Business Context and Reporting Period
Company: Griffon Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: Griffon is a diversified holding company operating through three primary segments: Telephonics (military/commercial sensor systems), Building Products (garage doors), and Plastics (specialty plastic films). The Company exited its Installation Services segment in 2008, reporting those results as discontinued operations.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2010 |
Nine Months Ended June 30, 2010 |
Nine Months Ended June 30, 2009 |
|---|---|---|---|
| Revenue | $327,026 | $946,160 | $865,806 |
| Gross Profit | $74,355 | $213,706 | $179,218 |
| Income from Operations | $11,216 | $22,320 | $8,731 |
| Net Income | $4,968 | $11,292 | $6,780 |
| Diluted EPS (Net Income) | $0.08 | $0.19 | $0.12 |
| Cash and Equivalents | $351,633 | $351,633 | $320,833 (Sep 30, 2009) |
| Operating Cash Flow | N/A | $48,194 | $41,940 |
| Total Debt (excl. discount) | $199,046 | $199,046 | $179,804 (Sep 30, 2009) |
Liquidity: Working capital increased to $520.1 million at June 30, 2010, from $471.3 million at September 30, 2009. The Company maintains two revolving credit facilities (CCA and TCA) with approximately $141.4 million available for borrowing.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 13.8% year-over-year for the quarter ($327.0M vs. $287.4M) and 9.3% for the nine-month period ($946.2M vs. $865.8M). All three segments reported revenue increases in the quarter.
- Profitability: Net income for the quarter decreased 19% ($4.97M vs. $6.14M) primarily due to restructuring charges of $1.5M in the Building Products segment. However, for the nine-month period, Net Income increased 67% ($11.3M vs. $6.8M) driven by significant operating improvements in Building Products and Plastics.
- Segment Performance:
- Telephonics: Revenue up 7% (quarter) and 18% (nine months) due to the CREW 3.1 contract and weather radar applications.
- Building Products: Revenue up 6% (quarter) but flat for the nine months. Operating income improved significantly due to facility consolidation and lower product costs.
- Plastics: Revenue up 29% (quarter) and 10% (nine months). Operating profit declined for the nine months due to rising resin costs not yet fully passed through to customers.
- Debt Structure: The Company issued $100M in 2017 Convertible Notes in December 2009. In July 2010 (subsequent to period end), substantially all of the $50M 2023 Convertible Notes were put to the Company and settled.
Outlook, Risks, and Unusual Items
- Acquisition: In July 2010, the Company entered a definitive agreement to acquire Ames True Temper, Inc. (ATT) for $542 million. Financing includes a new $500M term loan and $150M asset-backed revolving facility. The transaction is expected to close before September 30, 2010.
- Restructuring: The Building Products segment is undergoing facility consolidation expected to complete in early 2011. Total estimated pre-tax costs are $11M; approximately $5M has been incurred to date. Expected annual cost savings are $10M.
- Tax Rate Volatility: The effective tax rate for the nine months ended June 30, 2010 was 12.6%, compared to a 41% benefit in the prior year. The prior year benefit included the reversal of $1.4M in tax reserves. Excluding discrete items, the 2010 rate would have been 27.3%.
- Risks: Key risks include the successful integration of the ATT acquisition, reliance on major customers (e.g., Procter & Gamble accounts for ~18% of consolidated revenue), and exposure to raw material price fluctuations (resin and steel).
Investor Verification Checklist
- ATT Acquisition Closing: Verify the closing date and final consideration for the Ames True Temper acquisition, including any adjustments.
- Debt Settlement: Confirm the final settlement terms and cash impact of the July 2010 put option exercise on the 2023 Convertible Notes.
- Resin Cost Pass-Through: Monitor the Plastics segment's ability to pass increased resin costs to customers to stabilize margins.
- Restructuring Progress: Track the completion of the Building Products facility consolidation and the realization of projected $10M annual savings.
- Customer Concentration: Assess the stability of relationships with top customers, particularly Procter & Gamble (Plastics) and government contractors (Telephonics).