Griffon Corporation — Form 10-Q summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2018. Unless stated otherwise, financial amounts are in U.S. dollars; reported statement amounts are in thousands. Comparisons are with the corresponding 2017 periods.
Business context
Griffon operates through Home & Building Products (HBP)—AMES, ClosetMaid and Clopay Building Products (CBP)—and Defense Electronics (Telephonics). Results exclude Clopay Plastic Products (PPC), which was sold to Berry Global on February 6, 2018 and reported as discontinued operations.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $516.6 million, up 44% from $358.1 million | $1,432.4 million, up 31% from $1,094.2 million |
| Gross profit / margin | $138.8 million / 26.9%; prior year 27.4% | $381.1 million / 26.6%; prior year 26.8% |
| Operating income / margin | $24.5 million / 4.7%; prior year $17.4 million / 4.9% | $57.3 million / 4.0%; prior year $52.2 million / 4.8% |
| Continuing-operations income | $7.4 million; diluted EPS $0.18 | $32.2 million; diluted EPS $0.76 |
| Net income | $5.8 million; diluted EPS $0.14 | $127.1 million; diluted EPS $2.98 |
| Adjusted continuing-operations income and diluted EPS | $11.3 million; $0.27, versus $1.9 million; $0.04 | $16.4 million; $0.38, versus $7.0 million; $0.16 |
Adjusted income and EPS are company-defined non-GAAP measures. Nine-month net income includes an $86.4 million after-tax gain on the PPC sale; it is not representative of continuing operating performance. Nine-month continuing-operations tax benefit was $22.1 million, principally reflecting a provisional $23.9 million benefit associated with U.S. tax reform.
Continuing-operations operating cash flow was $2.8 million, down from $25.4 million. Capital expenditures were $33.1 million, implying operating cash flow less capital expenditures of approximately negative $30.4 million. Investing cash flow was positive $11.8 million, reflecting $474.0 million PPC sale proceeds offset by acquisitions and capital spending. Financing cash flow was positive $57.7 million.
At June 30, cash was $63.8 million and total debt was $1.150 billion; debt net of cash was $1.087 billion. Long-term debt, net of current maturities, was $1.125 billion. The $1.0 billion of 5.25% senior notes due 2022 was the largest debt component. The revolving facility had $69.9 million drawn and $264.9 million available, subject to covenants; the company reported compliance with its debt covenants. Current assets were $938.1 million and current liabilities $415.5 million.
Changes versus prior comparable periods
- Revenue growth chiefly reflected acquired businesses and HBP organic growth. HBP quarterly revenue rose 59%, with reported organic growth of 13%; nine-month revenue rose 46%, with organic growth of 8%.
- HBP segment adjusted EBITDA increased to $50.0 million for the quarter from $33.1 million and to $129.3 million year to date from $92.5 million. Segment operating margins were 8.8% and 7.9%, respectively, versus 8.6% and 7.8%.
- Telephonics revenue declined 6% for the quarter and 16% year to date. Its nine-month segment operating profit fell to $8.9 million from $18.5 million, partly due to lower revenue and revised estimates to complete certain programs.
- Debt net of cash rose to $1.087 billion from $944.7 million at September 30, 2017. Cash from continuing operations weakened amid working-capital increases, including inventory and receivables.
- Quarterly continuing-operations income improved year over year, but reported operating margin was lower. The year-to-date increase in net income largely reflects the PPC disposal gain and tax benefits.
Outlook, commentary, risks and unusual items
- Management said it believes liquidity is sufficient to fund existing businesses and strategic acquisitions. The filing provides no formal consolidated revenue or earnings guidance.
- Management cited expected first-12-month revenue of approximately $200 million for CornellCookson and $300 million for ClosetMaid; Kelkay was expected to contribute approximately $40 million. These are acquisition expectations, not consolidated guidance.
- Acquisitions included ClosetMaid (October 2017), Kelkay (February 2018) and CornellCookson (June 2018). CornellCookson’s $180 million purchase price allocation remained preliminary. Acquisition costs were $7.6 million for the nine-month period.
- Griffon paid a $1.00-per-share special dividend in April, in addition to quarterly dividends. The board declared another $0.07 quarterly dividend and authorized an additional $50 million share repurchase on August 1, 2018; $8.3 million remained under the prior authorization at June 30.
- Key risks include dependence on large customers: Home Depot represented 20% of consolidated revenue and 24% of HBP revenue; the U.S. Government and its agencies represented 10% of consolidated revenue and 62% of Telephonics revenue. The filing warns that order changes or loss of significant customer volume could adversely affect results and liquidity.
- Other cited risks include seasonality and weather, housing and defense spending conditions, raw-material costs, competition, acquisition integration, interest and foreign-exchange movements, and legal, environmental and government-contract matters. Griffon described discontinued-operation liabilities as primarily tax, product-liability, warranty, environmental and transaction accruals, with estimated future net cash outflows of $30.7 million.
- The company recorded a $117.6 million pre-tax gain on the PPC sale; related tax was preliminary. U.S. tax-reform accounting also remained provisional, with certain effects not yet reasonably estimable. Management noted HBP seasonality and cautioned that interim results may not indicate full-year results.
Important facts for investors to verify
- Whether HBP organic growth, pricing and acquired-business contributions can sustain performance, and how input-cost increases affect margins.
- Telephonics’ revenue and operating-profit trend, contract execution and customer-funded backlog; backlog was $346.2 million, with 67% expected to be fulfilled within 12 months.
- Working-capital conversion and cash generation, given low continuing-operations operating cash flow and capital expenditures exceeding it.
- Debt service, covenant headroom and liquidity after acquisitions, dividends and repurchases; available revolver capacity is subject to covenants.
- Final purchase-price allocations and integration outcomes for acquisitions, plus final PPC-sale tax and tax-reform accounting adjustments.
- Potential cash requirements for discontinued-operation, environmental and other contingencies, and continued exposure to major customers.