Griffon Corporation — Q2 FY2015 Form 10-Q
Business context and period. Griffon is a diversified holding company operating through Home & Building Products (HBP, including AMES and Clopay Building Products), Telephonics, and Plastics. This filing covers the quarter and six months ended March 31, 2015; amounts below are in millions of U.S. dollars unless stated otherwise. HBP is seasonal, so interim results may not indicate full-year performance.
Financial performance and liquidity
| Metric | Three months ended March 31, 2015 | Three months ended March 31, 2014 | Six months ended March 31, 2015 | Six months ended March 31, 2014 |
|---|---|---|---|---|
| Revenue | $500.0 | $507.7 | $1,002.2 | $961.1 |
| Gross profit / gross margin | $114.4 / 22.9% | $110.0 / 21.7% | $232.4 / 23.2% | $215.5 / 22.4% |
| Operating income / operating margin | $20.8 / 4.2% | $19.7 / 3.9% | $44.9 / 4.5% | $36.7 / 3.8% |
| Net income (loss) | $5.1 | $(25.8) | $12.6 | $(22.6) |
| Diluted EPS | $0.11 | $(0.53) | $0.26 | $(0.44) |
| Operating cash flow | Not presented separately for the quarter | $(43.1) | $(26.6) |
- Quarterly revenue declined 2% reported, but rose 2% excluding foreign currency effects. Six-month revenue increased 4% reported and 7% excluding currency effects. Management attributed the growth principally to acquisitions and HBP performance.
- Gross profit and operating income rose in both comparison periods. Six-month segment adjusted EBITDA was $93.8, up from $90.1; this is a non-GAAP measure defined by the company.
- Six-month cash used in investing was $30.6, including $39.7 of capital expenditures and $8.9 in proceeds from sale of investments. Financing provided $28.2. Cash fell $49.8 from September 30, 2014, to $42.6.
- At March 31, cash was $42.6 and total debt at face amount was $888.2, or $845.6 net of cash; reported debt carrying value, after discounts and issuance costs, was $867.5. Debt net of cash increased from $730.2 at September 30, 2014. Current assets were $790.4 and current liabilities $278.6.
- The amended revolving facility was increased to $250.0 and extended to March 2020. Borrowings were $95.0, standby letters of credit $20.6, and reported borrowing availability $134.4. Griffon said it was in compliance with debt covenants.
Material changes and segment performance
- HBP: Revenue rose 5% in the quarter and 14% for six months. CBP benefited from higher volume and product mix; AMES faced a late spring and weaker tool and planter sales in the quarter, partly offset by Cyclone. Six-month segment operating profit increased 37% to $25.0, including contributions from Northcote and Cyclone. The AMES plant consolidation was completed at the end of Q1; management expects annual cash savings exceeding $10.0, with realization beginning in Q2.
- Telephonics: Revenue declined 5% in both the quarter and six-month period, principally due to timing of awards and work. Six-month segment operating profit fell 22% to $16.6. Backlog was $482.0, with 73% expected to be fulfilled within 12 months; the company reported approximately $178.1 of new awards and incremental funding during the six months.
- Plastics: Revenue declined 9% in the quarter and 5% for six months, with foreign currency a major drag. Segment operating profit increased 6% in the quarter and 18% for six months, supported by resin-price pass-through effects and operational improvements.
- Foreign currency translation produced a $45.9 six-month other comprehensive loss, contributing to a $33.6 comprehensive loss despite reported net income. Management also estimated that, excluding currency effects, six-month net income would have been $15.0 rather than $12.6.
Outlook, commentary, risks and unusual items
- No consolidated full-year revenue or earnings guidance is provided. Management cited expected AMES annual cash savings above $10.0 and said the company believes it has sufficient liquidity for reinvestment and strategic acquisitions.
- Adjusted net income was $5.3 for the quarter versus $6.0 in the prior-year quarter, and $13.1 for six months versus $10.0. These company-adjusted figures exclude specified items and are non-GAAP; six-month reported diluted EPS was $0.26 while adjusted EPS was $0.27.
- The prior-year comparisons include a $38.9 debt-extinguishment loss and related tax impact, as well as restructuring and acquisition costs. No restructuring charges were recorded in the current quarter or six-month period. Current-year discrete tax provisions were $0.1 for the quarter and $0.5 for six months.
- Customer concentration is significant: for the six months, the U.S. Government represented 14% of consolidated revenue and 72% of Telephonics revenue; Procter & Gamble represented 14% of consolidated revenue and 51% of Plastics revenue; Home Depot represented 11% of consolidated revenue and 21% of HBP revenue. Management warned that reductions or loss of major-customer business could materially affect results and liquidity.
- Risks include seasonality and weather, foreign-exchange movements, raw-material costs, competition and pricing, customer demand, government spending and contract timing, and successful execution of acquisitions and cost savings. Telephonics is responding to a U.S. government inquiry and providing information under an administrative subpoena; no claim had been asserted, and Griffon reported no known material exposure. Environmental matters include the Peekskill site and ongoing remediation planning at AMES’s Frankfort, New York site. Management said resolution of disclosed legal and environmental matters was not expected to materially affect consolidated results, but outcomes remain uncertain.
- The board authorized an additional $50.0 stock-repurchase program in March; $52.4 remained under authorizations at March 31. Griffon repurchased 2.6 million shares for $36.5 during the six months and paid dividends of $0.08 per share. A further $0.04 quarterly dividend was declared after quarter-end.
- Management concluded disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether operating cash generation improves as inventory, receivables and contract assets—which contributed to working-capital cash use—normalize.
- Progress and realized savings from the completed AMES consolidation, and whether HBP’s seasonal demand and margins support management’s savings expectation.
- Telephonics contract awards, backlog conversion and customer/government funding timing, alongside the disclosed government inquiry.
- Debt levels, revolver availability and covenant headroom, especially given share repurchases, dividends and increased net debt.
- Currency effects on reported sales, earnings, cash and equity, and the company’s sensitivity to major-customer demand and environmental or legal outcomes.