Business Context and Reporting Period
Company: Griffon Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: Griffon is a diversified management and holding company operating through three segments: Home & Building Products (HBP), Telephonics Corporation, and Clopay Plastic Products Company (Plastics). The HBP segment includes Clopay Building Products and Ames True Temper (ATT), which was acquired on September 30, 2010.
Key Financial Metrics
| Metric | Three Months Ended Mar 31, 2011 | Six Months Ended Mar 31, 2011 |
|---|---|---|
| Revenue | $476.1 million | $890.5 million |
| Gross Profit | $101.1 million (21.2% margin) | $189.0 million (21.2% margin) |
| Operating Income | $15.6 million | $21.6 million |
| Net Income (Loss) | $(14.0) million | $(15.7) million |
| Diluted EPS | $(0.24) | $(0.26) |
| Cash and Equivalents | $208.3 million | $208.3 million |
| Total Debt (Gross) | $696.7 million | $696.7 million |
| Operating Cash Flow | Not provided for quarter | $(35.7) million (Used) |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 51.6% for the quarter and 43.8% for the six-month period compared to the prior year. This growth is primarily driven by the inclusion of ATT results, which were not consolidated in the prior year periods.
- Net Loss: The company reported a net loss of $14.0 million for the quarter and $15.7 million for the six months, compared to net income of $2.0 million and $6.3 million, respectively, in the prior year periods.
- Debt Extinguishment Charge: A significant non-cash charge of $26.2 million was recorded in the current quarter and six-month period related to the loss on extinguishment of debt. This charge resulted from refinancing activities, including the termination of a term loan and asset-based lending agreement.
- Acquisition Accounting Impact: The sale of inventory acquired from ATT at fair value resulted in an increased cost of goods sold of $3.8 million for the quarter and $15.2 million for the six-month period.
- Segment Performance:
- HBP: Revenue surged due to ATT inclusion. Operating profit improved significantly year-over-year but was impacted by the fair value inventory write-up and restructuring charges.
- Telephonics: Revenue declined slightly (2% for the quarter, 4% for six months) due to program transitions (ARPDD) and lower C-17 production rates, though operating profit margins improved.
- Plastics: Revenue increased 13% for the quarter and 14% for six months, driven by higher volume and favorable product mix, partially offset by higher resin costs.
Guidance, Outlook, and Risks
- Refinancing: On March 17, 2011, Griffon issued $550 million of 7.125% Senior Notes due 2018. On March 18, 2011, it entered into a new $200 million five-year revolving credit facility. These actions refinanced substantially all domestic subsidiary debt.
- Capital Expenditures: Management expects capital spending to range between $60 million and $70 million for fiscal year 2011.
- Restructuring: The consolidation of CBP manufacturing facilities is substantially complete. Remaining costs are primarily shutdown costs for the Baldwin plant, with total project costs estimated at $11 million.
- Risks and Contingencies:
- Customer Concentration: The U.S. Government (18% of consolidated revenue), Procter & Gamble (14%), and The Home Depot (12%) represent significant portions of revenue. Loss of volume from these customers could materially impact operations.
- Environmental: Ongoing remediation at the Peekskill Site (NY) and Frankfort Site (NY). The Peekskill feasibility study was approved, but a Proposed Remedial Action Plan suggests costs of approximately $10 million, though Griffon does not acknowledge responsibility.
- Legal: Potential litigation regarding improper advertisement claims involving Union Tools products; loss amount cannot be estimated.
Investor Verification Checklist
- Debt Extinguishment Impact: Verify the non-recurring nature of the $26.2 million loss on debt extinguishment and its effect on adjusted earnings.
- ATT Integration: Assess the sustainability of HBP revenue growth once the one-time fair value inventory write-up ($15.2 million for six months) is fully realized.
- Refinancing Terms: Review the covenants and interest rate implications of the new $550 million Senior Notes and $200 million Revolver compared to the terminated facilities.
- Customer Concentration: Monitor the stability of contracts with the U.S. Government, Procter & Gamble, and The Home Depot.
- Environmental Liabilities: Track the final Record of Decision for the Peekskill Site to determine if the estimated $10 million remediation cost will be incurred by Griffon.