Griffon Corporation — FY2015 Form 10-K Summary
Business context and period. This annual report covers the fiscal year ended September 30, 2015; the filing describes the full fiscal year, not a standalone fourth quarter. Griffon is a diversified holding company with three reportable segments: Home & Building Products (HBP, including AMES and Clopay Building Products), Telephonics, and Clopay Plastic Products (PPC). Unless otherwise stated, dollar amounts below are in millions.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|
| Revenue | $2,016.0 | $1,991.8 |
| Gross profit / gross margin | $475.8 / 23.6% | $459.4 / 23.1% |
| Operating income / operating margin | $101.0 / 5.0% | $78.2 / 3.9% |
| Income (loss) from continuing operations | $34.3 | $(0.2) |
| Diluted EPS from continuing operations | $0.73 | $0.00 |
| Cash from operating activities | $76.1 | $93.3 |
| Capital expenditures | $73.6 | $77.1 |
| Cash and equivalents at year-end | $52.0 | $92.4 |
- Revenue rose 1.2% as reported; management said growth was 5% excluding unfavorable foreign-currency effects. Gross margin improved 0.5 percentage points.
- Net income improved substantially from FY2014, which included a $38.9 debt-extinguishment loss, $6.1 of restructuring charges, and $3.2 of acquisition costs. On the company’s adjusted basis, continuing-operations income was $34.2 versus $25.9, and adjusted diluted EPS was $0.73 versus $0.51. These are non-GAAP measures.
- Operating cash flow fell $17.2, principally reflecting working-capital use, including inventory growth and settlement of payables and other liabilities. Operating cash flow less capital expenditures was approximately $2.5, compared with approximately $16.2 in FY2014.
- At September 30, 2015, debt outstanding before unamortized discounts and issuance costs was $861.2; balance-sheet debt net of those items was $843.6. Cash-adjusted debt was $809.2. The revolving facility was increased to $250.0 and extended to March 2020; $198.1 was available to borrow after outstanding borrowings and letters of credit. The company reported compliance with debt covenants.
- Current assets were $756.9 and current liabilities $323.6. Shareholders’ equity declined to $430.5 from $532.0, including the effect of share repurchases and foreign-currency translation losses.
- Other comprehensive loss was $61.1, primarily from $56.4 of foreign-currency translation losses. Consequently, comprehensive loss was $26.8 despite positive net income.
Segments and material changes
| Segment | FY2015 revenue | FY2014 revenue | FY2015 segment adjusted EBITDA |
|---|
| HBP | $1,052.2 | $979.4 | $94.2 |
| Telephonics | $431.1 | $419.0 | $53.0 |
| PPC | $532.7 | $593.4 | $57.1 |
- HBP: Revenue increased 7%; segment operating profit rose to $58.9 from $40.5. Growth reflected AMES acquisitions, improved product mix and CBP volume, and savings from the completed AMES manufacturing consolidation. The prior-year comparison included restructuring and acquisition costs. Management continued to estimate annual cash savings from the AMES initiative above $10.0; savings began in FY2015’s second quarter.
- Telephonics: Revenue increased 3%, but segment operating profit declined to $43.0 from $45.3. Results reflected unfavorable program mix and higher depreciation, partly offset by lower operating expenses. Funded backlog declined to $442.0 from $494.0; approximately 73% was expected to be fulfilled in FY2016.
- PPC: Revenue decreased 10%, mainly because of $46.1 of unfavorable foreign-currency effects and lower volume following product rationalization. Segment operating profit increased to $33.1 from $28.9, helped by a favorable change in resin-price pass-through effects.
Outlook, risks and unusual items
- The filing provides no formal numeric consolidated revenue or earnings guidance. Management identifies continued exposure to economic and housing-market conditions, competition and pricing pressure, raw-material costs, weather and seasonality, currency movements, and execution of cost-saving and acquisition plans. HBP represented 52% of FY2015 revenue.
- Customer concentration is material: P&G generated 14% of consolidated revenue and 51% of PPC revenue; the U.S. Government and its agencies represented 14% of consolidated revenue and 66% of Telephonics revenue; Home Depot represented 12% of consolidated revenue. The filing warns that loss or reduced orders from major customers could adversely affect results and liquidity.
- Telephonics faces U.S. defense-budget, contract-funding, audit, performance and government-shutdown risks. Its funded backlog is subject to timing uncertainty, particularly for international awards. The company also disclosed providing information in response to a Defense Department Inspector General and Department of Justice inquiry; no claim had been asserted and Griffon reported no known material financial exposure.
- Telephonics had approximately $81.0 of outstanding industrial cooperation (offset) commitments, some extending through 2028. The filing states that penalties were neither estimable nor probable at year-end.
- Environmental matters include the Frankfort, New York site, for which AMES expected to submit a feasibility study by March 2016, and the Peekskill site, where Griffon did not acknowledge responsibility for remediation. Management did not expect the matters then known to materially affect consolidated results, financial position or cash flows.
- Other notable items: Griffon repurchased $82.3 of shares during FY2015 and paid $7.7 in dividends; the annual dividend per share increased to $0.16 from $0.12. After year-end, CBP announced a Troy, Ohio facility expansion expected to be completed in 2016. A $0.05-per-share dividend was declared in November 2015.
Important facts for investors to verify
- Whether HBP’s reported improvement and AMES savings persist, and how the announced CBP expansion affects capital spending and capacity.
- Whether Telephonics converts backlog into revenue as planned, and the timing and funding of international and U.S. government programs.
- Whether PPC can stabilize revenue and volume amid currency effects, customer product redesigns and resin-price pass-through timing.
- Cash generation relative to capital expenditures, working-capital needs, shareholder returns and scheduled debt obligations, including the $100.0 convertible notes due in 2017.
- Developments in the government inquiry and environmental matters, along with continuing exposure to major customers and foreign exchange.
