Griffon Corp (GFF) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by, and welcome to the Griffon Corporation third quarter 2011 financial results call.

Today's conference is being recorded.

All participants are in a listen-only mode until our question-and-answer session after the presentation.

At this time, I would like to turn the conference over to Chief Financial Officer Mr.

Doug Wetmore.

Please go ahead, sir.

Thank you, Abe.

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.

First, I'll note that our call today is being recorded, and will be available for playback.

Details regarding the playback are provided in our press release issued earlier today, and are also available on our website.

Second, during this call, we'll make certain forward-looking statements about the Company's performance.

These forward-looking statements are subject to inherent risks and uncertainties that could cause actual results to differ materially from those expressed.

For additional information concerning factors that could cause actual results to differ from those discussed, you should refer to the cautionary statements contained in today's press release, as well as the risk factors we discuss in our filings with the Securities and Exchange Commission.

Finally, some of today's prepared remarks will exclude those items that affect comparability between reporting periods.

These items are laid out in our non-GAAP reconciliation, which accompanies our press release.

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

Good afternoon.

I'll start with the financial highlights.

Revenues in the quarter were up 39% to $455 million, driven mainly by the Ames acquisition, but also due to growth in both plastics and, to a lesser extent, Telephonics.

On a pro forma basis, revenues were approximately even for the year-ago level.

Segment-adjusted EBITDA in the quarter grew 38% to $40.7 million versus $29.4 million, pro forma segment-adjusted EBITDA was $53.7 million in the third quarter of last year.

Earnings per share in the quarter were $0.08, comparable to that which we reported in the prior year.

Adjusted EPS, to exclude certain discreet tax benefits recorded this quarter, as well as restructuring charges reported in both the current and prior-year quarters were $0.05 this year, compared to $0.10 in the prior year.

There are two issues behind this quarter's financial performance.

First, we achieved strong revenue growth in our Clopay plastics business, but as we ramped-up production of new capital equipment, we encountered some significant growing pains.

This was the most ambitious capacity-expansion project we have undertaken.

We gained market share and achieved increased sales, though at less than the profitability we had anticipated.

Operationally, plastics experienced both low absorption and high scrap costs while bringing new equipment online in Brazil and in Germany.

We are addressing these startup issues, and expect plastics to return to normalized rates of profitability over the next three quarters at significantly higher volumes.

Let me say this clearly.

This is a timing issue.

We anticipate a ramp up back to normalized profitability levels over the next three quarters.

In the meantime, we expect to continue to attract both new customers and to continue to further scale the business with our existing customers.

Once these issues are behind us, we expect an increase in total operating profits and perhaps an increase in peak margins as we reduce our unabsorbed variances.

Also in the quarter, our home and building products results reflect the decline in demand for Ames, which was caused by the unusual and partially-bizarre weather throughout much of North America.

This is a continuation of similar difficulties we reported on in our second quarter.

As you know, volumes and sales velocity at retail has been and looks like it will continue to be affected by poor weather.

With the recent extreme heat in much of the country, we don't expect to recapture all of this lost opportunity.

Additionally, markets were impacted by a continued rise in input costs, at a time where retail pricing is constrained.

While it's little comfort, obviously we're not alone, and both of these issues are affecting many other companies.

The fundamentals of Ames remain strong.

Our conviction in the investment thesis for this business remains certain.

The recovery in the US housing market has clearly not started.

Clopay Door's business was stable in the quarter.

While there are still some severance-related expenses next quarter, the restructuring is effectively complete, and has been successful.

I will reiterate that we can now operate this business profitably, even if volumes remain at these depressed levels, and with any uptick in demand, we continue to be well-positioned to drive significant improved profitability.

Additionally, I'm pleased to report that Telephonics continues to perform well, with growth in revenues and operating profits versus a strong year-ago quarter.

Backlog at Telephonics improved to an all-time high of $442 million.

The market for its highly-engineered intelligence, surveillance and reconnaissance products remain strong, and we remain positioned as a true technology leader in this space.

This is particularly true for radar systems in the low size, weight, and power category, which is extremely important for a number of platforms, including the fast-growing UAV market.

This includes the Fire Scout, which we believe is an excellent program that will generate significant revenues for us starting next year.

Strategically, our business model has two components.

First, it's to own and operate strong businesses, provide them with capital and help grow and prosper.

This quarter, while not satisfying in our bottom line, is part of building long-term value.

There will be speed bumps in the road to increase profitability.

Second is to build our portfolio of businesses through acquisition.

Our clear priority right now is to address the operational issues in our business, particularly in plastics, and to minimize how long they affect our near-term profitability.

We are resolving these issues.

I'm going to give it back to Doug to review the numbers for the quarter, and then we'll take your questions.

Thanks, Ron.

Again, consolidated revenues in the quarter increased 39% to $455 million, with the majority of this growth being driven by home and building products, which more than doubled revenue to $214 million versus the $104 million reported last year.

The growth was due entirely to the Ames acquisition.

On a pro forma basis, the segment's revenues were actually down by about 8%.

For the quarter, Ames and the garage door business revenue decreased 10% and 4%, respectively, driven mainly by volume.

The decline in Ames revenue was primarily the result of the inclement weather in the quarter, with a resultant impact on the sellthrough of lawn and garden tools.

Door volume decline was mainly the result of a difficult comparative with the prior-year period, when third quarter sales benefited from -- third quarter sales 2010 benefited from home and energy tax credits.

Such credits expired last year and are no longer in place.

We believe our volume decline is consistent with the market for our products in general, and reflects both the erratic and unusual weather we have seen this year, as well as an overall soft consumer spending environment.

Telephonics revenue grew 3% in the quarter with total sales increasing to $104 million.

This growth was due to an increases on a number of programs, including the ground surveillance radar, which continues to see good demand, as well as for the LAMPS MMR program.

This revenue strength is partially offset by lower revenues on other contracts, notably, the CREW 3.1 program, although our spares business for that program was actually a little bit stronger than had been expected.

Excluding CREW 3.1 sales from both the current and prior-year quarters, that's not technology developed by Telephonics, we're a contract manufacturer, our core Telephonics business grew about 15% in the third quarter.

Very strong performance.

Plastics reported a 12% revenue growth in the quarter, although this growth was mainly driven by a combination of favorable foreign exchange and the impacts of higher resin costs being passed through to customers.

Volume shift was pretty much level with the prior year, as we were constrained by the challenges encountered in scaling up the productive assets in Brazil and Germany.

Consolidated gross profit in the third quarter was $99 million, or 21.8% of sales, versus the prior-year rate of 22.7% of sales.

The dollar value of growth and gross profit versus last year reflects the addition of the Ames business.

The gross margin -- or, excuse me, the gross profit declined in value in comparison to the pro forma result for the prior year.

That decline was a result of two main factors.

First, as we mentioned, we realized lower margins on the Ames business as we saw a loss of scale with the revenue weakness, the volume weakness, further aggravated by an increase in underlying raw material costs.

The balance of a gross profit decline was attributable to plastics, due to the ramp-up in efficiencies mentioned earlier.

Consolidated selling, general and administrative expenses, which exclude restructuring charges in the quarter were $82 million, or 18% of sales, versus $61.7 million, or 18.9% of sales in the prior-year quarter.

The improved rate as a percentage of revenue was due primarily to efficiencies of scale and good cost discipline at corporate and each of our operating businesses, as well as -- incentive accruals are also lower, reflecting our operating performance against plan.

With respect to the operating profitability of our segments, consolidated, segment-adjusted EBITDA in the quarter grew to $40.7 million from $29.4 million in the year-ago quarter, all as a result of -- including Ames.

On a pro forma basis, as we mentioned earlier, it declined from $53.7 million last year, mainly driven by the decline in gross profit at Ames and plastics.

By segment, home and building products reported EBITDA of $22.5 million versus just $5.9 million in the prior year, again, reflecting the Ames acquisition.

Due to the volume decline and the gross-margin impact at Ames, we had an unfavorable comparison against the year-ago pro forma segment adjusted EBITDA of $30.2 million.

Despite the growth in revenues, plastics segments adjusted EBITDA totaled $6 million, a sharp decline against the year-ago level of $11.7 million, and this result reflects the ramp-up in efficiencies in Germany and Brazil.

Resin did not have a material impact on third-quarter operating results.

Telephonics achieved segment-adjusted EBITDA of $12.1 million, a 3% increase versus prior year, driven by the revenue growth, and despite the operational challenges of the quarter, our consolidated income from operations for the quarter rose to $15 million from just over $11 million last year.

Griffon's effective tax rate for continuing operations for the current quarter was a benefit of 81.3% compared to a provision of 28.3% in the prior-year quarter.

That's a rather unusual swing.

Let me comment on that for a minute.

The quarter -- the current quarter's effective tax rate reflected a change in earnings mix between domestic and non-domestic operations, as well as the inclusion of the results of Ames, which was acquired on September 30th last year.

Discreet tax benefits also had a significant impact on the rate.

The current quarter included benefits arising on the filing of tax returns in various jurisdictions, and tax-planning initiatives related to unremitted foreign earnings.

Excluding these discreet items, the effective tax rate on continuing operations would have been 78%, and that's a cost, rather than a benefit.

This 78% tax rate is impacted by the combined effects of a nominal amount of pre-tax income in the current quarter, combined with a forecast full-year pre-tax loss for 2011, mainly driven by the write-off of the financing costs in our second quarter, as well as fluctuations in the full-year expected effective tax rate, driven by changes in earnings mix between domestic and non-domestic operations.

Earnings per share in the quarter were $0.08, the same as reported in the prior-year quarter.

As we note in our press release, adjusting for the restructuring charges and the discreet period of tax benefits in the current quarter, adjusted EBITDA in this quarter were $0.05 per share, compared to $0.10 in the prior year.

With respect to our balance sheet, we ended the quarter with $247 million in cash, and total debt net of discounts of just under $694 million.

As we previously noted, this is a year of higher-than-normal capital spending, most notably in plastics, but in other areas of our business as well.

Year-to-date, we have spent just under $65 million, and we currently expect to spend around $85 million for the full fiscal year.

As we look out for the remainder of this fiscal year, we continue to expect consolidated revenue to be in the range of $1.8 billion to $1.9 billion.

We expect home and building products to grow in the low single digits compared to the prior-year pro forma level of revenue.

Telephonics is expected to grow revenue in the mid-single digits, while plastics is expected to grow in the high single-digits.

As I've said in past quarters, in the case of plastics, revenue will fluctuate depending on resin pricing, as well as currency exchange rates.

Based on expected revenue growth, we now expect segment-adjusted EBITDA, which excludes the corporate cost, to be between $165 million and $170 million.

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

Well, we're not pleased with the quarter's results, but I'm confident in our businesses.

Our balance sheet remains very strong, our operating cash flow, even considering the reductions we've made to the forecast because of this capacity ramping issue, also is very strong.

We continue to believe that our existing businesses can grow to 10% or better EBITDA margins in 2012.

This is a difficult and increasingly uncertain economic environment.

The broad recovery in the global economy, particularly in the US housing markets, is still ahead of us.

We are very well-positioned to benefit from the upside to what we continue to believe is an inevitable recovery.

In the meantime, we have a clear opportunity to grow and produce increasing levels of profitability and cash flow.

We have a strong belief in the underlying, intrinsic value of our businesses that may not be accurately reflected in the current price of our common stock.

Accordingly, our board authorized an additional $50 million stock buyback authorization to our existing 1.4 million share authorization.

Beyond that, we have excellent access to strategic capital, and remain committed to the long-term development and diversification of our portfolio of businesses.

With that, operator, why don't we open it up to questions?

Thank you very much.

(Operator Instructions).

We will take our first question from Timothy Quillin with Stephens Incorporated.

Hey, good afternoon.

In terms of your guidance for 4Q for home and building products, in order to get to that low single-digit organic growth, I think you're going to have to have a little bounce back during the fourth quarter.

So, I guess there's a just few questions.

One, I guess, is ATT bouncing back in the current quarter, I guess the only problem right now is heat.

I don't know if people want to work in the heat, and then in the doors business, are the comps still difficult in 4Q?

No, the comps get a little bit easier in the fourth quarter in the door business, and, quite frankly, they also get a little bit easier with Ames, if memory serves, because Ames had kind of a lumpy fourth quarter of last year, probably having to do with the transaction being consummated at that same time.

But, to your point about the selling season, losing this spring is not something that you can make up.

Right, no, that's understood.

And then, on Telephonics, also, the mid single-digit growth there I think implies a pretty strong fourth quarter, and you have a big backlog, so is that just shipments out of backlog, or what are you expecting in terms of bookings in the government year-end?

There was a pretty strong element of shipping of the CREW 3.1 product in the fourth quarter last year, so, again, that's an element of easier comparison, but you also see end-of-year type -- end of the government year, with some shipments in September to meet spending levels and so forth.

They are the ones -- (inaudible) is probably the one that is easiest to predict, especially given the proximity to the end of the year, at this point in time.

Yes, they are shipping out of backlog, and they continue to work on -- while clearly the defense budget is getting lots of headlines, we are very confident in Telephonics' near-term visibility out into 2012.

What the world is going to look like after this budget deficit compromise, and where we're going, we continue to believe that the products that we're involved in are necessities, regardless of what's going to happen to the overall defense budget.

That's not to say that we're immune from it, but we are clearly in the right products on surveillance, on intelligence, and in communications.

Okay, and can you just remind me on where we are in CREW 3.1 what revenue you have done this year on that program, and how that compares to last year, and what you think you can do on, let's say IED programs in general in 2012?

The revenue year-to-date, Tim, is down about $10 million.

This, year-to-date for nine months versus last year.

Overall, we've never broken out that number separately, but broadly speaking, for the nine months last year, it's right around $40 million, right around $30 million this year, and I think the best indications are that the volume moving forward, as I mentioned in my comments, is probably more related to providing spare parts rather than the product itself.

Okay, are you expecting --

The other point I want to re-emphasize is, the core business within Telephonics, outside of CREW, is really quite strong and that 15% organic growth is something that we're quite proud of.

Okay, and just one last question, and I'll jump back into line, but on Clopay, so, you expect to get this back to a normal margin in three quarters.

Will it be profitable in fourth quarter?

Yes, and we expect it to be increasingly profitable month-by-month as we build -- it's going to take -- to get from our current operating margins to that 10% or better targeted margins on an increase in revenue as we have been able to deliver, we expect it to take several quarters, but the improvements are happening month-over-month.

Thank you.

Great, thank you very much.

And we'll move on to Philip Volpicelli with Deutsche Bank.

Good afternoon.

Can we get a little bit more color on the, I guess, the one-time cost in Brazil and Germany in the plastics business?

Can you quantify those in any way?

Well, they were fairly steep, and it's a combination of scrap, which, as we said on the call, as you run in -- we're meeting our customer demands, we had excessive levels of scrap because we're working with new, high-tech equipment, and there's a learning curve associated with that, and the problem is exacerbated by the high cost of resin.

If we were talking a year ago, the cost of scrap would be probably about 50% to 60% of what it is today, just as an example.

We've quantified it internally, and I think the scrap is the biggest element of the cost in Brazil.

I think it's more a question of underabsorbed expense, as well as the incremental, let's say, overtime, for lack of a better definition, in Germany.

While we're working to meet customer demands, they're basically running faster and working longer to meet the demands, because the new technologies put in place have been difficult to scale up.

We are very confident that they will get there, and early indications are, from July, are that there is an improvement over June, and they have a plan in place to address that, but we'll continue to incur both scrap, albeit at a reduced level or a reducing level, as well as additional overtime and, meanwhile, we are also underabsorbing the fixed overhead of the equipment that we have installed.

Okay, so the EBITDA is down from roughly $11.7 million to $6 million.

Is all of that kind of one-time costs?

I mean, if you had to --

The answer is yes.

Yes, because resin was fairly neutral, and the unfortunate thing is that the results of Brazil and Germany actually mask a very -- just an outstanding performance in North America, which we're very grateful we had that outstanding performance in North America, because that kind of cushioned the downward impact a little bit.

We're not happy about it.

This has clearly taken us longer to ramp up than we expected, but the impact on margin is 2% or 3% at the EBITDA line, which is probably $6 million or $7 million in the quarter.

Yes, that's very helpful.

Then, with regard to the Fire Scout, clearly that's a fiscal 2012 project for you guys.

Can you give us any kind of guidance on the size and the timing of when that might start rolling into Telephonics?

Well, I'll give you two comments.

We've said previously that we think it's worth several hundred million dollars over its lifetime, which -- and we've also said that we don't expect it to impact our numbers until at least the third quarter fiscal 2012, and it will be a slow ramp-up from there, so you're really not going to see the full impact of that program in our future development until 2013.

Yes, 2012 will be a low rate of initial production period, but we'll be getting at -- but then you would expect it to scale further in 2013.

And what we've said, and I'll say again, our backlog does not include Fire Scout or any of the other programs that are not currently funded, so the visibility that we have in Telephonics out through 2012 is quite good, on our existing programs, particularly the MH-60R, and to be able to then ramp in to some of the UAV programs towards the end of our next fiscal year and what that would look like going into '13 and beyond.

So, we continue to believe Telephonics is very well-positioned in its products, in its programs, and that's not to say that any cuts in the future defense budget aren't going to impact us.

They clearly -- it remains to be seen, but we think this company has never been better-positioned than it is today.

Right, right.

And then, on the Ames True Temper side, to go to that part of the business, it sounds like material costs did have an impact there.

Are you willing to quantify what you might have faced there either, I guess, from steel, aluminum, plastic, I guess wood was also --

Yes, steel and resin had been the two elements that impacted us the most there, and we have talked about that on prior calls.

The big impact in the current quarter, I don't have it precisely, was the volume shortfall.

It is a business that really thrives on that volume.

You get substantial capacity absorption, and you need that volume, and weather certainly played an effect on it.

It's difficult to say precisely, but Ames management has estimated that weather was at least $10 million of revenue shortfall during the quarter, and a lot of our customers have talked about the impact of weather on their lawn and garden business.

I make a point of not mentioning customers on the call, but it's the usual suspects, and they have commented also that it's doubtful that you'll catch up on all of that.

There was hope to catch up on a piece of it, but the main driver for the Ames shortfall was volume.

So, there's no need to raise prices at retail to offset raw material costs, this is just simply getting more throughput through the --

I think that's more a question of the consumer economy.

We'd love to raise prices, and I'm sure our customers would love to raise them.

Unfortunately, the consumer is tapped.

Gasoline prices are up, unemployment is up, this is no time to be worried about maximizing margins.

What we worry about, and what we're doing, is making sure that we keep revenue and unit volume.

Yes, and Phil, we have actually said on the first and second-quarter calls of this year that gross margin at Ames was impacted by rising steel and resin cost, and the difference between garage door business and Ames business was that the garage door business passed on roughly a 6% price increase, if memory serves me, effective January 1st of this year, mainly driven by steel increases.

Typically, Ames is unable to pass through price increases.

Prices are fixed for a year at the time line reviews are completed, so you don't -- very rarely, I think, once in recent history, have they passed on a price increase, so that's not happening this year at Ames.

Yes, and then with regard to the guidance, the $165 million to $170 million of EBITDA, if I do my math correctly, you're roughly about $124 million as of the third quarter here, so that says somewhere around $41 million to $46 million of EBITDA for the fourth quarter.

I think last year you did about $41 million.

What gives you confidence that you can beat last year's numbers with these different headwinds facing you?

Well, it's the best estimate we have at this point in time.

It's a very current estimate.

It was prepared within the last week, and it -- we look at the comparatives, and that's the numbers that we came up with.

Are the numbers that I just read out there accurate in terms of last year at $41 million and you guys being at $124 million thus far for the year?

I don't have that in front of me.

It doesn't sound markedly off-target, but I don't have a sheet in front of me that has that.

Okay, I'll follow up with you, then, Doug.

I appreciate that.

Last question from me, sorry, let me just sneak this one in, the share repurchase program, you have 1.4 million shares currently available to repurchase, adding another (inaudible), is there a time period over which you will look to make that -- those repurchases?

No, but we bought, I believe, prior to this quarter we had bought $8 million through our ESOP line.

During this quarter, we bought, I think, $11 million under the ESOP authorization.

We don't have a timeframe on the buyback, but continue to believe that at current prices, that it's an attractive alternative, and, including the 1.4 million shares, we've added an additional $50 million of availability.

We'll see what the timeframe is based on price.

Understood.

Thank you very much.

(Operator Instructions.) And we'll move on next to Arnie Ursaner with CJS Securities.

Hi, good afternoon, it's actually Torin Eastburn filling in for Arnie.

Hello.

How are you?

My first question is on Ames.

How do your inventories look at the retailers, and do they have any recourse to seek relief through rebates or something like that if inventories spike going to the end of the year?

You mean, in terms of the ability to return the product?

No, they don't have that opportunity.

The inventory levels all vary, but with the weather being what it is, our customers are very careful about the inventory levels they build, and that certainly is reflected in our revenue results.

It -- I couldn't tell you precisely at this point in time what our revenue levels are for a specific customer, but obviously it's not being driven by very good sales performance at the retail level.

Sure, and in Telephonics, your backlog is up about 10% year-over-year.

How reflective is that growth rate of what you think you could see for revenue growth in that business over the next year or two?

I think we're still in the process of doing the budget right now, but I wouldn't plan on it.

What we've said in past calls, the core business grew 11% to 12%, but moving forward with what we saw, you should probably look at Telephonics growing in the high single digits, recognizing the DoD budgetary pressures, and counterbalancing a portion of the strong areas of the business that we're in, the intelligence, surveillance, and reconnaissance.

We continue to believe Telephonics' 2012 visibility is accurately reflected in its increase in backlog and its ability to deliver in the ensuing 12 months.

About 76% of that backlog will be delivered in the following 12 months from July 1st, '11 to June 30th, 2012.

Okay, and my last question, in plastics, you mentioned in the press release, I think, you expect, once you get the new business ramped up, for volumes to be significantly higher than they are now.

Can you quantify that for now?

We've always talked about that -- the CapEx that we spent in that business was in anticipation of both new customers and increased business from existing customers.

You're not seeing that in the current kind of trailing 12-months, your $515 million of revenue in the plastics business.

We expect that to be higher sequentially as you go into our fourth quarter, and that the full ramp is going to be dependent on our solving the operating issues and to continue to grow that business based on capital we have already expended.

It's not an unreasonable goal to see the plastics business continuing to grow its top line at high single-digit rates.

Alright, that's all I have.

We look forward to seeing you at our conference, thank you.

Thank you.

Thank you very much, and we'll move on to a follow-up with Tim Quillin with Stephens.

Hey, thank you, just had a couple detail questions.

One is, and I may be afraid to ask this question, but what are you expecting for tax rates in 4Q and then into 2012?

I wish I had a crystal ball, because we've had a fluctuating rate this year because of discreet items, but on a normalized basis, for fiscal 2011, firstly, right now, excluding the discreet items, I would expect a rate somewhere between 26% and 27%.

Moving into 2012, barring any change in legislation affecting corporate rates either here or overseas, it probably would get back to something along the lines of a 30% to 31% rate.

Okay, well, that's helpful.

Thanks.

We'll know -- when we do the full-year call, we'll provide a little more insight into what we expect for the 2012 effective rate.

Okay, and are there any lingering restructuring charges planned for 4Q?

Yes, there are going to be -- the most notable amount, as Ron mentioned in his comments is, we just turned over the closed Baldwin, Wisconsin facility last week to the landlord, so those folks are going -- that were employed there will be receiving their severance, and we'll be taking that as a charge in the fourth quarter.

That would represent the bulk of any remaining restructuring charges.

In order of magnitude, is it going to be smaller than the charge that you took in 3Q or similar, or --

It's not going to be markedly similar.

My guess is, it's going to be somewhere between $2 million and $3 million.

Got it.

Okay, then, and lastly, can you just talk a little bit about what you're seeing in terms of acquisition opportunities?

The types of companies that you're considering, and maybe the timing on that?

Thanks.

Sure.

Immediate pipeline is really tucking acquisitions, both product and customer, and really focused on home and building products.

That's where we see pricing that's attractive and things that can fit in to our existing footprint, and don't lose sight of when you look at home and building product as a segment, even with the weather that we've had and the sluggish housing market, weak consumer demand and increased commodity costs, we're still $850 million of the segment, with approximately $80 million at the EBITDA level.

So, adding on incremental revenue there at opportunistic pricing is something that we think positions us well in anticipation of the turnaround in the housing market.

So, that's the most immediate, and those are in -- things that are less than $50 million increments.

In terms of the big picture, the move the needle, our focus is clearly on execution.

The acquisitions, while we're always looking, are really not a priority at the moment.

This is a difficult environment, we want to make sure that we've got our plastics business performing at the level for the capital that we've committed to it.

We believe that's going to prove itself over the ensuing quarters.

Telephonics we continue to think is very well-positioned, and when we look at acquisition opportunities in that space, every transaction ends with there were more people bidding at higher prices than anyone anticipated, and we have looked at opportunities that have been similar companies that have traded at 13 and 14 times EBITDA.

We think Telephonics is very valuable.

We think it's a better business than many of the things that have traded at those kind of valuations, and we think its best days are still ahead of it, so while we'll always look for a business to add on there, the most likely scenario for us is that we'll continue to run an excellent business and try to organically make it better.

Then, the outside the box, when we find something that we think is compelling, that can add value to our shareholders, of course we've got the financial capacity to look at it.

At the moment, we like the value that Griffon represents, and we're going to try to take advantage of that.

Thanks, guys.

Thank you.

Now, we'll move on to Zahid Siddique with Gabelli.

Hi, good afternoon.

As a follow-up to the acquisition question, is there something we can learn from the ATT acquisition in terms of the learning curve?

I guess it took you a while for you to find the acquisition, and then the results have been -- they are still working through the results, but are there things that you can learn that could be applied to the next acquisition?

Well, I think the thing that I would say to you is, we bought the business not expecting instant gratification, and we haven't gotten it.

We bought it for the long-run, we continue to believe that it's a business that fits well within our home and building products segments.

Combining it with Clopay is a step in that direction.

This is a business that has been around for 200 plus years.

It's in a permanent capital structure that we didn't need to get an immediate return on it, and clearly one of the lessons in this is is that it's a volatile business.

Weather has an impact.

It has immediately impacted us this year, not just in this quarter, in the prior quarters, during the extreme snow in North America, and the lack of snow in Canada.

So, one of the lessons, and one of the things I take away from it is that's why Griffon isn't highly leveraged, that we've got the staying power and the liquidity on our balance sheet to be able to take the long view of building our businesses.

So, if we were over-levered, if we had covenants that required us to do things differently, we'd be making different operating decisions.

So, part of what this confirms to me, from the Ames acquisition, is that you should always take a longer view.

Things don't always go exactly as planned, and if you have liquidity, and you've got the conviction in your management team to be able to execute, over time, we continue to believe it's going to be a very attractive, cash flow generating, still-accretive, we have financed it incredibly opportunistically by doing our bond offering earlier this year.

So, we will look to use our balance sheet strength to do things that can create incremental cash flow, and as we move forward, as we get ourselves positioned to grow beyond the $1.8 billion, $1.9 billion of revenue that we're currently running at at what I would continue to say are depressed economic conditions for the businesses that we operate in, we think we'll organically grow nicely.

We think our cash flow will increase, our CapEx will decrease, and we'll continue to be a very high cash-flow-generating enterprise that will continue to look to redeploy that cash flow into other opportunities.

Okay, that's helpful, and in terms of the timing of your next acquisition, do you have a timeline in mind?

Well, there's always something baking, but as I said, previously, the immediate priority is around tuck-in acquisitions around the home and building products area, which are things that we are working on and will continue to work on, and that the operational execution is what you would expect us to be doing over the next several quarters as we get the plastics business to where we've said we want it to be.

Great, thank you so much.

Thank you.

Alright, thank you.

(Operator Instructions).

Now, we'll go to [Tom O'Shea] with Federated Investors.

Please go ahead.

Yes, thank you for taking my call.

I noticed that you ramped up your capital expenditure guidance for the year from $60 million to $70 million in your previous release to $85 million to $90 million in this release.

I was just wondering, number one, is that all going towards plastics, and number two, how long do you expect to keep your CapEx at this elevated level?

Well, that's a good question.

Yes, we did ramp it up, and a lot of it just had to do with the timing of cash expenditures, and I've said on several calls that over any four or five-year period, you should look -- and you can model, our CapEx really will be in line with depreciation during that period of time, but our CapEx, particularly in the plastics business, to a lesser extent in the garage door business, is very lumpy.

There is big capital.

Germany, we're putting in the thick end of $20 million to $25 million.

We've made some substantial investments in Brazil, and --

They're lumpy investments.

I would expect it to -- CapEx next year to be down probably just a little bit above depreciation, because as we finish off the projects in plastics as well as the garage door ones, and then you'll get to a period of a couple of years where it will actually be below depreciation, meaning CapEx below depreciation, and just to touch on Ames, the one thing that was very attractive to us about Ames is that they are very stable cash flow, but they are not very capital intensive at all, so in some respects, having Ames is very complementary to fund the door business and the plastics business.

Okay, and in terms of your raise in your guidance, pretty significantly, quarter-to-quarter, were there projects that you felt like you had to speed up, or that ended up being sped up that led to this raise?

Quite frankly, it was just modeling out the timing of the cash flow, and that's why I still provide a range, because whether I pay for something on October 1st or September 30th, it can impact that flow, so there's no new, significant projects that are being added, that is driving up that number, it's really just a matter of continuing to monitor the spending and updating the forecast.

Alright, thank you very much.

Alright, thank you.

(Operator Instructions).

And we'll move on to [Michael Callquin] with Aberdeen Asset Management.

Good afternoon, guys.

Just wanted to get some color.

Obviously, adding to the share repurchase program, and kind of having I guess a couple of quarters of negative free cash flow, just wanted to see where you guys stood on maintaining the cash balance and liquidity and things like that, and I guess where that stood as far as a priority for the Company.

It continues to be a significant priority, and if you heard my earlier comment about liquidity being so important as we continue to grow these businesses in an uncertain time, and so at our current net debt-to-EBITDA rate, we're approximately three times or less.

That's what we believe is right for the kinds of businesses that we're in.

And I just also want to point out, the CapEx that we've spent is about increasing both the top line and EBITDA, though clearly that is not the case in this quarter's numbers, that's part of why we are so confident of what 2012 and beyond looks like, it's the CapEx that we had committed to spend, and the return on that CapEx which you have yet to see.

Okay, so there hasn't really been a change in the business plan or the business strategy or anything like that?

Not at all.

And the CapEx that we have been talking about for plastics is something that we have been talking about for the thick end of four quarters now, and we knew that there was going to be a ramp-up in the spending of capital and plastics, because of market share gains that we realized most notably in Europe, but also in North America and Brazil, and these are the investments that are necessary in order to service that market share.

Great, thank you, guys.

I appreciate the color.

Thank you for the question.

Okay, I'm being told that's our last question, so, thank you all, and we look forward to speaking with you all in November.

Great, thank you very much, well, again, ladies and gentlemen, that does conclude today's conference.