Griffon Corporation — Q1 FY2019 10-Q
Reporting period: Three months ended December 31, 2018; comparative period is the three months ended December 31, 2017. Amounts are in U.S. dollars; financial figures below are in millions unless stated otherwise.
Business context and results
Griffon operates through Home & Building Products (HBP), comprising AMES and Clopay Building Products (CBP), and Defense Electronics, comprising Telephonics. Results reflect the continuing businesses; the Plastic Products Company (PPC) was sold in February 2018 and is reported as discontinued operations.
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Revenue | $510.5 | $437.3 |
| Gross profit / gross margin | $143.0 / 28.0% | $120.8 / 27.6% |
| Operating income / operating margin | $29.3 / 5.7% | $14.2 / 3.2% |
| Income from continuing operations | $8.8 | $22.8 |
| Net income | $8.8 | $31.0 |
| Diluted EPS | $0.21 | $0.72 |
| Segment adjusted EBITDA | $56.6 | $43.7 |
| Cash from continuing operating activities | $1.0 | $(5.7) |
| Capital expenditures | $8.4 | $10.8 |
Revenue increased 17% year over year, including 5% organic growth. HBP revenue rose 19% to $439.8 million, with approximately $51 million from CornellCookson and contributions from pricing, mix and volume. AMES revenue was broadly flat; U.S. lawn and garden growth was offset by weather-related weakness in non-U.S. markets and lower storage and organization volume. Defense Electronics revenue increased 7% to $70.8 million.
HBP segment operating profit was $39.5 million, up 43%; segment adjusted EBITDA was $51.9 million, with an 11.8% margin versus 10.6%. Defense Electronics segment operating profit was $2.1 million versus $1.5 million; adjusted EBITDA was $4.8 million versus $4.2 million.
Material changes and financial position
- Reported continuing-operations income and EPS fell from the prior year, but the comparison is heavily affected by tax items: Q1 FY2018 included $23.0 million of net discrete and other tax benefits, primarily related to U.S. tax reform. Griffon’s adjusted continuing income was $9.2 million ($0.22 per diluted share), versus $2.4 million ($0.06) a year earlier, excluding the specified tax items and prior-year acquisition and life-insurance costs.
- Prior-year net income included $8.2 million from discontinued operations. PPC contributed $120.4 million of revenue in the prior-year quarter; it contributed no revenue in the current quarter. Thus consolidated net-income and revenue comparisons are not fully like-for-like.
- Interest expense was $16.5 million, compared with $16.8 million. The current quarter tax provision was $5.2 million on $14.0 million of pretax continuing income; the reported effective tax rate was affected by items that Griffon identifies as affecting comparability.
- Operating cash flow improved to $1.0 million from cash use of $5.7 million. Working capital remained a use of cash: inventory increased and accounts payable and accrued liabilities declined, partly offset by collections and lower contract assets. Cash and equivalents were $81.8 million at December 31, 2018.
- Total debt was $1,167.6 million, versus $1,134.7 million at September 30, 2018; net debt was $1,085.8 million. Net debt to EBITDA under the credit agreement was 5.4x. The $1.0 billion 5.25% senior notes mature in 2022. Revolver borrowings were $57.5 million; $277.8 million remained available, subject to covenants, with $14.7 million of standby letters of credit outstanding. The company reported compliance with debt covenants.
- Current assets were $916.6 million and current liabilities $367.3 million. Shareholders’ equity was $471.6 million, down from $474.4 million at September 30, 2018.
Outlook, commentary, risks and unusual items
- At December 31, funded backlog was $366.7 million; Griffon expected approximately 70% to be recognized as revenue by fiscal year-end 2019. Backlog was $374.2 million at September 30, 2018, restated for ASC 606. Management cautions that awards and timing can be affected by customer budgets, political uncertainty, negotiations and approvals.
- Management said the first-quarter effect of ASC 606 was not material to consolidated statements and expected its full-year effect to be immaterial. Adoption increased current-quarter reported revenue by $4.6 million and continuing income by $1.0 million relative to the amounts calculated without adoption; it reduced opening retained earnings by approximately $5.7 million.
- CBP announced a $14 million investment in CornellCookson’s Mountain Top, Pennsylvania facility, including a 90,000-square-foot expansion; completion was expected by the end of calendar 2019. CornellCookson was expected to contribute approximately $200 million of annual revenue.
- Risks highlighted include housing and economic conditions, competition and pricing, raw-material costs and tariffs, seasonality and weather, customer concentration, government spending and contract audits, foreign-exchange movements, acquisition integration, and the ability to service or refinance debt. The Home Depot represented 17% of consolidated revenue; the U.S. Government and its agencies represented 9% overall and 64% of Telephonics revenue.
- Environmental matters include a New York site where the state sought EPA consideration for National Priorities List inclusion and reported a potentially wider extent of contamination; Griffon disclaimed responsibility for remediation and said the outcome was uncertain. AMES expected remediation work at its Frankfort, New York site to be completed in 2019. The filing also describes a potential, unquantifiable indemnity claim related to Union Tools advertising and the possibility of government investigations of defense contracts. Management believed the described matters would not materially adversely affect consolidated results, financial position or cash flows.
- Other notable items: foreign-currency translation reduced other comprehensive income by $5.7 million; the company paid quarterly dividends of $0.0725 per share and declared the same amount for payment in March 2019. No full-year consolidated earnings guidance was provided in the filing.
Most important facts for investors to verify
- Whether organic growth and HBP margin improvement continue after separating acquisition contributions, tariffs and input-cost effects.
- Cash conversion and working-capital trends, especially inventory, accounts payable and Telephonics contract balances.
- Debt leverage, covenant headroom, refinancing needs and the maturity or renewal of Australian and other foreign facilities in 2019.
- Backlog conversion, the timing of government awards, and the impact of cost-estimate revisions on Defense Electronics contracts.
- Progress, cost exposure and developments in the environmental and other contingent matters described in the filing.