GRIFFON CORP — Interim / Quarterly Report 2006

May 10, 2006

10-Q 1 v042468.htm Unassociated Document Licensed to: vf Document Created using EDGARizer HTML 3.0.4.0 Copyright 2006 EDGARfilings, Ltd., an IEC company. All rights reserved EDGARfilings.com

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, 2006

or

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

For the transition period from_ to_

Commission File Number: 1-6620

GRIFFON CORPORATION (Exact name of registrant as specified in its charter)

DELAWARE	11-1893410
(State
or other jurisdiction of
incorporation or organization)	(I.R.S.
Employer
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 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 o Accelerated
filer x 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. 29,761,478 shares of Common
Stock as of April 30, 2006. |

FORM 10-Q

CONTENTS

| PART I - | FINANCIAL
INFORMATION (Unaudited) | |
| --- | --- | --- |
| Item 1 - | Financial
Statements | |
| | Condensed
Consolidated Balance Sheets at March 31, 2006 and September 30,
2005 | 1 |
| | Condensed
Consolidated Statements of Operations for the Three and Six Months
Ended
March 31, 2006 and
2005 | 3 |
| | Condensed
Consolidated Statements of Cash Flows for the Six Months ended March
31,
2006 and 2005 | 5 |
| | Notes
to Condensed Consolidated Financial
Statements | 6 |
| Item 2 - | Management's
Discussion and Analysis of Financial Condition and Results of
Operations | 11 |
| Item 3 - | Quantitative
and Qualitative Disclosure about Market
Risk | 16 |
| Item 4 - | Controls
& Procedures | 16 |
| PART II - | OTHER
INFORMATION | |
| Item 1 - | Legal
Proceedings | 17 |
| Item 2 - | Unregistered
Sales of Equity Securities and Use
of Proceeds | 17 |
| Item 3 - | Defaults
upon Senior
Securities | 17 |
| Item 4 - | Submission
of Matters to a Vote of Security Holders | 17 |
| Item 5 - | Other
Information | 18 |
| Item 6 - | Exhibits | 18 |
| | Signature | 19 |

Part I - Financial Information

Item 1 - Financial Statements

GRIFFON CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

		(Note
1)
ASSETS
CURRENT
ASSETS :
Cash
and cash equivalents	$ 31,871,000	$ 60,663,000
Accounts
receivable, less allowance for doubtful
accounts	176,347,000	189,904,000
Contract
costs and recognized income not yet
billed	55,240,000	43,065,000
Inventories
(Note 2)	156,605,000	148,350,000
Prepaid
expenses and other current assets	44,478,000	41,227,000
Total
current assets	464,541,000	483,209,000
PROPERTY,
PLANT AND EQUIPMENT at
cost, less accumulated depreciation and
amortization of $202,084,000 at March
31, 2006 and $186,982,000 at September
30, 2005	214,868,000	216,900,000
OTHER
ASSETS:
Goodwill	97,832,000	96,098,000
Intangible
assets and other	56,625,000	55,220,000
	154,457,000	151,318,000
	$ 833,866,000	$ 851,427,000

See notes to condensed consolidated financial statements.

1

GRIFFON CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

| LIABILITIES
AND SHAREHOLDERS' EQUITY | | (Note
1) |
| --- | --- | --- |
| CURRENT
LIABILITIES: | | |
| Accounts
and notes payable | $ 101,511,000 | $ 99,159,000 |
| Other
current liabilities | 86,369,000 | 110,884,000 |
| Total
current liabilities | 187,880,000 | 210,043,000 |
| LONG-TERM
DEBT (Note 2) | 200,573,000 | 196,540,000 |
| OTHER
LIABILITIES AND DEFERRED CREDITS | 82,072,000 | 82,890,000 |
| Total
liabilities and deferred credits | 470,525,000 | 489,473,000 |
| 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 41,072,990 shares at March
31, 2006 and 40,741,748 shares at September 30, 2005; 11,314,687
and
10,502,896 shares in treasury at March 31, 2006 and September 30,
2005, respectively | 10,268,000 | 10,186,000 |
| Other
shareholders' equity | 353,073,000 | 351,768,000 |
| Total
shareholders' equity | 363,341,000 | 361,954,000 |
| | $ 833,866,000 | $ 851,427,000 |

See notes to condensed consolidated financial statements.

2

GRIFFON CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	2006		2005
Net
sales	$ 366,151,000	$	322,473,000
Cost
of sales	275,898,000		245,153,000
Gross
profit	90,253,000		77,320,000
Selling,
general and administrative expenses	78,710,000		69,717,000
Income
from operations	11,543,000		7,603,000
Other
income (expense):
Interest
expense	(2,565,000	)	(2,057,000	)
Interest
income	418,000		572,000
Other,
net (Note 7)	2,072,000		(17,000	)
	(75,000	)	(1,502,000	)
Income
before income taxes	11,468,000		6,101,000
Provision
for income taxes	4,260,000		832,000
Income
before minority interest	7,208,000		5,269,000
Minority
interest	---		(1,125,000	)
Net
income	$ 7,208,000	$	4,144,000
Basic
earnings per share of common stock (Note 3)	$ .24	$	.14
Diluted
earnings per share of common stock (Note 3)	$ .23	$	.13

See notes to condensed consolidated financial statements.

3

GRIFFON CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	2006		2005
Net
sales	$ 724,675,000	$	662,647,000
Cost
of sales	545,253,000		497,035,000
Gross
profit	179,422,000		165,612,000
Selling,
general and administrative expenses	153,934,000		140,175,000
Income
from operations	25,488,000		25,437,000
Other
income (expense):
Interest
expense	(5,143,000	)	(4,165,000	)
Interest
income	908,000		1,155,000
Other,
net	1,008,000		1,229,000
	(3,227,000	)	(1,781,000	)
Income
before income taxes	22,261,000		23,656,000
Provision
for income taxes	8,277,000		7,327,000
Income
before minority interest	13,984,000		16,329,000
Minority
interest	---		(2,993,000	)
Net
income	$ 13,984,000	$	13,336,000
Basic
earnings per share of common stock (Note 3)	$ .47	$	.45
Diluted
earnings per share of common stock (Note 3)	$ .45	$	.43

See notes to condensed consolidated financial statements.

4

GRIFFON CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

| | SIX
MONTHS ENDED MARCH 31, — 2006 | 2005 | | |
| --- | --- | --- | --- | --- |
| CASH
FLOWS FROM OPERATING ACTIVITIES: | | | | |
| Net
income | $ 13,984,000 | $ | 13,336,000 | |
| Adjustments
to reconcile net income to net cash
provided by operating activities: | | | | |
| Depreciation
and amortization | 16,951,000 | | 15,272,000 | |
| Minority
interest | --- | | 2,993,000 | |
| Provision
for losses on accounts receivable | 816,000 | | 867,000 | |
| Change
in assets and liabilities: | | | | |
| Decrease
in accounts receivable and contract costs and recognized income not
yet
billed | 812,000 | | 18,537,000 | |
| (Increase)
decrease in inventories | (8,003,000 | ) | 4,467,000 | |
| Decrease
in prepaid expenses and other assets | 257,000 | | 2,497,000 | |
| Decrease
in accounts payable, accrued liabilities
and income taxes | (17,121,000 | ) | (27,040,000 | ) |
| Other
changes, net | 838,000 | | 3,586,000 | |
| Total
adjustments | (5,450,000 | ) | 21,179,000 | |
| Net
cash provided by operating activities | 8,534,000 | | 34,515,000 | |
| CASH
FLOWS FROM INVESTING ACTIVITIES: | | | | |
| Acquisition
of property, plant and equipment | (13,442,000 | ) | (22,533,000 | ) |
| Acquisition
of minority interest in subsidiary | (1,304,000 | ) | (3,883,000 | ) |
| Acquired
businesses | --- | | (9,235,000 | ) |
| (Increase)
decrease in equipment lease deposits | (4,463,000 | ) | 3,314,000 | |
| Net
cash used in investing activities | (19,209,000 | ) | (32,337,000 | ) |
| CASH
FLOWS FROM FINANCING ACTIVITIES: | | | | |
| Purchase
of shares for treasury | (15,573,000 | ) | (7,946,000 | ) |
| Proceeds from borrowings under long-term debt arrangements | 60,000,000 | | 7,778,000 | |
| Payments
of long-term debt | (62,982,000 | ) | (9,040,000 | ) |
| Payment of debt issuance costs | (607,000 | ) | --- | |
| Decrease
in short-term borrowings | (1,181,000 | ) | (44,000 | ) |
| Distributions
to minority interest | (354,000 | ) | (988,000 | ) |
| Exercise
of stock options | 649,000 | | 4,137,000 | |
| Tax
benefit from exercise of stock options | 1,863,000 | | --- | |
| Net
cash used in financing activities | (18,185,000 | ) | (6,103,000 | ) |
| Effect
of exchange rates on cash and cash equivalents | 68,000 | | 533,000 | |
| NET
DECREASE IN CASH AND CASH EQUIVALENTS | (28,792,000 | ) | (3,392,000 | ) |
| CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 60,663,000 | | 88,047,000 | |
| CASH
AND CASH EQUIVALENTS AT END OF PERIOD | $ 31,871,000 | $ | 84,655,000 | |

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, 2006 are not necessarily indicative of the results that may be expected for the year ending September 30, 2006. The balance sheet at September 30, 2005 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 to shareholders for the year ended September 30, 2005.

(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:

	2006	2005
Finished
goods	$ 56,646,000	$ 52,908,000
Work
in process	57,346,000	58,908,000
Raw
materials and supplies	42,613,000	36,534,000
	$ 156,605,000	$ 148,350,000

In December 2005 the company and a subsidiary entered into a five-year senior secured multicurrency revolving credit facility in the amount of up to $150,000,000. Commitments under the credit agreement may be increased by $50,000,000 under certain circumstances upon request of 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.

The credit agreement replaced a loan agreement dating from October 2001 and refinanced $60 million of borrowings under such agreement. The proceeds of additional borrowings under the credit agreement are intended to be used for general corporate purposes, including share repurchases and acquisitions.

(3) Earnings per share (EPS) and accounting for stock-based compensation -

Basic EPS is calculated by dividing income by the weighted average number of shares of common stock outstanding during the period. The weighted average number of shares of common stock used in determining basic EPS was 29,874,000 and 29,387,000 for the three months ended March 31, 2006 and 2005, respectively, and 30,039,000 and 29,318,000 for the six months ended March 31, 2006 and 2005, respectively.

6

Diluted EPS is calculated by dividing income by the weighted average number of shares of common stock outstanding plus additional common shares that could be issued in connection with potentially dilutive securities. Holders of the company’s 4% convertible subordinated notes are entitled to convert their notes into the company’s common stock upon the occurrence of certain events described in Note 2 of Notes to Consolidated Financial Statements in the company’s annual report to shareholders for the year ended September 30, 2005. Shares potentially issuable upon conversion of the notes had no effect on the calculation of diluted earnings per share for the periods presented because the average price of the company’s common stock was less than the conversion price of the notes. The weighted average number of shares of common stock used in determining diluted EPS was 31,103,000 and 31,179,000 for the three months ended March 31, 2006 and 2005, respectively, and 31,302,000 and 31,172,000 for the six months ended March 31, 2006 and 2005, respectively, and reflects additional shares in connection with stock option and other stock-based compensation plans.

SFAS 123R, “ Share-Based Payment ”, requires that compensation costs relating to share-based payment transactions be recognized in the financial statements based upon fair value, eliminates the option to continue to account for such compensation under APB Opinion No. 25 and, pursuant to SEC Release 33-8568, became effective in the first quarter of fiscal 2006. The company adopted this pronouncement using modified prospective application and previously reported operating results and earnings per share amounts are unchanged. The effect of the adoption of SFAS 123R was not material to consolidated results of operations, cash flows or financial position. See Note 6 for a discussion of other recent accounting pronouncements.

The adoption of SFAS 123R in fiscal 2006 resulted in additional compensation cost recognized in the income statement and changed the manner of presenting certain tax benefits in the statement of cash flows. Operating results of future periods will be affected by compensation cost attributable to the fair value of unvested options at the date of SFAS 123R adoption (approximately $1,200,000 for unvested options outstanding as of March 31, 2006) and the fair value of subsequent option grants as determined pursuant to SFAS 123R. Fair value and related compensation cost for stock options under SFAS 123R will be based upon a number of estimates including the expected term of the option, risk-free interest rates for the expected term, expected dividend-yield of the underlying stock and the expected volatility in the price of the underlying stock. Fair value and related compensation cost estimates for stock options will also be dependent on the number of options granted and the market price of the underlying stock at the date of grant. 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 for the three months and six months ended March 31, 2005 would have been as follows:

| Net
income, as reported | $ 4,144,000 | $ | Six
Months — 13,336,000 | |
| --- | --- | --- | --- | --- |
| Deduct
total stock-based employee compensation expense determined under fair
value based method for all awards, net of related tax
effects | (1,854,000 | ) | (2,375,000 | ) |
| Pro
forma net income | $ 2,290,000 | $ | 10,961,000 | |
| Earnings
per share: | | | | |
| Basic
- as reported | $ .14 | $ | .45 | |
| Basic
- pro forma | $ .08 | $ | .37 | |
| Diluted
- as reported | $ .13 | $ | .43 | |
| Diluted
- pro forma | $ .07 | $ | .35 | |

7

(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, 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:

Revenues
from external
customers -
Three
months
ended
March
31, 2006	$ 117,062,000	$ 81,603,000	$ 95,869,000	$ 71,617,000	$ 366,151,000
March
31, 2005	105,104,000	66,483,000	94,533,000	56,353,000	322,473,000
Six months
ended
March
31, 2006	$ 254,621,000	$ 163,714,000	$ 182,042,000	$ 124,298,000	$ 724,675,000
March
31, 2005	235,291,000	138,736,000	185,865,000	102,755,000	662,647,000
Intersegment
revenues -
Three
months
ended
March
31, 2006	$ 4,525,000	$ 18,000	$ ---	$ ---	$ 4,543,000
March
31, 2005	5,070,000	25,000	---	---	5,095,000
Six
months ended
March
31, 2006	$ 9,793,000	$ 61,000	$ ---	$ ---	$ 9,854,000
March
31, 2005	10,590,000	61,000	---	---	10,651,000
Segment
profit -
Three
months ended
March
31, 2006	$ 3,637,000	$ 1,204,000	$ 8,910,000	$ 4,751,000	$ 18,502,000
March
31, 2005	749,000	1,287,000	6,220,000	3,397,000	11,653,000
Six
months ended
March
31, 2006	$ 17,207,000	$ 4,014,000	$ 7,274,000	$ 7,718,000	$ 36,213,000
March
31, 2005	11,398,000	2,576,000	14,818,000	5,921,000	34,713,000

8

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

| | 2006 | | 2005 | | Six
Months Ended March 31, — 2006 | | 2005 | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Profit
for all segments | $ 18,502,000 | $ | 11,653,000 | $ | 36,213,000 | $ | 34,713,000 | |
| Unallocated
amounts | (4,887,000 | ) | (4,067,000 | ) | (9,717,000 | ) | (8,047,000 | ) |
| Interest
expense, net | (2,147,000 | ) | (1,485,000 | ) | (4,235,000 | ) | (3,010,000 | ) |
| Income
before income taxes | $ 11,468,000 | $ | 6,101,000 | $ | 22,261,000 | $ | 23,656,000 | |

Unallocated amounts include general corporate expenses not attributable to any reportable segment. Goodwill at March 31, 2006 includes $12.9 million attributable to the garage doors segment, $19.4 million attributable to the electronic information and communication systems segment and $65.5 million attributable to the specialty plastic films segment. During the quarter ended December 31, 2005 the ownership interest in the company’s subsidiary in Brazil was increased from 90% to 100%. This additional investment increased goodwill of the specialty plastic films segment by $1.1 million. The remainder of the change in goodwill was primarily due to specialty plastic films’ currency translation adjustments.

(5) Comprehensive income and defined benefit pension expense -

Comprehensive income, which consists of net income and foreign currency translation adjustments, was $11.6 million and $2.1 million for the three-month periods and $15.3 and $16.8 million for the six-month periods ended March 31, 2006 and 2005, respectively.

Defined benefit pension expense was recognized as follow:

| | 2006 | | 2005 | | Six
Months Ended March 31, — 2006 | | 2005 | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Service
cost | $ 339,000 | $ | 392,000 | $ | 678,000 | $ | 784,000 | |
| Interest
cost | 864,000 | | 753,000 | | 1,728,000 | | 1,506,000 | |
| Expected
return on plan assets | (374,000 | ) | (321,000 | ) | (748,000 | ) | (642,000 | ) |
| Amortization
of net a ctuarial
loss | 538,000 | | 301,000 | | 1,076,000 | | 602,000 | |
| Amortization
of prior service
cost | 2,000 | | 2,000 | | 4,000 | | 4,000 | |
| Amortization
of transition obligation | 290,000 | | 223,000 | | 580,000 | | 446,000 | |
| | $ 1,659,000 | $ | 1,350,000 | $ | 3,318,000 | $ | 2,700,000 | |

(6) Recent accounting pronouncements -

The FASB has issued Statement of Financial Accounting Standards Nos. 151, “Inventory Costs”; 152, “Accounting for Real Estate Time-Sharing Transactions”; 153, “Exchange of Nonmonetary Assets”; 154, “Accounting Changes and Error Corrections”; 155, “Accounting for Certain Hybrid Financial Instruments”; 156, “Accounting for Servicing of Financial Assets”; and Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations.” SFAS 151 requires that abnormal amounts of idle facility expense, freight, handling costs and spoilage be recognized as period charges and became effective in fiscal 2006. SFAS 152 requires that real estate time-sharing transactions be accounted for pursuant to the AICPA Statement of Position, “Accounting for Real Estate Time-Sharing Transactions” rather than SFAS 66 and SFAS 67 and became effective in fiscal 2006. SFAS No. 153 replaces the exception from fair value measurement for non-monetary exchanges of similar productive assets with an exception for exchanges that do not have commercial substance and became effective in fiscal 2006. SFAS 154 changes the accounting for and reporting of a change in accounting principle by generally requiring that they be retrospectively applied in prior period financial statements and becomes effective in fiscal 2007. SFAS 155 establishes the accounting for certain derivatives embedded in other financial instruments. SFAS 156 amends the accounting for separately recognized servicing assets and liabilities. Interpretation 47 clarified when certain asset retirement obligations should be recognized and became effective in fiscal 2006. The company does not believe that the adoption of SFAS 151, SFAS 152, SFAS 153, SFAS 154, SFAS 155, SFAS 156 and Interpretation 47 have had or will have a material effect on the company’s consolidated financial position, results of operations or cash flows.

9

(7) Other income -

Other income for the quarter ended March 31, 2006 included approximately $1.7 million of realized 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.

10

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

AND RESULTS OF OPERATIONS

OVERVIEW

Net sales for the quarter ended March 31, 2006 were $366,151,000, up from $322,473,000 for the second quarter of fiscal 2005. Income before income taxes was $11,468,000 compared to $6,101,000 last year. Net income was $7,208,000 compared to $4,144,000 last year.

Operating results in the second quarter were significantly improved compared to the second quarter of 2005. Net sales and operating profits in the garage doors segment and in the specialty plastic films segments benefited from higher prices that recovered prior raw material cost increases.

The cost of resin decreased approximately 15% in the second quarter and continued to decline in April 2006. Through the end of April cumulative decreases since December, 2005 in North America approximate 25% of the sharp increases experienced from August to November 2005. During the second quarter, the lower resin costs favorably affected specialty plastic films’ operating income by approximately $1.5 million. It is uncertain whether the declines over the last several months will continue and whether the upcoming hurricane season will affect the price of natural gas and related by-products, such as resin. The specialty plastic films segment also experienced a return to normalized unit volume levels in North America from its largest customer.

Half way through fiscal 2006 we are optimistic about the specialty plastic films’ volume and margin improvements. As previously noted, volume with our largest customer in North America has returned to normal levels. Also, our ongoing sales development activities are yielding very encouraging results. Our strategy is to diversify and grow our films business with new products and new customers and into geographic regions with higher growth. During the quarter we successfully qualified our products and negotiated supply agreements with several important customers that will bring substantial volume into the business in 2006 and beyond. For example, our European sales volumes to new customers doubled from the first to second quarter of fiscal 2006. Also, with the start-up of our new production capacity in Brazil we are seeing increased volumes and sales of new products into this region. Year to date, our volume in Brazil is up 20% over the prior year.

Finally, in addition to our sales development success, growth should also be fostered by the introduction of new elastic films and laminates. These products will improve the fit, comfort and appeal of future baby diaper and adult incontinent products. Production capacity is being installed in North America to produce these products. Consequently, capacity expansion and sales growth in North America and Europe is expected over the next several years.

In the garage doors segment, coil and hardware steel costs were stable and somewhat lower compared to the corresponding period of the prior year. We do not anticipate unusual volatility in steel costs for the remainder of fiscal 2006. Higher selling prices in the quarter recovered the raw material cost increases that the segment experienced in the second quarter of fiscal 2005.

The electronic information and communication systems segment had substantial growth in sales and improved operating profit compared to last year. A significant factor in the increase is the revenue and profit in connection with fiscal 2006 subcontracts with Syracuse Research Corporation (SRC). To date, this segment has received SRC subcontracts in excess of $175 million. We previously noted that under the structure of the joint cooperation agreement with SRC, the segment’s total share of all production for SRC could exceed $150 million. T he SRC program is somewhat unusual for the segment as it does not have a lengthy development phase, and will therefore have an immediate and significant effect on the segment’s operating results. We expect this segment’s revenue in the second six months of fiscal 2006 to approximate $250 million and anticipate that total segment revenue for the year will approximate $375 million.

11

RESULTS OF OPERATIONS

See Note 4 of Notes to Condensed Consolidated Financial Statements.

THREE MONTHS ENDED MARCH 31, 2006

Operating results (in thousands) by business segment were as follows for the three-month periods ended March 31:

| | 2006 | | 2005 | | Segment
Operating Profit — 2006 | 2005 |
| --- | --- | --- | --- | --- | --- | --- |
| Garage
doors | $ 121,587 | $ | 110,174 | $ | 3,637 | $ 749 |
| Installation
services | 81,621 | | 66,508 | | 1,204 | 1,287 |
| Specialty
plastic films | 95,869 | | 94,533 | | 8,910 | 6,220 |
| Electronic
information and communication systems | 71,617 | | 56,353 | | 4,751 | 3,397 |
| Intersegment
revenues | (4,543 | ) | (5,095 | ) | -- | -- |
| | $ 366,151 | $ | 322,473 | $ | 18,502 | $ 11,653 |

Garage Doors

Net sales of the garage doors segment increased by $11.4 million compared to last year. The sales growth was principally due to increased unit volume ($7.5 million) and selling price increases ($1.2 million) that recovered prior-period raw material cost increases. The remainder of the sales increase was primarily due to favorable product mix attributable to the continuing shift to premium doors.

Operating profit of the garage doors segment increased $2.9 million compared to last year. Gross margin percentage increased to 28.5% for the quarter compared to 25.3% last year due to the selling price increases and moderating raw material costs that positively affected gross margin and operating profit by $2 to $3 million. Increased unit volume contributed approximately $2 to $3 million to the gross margin and operating profit improvement. Selling, general and administrative expenses increased compared to last year principally due to higher marketing expenses to support the sales growth and increased distribution and freight costs. As a percentage of sales, selling, general and administrative expenses increased to 25.5% from 24.6% last year.

Installation Services

Net sales of the installation services segment increased by $15.1 million compared to last year. The higher sales primarily resulted from increased volume in the segment’s Las Vegas and Phoenix markets.

Operating profit of the installation services segment was approximately the same as in the prior year. Gross margin percentage decreased to 25.8% from 26.5% last year principally due to higher raw material costs attributable to sales of cabinet products and narrower margins due to competitive market conditions. Selling, general and administrative expenses increased compared to the prior year principally due to higher distribution expenses to support the sales growth. As a percentage of sales, selling, general and administrative expenses was 24.4% compared to 24.6% last year.

In the Phoenix market, we have achieved market share gains among National and Regional home builders. In Las Vegas, recent customer program changes and market share losses may result in operating result declines for the segment in future quarters unless we are successful in replacing the business through the development of new customers.

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Specialty Plastic Films

Net sales of the specialty plastic films segment increased $1.3 million compared to last year. The increase was principally due to higher selling prices ($3 million) driven by prior period resin cost increases and increased unit volume ($2 million) partly offset by the effect ($3.2 million) of a stronger U.S. Dollar on translated foreign sales.

Operating profit of the specialty plastic films segment increased $2.7 million compared to last year. Gross margin percentage increased to 21.1% from 19.9% last year. The improved gross margin and operating profit reflected the effect ($1 million) of higher unit volume and the positive impact ($1 to $2 million) of moderating raw material costs. The negative effects on operating profit of start-up costs associated with new manufacturing capacity in Brazil and of a stronger U.S. Dollar on translated foreign operating results were substantially offset by realized foreign exchange gains. Selling, general and administrative expenses were relatively flat compared to last year and as a percentage of sales increased to 13.9% from 13.3% last year.

Electronic Information and Communication Systems

Net sales of the electronic information and communication systems segment increased $15.3 million compared to last year. The sales increase was principally attributable to the SRC subcontract ($11.4 million) and growth in radar programs.

Operating profit of the electronic information and communication systems segment increased $1.4 million principally due to the substantial revenue growth attributable to the SRC subcontract. Gross margin percentage decreased to 19.5% from 22.8% last year, principally due to lower margins on certain development programs and new awards. The effect of the lower gross margin percentage was offset by the sales increase. Selling, general and administrative expenses decreased slightly compared to last year but as a percentage of sales was 13.3% compared to 17.1% last year due to the sales increase.

Provision for income taxes

The provision for income taxes for the quarter ended March 31, 2005 was reduced to reflect a lower projected annual effective tax rate. The lower rate encompassed revised projections of the company’s domestic and foreign tax positions for fiscal 2005 as a result of the effects of the raw material price escalation and reassessments of other income tax matters.

SIX MONTHS ENDED MARCH 31, 2006

Operating results (in thousands) by business segment were as follows for the six-month periods ended March 31:

| | 2006 | | 2005 | | Operating
Profit — 2006 | 2005 |
| --- | --- | --- | --- | --- | --- | --- |
| Garage
doors | $ 264,414 | $ | 245,881 | $ | 17,207 | $ 11,398 |
| Installation
services | 163,775 | | 138,797 | | 4,014 | 2,576 |
| Specialty
plastic films | 182,042 | | 185,865 | | 7,274 | 14,818 |
| Electronic
information and communication systems | 124,298 | | 102,755 | | 7,718 | 5,921 |
| Intersegment
revenues | (9,854 | ) | (10,651 | ) | -- | -- |
| | $ 724,675 | $ | 662,647 | $ | 36,213 | $ 34,713 |

13

Garage Doors

Net sales of the garage doors segment increased by $18.5 million compared to last year. The sales growth was principally due to selling price increases ($7 million) that passed the effect of prior period raw material cost increases to customers and increased unit volume ($6 million). The remainder of the sales increase was primarily due to favorable product mix.

Operating profit of the garage doors segment increased $5.8 million compared to last year. Gross margin percentage in the first six months of fiscal 2006 increased to 30.1% compared to 27.6% for last year’s first half due to the effect of increased selling prices ($6 to $7 million), increased unit volumes ($1 to $2 million), improved product mix ($1 to $2 million) and raw material cost reductions that positively affected gross margin and operating profit by approximately $2 million. Selling, general and administrative expenses increased primarily due to higher marketing and distribution costs compared to last year and, as a percentage of sales, was 23.6% compared to 23.0% last year.

Installation Services

Net sales of the installation services segment increased by $25.0 million compared to last year. The higher sales resulted from increased first-half sales volume in the segment’s Las Vegas and Phoenix markets. Strong sales of flooring and cabinet products were driven by higher housing starts and increased market share in Phoenix and Las Vegas.

Operating profit of the installation services segment increased $1.4 million compared to last year. Gross margin was 26.3% in both 2006 and 2005. Selling, general and administrative expenses increased primarily due to higher distribution and selling costs to support the sales growth. Selling, general and administrative expenses as a percentage of sales was 23.9% compared to 24.6% last year due to the sales increase.

Specialty Plastic Films

Net sales of the specialty plastic films segment decreased $3.8 million compared to last year. The decrease was due to lower unit volume ($19 million) principally related to the diaper redesign process that primarily impacted first quarter unit volumes and the negative effect of a stronger U.S. Dollar on translated foreign sales ($6 million), partly offset by the net effect ($18 million) of sales to new customers and favorable product mix, and by higher selling prices ($3 million).

Operating profit of the specialty plastic films segment decreased $7.5 million compared to last year. Gross margin percentage decreased to 17.4% from 20.7% last year. The lower gross margin and operating profit reflected the effect (approximately $5 million) of lower unit volume and the negative impact ($2 to $3 million) of higher raw material costs. Selling, general and administrative expenses increased slightly as a percentage of sales to 14.0% from 13.2% last year.

Electronic Information and Communication Systems

Net sales of the electronic information and communication systems segment increased $21.5 million compared to last year. The sales increase was principally attributable to the SRC subcontract ($13 million) and growth in radar program awards.

Operating profit of the electronic information and communication systems segment increased $1.8 million compared to last year. Gross margin percentage decreased to 19.6% from 21.9% last year, principally due to lower margins on development programs and new awards. The effect of the lower gross margin percentage was offset by the sales increase. Selling, general and administrative expenses were flat compared to last year but as a percentage of sales was 13.7% compared to 16.5% last year due to the sales increase.

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Provision for income taxes

The provision for income taxes for the six months ended March 31, 2005 was reduced to reflect a lower projected annual effective tax rate. The lower rate encompassed revised projections of the company’s domestic and foreign tax positions for fiscal 2005 as a result of the effects of the raw material price escalation and reassessments of other income tax matters.

LIQUIDITY AND CAPITAL RESOURCES

Cash flow generated by operations for the six months ended March 31, 2006 was $8.5 million compared to $34.5 million last year and working capital was $276.7 million at March 31, 2006. Operating cash flows decreased compared to last year due primarily to increased inventory levels, higher contract-related receivables, the classification of tax benefits from stock option exercises as a financing activity in 2006, and reductions in current liabilities.

During the six months ended March 31, 2006 the company had capital expenditures of approximately $13.4 million. Capital expenditure activity should continue at levels consistent with prior years.

Financing cash flows included treasury stock purchases of $15.6 million to acquire approximately 641,000 shares of the company’s common stock and $60 million of debt refinancing. In December 2005, the company and a subsidiary entered into a new five-year senior secured multicurrency revolving credit facility in the amount of up to $150,000,000. Commitments under the credit agreement may be increased by $50,000,000 under certain circumstances upon request of 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. The credit agreement replaced a loan agreement dating from October 2001 and refinanced $60 million of borrowings under such agreement. The proceeds of additional borrowings under the credit agreement are intended to be used for general corporate purposes, including share repurchases and acquisitions.

Approximately 1,800,000 additional shares are available for purchase pursuant to the company’s stock buyback program, and additional purchases under the plan or a 10b5 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, 2005. 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 2005 Annual Report.

The Financial Accounting Standards Board has issued a number of financial accounting standards, staff positions and emerging issues task force consensus. See Notes 3 and 6 of Notes to Condensed Consolidated Financial Statements for a discussion of these matters.

15

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, results of integrating acquired businesses into existing operations, competitive factors and pricing pressures for resin and steel, 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.

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.

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PART II - OTHER INFORMATION

| Item
1 | Legal
Proceedings |
| --- | --- |
| | None |
| 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 ) | | 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 (2 ) |
| --- | --- | --- | --- | --- |
| January
1 - 31 | 145,000 | $ 23.88 | 145,000 | 1,868,495 |
| February
1 - 28 | 80,000 | 23.10 | 80,000 | 1,788,495 |
| March
1 - 31 | --- | --- | --- | 1,788,495 |
| Total | 225,000 | | 225,000 | |

| (1)
The company’s stock buyback program has been in effect since 1993, under
which a total of approximately 16.8 million shares have been purchased
for
$224.6 million. The unused authorization is 1.8 million shares. There
is
no time limit on the repurchases to be made under the plan. |
| --- |
| (2)
In November 2005, the company announced that its Board of Directors
approved the entry into a Rule 10b5-1 trading plan with a broker to
facilitate the repurchase of its shares of common stock under its stock
buyback program. During January and February 2006, the company purchased
195,000 shares under a Rule 10b5-1 plan. Such 10b5-1 plan terminated
in
February 2006 in accordance with its terms. Therefore, no additional
shares may be purchased pursuant to that plan. However, under prior
authorizations from the Board of Directors, management may enter into
additional Rule 10b5-1 trading plans to facilitate stock repurchases
without further announcement. |

| 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 3,
2006. |
| | (b)
Not applicable |
| | (c)(i)
Four directors were elected at the Annual Meeting to serve until
the
Annual Meeting of Stockholders in 2009. The names of these directors
and
votes cast in favor of their election and shares withheld are as
follows: |

| Name | Votes
For | Votes
Withheld |
| --- | --- | --- |
| Harvey
R. Blau | 24,853,859 | 1,900,068 |
| Ronald
J. Kramer | 24,840,163 | 1,913,764 |
| General
Donald J. Kutyna | 25,898,317 | 855,610 |
| Lt.
Gen. James W. Stansberry | 24,849,343 | 1,904,584 |

(ii) The company’s 2006 Equity Incentive Plan was approved at the Annual Meeting as follows:

| Votes
For | Votes
Against | Shares
Abstained | Broker
Non-Votes |
| --- | --- | --- | --- |
| 17,112,038 | 4,654,467 | 115,604 | 4,871,818 |

(iii) The company’s 2006 Performance Bonus Plan was approved at the Annual Meeting as follows:

| Votes
For | Votes
Against | Shares
Abstained | Broker
Non-Votes |
| --- | --- | --- | --- |
| 23,951,639 | 2,667,079 | 135,207 | - |

17

| Item
5 | Other
Information |
| --- | --- |
| | None |
| Item
6 | Exhibits |
| | Exhibit
10.1 - Griffon Corporation 2006 Equity Incentive Plan (incorporated
by
reference to Griffon Corporation’s current report on Form 8-K filed with
the Securities and Exchange Commission on February 17,
2006). |
| | Exhibit
10.2 - Griffon Corporation 2006 Performance Bonus Plan (incorporated
by
reference to Griffon Corporation’s current report on Form 8-K filed with
the Securities and Exchange Commission on February 17,
2006). |
| | 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. |

18

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 9, 2006

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