Griffon Corporation — Q2 FY2020 Form 10-Q
Reporting period: Fiscal quarter and six months ended March 31, 2020. Unless otherwise stated, financial amounts below are in U.S. dollars and millions. Griffon operates Consumer and Professional Products (CPP), Home and Building Products (HBP), and Defense Electronics (DE).
Financial results and liquidity
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Revenue | $566.4 | $549.6 | $1,114.8 | $1,060.2 |
| Gross profit / margin | $152.0 / 26.8% | $137.5 / 25.0% | $302.0 / 27.1% | $280.6 / 26.5% |
| Operating income / margin | $25.6 / 4.5% | $25.7 / 4.7% | $57.7 / 5.2% | $55.0 / 5.2% |
| Income from continuing operations | $0.9 | $6.5 | $11.5 | $15.2 |
| Diluted EPS from continuing operations | $0.02 | $0.15 | $0.26 | $0.36 |
| Adjusted income from continuing operations* | $10.1 | $6.4 | $25.6 | $15.6 |
| Adjusted diluted EPS* | $0.23 | $0.15 | $0.59 | $0.37 |
*Company-reported non-GAAP measure; excludes specified restructuring, debt-extinguishment, acquisition and tax items. It is not a substitute for GAAP results.
- Segment performance: Q2 revenue and adjusted EBITDA were CPP $274.9 and $25.0; HBP $209.8 and $30.6; DE $81.6 and $4.2. HBP led growth and profit improvement. CPP revenue and adjusted EBITDA declined; DE revenue rose but adjusted EBITDA fell.
- Cash flow: Continuing operating activities used $60.8 in the first half, versus $55.0 used a year earlier, primarily reflecting working-capital investment, seasonal inventory, receivables and payment timing. Investing activities used $32.8, including $22.5 of capital expenditures and $10.5 for the Apta acquisition. Financing activities provided $94.4. Cash declined $3.4 to $69.0.
- Debt and liquidity: Total debt was $1,242.5 and debt net of cash was $1,173.5 at March 31, compared with net debt of $1,041.8 at September 30, 2019. The company reported 5.1x net debt to EBITDA under its credit agreement and said it was covenant-compliant. Revolver borrowings were $183.5; $195.1 was available, subject to covenants. The reported cash balance was $69.0.
- Balance sheet: Total assets were $2,318.7 and shareholders’ equity $476.5. Current assets were $1,003.7 and current liabilities $387.1. Adoption of lease accounting added operating lease right-of-use assets and liabilities; operating lease liabilities totaled $161.5 at quarter-end.
Material changes versus prior comparable periods
- Q2 revenue increased 3% (2% organic); first-half revenue increased 5% (5% organic). HBP gains and DE growth in the quarter offset CPP’s decline. First-half growth was led by HBP.
- Q2 GAAP continuing income fell to $0.9 from $6.5, despite higher gross profit, reflecting lower operating income and higher other expense, including a $6.7 debt-extinguishment loss and $3.1 of restructuring and $3.0 of acquisition costs. Company-adjusted income was higher year over year. First-half GAAP continuing income declined to $11.5 from $15.2, while adjusted income increased.
- Q2 HBP revenue rose 12% and adjusted EBITDA 52%; CPP revenue fell 4% and adjusted EBITDA 13%; DE revenue rose 9% but adjusted EBITDA declined 14%. For the first half, HBP revenue rose 10% and adjusted EBITDA 39%; CPP revenue rose 2% but adjusted EBITDA fell 5%; DE revenue rose 1% and adjusted EBITDA fell 10%.
- First-half net cash used in operations worsened by $5.8. Total debt increased as Griffon issued $850.0 of 5.75% notes due 2028 and redeemed 85% of its 5.25% notes due 2022.
- Q2 comprehensive loss was $13.9, including a $16.5 foreign-currency translation loss, compared with comprehensive income of $1.7 in the prior-year quarter.
Outlook, management commentary, risks and unusual items
- COVID-19: Management said the pandemic’s eventual effect was uncertain. At filing, most North American and Australian facilities were operating; AMES’s Reynosa plant and certain UK, Ireland and New Zealand facilities were furloughed, with reopening expectations then stated as early May for Reynosa and early July for the other locations. Management reported normal CPP North American and Australian sales, normal HBP commercial door sales, HBP residential sectional garage-door sales down approximately 15–20%, and no significant DE sales impact. It said supply chains had not experienced significant disruption to date.
- Liquidity outlook: Management said it believed available liquidity was adequate and noted that the first half is typically a cash-use period, with cash generation usually strengthening from April through fiscal year-end. It did not provide consolidated revenue or earnings guidance in the supplied filing text.
- CPP transformation: A roughly three-year initiative, expected to finish by calendar year-end 2022, targets annual cash savings of $15–$20 and inventory reduction of $20–$25. Expected costs are about $35 of one-time charges and $40 of capital investment. Griffon recorded $9.5 of restructuring charges through March 31, including cash and non-cash items, and reported a 148-person headcount reduction.
- Debt refinancing: The new $850.0 notes extend most senior-note maturities to 2028 but carry a 5.75% coupon versus 5.25% on the retired notes; the transaction generated a $6.7 GAAP extinguishment loss. The $400.0 revolver was extended to 2025, subject to a provision that could shorten maturity to December 2021 if the remaining 2022 notes are not addressed before then.
- Other items and exposures: Griffon acquired UK garden-products supplier Apta for approximately $10.5. Government-contract audits could result in claims, penalties or restrictions affecting DE. Environmental matters include EPA investigation of the Peekskill site, with a remedy selection estimated for 2022; Griffon said it did not acknowledge responsibility for remediation. Remediation work at the former Union Fork and Hoe site was expected to be completed by summer 2020. Management said resolution of disclosed legal and environmental matters was not expected to materially affect consolidated results, but outcomes remain uncertain.
- Customer concentration is material: the U.S. Government represented 9% of consolidated first-half revenue and 65% of DE revenue; Home Depot represented 17% of consolidated revenue. Griffon identified customer demand, pandemic developments, supplier disruption, tariffs, currency movements, housing conditions and debt servicing/refinancing among its risks.
Investor verification priorities
- Track subsequent COVID-related facility status, sales trends—especially HBP residential doors—and supplier/customer disruptions against management’s filing-date commentary.
- Verify cash conversion after the seasonal first-half working-capital build, and whether the available revolver capacity and covenant headroom remain adequate.
- Monitor leverage, refinancing of the remaining 2022 notes, the revolver’s conditional maturity provision, and the cost and terms of debt.
- Assess delivery of the CPP program’s savings, inventory reduction, timeline, remaining charges and capital spending against stated targets.
- Follow segment margins and adjusted EBITDA, particularly whether CPP and DE recover and whether HBP’s strong performance persists.
- Review backlog conversion: reported backlog was $331.7 at March 31, down from $389.3 at September 30, with 73% expected to convert within one year.
- Check developments in environmental and government-contract contingencies, customer concentration, and the board’s discretionary dividend policy.