Griffon Corporation - Building Garage Doors

- 05.04

Griffon Corporation is a multinational conglomerate holding company headquartered in New York, NY. The company's four subsidiaries are: The AMES Companies, Clopay Building Products, Clopay Plastic Products, and Telephonics Corporation. In 2015, Griffon generated over $2 billion in sales with approximately 6,000 employees worldwide. Griffon has been publicly traded since 1961 and is listed on the New York Stock Exchange as a component stock of the S&P SmallCap 600, S&P Composite 1500, and Russell 2000 indices.

Griffon operates as a diversified management and holding company conducting business through wholly-owned subsidiaries. Griffon oversees the operations of its subsidiaries, allocates resources among them, and manages their capital structures. Griffon provides direction and assistance to its subsidiaries in connection with acquisition and growth opportunities as well as in connection with divestitures. In order to further diversify, Griffon also seeks out, evaluates and, when appropriate, will acquire additional businesses that offer potentially attractive returns on capital.

Griffon's subsidiaries are industry leaders in their respective fields. Clopay Building Products is the largest manufacturer of residential garage doors in North America. The AMES Companies is a leading global manufacturer of non-powered lawn and garden tools and accessories. Clopay Plastic Products produces and develops highly engineered plastic films and laminates for a variety of hygienic, personal health care, and industrial uses in the United States, Western Europe, and Latin America. Telephonics specializes in advanced electronic information and communications systems for defense, aerospace and civil applications.

Griffon follows its heritage as a diversified conglomerate, expecting to outperform the market by efficiently allocating resources, devising and overseeing the implementation of its corporate strategy, and providing operational oversight to its subsidiaries. Griffon is focused on acquiring, owning, and operating businesses in a variety of industries, and intends to continue the growth of its existing segments and diversify further through investments and acquisitions.

The company's name was inspired by the mythical beast that was half-lion, half-eagle, and entrusted with the duty of guarding valuable treasure. Like its namesake, Griffon aims to achieve "strength through diversity" (corporate motto) and achieve shareholder value through providing world-class products to a global customer base.

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Founding and Early Years (1959-1964)

In 1959, Long Island businessman Helmuth W. Waldorf - a tool and die maker's apprentice who had immigrated to the United States from Germany to study at Columbia University - founded a small defense electronics company in College Point, Queens that was initially named Waldorf Controls Corporation but changed its name later that year to Instrument Systems Corporation (ISC). In 1961, ISC issued shares to the public and bolstered its fledgling avionics business by acquiring Telephonics Corporation. Established in December 1933, Telephonics was among a handful of aviation electronics pioneers that formed the nucleus of the aviation and defense industry on Long Island during the mid-20th century. Although highly regarded for its products, ISC struggled financially in its early years. To reposition the company for future growth, ISC's major stakeholders, including Waldorf and director Lester Avnet, the president of Avnet Electronics Corporation, turned to a highly regarded former executive at Loral Corporation, Edward Garrett.

Edward J. Garrett Era (1964-1982)

Edward Garrett was named chairman and president of ISC in 1964. Following a strategy that had proved successful at Loral, Garrett transformed ISC by closing deficit-ridden plants, seeking civilian markets as well as government research-and-development contracts, and acquiring a wide array of young growth-oriented companies, mainly in defense and commercial electronics and manufacturing. In 1966, Garrett brought in his son-in-law, Harvey Blau, a former Assistant U.S. Attorney for the Southern District of New York, as General Counsel to help navigate legal issues and close transactions. ISC purchased 20 companies in 1968 alone, ranking second in acquisitions nationwide that year, as investor appetite for corporate conglomerates reached its peak. That year ISC listed its stock on the American Stock Exchange, which was then home to many fast-growing companies. ISC's subsidiaries operated plants throughout the United States and Canada producing electronic devices, special purpose trucks, hardware tools, batteries, furniture, decorative glassware, plastic packaging, calculators and data processors, and sheet-metal building products, among others. ISC's biggest contracts of the Garrett era exemplified the company's continued ability to leverage innovative technologies it had developed for military or government purposes and apply them to civilian use. For example, after successfully producing communications systems for the U.S. military, Telephonics won multi-year contracts to produce multiplex passenger entertainment systems for the new Boeing 747 and Lockheed L-1011 wide-body airplanes.

Garrett's aggressive strategy grew ISC at an astonishing rate, transforming it from a struggling small electronics company to a nationally recognized industrial conglomerate in less than a decade. Net sales increased from $5.7 million in 1964 to $165.2 million in 1970 and total assets from $4.1 million to $120.4 million in the same period. In 1970, ISC was listed for the first time on the prestigious Fortune 500 list of America's largest companies. As the 1970s progressed, however, Garrett's strategy faced stiff headwinds. Conglomerates had fallen out of favor with investors, who preferred companies to focus on a single industry, and with the Nixon Administration, which was concerned about mass layoffs after acquisitions. As the Vietnam War winded down, U.S. defense spending also started to decrease. The first and second oil crises as well as the recessions of 1973-1975 and the early 1980s further diminished ISC's prospects. As a result of these macroeconomic developments and the divestiture of underperforming divisions, ISC's revenues fell from $233.25 million in 1974 to $104.3 million in 1982 - the year Garrett passed away at age 64.

Harvey R. Blau Era (1982-2008)

Following Edward Garrett's death in 1982, Harvey Blau was named Chairman of the Board and CEO. Blau moved ISC from "the brink of not surviving" back on a profitable footing by accelerating Garrett's divestiture and cost-cutting plan and selling ISC's window, lighting and metal casting operations. The new leadership also improved the company's finances by raising capital via a rights offering to existing shareholders, boosting shareholder equity from $4.6 million to $33.7 million and reducing long-term debt. "What we have left is what we want and it's profitable," Blau told shareholders in 1983. ISC's subsidiaries also successfully secured new business. Telephonics received orders to develop components for the central integrated test system of Rockwell International's B-1B bomber, communications and radio control systems for Lockheed S-3A aircraft and Sikorsky SH-60 Seahawk LAMPS MK III helicopters, and a new advanced audio communications system for NASA's Space Shuttle orbiter spaceplane.

In addition to strengthening ISC's existing lines of business, Blau pursued a price-conscious acquisition strategy and reestablished a conglomerate structure by purchasing undervalued growth-oriented companies in unrelated industry sectors in order to diversify ISC's source of revenue and earnings. In 1984, ISC acquired troubled clothing manufacturer Oneita Knitting Mills, Inc., for $14 million. Blau and his team renamed the company Oneita Industries, restructured its finances, and grew it to the country's third-largest maker of specialty T-shirts, tripling sales to $300 million within a few years. ISC took Oneita public in 1988, selling 34 percent of shares for about $9 million, and had divested the remainder of the company by 1993.

The purchase of Clopay Corporation in 1986 for $37 million represented ISC's most successful diversification effort under Blau. Founded as a paper wholesaler in 1859, this Cincinnati-based company started to produce window coverings during World War II and subsequently changed its name to Clopay, a portmanteau of "cloth and paper." Clopay entered the plastic film and garage door business in 1952 and 1966, respectively. It was these two divisions that would become key elements of ISC's growth in the 1990s and 2000s. By building long-term relationships with key strategic business partners, ISC built Clopay into the leading manufacturer of residential garage doors in the United States and one of the leading suppliers of plastic films for diapers, surgical gowns, and drapes. In 1991, Clopay accounted for 70 percent of ISC's $50 million operating income.

Although Blau had transformed ISC into a streamlined holding company with three thriving core businesses - plastics, garage doors, and electronics - within a decade, Wall Street hadn't noticed. "We're very frustrated that we haven't gotten our story across," Blau stated at the time. To raise ISC's profile, Blau moved the company's stock from the American Stock Exchange to the more prestigious New York Stock Exchange in 1994 and changed its name to Griffon Corporation after the mythical half-lion, half-eagle that represented strength through diversity and was known for guarding valuable treasure.

Griffon continued its strong growth from the mid-1990s through the mid-2000s. Sales surpassed the $1 billion mark in 1999 and $1.5 billion mark in 2006. Clopay Plastics formed a joint venture named Finotech with German-based Corovin GmbH to manufacture specialty plastic films and laminates in Europe in 1996, taking a 60 percent stake in the new company. Finotech provided Clopay Plastics with a platform for further international expansion. Clopay purchased Bohme Verpackungsfolien GmbH & Co., a German manufacturer of plastic packaging and specialty films in 1998 and a 60 percent stake in Isofilme Ltda, a Brazilian manufacturer of plastic hygienic and specialty films, in 2002. Three years later, Clopay acquired full ownership in Finotech and Isofilme. Telephonics won its first contract for more than $100 million in 1997. It received $114 million from the British Royal Air Force to supply communications equipment to upgrade Nimrod anti-submarine airplanes. However, Telephonics reduced its overall dependence on military contracts and expanded its commercial and nondefense government business. Among others, it won a $26 million contract to supply wireless communications equipment for 1,080 New York City subway cars in 1997. Griffon's garage door subsidiary expanded in step with the residential housing boom in the United States. It added a home installation service for residential building products such as garage doors, manufactured fireplaces, floor coverings, and cabinetry. In 1997, Griffon purchased Holmes-Hally Industries for about $35 million. Holmes-Hally was a West Coast manufacturer and installer of residential garage doors and related hardware with $80 million in annual sales. By 2006, the installation services subsidiary served 17 percent of all new residential housing in the United States.

The bursting of the U.S. housing bubble in 2007 and subsequent collapse of the subprime mortgage industry and global financial crisis affected the garage door and installation services subsidiaries severely and depressed Griffon's overall financial results. Net sales of the garage doors subsidiary declined by 13 percent in 2007 and 10.5 percent in 2008 with operating profits decreasing from $41 million in 2006 to $7 million in 2007 to -$17 million in 2008. Net sales of the installation services subsidiary shrunk from $309 million in 2006 to $251 million in 2007 to $109 million in 2008, forcing Griffon to discontinue the installation services business in 2008. Griffon's overall net income shrunk from $52 million to $22 million to -$41 million in the same time period. Griffon also came under pressure from shareholders during this crisis. In 2007, the hedge fund Clinton Group, which was Griffon's second-largest shareholder at 8.5 percent, urged the company to boost its share price by purchasing 50 percent of the shares outstanding and also demanded the right to appoint the majority of Griffon directors. In response, Blau hired Goldman Sachs to evaluate strategic alternatives for the company.

Ronald J. Kramer Era (2008-Present)

As Harvey Blau approached his 25th anniversary as Griffon CEO, he concluded that it was time for new leadership to lead the company through the Great Recession and return it to a growth trajectory. Just as Blau had succeeded his father-in-law Edward Garrett in 1982, he was succeeded by his son-in-law Ron Kramer on April 1, 2008. Blau continued as non-executive Chairman of the Board. An investment banker who had married Blau's daughter Stephanie in 1992, Kramer had served on the company's board of directors since 1993 and was elected Vice Chairman in 2003.

To improve Griffon's balance sheet, Kramer secured a new $100 million revolving line of credit from JPMorgan Chase, exited the residential installation services business, which had experienced a 65-percent decline in net sales over 3 years (see above), refinanced Griffon's senior debt, and raised about $250 million from a stock offering and investments by Goldman Sachs, Kramer, and existing Griffon shareholders. Griffon's recapitalization eliminated the need to meet near-term debt obligations and built a cash cushion for future acquisitions. Having rebuilt Griffon's equity base, Kramer began to reconfigure the company for future growth.

Concerned about reductions in U.S. defense spending with the wars in Iraq and Afghanistan winding down, Griffon reduced Telephonics' staff from 1,400 in 2010 to 1,100 in 2012, restructured its facilities and organizational structure, and focused on expanding its presence in the growing homeland security, air traffic management, and unmanned aerial vehicle ("drone") markets, both domestically and internationally. In 2012, Telephonics formed a joint venture with Mahindra & Mahindra to produce radar and surveillance systems for the Indian Ministry of Defense and the civilian sector near Delhi, India. This joint venture together with civilian contracts, such as a $23 million award from the Federal Aviation Administration in 2014 to upgrade airport surveillance radar, positioned Telephonics for further growth. To diversify revenue stream in the home and building products division, Griffon purchased Ames True Temper for $542 million in 2010. Founded in 1774, Ames was a leading global manufacturer of non-powered landscaping tools. Kramer strengthened the new subsidiary through further acquisitions, which were integrated into Ames (renamed The AMES Companies). In 2011, Griffon acquired the Southern Patio pots and planters business from Southern Sales & Marketing Group for $23 million. To complement the Southern Patio brand, Griffon purchased Northcote Pottery, an Australian maker of garden decor products founded in 1897, for $22 million in late 2013. A few months later, Griffon acquired Cyclone, the Australian garden and tools division of Illinois Tool Works, for $40 million.

While pursuing its long-term strategy of "strength through diversity," Griffon also sought to enhance leadership support to its subsidiaries. Griffon added further depth to senior management to better guide strategic decision-making, assist with acquisition and growth opportunities, and allocate resources more effectively. In 2009, Griffon hired Brian Harris from Dover Corporation as chief accounting officer, promoting him to vice president and controller in 2012 and senior vice president and CFO in 2015. In 2012, the company named Robert Mehmel President and COO. Mehmel joined Griffon from DRS Technologies, a manufacturer of defense electronic products, systems, and military support services, which grew from $400 million to over $4 billion in sales during his tenure. In 2008, DRS was acquired by Italian conglomerate Finmeccanica for $5.2 billion which, at that time, was the largest single acquisition of a U.S. defense company by a foreign firm.

Confident in the long-term prospects of its subsidiaries and believing that company stock had been undervalued, Griffon's management has used the company's cash to gradually repurchase Griffon shares. Between August 2011 and September 2015, Griffon repurchased 16.8 million shares of common stock for a total of $203 million. In July 2015, the board of directors authorized the purchase of an additional $50 million of company stock.

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Griffon today conducts its operations through four wholly owned subsidiaries in three reportable segments.

Clopay Building Products

Clopay Building Products (CBP) is the largest manufacturer and marketer of residential garage doors in North America and one of the largest manufacturers of industrial and commercial doors for the new construction, and repair, and remodel markets. CBP operates through a national network of over 50 distribution centers, and sells to approximately 2,000 independent professional installing dealers as well as to major home center retail chains.

CBP's largest customers are Home Depot and Menards. CBP's family of brands includes Clopay, America's Favorite Garage Doors, Holmes Garage Door Company, and IDEAL Door.

The AMES Companies

Acquired by Griffon for $542 million in 2010, the AMES Companies ("Ames") are a leading global provider of non-powered lawn and garden tools and accessories, including include long handle tools, wheelbarrows, planters, snow tools, striking tools, pruning tools, and garden hoses.

The largest customers of AMES are Home Depot, Lowe's, Walmart, Costco, and Bunnings Warehouse. AMES tool brands include AMES, True Temper, Union Tools, Garant, Cyclone, Kelso, Razor-Back, Jackson, Trojan, Trojan Cyclone, Supercraft, and Westmix. Garden hose and storage products are sold primarily under the AMES, NeverLeak, Nylex, and Jackson brands. Planters and lawn accessories brands include Southern Patio, Northcote Pottery, and Dynamic Design.

Clopay Plastic Products

Clopay Plastics produces and develops highly engineered plastic films and laminates for a variety of hygienic, personal health care, and industrial uses in the United States, Western Europe, and Latin America. Its largest customer is Procter & Gamble, which accounts for almost half of Clopay Plastics' revenue.

Telephonics Corporation

Telephonics specializes in advanced electronic information and communications systems for defense, aerospace and civil applications. Its customers include the U.S. Government, Lockheed Martin, Northrop Grumman, Boeing, and Sikorsky Aircraft.

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