Business Context and Reporting Period
Company: Griffon Corporation (GFF)
Filing Type: Form 10-K (Annual Report)
Period Ended: September 30, 2010
Business Overview: Griffon is a diversified management and holding company operating through three primary segments: Telephonics Corporation (defense and commercial electronics), Home & Building Products (garage doors and landscaping tools), and Clopay Plastic Products (specialty plastic films).
Key Event: On September 30, 2010, Griffon acquired Ames True Temper, Inc. (ATT), a global provider of non-powered landscaping products, for $542 million in cash. ATT's operating results are not included in the 2010 consolidated income statement but are reflected in the balance sheet as of the acquisition date.
Key Financial Metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Revenue | $1,294.0 million | $1,194.1 million | +8.4% |
| Gross Profit | $288.3 million | $257.1 million | +12.1% |
| Gross Margin | 22.3% | 21.5% | +80 bps |
| Net Income | $9.6 million | $18.7 million | -48.7% |
| Diluted EPS | $0.16 | $0.32 | -50.0% |
| Operating Cash Flow | $83.1 million | $84.1 million | -1.2% |
| Total Debt | $555.5 million | $180.0 million | +208.6% |
| Cash & Equivalents | $169.8 million | $320.8 million | -47.1% |
| Total Assets | $1,749.5 million | $1,143.9 million | +52.9% |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenue increased 8.4% driven by a 12% increase in Telephonics revenue (due to radar program awards) and a 14% increase in Plastics revenue (due to higher volumes and currency translation). This was partially offset by a 1% decline in Home & Building Products (Clopay Building Products) due to the weak housing market.
- Profitability Decline: Net income decreased 48.7% to $9.6 million. This decline was primarily due to $9.8 million in acquisition-related costs for ATT and a $1.1 million loss on debt extinguishment. Excluding these items, adjusted income from continuing operations would have been $17.2 million.
- Balance Sheet Transformation: Total debt increased significantly to $555.5 million, primarily due to a new $375 million term loan and $25 million drawn under a new asset-based lending facility to fund the ATT acquisition. Cash balances decreased to $169.8 million following the transaction.
- Segment Performance:
- Telephonics: Operating profit increased to $38.6 million (8.9% margin).
- Home & Building Products: Returned to profitability with $5.0 million operating profit (1.3% margin), an improvement of $16.3 million from the prior year loss, driven by restructuring and cost controls.
- Plastics: Operating profit decreased to $20.5 million (4.4% margin) due to rising resin costs that could not be immediately passed through to customers.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects the inclusion of ATT to shift seasonality, with revenue and earnings likely to be lowest in the first and second quarters and highest in the third and fourth quarters. The company anticipates continued pressure from the residential housing market on its garage door business.
- Unusual Items:
- Acquisition Costs: $9.8 million in SG&A expenses related to the ATT acquisition.
- Debt Extinguishment: $1.1 million loss on extinguishment of debt related to the termination of the previous asset-based lending facility.
- Restructuring: $4.2 million in restructuring charges for Clopay Building Products facility consolidation.
- Key Risks:
- Customer Concentration: Procter & Gamble accounts for ~50% of Plastics revenue; Home Depot accounts for ~13% of pro forma consolidated revenue. The U.S. Government accounts for ~73% of Telephonics sales.
- Raw Material Volatility: Significant exposure to resin, steel, and wood prices. Lag times in passing cost increases to customers can compress margins.
- Integration Risk: Risks associated with integrating ATT, including maintaining relationships with key customers and suppliers.
- Government Contracting: Telephonics faces risks related to government budget constraints, contract terminations, and audit findings.
Investor Verification Checklist
- ATT Integration Progress: Verify the timeline and cost realization of synergies between ATT and existing Home & Building Products operations.
- Debt Covenants: Confirm compliance with the new Term Loan and Asset-Based Lending covenants, specifically interest coverage and leverage ratios.
- Resin Cost Pass-Through: Monitor the Plastics segment's ability to pass on raw material cost increases to customers to restore operating margins.
- Telephonics Backlog: Track the execution of the $407 million backlog, 73% of which is expected to be fulfilled in 2011.
- Housing Market Exposure: Assess the impact of continued weakness in new home starts and existing home sales on Clopay Building Products revenue.