Griffon Corporation — Fiscal 2015 Third-Quarter 10-Q
Reporting period: Quarter and nine months ended June 30, 2015; amounts below are in U.S. dollars, generally rounded to millions. Griffon operates Home & Building Products (HBP), Telephonics, and Plastics. The filing notes that HBP is seasonal and interim results may not indicate full-year performance.
Financial performance
| Metric | Quarter ended June 30, 2015 | Prior-year quarter | Nine months ended June 30, 2015 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $511.7m | $505.0m | $1,513.9m | $1,466.2m |
| Gross profit / margin | $123.5m / 24.1% | $118.3m / 23.4% | $355.9m / 23.5% | $333.8m / 22.8% |
| Operating income / margin | $27.9m / 5.5% | $21.8m / 4.3% | $72.8m / 4.8% | $58.5m / 4.0% |
| Net income (loss) | $10.9m | $14.5m | $23.5m | $(8.1)m |
| Diluted EPS | $0.23 | $0.29 | $0.50 | $(0.16) |
- Quarterly revenue rose 1% as reported and 5% excluding foreign-currency effects. Net income declined year over year, although adjusted net income was $10.6m versus $9.5m and adjusted diluted EPS was $0.23 versus $0.19. These are company-defined non-GAAP measures.
- Nine-month revenue rose 3% as reported and 6% excluding currency effects. The prior-year loss included a $38.9m pretax debt-extinguishment charge; adjusted net income was $23.7m versus $19.5m.
- Cash from operations was $29.6m for the nine months, down from $49.9m. Capital expenditures were $55.4m, implying operating cash flow less capital expenditures of approximately negative $25.8m. Cash fell to $46.0m from $92.4m at September 30, 2014.
- At June 30, current assets were $756.7m and current liabilities $288.8m. Balance-sheet debt carrying value was $840.5m, including current debt; debt before unamortized discounts and issuance costs was $859.5m. Management reported debt net of cash of $813.6m on that gross basis. Revolver availability was $167.8m, after $65.0m of borrowings and $17.2m of letters of credit. The company said it was in compliance with debt covenants.
- Quarterly dividend paid was $0.04 per share; $0.12 per share was paid in the nine-month period. The board declared another $0.04 dividend for September 2015.
Segments and material changes
- HBP: Quarterly revenue increased 7% to $272.2m; segment operating profit rose 67% to $16.3m. Growth reflected AMES acquisitions and higher CBP volume/mix, while currency was unfavorable. Nine-month operating profit increased 48% to $41.3m. The AMES plant consolidation was completed in the first quarter; management expects annual cash savings above $10m, with savings beginning in the second quarter.
- Telephonics: Quarterly revenue rose 13% to $115.3m, primarily due to timing of radar work; operating profit was nearly flat at $13.3m, with margin down 130 basis points amid unfavorable program mix. Nine-month operating profit fell 13% to $29.9m, attributed to technology investment and program mix. Backlog was $439m, with 79% expected to be fulfilled within 12 months.
- Plastics: Quarterly revenue fell 16% to $124.2m, affected by currency, lower volume and resin-price pass-through; operating profit rose 3% to $8.3m. Nine-month revenue declined 9% to $401.7m, while operating profit increased 13% to $26.2m, helped by operating improvements and resin-pricing effects.
- In April, AMES acquired a Pennsylvania wood mill for $2.2m to secure wood supplies and reduce production costs. In March, Griffon increased its revolver from $225m to $250m and extended its maturity to March 2020.
- Griffon repurchased 3.84m shares for $57.1m during the nine months. Subsequent to quarter-end, the board authorized a further $50m repurchase program and declared a quarterly dividend.
Outlook, risks, contingencies and unusual items
- The filing provides no consolidated revenue or earnings guidance. Management expressed confidence in liquidity and capacity to invest, pursue acquisitions, and manage capital; it highlighted the AMES savings target noted above.
- Customer concentration is significant: 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 12% of consolidated revenue and 23% of HBP revenue. Loss or reduction of business from a major customer could materially affect results and liquidity.
- Disclosed risks include currency and raw-material movements, housing and weather cycles, competition and pricing, government spending and contract audits, customer demand, acquisition execution, and the ability to realize cost savings. Plastics’ resin-price pass-through occurs with a delay. Management said a 100-basis-point LIBOR change and a 10% or smaller foreign-currency movement would not materially affect the specified financial measures.
- Environmental matters include the Peekskill site, where the state’s selected remedy was estimated at approximately $10m; Griffon disclaims responsibility for remediation. AMES must submit a feasibility study for its Frankfort, New York site, with remediation options and costs not yet established in this filing.
- Telephonics was responding to a U.S. government administrative subpoena/inquiry; no claim had been asserted and the company reported no known material financial exposure. The filing warns that government findings could lead to penalties or suspension/debarment, which could materially affect Telephonics.
- Other notable items: nine-month foreign-currency translation losses of $41.1m contributed to total other comprehensive loss of $40.8m; the prior-year comparison included the debt-extinguishment charge and restructuring/acquisition costs. Griffon reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification points
- Reconcile operating cash generation, $55.4m of capital spending, working-capital changes, and the decline in cash; assess whether cash flow supports ongoing buybacks and dividends.
- Review debt maturities, floating-rate exposure, covenant headroom, and revolver availability alongside the reported debt balances and net-debt calculation.
- Test whether AMES consolidation savings are being realized and whether reported HBP profit growth persists after acquisition and currency effects.
- Track Telephonics program mix, investment spending, backlog conversion, government inquiry developments, and customer concentration.
- Monitor Plastics’ volume, resin pass-through timing, foreign-exchange exposure, and margin sustainability.
- Seek updated cost estimates and liability assessments for environmental matters and any developments in the government inquiry.