Business Context and Reporting Period
Company: Griffon Corporation (Delaware)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended March 31, 2010
Business Overview: Griffon is a diversified holding company operating through three primary segments: Telephonics (military/commercial communications and sensors), Building Products (garage doors), and Plastics (specialty plastic films). The company also reports discontinued operations related to its former Installation Services segment.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Mar 31, 2010 | Six Months Ended Mar 31, 2010 |
|---|---|---|
| Revenue | $313,977 | $619,134 |
| Gross Profit | $69,070 | $139,351 |
| Operating Income | $3,795 | $11,104 |
| Net Income (Continuing Ops) | $2,034 | $6,214 |
| Net Income (Total) | $2,033 | $6,324 |
| Diluted EPS (Total) | $0.03 | $0.11 |
| Cash and Equivalents | $348,442 | $348,442 |
| Total Debt (Excl. Discount) | $226,201 | $226,201 |
| Working Capital | $545,767 | $545,767 |
Note: Working Capital calculated as Total Current Assets ($783,275) minus Total Current Liabilities ($237,508).
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 13.7% year-over-year for the quarter ($314.0M vs. $276.1M) and 7.0% for the six-month period ($619.1M vs. $578.4M). All three segments reported revenue increases for the quarter.
- Profitability Turnaround: The company returned to profitability from continuing operations, reporting $2.0M net income for the quarter compared to a $2.1M loss in the prior year quarter. This was driven by revenue growth and cost controls, partially offset by restructuring charges.
- Restructuring Charges: The company incurred $1.2M in restructuring charges for the quarter and $2.2M for the six months, primarily related to facility consolidation in the Building Products segment. No comparable charges were recorded in the prior year periods.
- Tax Benefit: The effective tax rate for the quarter was a benefit of 137% due to the resolution of non-domestic tax audits releasing $1.5M in reserves. Excluding this discrete item, the effective rate would have been an expense of 26.6%.
- Debt Structure: Total debt increased significantly due to the issuance of $100M in 4% convertible subordinated notes in December 2009. The company also repurchased portions of its 2023 Notes, resulting in minor gains/losses on extinguishment.
Guidance, Outlook, and Risks
- Segment Outlook:
- Telephonics: Backlog stands at $433M, with 71% expected to be realized in the next 12 months. Recently awarded a significant long-term program for the U.S. Navy's Fire Scout UAV.
- Building Products: Revenue stabilized due to housing market recovery, though commercial construction remains weak. Facility consolidation is on schedule for early 2011 completion, with expected annual savings of $10M.
- Plastics: Operating profit margins are under pressure due to rising resin costs that have not yet been fully passed to customers. Management expects a slow rebound in the third fiscal quarter.
- Capital Expenditures: Expected to range between $40M and $45M for fiscal year 2010.
- Liquidity: The company maintains strong liquidity with $348.4M in cash and equivalents and approximately $105.6M in available borrowing capacity under revolving credit facilities. Management expects cash flows to be adequate to meet obligations.
- Risks and Contingencies:
- Customer Concentration: Procter & Gamble accounts for approximately 18% of total consolidated sales and 50% of Plastics sales. Loss of this customer would materially impact operations.
- Convertible Debt: The 2023 Notes ($50M outstanding) are classified as current liabilities because the stock price is below the conversion price, and holders may require repurchase in July 2010.
- Legal/Environmental: Ongoing remediation at the Peekskill Site (Lightron subsidiary) with estimated capital costs of approximately $5M. No material exposure is currently anticipated.
Investor Verification Checklist
- Debt Repurchase Obligation: Verify the company's ability to fund the potential repurchase of $50M in 2023 Notes due in July 2010 if the stock price remains below the conversion price.
- Resin Cost Pass-Through: Monitor the Plastics segment's ability to pass increased resin costs to customers to restore operating margins in the coming quarters.
- Restructuring Progress: Track the completion of the Building Products facility consolidation and the realization of the projected $10M annual cost savings.
- Customer Concentration: Assess the stability of the relationship with Procter & Gamble, which represents a significant portion of revenue.
- Tax Rate Normalization: Note that the reported tax benefit is non-recurring; future effective tax rates are expected to normalize to approximately 25-27%.