Griffon Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2013; filed August 7, 2013. Dollar amounts below are in millions unless stated otherwise. Griffon operates Home & Building Products (HBP: Ames True Temper and Clopay Building Products), Telephonics, and specialty plastics.
Financial performance
| Metric | Three months ended June 30, 2013 | Prior-year quarter | Nine months ended June 30, 2013 | Prior-year period |
|---|---|---|---|---|
| Revenue | $509.8 | $480.2 | $1,422.3 | $1,413.7 |
| Gross profit / margin | $108.3 / 21.2% | $115.6 / 24.1% | $311.5 / 21.9% | $321.2 / 22.7% |
| Operating income / margin | $20.4 / 4.0% | $28.2 / 5.9% | $44.8 / 3.2% | $62.7 / 4.4% |
| Net income | $3.6 | $9.0 | $3.3 | $13.6 |
| Diluted EPS | $0.06 | $0.16 | $0.06 | $0.24 |
| Operating cash flow | Not presented for the quarter | $2.6 | $30.3 |
Quarterly revenue rose about 6%, but gross profit fell about 6% and operating income fell about 28%. For the nine-month period, revenue was nearly flat while operating income declined about 29%. Adjusted net income, a company-defined non-GAAP measure excluding specified items, was $3.1 million for the quarter versus $7.4 million, and $10.4 million for nine months versus $13.2 million.
Nine-month operating cash flow fell to $2.6 million, chiefly amid increased receivables and unbilled contract costs and lower accrued liabilities; inventory reductions partly offset these uses. Capital expenditures were $45.9 million versus $57.7 million. Cash and equivalents were $126.1 million at June 30, down from $209.7 million at September 30, 2012. Current assets were $793.7 million and current liabilities $253.7 million.
Total debt was $705.8 million, compared with $716.2 million at September 30, 2012; debt net of cash rose to $579.7 million from $506.6 million, reflecting the lower cash balance. The balance sheet reported $678.3 million of long-term debt, net of discount, and $13.4 million of current debt. A $225 million revolving facility had $199.1 million available, subject to covenants, after $25.9 million of letters of credit. Griffon reported compliance with debt covenants.
Segments and material changes
- HBP: Quarter revenue increased about 1% to $240.6 million, but segment operating profit declined to $11.5 million from $17.5 million. Nine-month revenue fell about 2% to $656.5 million and operating profit fell to $22.7 million from $35.4 million. Weak, weather-affected ATT demand and manufacturing inefficiencies weighed on results; CBP benefited from higher volume and favorable mix.
- Telephonics: Quarter revenue increased 29% to $130.0 million, including higher electronic-warfare contract-manufacturing revenue; excluding those programs, management reported 12% growth. Operating profit fell 25% to $10.6 million, mainly due to product mix and restructuring. Nine-month revenue rose 9%, while operating profit declined 3%. Backlog was $440 million at June 30, with 67% expected to be realized within 12 months.
- Plastics: Quarter revenue declined 2% to $139.2 million while operating profit increased to $5.4 million from $3.5 million, helped by mix and efficiency improvements. Nine-month revenue fell 1%, while operating profit increased to $9.0 million from $7.9 million. Results included the effects of exiting low-margin products and resin-cost timing.
Outlook, risks and unusual items
- No consolidated revenue or earnings guidance is provided. Griffon expected fiscal 2013 capital spending of $65–70 million.
- ATT’s facility consolidation, targeted for completion by the end of fiscal 2014, is expected to generate annual cash savings exceeding $10 million at current operating levels. Estimated restructuring and exit costs are about $8 million, and associated capital spending is expected to be $20 million. Management reported $5.4 million of restructuring costs and $8.4 million of related capital expenditures incurred to date. Manufacturing inefficiencies were expected to continue during the transition.
- Nine-month results included $12.0 million of restructuring charges and a $2.1 million non-cash pension settlement loss. Plastics recorded $4.8 million of charges for a European restructuring that included approximately 80 positions; Telephonics recorded $0.8 million for a lease termination. Effective tax rates were elevated: 54.0% for the quarter and 53.6% for nine months; excluding discrete tax benefits, rates were 73.1% and 79.4%, respectively.
- Key risks include customer concentration (U.S. Government agencies represented 19% of consolidated nine-month revenue; P&G 14%; Home Depot 12%), weather-sensitive HBP demand, raw-material costs, and reduced military spending or sequestration. Telephonics was responding to a Department of Defense Inspector General inquiry; no claim had been asserted and Griffon reported no known material exposure. Environmental matters include the Peekskill and Frankfort sites; the filing says management could not estimate some potential exposures or did not acknowledge responsibility for specified remediation. Management believed the identified matters would not materially adversely affect consolidated results, cash flows, or financial position.
- The company’s revolving credit facility was amended in March 2013: capacity increased from $200 million to $225 million and maturity extended to March 2018. The filing also notes the European term loan maturity in December 2013 and management’s stated intent and ability to refinance an ESOP loan balance due in December 2013.
Important facts for investors to verify
- Whether weak operating cash generation and rising net debt persist as working capital changes.
- Progress, remaining costs, capital needs, and realized savings from the ATT consolidation and other restructuring programs.
- Whether Telephonics backlog converts to revenue and profit, given contract mix, government spending, and audit risks.
- Exposure to major customers, resin and steel costs, weather, and currency movements.
- Debt maturities, revolver covenant headroom, and the sustainability of dividends and share repurchases; Griffon repurchased $25.7 million of shares and paid $4.4 million of dividends during the nine months.