Griffon Corporation (NYSE: GFF) — FY2016 Form 10-K
Reporting period: Fiscal year ended September 30, 2016. This is an annual report, not a standalone fourth-quarter filing; quarterly figures are noted where useful. Dollar amounts below are in millions unless stated otherwise.
Business context
Griffon is a diversified holding company operating through Home & Building Products (HBP: AMES tools and landscaping products, and Clopay garage doors), Telephonics (defense, aerospace and communications systems), and Clopay Plastic Products (PPC: specialty films and laminates). HBP contributed 53% of revenue, Telephonics 22%, and PPC 25%.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $1,957.2 | $2,016.0 |
| Gross profit / gross margin | $473.4 / 24.2% | $475.8 / 23.6% |
| Operating income | $103.5 | $101.0 |
| Net income | $30.0 | $34.3 |
| Diluted EPS | $0.68 | $0.73 |
| Operating cash flow | $105.9 | $76.1 |
| Capital expenditures | $90.8 | $73.6 |
| Cash and equivalents at year-end | $72.6 | $52.0 |
| Total debt, net of cash, as presented in MD&A | $880.3 | $809.2 |
- Gross margin improved 0.6 percentage points. Operating income rose despite lower revenue, while net income and diluted EPS declined. The reported 2016 tax rate was 43.6%, versus 36.1% in 2015.
- Operating cash flow less capital expenditures was approximately $15.2 million. Operating cash flow benefited mainly from higher accounts payable and income-tax refunds; the filing does not characterize this difference as free cash flow.
- Year-end current assets were $781.0 million and current liabilities $318.3 million, implying working capital of about $462.7 million and a current ratio of approximately 2.45.
- Balance-sheet debt, net of discounts and issuance costs, was $936.6 million; cash was $72.6 million. The revolving facility was increased to $350 million and extended to March 2021. No revolver borrowings were outstanding at year-end; $333.7 million was available, subject to covenants. The company reported covenant compliance.
- Annual dividends increased to $0.20 per share from $0.16. The board declared a subsequent $0.06-per-share dividend for December 2016.
Material changes versus FY2015
- Revenue fell 2.9% as reported; excluding unfavorable currency effects, revenue was down 1%. HBP revenue declined 1%, Telephonics grew 1%, and PPC declined 10%.
- HBP segment operating profit increased to $79.7 million from $58.9 million, helped by efficiencies, cost controls, CBP volume and mix, and lower material costs. AMES sales were affected by unfavorable weather; CBP revenue rose 2%.
- Telephonics operating profit was essentially flat at $42.8 million. Funded backlog fell to $420 million from $442 million, largely due to timing of international awards; about 71% was expected to be filled in FY2017.
- PPC operating profit declined to $20.3 million from $33.1 million. Excluding $5.9 million of restructuring charges, it was $26.2 million, still down 21%, reflecting lower volume and unfavorable product mix.
- Griffon issued an additional $125 million of 5.25% senior notes due 2022, using proceeds to repay revolver borrowings. Total debt, net of cash, increased from $809.2 million.
Outlook, risks and unusual items
- Management said it believed liquidity was sufficient for existing operations and strategic acquisitions, but gave no specific consolidated revenue or earnings guidance. PPC’s capacity and technology investment was expected to be completed in FY2018; management estimated PPC restructuring actions could generate annual cash savings of $4 million. AMES’ completed consolidation was estimated to yield annualized cash savings exceeding $10 million.
- Key exposures include housing and renovation demand, weather and seasonality, raw-material costs and pricing lags, foreign exchange, competition, and dependence on major customers. P&G represented 13% of consolidated revenue and 51% of PPC revenue; Home Depot represented 13% of consolidated revenue; U.S. government business represented 16% of consolidated revenue.
- Telephonics faces defense-budget, contract-funding, government-shutdown, audit and performance risks. Its U.S. government contracts and subcontracts accounted for 70% of segment revenue. Offset agreements totaled approximately $61 million; potential penalties were not considered estimable or probable.
- FY2016 included $5.9 million of PPC restructuring charges and $2.7 million of net discrete tax provisions. Excluding restructuring and specified tax items, management reported adjusted net income of $36.9 million and adjusted EPS of $0.84; these are non-GAAP measures.
- Griffon disclosed discussions with the U.S. Department of Justice concerning amounts allegedly owed under certain government subcontracts; no claim had been asserted, and the company believed material exposure was unlikely. Environmental matters include the former Peekskill site and the AMES Frankfort site; management did not expect known matters to materially affect consolidated results, but outcomes remain uncertain.
- The $100 million 4% convertible subordinated notes mature in 2017 and are convertible. Griffon stated it would settle up to $125 million of conversion value in cash and any excess in shares, creating possible dilution. Other risks include debt covenants, customer concentration, supplier reliance, impairment estimates, and cyber threats.
Important facts for investors to verify
- Whether PPC’s lower volume and unfavorable mix improve, and whether the restructuring savings and FY2018 investment deliver expected returns.
- Telephonics’ backlog conversion, timing of international contract awards, and the effect of government funding and audits.
- Cash generation after elevated capital spending, and the company’s ability to manage debt, the 2017 convertible notes, and covenant requirements.
- Exposure to concentrated customers—especially P&G, Home Depot and government-related business—and any changes in their orders or payment quality.
- Reconciliation of reported EPS figures: the audited statements show FY2016 basic EPS of $0.73 and diluted EPS of $0.68; adjusted EPS is $0.84. Investors should distinguish basic, diluted and adjusted measures.