Griffon Corporation — Q2 FY2017 10-Q
Business context and period. Griffon is a diversified holding company with three reporting segments: Home & Building Products (HBP, including AMES and Clopay Building Products), Telephonics, and Clopay Plastic Products (PPC). This filing covers the quarter and six months ended March 31, 2017; the fiscal year ends September 30. Amounts below are in U.S. dollars, in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q2 FY2017 | Q2 FY2016 | Six months FY2017 | Six months FY2016 |
|---|---|---|---|---|
| Revenue | $495.8 | $500.1 | $962.9 | $994.3 |
| Gross profit / margin | $115.5 / 23.3% | $114.2 / 22.8% | $231.7 / 24.1% | $230.3 / 23.2% |
| Operating income / margin | $23.1 / 4.7% | $22.6 / 4.5% | $49.4 / 5.1% | $47.4 / 4.8% |
| Net income | $5.0 | $6.1 | $17.3 | $16.9 |
| Diluted EPS | $0.12 | $0.14 | $0.40 | $0.38 |
| Segment adjusted EBITDA | $51.3 | $48.6 | $105.6 | $100.5 |
- Q2 revenue declined 1% year over year; six-month revenue fell 3%. Q2 net income declined, while six-month net income and diluted EPS increased modestly.
- Adjusted for discrete and certain other tax items, management reported Q2 net income of $6.4 million and diluted EPS of $0.15, versus $6.1 million and $0.14 a year earlier. Six-month adjusted net income was $14.4 million and adjusted diluted EPS $0.34, versus $14.3 million and $0.32.
- Six-month operating cash flow was $8.8 million, versus cash used of $3.2 million in the prior-year period. Investing used $48.4 million, primarily including $42.5 million of capital expenditures and the $6.1 million Hills acquisition. Financing provided $16.3 million. Cash declined to $47.4 million from $72.6 million at September 30, 2016.
- At March 31, 2017, total debt was $1,024.2 million before discounts and issuance costs, and net debt was $976.8 million. Long-term debt, net of discounts and issuance costs, was $993.6 million; current debt was $16.8 million. The $350 million revolving facility had $176.0 million drawn, $16.4 million of letters of credit and $157.6 million available, subject to covenants.
- Working-capital balances included current assets of $775.8 million and current liabilities of $275.2 million. Shareholders’ equity was $377.9 million.
Material changes and segment performance
- HBP: Q2 revenue rose 2% to $285.5 million and segment operating profit increased to $18.3 million. Six-month revenue rose 2% to $549.7 million and operating profit increased 5% to $41.0 million. CBP growth, AMES Australia expansion and the Hills acquisition contributed; higher CBP material costs and lower sales in certain AMES product categories partly offset gains.
- Telephonics: Q2 revenue declined 7% to $98.3 million, primarily on lower mobile ground-surveillance radar sales, while operating profit rose 14% to $9.0 million on program mix and efficiency improvements. Six-month revenue fell 13% to $186.4 million and operating profit fell 8% to $14.4 million. Backlog was $387 million, down from $420 million at September 30, 2016; 73% was expected to be fulfilled within 12 months.
- PPC: Q2 revenue declined 3% to $112.0 million, mainly from unfavorable product mix; operating profit declined 10% to $5.3 million, partly reflecting higher depreciation from capacity investment. Six-month revenue fell 5% to $226.8 million, while operating profit increased 12% to $13.3 million, supported by European operational improvements.
- In January 2017, Griffon settled its $100 million 4% convertible notes for $173.9 million: $125 million in cash funded with revolver borrowings and $48.9 million in treasury shares. The settlement and other financing activity contributed to higher debt and lower cash.
Outlook, commentary, risks and contingencies
- The filing provides no specific consolidated full-year revenue or earnings guidance. Management said it believes liquidity is sufficient to invest in existing businesses and pursue strategic acquisitions. HBP results are seasonal, and interim results may not indicate full-year performance.
- Management cited growth opportunities from the Hills acquisition and HBP expansion, and ongoing PPC breathable-film investment, which was expected to be completed in fiscal 2018. Hills was expected to generate approximately AUD 10 million in revenue during its first 12 months after acquisition.
- Key exposures include customer concentration: for the six months, the U.S. Government represented 13% of consolidated revenue and 69% of Telephonics revenue; Procter & Gamble represented 12% of consolidated revenue and 49% of PPC revenue; Home Depot represented 12% of consolidated revenue and 21% of HBP revenue. Loss of significant customer business could materially affect results and liquidity.
- Other disclosed risks include defense spending and contract timing, raw-material costs, product mix, housing and weather conditions, competition, foreign exchange and interest rates, and acquisition and restructuring execution. A 100-basis-point LIBOR change and a 10% or smaller move in relevant foreign currencies were each stated not to have a material effect under the company’s disclosed sensitivity analysis.
- Contingencies include environmental matters at the Peekskill and former Union Fork and Hoe sites, a potential customer indemnity matter involving Union Tools advertising, and DOJ discussions concerning amounts on certain government subcontracts. Griffon said no DOJ claim had been asserted and it did not believe that matter created material financial exposure; management said the identified legal matters were not expected to materially affect consolidated results, position or cash flows. Telephonics remains exposed to possible consequences of government contract audits, including suspension or debarment risk.
- The quarter’s tax provision included $1.3 million of discrete tax items, including a valuation allowance against German net operating loss carryforwards. The reported quarterly effective tax rate was 50.7%; excluding identified tax items, management reported 37.7%. The six-month reported rate was 25.4%, reflecting net tax benefits.
- Griffon reported compliance with its debt covenants at March 31, 2017. Disclosure controls were judged effective at the reasonable-assurance level, with no material change in internal control over financial reporting reported.
Most important facts for investors to verify
- Whether Telephonics revenue and backlog recover, and the timing and conversion of its funded contract pipeline.
- Whether HBP growth and PPC operational improvements offset product-mix pressure, material costs and increased depreciation.
- Debt, cash generation and revolver availability after the convertible-note settlement; monitor covenant headroom and refinancing needs.
- The sustainability of adjusted earnings relative to reported earnings, particularly the effect of discrete tax items and the German valuation allowance.
- Customer concentration, government-contract exposure, and the eventual cost and resolution of environmental and other legal contingencies.