Griffon Corporation — Form 10-Q summary
Business context and period. This unaudited report covers the three and nine months ended June 30, 2012, Griffon’s fiscal third quarter and year-to-date period. Griffon operates Home & Building Products (HBP), Telephonics, and Plastics. Unless noted otherwise, financial amounts below are in millions; the filing reports statements in thousands.
Financial performance
| Metric | Three months ended June 30, 2012 | Prior-year quarter | Nine months ended June 30, 2012 | Prior-year period |
|---|---|---|---|---|
| Revenue | $480.2 | $455.3 | $1,413.7 | $1,345.8 |
| Gross profit; gross margin | $115.6; 24.1% | $99.2; 21.8% | $321.2; 22.7% | $288.2; 21.4% |
| Operating income; operating margin | $28.2; 5.9% | $15.0; 3.3% | $62.7; 4.4% | $36.6; 2.7% |
| Net income (loss) | $9.0 | $4.9 | $13.6 | $(10.8) |
| Diluted EPS | $0.16 | $0.08 | $0.24 | $(0.18) |
| Interest expense | $12.9 | $12.6 | $39.0 | $35.1 |
Adjusted net income, a company-defined non-GAAP measure, was $7.4 million ($0.13 per share) for the quarter versus $3.2 million ($0.05 per share). For nine months, adjusted net income was $13.2 million ($0.23 per share), compared with $14.4 million ($0.24 per share).
- Cash flow: Nine-month operating cash flow was $30.3 million, up from $13.1 million. Investing used $79.8 million, including $57.7 million of capital expenditures and $22.4 million for the Southern Patio acquisition. Financing used $20.3 million. Cash declined $71.1 million to $171.9 million.
- Liquidity and debt: Current assets were $820.4 million and current liabilities $260.9 million at June 30. Gross principal debt was $720.3 million, versus $733.1 million at September 30, 2011; cash-adjusted gross debt was $548.4 million. The balance-sheet debt carrying amount, after discount, was $702.9 million. The $200 million revolving facility had $178.5 million available after outstanding letters of credit. Griffon reported compliance with debt covenants.
- Capital returns: Griffon paid three quarterly dividends of $0.02 per share and declared a further $0.02 dividend for September 2012. It repurchased 417,667 shares during the quarter for $3.3 million; $43.0 million remained under its $50 million authorization at June 30.
Changes versus prior period and segment results
- Quarterly revenue grew 5%; nine-month revenue grew 5%. Quarterly operating income rose to $28.2 million from $15.0 million. Year-to-date net income turned positive, but adjusted net income declined from $14.4 million to $13.2 million.
- HBP: Quarter revenue was $237.2 million, up 11%, and segment operating profit was $17.5 million versus $13.5 million. Higher volume, favorable mix and efficiency gains helped; ATT’s results included Southern Patio, acquired in October 2011. Year-to-date HBP operating profit was $35.4 million versus $18.8 million, though the comparison is affected by $15.2 million of prior-year acquired-inventory fair-value charges.
- Telephonics: Quarter revenue declined 2% to $101.1 million, while operating profit increased to $14.1 million from $9.7 million. Year-to-date revenue was up 1% and operating profit up 27%. Backlog was $422 million; 69% was expected to be realized within 12 months. The quarter included $88.7 million of new awards and incremental funding.
- Plastics: Quarter revenue increased 3% to $141.9 million and operating profit improved to $3.5 million from a loss of $0.3 million. Year-to-date revenue rose 9%, but operating profit decreased 13% to $7.9 million, reflecting startup costs and scrap from capacity expansions, resin costs, foreign exchange and mix.
Outlook, commentary and risks
- Management expected fiscal 2012 capital spending of $65–70 million. Plastics operations were trending toward normal efficiency levels in the quarter, with a return to normal levels expected again in the fourth quarter. The filing provides no clear consolidated earnings or revenue guidance.
- HBP results are seasonal, and interim results may not indicate full-year performance. Management cited housing and economic conditions, weather, competition, steel and resin pricing, supply constraints, acquisition execution, and debt-covenant compliance as risks.
- Customer concentration is significant: for the nine-month period, the U.S. Government and agencies represented 18% of consolidated revenue and 80% of Telephonics revenue; Procter & Gamble represented 13% of consolidated revenue and 44% of Plastics revenue; Home Depot represented 12% of consolidated revenue and 25% of HBP revenue.
- Telephonics was providing information under a U.S. Department of Defense Inspector General subpoena; no claim had been asserted and Griffon reported no known material financial exposure. Environmental and other legal contingencies include New York sites and a possible indemnity claim involving ATT; management said outcomes were not expected to materially affect consolidated results, but some exposures were not estimable.
- Unusual comparability items include prior-year debt-extinguishment loss of $26.2 million, acquired-inventory fair-value expense of $15.2 million, and restructuring charges of $4.7 million. Current-year nine-month results included $1.8 million of restructuring charges, $0.2 million of acquisition costs and a $1.6 million discrete tax benefit. Current-quarter tax benefit from released uncertain-tax reserves also affected results.
Important facts for investors to verify
- Whether improved HBP and Telephonics profitability is sustainable, and whether Plastics’ expansion costs and operating inefficiencies continue to ease.
- Cash conversion, working-capital needs and planned capital spending, given the $71.1 million decline in cash and substantial investing outflows.
- Debt service, facility availability, covenant headroom and refinancing needs, particularly for near-term subsidiary borrowings and maturities.
- Exposure to major customers, including changes in government-contract funding, and the status and potential cost of environmental, legal and government inquiries.
- How much reported and adjusted earnings depend on tax items and other management-defined adjustments; review the reconciliation and underlying assumptions.