Griffon Corporation — Q1 FY2012 Form 10-Q
Business context and reporting period. The quarter ended December 31, 2011. Griffon operates through Home & Building Products (HBP), Telephonics, and Clopay Plastic Products (Plastics). Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless noted.
Financial performance and position
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Revenue | $451.0 million | $414.4 million |
| Gross profit / margin | $102.7 million / 22.8% | $87.9 million / 21.2% |
| Operating income / margin | $17.8 million / 4.0% | $6.0 million / 1.5% |
| Net income (loss) | $2.5 million | ($1.7) million |
| Diluted EPS | $0.04 | ($0.03) |
| Operating cash flow | ($13.8) million | ($23.8) million |
- Adjusted net income, excluding specified restructuring, acquisition, inventory fair-value, and discrete tax items, was $3.8 million ($0.07 per share), versus $6.3 million ($0.11 per share) in the prior-year quarter.
- Cash and equivalents were $177.4 million at December 31, down from $243.0 million at September 30. Total debt was $725.5 million, versus $733.1 million; net debt was $548.2 million, compared with $490.1 million.
- Cash used in investing was $42.3 million, including $22.4 million for the Southern Patio acquisition and $19.9 million of capital expenditures. Financing used $9.5 million. Cash declined $65.7 million during the quarter.
- Current assets were $854.3 million and current liabilities $295.7 million. The $200 million revolving credit facility had $180.5 million available after standby letters of credit at quarter-end.
- Interest expense rose to $13.1 million from $11.2 million. The effective tax rate was 49.2%, versus a 44.9% tax benefit in the prior-year quarter.
Material changes versus the prior comparable period
- Revenue rose 9% overall. HBP revenue increased 6%, Telephonics 6%, and Plastics 16%.
- HBP segment operating profit was $9.8 million versus a $1.6 million loss, although the prior-year period included $11.4 million of acquired-inventory fair-value charges. Management said underlying HBP segment profit before specified items was broadly in line with the prior year.
- Telephonics segment operating profit increased 17% to $12.5 million, with margin rising to 12.0% from 10.9%.
- Plastics segment operating profit fell 55% to $1.9 million, and margin declined to 1.4% from 3.5%, despite higher revenue.
- Reported net income improved year over year, but adjusted net income and adjusted EPS declined. The prior year benefited from a $320,000 discrete tax benefit.
Outlook, management commentary, risks and unusual items
- Management described liquidity as sufficient for reinvestment and strategic acquisitions and expected fiscal 2012 capital spending of $65 million to $70 million. No earnings or revenue guidance was provided in the filing text.
- Management expected Plastics to operate below normal efficiency levels through the first half of fiscal 2012 as expanded Germany and Brazil facilities continued to incur startup costs, including elevated scrap.
- Telephonics backlog was $380 million at December 31, down from $417 million at September 30 and $424 million a year earlier; 78% was expected to be realized in the next 12 months. New contracts and incremental funding totaled $68 million during the quarter.
- HBP is seasonal, so interim results may not indicate full-year performance. Operating cash flow reflected inventory growth and lower accounts payable and accrued liabilities, which management attributed primarily to normal HBP seasonality.
- Customer concentration is material: the U.S. Government and agencies represented 18% of consolidated revenue; Procter & Gamble 14%; and Home Depot 11%. Management warned that reduced orders or loss of a major customer could adversely affect operations and liquidity.
- Restructuring charges were $1.8 million, mainly workforce-related; Telephonics accounted for $1.5 million. Southern Patio was acquired for $22.4 million on October 17, 2011; it had revenue exceeding $40 million in 2011.
- Environmental matters include a proposed approximately $10 million remedy at the Peekskill site; Griffon disclaims responsibility, and the filing says negotiations with potentially responsible parties are expected. At the Frankfort, New York site, ATT is conducting investigation and remediation planning. A Defense Department Inspector General inquiry was ongoing; no claim had been asserted and Griffon reported no known material financial exposure.
- Installation Services discontinued-operation liabilities included $3.6 million of estimated future net cash outflows and approximately $624,000 of contingent facility-lease exposure. Management did not expect these contingencies to be material.
- Griffon reported compliance with debt covenants at quarter-end. Key risks include covenant compliance, housing and economic conditions, input-cost and supply pressures, acquisition integration, customer concentration, and legal and environmental matters.
Important facts for investors to verify
- Whether cash conversion improves as inventory and seasonal working-capital demands normalize; operating cash flow remained negative despite improved earnings.
- Progress and costs associated with Plastics facility expansions, and whether margins recover after the expected first-half efficiency issues.
- Telephonics backlog conversion, program funding, and exposure to U.S. Government contracts and investigations.
- Southern Patio integration and contribution to HBP results, including final purchase-price adjustments and acquired-intangible amortization.
- Debt service, available revolver capacity, covenant headroom, and the continuing effect of higher interest expense.
- Potential costs or liabilities from environmental and other contingencies, including the Peekskill remedy and discontinued-operation obligations.