Griffon Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2022; compared with the quarter ended December 31, 2021. Amounts below are in U.S. dollars unless stated otherwise. Telephonics, sold in June 2022, is presented as discontinued operations; results discussed are generally from continuing operations.
Business context
Griffon operates through Consumer and Professional Products (CPP), including AMES and Hunter, and Home and Building Products (HBP), principally Clopay. The company acquired Hunter in January 2022. Its board’s strategic alternatives review, announced in May 2022, remained ongoing; the filing gives no assurance a transaction will result.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Revenue | $649.4 million | $591.7 million |
| Gross profit / margin | $233.8 million / 36.0% | $165.8 million / 28.0% |
| Operating income / margin | $81.1 million / 12.5% | $38.5 million / 6.5% |
| Income from continuing operations | $48.7 million | $16.7 million |
| Diluted EPS from continuing operations | $0.88 | $0.31 |
| Adjusted income from continuing operations (non-GAAP) | $47.4 million | $20.9 million |
| Adjusted diluted EPS (non-GAAP) | $0.86 | $0.39 |
Revenue increased 10%. HBP revenue rose 29% to $396.6 million, while CPP revenue fell 11% to $252.8 million. Hunter contributed $54.1 million of revenue and $4.4 million of segment adjusted EBITDA; excluding Hunter, company revenue increased 1% year over year.
HBP adjusted EBITDA increased to $124.1 million from $56.3 million, supported by price/mix, volume and lower material costs. CPP reported an adjusted EBITDA loss of $1.8 million versus income of $16.2 million; excluding Hunter, CPP’s loss was $6.2 million. Lower volume, weaker manufacturing absorption and higher material costs weighed on CPP. Consolidated adjusted EBITDA was $108.6 million versus $59.2 million.
Cash flow, debt and liquidity
- Cash from continuing operating activities was $75.5 million, compared with cash used of $85.0 million a year earlier. Management attributed the improvement to HBP cash generation and lower working capital, particularly receivables and inventory.
- Continuing investing activities provided $4.5 million, including $11.8 million of building-sale proceeds, partly offset by $4.7 million of capital expenditures and a $2.6 million Telephonics post-closing payment.
- Continuing financing activities used $78.4 million, including net debt repayments, $7.1 million of dividends and $12.7 million of treasury-share purchases principally to cover employee tax withholding. Cash ended the quarter at $120.6 million.
- Total debt was $1.54 billion; debt net of cash was $1.42 billion, down from $1.48 billion net at September 30, 2022. The company reported $342.6 million of available revolver capacity, subject to covenants, and gross debt to EBITDA of 2.7x under its credit-agreement definition.
- Term Loan B carried a 7.01% rate at quarter-end; senior notes of $974.8 million mature in 2028, Term Loan B of $494.0 million in 2029, and the $45.1 million revolver balance matures in 2025. Griffon said it was compliant with its debt covenants.
Material changes, outlook and risks
- GAAP results included a $10.9 million building-sale gain, $8.2 million of strategic-review retention and other costs, and $1.5 million of proxy expenses. Management’s adjusted figures also exclude other comparability items; these non-GAAP measures should be considered alongside GAAP results.
- Management expects the completed CPP business-platform initiative to generate annual cash savings of approximately $25 million; realization began in the quarter. The initiative involved approximately $51.9 million of one-time charges and $15 million of capital investment, net of expected facility-sale proceeds.
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Griffon cautions that seasonal interim results, particularly in CPP, may not indicate full-year performance. HBP backlog and lead times continued to normalize.
- Key disclosed risks include housing and economic conditions, inflation and interest rates, commodity and input costs, customer concentration and demand changes, seasonality, foreign exchange, acquisition integration, debt service/refinancing, and the uncertain outcome of the strategic review. Home Depot represented 11% of consolidated revenue.
- Environmental matters include the Peekskill site investigation and potential contamination at Hunter’s former Memphis site; management said resolution of disclosed matters is not expected to materially adversely affect consolidated results, financial position or cash flows. The filing notes potential liability at Memphis, with the extent and cost unclear.
- Disclosure controls were assessed as effective at a reasonable assurance level. Management’s evaluation excluded Hunter’s internal control over financial reporting during the first year after acquisition; Griffon expected to include Hunter in its fiscal 2023 year-end assessment.
Important facts for investors to verify
- Whether the strategic alternatives review produces a transaction, and the terms and implications for shareholders if it does.
- Whether HBP’s strong margins persist as backlog and lead times normalize, and whether CPP volumes and profitability recover.
- Actual realization of the projected $25 million annual savings and the remaining costs to achieve them.
- Debt repayment capacity and sensitivity to floating rates, particularly the Term Loan B’s 7.01% rate and covenant-limited revolver availability.
- Potential environmental and post-sale liabilities, including the Memphis investigation and remaining Telephonics-related obligations.
- Customer concentration and the effect of any material change in Home Depot or other major-customer orders.