Griffon Corporation — Q2 FY2023 Form 10-Q
Reporting period: Three and six months ended March 31, 2023; fiscal Q2. Unless stated otherwise, dollar figures below are in millions. The filing reports continuing operations unless noted. Griffon operates through Consumer and Professional Products (CPP) and Home and Building Products (HBP); Telephonics was sold in June 2022 and is presented as a discontinued operation.
Key financial results
| Metric | Three months ended March 31, 2023 | Prior-year quarter | Six months ended March 31, 2023 | Prior-year period |
|---|---|---|---|---|
| Revenue | $711.0 | $779.6 | $1,360.4 | $1,371.4 |
| Gross profit | $194.5 | $260.6 | $428.3 | $426.5 |
| Gross margin | 27.4% | 33.4% | 31.5% | 31.1% |
| Operating income (loss) | $(65.8) | $102.8 | $15.3 | $141.3 |
| Net income (loss) | $(62.3) | $65.7 | $(13.6) | $85.0 |
| Diluted EPS | $(1.17) | $1.23 | $(0.26) | $1.59 |
| Adjusted income from continuing operations and adjusted EPS | $66.9; $1.21 | $72.7; $1.36 | $114.4; $2.07 | $93.6; $1.75 |
Quarterly revenue fell 9%; six-month revenue declined 1%. Q2 operating results included a $100.0 non-cash intangible impairment and $78.3 of restructuring charges. The company’s adjusted results are non-GAAP measures and exclude specified items; reported and adjusted results therefore differ substantially.
Segments and material changes
- CPP: Q2 revenue declined 24% to $314.3 and segment adjusted EBITDA fell to $19.6 from $47.8. For six months, revenue declined 18% to $567.1 and adjusted EBITDA fell to $17.8 from $64.1. Management cited lower volume from reduced demand, elevated customer inventories and U.S. customer supplier diversification, along with weaker manufacturing absorption and higher material costs. Hunter contributed $21.6 of Q2 revenue and $75.8 for the six-month period.
- HBP: Q2 revenue rose 8% to $396.7 and adjusted EBITDA increased 26% to $131.9. For six months, revenue rose 17% to $793.2 and adjusted EBITDA increased 59% to $256.0. Pricing and mix and lower material costs supported results; quarterly volume was down 6%, with residential weakness partly offset by commercial growth.
- Consolidated adjusted EBITDA was $136.9 in Q2 versus $139.3; six-month adjusted EBITDA was $245.4 versus $198.5. Growth at HBP offset much of CPP’s deterioration.
Cash flow, debt and liquidity
- Six-month operating cash flow from continuing operations was $161.6, versus cash used of $173.4 a year earlier. Management attributed the improvement chiefly to HBP cash generation and lower working capital, particularly inventory and receivables.
- Investing cash use was $2.6, including $11.8 of capital expenditures and $2.6 paid for Telephonics sale-related working-capital adjustments, offset largely by $11.8 of building-sale proceeds. Financing cash use was $99.6, including $73.7 of net debt repayments, $12.8 of dividends and $13.0 of treasury-share purchases, principally tax withholding on employee awards.
- At March 31, cash was $175.6 and gross debt was $1,527.2; debt net of cash was $1,351.6, down from $1,475.4 at September 30, 2022. The company reported $356.3 available on its $400.0 revolver, subject to covenants, and leverage of 2.5x under its credit-agreement definition. Griffon said it was in compliance with its debt covenants.
- Interest expense for six months increased to $49.5 from $37.1. The Term Loan B rate was 7.55% at March 31; variable-rate exposure and refinancing needs remain relevant. The filing states that a 100-basis-point rate change would not materially affect results or liquidity at then-current borrowings.
Outlook, risks and unusual items
- On May 3, 2023, Griffon announced an expansion of CPP’s global sourcing strategy, targeting completion by the end of calendar 2024. It expects $120–$130 of charges, including $50–$55 cash and $70–$75 primarily non-cash, plus $3–$5 of capital investment. The strategy targets CPP EBITDA margins of 15% and improved free cash flow; these are management objectives, not consolidated financial guidance. Management expects real-estate and equipment sale proceeds to largely offset cash charges, excluding transition inefficiencies.
- The filing gives differing footprint reduction descriptions: approximately 1.2 million square feet, stated as about 15% in one disclosure and 30% of the U.S. footprint in another. It also expects about 600 fewer employees. The strategy adds supplier, execution, customer-disruption and cybersecurity risks; expected asset-sale proceeds may not be realized.
- The Board ended its strategic-alternatives review on April 20, 2023, concluding that executing the existing strategic plan was the best way to maximize shareholder value. Subsequent to quarter-end, it declared a $2.00-per-share special dividend and increased the share-repurchase authorization to $257.955; it also declared a $0.125 quarterly dividend.
- CPP demand and inventory conditions, customer concentration, seasonality, inflation, currency movements, supply-chain reliance and interest rates are cited risks. Home Depot represented 11% of consolidated six-month revenue. Griffon identified potential environmental exposure at the former Hunter Memphis site and described liability there as probable, but the filing does not provide a clear estimate of the amount. Management said resolution of disclosed legal and environmental matters is not expected to materially adversely affect consolidated results, financial position or cash flows.
Important facts for investors to verify
- Whether CPP demand and customer inventory levels recover, and whether its sourcing transition achieves targeted margins and cash-flow benefits.
- The realized cash and non-cash costs, asset-sale proceeds, execution disruption and timing of the CPP restructuring; clarify the disclosed 15% versus 30% footprint reduction.
- Whether HBP’s pricing and margin strength can continue and offset CPP weakness.
- Debt repayment capacity, variable-rate interest costs, revolver availability under covenants and upcoming subsidiary debt maturities.
- The assumptions behind adjusted earnings and the $100.0 intangible impairment, and the eventual costs, if any, of the Memphis environmental matter.