Business Context and Reporting Period
Company: Griffon Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended December 31, 2006 (First Quarter of Fiscal 2007)
Business Overview: Griffon operates four reportable segments: Garage Doors, Installation Services, Specialty Plastic Films, and Electronic Information and Communication Systems.
Key Financial Metrics
| Metric | Q1 2007 (Dec 31, 2006) | Q1 2006 (Dec 31, 2005) |
|---|---|---|
| Net Sales | $434,315,000 | $358,524,000 |
| Gross Profit | $93,204,000 | $89,169,000 |
| Gross Margin % | 21.5% | 24.9% |
| Income from Operations | $16,064,000 | $13,945,000 |
| Net Income | $8,465,000 | $6,776,000 |
| Diluted EPS | $0.27 | $0.22 |
| Operating Cash Flow | $34,039,000 | $4,728,000 |
| Cash and Equivalents (End of Period) | $55,626,000 | $45,960,000 |
| Long-Term Debt | $229,781,000 | $209,228,000 |
| Working Capital | $334,347,000 | $308,705,000 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 21.1% year-over-year, driven primarily by the Electronic Information and Communication Systems segment (+146.5%) and Specialty Plastic Films (+20.3%).
- Profitability: Net income rose 24.9% to $8.5 million. Operating income increased 15.2% despite margin compression in the Garage Doors segment.
- Cash Flow: Operating cash flow surged to $34.0 million from $4.7 million, largely due to a $48.5 million decrease in accounts receivable and contract costs.
- Debt Structure: In December 2006, the company modified its senior secured revolving credit facility, increasing capacity to $175 million and extending the term to five years. Long-term debt increased by approximately $20.5 million.
- Segment Performance:
- Electronic Systems: Profit jumped to $12.9 million from $3.0 million due to contracts with Syracuse Research Corporation (SRC).
- Specialty Plastic Films: Turned a loss of $1.6 million into a profit of $4.3 million, aided by lower resin costs.
- Garage Doors: Sales and profit declined due to the weak housing market; operating profit fell to $4.0 million from $13.6 million.
- Installation Services: Reported an operating loss of $0.9 million compared to a profit of $2.8 million, impacted by housing downturns in Las Vegas and Phoenix.
Outlook, Risks, and Management Commentary
- Outlook: Management anticipates shipments for the $330 million SRC awards will be completed through the remainder of the fiscal year. The Specialty Plastic Films segment expects volume ramp-up for new elastic laminate products.
- Housing Market: The Garage Doors and Installation Services segments remain under pressure from the housing market downturn. Management is implementing promotional programs and cost-reduction plans to bolster volume.
- Acquisitions: In January 2007, the Installation Services segment acquired a kitchen cabinet installation business with approximately $30 million in annual revenues.
- Risks: Key risks include volatility in resin and steel prices, capacity constraints, and the continued weakness of the housing market. The company is also assessing the impact of FASB Interpretation No. 48 on income tax accounting.
- Capital Allocation: The company continues its stock buyback program, with approximately 1.6 million shares remaining available for purchase.
Investor Verification Checklist
- Revenue Quality: Verify the sustainability of the Electronic Systems segment's growth, which is heavily reliant on specific government contracts (SRC).
- Housing Exposure: Monitor the Garage Doors and Installation Services segments for further deterioration due to the ongoing housing market correction.
- Margin Pressure: Assess the impact of resin cost volatility on the Specialty Plastic Films segment and pricing concessions granted to major customers.
- Debt Covenants: Review the terms of the amended $175 million credit facility and the company's ability to service the increased long-term debt load.
- Integration Risks: Evaluate the success of the January 2007 acquisition in the Installation Services segment and its contribution to future synergies.