Griffon Corporation — FY2012 Form 10-K
Reporting period: Fiscal year ended September 30, 2012. The filing is an annual report, not a standalone fourth-quarter filing; quarterly results for the quarter ended September 30, 2012 are included below. Financial amounts are presented in approximate U.S. dollars in millions unless noted.
Business context
Griffon is a diversified holding company operating through Home & Building Products (HBP: Ames True Temper landscaping products and Clopay Building Products garage doors), Telephonics (defense, communications and sensor systems), and Clopay Plastic Products (specialty films and laminates). FY2012 revenue mix was approximately 46% HBP, 24% Telephonics and 30% Plastics. The Southern Patio pots and planters business was acquired in October 2011 for approximately $22.4 million and integrated with Ames True Temper.
Financial performance and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $1,861.1 | $1,830.8 |
| Gross profit / gross margin | $418.8 / 22.5% | $393.5 / 21.5% |
| Operating income | $72.4 | $55.5 |
| Net income (loss) | $17.0 | $(7.4) |
| Diluted EPS | $0.30 | $(0.13) |
| Operating cash flow | $90.1 | $35.4 |
| Capital expenditures | $68.9 | $87.6 |
| Cash and equivalents at year-end | $209.7 | $243.0 |
Revenue rose 1.7% year over year. Gross margin improved from 21.5%; FY2011 gross profit included $15.2 million of acquisition-accounting inventory costs, and excluding that charge FY2011 gross margin was 22.3%. Management’s adjusted net income, a non-GAAP measure excluding specified items, was $15.3 million ($0.27 per share) in 2012 versus $19.9 million ($0.34 per share) in 2011.
FY2012 cash flow from operations less capital expenditures was approximately $21.3 million. Current assets were $826.2 million and current liabilities $273.4 million at year-end. Total debt was approximately $716.2 million gross, or $699.6 million net of debt discount; cash-adjusted debt was approximately $506.6 million. The $200 million revolving facility had $178.3 million available after standby letters of credit. Griffon reported compliance with debt covenants.
FY2012 quarterly results included September-quarter revenue of $447.4 million, gross profit of $97.7 million, net income of $3.4 million and diluted EPS of $0.06. Compared with the September 2011 quarter, revenue declined from $485.0 million, while net income increased from $3.4 million (reported as $3.378 million versus $3.448 million).
Segment developments and changes versus prior year
- HBP: Revenue increased 2% to $856.5 million. Segment operating profit rose to $37.1 million from $28.2 million, but FY2011 included $15.2 million of acquired-inventory costs; excluding that charge, FY2011 segment profit was $43.4 million. Weak snow-tool demand due to little snowfall and lower lawn-tool volumes amid drought pressured Ames True Temper; Clopay Building Products benefited from higher volume, favorable mix and lower distribution costs.
- Telephonics: Revenue declined 3% to $441.5 million, partly reflecting lower CREW 3.1 program revenue. Excluding that program, revenue increased 2%. Segment operating profit increased 21% to $49.2 million, reflecting program mix, manufacturing efficiencies and restructuring benefits. Funded backlog increased to approximately $451 million from $417 million; about 70% was expected to be delivered in FY2013.
- Plastics: Revenue increased 5% to $563.1 million, driven by 10% volume growth, partly offset by foreign-exchange effects. Segment operating profit was $13.7 million versus $13.3 million; higher volume, resin benefits and efficiencies were offset by product mix and currency effects.
Outlook, risks and unusual items
- No specific consolidated FY2013 revenue or earnings guidance is provided. Management described liquidity as sufficient for reinvestment and strategic acquisitions, while warning that housing-market weakness could continue to affect HBP, particularly garage doors.
- Management expected the scheduled U.S. defense sequestration to reduce Telephonics revenue, profit and cash flow if implemented; the outcome and program-level effects were uncertain. Telephonics is also exposed to government funding, contract audits and performance requirements.
- Customer concentration is significant: the U.S. Government and agencies represented 19% of consolidated revenue; Procter & Gamble 13%; and Home Depot 12%. Loss or reduced purchases from major customers could materially affect results and liquidity. Weather, housing activity, raw-material prices, sourcing dependence, foreign exchange and competition are additional risks.
- FY2012 included $4.7 million of restructuring charges, $0.5 million of acquisition and integration costs, and $5.1 million of net discrete tax benefits. The 2012 effective tax rate was 22.5%; excluding discrete tax items, management cited 45.8%.
- Griffon announced after year-end that Clopay Building Products would close its Auburn, Washington facility and consolidate operations in Ohio, with completion expected in the second quarter of FY2013.
- Legal and environmental matters include a New York site remedy estimated by the state at approximately $10 million; Griffon does not acknowledge responsibility. A Frankfort, New York cleanup following a demolition-site fire was ongoing, with the contractor’s insurer committed to funding fire-related remediation. An Inspector General inquiry was disclosed, but no claim had been asserted and Griffon reported no known material financial exposure. Management did not expect known matters, individually or in aggregate, to materially affect consolidated results, financial position or cash flows.
- The company paid $0.08 per share in dividends during FY2012 and declared a subsequent $0.025-per-share dividend in November 2012. It repurchased approximately $10.4 million of shares in FY2012. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Reconcile GAAP earnings with management’s adjusted results, especially the impact of FY2012 tax benefits and restructuring charges.
- Assess whether HBP can recover from weather- and housing-related weakness, and whether the planned facility consolidation delivers expected savings.
- Track Telephonics backlog conversion, defense-budget/sequestration effects, contract execution and the status of government inquiries and audits.
- Evaluate Plastics’ customer concentration, product redesign trends and ability to pass through resin-cost changes.
- Review debt maturities, covenant headroom, cash accessibility and the continuing capacity to fund capital spending, dividends and buybacks.
- Monitor the New York and Frankfort environmental matters, the unresolved potential customer indemnity claim, and any change in estimated exposure.