Griffon Corporation — Form 10-Q Summary
Business context and period. This report covers the fiscal first quarter ended December 31, 2012, compared with the quarter ended December 31, 2011. Griffon operates through Home & Building Products (HBP: Ames True Temper and Clopay Building Products), Telephonics, and Clopay Plastic Products. Unless otherwise noted, amounts below are in millions of dollars.
Financial performance and position
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Revenue | $423.7 | $451.0 |
| Gross profit / margin | $97.7 / 23.0% | $102.7 / 22.8% |
| Operating income / margin | $14.3 / 3.4% | $17.8 / 4.0% |
| Net income | $0.6 | $2.5 |
| Diluted EPS | $0.01 | $0.04 |
| Operating cash flow | $(32.5) | $(13.8) |
| Capital expenditures | $17.3 | $19.9 |
- Reported net income included $1.1 million of restructuring charges, a $2.1 million non-cash pension settlement loss, and $0.1 million of net discrete tax benefits. Management’s adjusted net income was $2.6 million, or $0.05 per share, versus $3.8 million, or $0.07 per share, a year earlier; this is a non-GAAP measure.
- Total segment adjusted EBITDA was $42.9 million, up from $41.6 million. Segment adjusted EBITDA is a company-defined measure and excludes specified costs and items.
- Cash and equivalents were $150.1 million at December 31, down from $209.7 million at September 30, 2012. Current assets were $784.2 million and current liabilities $234.9 million. The resulting current ratio was approximately 3.3.
- Total debt was $714.4 million, compared with $716.2 million at September 30; debt net of cash was $564.4 million, versus $506.6 million. The principal borrowing was $550 million of 7.125% senior notes due 2018. The company reported $178.7 million available under its $200 million revolving credit facility after outstanding letters of credit.
- Cash used in operating activities increased year over year, principally reflecting a $50.2 million decrease in accounts payable, accrued liabilities and income taxes payable. Inventory increased $9.8 million during the quarter.
Changes and segment results
- Revenue fell 6% year over year. HBP revenue declined 10% to $190.2 million, Telephonics declined 8% to $96.1 million, and Plastics increased 1% to $137.5 million.
- HBP segment adjusted EBITDA was $17.2 million versus $17.8 million. Ames True Temper’s sales were hurt by mild weather, weak snow-tool demand and retailers’ elevated carryover inventory; Hurricane Sandy-related sales partly offset the decline. Clopay Building Products benefited from pricing and mix.
- Telephonics segment adjusted EBITDA rose to $16.4 million from $15.7 million despite lower revenue. Prior-year revenue included $5.9 million from the CREW 3.1 program, with no such revenue this quarter; excluding it, revenue decreased 3%. Improved program mix, manufacturing efficiency and cost reductions supported profitability.
- Plastics segment adjusted EBITDA increased to $9.3 million from $8.2 million. Higher volume and efficiency gains helped, while higher resin costs not yet reflected in selling prices had an unfavorable impact of $4.8 million.
- The effective tax rate was 68.1%, versus 49.2%, reflecting permanent tax differences and changes in earnings mix. Interest expense was broadly stable at $13.1 million.
Outlook, risks and unusual items
- In January 2013, Griffon announced an Ames True Temper facility consolidation, expected to be completed by the end of fiscal 2014. Management estimates annual cash savings exceeding $10 million at current operating levels, with $8 million of pretax restructuring and exit costs ($4 million cash and $4 million asset-related) and approximately $20 million of associated capital expenditures.
- Management expects fiscal 2013 capital spending of $65 million to $70 million. The filing provides no consolidated revenue or earnings guidance.
- Telephonics reported $467 million of funded contract backlog at December 31, 2012, up from $451 million at September 30, 2012; 73% was expected to be realized within 12 months. New awards and incremental funding totaled $112 million during the quarter.
- Key risks include customer concentration and order variability: the U.S. Government represented 18% of consolidated revenue and 81% of Telephonics revenue; Procter & Gamble represented 15% of consolidated revenue and 45% of Plastics revenue; Home Depot represented 10% of consolidated revenue and 23% of HBP revenue. The filing also cites possible U.S. military spending reductions, including sequestration then scheduled for March 2013, weather-related demand volatility, raw-material costs, competition, and foreign-exchange exposure.
- Griffon reported compliance with debt covenants. Contingencies include environmental matters, a potential indemnity claim relating to Union Tools advertising litigation, and a Department of Defense Inspector General inquiry; no claim had been asserted in that inquiry, and the company stated it was unaware of material financial exposure. Management did not expect the disclosed legal and environmental matters to materially affect consolidated results or financial position.
- The pension settlement was funded by plan assets and reduced the company’s net pension liability by $3.5 million. Share repurchases were $7.3 million in the quarter; $31.0 million remained under the authorization. The board declared a further $0.025-per-share dividend payable in March 2013.
Important facts for investors to verify
- Whether the Ames True Temper consolidation achieves the projected savings, and whether its costs and capital spending remain within estimates.
- Cash conversion and working-capital trends, particularly operating cash outflow and inventory growth.
- Telephonics backlog conversion and exposure to U.S. defense budgets, contract audits and government procurement.
- Plastics’ ability to recover resin-cost increases through pricing, and HBP’s recovery from weather-sensitive demand and excess channel inventory.
- Liquidity and debt-service capacity, including revolver availability, covenant headroom and the impact of cash returns and repurchases.
- Developments in environmental matters, the government inquiry and any potential customer indemnity claim.