Griffon Corporation — Q2 FY2018 Form 10-Q
Reporting period: Three and six months ended March 31, 2018. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where shown. Comparatives are continuing operations unless noted. Griffon operates Home & Building Products (HBP) and Telephonics.
Financial performance
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Revenue | $478.6m | $383.8m | $915.9m | $736.1m |
| Gross profit / margin | $121.5m / 25.4% | $98.9m / 25.8% | $242.3m / 26.5% | $195.6m / 26.6% |
| Operating income / margin | $17.8m / 3.7% | $16.9m / 4.4% | $32.8m / 3.6% | $34.8m / 4.7% |
| Income from continuing operations | $2.0m | $2.0m | $24.8m | $9.0m |
| Net income | $90.3m | $5.0m | $121.3m | $17.3m |
| Diluted EPS | $2.11 | $0.12 | $2.82 | $0.40 |
| Operating cash flow, continuing operations | Not separately presented | Not separately presented | $(38.8)m | $(14.2)m |
Q2 revenue increased 25%; six-month revenue increased 24%. Growth came chiefly from HBP acquisitions and organic gains, partly offset by lower Telephonics revenue. Q2 continuing income was essentially flat. Six-month continuing income benefited substantially from a provisional $23.1m tax benefit related mainly to U.S. tax reform; excluding disclosed acquisition, life-insurance and tax items, adjusted continuing income was $5.1m, or $0.12 diluted EPS, versus $5.0m, or $0.12, a year earlier.
Net income includes discontinued operations and the sale of Clopay Plastic Products Company (PPC): Griffon recorded a $117.6m pre-tax gain ($86.4m after tax). PPC sale proceeds were $475.0m, subject to post-closing adjustments. The six-month discontinued-operations income was $96.5m after tax.
Segments and material changes
- HBP: Q2 revenue rose 39% to $396.3m; segment operating profit increased 55% to $28.5m. Six-month revenue rose 40% to $767.3m and operating profit increased 37% to $56.2m. Acquisitions, CBP pricing and mix supported results; unfavorable U.S. weather reduced AMES sales.
- Telephonics: Q2 revenue declined 16% to $82.3m and operating profit fell to $1.3m from $9.0m. Six-month revenue declined 20% to $148.6m and operating profit fell to $2.8m from $14.4m. Management cited lower maritime radar and other program work, reduced margins, and revised estimates to complete certain contracts.
- ClosetMaid was acquired October 2, 2017; AMES acquired Harper in November 2017 and Kelkay in February 2018. Their results are included from acquisition dates. Griffon completed the PPC divestiture in February 2018 and presents it as discontinued operations.
Cash, debt and liquidity
- At March 31, cash and equivalents were $236.5m; total debt was $1,106.9m and debt net of cash was $870.4m. Long-term debt, net of current maturities, was $1,078.5m.
- Working-capital movements, particularly inventory, receivables and contract costs, contributed to negative continuing operating cash flow of $38.8m for the six months. Capital expenditures were $21.6m.
- Continuing investing activities provided $206.6m, principally reflecting PPC sale proceeds, partly offset by $246.2m of business acquisitions. Continuing financing activities provided $71.9m.
- The $350m revolving facility had $14.9m of borrowings and $320.2m available, subject to covenants. Griffon reported compliance with debt covenants. Its $1.0bn of 5.25% senior notes mature in 2022.
Outlook, commentary and risks
- No quantified company-wide earnings or revenue guidance is provided. Management said it believes liquidity is sufficient for existing operations and strategic acquisitions; HBP is seasonal, so interim results may not indicate full-year performance.
- On May 3, 2018, CBP agreed to acquire CornellCookson for $180m, subject to adjustments; the effective purchase price after tax benefits was estimated at about $170m. Closing was expected in June, subject to regulatory approval and customary conditions. Griffon estimated approximately $200m of first-year revenue from the business.
- The Board declared a $1.00-per-share special dividend in March, paid April 16, 2018, and declared a further $0.07 quarterly dividend in May. Future dividends remain at the Board’s discretion.
- Key exposures include customer concentration (Home Depot was 20% of consolidated six-month revenue; the U.S. Government and agencies were 10% overall and 59% of Telephonics revenue), government contract funding and audits, raw-material costs, weather and seasonality, acquisition integration, competition, interest and foreign-exchange movements, and environmental or legal contingencies. Management stated that pending legal and environmental matters were not expected to materially adversely affect consolidated results, but some losses cannot be estimated.
- Discontinued-operation liabilities were estimated to require $56.0m of future net cash outflows. The filing also describes environmental remediation matters and potential customer indemnity exposure for which AMES could not estimate a loss.
Important facts for investors to verify
- How much of reported revenue and HBP profit growth is organic versus attributable to acquisitions, and whether acquired businesses meet expected contribution levels.
- Underlying continuing earnings and cash generation after separating the PPC disposal gain and provisional tax benefits from recurring results.
- Telephonics contract execution, revised completion estimates, backlog conversion and dependence on U.S. government funding.
- Debt and liquidity after the special dividend and planned CornellCookson acquisition, including covenant headroom and acquisition funding.
- Final tax effects of the Tax Cuts and Jobs Act, PPC sale adjustments and the estimated cash costs of discontinued-operation, environmental and other contingencies.