Griffon Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended September 30, 2017. Unless noted, financial amounts below are in millions of U.S. dollars. The filing reports annual results; fiscal fourth-quarter figures are identified separately. Continuing operations principally comprise Home & Building Products (HBP) and Telephonics. Clopay Plastic Products (PPC) is presented as a discontinued operation.
Business context and reporting period
Griffon is a diversified holding company. HBP manufactures lawn and garden tools, garage doors and related building products; Telephonics supplies defense, aerospace and commercial surveillance and communications systems. On October 2, 2017, Griffon acquired ClosetMaid, which was not included in FY2017 results or the September 30 balance sheet. On November 16, 2017, it announced an agreement to sell PPC to Berry Global for $475 million cash, subject to approvals and customary conditions, with closing expected in calendar Q1 2018.
Key financial metrics
| Metric | FY2017 | FY2016 |
|---|---|---|
| Continuing-operations revenue | $1,525.0 | $1,477.0 |
| Gross profit / gross margin | $408.1 / 26.8% | $400.7 / 27.1% |
| Income from operations | $69.0 | $82.3 |
| Continuing-operations pretax income | $16.7 | $32.2 |
| Continuing-operations income / diluted EPS | $17.8 / $0.41 | $19.8 / $0.45 |
| Net income / diluted EPS, including discontinued operations | $14.9 / $0.35 | $30.0 / $0.68 |
| Operating cash flow, continuing operations | $49.2 | $80.1 |
| Capital expenditures, continuing operations | $34.9 | $59.3 |
Year-end cash and equivalents were $47.7, compared with $72.6 a year earlier. Debt was approximately $992.4 gross principal, or $979.2 net of discounts and issuance costs on the balance sheet; debt less cash was approximately $944.7. The revolving facility had $144.2 outstanding and $191.9 available, subject to covenants. Current assets were $1,098.1 and current liabilities $371.1; both totals include amounts related to discontinued operations held for sale. The company reported compliance with debt covenants at year-end.
FY2017 dividends were $0.24 per share, up from $0.20. The board subsequently declared a $0.07-per-share dividend payable in December 2017. Reported figures are affected by acquisition costs, contract settlement charges, reserve charges and tax items; see unusual items below.
Material changes versus the prior comparable period
- Continuing revenue rose 3%. HBP revenue increased 7% to $1,113.3; AMES grew 6% and CBP grew 8%. Telephonics revenue fell 6% to $411.7.
- HBP operating profit increased to $89.5 from $79.7, with higher volume, pricing and favorable mix partly offset by higher steel and resin costs. Telephonics operating profit declined to $29.9 from $42.8, reflecting lower sales, unfavorable program mix, revised contract estimates and a settlement charge.
- Gross margin declined 0.3 percentage points. SG&A rose 7% to $339.1, or 22.2% of revenue versus 21.6%, including acquisition-related expenditures.
- Operating cash flow from continuing operations decreased $31.0, primarily because of working-capital investment, including a $29.3 inventory increase. Net cash used in investing activities rose to $71.3, primarily due to acquisitions.
- Reported net income declined to $14.9 from $30.0. Excluding specified items, management-reported adjusted net income was $37.4 versus $36.9, and adjusted diluted EPS was $0.87 versus $0.84; these are non-GAAP measures.
- Telephonics funded backlog fell to $350.9 from $420.0; approximately 70% of year-end backlog was expected to be fulfilled in FY2018.
Outlook, risks, contingencies and unusual items
- Outlook: The filing does not provide consolidated earnings or revenue guidance. Management cited housing, repair-and-remodel and garage-door market activity as relevant to HBP, while emphasizing exposure to economic conditions and weather. The filing reports industry estimates, not Griffon guidance.
- Post-year-end transactions: ClosetMaid was acquired for approximately $200 million (approximately $175 million including the net present value of tax benefits) and was expected to contribute about $300 million in revenue in its first 12 months. Griffon also issued $275 million of 5.25% notes due 2022; total notes outstanding became $1.0 billion. Proceeds funded the acquisition and reduced revolving borrowings. PPC’s proposed sale proceeds are not yet realized.
- Reported earnings items: FY2017 continuing results included $9.6 million of acquisition costs and $5.1 million of Telephonics contract settlement charges. The settlement related to government subcontract work performed in 2005–2013; Telephonics paid $4.25 million plus interest and associated legal costs. The overall FY2017 tax benefit from continuing operations was $1.1 million, including $8.3 million of discrete and other tax benefits.
- Discontinued operations: PPC generated $460.9 million revenue and $28.0 million operating income before other items in FY2017. Griffon also recorded $5.7 million of discontinued-operation reserves for historical environmental remediation and homeowner-association claims; discontinued operations reported a $2.9 million loss after tax.
- Principal risks: Housing and renovation cycles; seasonal and weather-sensitive demand; customer concentration (Home Depot represented 17% of consolidated revenue; the U.S. Government and its agencies represented 18%); raw-material inflation and pricing delays; defense budgets, contract funding and audits; supplier and manufacturing disruption; foreign exchange and trade exposure; acquisition integration; and debt service and covenant restrictions.
- Other exposures: Telephonics had $56 million of outstanding offset commitments, some extending through 2029; the filing says penalties were neither estimable nor probable at year-end. Griffon is also involved in ordinary-course litigation and environmental matters; management stated that currently known matters were not expected to have a material adverse effect. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Fiscal Q4: For the quarter ended September 30, 2017, revenue was $430.8 million and gross profit was $114.5 million; reported net loss was $12.0 million, or diluted loss per share of $0.28. The filing does not provide a clear quarter-specific reconciliation of the net loss to the annual adjusted measures.
Important facts for investors to verify
- Whether the PPC sale closes on expected terms and timing, and the net cash proceeds after transaction costs, taxes and any debt or other adjustments.
- Post-acquisition ClosetMaid performance, integration costs, realized synergies and the resulting leverage and covenant position.
- Whether HBP growth and margins can offset Telephonics’ lower revenue, reduced backlog and contract-estimate pressures.
- Working-capital conversion, especially inventory levels and operating cash flow, alongside debt maturities, interest costs and available revolver capacity.
- Resolution and financial effects of the Telephonics settlement, environmental and warranty exposures, customer concentration, and raw-material and weather-related risks.