Griffon Corp (GFF) 2010 Q1 法說會逐字稿

Greetings and welcome to the Griffon Corporation first quarter 2010 financial results conference call. (Operator instructions) It is now my pleasure to introduce your host, Mr. Doug Wetmore, CFO for Griffon Corporation. Thank you. You may begin.

Thanks Jan and good afternoon everyone. With me on the call is Ron Kramer, our Chief Executive Officer. Before we get into the details of the call, there are a couple of matters I want to bring to your attention. As Jan mentioned, this call is being recorded and will be available for playback. Information regarding the playback is provided in our press release issued earlier today. In this call we may make forward-looking statements about the Company's performance. Such forward-looking-statements are subject to inherent risks and uncertainties that could cause actual results to differ materially from those expressed in those forward-looking-statements.

For additional information concerning factors that could cause the actual results to differ materially from those discussed in our forward-looking statements, I would ask you to refer to the cautionary statement and risk factors contained in today's press release, and in Griffon's various filings with the SEC. In addition, some of today's prepared remarks will exclude those items that affect comparability. These items are laid out in our non-GAAP reconciliation which is included in the press release.

And finally, effective October 1st, 2009 the Company adopted the new FASBI accounting standard regarding the accounting for convertible debt instruments that may be settled in cash upon conversion. This standard clarifies the accounting and disclosure for convertible debt instruments, including separate accounting for the liability and equity components of the debt. It also requires us to reflect our nonconvertible debt borrowing rate when interest cost is recognized on the convertible instruments. The standard was implemented retrospectively and prior period financial results were adjusted to reflect its adoption. The Company filed an 8-K last evening providing full details regarding the impact of adoption on prior reported results. In all of our comments today, all comparisons made with prior reporting periods will be with reference to results adjusted to reflect the impact of adoption of this standard.

With that I'll turn the call over to Ron.

Thanks. Good afternoon. I'm glad you all could join us today. As you read in our press release this morning, we had a strong start to the fiscal year. Doug will take you through the numbers in more details in a few moments, but here are the financial highlights from the first quarter.

Revenue was $305 million, up modestly from the $302 million in the prior year. Operating income increased three-fold to $7.3 million from $2.4 million in the first quarter last year, reflecting the improvements we've made to the operations. EBIDA for the consolidated group increased nearly 50% to $25 million versus $17 million in the first quarter of last year. Our net income more than doubled, rising to $4.3 million versus $2.1 million in the year ago period and our diluted earnings per share rose to $0.07 from $0.04.

I note that the current quarter includes a $1 million charge or about $0.01 for our previously announced restructuring of our Building Products business. Also as you compare our pretax income, remember that the year ago quarter contained a nonrecurring gain of $4.3 million or $0.04 per diluted share relating to a gain on the extinguishment of debt. If you adjust the $1 million restructuring charge this quarter and the gain on debt extinguishment in the prior year, you see that excluding these items, pretax earnings improved by $7.3 million versus 2009 on a comparable basis, something we're very proud of.

Our balance sheet is in great shape with cash on hand of over $375 million and outstanding debt of $247 million. As you know, during the quarter we completed a $100 million convertible debt offering that expanded our already substantial liquidity. I'm very pleased to report that we are increasingly in a position of financial and operational strength. Each of our businesses is well positioned for fiscal 2010.

As I spoke about on our last earnings call, our core initiatives are to maximize profitability, maintain a strong balance sheet, utilize our executive teams' skill to manage risk and to build business both organically and through acquisitions, obviously keeping in mind to build shareholder value. I think we are making significant progress on all of our initiatives.

I'd like to give you a little color on each of our three business units. First I'll talk about the garage door business, which was where we saw the greatest improvement in the quarter. As you know, we've given this business a great deal of attention. We shed the installation business in 2008, are currently consolidating manufacturing facilities and we continue to streamline our processes. While this work will not be fully completed until early next year, this quarter shows a dramatic positive impact from the work that's been completed today.

While revenue was down about 9% versus last year, we generated segment level operating profit of nearly $7 million in the quarter, an $11 million swing versus the $4 million loss in the same quarter last year. We saw cost come down and gross margin improve. We continue to have a lot of work to do in terms of executing our planned consolidation initiative. At this point I think it would be premature to anticipate that we will have this level of operating profit improvement in the next few quarters. However, in a scenario where volumes begin to improve as we get to an improving economy, we have an excellent ability to accelerate bottom line growth. What I think this shows more than anything is the strength of our strategy and the excellence of our execution.

Let's turn to the defense electronics business. Telephonics reported another great quarter. Revenue was strong, growing nearly 30% versus the prior year, to $104 million. Demand for our electronic systems, radar products, communication products, all contributed to the increase with a large contribution from the CREW 3.1 contract we have with Sierra Nevada Corporation. Our segment level operating profit was strong, rising 30% to $7 million. We were fortunate to have considerable opportunities to drive this business even higher. We're continuing an aggressive push to grow our weather and air traffic radar products. This is a fast developing market where there is significant opportunities on the horizon and we believe our technology and expertise put us in a solid position.

Our backlog in the Telephonics business at the end of the quarter was approximately $375 million. We've been executing well against this backlog and we expect this business to remain very strong throughout fiscal 2010.

Our Clopay Plastics business was profitable but not a significant contributor this quarter. The upward move in resin cost undercut the operating performance of the business, contributing to a 9% decrease in revenue to $102 million and reduced our profit margin. Business posted segment operating profit of $400,000 in the quarter. As you know, there is by contract a three month lag in passing through the impact of cost increases of resin or decreases to our customers via selling prices. We are working hard to introduce new products and better utilize our manufacturing assets, particularly in Europe, which as we previously stated, lags the profitability levels here in the United States.

I'll note that the business did generate significant cash as it carries the highest level of depreciation and amortization of any of our segments. Segment level EBITDA as it's laid out in our press release for Plastics was $6 million in the quarter. Let me say that we're cautiously optimistic that we will be increasingly profitable throughout the year in this business.

Let's turn to the balance sheet. As I mentioned, during the quarter we completed $100 million convertible debt offering. The bonds have a 4% interest rate and they're convertible at $14.91. This deal more than funds the retirement of the remaining notes that are outstanding from our previously issued convertible debentures, which are putable in July of this year. What this financing really does is it enhances our capital structure and it enables us to pursue a wider range of potential acquisition targets. I want to point out that at the same time we issued this debt, we were able to repurchase $19 million of the old convertible notes that we would otherwise have expected to be put to us in July, resulting in an immaterial net loss but enabling us to avoid the interest thereon for the next seven months. In January of this year we repurchased an additional $10 million on similar terms, so today we have $50 million left of the old notes and we fully expect that they'll be gone by July.

Let me turn to the acquisitions. While we don't have anything specific to talk about today, I'm confident that this year will be the year that we're able to add to our platform. We're hard at work evaluating a full range of opportunities, both within the existing businesses and also looking at things that compliment our future growth. With improvements in our base business, we're increasingly confident we're ready to take on these new projects and believe that we can unlock value for our shareholders.

Our management structure has solidified over the past few quarters, the team that has the right skill sets, execute on these types of transactions and of course on the related integration work.

With that I'm going to turn it back to Doug to give you some more details on the financials and then of course we'll take your questions later.

Thanks Ron. For the first quarter ending December 31, 2009 net sales were $305 million, increasing 1% from the $302 million in last year's quarter. The increase resulted from the increased sales in Telephonics partially offset by revenue declines at both Plastics and Building Products.

Consolidated gross margin in the first quarter increased to 23% from 19.5% the prior year quarter. The prior year quarter was reduced in part by significant weakness in the Building Products business. I'll note that despite the revenue increase, the absolute value of cost of goods sold and services declined by over $8 million. The margin improvement resulted from a combination of favorable product mix and excellent manufacturing and input cost control in the Building Products business. These gains were partially offset by the impact of the higher resin costs in the Plastics division.

Operating expenses for the first quarter were $62.9 million or 20.6% of sales and compared to the year ago total of $56.5 million or 18.7% of sales. Note that the increase includes the effect of $1 million of restructuring charges related to workforce reductions. The increase in expenses as a percent of revenue was due to increased costs at Telephonics for research and development and cost necessary to support sales growth, in addition to higher compensation cost related to the corporate team, notably because of filling positions that were open in the prior year quarter.

Income from operations in the first quarter of 2010 was $7.3 million compared to the year ago quarter's level of $2.4 million. Net interest expense during the first quarter was $2.9 million, down from $3.3 million in the prior year quarter. The improvement relates primarily to both the extinguishment of convertible debt in fiscal 2009 and lower average interest rates on borrowings. There was a nominal impact on interest expense from the $100 million of convertible notes issued in December 2009.

The tax rate came in a little bit lower than expected, just under 17% of pretax. This was mainly the result of booking provision to return adjustments on filing various state and local tax returns. We now expect the full year rate to be in the range of 30 to 35%. We're not expecting any more discreet period items this year.

Income from continuing operations for the first quarter of 2010 was $4.2 million or $0.07 per share compared to $2.1 million or $0.04 per share last year. As Ron previously mentioned, if you adjust for the restructuring charge and the gain on debt extinguishment in the prior year quarter, pretax earnings increased by $7.3 million year-over-year.

I'd now like to provide further details about our individual segments, starting with Telephonics. The Telephonics revenue rose to $104 million in the quarter, up 28%. As Ron mentioned, the increase was due to higher sales in Electronic Systems, radar and communications divisions with the largest contribution coming from the Sierra Nevada Corporation contract.

Telephonics operating profit for the first quarter was $7 million, an increase of 30% versus the prior year, driven by revenue growth. Gross margins were comparable in both periods. As I mentioned earlier, we continue to invest in growing the Telephonics business as reflected by the increased level of the SG&A expenses as well as the R&D. The increase in these expenses was primarily due to the higher research expenditures and other additional expenses necessary to support sales growth as we continue to pursue new business in unmanned aerial vehicles and air traffic management.

Building Products revenue for the first quarter totaled $99.5 million, down 9% versus the prior year quarter. The decrease was primarily due to a decline in volume from the effects of the weak commercial construction market. We're pleased to see some signs of stabilization in the housing market, though we continue to remain cautious in terms of our full year's expectations.

First quarter operating profit was $6.9 million compared to a loss of $4.4 million in the year ago quarter. Improved operating performance, notwithstanding the decline in revenue was driven by lower product costs and lower selling, general and administrative expenses. The SG&A expense reductions were enabled by the various restructuring activities Building Products has undertaken in the past several quarters.

Plastics generated first quarter revenue of $102 million, down 9% from the first quarter of 2009. The decline was driven primarily by pass-through of lower resin cost and lower volume in the European business, partially offset by favorable foreign exchange and by higher volume in North America. Resin has had a significant impact on current Plastics operating results compared to the prior year quarter. Remember, fluctuations in resin costs are passed through to our customers on a three-month lag basis. And to put this in context, resin pricing peaked in the second and third quarters of calendar 2008, then declined sharply in late 2008 and early 2009 and since that time, resin pricing has rebounded. The timing and magnitude of these fluctuations and their related impact on customer selling prices and cost of goods sold result in both revenue and profits being squeezed this quarter relative to the prior year quarter.

Plastics operating profit for the quarter declined by $5.2 million, driven nearly entirely by the impact of the resin cost matter. Operating profit was also impacted to a lesser degree by under-absorption of fixed manufacturing costs in Europe due to the weaker volume. Based on current resin prices, which are about $0.78 to $0.80 per pound, we expect that revenue and operating profit compared to the comparable prior year will continue to be unfavorably impacted until the end of the second quarter of this fiscal year.

Turning to the balance sheet, at quarter end we had $376 million of cash, with outstanding debt of $247 million and we have undrawn borrowing capacity of close to $90 million in our subsidiaries. From a working capital perspective we're pleased that despite increasing revenue, net inventories declined $33 million or about 20% versus the year ago figure. Receivables increased but remain very current and payables also increased slightly, up about $9 million versus the prior year. We're very focused on working capital efficiency and believe we can make further improvements over time.

Finally, for the full year we continue to expect high single to low double-digit revenue growth at Telephonics. The first quarter was obviously much stronger than this and our assumption may prove conservative but we don't have quite enough visibility to adjust expectations at this point in time. We continue to expect relatively flat revenue performance for both Building Products and Plastics for the full fiscal year.

With that I'll turn the call back over to Ron for some closing comments.

Thanks for being with us. We're excited about the continued improvement we're seeing in our financial results, the ongoing strength of our balance sheet and the prospects that we have for further development. We're off to an excellent start, but it's only a start. We believe that 2010 will be a pivotal and defining year for us. We're positioned well, we're energized and focused on building value for our shareholders. And with that, be happy to take your questions.

(Operator instructions) Our first question is from Bob Labick with CJS Securities.

Congratulations on a good quarter. A couple of things; first, a few things jumped out at me and particularly in films and I know you touched on this, I was hoping you could give us a little more clarity. The gross margin you got, was the impact in the quarter gross margin related or SG&A; was there something different this quarter than in the past? Because you've had resin price fluctuations for a number of years and if SG&A was somewhat constant, you were probably in the 10 to 12% gross margin, which is the lowest since we've been modeling, so just trying to get a sense of if there's a change in the contracts or if there was an SG&A hit in the quarter or if there's anything else unusual in the quarter that we should think about?

Bob, I think it's unusual and there's a couple of elements that coalesce. First to answer your question, it is primarily gross margin. Expenses, Plastics has done a pretty good job of maintaining expense control. But if you recall and I kind of touched on it in my comments, there was a significant but a gradual rise in resin cost from about the end of 2006 to the middle of 2008; just continual shooting up to just under $1.10 per pound. But then in the span of about six months, so about 25% of the timeframe it took to rise to that level, resin prices fell precipitously, down to about $0.50 a pound and now over the last say 12 months they've rebounded to where they are right now at about $0.78 to $0.80 per pound.

The profitability in the first and second quarter of the last fiscal year was amplified because of the really steep decline of resin pricing, so it's really a difficult comparison year-over-year for the first and second quarters of fiscal 2010 compared to fiscal 2009. So the Plastics operating profit is mainly driven by a difficult gross margin situation. Again, the expenses I think they've done a pretty good job in a difficult environment of containing expenses.

The second thing is, we mentioned we have good volume in North America, but good volume in North America doesn't help at all with expense absorption of the European costs and the European volume was very weak in the quarter. It picked up a little bit in December and we're seeing that continue which kind of drives Ron's comments about being cautiously optimistic about continued profitability improvement, but it was a very difficult situation to deal with from an expense absorption standpoint in the first fiscal quarter.

That's very helpful. And then switching over to doors, kind of the opposite end of the surprise. The profitability there I think was fantastic and Ron, I think you touched on don't expect quite this level going forward. Could you just take us one level further and give us a sense? Because even if you look at a year ago--.

Sure. Look, we think that there's signs of stability in the housing market but this quarter really represents our outperformance in terms of cost cutting, grabbing market share, managing the business and we've gotten no benefit from a tailwind of an economic recovery or particularly a housing recovery. So we've done a very good job and Gene Colleran and Steve Lynch who run that business have done an exceptional job of executing our corporate strategy and the results kind of speak for it.

Second quarter that we're now in is always seasonally our weakest. The trends that we've seen are continuing so our business is doing fine and expect that there will be a recovery in housing at some point in the future our manufacturing overheads are reduced, are being reduced. We have a lot in process in the plant consolidations but this is a business that I've said at much darker economic moments that we see value in and it's nice to be able to put up numbers that confirm that view that this is a very good business that has just suffered through the worst housing crisis in US history.

Okay terrific. Well just to get a sense, you did $100 million or so in sales, if you do that on a go-forward basis down the road, would you expect profit near this level?

I think you've got to look in the rearview mirror and you see that this is a business that was doing more than $50 million of EBITDA at what's now peak. We have no expectations that we're going to be back at that and I think we're all trying to struggle with what's the new normal. Housing starts are at levels that we haven't seen in generations. So the repair and remodel business which we have aggressively gone after, we've gotten market share, we've been able to maintain volumes and we've gotten some benefit of decreased steel cost in producing that profitability.

So it's difficult to kind of look ahead and say obviously $100 million of incremental revenue is going to be substantially more profitable, but we're starting with business that we didn't lose money in with a more inefficient manufacturing footprint in the worst of times and as we get to better times, we think we have the number one brand in Clopay, we have the best dealer network and we have significant big box relationships that are going to be able to allow us to be the number one garage door company for a very long time.

Great. And then just jumping over to Telephonics real quick, obviously you mentioned the success with the CREW 3.1; is that contract front-end loaded for the year or how will that play out? Are there opportunities for add-ons with that and can you just talk about a couple of the other key drivers that you see for the full year in Telephonics?

Bob, there was a bit of a surge to get the CREW contract out there, but no, that's not front-end loaded, so I don't think that that individually is going to fall down significantly in the second quarter; you can look for that to continue to be a very strong performer.

And as we went into the year with an exceptionally strong backlog, we've continued to execute against it. We think Telephonics is very well positioned. Contract awards are always difficult as to timing but we think that our products are key to procurement in the defense initiatives, including the helicopter programs that we're on, the M860 in particular, and so we really are feeling very good about Telephonics' competitive position.

The backlog was at a record high at September 30th, 2009 and it's come down a bit from that, obviously because of the revenue activity but we're still looking at a backlog of about $375 million at December 31st, so that's a pretty strong performance. And the orders can fluctuate because when you get a contract award the backlog can jump significantly and then you work that down.

Your next question is from Fritz Gallagher with Lazard Capital Markets.

My first question is on the margin improvement in doors. I was wondering if you could kind of bucket that and give us a sense how much might have been due to favorable steel prices, maybe currency helped a little bit, but really how much of that was organic and purely driven by the consolidation?

You're right on point in terms of the fuel prices certainly helped a little bit because the freight cost did go down. You've got a mix. There's some material costs; steel and aluminum, as I'm sure you're aware, have gone up. But mix enters into it and just the cost savings initiatives that we've undertaken and they all coalesce and as Ron said earlier, some of it may have been we were able to avoid some repair and maintenance in certain of the plants because that plant is in the process of being wound down and so there's some timing elements which is why we suggest that you shouldn't just annualize the profit surge that we enjoyed in this first quarter and extrapolate that for the balance of the year. We think that would be overly optimistic at this point in time. It bears repeating though what a great job the guys in Building Products have done from a cost containment perspective.

Yes, it was phenomenal. My second question is on Plastics. I guess considering the weakness in Europe and some of the macro forecasts I'm hearing over there, are you guys expecting volumes to remain weak throughout the year and if so, are there any leverage you can pull on the margin side?

Well, I just mentioned it to Bob on the previous question that we actually saw an improvement in volume in Plastics in Europe during the month of December. Obviously that doesn't help you with expense absorption during the first two months of the quarter. But we do expect volume in Europe to pick up. There was a couple of reasons why volume was weak in Europe in the first two months; there were some let's say delays in launching of certain products that have since been launched but we have expected them to let's say come on-stream a little bit earlier in the quarter but they are now in production.

And secondly, we have seen additional volume in terms of order activity so we're anticipating and Plastics management is forecasting that volume will continue to pick up in Europe. But it's still a fragile economy and there's a lot of turbulence going on in Europe even today, so you never know if that's going to affect some of our customers outlook in terms of their productive capacity, so that's why we're being a bit cautious with it.

And the other part is in the competitive dynamic some of our competitors there have gotten into distress and there's a broadened opportunity for us to be able to meet demand from customers in Europe, so that business trend that Doug referenced in December we're seeing in January and it gives us that this was a timing issue and a product introduction issue more than it is a fundamental problem in the business.

That's very helpful. And lastly, I was just wondering if you can maybe comment or provide some commentary on the outlook? Given the strength of doors and Telephonics, are you guys feeling pretty good about hitting that high single to low double-digit growth in Telephonics and also I imagine you're feeling pretty good about possibly extracting more than modest margin improvement in doors?

Look, we've said that we think Telephonics is a terrifically positioned business, very confident in its ability to meet that high single digit, low double-digit growth rates. The door business, the US economy feels like it's struggling at a bottom. We've done well in what hopefully are far worse times over the last two years, so it's hard to predict what tomorrow is going to bring. But this business has been managed very well, it's got its cost structure coming down, so we think that business is well positioned. And our Plastics business has been consistent, that valued relation with Proctor & Gamble, we see the strength in their business. So we feel like each of our operating businesses, while they each have their issues, are doing as well as you can do in the economy that they're operating in. These businesses we've taken out as much cost as we can take out, we've done all the hard reductions in force that needed to be done, these businesses are very well positioned for the eventual economic recovery.

Your next question is from Marty Pollock with NWQ Investment Management.

Just a couple of questions. I'm just wondering, on the sequential decline in profitability for Telephonics, I mean I see revenues down quarter to quarter but just the margins slipping from 9.5 to 7% or so, you're obviously optimistic for strength in that business but I'm just wondering if you could just describe what might have specifically affected the profitability here?

I think the profitability you're referencing fourth quarter of 2009 to first quarter of 2010?

Yes, September to the December.

Yes, it is some increased cost related to new contracts that are in process and so part of the manufacturing overhead is the additional contracts, including we've just submitted a proposal for the Hong Kong air traffic management systems which we're partners with Hewlett Packard on that, with some other programs including the Fire Scout where we have contract proposals out, so those increased cost are part of what you're looking at. And we view those as being the natural development expense for future growth of the business.

And with regard to the Plastics, again if we stay sequentially, revenue is down a bit from September, profit's down significantly; just wanting clearly it's that issue with the cost lag in terms of pricing it through, but should we assume that since there wasn't a big revenue shift that really most of that decline is in fact in that essentially cost price mismatch at this point; is that really most of it? Because obviously if we have another quarter of this, assuming we don't have that impact on your third and fourth fiscal quarters, I mean could we be back at 6-7% margin for that business?

There have been. I suspect that probably in the next quarter as well you're going to continue to see some addition expenses at Telephonics because these are not one quarter long projects because they're associated with trying to win some very long-term contracts, but let's say in the third and fourth quarters of this year you might see some falloff in that R&D in the business development costs. But those are certainly long-term initiatives.

What I was referring to is Plastics. So in the Plastics, clearly the big impact has not been so much sort of on the revenue line as much as clearly on the profitability line--.

Understood. As we said, we don't see getting down to that. There's no evidence to say that that's where the margins in that business are.

Assuming that, I mean if we look at that third quarter where you didn't have that impact, your margins were fairly solid, near the 7% area and so that should we assume by the third fiscal, fourth fiscal if you don't have the same penalty affecting the profitability in the December and in the March quarter that really we could be bouncing back during those two quarters, to sort of where we were earlier?

Yes, and that's the comment about until we do it, we're optimistic about doing it but the hope and the management plan is to be able to maintain margin.

Just one last question. On new products in the Telephonics area, I guess there's a 3.2 for the shoulder mounted IED, is that the new product that you would be putting out there? I'm just wondering which product configuration is that?

You're accurate.

Any evidence of that at this point? Can you tell us what the progress is in terms of interest in that and potential competition when that happens?

No, too early to do and it's not something, as I said, that we can -- as requested, we're prepared to be able to deliver.

(Operator instructions) Your next question is from Zahid Siddique, Gabelli & Company.

A couple of questions; first on the films, what was the volume declines on a consolidated basis?

The volume decline accounted for about between 25% and one-third of the overall decline.

Okay. And what's the book to bill for Telephonics?

You mean the backlog?

I guess backlog to orders that are coming in. Do you calculate the book to bill ratio for that segment?

We just look at and we measure the backlog and as I mentioned on earlier comment, the backlog stands at $375 million at the end of the first quarter.

Okay. And then on the Sierra project, could you refresh in terms of the size and how many quarters of revenue that project should have?

We would prefer not to talk about the individual contract and secondly, in this case I believe that is an indefinite quantity, indefinite timeframe contract, so it's kind of hard to predict.

Okay. And if I remember correctly, the add-on was about $45 million, does that sound accurate?

You mean from the latest press release, Zahid?

Yes.

Yes, I was going to say it was 40 or 45.

And just last question, CapEx for the year, what's the expectation for that?

As I mentioned in my comments, about 10 million for the first quarter and by the way, the 10-Q will be filed tomorrow, so we'll have that in there, but the expectations for the full year right now are consistent with what we said on our last call, between the range of 40 to 45. Obviously we expect a little bit of fluctuation just in the timing of some expenditures.

Your next question is from Gary Steiner with Huber Capital Management.

I have a couple of questions. I guess just the first easy one, just in terms of the tax rate being 17%, I'm not sure if I missed it but did you explain why it was so low in the quarter?

Yes, I did in my comments. What we ended up having is when we filed some state and local returns, most significantly, it's basically adjusting the book provision to dovetail with the final tax liability and we were essentially over provided last year, associated with those tax liabilities. And then I said for the full year that we would expect the tax to be in the range of 30 to 35%. The reason you get some variability is simply because of the earnings mix; those operations outside the United States are typically in lower tax jurisdictions, hence depending on the results in those locations you can have some variability.

I guess looking past this year on a longer-term basis would you expect it to be more in the high 30s on a sustainable basis?

Well it all depends, as you get growth in places like Brazil and Germany, which are the two significant overseas locations for us, they are typically lower tax jurisdictions than the United States, so that's the earnings mix that I'm referring to. But you're absolutely right to the extent that the business grows in North America, US when you combine the state and federal, you have a tendency to trend close to 40% and that's assuming tax rates stay where they are right now.

Okay great. To go back to a line of questioning from before in terms of the film business, I guess the question that I have is as you look out three, four, five years, what do you consider to be a normalized level of operating margin for that business, putting aside any of the shorter term movements in resin cost?

I think it's a difficult business to think that you can do meaningfully above 10 to 12% margins in a perfect operating scenario.

Okay. Well we're pretty far away from those numbers.

If you're looking at it from an industry, from a consistency, that would be a goal, a range that you would want to be able to get to.

And you're speaking now I assume in terms of the operating margin, not the gross margin?

Yes.

So I guess if I look back a certain number of years, you guys were able to do double-digit margins, we have not seen that for some period of time and then you had referenced kind of difficult comparisons in the first half of last year, where resin was going in the right direction and if my numbers are correct, even in that environment your operating margins were in the mid single digits and this year of course the first quarter it's much worse than that and you're saying that the second quarter as well is going to be pretty tough. I guess I'm just having some difficulty trying to figure out what it would take to improve the margins and what is causing the margins to be at such a sustainably lower level today?

Competition, you know, overcapacity in the industry and lowered consumer demand for the end product. So the place where you can get back to better margins is new product, which is why you spend money in R&D and why you try to innovate and why you try to work with your customers to come up with something that they need, we could provide and there is an initiative within the company to be able to come up with those kinds of products that we can get better throughput at higher margins, not just to be a commodity supplier.

And one of the other things that's happened over the last five to seven years is that the thickness of the plastic film has decreased and we're really basically selling a value based on the poundage shipped and as the thickness decreases, the poundage shift decreases, which has a direct impact on our revenue.

Volume means a lot so it's a business that more volume gives you some efficiency, so this is a footprint that we are focused on the ability to improve margin in that business and a big part of it is, as I said, the ultimate consumer demand.

Okay. If I may, just one more question on that topic. I mean as you work with the key customer there in terms of new products and you look at your pipeline and what you're working on, do you see meaningful new products that are in the pipeline that could kind of regenerate the margin structure of this business within the foreseeable future?

You know, I think it's going to be an evolutionary process in terms of product development and enhancement. I don't think you'll see some sort of significant event that suddenly triggers a substantial margin expansion. What we're looking to do is develop products that the consumer is attracted to, to purchase and that our customer base wants to market, so it's more evolutionary rather than revolutionary. But the management of the Plastics business is focused on volume and sales growth, while improving the return on the underlying assets that we have invested in the business.

Okay terrific. My last question is just in terms of acquisitions, Ron, you had mentioned that you're looking both within your existing businesses as well as new businesses, you have obviously been looking for a while and trying to identify the best opportunities; I'm wondering if you see more opportunities within your existing businesses or kind of in new areas for Griffon? Thank you very much.

I think the answer is, both, and there is an increased activity level, flow of prospects that has developed over the last three months that I would say is stronger, better in both quantity, quality and more realistic pricing than we've seen. So we are very cautious. A market day like today reminds us how fragile the economy is and how fragile the markets can make the economy, so we're not in a rush to do a deal because we have the capacity to do a deal, we're going to find things that are really complimentary to businesses we already own and when it's something that is outside of a business that we own, it's going to be something that we have a very high degree of confidence and as I've said to people that the best deals we did in 2009 were the ones we didn't do.

We don't feel we've missed anything. We think our balance sheet gives us an increased ability to look at bigger and better targets as a result of the financings we've done and we've spent a tremendous amount of time rebuilding the corporate office as well as the operating businesses to be able to both assess acquisitions, be able to process them, finance them and then to be able to integrate them into what is the start of a culture. And until we actually find something that we pull the trigger on, this is something that we've communicated regularly, that it is the goal to be able to further diversify the company, but this has been an environment that blocking and tackling on the issues of the existing businesses while providing the balance sheet to be able to grow has been where our time has been spent. But the simple answer, there's more and better opportunities now than we've seen in the last year.

Great. Thanks for all the color; I really appreciate it.

Your next question is from Tom Spiro with Spiro Capital Management.

On the subject of acquisitions, the company today has net cash, you're in a great position, I presume that your goal is at some point to spend that money. Is there a net debt to capital ratio that you think the company could sensibly support where you'd be comfortable?

Let me answer slightly differently, just to show you how we think about it. Our existing operating businesses are approximately on a trailing basis $90 odd million of EIBTDA, being 2 times levered on those assets. If you look at the capital structure that we've designed that we have our credit facilities at the subs, not at the parent and they're non-recourse, so supporting 2 times levered on the operating businesses that we have would be a very conservative capital structure. And if you then look at that and all the rest of the cash in the company is available for investment, you can start to pencil out that we've got a significant amount of equity to be able to put into the equity account of what could then be a leveraged acquisition.

So for us the way we think about it is that there's still a high degree of uncertainty on the economy. Liquidity that we've been fortunate and agile in terms of being able to build up, is not something that we want to give up so the ability for us to make an acquisition and still be able to maintain liquidity is part of how we look at this whole process. And so the idea that we're going to use up or leverage up our company and put all these businesses at risk for an acquisition is just not something in terms of risk profile that we're looking to do. We want to be able to build and the things that we're currently evaluating are add-on acquisitions into our existing segments as well as adding another leg or two to the stool. So this is an ongoing process, it's never predictable, it's always subject to various financing markets which come and go, but the overall feeling is far more positive than we've been able to say over the last few months.

That was helpful, Ron, thank you. Doug, one numbers question. Do you happen to have Telephonics' backlog at the end of last year's first quarter?

I do not have it in front of me, but it was ramping up as the year progressed. I'm sure it will be available in the first quarter Q from last year, but no, I'm sorry, I don't have it.

Ladies and gentlemen, at this time I would like to turn the conference over to Management for any closing comments.

Look, we had a great quarter, we think we're off to a very strong year and we'll be speaking to you after our next quarter.

Thanks very much.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.