Griffon Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2019. Unless noted, amounts are in U.S. dollars and millions. Griffon operates Home & Building Products (HBP) and Defense Electronics; the sold Clopay Plastics Products business is reported as discontinued operations.
Financial performance
| Metric | Three months ended March 31, 2019 | Prior-year quarter | Six months ended March 31, 2019 | Prior-year period |
|---|---|---|---|---|
| Revenue | $549.6 | $478.6 | $1,060.2 | $915.9 |
| Gross profit / margin | $137.5 / 25.0% | $121.4 / 25.4% | $280.6 / 26.5% | $242.2 / 26.4% |
| Operating income | $25.7 | $16.9 | $55.0 | $31.0 |
| Income from continuing operations | $6.5 | $2.0 | $15.2 | $24.8 |
| Net income (loss) | $(1.2) | $90.3 | $7.6 | $121.3 |
| Diluted EPS | $(0.03) | $2.11 | $0.18 | $2.82 |
Quarterly revenue rose 15% (organic growth 5%); six-month revenue rose 16% (organic growth 5%). Quarterly operating margin was approximately 4.7%, versus 3.5% a year earlier. The quarter’s net loss reflects an $11.0 million discontinued-operations charge, primarily for a PPC sale-related claim and an additional legacy environmental reserve. The prior-year quarter included a substantial gain on the PPC sale. Prior-year six-month continuing income also benefited from a $22.7 million tax benefit, primarily related to the Tax Cuts and Jobs Act.
- Segments: Quarterly HBP revenue was $474.5 million, up 20%, and segment adjusted EBITDA was $48.8 million (10.3% margin). Defense Electronics revenue was $75.1 million, down 9%; segment adjusted EBITDA was $4.9 million (6.6% margin). HBP growth reflected acquisitions, pricing and organic demand; Defense revenue declined mainly on lower maritime surveillance radar sales.
- Cash flow: Continuing operations used $55.0 million of operating cash in the six months, versus $47.1 million used in the prior period. Working-capital increases—receivables and contract assets, inventory, and lower payables—were key uses. Capital expenditure was $17.4 million. Cash and equivalents were $58.0 million, down from $69.8 million at September 30, 2018.
- Debt and liquidity: Total debt was $1,229 million and debt net of cash was $1,171 million, compared with $1,135 million and $1,065 million, respectively, at fiscal year-end. Credit-agreement net leverage was 5.7x. The $350 million revolver had $157.9 million drawn, $16.1 million of standby letters of credit and $176.0 million available, subject to covenants. The company reported compliance with debt covenants.
- Other metrics: Telephonics reported funded backlog of $378.3 million; 73% was expected to be fulfilled within 12 months. Quarterly dividend was $0.0725 per share. The board declared the same dividend for payment in June 2019.
Material changes and management commentary
- HBP growth included CornellCookson, acquired in June 2018, and organic gains at AMES. HBP profitability improved despite higher material and tariff costs; CBP also faced unfavorable volume and mix.
- Defense Electronics operating profit increased as expenses fell and research-and-development timing improved, partly offset over six months by revised estimates to complete certain contracts. Contract estimates produced unfavorable cumulative adjustments of approximately $2.8 million in the quarter and $5.3 million year to date.
- Adoption of ASC 606 on October 1, 2018 reduced opening retained earnings by approximately $5.7 million. The company reported a $1.3 million increase to six-month continuing income from adoption; prior periods were not restated.
- Management cited seasonality in HBP and cautioned that interim results are not necessarily indicative of full-year performance. The filing provides no quantified full-year revenue or earnings guidance.
- CBP announced a $14 million CornellCookson facility expansion and equipment investment, expected to be completed by the end of calendar 2019.
Risks, contingencies and unusual items
- Risks include housing and economic cyclicality, weather and seasonality, competition and pricing, raw-material and tariff costs, customer concentration, government funding and defense spending, contract-estimate changes, foreign exchange, and the ability to service or refinance debt.
- The Home Depot represented 17% of consolidated six-month revenue; the U.S. Government and its agencies represented 9% of consolidated revenue and 63% of Telephonics revenue.
- Environmental matters include the Peekskill site, which New York sought to nominate for the federal Superfund list, and remediation work at AMES’s Frankfort, New York site. Potential future costs are uncertain. The filing also describes a possible Union Tools advertising-related indemnity claim whose amount cannot be estimated.
- U.S. government contract audits or investigations could lead to claims, penalties, or suspension/debarment, which could materially affect Telephonics. Management said it did not expect the disclosed legal and environmental matters, based on currently known facts, to materially adversely affect consolidated results or cash flows.
Key facts for investors to verify
- Whether HBP organic growth and margins can persist as acquisition contributions, weather effects, material costs and tariffs change.
- Whether operating cash flow improves as working capital is managed, and how the 5.7x leverage and revolver availability evolve.
- Telephonics contract execution, backlog conversion, cost-to-complete estimates and exposure to government funding and customer concentration.
- Final costs and outcomes for the PPC divestiture claim and environmental matters, including potential Peekskill developments.
- How reported results compare with adjusted results, particularly given the prior-year PPC sale gain, tax benefits, current discontinued-operations charge and ASC 606 adoption.