Good day, and welcome to the Griffon Corporation Third Quarter 2012 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Doug Wetmore, Griffon's CFO. Please go ahead.

Thank you, Shevonne, 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 certain matters that I want to bring to your attention. First, I'll mention, again, that our call today is being recorded and will be available for playback. Details regarding that playback are provided in our press release issued earlier today and details are also available on our website. Secondly, during our call, we will make certain 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. For additional information concerning factors that could cause actual results to differ from those discussed in our forward-looking statements, you should refer to the cautionary statements contained in today's press release, as well as the risk factors that we discuss in our filings with the Securities and Exchange Commission. And finally, some of today's prepared remarks will adjust for those items that affect comparability between reporting periods. These items are laid out in our non-GAAP reconciliations, which are included in our press release. With that, I will turn the call over to Ron.

Thanks, Doug. Good afternoon, everyone. This was a very good quarter for us. We're performing well in what continues to be a challenging environment for each of our businesses, and we're very pleased with our results. Consolidated revenues increased by 5% to $480 million compared to the prior year quarter. Our consolidated segment adjusted EBITDA was $51.8 million, 27% higher than the prior year quarter. Adjusted earnings per share in the quarter were $0.13 per share versus the comparable adjusted EPS of $0.05 in the prior year quarter, a 160% increase. I'd like to take you through each of our operating segments in greater detail so that you can better understand the direction in which each is heading and why we are confident about their long-term prospects. Let's start with Telephonics. Telephonics continues to perform extremely well despite the challenging environment for defense companies. Revenue in the quarter declined modestly compared to the prior year quarter. However, quarter revenue, excluding sales associated with the CREW 3.1 program, for which we're a contract manufacturer, grew 1%. Telephonics displayed superior profitability performance, with EBITDA up 31% to $15.9 million and margin of 15.7%, up 400 basis points over last year. Telephonics has been operating at historically high margins throughout this year, enabled in part by cost reduction and reorganization activities undertaken in the latter stages of fiscal 2011 and in the first quarter of this year. Telephonics has also benefited from a favorable mix of products, most notably the LAMPS MMR, as well as continued focus on manufacturing efficiencies. Telephonics is operating in a business environment where strong commercial market opportunity in many of our defense programs, which are mission-critical, give us a degree of insulation from the broader defense budget environment. Our experience suggests that demand and funding for intelligence, surveillance…

Thanks, Ron. Consolidated revenue totaled $480 million in the quarter, increasing 5% in comparison to the prior year quarter. Home and Building Products revenue increased 11%, while Plastics revenue increased 3%. Telephonics revenue declined 2%. As has been the case for the last several quarters, Telephonics revenue associated with the CREW 3.1 production impacts reported growth in what we consider to be our core business. Excluding sales associated with CREW 3.1 for both the current and the prior year quarter, revenue growth in Telephonics core business was 1%, and year-to-date, growth was up 5% in that core business. Telephonics profitability increased significantly in the quarter. Third quarter segment adjusted EBITDA for Telephonics was $15.9 million, increasing $3.8 million or 31% compared to the prior year quarter. Segment EBITDA margin increased 400 basis points compared to the prior year quarter. Telephonics improved profitability has been a function of product mix and manufacturing efficiencies, partially offset by slightly higher SG&A expense in the quarter, mainly related to the timing of proposal activities. Telephonics has also benefited from the prior year voluntary early retirement plan that was undertaken in the fourth quarter of last year and other restructuring and reorganization activities undertaken earlier this year. Importantly, the improvements to Telephonics cost structure are not only contributing to current profitability growth, but also making the business more cost-competitive, depending on future business opportunities. The backlog declined to $422 million at June 30, 2012, from $434 million at March 31, 2012, still in line with expectations, and we're confident in the near term. For reference, backlog in September 30, 2012, was $417 million and $442 million at June 30, 2011. Turning to Plastics. Third quarter revenue was $142 million, representing an increase of $4.4 million or 3% compared to the prior year quarter. Revenue growth…

Although we're pleased with the overall performance in the quarter, we believe there is significant incremental earnings power for the company as the economy improves. We're well positioned for today's business environment for what is likely to be continued uncertainty regarding the overall economy. Telephonics is poised to grow. Plastics will continue to improve, and the Home and Building Products business will benefit from a recovery in housing. We see excellent growth opportunities both in our existing businesses and through strategic acquisitions, particularly with the smaller tuck-ins that can meaningfully boost near-term profitability. As the global economy improves, we expect to see our profitability expand. All of our businesses are growing, and we believe they will continue to outperform their competition. We have ample resources to invest in these businesses to support their growth, and we remain excited about their prospects. We've built a strong business with talented management, and each of our businesses to take us forward and continue to create value for our shareholders. With that, operator, we're happy to open up for some questions.

[Operator Instructions] And we will take our first question from Arnold Ursaner with CJS Securities.

My question relates to your Telephonic EBITDA margin, which was extraordinarily good at 15.7%. Was there any one-time in there? Or how should we think about it on a go-forward basis? And then I have a specific follow-up on that one.

Sure, no one-time item in that. Doug, do you want to talk about some of those specifics?

Yes, as I mentioned and actually Ron mentioned in his comments, you'll recall if you look back, we had an early retirement program there last year, which took out a lot of cost and that we took a restructuring charge for that in the fourth quarter of fiscal 2011. The heads that took advantage of that retirement program have not been replaced, so they've kept their costs down. And we'll continue to benefit from the cost avoidance through the fourth quarter of this year. And we get a little bit of mix as well. And as I mentioned, there was very limited sales activity for CREW 3.1 in the third quarter, which, as you know, we're a contract manufacturer, with fairly low contract manufacturing margin associated with that. So it's really our core business that we're benefiting from and the manufacturing efficiencies that they've achieved notably in the LAMPS MMR program drove the profitability. And it's positioning us well for also bidding for business in the future. So -- but we've said for the last several quarters, just to be clear though, we know that we're not going to be able to sustain the current high level of profitability in perpetuity. We know that will tail off somewhat over time.

I'd just like to add that Joe Battaglia has done an outstanding job with positioning the business, managing it. And all the issues related to defense have been building, and we've talked about it over the last year. That cost cutting that we've been doing was in anticipation of what we expected to be a more difficult environment. So obviously, very satisfying to see our results improving as we've managed the business. And the backlog, our mix of business continues to improve, and the outlook continues to be quite strong, particularly as we move on to some of these new initiatives like the Fire Scout.

Okay. My second question, if I could. You had met -- provided or announced the pretty sizable contract awards for the AN/APS-153 radar for the Navy. Can you talk about the retrofit opportunity and the potential size that could be?

Arnie, are you talking about the release we talked about during our last call?

The one in April, yes.

Yes. That was -- that contract didn't contemplate any of the retrofit of the existing systems that are in place already. So that's just additional new radars that will be ordered over the course of the next -- that contract runs until sometime in 2017, so roughly 5 years.

That gives us visibility for our business at a time where there is generally uncertainty. While no one's going to be immune from the potential for sequestration, we feel like our business is as well positioned in terms of intelligence, surveillance and reconnaissance as it can be.

Our next question is from Philip Volpicelli with Deutsche Bank.

This is Sean Wondrack sitting in for Phil. My first question revolves around the Plastics business. You guys have obviously shown good improvement. When do you expect to be done with some of these manufacturing inefficiencies that you had there? I know you've stated a couple of times. And if you can just provide an update on that? And then also, my second question would be about resin costs, what the lag is on resin costs, how they've been trending and how you kind of expect to deal with them going forward.

I would answer it by saying that we continue to meet our customer demands. Our top line has been growing, and we continue to make improvements. North America is doing exceptionally well. Germany is continuing to improve, and Brazil has made progress. We expect it to continue in the fourth quarter, and we think well into the next fiscal year to get to our targeted EBITDA margin. Month-over-month, quarter-over-quarter, we are very satisfied that we are getting things worked out and that we're on the path. And I clearly understand that this has taken longer, but these are big complicated processes that we've been working through. We think we made the right capital decisions around supporting the growth of our capital -- support of our capital into the Plastic business. Our capital requirements are behind us as we go into the next fiscal year. So our free cash flow from that business starts to improve. We like the way the management team has positioned it to grow. And month-over-month, quarter-over-quarter, we hope to be able to continue to see that trend continue. So we're generally pleased. In terms of resin pricing, the lag on it tends to be 3 months contractually.

It varies by customer between 1 and 3 months and -- but if you're -- if the customer is always on 1 month, they're always on 1 month. If they're on 3 months, they're always on 3 months. It's not like it's an elastic band that goes back and forth. But did you have a -- Sean, what was your specific question on resin prices?

No, I think that's helpful. I'm curious to see what direction this is going. And with your contracts, do you guys think you'll be able to fully offset it walking into the fourth quarter or if think you it'll be a little bit of a headwind going forward?

Well, it seems that -- the prices seem to have peaked sometime during this -- the most recent peak is sometime during the most recent quarter completed, and we've actually begun to trend downwards a little bit. So we would expect our material costs to decline somewhat in the fourth quarter and the adjusted -- the corresponding adjustments in the customer selling prices will lag that. So that's the period of time when you actually get a little bit of margin expansion when resin cost is declining because the adjustment to customer selling prices lags your adjustment to your cost of materials.

Great, okay. That's very helpful. Just really quickly, do you think -- just back to the first question, do you think you that this will continue to be a headwind into 2014 in terms of the manufacturing inefficiencies? Or do you think by then you'll hopefully be able to get to the 10% margin that you're shooting for?

Sean, I think it's a very good question, and I wish we could have a more precise answer for you. I think we're make a lot of progress, as both Ron and I mentioned in our comments, in terms of the operating efficiencies. And I think some of the challenges that are impacting those operations are also some of the macroeconomic factors that are affecting Europe and Latin America, most notably Brazil, where the operations are. The economies have slowed down and so forth, and I think, if nothing else, that forces our customers to more tightly manage their working capital, which obviously has a knock-on effect on us. But our expectation is from an operating perspective that we will achieve -- get back to a normalized level of operating efficiency during the course of fiscal 2013.

[Operator Instructions] We will take our next question from Marty Pollack with NWQ Investment Management.

I'm wondering if you could talk -- I wonder if you could just perhaps give us a little bit more transparency on the Building Products side. You guys gave us the sales number on True Temper, as well as the garage door, but can you provide a little bit more of a sense of how both units were performing? Even if you're not able to describe the numbers directly, but just subsets of what they've both done, I'll appreciate that.

Sure, let's start at the top line. We were $130 million for Ames True Temper versus $114 million in the prior year. And for Clopay, we were $106 million versus $100 million in the prior year. So the way I would characterize it to you is that we had clearly seen improvement. Part of the year-over-year comparison for Ames is helped by the Southern Patio acquisition, which we're pleased with. It gets us stronger in our pots and planters part of that business. But the general commentary is that we haven't been expecting a recovery in either the broader consumer economy or in the housing markets. And our businesses were positioned for that. They're doing well in what's a muddled economic environment. And we think these businesses, over time, do substantially better. From the doors side of it, the repair and remodels business has been what's carried it, and the mix has shifted away from new home constructions substantially. As housing starts to recover, we expect Clopay to do better. The big story there from an efficiency standpoint is the consolidation that we did over the prior 2 years. We're seeing the benefit of that, and margins in that business are far less that what we expected them to be going into a recovery, but they're certainly adequate and as well as you can be doing. We believe that we have maintained or increased our market share in all of the products that we're in, in Home and Building Products. That continues to be our strategy going forward, is that we’re going to defend our #1 position in everything from shovels to wheelbarrows to garage doors. And there will be a recovery in the United States and when there is, we expect significant top line growth in both the Ames business and the Clopay business and significantly improved profitability.

If I may also just ask you with regard to the impact of the drought on any of your markets. Are you seeing any impact there as well?

Marty, I've mentioned it a little bit in my comments.

Sorry, I did not hear that.

No, no that's fine. It was the -- remember, we started off the quarter with very strong sales in April. We've mentioned that in our last call and we attributed to the really the early and very, very solid lawn and garden season. But about half of the country is in various stages of drought right now, and that has affected point of sale. And as a result of that, it's affected our sale to our end-distribution channels. A lot of people in these conditions are not working in their lawn. They're not planting new lawns or bushes or trees or anything like that because it's very difficult to keep those plants alive with such limited rainfall. So that has affected us. We can't quantify it precisely, but we certainly know it's there because we see it in a very weak point of sale from lawn and garden.

And the one other comment that I'd make for the 9 months is that, remember that on the Ames side of our business, we lost winter in our last quarter, and thereby, the profitability from that. So in any kind of normalized winter adjustment to our operating results, we're actually quite pleased with where Ames is. And we think it's more bad luck than anything more systemic related to the economy. And over time, there'll be good winters, there'll be bad winters. And last year we had a terrible spring. This year we had an extended spring. We like the business long term. We think that is a cash generator, and we'll continue to view this, as combined with our door business, is giving us significant upside potential with very, very limited or no downside.

We'll take our next question from Fred Knight [ph] with Dallas Capital Management.

Your net debt to adjusted EBITDA looks like it's running about 3x. Can you give us a little color on what leverage you're currently comfortable with? And what kind of allocation of funding you would use for major acquisitions going forward?

We're comfortable where we are today. We believe one of our strategic advantages is having access to low-cost debt, which is -- comes from having modest leverage in the 3x level has been where we've been. We don't have a debt maturity for 5 years, and we have a recovery in front of us. We're performing well. We're generating cash. We'll continue to build up cash in our balance sheet. And if there's opportunities there, we clearly have the ability to pull the trigger. We have $200 million of undrawn revolver, but we kind of like where our balance sheet is today. And at the moment, we continue to look at using our cash flow to fund tuck-in acquisitions and not looking to go out and do anything more dramatic in terms of our balance sheet. But the potential is there, and if the opportunity presented itself, we won’t to hesitate to do it.

Our next question comes from Zahid Siddique with Gabelli & Company.

A couple of questions, first one, within the Clopay and ATT businesses, could you quantify how much was the Southern Patio acquisition contribution from that?

No, as we've said all along, it was about a $40 million revenue business. And to break that down any further, we have committed to not doing that at this point in time. It certainly was an element that contributed to the Home and Building products EBITDA growth this quarter.

Okay. As a follow-up on that, was the ATT business, excluding Southern Patio, was that a positive number, the revenue growth?

The revenue growth? It was pretty much flattish. It was up just slightly, if memory serves and you could...

Yes, as we said before, we're pleased with the top line in the ATT business, very pleased with the contribution from Southern Patio. I wish we could find more transactions like it that we can do. It's just they come along and they're hard to predict. But when they're available, we're going to continue to look to do it.

Okay. Assuming that it was flattish, the ATT business, that would imply $16 million roughly for Southern Patio, but that seems a little high number? Is the full year $40 million for Southern Patio?

There is a great deal of seasonality in the Southern Patio business. That's your number, not our number.

Right, right, okay. That makes sense. And then another question on the JV in India that you're working on. Anything that you can quantify terms of timing or the dollar value of that JV?

Zahid, it's a very good question, and we certainly anticipated that. It's probably a little too early to give a precise time frame for when the JV will have its first transaction. As we mentioned there's one final regulatory approval, which is the "check the box" type of thing. We don't expect any delays. And in quantifying it, remember we will be a minority owner, so we won't be consolidating this. There will be no top line benefit to Griffon Corporation as a result of the JV, although we will have equity accounting for our percentage ownership interest. And Telephonics will benefit significantly from the technical feed that comes from joint venture licensing Telephonics technology.

Right. We don't expect it to be meaningful into our revenue stream until 2013 at a minimum, and then it will be a startup at that level. The longer term positive for it is that it's licensed income is high margin to Telephonics. And it's a directional diversification and an expansion with a fantastic high-quality company in India, and we couldn't be happier about being involved with them. But this is a long term, and it's not in our backlog. It won't be -- we don't expected it to be backlog for -- certainly in 2012 and until second half of 2013.

And I think another thing that's very important to us is that there's, relatively speaking, very low capital deployed on Telephonics part to participate in joint ventures. So from a return for capital deployed, it's going to be fairly significant to us.

So it's significantly improves the long-term outlook for Telephonics.

And at this time, we have no further questions in the queue. I'll turn the conference back over to Mr. Ron Kramer.

Okay. We appreciate you all participating. Excellent quarter. We've got a lot of work ahead of us, and we look forward to speaking to you in November.

Thanks very much.

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation.