Griffon Corporation — Q1 FY2017 10-Q Summary
Business context and period. The quarter ended December 31, 2016 (the three months ended; fiscal Q1). Griffon operates through Home & Building Products (HBP: AMES and Clopay Building Products), Telephonics, and Clopay Plastic Products (PPC). Amounts below are in millions of U.S. dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Revenue | $467.1 | $494.1 |
| Gross profit / margin | $116.1 / 24.9% | $116.1 / 23.5% |
| Operating income / margin | $26.4 / 5.6% | $24.8 / 5.0% |
| Income before taxes | $13.0 | $13.3 |
| Net income | $12.3 | $10.8 |
| Diluted EPS | $0.29 | $0.24 |
| Adjusted net income / adjusted diluted EPS, excluding specified tax items | $8.0 / $0.19 | $8.2 / $0.18 |
| Operating cash flow | $7.6 | $(17.4) |
| Capital expenditures | $22.5 | $25.0 |
| Cash and equivalents, quarter-end | $52.3 | $50.0 |
| Total debt, quarter-end | $979.7 | Not stated here |
Cash less total debt was $927.4 million at December 31, 2016, compared with $880.3 million at September 30, 2016. Operating cash flow less capital expenditures was negative $14.9 million in the quarter, versus negative $42.4 million in the prior-year quarter. The company reported $310.971 million available under its $350 million revolving credit facility, subject to covenants; $23 million was drawn and $16.029 million of standby letters of credit were outstanding.
Material changes and segment results
- Consolidated revenue declined 5%, mainly due to lower Telephonics multi-mode radar revenue and reduced PPC volume and unfavorable mix. Net income increased, but included a $4.263 million discrete tax benefit versus $2.591 million a year earlier. Excluding the specified tax items, adjusted net income decreased from $8.197 million to $8.001 million.
- HBP revenue grew 1% to $264.2 million; segment operating profit rose 7% to $22.6 million. AMES Australia expansion and operating improvements supported results; CBP revenue was broadly unchanged.
- Telephonics revenue fell 19% to $88.1 million and segment operating profit fell 31% to $5.4 million, reflecting lower radar revenue and timing of revenue and expenses. Backlog was $384 million, down from $420 million at September 30, 2016; 79% was expected to be fulfilled within 12 months.
- PPC revenue declined 7% to $114.8 million, while segment operating profit increased 33% to $8.0 million, helped by improved margins in Brazil and operating performance in Europe, partly offset by mix and resin-pricing effects.
- Total segment adjusted EBITDA increased to $54.4 million from $52.0 million. Interest expense increased to $13.4 million from $12.0 million.
Outlook, commentary, and risks
- No formal consolidated earnings or revenue guidance is provided. Management said HBP is seasonal and interim results are not necessarily indicative of full-year results. Management believes liquidity is sufficient to support existing businesses and strategic acquisitions.
- AMES Australia acquired Hills Home Living on December 30, 2016 for approximately $6.1 million. Griffon expects Hills to generate approximately $7.2 million of annualized revenue in its first 12 months after acquisition.
- After quarter-end, on January 17, 2017, Griffon settled its 4% convertible notes for $173.855 million: $125 million in cash funded using the revolver and 1,954,993 common shares. This followed quarter-end debt of $100 million principal on the notes.
- Key exposures include customer concentration: the U.S. Government represented 14% of consolidated revenue and 72% of Telephonics revenue; Procter & Gamble represented 12% of consolidated revenue and 51% of PPC revenue; Home Depot represented 11% of consolidated revenue and 19% of HBP revenue. Changes in orders or loss of a major customer could materially affect results.
- Other risks include government defense spending and contract audits, raw-material costs, foreign exchange, competition and pricing, housing-market conditions, seasonality, and environmental or legal contingencies. Griffon reported it was in compliance with debt covenants. It described ongoing environmental matters and discussions with the U.S. Department of Justice concerning government subcontract amounts; no claim had been asserted in the latter matter, and management did not expect material exposure.
- The company declared a $0.06-per-share quarterly dividend payable March 22, 2017. Future dividends remain subject to board discretion.
Important facts for investors to verify
- Whether Telephonics radar revenue and backlog recover, and whether the reported backlog converts to sales on expected timing.
- Whether PPC can sustain improved operating profit despite lower sales, product-mix pressure, and resin-price pass-through timing.
- The durability of reported earnings after removing discrete tax benefits; the effective tax rate excluding those benefits was 38.3% versus 38.6% in the prior-year quarter.
- Debt and liquidity after the post-quarter convertible-note settlement, including revolver usage, covenant headroom, and the resulting share dilution.
- Cash conversion, capital spending, and working-capital movements, including the quarter’s inventory increase and reductions in accounts payable and accrued liabilities.
- Progress and potential cost of environmental matters, government contract discussions, and concentration-related customer risks.