Griffon Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2012; comparable periods ended March 31, 2011. Dollar amounts below are in millions unless stated otherwise. Griffon operates Home & Building Products (HBP), Telephonics, and Clopay Plastic Products (Plastics). The statements are unaudited. HBP is seasonal, so interim results may not indicate full-year performance.
Financial performance
| Metric | Three months 2012 | Three months 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $482.4 | $476.1 | $933.5 | $890.5 |
| Gross profit | $102.8 | $101.1 | $205.5 | $189.0 |
| Gross margin | 21.3% | 21.2% | 22.0% | 21.2% |
| Operating income | $16.6 | $15.6 | $34.5 | $21.6 |
| Net income (loss) | $2.0 | ($14.0) | $4.5 | ($15.7) |
| Diluted EPS | $0.04 | ($0.24) | $0.08 | ($0.26) |
- Quarterly revenue increased 1%; six-month revenue increased 5%. Six-month operating income rose to $34.5 million from $21.6 million.
- Management’s adjusted net income was $2.0 million for the quarter versus $6.1 million in the prior-year quarter, and $5.8 million for six months versus $12.4 million. Adjustments exclude specified items including restructuring, acquisition costs, debt extinguishment, acquired-inventory fair-value charges, and discrete tax items.
- Interest expense was $13.0 million for the quarter and $26.1 million for six months, compared with $11.3 million and $22.5 million, respectively, a year earlier. The prior-year periods included a $26.2 million debt-extinguishment loss.
Segments and material changes
- HBP: Quarterly revenue declined 3% to $224.6 million, mainly on lower ATT snow-tool sales after a mild winter; CBP revenue increased 5%. Six-month revenue increased 1%. Segment operating profit was $8.1 million for the quarter and $17.9 million for six months; excluding the prior-year acquired-inventory charge, management said profit declined in both comparisons, citing lower ATT volume and higher material and fuel costs.
- Telephonics: Quarterly revenue was $114.0 million, broadly flat; six-month revenue grew 3% to $218.5 million. Segment operating profit increased 21% for the quarter and 19% for six months, with improved program mix and revenue cited as drivers. Backlog was $434 million at March 31, with 69% expected to be realized in the next 12 months. The company reported $168 million of new awards and incremental funding during the quarter.
- Plastics: Revenue rose 10% for the quarter and 13% for six months, but segment operating profit fell 52% and 53%, respectively. Management attributed pressure to start-up costs and scrap from capacity expansions in Germany and Brazil, less-robust-than-anticipated market conditions, and higher resin costs. It said operating efficiency was improving as planned and expected a trend toward normal efficiency levels in the second half of fiscal 2012.
- Griffon acquired Southern Patio, a pots-and-planters business integrated into ATT, on October 17, 2011 for $22.4 million; it reported 2011 revenue exceeding $40 million. The acquisition contributed to current-period results.
Cash flow, debt and liquidity
- Six-month operating cash flow was negative $2.2 million, improved from negative $35.7 million. Investing cash flow was negative $62.4 million, including the $22.4 million acquisition and $40.2 million of capital expenditures. Financing cash flow was negative $13.7 million.
- Cash declined to $164.9 million at March 31 from $243.0 million at September 30, 2011. Total debt was $723.4 million, versus $733.1 million; reported net debt increased to $558.6 million from $490.1 million.
- The $200 million revolving facility had no borrowings reported and $180.5 million available, net of $19.5 million in standby letters of credit. Griffon said it was in compliance with credit and loan covenants.
- Management described liquidity as sufficient for business reinvestment and strategic acquisitions. Capital spending for fiscal 2012 was expected to be $65–70 million. The filing does not provide formal revenue or earnings guidance.
Outlook, risks and unusual items
- Quarterly and six-month GAAP earnings improved substantially versus prior-year losses, but prior-year comparisons included significant refinancing and acquisition-accounting charges. On management’s adjusted basis, six-month earnings declined year over year.
- The six-month effective tax provision rate was 53.2%, versus a 33.8% benefit in the prior-year period. Griffon cited nondeductible items, tax reserves, and a changed earnings mix; it reported no discrete current-period tax items.
- Revenue concentration is significant: the U.S. government and agencies were 19% of consolidated six-month revenue and 79% of Telephonics revenue; Procter & Gamble was 13% of consolidated revenue and 44% of Plastics revenue; Home Depot was 11% of consolidated revenue and 23% of HBP revenue. Management warned that reduced orders or loss of a major customer could materially affect results and liquidity.
- Other stated risks include housing and economic conditions, weather, steel and resin pricing, supply and capacity constraints, acquisition integration, and compliance with debt covenants. A 100-basis-point LIBOR change and a 5% or smaller currency move were not expected by the company to materially affect results or liquidity.
- Contingencies include environmental matters at the Peekskill and Frankfort, New York sites. The state’s selected Peekskill remedy was estimated at approximately $10 million; Griffon did not acknowledge responsibility for remediation. A Department of Defense Inspector General inquiry was ongoing; no claim had been asserted and Griffon said it knew of no material financial exposure. Management said the resolution of disclosed matters was not expected to materially affect consolidated results, position, or cash flows.
- Installation Services discontinued-operation liabilities included $3.3 million current liabilities; related future cash outflows were estimated at $3.3 million. Certain subsidiaries were contingently liable for approximately $0.6 million of assigned facility leases.
- The board declared a quarterly dividend of $0.02 per share in May 2012. Griffon had repurchased 448,779 shares for $3.7 million cumulatively under its $50 million authorization; approximately $46.3 million remained available. Separately, the filing reports no repurchases during January–March 2012.
Investor items to verify
- Whether Plastics’ capacity ramp reaches normal efficiency in the second half and how resin-cost pass-through affects margins.
- HBP’s recovery from weather-driven snow-tool weakness and the contribution and integration performance of Southern Patio.
- Telephonics backlog conversion, contract awards, and exposure to U.S. government customer concentration.
- Cash generation and working-capital trends, given seasonal operating cash use, planned capital spending, and the increase in net debt.
- Developments in environmental matters and the government inquiry, as well as upcoming debt maturities, covenants, and the ESOP loan extension.
- Performance on management’s adjusted basis alongside GAAP results, including the assumptions and exclusions used in adjusted measures.