Griffon Corporation — Q2 FY2022 Form 10-Q
Reporting period: Three and six months ended March 31, 2022. Unless noted otherwise, dollar amounts below are in millions. The filing reports continuing operations separately from Telephonics, which is classified as discontinued operations.
Business context and reporting period
Griffon operates Consumer and Professional Products (CPP), including tools, fans and home products, and Home and Building Products (HBP), principally garage and rolling steel doors. It acquired Hunter Fan Company on January 24, 2022, expanding CPP. On April 18, 2022, after quarter-end, Griffon agreed to sell Telephonics for $330 million cash, with closing expected in Q2 calendar 2022, subject to conditions and regulatory approvals.
Financial performance
| Metric | Three months ended March 31, 2022 | Prior-year quarter | Six months ended March 31, 2022 | Prior-year period |
|---|---|---|---|---|
| Revenue | $779.6 | $574.7 | $1,371.4 | $1,116.2 |
| Gross profit | $260.6 | $161.2 | $426.5 | $325.3 |
| Income from operations | $102.8 | $43.6 | $141.3 | $96.1 |
| Continuing-operations income | $58.6 | $18.1 | $75.5 | $43.5 |
| Net income | $65.7 | $17.1 | $85.0 | $46.6 |
| Diluted EPS from continuing operations | $1.10 | $0.34 | $1.41 | $0.82 |
- Quarterly revenue rose 36%; excluding Hunter’s $70.8 million contribution, revenue increased 23%. Six-month revenue rose 23%; excluding Hunter, it increased 17%.
- Gross margin was approximately 33.4% for the quarter versus 28.0% and 31.1% for six months versus 29.1%. Operating margin was approximately 13.2% versus 7.6% for the quarter and 10.3% versus 8.6% for six months.
- Quarterly adjusted EBITDA was $139.6 million, compared with $65.4 million; six-month adjusted EBITDA was $199.1 million, compared with $133.8 million. These are non-GAAP measures.
- CPP quarterly revenue increased 24% to $411.0 million, while adjusted EBITDA increased 28% to $47.8 million. Excluding Hunter, CPP adjusted EBITDA declined amid lower U.S. volume and higher material, labor and transportation costs.
- HBP quarterly revenue increased 52% to $368.6 million and adjusted EBITDA increased to $104.5 million from $40.1 million. Pricing and mix supported results; higher input and logistics costs and residential volume constraints were offsets.
Cash flow, debt and liquidity
- Continuing-operations operating cash flow was negative $172.6 million for the six months, versus negative $44.4 million. Management attributed the outflow primarily to seasonal increases in receivables and inventory.
- Investing cash outflow was $858.5 million, including $851.5 million for Hunter. Financing cash inflow was $899.9 million, principally reflecting debt proceeds. Cash and equivalents ended at $122.3 million, down from $248.7 million at September 30, 2021.
- Total debt was $2.00 billion and net debt was $1.88 billion at March 31, 2022, compared with $1.06 billion and $811.9 million, respectively, at September 30, 2021. Gross debt to EBITDA under the credit agreement was 4.4x.
- Cash plus available revolver capacity was approximately $355.3 million; $233.0 million of the $400 million revolving facility was available, subject to covenants. The company reported compliance with debt covenants.
- Hunter was primarily financed with an $800 million, seven-year Term Loan B, bearing a stated current rate of 3.25%. Griffon also has $1 billion of 5.75% senior notes due 2028. Interest expense rose to $21.4 million in the quarter from $15.8 million.
Changes, outlook, risks and unusual items
- Quarterly results included $6.7 million of acquisition costs, $4.7 million of proxy expenses, $4.8 million of restructuring charges and $2.7 million of acquired-inventory fair-value step-up expense. Adjusted continuing-operations income was $73.1 million, or $1.37 per share, versus $25.1 million, or $0.47, in the prior-year quarter. These adjusted figures are non-GAAP.
- Management expected Hunter to contribute approximately $385 million of revenue in its first 12 months after acquisition. No broader financial guidance was provided in the supplied filing text.
- The CPP business-platform initiative was revised to finish by fiscal year-end 2022. Management now estimates $25 million in annual cash savings, approximately $50 million in one-time charges and approximately $15 million in capital investment, reduced from earlier estimates. The filing reports $41.6 million of cumulative charges through March 31, 2022.
- Management cited COVID-related supply-chain disruptions, labor shortages, longer lead times, constrained capacity and rising commodity costs; the company may not pass all cost increases to customers promptly or fully. CPP also faced softer U.S. consumer demand and customer supplier diversification.
- Telephonics discontinued operations contributed $9.5 million of six-month income, including an estimated $5.0 million deferred tax benefit related to its anticipated sale. The proposed sale remains subject to closing conditions and approvals.
- Environmental matters include potential investigation and remediation exposure at the acquired Hunter Memphis site; the extent of contamination and potential liability is uncertain. Griffon stated that resolution of disclosed legal and environmental matters was not expected to materially adversely affect consolidated results or financial condition.
Important facts for investors to verify
- Whether the Telephonics sale closes on expected terms and timing, and the resulting net proceeds and tax effects.
- Hunter integration progress, realized contribution, purchase-price allocation and related goodwill/intangible assumptions.
- Whether working capital normalizes and operating cash flow improves after the seasonal build.
- Debt reduction, borrowing costs, leverage and covenant headroom following the Hunter acquisition.
- CPP volume and cost trends, HBP residential supply constraints, and delivery of the revised restructuring savings and spending targets.
- Potential environmental obligations at the Memphis site and developments in other disclosed environmental matters.