Business Context and Reporting Period
Company: Griffon Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009 (Fiscal Third Quarter)
Business Overview: A diversified holding company with three reportable segments: Telephonics (military/commercial communications), Clopay Building Products (garage doors), and Clopay Plastic Products (specialty films). The Installation Services segment was discontinued in fiscal 2008.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 | Nine Months Ended June 30, 2009 |
|---|---|---|
| Net Sales | $287.4 million | $865.8 million |
| Gross Profit | $66.3 million (23.1% margin) | $179.2 million (20.7% margin) |
| Income from Continuing Operations | $6.9 million | $9.7 million |
| Net Income | $6.9 million | $10.4 million |
| Diluted EPS (Continuing Ops) | $0.12 | $0.17 |
| Cash and Equivalents | $289.6 million | $289.6 million (Balance Sheet) |
| Operating Cash Flow (9mo) | $42.3 million | |
| Long-Term Debt | $177.7 million | |
| Working Capital | $527.1 million |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 11% year-over-year for the quarter ($287.4M vs. $322.3M) and 5% for the nine-month period ($865.8M vs. $915.6M). Declines were driven by the Clopay Building Products and Clopay Plastic Products segments due to weak housing markets and lower resin costs/volume.
- Profitability Improvement: Despite lower sales, Net Income turned positive ($6.9M) compared to a Net Loss of $9.8M in the prior year quarter. This improvement is largely due to the absence of significant losses from the discontinued Installation Services segment (which lost $19.2M in the prior year quarter) and gains from debt extinguishment.
- Debt Reduction: The company repurchased $50.6 million face value of convertible notes during the period, recording a net gain of $7.4 million from debt extinguishment. Outstanding convertible notes were reduced to $79.4 million.
- Segment Performance:
- Telephonics: Sales increased 7% ($94.1M) driven by homeland defense contracts.
- Clopay Building Products: Sales decreased 13% ($98.5M); however, the segment returned to profitability ($0.6M operating profit) for the first time this fiscal year due to cost reductions.
- Clopay Plastic Products: Sales decreased 22% ($94.8M), but operating margins improved due to expense management.
Outlook, Risks, and Unusual Items
- Restructuring Plan: In June 2009, the company announced a plan to consolidate facilities in the Clopay Building Products segment. This is expected to incur approximately $12 million in pre-tax exit costs (mostly cash) and $11 million in capital expenditures over fiscal 2010 and 2011, with anticipated annual savings of $10 million.
- Debt Maturity Risk: $79.4 million of 4% convertible subordinated notes due 2023 are subject to a mandatory repurchase offer in July 2010. Management anticipates these will be repurchased and has reclassified them as current liabilities for the fourth quarter of fiscal 2009.
- Customer Concentration: Procter & Gamble accounted for 53% of Clopay Plastic Products sales in the quarter. Significant customers for other segments include The Home Depot, Menards, Lockheed Martin, and Boeing.
- Legal Proceedings: Telephonics protested a military contract award in July 2009; a GAO decision is expected by October 28, 2009.
- Management Changes: A new CFO (Douglas J. Wetmore) and Chief Administrative Officer (Patrick L. Alesia) were appointed effective September 1, 2009.
Investor Verification Checklist
- Debt Repurchase Obligation: Verify the company's liquidity position to ensure it can fund the anticipated $79.4 million repurchase of convertible notes in July 2010.
- Restructuring Execution: Monitor the timing and actual cost of the $12 million restructuring charges and $11 million capital expenditures for the Clopay Building Products consolidation.
- Housing Market Sensitivity: Assess the continued impact of the residential housing downturn on Clopay Building Products sales volume and pricing power.
- Telephonics Contract Stability: Track the outcome of the GAO protest regarding the military contract award and the funding status of the MH-60 program.
- Customer Concentration: Evaluate the risk associated with Procter & Gamble representing over half of the Clopay Plastic Products segment's revenue.