Griffon Corporation — Q1 FY2021 10-Q
Reporting period: Three months ended December 31, 2020; comparisons are with the three months ended December 31, 2019. Griffon is a diversified holding company operating in Consumer and Professional Products (CPP), Home and Building Products (HBP), and Defense Electronics (DE). Amounts below are in U.S. dollars; financial figures are rounded to millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Revenue | $609.3 million | $548.4 million |
| Gross profit / gross margin | $170.2 million / 27.9% | $149.9 million / 27.3% |
| Operating income / operating margin | $48.6 million / 8.0% | $32.1 million / 5.9% |
| Net income | $29.5 million | $10.6 million |
| Diluted EPS | $0.55 | $0.24 |
| Adjusted EBITDA (non-GAAP) | $74.6 million | $55.2 million |
| Operating cash flow | $20.8 million | $(18.2) million |
| Capital expenditures | $11.9 million | $13.2 million |
Revenue rose approximately 11%, and adjusted EBITDA increased approximately 35%. Operating cash flow less capital expenditures was approximately $8.9 million, versus approximately $(31.3) million in the prior-year quarter. The company attributed the operating cash-flow improvement to operating earnings and non-cash adjustments, partly offset by seasonal inventory growth.
CPP revenue was $291.0 million, up 21%, and segment adjusted EBITDA was $32.7 million versus $21.9 million. HBP revenue was $250.5 million, up 4%, and adjusted EBITDA was $48.4 million versus $40.7 million. DE revenue was $67.8 million, up 3%, and adjusted EBITDA was $5.6 million versus $4.5 million.
At December 31, 2020, cash and equivalents were $233.8 million and total debt was $1,065.4 million, giving debt net of cash of $831.6 million. The current portion of debt was $11.2 million. The $400 million revolving facility had $13.5 million drawn and $369.8 million available, subject to covenants; standby letters of credit were $16.7 million. Reported leverage under the credit agreement was 3.1x, and the company said it was in compliance with its credit and loan covenants. Cash and equivalents increased from $218.1 million at September 30, 2020.
Material changes and notable items
- Revenue growth was strongest in CPP, driven mainly by higher consumer demand for home improvement, early U.S. spring orders, and home-organization products. HBP benefited from higher volume; DE growth reflected naval and cyber systems work.
- Reported results included $10.8 million of restructuring charges and a $6.2 million pre-tax gain on the sale of DE’s Systems Engineering Group (SEG). The filing reports adjusted net income of $29.8 million and adjusted diluted EPS of $0.56, compared with $15.6 million and $0.36, respectively, in the prior-year quarter. These are non-GAAP measures.
- On December 18, 2020, Griffon sold SEG for $15.0 million, subject to working-capital adjustments. The company received net proceeds of $15.6 million and recorded the gain; SEG had reported first-quarter sales of approximately $7 million.
- On December 22, 2020, AMES acquired Australian landscaping-products maker Quatro for approximately $2.7 million in cash, with up to approximately $0.8 million of contingent consideration. Quatro is expected to contribute approximately $5 million of annualized revenue in its first year.
- Inventories increased to $445.0 million from $413.8 million, mainly reflecting seasonal requirements. Backlog was $388.7 million at quarter-end, with approximately 66% expected to be recognized as revenue within one year.
Outlook, risks and contingencies
- No consolidated revenue or earnings guidance was provided. The expanded CPP business-platform initiative is expected to be completed by the end of calendar 2023. Management estimates annual cash savings of $30–$35 million and inventory reduction of $30–$35 million, based on fiscal 2020 operating levels, after approximately $65 million of one-time charges and $65 million of capital investment. These are expectations, not guaranteed outcomes.
- Management said facilities were fully operational, order patterns were normal or better than the prior year, and supply chains had not experienced significant disruption. It cautioned that the future effects of COVID-19 remain uncertain.
- Customer concentration is material: Home Depot represented 17% of consolidated revenue; the U.S. Government and its agencies represented 8% of consolidated revenue and 70% of DE revenue. Management warned that loss or reduced business from major customers could adversely affect results and liquidity.
- Risks include restructuring execution and savings realization, demand and seasonality, raw-material availability and costs, foreign exchange, government-contract funding and audits, and the ability to service or refinance debt. The filing also describes environmental matters, including the Peekskill site investigation and remediation work at the former Union Fork and Hoe site. Management said it did not expect resolution of the disclosed legal and environmental matters to materially affect consolidated results, financial position, or cash flows, based on information then available.
- The quarterly dividend was $0.08 per share; the board declared another $0.08 dividend payable March 18, 2021. Future dividends remain at the board’s discretion.
Important facts for investors to verify
- Whether CPP’s strong growth and the planned platform savings persist, and whether restructuring costs and capital investment remain near estimates.
- Whether cash generation can sustain investment, dividends, and debt service as seasonal working-capital needs change.
- Debt covenant headroom and the terms and refinancing needs of the 2028 senior notes, revolving facility, and subsidiary borrowings.
- Backlog conversion, government-contract funding and timing, and exposure to Home Depot and other major customers.
- Progress and potential costs associated with environmental matters, discontinued operations, and government-contract audits.