Griffon Corporation — Q3 FY2011 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and nine months ended June 30, 2011, in Griffon’s fiscal year ending September 30. Griffon operates Home & Building Products (including Ames True Temper, acquired September 30, 2010, and Clopay Building Products), Telephonics, and Clopay Plastic Products. Unless noted, amounts below are in U.S. dollars; financial amounts are shown in millions.
Financial performance and position
| Metric | Three months ended June 30, 2011 | Three months ended June 30, 2010 | Nine months ended June 30, 2011 | Nine months ended June 30, 2010 |
|---|---|---|---|---|
| Revenue | $455.3 | $327.0 | $1,345.8 | $946.2 |
| Gross profit | $99.2 | $74.4 | $288.2 | $213.7 |
| Gross margin | 21.8% | 22.7% | 21.4% | 22.6% |
| Operating income | $15.0 | $11.2 | $36.6 | $22.3 |
| Net income (loss) | $4.9 | $5.0 | ($10.8) | $11.3 |
| Diluted EPS | $0.08 | $0.08 | ($0.18) | $0.19 |
- Adjusted results: Excluding the company’s specified restructuring, debt-extinguishment, acquired-inventory fair-value and discrete tax items, continuing-operations income was $3.2 million ($0.05 diluted EPS) for the quarter versus $6.0 million ($0.10) a year earlier. For nine months, adjusted income was $14.4 million ($0.24) versus $11.7 million ($0.20). These are company-defined non-GAAP measures.
- Cash flow: Nine-month operating cash flow was $13.1 million, down from $48.2 million. Investing used $60.6 million, including $65.0 million of capital expenditures; financing provided $123.8 million. Cash increased to $246.6 million from $169.8 million at September 30, 2010.
- Liquidity and debt: Current assets were $907.8 million and current liabilities $294.5 million. Total debt was $714.3 million, compared with $555.5 million at September 30; cash less debt was a net debt position of $467.7 million. The $200 million revolving facility had no borrowings and $179.5 million available after letters of credit at June 30. The company reported compliance with credit-agreement covenants.
- Margins and segment performance: Quarterly gross margin declined year over year. Telephonics’ quarterly revenue increased 3% and operating profit was broadly flat; nine-month operating profit increased 15%. Plastics’ quarterly revenue rose 12%, but it recorded a $0.3 million operating loss, versus $6.7 million profit, amid expansion start-up costs and scrap. Home & Building Products’ results include ATT for 2011 but not the reported 2010 comparison.
Material changes versus comparable periods
- Reported revenue increased 39% for the quarter and 42% year to date, substantially reflecting ATT’s inclusion. On a pro forma basis assuming ATT had been acquired earlier, revenue increased 0.2% for the quarter and 3% for nine months. Pro forma continuing-operations income was $4.9 million versus $10.8 million for the quarter, and a nine-month loss of $10.8 million versus pro forma income of $24.5 million.
- Nine-month results included a $26.2 million pretax loss on extinguishment of debt and $15.2 million of acquired-inventory fair-value costs. The debt loss followed the March 2011 refinancing: Griffon issued $550 million of 7.125% senior notes due 2018 and entered a new $200 million five-year revolver, using proceeds to repay and terminate prior facilities. Nine-month interest expense rose to $35.1 million from $10.5 million, primarily due to acquisition-related debt.
- Nine-month capital expenditures rose to $65.0 million from $26.6 million. Griffon expected fiscal 2011 capital spending of $85–$90 million.
Outlook, commentary, risks and contingencies
- Management described liquidity as sufficient for reinvestment and strategic acquisitions. No specific earnings or revenue guidance was provided. HBP is seasonal, and interim results may not indicate full-year performance.
- Management expected Plastics to operate below normal efficiency for the next three quarters as expanded German and Brazilian capacity ramped up. HBP faced lower lawn-and-garden volumes associated with inclement weather, lower garage-door volume versus a tax-credit-supported prior-year comparison, and higher material costs.
- Customer concentration is significant: for the nine months, the U.S. government represented 17% of consolidated revenue, Procter & Gamble 14%, and Home Depot 13%. The filing warns that reduced business from major customers could materially affect results and liquidity. Telephonics backlog was $442 million at June 30, with 76% expected to be realized within 12 months; backlog depends on authorized and appropriated funding.
- Other disclosed risks include housing and economic conditions, resin and steel pricing, supply and capacity constraints, acquisition integration, debt-covenant compliance, foreign exchange, and legal or environmental matters. Telephonics was providing information under a U.S. Department of Defense Inspector General subpoena; no claim had been asserted, and Griffon reported no known material financial exposure. Environmental matters include a New York site remedy estimated at approximately $10 million, for which Griffon disputed responsibility, and a separate Frankfort, New York matter for which ATT said it had accrued reasonably estimable costs; the amount of that accrual is not stated here.
- The board authorized up to an additional $50 million of share repurchases; approximately 1.366 million shares remained available under an existing program. In July, Clopay Europe drew its €20 million term loan, using part of the proceeds to repay its revolving facility. Griffon also reported an expected amendment to an ESOP loan; verify whether it was completed.
Important facts for investors to verify
- Reconcile reported growth with the acquisition-adjusted comparisons, and assess ATT’s contribution, integration progress, and operating performance.
- Track cash conversion, working-capital movements, capital spending against the $85–$90 million estimate, and the effect of higher debt and interest expense.
- Monitor Plastics’ ramp-up costs and efficiency, material-price pressures, and HBP demand and seasonality.
- Review debt maturities, refinancing terms, revolver availability, covenant headroom, and the completion of the European loan draw and ESOP amendment.
- Follow the outcome and potential cost of environmental matters and the government inquiry, as well as customer concentration and Telephonics program funding.