GRIFFON CORP annual report, FY2013

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Griffon Corporation — FY2013 Form 10-K

Business context and reporting period. This annual report covers the fiscal year ended September 30, 2013; it is not a stand-alone fourth-quarter filing. Griffon operates through Home & Building Products (HBP: Ames True Temper and Clopay Building Products), Telephonics, and Clopay Plastic Products (Plastics). Amounts below are U.S. dollars; financial-statement figures are generally in millions unless noted.

FY2013 fourth-quarter revenue was $449.0 million and net income was $0.4 million, compared with $447.4 million and $3.4 million, respectively, in the year-earlier quarter. Quarterly results reflect restructuring charges and seasonal business patterns.

Financial performance and position

  • Revenue: $1,871.3 million, up 0.5% from $1,861.1 million. Gross profit was $417.6 million, down from $418.8 million; gross margin declined to 22.3% from 22.5%.
  • Profit: Operating income was $63.9 million versus $72.4 million. Income from continuing operations was $6.8 million ($0.12 per diluted share), compared with $17.0 million ($0.30). Net income was $3.8 million ($0.07 per diluted share), versus $17.0 million. The FY2013 effective tax rate was 52.6%, compared with 22.5%.
  • Adjusted results: Excluding specified restructuring, pension-settlement, acquisition, and discrete tax items, management reported adjusted continuing-operations income of $16.1 million ($0.29 per share), versus $15.3 million ($0.27) in FY2012. This is a company-defined non-GAAP measure.
  • Segments: HBP revenue was $855.0 million and operating profit $26.1 million, compared with $856.5 million and $37.1 million. Telephonics revenue was $453.4 million and operating profit $55.1 million, versus $441.5 million and $49.2 million. Plastics revenue was $563.0 million and operating profit $16.6 million, versus $563.1 million and $13.7 million.
  • Cash flow and investment: Continuing-operations operating cash flow was $85.7 million, down from $90.1 million. Capital expenditures were $64.4 million, implying approximately $21.2 million of operating cash flow less capital expenditures. Investing activities used $62.9 million; financing activities used $52.2 million. Cash and equivalents ended the year at $178.1 million, compared with $209.7 million.
  • Debt and liquidity: Gross debt was $702.5 million, versus $716.2 million; debt net of cash was $524.4 million, versus $506.6 million. The amended $225 million revolving facility had $199.5 million available at year-end, subject to covenants. The company reported compliance with debt covenants. Current assets were $824.4 million and current liabilities $284.4 million.
  • Other: Total assets were $1,788.8 million and shareholders’ equity $650.5 million. FY2013 dividends totaled $0.10 per share, up from $0.08 in FY2012. Research and development expense was $22.4 million.

Material changes versus FY2012

  • Revenue rose modestly, primarily due to Telephonics; consolidated gross profit and gross margin edged lower.
  • Reported continuing-operations income fell, largely reflecting higher restructuring charges ($13.3 million versus $4.7 million), a $2.1 million non-cash pension-settlement loss, and fewer discrete tax benefits. The pension buyout reduced the net pension liability by $3.5 million.
  • HBP profit declined amid lower ATT sales, weather-related demand weakness, and manufacturing inefficiencies during plant consolidation. Telephonics profit improved with revenue growth and lower-than-anticipated R&D and proposal spending. Plastics’ reported operating profit improved, although higher resin costs had not yet been fully reflected in customer prices.
  • Cash flow from operations decreased by $4.4 million. Cash fell by $31.5 million, with share repurchases, debt repayments, and dividends among the financing uses. Inventory decreased to $230.1 million from $257.9 million, while accounts receivable and unbilled contract assets increased.

Outlook, risks, contingencies, and unusual items

  • Outlook: No consolidated numerical earnings or revenue guidance is provided. Management warns that economic uncertainty and housing-market conditions could affect HBP in FY2014, particularly Clopay Building Products. It expected sequestration-related defense reductions to pressure Telephonics revenue, profits, and cash flow. Telephonics funded backlog was $444 million at year-end, down from $451 million; approximately 72% was expected to be filled during FY2014.
  • Restructuring: ATT’s manufacturing consolidation was planned for completion by the end of calendar 2014, with approximately $8 million of expected pre-tax restructuring and exit costs and $20 million of expected capital expenditures. At the report date, $6.6 million of restructuring costs and $11.9 million of capital expenditures had been incurred. Plastics’ European exit from low-margin products and reduction of approximately 80 positions was substantially complete.
  • Customer and market concentration: The U.S. Government represented 19% of consolidated revenue and 77% of Telephonics revenue; P&G represented 14% of consolidated revenue and 47% of Plastics revenue; Home Depot represented 11% of consolidated revenue. Customer loss, order changes, housing-market weakness, weather, raw-material inflation, supplier dependence, and competition are material risks.
  • Contingencies: Griffon recorded a $4.7 million discontinued-operations charge for increased environmental and casualty-insurance reserves related to its former Installation Services business; estimated future net cash outflows for those liabilities were $8.0 million. Telephonics was responding to a Department of Defense Inspector General information request; the company said no claim had been asserted and it was unaware of material financial exposure. Environmental matters and other litigation remain subject to uncertainty; management did not expect currently known matters to materially affect consolidated results, financial position, or cash flows.
  • Subsequent events: In November 2013, Griffon announced a $50 million private repurchase of 4,444,444 shares from GS Direct at $11.25 per share, funded with cash on hand, in addition to its existing repurchase authorization. It also declared a $0.03-per-share dividend payable in December 2013.
  • Controls and audit: Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting; management reported effective disclosure controls and no material fourth-quarter control changes.

Important facts for investors to verify

  • Reconcile reported earnings with management’s non-GAAP adjusted earnings, including the specified adjustments and the unusually high effective tax rate.
  • Track progress, remaining costs, capital spending, and expected savings from ATT’s consolidation; assess whether FY2013 operational inefficiencies persist.
  • Monitor Telephonics backlog conversion, contract funding, government audits, sequestration, and the status and financial implications of the Inspector General inquiry.
  • Assess customer concentration and exposure to Home Depot, P&G, and government-related contracts, as well as the effects of housing, weather, and resin or steel prices.
  • Verify liquidity after the announced $50 million share repurchase, debt maturities and covenant headroom, and the sustainability of dividends and further buybacks.
  • Review the assumptions behind the $8.0 million discontinued-operations liability estimate and other environmental, product-liability, warranty, and tax contingencies.