Griffon Corporation — Form 10-Q Summary
Business context and reporting period
Quarterly period ended March 31, 2013, the second quarter of Griffon’s fiscal 2013; six-month comparisons are for the period ended March 31. Griffon operates Home & Building Products (HBP: Ames True Temper and Clopay Building Products), Telephonics, and Clopay Plastic Products. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. Interim results may be affected by seasonality, particularly in HBP.
Financial performance and liquidity
- Second quarter: Revenue was $488.7 million, up 1.3% from $482.4 million. Gross profit was $105.5 million (21.6% margin), versus $102.8 million (21.3%). Operating income was $10.1 million (2.1% margin), down from $16.6 million (3.5%). Net loss was $0.8 million, or $0.02 per share, versus net income of $2.0 million, or $0.04 per share.
- Six months: Revenue was $912.5 million, down 2.2% from $933.5 million. Gross profit was $203.2 million (22.3% margin), versus $205.5 million (22.0%). Operating income was $24.4 million (2.7% margin), versus $34.5 million (3.7%). Net loss was $0.3 million, versus net income of $4.5 million.
- Adjusted results: Excluding specified restructuring, pension settlement, acquisition-cost and discrete tax items, management reported adjusted net income of $4.7 million ($0.08 per share) for the quarter, versus $2.0 million ($0.04) a year earlier; six-month adjusted net income was $7.3 million ($0.13), versus $5.8 million ($0.10). These are non-GAAP measures.
- Cash flow: Six-month operating cash flow was negative $34.0 million, compared with negative $2.2 million a year earlier. The company attributed the deterioration mainly to an $87.5 million increase in accounts receivable and unbilled contract costs. Investing cash use was $29.8 million, including $31.0 million of capital expenditures; financing cash use was $28.4 million. Cash declined $92.7 million to $116.9 million.
- Debt and liquidity: Gross debt was $713.3 million and cash was $116.9 million at March 31; balance-sheet debt, net of debt discount, was $698.3 million including current maturities. The amended revolving facility provides $225 million of capacity and had $202.3 million available after standby letters of credit. The company reported compliance with debt covenants. Current assets were $826.8 million and current liabilities $287.8 million.
- Capital allocation: Griffon repurchased $22.1 million of shares and paid $2.9 million in dividends during the six months. The board declared a further $0.025-per-share dividend payable in June 2013.
Material changes and segment trends
- HBP: Second-quarter revenue increased 1% to $225.7 million, while segment operating profit fell to $3.8 million from $8.1 million, primarily due to $4.6 million of restructuring charges. Excluding those charges, management cited improved mix and efficiencies. Six-month revenue fell 4%, chiefly because of lower snow-tool sales and retailer inventory; segment operating profit was $11.1 million versus $17.9 million, including $5.7 million of restructuring costs.
- Telephonics: Second-quarter revenue rose 7% to $121.6 million and segment operating profit increased 2% to $13.8 million; margin declined to 11.3% from 11.9%, primarily reflecting program mix. Six-month revenue was nearly flat at $217.7 million, while operating profit rose to $28.4 million. Backlog was $477 million, with 71% expected to be realized within 12 months.
- Plastics: Second-quarter revenue declined 2% to $141.4 million; operating profit was $0.9 million versus $2.5 million, including $4.8 million of restructuring charges. Excluding these charges, management cited stronger mix and efficiency, partly offset by resin-cost timing. Six-month revenue was down less than 1% to $278.9 million.
- Six-month total segment adjusted EBITDA increased to $88.3 million from $82.0 million. Corporate unallocated costs rose to $15.6 million from $12.8 million, mainly reflecting higher incentive and stock-based compensation.
Outlook, commentary, risks and unusual items
- Management expects fiscal 2013 capital expenditures of $65–70 million. ATT’s facility consolidation, targeted for completion by the end of fiscal 2014, is expected to generate annual cash savings exceeding $10 million at current operating levels. ATT estimates approximately $8 million in restructuring and exit costs and $20 million in related capital expenditures.
- Plastics announced plans to exit low-margin European business and eliminate approximately 80 positions. Its $4.8 million restructuring charge was recorded in the quarter.
- Other notable items included a $2.1 million noncash pension settlement loss in the six-month period and discrete tax benefits of $0.3 million for the quarter and $0.4 million for the six months. The 2023 convertible notes were redeemed at par plus accrued interest on April 15, 2013, after quarter-end.
- Key disclosed risks include seasonal and weather-sensitive demand, housing and economic conditions, raw-material price changes (including resin and steel), foreign exchange, customer concentration, and potential reductions in U.S. military spending, including sequestration. For the six months, the U.S. government represented 19% of consolidated revenue; Procter & Gamble 14%; and Home Depot 10%.
- Contingencies include environmental matters at the Peekskill and Frankfort, New York sites, potential indemnity exposure related to Union Tools advertising litigation, and a Department of Defense Inspector General inquiry. No claim had been asserted in the government inquiry; management said it was unaware of material exposure. Management did not expect the disclosed legal and environmental matters to materially affect consolidated results, but outcomes remain uncertain.
- Management described liquidity as sufficient for reinvestment and strategic acquisitions. Forward-looking statements are subject to risks, and no specific consolidated revenue or earnings guidance was provided.
Important facts for investors to verify
- Whether the operating cash outflow and increased receivables/unbilled contract costs reverse in subsequent quarters.
- Actual savings, cash costs, capital spending and execution progress for the ATT and Plastics restructuring plans.
- Telephonics backlog conversion, government-contract exposure, and the effects of defense spending and contract audits.
- Debt covenant headroom, revolver availability, refinancing needs and cash requirements, including after the April 2023-notes redemption.
- Customer concentration, seasonal demand and resin, steel, foreign-exchange and other cost pressures.
- Potential liabilities and developments in the environmental, advertising-related and government inquiry matters.