Griffon Corporation — Form 10-Q Summary
Business context and period. Griffon is a diversified holding company operating through Consumer and Professional Products (CPP), Home and Building Products (HBP), and Defense Electronics (DE). This filing covers its first fiscal quarter, the three months ended December 31, 2019; comparisons are with the quarter ended December 31, 2018. Amounts below are in millions of dollars unless otherwise noted.
Financial results and liquidity
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Revenue | $548.4 | $510.5 |
| Gross profit / margin | $149.9 / 27.3% | $143.0 / 28.0% |
| Operating income / margin | $32.1 / 5.9% | $29.3 / 5.7% |
| Net income | $10.6 | $8.8 |
| Diluted EPS | $0.24 | $0.21 |
| Adjusted net income / diluted EPS | $15.6 / $0.36 | $9.2 / $0.22 |
| Operating cash flow from continuing operations | $(18.2) | $1.0 |
| Capital expenditures | $13.0 | $8.3 |
- Revenue increased 7%. CPP revenue rose 11% to $241.1 million and HBP rose 8% to $241.4 million; DE declined 7% to $66.0 million.
- Segment adjusted EBITDA was $67.1 million versus $56.6 million. HBP increased 30% to $40.7 million; CPP increased 7% to $21.9 million; DE declined 6% to $4.5 million. Consolidated adjusted EBITDA, including corporate costs, was $55.2 million versus $45.4 million.
- Cash used in operations reflected working-capital needs, including seasonal inventory growth and payment timing. Investing used $23.5 million, including $10.5 million for the Apta acquisition. Financing provided $34.7 million, principally from net debt borrowings. Cash declined to $64.8 million from $72.4 million.
- At December 31, total debt was $1.155 billion and debt net of cash was $1.091 billion; net debt to EBITDA under the credit agreement was 4.8x. The company reported covenant compliance. Revolver borrowings were $100.1 million, with $228.8 million available subject to covenants.
- Total assets were $2.258 billion and shareholders’ equity was $494.7 million. Adoption of lease accounting added operating lease right-of-use assets and liabilities; operating lease liabilities totaled $159.2 million at quarter-end.
Material changes and notable items
- Reported net income improved year over year, while adjusted net income increased to $15.6 million. The current quarter included $6.4 million of restructuring charges, or $4.1 million after tax, and $0.8 million of discrete and other tax provisions; the prior-year quarter included $0.5 million of such tax provisions.
- CPP’s sales growth reflected higher volume, pricing and mix, partly offset by foreign exchange and tariffs. HBP benefited from increased volume, favorable pricing and mix, and operating efficiencies. DE’s lower revenue was mainly attributed to reduced multi-mode airborne maritime surveillance system sales.
- Foreign-currency translation contributed $6.5 million of other comprehensive income, versus a $5.7 million loss in the comparable quarter.
- Griffon acquired UK garden-products supplier Apta for approximately $10.5 million. Management expects about $15 million in annualized revenue and earnings accretion in fiscal 2020.
Outlook, commentary and risks
- No consolidated full-year revenue or earnings guidance is provided in the filing. Griffon expects the CPP business-platform initiative to run through the end of calendar 2022. Management estimates $15–$20 million in annual cash savings and a $20–$25 million inventory reduction when fully implemented, based on initiative-starting operating levels. Estimated implementation costs are $35 million of one-time charges and $40 million of capital investment; $6.4 million of charges had been recorded in the quarter.
- DE backlog was $370.2 million at December 31, down from $389.3 million at September 30; approximately 74% was expected to be fulfilled within 12 months. Backlog and awards can be affected by government budgets, approvals, negotiations and timing.
- Management cited seasonality, customer concentration, competition and pricing, raw-material costs and tariffs, foreign exchange, interest rates, government spending and contract audits, and the ability to achieve restructuring and integration savings as relevant risks. Home Depot represented 17% of consolidated revenue; the U.S. Government and its agencies represented 8% overall and 65% of DE revenue.
- Environmental and legal contingencies include the Peekskill site, which was added to the EPA National Priorities List; the EPA expects to select a remedy in 2022. Griffon disclaims responsibility for remediation there. Management stated it did not expect the disclosed matters to materially adversely affect consolidated results, cash flows or financial position.
- After quarter-end, on January 30, 2020, Griffon amended its revolving credit facility, increasing capacity from $350 million to $400 million and extending maturity to March 2025, subject to an earlier December 2021 maturity if the 2022 senior notes are not refinanced or repaid before then.
Important facts for investors to verify
- Whether CPP achieves its projected savings and inventory reductions, and whether actual restructuring charges and capital spending remain near estimates.
- Debt refinancing needs and progress on the $1.0 billion of 5.25% senior notes due 2022, as well as compliance with leverage and other credit covenants.
- Whether negative operating cash flow reverses as seasonal working capital normalizes, and how inventory and supplier/customer payment timing evolve.
- DE contract awards, backlog conversion and dependence on U.S. Government funding; also monitor concentration in Home Depot and other major customers.
- Developments in the EPA’s Peekskill investigation, the Frankfort remediation, and other environmental, product-liability and government-contract contingencies.