Business Context and Reporting Period
Company: Griffon Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: September 30, 2008
Business Overview: Griffon is a diversified holding company with three primary segments: Electronic Information and Communication Systems (Telephonics), Garage Doors (Clopay Building Products), and Specialty Plastic Films (Clopay Plastic Products). In fiscal 2008, the Company exited substantially all operating activities of its Installation Services segment due to the downturn in the residential housing market, reporting these results as discontinued operations.
Key Financial Metrics
| Metric (in thousands) | 2008 | 2007 |
|---|---|---|
| Net Sales (Continuing Ops) | $1,269,305 | $1,365,729 |
| Income from Continuing Ops | $88 | $28,165 |
| Loss from Discontinued Ops | $(40,591) | $(6,086) |
| Net Loss | $(40,503) | $22,079 |
| Diluted EPS (Continuing Ops) | $0.00 | $0.84 |
| Diluted EPS (Total) | $(1.24) | $0.65 |
| Cash from Operating Activities | $86,049 | $59,698 |
| Total Assets | $1,171,566 | $959,858 |
| Long-term Debt | $230,930 | $229,438 |
| Working Capital | $562,143 | $354,190 |
Material Changes vs. Prior Period
- Revenue Decline: Net sales from continuing operations decreased 7.1% to $1.27 billion, driven by a 22.5% drop in the Electronic Information and Communication Systems (EICS) segment due to the wind-down of the Warlock-Duke contract and a 10.5% decline in the Garage Doors segment due to the housing market downturn.
- Profitability Collapse: Income from continuing operations plummeted to $88,000 from $28.2 million, primarily due to a non-cash goodwill impairment charge of $12.9 million in the Garage Doors segment.
- Discontinued Operations Loss: The exit of the Installation Services segment resulted in a $40.6 million loss, compared to a $6.1 million loss in the prior year, including $43.1 million in disposal costs.
- Capital Structure: The Company raised approximately $246.6 million in gross proceeds via a common stock rights offering and investments by GS Direct and the CEO, significantly strengthening liquidity. Cash and cash equivalents increased from $44.7 million to $311.9 million.
Guidance, Outlook, and Risks
- Outlook: Management expects the Garage Doors segment to remain challenged by the housing market in 2009. The Specialty Plastic Films segment anticipates improved performance from cost reduction programs but faces challenges with new product roll-outs. The EICS segment expects the MH-60 program to generate revenues at a run rate of approximately $100 million annually for the next several years.
- Key Risks:
- Housing Market: Continued weakness in residential construction directly impacts the Garage Doors segment.
- Customer Concentration: Procter & Gamble accounted for 56% of Specialty Plastic Films sales; The Home Depot and Menards are significant Garage Doors customers.
- Raw Materials: Volatility in steel and plastic resin prices impacts margins, with limited ability to pass costs to customers immediately.
- Convertible Notes: $130 million of 4% convertible notes are outstanding; holders may require repurchase in 2010 if stock price conditions are not met.
- Unusual Items: A $12.9 million non-cash goodwill write-off in the Garage Doors segment and $43.1 million in disposal costs for the discontinued Installation Services segment significantly impacted 2008 results.
Investor Verification Checklist
- Verify the sustainability of the $100 million annual revenue run rate for the EICS MH-60 program.
- Monitor the Company's ability to pass through rising raw material costs (steel and resin) to customers.
- Assess the impact of the $130 million convertible note repurchase option due in July 2010 on future liquidity.
- Track the completion of the Installation Services exit and the finalization of the estimated $7-8 million in remaining cash outflows.
- Review the performance of the Specialty Plastic Films segment given the 56% revenue concentration with Procter & Gamble.