Business context and reporting period
Griffon Corporation filed this Form 10-Q for the fiscal quarter and six months ended March 31, 2016. It operates through Home & Building Products (HBP, including AMES and Clopay Building Products), Telephonics, and Clopay Plastic Products (PPC). Amounts below are in millions of U.S. dollars unless noted. HBP results are seasonal, and interim results may not indicate full-year performance.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $500.1 | $500.0 | $994.3 | $1,002.2 |
| Gross profit | $114.2 | $114.4 | $230.3 | $232.4 |
| Income from operations | $22.6 | $20.8 | $47.4 | $44.9 |
| Net income | $6.1 | $5.1 | $14.7 | $12.6 |
| Diluted EPS | $0.14 | $0.11 | $0.33 | $0.26 |
- Q2 gross margin was approximately 22.8% versus 22.9%; operating margin was 4.5% versus 4.2%. Six-month gross and operating margins were approximately 23.2% and 4.8%, respectively, versus 23.2% and 4.5%.
- Six-month revenue declined 0.8% reported, but increased 2% excluding unfavorable foreign currency effects, according to management. Q2 revenue was essentially flat reported and increased 2% excluding currency.
- Six-month operating cash flow was a use of $5.4, improved from a use of $43.1 a year earlier. Investing activities used $48.8, including $46.0 of capital expenditures. Financing activities provided $56.3. Cash ended at $54.3.
- At March 31, cash was $54.3 and current assets were $789.8 versus current liabilities of $281.8. Balance-sheet debt was $941.8 net of discounts and issuance costs; reported total debt before those deductions was $957.2. Debt net of cash was $902.9.
- The amended revolving facility provides $350.0 of maximum availability; $122.5 was borrowed, $15.9 was committed for letters of credit, and $211.6 remained available subject to covenants. Griffon reported compliance with debt covenants.
Material changes and segment results
- HBP: Q2 revenue rose 6% to $279.2 and operating profit rose to $17.8 from $8.7. Six-month revenue increased 1% to $540.4 and operating profit increased to $39.0 from $25.0. Management cited efficiency and cost measures, higher CBP volume and favorable mix; warmer weather reduced AMES snow-tool sales year to date.
- Telephonics: Q2 revenue rose 7% to $105.9, while operating profit fell 14% to $7.9. Six-month revenue rose 14% to $214.9, while operating profit declined 6% to $15.7. Management attributed weaker profit and margins primarily to contract timing and cost growth on certain airport-surveillance radar components. Backlog was $446 at March 31; 76% was expected to be fulfilled within 12 months.
- PPC: Q2 revenue fell 17% to $115.0 and operating profit fell 40% to $5.9. Six-month revenue declined 14% to $238.9 and operating profit fell 33% to $11.9. Lower North American baby-care orders, currency, resin-price pass-through timing, and European maintenance-related inefficiencies affected results.
- Six-month adjusted net income, excluding discrete tax items, was $14.3 versus $13.1; adjusted diluted EPS was $0.32 versus $0.27. The 2016 period included a $0.4 discrete tax benefit, compared with $0.5 of discrete tax expense in 2015.
- Debt increased from $861.2 at September 30, 2015, and share repurchases used $29.9 in the six-month period. Griffon repurchased 1.95 million shares at an average $15.36 per share; $28.0 remained under the July 2015 authorization.
Outlook, commentary, risks and unusual items
- No consolidated full-year revenue or earnings guidance is provided in the filing. Management said it believes available liquidity is sufficient for investment in existing businesses and strategic acquisitions.
- PPC announced a planned $50.0 Sof-flex breathable-film capacity and technology investment, expected to be completed in late 2017. It expects approximately $5.0 of third-quarter 2016 restructuring charges and estimates annual cash savings of $3.0 from facility and workforce actions.
- On March 22, 2016, Griffon increased revolving credit availability from $250.0 to $350.0 and extended maturity to March 22, 2021. The $100.0 of 4% convertible notes due 2017 become holder-convertible at any time on or after July 15, 2016; Griffon stated intent and ability to settle principal in cash.
- Customer concentration is significant: for the six months, the U.S. Government and agencies accounted for 16% of consolidated revenue and 73% of Telephonics revenue; Procter & Gamble accounted for 12% consolidated and 52% of PPC; Home Depot accounted for 13% consolidated and 24% of HBP. Orders could fluctuate, and loss of material customer volume could adversely affect results and liquidity.
- Risks include seasonality and weather, raw-material costs, currency movements, competition, government spending and contract audits, and reliance on key customers. The filing describes environmental matters and a U.S. government contract discussion; no claim had been asserted in the latter matter, and management did not believe it represented material exposure. Management stated the disclosed legal and environmental matters were not expected to materially affect consolidated results, but outcomes remain uncertain.
- Foreign-currency translation produced six-month other comprehensive income of $10.3, while cash-flow hedges produced a $2.7 loss. Management stated a 100-basis-point LIBOR change and a 10% or smaller move in applicable currencies would not materially affect financial position, results, or cash flows.
Investor verification priorities
- Assess whether PPC’s lower volumes, customer demand, planned $50.0 investment, restructuring costs, and projected savings develop as described.
- Monitor Telephonics contract margins and cost growth, backlog conversion, and government-contract audit or claim developments.
- Review working-capital cash use, particularly collections of receivables and unbilled contract costs, against the improved but still negative operating cash flow.
- Track debt levels, revolver availability and covenant headroom, plus the 2017 convertible-note maturity and conversion or refinancing plan.
- Evaluate exposure to major customers, seasonality and weather, foreign exchange, and resin and steel costs; verify future dividends and share repurchases against cash needs.