Griffon Corp (GFF) 2006 Q3 法說會逐字稿

Hello everyone, and welcome to Griffon Corporation's third quarter 2006 earnings call. With us today we have Harvey Blau, Griffon's Chairman and Chief Executive Officer; and Eric Edelstein, Executive Vice President and Chief Financial Officer. [OPERATOR INSTRUCTIONS] This call is being recorded. Your participation implies consent to our recording this call. If you do not agree to these terms, simply drop off the line. Thank you. I would now like to turn the call over to Mr. Blau. Please go ahead, sir.

Good afternoon. Welcome to a financial overview of our third quarter of fiscal 2006, which ended on June 30, 2006. I am Harvey Blau, Chairman of Griffon Corporation and with me is Griffon's Executive Vice President, Eric Edelstein. I will discuss the overall results of the quarter and then Eric will answer questions with respect to operations and financial results.

First, I should point out that to the extent that matters to be discussed in this call include forward-looking statements. They involve certain risks and uncertainties that could cause the Company's actual results to differ materially from those in the forward-looking statements. Consolidated net sales for the quarter were 429 million, up from 351 million for the third quarter of fiscal 2005. Pretax income was 26.9 million compared to 19.9 million last year. An added income of $19.4 million for the quarter compared to $12.9 million resulting in diluted earnings per share of $0.61 compared to $0.41 last year. Telephonics, our electronics information, and communications system segment had record sales in the quarter of 111 million compared to $51 million last year. Telephonics operating income was 12.7 million, compared to 2.8 million last year. The significant increase in sales and operating income was primarily attributable to our contract with Syracuse Research. Telephonics has now received contracts in excess of $195 million. We expect that by year-end, approximately 70% of the contract will be complete. And the remainder will be completed during 2007.

We have been informed that the unit is performing well in the field and that there are ongoing discussions about orders for additional equipment. New orders and contract rewards were also steady for Telephonics other programs. Our backlog at June 30, is at an all-time high of $390 million. The MH60-R program continues to ramp-up as anticipated and is the primary reason for our increase in backlog. Our building products operations performed consistently in the third quarter with operating results approximating prior year third quarter results. Sales in garage doors for the quarter were 139 million compared to 137 million last year, and operating income was 10.3 million compared to the prior-year quarter of 10.7 million.

Garage door sales in the quarter were impacted positively by a more favorable product mix to more premium line doors. Sales volumes to our dealer network increased by approximately 5%. This increase was offset by a decline in sales through our retail distribution channel. Operating income was favorably impacted by the product mix and unfavorably impacted by increased distribution and freight costs, advertising, and market costs. In the third quarter of fiscal 2006, steel prices remained fairly level, although we did receive selective increases in certain types of steel. Generally the steel market that supplies our operations is tightening. Accordingly, we're experiencing significant cost increases in the fourth quarter and have announced sales price increases to recover these costs.

This past Monday, July 31, Clopay building products purchased a manufacturing facility in Troy, Ohio. We're excited about this acquisition as the facility will be used to expand existing manufacturing capabilities and to add new manufacturing process and products to Clopay's already broad door line. Our service and installation operation had sales in the quarter of 86 million compared to 77 million in prior year. Operating income was 2.2 million compared to 2.6 million last year. The increase in revenue continues to be attributable to increased volume in our Las vegas and Phoenix markets. The decline in operating income reflected lower margins and higher selling, general, and administrative expenses related to the increased compensation in each of our markets. Although several national builders have recently experienced and forecast the continuing weakening sales of new residential housing, we have not as yet seen the impact of the slowdown in our service and installation operation. We do expect lower sales in 2007, attributable to the weaker housing markets and the loss of key accounts in Las vegas due to increased competition.

The combination of lower sales and margin pressure will result in lower earnings for the segment in 2007. Management's evaluating several cost reduction initiatives to offset the expected profit decline as well as new sales initiative. In addition, the segment financial team has been strengthened by the addition of several industry veterans, new general managers has been added to the Phoenix and Las Vegas location, and Lynn Adams, co-founder, of the Company's Las Vegas, Phoenix, and Canada business has rejoined the Company. In specialty plastic films, sales for the quarter were 97 million compared to 91 million last year. Operating income was 8 million compared to 6 million last year. The 7% increase in the sales in the quarter include a higher selling pricing for unit volume increases and a weaker U.S. dollar on [Inaudible] sales.

Operating income compared favorably to the prior year, a 2.1 million increase as the prior year quarter results were not particularly strong. Nevertheless, third quarter results for our plastic film business were mixed. We're encouraged that our unit volume continues to grow and the quarter volume was up by about 5% versus the prior year. The bulk of that growth came in our North American and Europe hygiene product segment where our business development efforts focused on introducing new products for new customers are bearing fruit. The outlook is positive for continued volume expansion in this area.

In the quarter, our Brazilian operation was limited by capacity restraints due to the final stages of its relocation, which we hope will take place in the next few weeks. Operating margin performance for the quarter exceeded the prior year, but does not meet our expectations. Margins were negatively impacted by the resin prices, approximately $1 million. Start-up costs for our new product business efforts and the moving costs for Brazil. In our plastic business, the bulk of our products are custom engineered for each customer's unique requirements.

As new customers and products come onboard, we go through a start-up period that hurts our output and material yields as we ramp up the commercial volume. These factors add cost and they are particularly significant in the current climate of high resin prices. The second and third quarters were negatively impacted by this factor. The start-up period challenges are not new to our business and we are confident that as in the past they will be effectively addressed.

Looking forward, we are optimistic that our business development activities will fuel continued unit volume growth for the business. In the fourth quarter, we expect to bring in shipping commercial quantities of our new product, elastic laminates for the hygiene products market. More information on that subject will be available in the future. Margin improvement remains a key goal. The contribution from increased unit volumes will be challenged by continuing start-up costs, resin price increases, with the first increase already in place in June and competitive pricing pressures. Consolidated operating cash flow in the quarter was $10.8 million and we continue to support the growth of our business with capital expenditures in the quarter of $9 million. Our balance sheet at June 30, remains strong with working capital of 295 million and total indebtedness representing 35% of capital. We continued to fund our common stock purchase program during fiscal 2006. To date we have purchased approximately 750,000 shares. At this time, we would like to take questions.

Thank you. [OPERATOR INSTRUCTIONS] Bob Labick, CJS Securities.

Good afternoon. First question. I just wanted to dig a little deeper into a couple of the segments. In terms of doors, you had very strong growth in Q2, and I think you attributed it, it was plus 10%, you attributed it mostly to unit growth. You mentioned that the retail customers door sales were down. Can you just give us a little color to the driver of that and what your expectations are going forward, and how that area looks right now?

Hi, Bob. Talking about unit sales for the whole segment, overall for the quarter they were up just slightly and as Harvey had indicated, up on dealer and down in the retail area. From what we see and know, we believe we're down kind of consistent with the decline the big box retailers themselves are experiencing. Needless to say, they're working hard on it as we are. And that includes things like promotional programs -- special promotional programs and advertising. We're hopeful that some of those steps which have already been taken will strengthen the sales volume in that distribution channel.

Okay. As far as we've gone through the rest of this quarter and everything else, have you seen any improvement there? Or at least less of a decline from that area? I'm just trying to get a sense of really, end of this year, and really looking into '07, where you think garage doors--?

We don't have a really -- it's the fist week in August, we're talking about the last four weeks. We don't really have any good information just yet of which way it's going.

Okay. Moving on just to films. You obviously indicated just start-ups with new customers, which are positive, are impacting margins right now. How much of it is that start-up cost and how much of it is the lower utilization because you have the higher capacity right now that's impacting the margins? And when should we see them ramp back to the mid-20s that they used to be gross margins, that is, for the films division?

The first part of that question, I would say most of it is the start-up costs. Overall, our volumes are pretty good. Harvey did reference some capacity constraints in Brazil as a result of the move, but in North America and Europe, the utilization is good. As he noted, it is primarily efficiencies that to some degree we're struggling with as we bring on the new business. We've faced this in the past and we have conquered it and we certainly expect to do that again. It's a little difficult to tell just how quickly it will all fall in place. I can tell you that for certain customers, where we had these issues in the latter part of last quarter, they are no longer an issue. They've been fixed. Now we have new customers in addition to those that we're bringing on that are creating problems. I'd like to believe overall it's a question of two to three months to iron things out. But it's a little bit of an unknown and in some instances, it could take longer.

In terms of the new product, the flexible laminant that Harvey alluded to, how much more color can you give us on that?

Well, first thing is, this might be consistent with what we've said in the past, I think it is, that we're targeting the latter part of this quarter, that is the month of September to start shipping some products and we're looking forward to seeing it ramp up nicely through fiscal 2007.

And from a sense of size, is that 10 million in capacity or 50 million in capacity or 100 million in capacity?

Right in the middle.

Okay. Terrific, that would be obviously very meaningful to the division. That would be great. Just moving to telephonics, obviously you had a very strong quarter and the margins were very strong as well. Typically, you guys have had higher margin in Q4, be it from a conservative accruals or whatnot. Can you help us a get a sense of what margins should look like this year, because there will be a lot of sales particularly related to Syracuse, but you're ramping everything else up. How should we look at Q4 and margins for telephonics and kind of going into next year, the margins on Syracuse, if you can break those out?

Well, we -- I'm not going to actually break it out because it relates to some of the confidentiality around SRC, that contract. But I think I can provide you some meaningful information. The first thing is that last quarter we made the statement that the additional revenue and business we were doing through the SRC contract would impact operating margins consistent with telephonics overall operating margins. Appreciate that this is new work for us, this is not something we had done in the past and as it turns out, it's contributing a little bit more than what has been the overall effective rate of all of our other business in the past. And maybe inherently you can almost see that in the numbers. That's the first bit of information. The second would be to simply confirm that some of the traditional -- not some, the traditional boost you see in our margins in the fourth quarter, we would expect for the other business to pretty much be there. Maybe not quite as high as in the past, but it should be there.

Great. Well, congratulations on a good quarter. We look forward to seeing you at our conference.

Your next question is from Zahid Siddique of Gabelli and Company.

Good afternoon. A question on the tax rate, I noted it was about 28%. Your normalized rate, what is that?

We believe the overall effective rate for the year should end up in the 34% range.

34%?

Yes.

And the second question I have is with regards to the garage door. What percentage of your sales go to the distributor channel versus the retail and if you could maybe give us a specific number as to the decline of the retail? You said they were in-line with big box retailer, and I don't have information on how the big box retailers are doing, so if you could maybe give some color on that.

The split deal versus retail is two-thirds, one-third, 70/30 with the dealer being the higher piece, approximately.

Okay.

And I can't speak to the percentages. I can simply point to what we said a little earlier that we were 5% up unit volume in the dealer segment, or dealer distribution channel, and that retail pretty much offset it.

Sure. That's very helpful. Last question. On the unused capacity, I know we have talked about it on few calls, you have some I believe in Brazil, some in Europe, roughly about 80 million. Has that number changed in any way?

Well, we haven't always talked about it as unused capacity. We've talked about adding additional capacity and we believe we're well on our way through the business development efforts we've been talking about to utilizing a lot of that capacity. We have certain areas of our business and certain types of equipment where we are already sold out. And so our goal is over time, over the coming year, hopefully to bring the volumes up to a level where effectively we're at full capacity.

Okay. Thanks a lot.

Thank you. [OPERATOR INSTRUCTIONS] Your next question is from Rob Longnecker of Barrington.

Hey, guys, just a couple questions. Can you give a little color on the Finotech operations. Obviously there's been a lot of talk the last couple calls about filling the non-P&G lines. Can you just give us an update on where you stand on that?

Yes. In some respects, I'm going to repeat what we've been saying a little bit earlier. Because an awful lot of the new capacity and an awful lot of the business development efforts are focused on Finotech. As we've said in the past, not all of it, but much of it is the private label diaper/hygiene market and as we've said, we're continuing to make great strides. And then also a fallout, so to speak, in developing this business, we are experiencing some significant transition and start-up costs. In some instances, it's we're producing salable goods, but at efficiencies lower than we openly expect to achieve. And in other instance, it's running trials and things like that, call it the presale phase.

Am I correct in thinking that you guys had about 50 million of excess capacity there?

We added 50 million of additional capacity, correct.

Can you give a rough color on where your utilization is?

Not really. Still too hard to tell. But I would go back to what I just said a little earlier, which was we're doing real well and in certain types of business, we are already at capacity. That would mean certain lines. And we would hope, given all of the business development activity we have that we would be thinking about and dealing with issues towards the end of next year we're out of capacity.

We don't look at it as excess capacity. We added on Finotech 4 which gave us 40 to $50 million of capacity additionally to what we had because without it we could not have gone out looking for private label or other major label customer business since we were 100% sold out and we didn't have room to do anything for anybody else. We thought that was a bad position to be in. We should be out there trying to get more business and we should be out trying to get diversified business. So we look at it as additional opportunities. And the real question you have to ask and I think you should leave it until year-end, the phone call, is how have we been able to fill the capacity that we added this year and it will take a little bit more time than just a couple of months.

I thought that's what I was asking.

Okay. Well, I don't think we can give an answer yet. It's too preliminary. We're still doing test runs. We're still doing a whole bunch of things for the customer and we're still out soliciting business for customers.

Okay. Can you guys just give a dollar amount of what the Syracuse Research business was this quarter?

No, we can't because we're actually falling back on the contract itself being highly, highly confidential. We're supposed to stay away from all sorts of things on unit shifts and sales and profitability and the like. But I would tell you to focus on the remarks earlier from Harvey that substantially all of the increase comes from that.

Okay. And just a question for Harvey. Obviously been in the business a while. I'm trying to get a feel for what the impact of housing downturns could be and I looked back to the 2000 time frame when existing home sales were down a little less than 1% and I think your garage door business dropped about 4 to 5% in revenues and margins went down to mid- to low single digits. Do you think that's a reasonable expectations of what would happen if we see a 2000 play out again?

I think that the difference between where we are now and where we were in 2000 and 2001 is that we have a lot bigger base in the installation business, which is basically all new construction. So the to the extent that the new construction market goes down further in 2007 and therefore has an effect on the installation business or new business to be added on to the installation business, that could probably have a bigger effect than it had in the past. On the other hand, the gross profit margins and margins in that business are very small. So as you can see even in this quarter, they're not very large--.

I'm talking specifically in garage doors.

Well, in garage doors, remember that 75% of our business is through to non-new construction. At least 75% of our new business. So to the extent that there's 25% of our business is for new construction, to the extent that that goes down somewhat, that could affect us in that comparably to where we were last time.

So you think down 4 to 5% that happened in 2000 could be a reasonable expectation?

Just to emphasize how this is so much of a crystal ball, I'll actually add something that admittedly maybe will be slightly contradictory to what Harvey just said and then we'll leave it to you to figure out where this is ultimately going to go. We haven't historically focused so much on what you're referencing as a 2001 dip. When our guys look at the history of the business over the last 15 plus years, we tend to have to go all the way back to the late 80s to see what we felt were the true national drop-offs in housing starts. And back then, when that happened, our business actually picked up. And so admittedly, we're hanging our hat on something that's 17 years old, but we have a sense that if there truly is a strong drop-off nationally that the repair and renovate market will pick up and more than cover what we might lose in our new home construction. That's the first point.

Second point is, and I'm not sure exactly how the 2001 period you're defining, where it falls off, where it starts, but admittedly back then, we were having some serious customer service problems and we hurt ourselves back then in not being able to deliver. So what you're defining as a drop off then for us could very well have been service-related.

What do you think about that, Harvey?

Well, I think if you look at the past, you will see that we had a increase in the remodeling business, because when people aren't selling their houses, one of the things they do is try to improve them while they're living there. So a lot of people would go out and buy garage doors and install them. A lot of that -- as a matter of fact, a lot of that installation took place with people doing it themselves rather than going through professional installers. So you've got to see how the market is going to react and how bad the economy is going to be and how bad interest rates are going to be and how bad all these things are. We're sort of on the conservative side, but we've been able to produce pretty good returns over the years.

Okay. Just one last question and I'll get back in queue, it looks like there was a move in the inventory this quarter, is anything going on there?

What did you say?

It looked like inventory jumped up in the latest quarter?

It certainly did. A good part of it is telephonics tied into the large contract we've been talking about. And then there's also a reasonable-sized jump in our garage door business and film businesses. That's where it's coming from.

Okay, thank you.

Your next question is from Stephen Chin, Amtrust.

Historically in your plastics business, your operating margins were around 12%. When do you think that you can get back to that level?

I tended to talk about our operating margins in that business over time being fairly volatile and ranging anywhere from 8 to 13 as opposed to us consistently hitting 12. And we did get pretty close to 13, hit 13, in 2004. We've also said that over the long-term, 10% is a pretty good goal. And we would hope to get back to 10% fairly quickly. We believe that in a good environment -- by good environment I mean relatively stable resin pricing and I mean some of the new product cycles are on the front end where things are more in demand -- that we can achieve 12 and 13 in the future. But the business as currently constituted, I don't think 12, 13, year in and year out is realistic. 10 is more realistic.

Okay, thank you. Your working capital, as somebody noted, is notably higher in this quarter. So when do you expect to work that down?

Well, we covered the inventory. Receivables are up because our sales are up so significantly in telephonics. It's not going to come down dramatically because of the ongoing work at Syracuse Research, unless it's in next quarter. I would like to see -- we always want to manage the business with minimal orders of inventory without hurting services. I'd like to see some of it come back down in the next quarter, inventory at garage doors and the film business. But it's not going to drop way back down.

And then finally, is there a way that you can highlight -- or is there a way to highlight the value of your defense business, which your market value is higher than your other businesses?

What does that mean? You're talking about a sale price of what it's worth?

Sure.

No, no, is that what you're talking about?

I guess just trying to figure out, the Company gets a certain multiple and in the Company you've got a business that generally gets a higher multiple in the public market. So is there a way to increase the multiple that your business is getting because you've got this telephonics business?

Well, I would think that on a blended basis people are taking into consideration the breakup value of the Company. If you took a look at the breakup value of the Company and said that some value of that has to be put into a market value, there would be a factor for the military business that would be significantly higher than for the other businesses because the military businesses today have been selling for maybe 50, 60% more on an EBITDA basis than the other businesses.

Okay. But the market is not doing that. It is not giving you the value for this business.

The question I have to ask you is, if we did not have the military business but we were in the other businesses, would our PE be higher or lower?

I guess the Company is trading at a 10.5 multiple and that's not where the military businesses would be trading.

10.5 PE or 10.5 EBITDA?

10.5, PE for next year.

10.5 PE. Well, you're talking about next year. I'm talking about last trailing earnings. If you take a look at last year, we did $1.50 some odd a share and stock was selling for somewhere around 15 times earnings. Now the question is would it sell for a lower price than that if we didn't own the military business? I'm not sure where you're coming from. We own it, it's in the numbers, are we getting full value for it from a public perspective? Probably not. Could we sell it? The answer is yes. If we sold it, would there be tax leakage? The answer is yes. Therefore we wouldn't be getting full value for it, we'd have to take it minus taxes. So even if we did that and bought back stock, I don't know if that puts us in a better or worse position. But it certainly adds to the value of the overall company.

Okay, thank you.

Your next question is from Bob McDorman, Investment Counselors

A minute ago you said you didn't think that much of the receivables or inventories would be converted to cash over the next few months even though the FSE contract is largely going to be completed. Is that correct?

We didn't say the FSE contract was largely going to be completed in the next few months.

Oh, okay. You said 70% of these rewards are expected to be completed.

70% of the awards to date will be completed by December--.

No, no, September, and the other 30 will be after that.

Okay, okay. So we won't see much more buildup in inventories and receivables or?

I wouldn't expect there to be much in the way of buildup, but we've got this thing running at a rate and it's going to stay at that rate.

I would hope we'd have a big inventory buildup if they increase the size of the program.

That's a good problem to have. Harvey, I guess the contract is pretty secure, then, isn't it? Never mind.

What do I know? I hear all kinds of rumors and I try to stay away from them.

It's a funded contract, period.

You mentioned you bought another manufacturing facility for the garage door business?

That's correct. We bought a facility, not a business.

Right.

It's not very far from our headquarters for garage doors and as Harvey noted, it's going to provide us with a lot of flexibility in improving and changing our manufacturing processes and broadening out our product line, which is already quite broad.

So it's not so much a capacity increase as it is maybe efficiency improvements?

No, it's both.

It's both. But it basically was bought for the efficiencies. It's big enough where you can manufacture the door without breaking the line. You can add other types of doors that we haven't been able to make now because we're constrained by space. So it will give us capacity and it should make us more efficient and eventually add to gross profit margins.

Great. Thanks very much.

You're welcome.

Your next question is from David Rosen of CR Intrinsic.

First of all, excellent quarter, congratulations.

Congratulations to you, David.

Thanks. I wanted to talk a little bit about what a prior caller had mentioned on the breakup analysis. I think what he was trying to articulate as that of this -- if you look at the specialty films business, as an example, there is a reasonably comparable company, which is this Tredegar which does trade at 17, 18 times earnings on current-year earnings. So you do have a comp for the specialty films. There are definitely comps that you could look at for garage doors to try and evaluate what a business like that should trade at, recognizing the fact that you have a platform for growth and you have a strong brand. And then if you actually look at the defense businesses, there's clearly evidence to support the fact that the EBITDA multiples should be in the 10 range.

If I sum up those various points and you attribute it to some of those parts, it's clear the multiple you're getting today on your earnings stream is not sufficient in relation to the value of the asset that you do possess. So I strongly concur with the analyst and I think what he was trying to say is, it's clear that the stock market is not valuing some of the parts properly. And that may be the case now for a couple of years. I guess we all want to know, how do you anticipate remedying that, if there is a plan? Thank you.

The difficulty of remedying that is because from time to time things change. Now, in Tredegar's case I don't have current facts, I don't know the story. But I know that at some point they had a changeover in their business, they had some business issues. Their aluminum extrudes line business was having some problems. Every once in a while, the best way to get a high PE is to have low earnings. We think we're doing a good job. We think that in a conglomerate nature that we are -- that you do get some sort of a discount. And I think that the only way you can remedy that in my opinion is if somebody comes along and makes an offer to buy the Company. And then they show that they have a value that is greater than the value that is there now. And we're here. My phone is open.

But the answer is, is that we're doing everything we can to do it, as you know in our conversations that we've had about this same issue that the problem of selling something off has a tax leakage to it. There are other ways of doing it, but they are basically noncash. It just doesn't make too much sense to me. But I'll be very happy to continue this conversation.

Okay. I guess, in also response to how I just -- you have to have small earnings to have a high PE, I think that would also apply to the specialty films business in its current earnings stream. So I don't know if that's necessarily a bad comparable to Tredegar, but that's that.

I disagree.

With that said, I think we all acknowledge that there's some undervalued and we should all collectively try and figure out a way of realizing the inherent value and I appreciate the job that you guys are doing and the fact that you guys are looking at all potential avenues and I just -- I implore you to continue that process.

My job is to make you look good.

Please do that more often. Thanks, guys.

Your next question is from Shaun Nicholson of Kennedy Capital.

Hi, guys. How you doing?

Great, how are you?

Good, good. I just wanted to clarify something, if you guys could. I know you stated you try to stay away from rumors and whatnot within the telephonics business, but a competitor has talked about the Crew III contract, which doesn't come to bid for quite some time. Can you just talk -- and as far as them getting that contract. Can you just kind of go through what's out there as far as the bids and what you're seeing as far as the competitive landscape?

I will give you -- I don't know exactly who you're talking about.

It's Ito.

I have no idea what Ito has been saying. I know they were on the program once and I don't know what their status is at the present time. So our knowledge at the present time, there is no Crew III. There's been no RFI, there is no RFP. At the earliest, it's been indicated to us, if there were to be a Crew 3, it would not be until sometime in late 2007. What the specs of Crew III is, no one knows. Whether there's going to be a Crew III, no one knows. Whether the various military departments are going to enhance current systems, we believe they will, we believe they will enhance the current system.

There are two people now working on this type of program. One is for the Marines and one is for the Army. We believe that there's going to be a constant upgrading of the existing systems. So as far as Crew III is concerned, that's something that we have nothing to say because there's nothing to say. With respect to the improvements on the existing system, we will see what the customer wants and we will see what is the -- what is able to be accomplished by the existing contractors, which is one -- as I said one for the Marines and one for the Army. And then we'll see what goes on.

In historic programs in the Military, companies get contracts. Whether it's for communications equipment, whether it's for radars, or whether it's for weapons systems. After that contract is let, months go by, a year goes by, and then the military comes back and asks for enhancements to those program or modifications, because most of the programs are years old by the time they go into production. We have that in the C-17, we have that in the LAMPS helicopter. They're always looking for lighter weight, better power, all kinds of upgrades. And those are change orders to existing contracts which normally keep the same reference number, but have change orders and you keep getting change orders to the contracts and then retrofit to the existing systems that are out there. I would not believe that there is any reason to think that the program that we're on is not going to go through a similar life cycle pattern.

Okay. That helps out a lot. Thanks, guys.

Your next question is from Omar Hosed of JKK Partners.

Excellent results and thanks again, for taking my question. I have most of my questions answered but I wondered if you could indulge me on one and that's with respect to one of these transactions that you've alluded to. Not to beat a dead horse on the questions that have already been asked, but is one of the transactions possibly borrowing against the telephonics units and engaging something like a dutch tender and buying back a lot of stock to highlight the undervaluation?

Is it what? Is it something that we are thinking of doing?

Is it possible? Is it likely?

I would not characterize it as likely. We have probably game planned 100 different things. We've talked to a number of investment bankers and bankers about the situation. I think I have said before that my goal is always to get the price of the stock up. I'm a major stockholder, I want to see the price of the stock up, but normally we want to do it by virtue of reporting earnings and growth and things like that. But we have nothing come up with any plan along the line of selling telephonics or doing a dutch tender or any of those things. Obviously if we ended up selling telephonics, a dutch tender would certainly be one of the uses of the proceeds.

Thanks, Harvey.

You're welcome.

Your next question is from Rob Norfleet of Davenport and Company.

Nice quarter. Just a quick question. You had mentioned earlier, obviously about some issues that the installation business is facing, especially given that you're in some of the markets like Phoenix and Vegas where there's obviously been a fair amount of speculative investment and obviously it's weighing on the markets in those regions. Can you discuss in a little more detail, and again, I know this is not one of your major segments in terms of its contribution to operating income, but talk a little bit in more detail about what you're going to try to do to stem the potential -- not losses, but relative to the lower year-over-year profit growth and obviously a decline in revenues. What can you do there to somewhat offset the weakening residential market?

Well, firstly, we are bringing in new management for special parts of the business such as the kitchen cabinet business and things like that to enhance our production and try to do a better job. Because there is still a lot of business out there, we have a big backlog of orders in the Phoenix area that we have to take care of to make sure we do the job well. The first thing is to try and get productivity and do the job well so we can make money.

The second thing is, we've brought back the former owner of Adams Brothers who knows this business very, very, very well and he's been working with us for the next three to five years. And his goal is to try to get us more customer base so that we can pick up more business from competition and try to increase our, or maintain our position in the market out there even if there's a decline.

The third thing we're doing is strengthening our Las vegas operation, making investments in the Las vegas operation, and maybe even looking at an acquisition in the Las vegas acquisition -- in the Las vegas market that will give us the opportunity to continue being a player there. And to not allow the erosion of any more sales by virtue of either competition or by the slowdown in the marketplace. But we have the financial wherewithal to do this. We don't think some of our competition does, and we think that in the big picture we're going to be stronger, bigger, and better player in this business in the next two years, three years, however long it takes for this market to go through its catharsis and come back. Because it seems to me that the major builders have bought tremendous amounts of land all over that area of the country and are not giving up on the fact that the future looks very bright for the marketplace over the long pull. But you go through these cycles all the time.

I think that makes a lot of sense. Thanks.

I'd like to turn the call back over to Mr. Blau for closing remarks.

I want to thank you all for taking your time to listen to the call and to give us an opportunity to answer questions. I wish we could tell you more about some of the military programs that we can, but we're under basically tight rules on those. We're going to continue to try to work hard and keep everything going because we know it's important for us to have you as our stockholders and we'll talk to you again in a couple of months. Thanks a million.

Thank you. This concludes today's Griffon Corporation third quarter 2006 conference call. You may now disconnect and have a pleasant day.