Business Context and Reporting Period
Company: Griffon Corporation (GFF)
Filing Type: Form 10-K (Annual Report)
Period Ended: September 30, 2009
Business Overview: Griffon is a diversified management and holding company operating through three primary segments: Telephonics Corporation (defense and commercial electronics), Clopay Building Products Company (garage doors), and Clopay Plastic Products Company (specialty plastic films). The Company exited its Installation Services segment in 2008, reporting those results as discontinued operations.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Revenue | $1,194.1 million | $1,269.3 million |
| Gross Profit | $257.1 million | $273.0 million |
| Gross Margin | 21.5% | 21.5% |
| Net Income (Loss) | $22.8 million | ($40.5 million) |
| Diluted EPS | $0.39 | ($1.24) |
| Operating Cash Flow | $84.1 million | $86.0 million |
| Total Debt | $179.8 million | $233.2 million |
| Cash and Equivalents | $320.8 million | $311.9 million |
| Cash Net of Debt | $141.0 million | $78.7 million |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated revenue decreased 6% to $1.19 billion, driven by lower volumes in Building Products (down 10%) and Plastics (down 12%), partially offset by a 6% increase in Telephonics revenue.
- Profitability Recovery: The Company returned to profitability with $22.8 million in net income, a significant improvement from the $40.5 million loss in 2008. The 2008 loss was heavily impacted by a $12.9 million non-deductible goodwill impairment charge in the Building Products segment.
- Debt Reduction: Total debt decreased by approximately $53.4 million. This was primarily due to the repurchase of $50.6 million face value of convertible notes at a discount, resulting in a $7.4 million pre-tax gain on debt extinguishment.
- Segment Performance:
- Telephonics: Revenue increased to $387.9 million with operating profit of $34.9 million (9.0% margin), driven by the MH-60R radar program.
- Building Products: Revenue fell to $393.4 million with an operating loss of $11.3 million, though the loss narrowed significantly compared to 2008 due to cost-cutting measures.
- Plastics: Revenue declined to $412.8 million, but operating profit increased 17% to $24.1 million (5.8% margin) due to cost savings and favorable product mix.
Guidance, Outlook, Risks, and Unusual Items
- Restructuring: In June 2009, the Company announced a plan to consolidate Building Products facilities, expected to save $10 million annually. Estimated pre-tax exit costs are $12 million, with most charges expected in 2010 and 2011.
- Convertible Notes: $79.4 million of 4% convertible notes are outstanding. If the stock price remains below the conversion price ($22.41) in July 2010, the Company anticipates a mandatory repurchase. Management believes current liquidity is sufficient to fund this.
- Key Risks:
- Housing Market: Building Products remains heavily dependent on the U.S. residential housing market, which continues to face downturns.
- Customer Concentration: Procter & Gamble accounts for ~54% of Plastics revenue; Home Depot and Menards are significant to Building Products; U.S. Government contracts account for ~71% of Telephonics sales.
- Raw Materials: Fluctuations in steel and resin prices impact margins, with limited ability to pass costs to customers immediately.
- Unusual Items: The 2009 results included a $7.4 million gain from debt extinguishment. The 2008 results included a $12.9 million goodwill impairment charge.
Investor Verification Checklist
- Convertible Note Repurchase: Verify the Company's ability to fund the potential $79.4 million repurchase of convertible notes in July 2010 if the stock price does not recover.
- Building Products Turnaround: Monitor the execution of the facility consolidation plan and the impact on the segment's operating loss, given the continued weakness in the housing market.
- Customer Concentration: Assess the stability of relationships with major customers (P&G, Home Depot, U.S. Government) and the risk of order reductions.
- Raw Material Costs: Track steel and resin price trends and the Company's ability to implement price increases to maintain margins.
- Telephonics Backlog: Confirm the conversion of the $393 million backlog into revenue, particularly the MH-60R program funding.