March 31, 2007. Operating cash flows increased compared to last year due primarily to lower trade receivables partly offset by decreases in current liabilities.

During the six-months ended March 31, 2007, the company had capital expenditures of approximately $19.5 million, principally in connection with the garage doors and specialty plastic films segments.
 
 
12

 

Financing cash flows included treasury stock purchases of $2.3 million to acquire approximately 97,500 shares of the company’s common stock. During the six months ended March 31, 2007 the company borrowed approximately $43 million to finance its manufacturing facility in Troy, Ohio and the acquisition of a kitchen cabinet installation business as well as for other working capital purposes.

Approximately 1,500,000 shares of common stock are available for purchase pursuant to the company’s stock buyback program, and additional purchases under the plan or a 10b5-1 plan will be made, depending upon market conditions, at prices deemed appropriate by management.

Anticipated cash flows from operations, together with existing cash, bank lines of credit and lease line availability, should be adequate to finance presently anticipated working capital and capital expenditure requirements and to repay long-term debt as it matures.

CRITICAL ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS

The company's significant accounting policies are set forth in Note 1 of Notes to Consolidated Financial Statements in the company's annual report to shareholders for the year ended September 30, 2006. A discussion of those policies that require management judgment and estimates and are most important in determining the company's operating results and financial condition are discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the 2006 Annual Report. The company is currently assessing what the effects will be upon adoption of Financial Accounting Standards Board Interpretation No. 48, which clarifies the accounting for uncertainty in income taxes recognized in the financial statements.

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, including but not limited to the housing market, results of integrating acquired businesses into existing operations, competitive factors and pricing pressures for resin and steel, and capacity and supply constraints. Such statements reflect the views of the company with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to the operations, results of operations, growth strategy and liquidity of the company. Readers are cautioned not to place undue reliance on these forward-looking statements. The company does not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect future events or circumstances or to reflect the occurrence of unanticipated events.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Management does not believe that there is any material market risk exposure with respect to derivative or other financial instruments that is required to be disclosed.

ITEM 4 - CONTROLS AND PROCEDURES
 
Under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), the company’s disclosure controls and procedures were evaluated as of the end of the period covered by this report. Based on that evaluation, the company’s CEO and CFO concluded that the company’s disclosure controls and procedures were effective.
 
 
13


 
During the period covered by this report there were no changes in the company’s internal control over financial reporting which materially affected or are reasonably likely to materially affect, the company's internal control over financial reporting.

Limitations on the Effectiveness of Controls 

The company believes that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all controls issues and instances of fraud, if any, within a company have been detected. The company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and the company’s chief executive officer and chief financial officer have concluded that such controls and procedures are effective at the “reasonable assurance” level.

PART II - OTHER INFORMATION

Item 1
Legal Proceedings
 
None
   
Item 1A
Risk Factors
 
The risk factor disclosed in the company’s report on Form 10-K for the year ended September 30, 2006 titled Trends in the housing sector and in general economic conditions will directly impact our business has been deleted and amended as follows:
   
 
Our businesses in the garage door and the installation industries are influenced by market conditions for new home construction and renovation of existing homes. For the year ended September 30, 2006, approximately 53% of our total net sales were related to new home construction and renovation of existing homes. Trends in the housing sector directly affect our financial performance. Accordingly, the strength of the U.S. economy, the age of existing home stock, job growth, interest rates, consumer confidence and the availability of consumer credit, as well as demographic factors such as the migration into the United States and migration of the population within the United States have an effect on our business. In that respect, the recent downturn in the housing market has had an adverse effect on the operating results of our garage door and installation services segments. For the three months ended March 31, 2007, we incurred operating losses of $4,556,000 in garage doors and $4,848,000 in installation services. 


Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
    (c)
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
 
 
 
    Period     
 
Total Number of
Shares
Purchased(1)
 
Average Price Paid  per Share  
 
Total Number of Shares
Purchased as part of
Publicly Announced Plans
or
Programs
 
Maximum Number of Shares
that May Yet Be Purchased
Under the Plans or Programs
at
Month End
 
January 1 - 31
 
---
 
---   
 
---   
 
1,567,995   
 
February 1 - 28
 
50,000
 
23.45   
 
50,000   
 
1,517,995   
 
March 1 - 31
 
   ---
 
---   
 
   ---   
 
1,517,995   
 
Total
 
50,000
     
50,000   
   
 
 
(1) The company’s stock buyback program has been in effect since 1993, under which a total of approximately 17 million shares have been purchased for $231 million. The unused authorization is 1.5 million shares. There is no time limit on the repurchases to be made under the plan.
 
 
14

 

 
Item 3
Defaults upon Senior Securities
 
None
 

Item 4
Submission of Matters to a Vote of Security Holders
 
(a)  The Registrant held its Annual Meeting of Stockholders on February 2, 2007.
 
(b)  Four directors were elected at the Annual Meeting to serve until the Annual Meeting of Stockholders in 2010. The names of these directors and votes cast in favor of their election and shares withheld are as follows:
 

Name
 
Votes For
 
Votes Withheld
         
Henry A. Alpert
 
26,164,124
 
2,067,457
Blaine V. Fogg
 
26,910,843
 
1,320,738
Rear Admiral Clarence A. Hill, Jr.
 
25,770,323
 
2,461,258
William H. Waldorf
 
24,469,201
 
2,761,880
 

 The nine other directors whose term of office continued after the Annual Meeting are as follows:
 
Bertrand M. Bell
Harvey R. Blau
Rear Admiral Robert G. Harrison
Ronald J. Kramer
Martin S. Sussman
General Donald J. Kutyna
Joseph J. Whalen
Lieutenant General James W. Stansberry
Lester L. Wolff
 
 
 
 
(c) No other matters were voted upon at the Annual Meeting.
   
 
(d) Not applicable.
   

Item 5
Other Information
 
None
   

Item 6
Exhibits
   
 
Exhibit 31.1 - Certification pursuant to Rules 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
 
Exhibit 31.2 - Certification pursuant to Rules 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act 2002.
   
 
Exhibit 32 - Certifications pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   

 
15

 

SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
    GRIFFON CORPORATION
 
 
 
 
 
 
    By /s/ Eric Edelstein
 
Eric Edelstein
  Executive Vice President and Chief Financial Officer
  (Principal Financial Officer)
   
Date: May 10, 2007  
   
 
 
16

 

EXHIBIT INDEX
 

Exhibit 31.1 -
Certification pursuant to Rules 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
Exhibit 31.2 -
Certification pursuant to Rules 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act 2002.
   
Exhibit 32 -
Certifications pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
17