Griffon Corporation (NYSE: GFF) — Form 10-Q summary
Reporting period: Fiscal second quarter and six months ended March 31, 2021; comparisons are with the corresponding 2020 periods. Griffon is a diversified holding company operating through Consumer and Professional Products (CPP), Home and Building Products (HBP), and Defense Electronics (DE). Dollar figures below are in millions unless stated otherwise.
Financial performance
| Metric | Quarter ended Mar. 31, 2021 | Prior-year quarter | Six months ended Mar. 31, 2021 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $634.8 | $566.4 | $1,244.1 | $1,114.8 |
| Gross profit / margin | $170.3 / 26.8% | $152.0 / 26.8% | $340.5 / 27.4% | $302.0 / 27.1% |
| Operating income / margin | $43.5 / 6.9% | $25.6 / 4.5% | $92.1 / 7.4% | $57.7 / 5.2% |
| Net income | $17.1 | $0.9 | $46.6 | $11.5 |
| Diluted EPS | $0.32 | $0.02 | $0.88 | $0.26 |
| Adjusted net income / diluted EPS (non-GAAP) | $25.4 / $0.48 | $10.1 / $0.23 | $55.2 / $1.04 | $25.6 / $0.59 |
Quarterly revenue rose 12%; CPP grew 21% and HBP 16%, partly offset by a 26% decline in DE. For the six-month period, revenue rose 12%, with CPP up 21%, HBP up 9%, and DE down 13%. Adjusted EBITDA was $67.8 million for the quarter, versus $48.0 million, and $142.4 million for six months, versus $103.1 million.
Quarterly segment adjusted EBITDA was $37.4 million for CPP (11.3% of segment revenue), $40.1 million for HBP (16.5%), and $2.2 million for DE (3.7%). CPP and HBP benefited from stronger volume; both cited higher material or distribution costs and COVID-related inefficiencies as offsets. DE’s results reflected lower program revenue and cost growth on Surveillance programs.
Cash flow, debt and liquidity
- Operating cash flow was negative $25.8 million for the six months, improving from negative $60.8 million a year earlier. Working-capital investment—particularly a $74.2 million inventory increase and a $47.1 million increase in receivables and contract assets—more than offset cash earnings; management attributed inventory growth primarily to seasonal needs.
- Investing cash outflow was $13.5 million, including $24.0 million of capital expenditures; proceeds from the SEG sale were $14.7 million. Financing cash outflow was $5.9 million. Cash declined $42.5 million from September 30, 2020 to $175.6 million.
- Total debt was $1,074.9 million and debt net of cash was $899.4 million at March 31, 2021, compared with $1,064.4 million and $846.3 million, respectively, at September 30, 2020. Gross debt to EBITDA under the credit agreement was 3.1x. The company reported compliance with debt covenants.
- The $400 million revolving facility had $20.6 million drawn and $363.1 million available, subject to covenants. The $1.0 billion of 5.75% senior notes mature in 2028. Management said available cash, operating cash flows and other liquidity sources were sufficient for expected requirements.
Material changes and unusual items
- On December 18, 2020, DE sold its Systems Engineering Group (SEG) business for $15.0 million and recognized a $5.3 million pretax gain in the six-month period. The second-quarter result included a $0.9 million adjustment reducing that gain. The sale was not described as a strategic shift with a major effect on operations.
- CPP acquired Australian landscaping-products company Quatro in December 2020 for approximately $2.7 million, with up to approximately $0.8 million of contingent consideration. Management expects about $5.0 million in first-12-month revenue.
- Six-month results included $18.4 million of restructuring charges and the $5.3 million SEG gain. Prior-year six-month results included $9.5 million of restructuring charges, $6.7 million of debt-extinguishment loss and $3.0 million of acquisition costs. These items, together with tax items, materially affect year-over-year comparisons; management’s adjusted results are non-GAAP.
- CPP’s expanded business-platform project now targets completion by the end of calendar 2023. Management estimates $30–$35 million of annual cash savings and a $30–$35 million inventory reduction, based on fiscal 2020 operating levels, when fully implemented. Estimated total one-time charges are approximately $65 million, plus approximately $65 million of capital investment. These are projections, not guaranteed outcomes.
Outlook, commentary and risks
The filing provides no consolidated revenue or earnings guidance. Management reported normal or better order patterns across businesses through the filing date, fully operational facilities, and no significant supply-chain disruption to date; it cautioned that COVID-19’s future effects remain uncertain. CPP is seasonal, and interim results may not indicate full-year performance.
Key exposures include raw-material costs and availability, competition and pricing, customer demand, seasonality and weather, foreign exchange, government spending and contract timing, and COVID-19-related disruption. Home Depot represented 17% of consolidated six-month revenue; the U.S. Government represented 7% of consolidated revenue and 64% of DE revenue. Griffon also disclosed environmental matters, including the Peekskill site investigation, and potential government-contract audit or enforcement consequences for Telephonics. Management said it did not expect the disclosed legal and environmental matters to materially adversely affect consolidated results, financial position or cash flows.
The company paid dividends of $0.08 per share in each of the first two fiscal quarters and declared another $0.08 dividend after quarter-end. Future dividends remain at the board’s discretion.
Important facts for investors to verify
- Whether CPP and HBP volume growth and improved adjusted EBITDA persist as material and distribution costs change.
- Whether DE program timing, contract execution and backlog convert into revenue and profit as expected; reported backlog was $353.9 million, with approximately 65% expected to be recognized within one year.
- Whether restructuring costs, capital investment, projected savings and inventory reductions track management’s estimates and revised 2023 completion timeline.
- Whether seasonal working-capital needs reverse and operating cash flow improves; cash flow was negative despite higher reported earnings.
- Debt leverage, covenant headroom, customer concentration, and developments in environmental and government-contract contingencies.