Business Context and Reporting Period
Company: Griffon Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended June 30, 2002
Business Overview: Griffon operates four reportable segments: Garage Doors, Installation Services, Electronic Information and Communication Systems, and Specialty Plastic Films.
Key Financial Metrics
Three Months Ended June 30, 2002
- Net Sales: $297.3 million (vs. $289.4 million in 2001)
- Gross Profit: $85.1 million (28.6% margin)
- Income from Operations: $16.9 million
- Net Income: $11.4 million ($0.34 basic EPS)
- Cash and Equivalents: $41.8 million
- Long-Term Debt: $82.2 million
Nine Months Ended June 30, 2002
- Net Sales: $866.5 million (vs. $841.8 million in 2001)
- Gross Profit: $243.7 million (28.1% margin)
- Income from Operations: $49.9 million
- Net Income: $2.7 million ($0.08 basic EPS)
- Operating Cash Flow: $59.3 million
- Working Capital: $186.3 million
Material Changes vs. Prior Period
- Accounting Change Impact: The adoption of SFAS 142 (Goodwill) resulted in a non-cash impairment charge of $24.1 million (net of tax) in the nine-month period, significantly reducing reported net income compared to the prior year. Excluding this charge, net income for the nine months would have been $26.8 million.
- Debt Reduction: Long-term debt decreased by approximately $26.4 million compared to the prior fiscal year-end, and total outstanding borrowings declined by approximately $48 million year-over-year.
- Segment Performance:
- Garage Doors: Sales increased due to favorable product mix and service levels; operating profit rose $0.7 million (quarter) and $6.7 million (nine months) excluding prior year pension gains.
- Installation Services: Sales increased due to expanded offerings and stronger new construction markets.
- Specialty Plastic Films: Sales decreased due to lower selling prices passed through to customers, though gross margins improved.
- Electronic Systems: Sales increased driven by defense communications programs.
- Interest Expense: Net interest expense decreased significantly ($1.2 million for the quarter; $4.8 million for nine months) due to debt repayments and lower rates.
Guidance, Outlook, and Risks
- Divestiture Plan: In August 2002, management adopted a plan to divest a peripheral operation selling slatted steel coiling doors. An estimated after-tax loss of $6–$7 million is expected in the fourth quarter.
- Capital Expenditures: Fiscal 2002 capital expenditures are expected to aggregate $25 million. Fiscal 2003 expenditures are anticipated to exceed $40 million, primarily for the Specialty Plastic Films segment.
- Acquisition: The company acquired a 60% interest in a Brazilian plastic film manufacturer in June 2002. Approximately $13 million of the purchase price remains unpaid and is due in fiscal 2003.
- Raw Material Costs: The Garage Doors segment faces rising steel prices, while the Specialty Plastic Films segment faces upward pressure on resin costs. Management expects to pass some costs to customers but notes uncertainty regarding future impacts.
- Liquidity: Management anticipates that cash flows from operations, existing cash, and credit lines will be adequate to finance working capital, capital expenditures, and debt maturities.
Investor Verification Checklist
- Goodwill Impairment: Verify the $24.1 million non-cash charge related to SFAS 142 adoption and its impact on the nine-month net income.
- Discontinued Operations: Monitor the fourth-quarter financials for the estimated $6–$7 million loss on the divestiture of the slatted steel coiling door operation.
- Debt Maturities: Review the schedule of debt repayments, noting $6.2 million due in 2003 and $5.8 million in 2004.
- Raw Material Sensitivity: Assess the impact of rising steel and resin costs on future gross margins, particularly in the Garage Doors and Specialty Plastic Films segments.
- Acquisition Settlement: Track the settlement of the $13 million unpaid balance for the Brazilian acquisition in fiscal 2003.