Griffon Corporation — Q3 FY2023 Form 10-Q
Reporting period: Fiscal third quarter and nine months ended June 30, 2023. Amounts below are in USD millions unless stated otherwise. Griffon operates Home and Building Products (HBP) and Consumer and Professional Products (CPP); results reflect continuing operations. Telephonics was sold in June 2022 and is presented as discontinued operations.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $683.4 | $768.2 | $2,043.8 | $2,139.5 |
| Gross profit / margin | $274.6 / 40.2% | $260.6 / 33.9% | $702.9 / 34.4% | $687.1 / 32.1% |
| Income from operations | $102.2 | $103.2 | $117.5 | $244.5 |
| Continuing-operations income | $49.2 | $52.8 | $35.7 | $127.6 |
| Diluted EPS from continuing operations | $0.90 | $0.98 | $0.65 | $2.38 |
| Adjusted EBITDA | $138.6 | $134.8 | $384.0 | $333.3 |
| Operating cash flow, continuing operations | Not separately provided | Not separately provided | $309.0 | ($65.0) |
Q3 revenue declined 11% year over year, while gross margin improved to 40.2%. Q3 continuing-operations income fell 7%; adjusted income from continuing operations rose to $70.3 million, or $1.29 per diluted share, from $66.5 million, or $1.23. Nine-month adjusted income was $184.7 million, or $3.35 per diluted share, versus $160.1 million, or $2.98.
Segments
- HBP: Q3 revenue was $401.1 million, down 1%; adjusted EBITDA was $134.3 million, up 12%, with margin of 33.5% versus 29.6%. For nine months, revenue increased 10% to $1,194.4 million and adjusted EBITDA increased 39% to $390.3 million. Management cited favorable pricing/mix and lower material costs, partly offset by lower residential volume and higher costs.
- CPP: Q3 revenue decreased 22% to $282.3 million and adjusted EBITDA fell to $18.3 million from $28.4 million. Nine-month revenue declined 20% to $849.4 million and adjusted EBITDA declined 61% to $36.1 million. Management attributed weakness mainly to reduced consumer demand, elevated customer inventories, lower volumes and U.S. supplier diversification; reduced discretionary spending partly offset the pressure.
Cash, debt and liquidity
- Cash and equivalents were $151.8 million at June 30, 2023, compared with $120.2 million at September 30, 2022. Current assets were $1,131.2 million and current liabilities $382.3 million.
- Operating cash flow from continuing operations was $309.0 million for the nine months, versus cash used of $65.0 million a year earlier. Management cited stronger HBP cash generation and lower working capital, particularly inventory and receivables.
- Investing activities used $10.9 million, including $20.2 million of capital expenditures, partly offset by $11.8 million of building-sale proceeds. Financing activities used $262.6 million, including $127.4 million of dividends and $98.4 million of share purchases.
- Total debt was $1,565.3 million; debt net of cash was $1,413.5 million. The company reported 2.6x gross debt to EBITDA under its credit-agreement definition and compliance with debt covenants at June 30. Interest expense for the nine months was $75.2 million, up from $61.1 million.
- At June 30, $300.5 million was available under the $400 million revolver, subject to covenants. On August 1, 2023, after quarter-end, Griffon increased the facility to $500 million and extended maturity to August 1, 2028, subject to an earlier December 1, 2027 maturity if the 2028 Senior Notes are not repaid, refinanced or replaced by then.
Material changes, outlook and risks
- Nine-month GAAP results included a $100 million non-cash impairment of CPP trademarks and $82.2 million of restructuring charges. The impairment followed weaker CPP sales and forecasts; management reported no additional impairment indicators in Q3.
- CPP’s expanded global-sourcing and asset-light restructuring is expected to finish by the end of calendar 2024. Management estimates total charges of $120–$130 million, including $50–$55 million cash and $70–$75 million non-cash charges, plus $3–$5 million of capital investment. Cash proceeds from asset sales are expected to largely offset cash charges, but transition inefficiencies are excluded from these estimates.
- Management says the CPP strategy is intended to support a 15% EBITDA margin, improve working capital and reduce capital expenditures; this is a strategic target, not formal company-wide earnings guidance. The filing gives no consolidated revenue or EPS forecast.
- The filing describes the restructuring footprint reduction as approximately 15% in one section and 30% in another, both referring to CPP’s U.S. footprint. This inconsistency warrants clarification.
- Griffon paid a $2.00-per-share special dividend in May and repurchased 2.54 million shares for $85.4 million during the nine months. The board declared a further $0.125 quarterly dividend for September, while noting future dividends remain at the board’s discretion.
- Key risks include restructuring execution and supplier disruption, consumer demand and customer inventory levels, reliance on major customers (Home Depot represented 12% of nine-month consolidated revenue), interest rates, foreign exchange, supply availability, and environmental matters. Management says known legal and environmental matters are not expected to materially adversely affect consolidated results or cash flows; it identifies potential liability relating to the former Hunter Memphis site, with the extent of any remediation uncertain.
Important facts for investors to verify
- Clarify the conflicting 15% versus 30% CPP U.S. facility-footprint reduction disclosure and track restructuring costs, savings, asset-sale proceeds and transition effects against estimates.
- Assess whether CPP demand and volume stabilize and whether the 15% CPP EBITDA-margin target is achievable; compare segment performance excluding restructuring and impairment effects.
- Review debt-service capacity, variable-rate exposure, revolver covenant headroom and the conditions tied to the amended facility’s maturity.
- Distinguish reported earnings from adjusted measures and account for the $100 million impairment, restructuring costs, unusual tax items, special dividend and share repurchases.
- Monitor potential environmental exposure at the Memphis site and the timing and outcome of the Peekskill site investigation.