Griffon Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2013; comparisons are with the three months ended December 31, 2012 unless otherwise noted. Griffon operates Home & Building Products (HBP), Telephonics and Plastics. Figures below are in U.S. dollars, millions, unless stated otherwise.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $453.5 | $423.7 |
| Gross profit / gross margin | $105.5 / 23.3% | $97.7 / 23.0% |
| Operating income / operating margin | $17.0 / 3.7% | $14.3 / 3.4% |
| Income before taxes | $4.8 | $1.8 |
| Net income | $3.2 | $0.6 |
| Diluted EPS | $0.06 | $0.01 |
| Segment adjusted EBITDA (non-GAAP) | $44.2 | $42.9 |
| Operating cash flow | $(24.4) | $(32.5) |
| Capital expenditures | $17.9 | $17.3 |
Revenue rose 7.0%. Net income improved, while reported results included $0.8 million of restructuring charges, $0.8 million of Northcote acquisition costs and $0.3 million of discrete tax benefits. Management’s adjusted net income, excluding specified items, was $4.0 million ($0.07 per diluted share), versus $2.6 million ($0.05) a year earlier; this is a company-defined non-GAAP measure.
Segments
- HBP: Revenue $218.5 million, up 15%; segment operating profit $9.4 million versus $7.3 million. ATT benefited from improved snow-tool sales and CBP from volume growth, partly offset by ATT plant-consolidation inefficiencies. The prior-year quarter included $1.0 million in Byrd Amendment receipts; current-period receipts were not significant.
- Telephonics: Revenue was essentially flat at $96.0 million. Operating profit fell to $10.7 million from $14.6 million, reflecting less favorable program mix and manufacturing efficiency than in the prior-year quarter. New awards and incremental funding totaled approximately $68.3 million; backlog was $416 million, down from $444 million at September 30, 2013.
- Plastics: Revenue increased 1% to $139.0 million; operating profit rose to $5.8 million from $2.6 million, mainly due to efficiency improvements and a favorable resin benefit, partly offset by lower volume.
Liquidity, debt and cash flow
Cash and equivalents were $95.4 million at December 31, 2013, down from $178.1 million at September 30. Total debt was $745.5 million, compared with $702.5 million; debt net of cash increased to $650.1 million from $524.4 million. Long-term debt on the balance sheet was $715.1 million, net of debt discount. The company reported $180.1 million available under its revolving credit facility, subject to covenants, and stated it was in compliance with credit and loan covenants.
Cash used in investing was $41.4 million, including $23.7 million for the Northcote acquisition and $17.9 million of capital expenditures. Cash used in financing was $16.5 million. The quarter included a $50.0 million private repurchase of 4.44 million shares from a Goldman Sachs affiliate; cash financing also reflected debt proceeds and repayments, dividends and share purchases. The filing describes seasonal HBP operations and cautions that interim results may not indicate full-year performance.
Outlook, risks and unusual items
- ATT’s facility-consolidation initiative is expected to be completed by the end of calendar 2014. Management estimated annual cash savings exceeding $10 million at current operating levels, approximately $8 million in total restructuring and exit costs, and $20 million in associated capital expenditures. To date, it had incurred $7.2 million in restructuring costs and $14.4 million in capital expenditures.
- ATT acquired Australian planter and decor business Northcote on December 31, 2013 for approximately $24 million. It is expected to generate approximately $28 million in annualized revenue; the purchase-price allocation remained preliminary.
- No formal consolidated earnings or revenue guidance is provided. Management described liquidity as sufficient for reinvestment and strategic acquisitions.
- Customer concentration is material: the U.S. Government represented 16% of consolidated revenue and 74% of Telephonics revenue; Procter & Gamble represented 13% of consolidated revenue and 43% of Plastics revenue; Home Depot represented 10% of consolidated revenue and 21% of HBP revenue. Loss or reduction of a major customer could adversely affect results and liquidity.
- Other disclosed risks include seasonality and weather, raw-material costs, housing and government spending, competition, currency and interest-rate exposure, and the ability to realize acquisition and restructuring benefits. The company also disclosed environmental matters, a potential customer indemnity claim relating to Union Tools advertising, and a Department of Defense Inspector General inquiry; no claim had been asserted in that inquiry and management reported no known material exposure. Management believed the legal and environmental matters would not materially adversely affect consolidated results, cash flows or financial position.
- Other notable items: the prior-year quarter included a $2.1 million non-cash pension settlement loss; current-quarter other comprehensive income included a $3.1 million foreign-currency translation loss. The effective tax rate was 32.4%, versus 68.1%, with discrete tax benefits in both periods.
Important facts for investors to verify
- Whether ATT completes its consolidation on schedule, achieves the projected savings, and manages remaining costs and capital spending.
- Northcote’s integration, actual revenue and cash contribution, and final purchase-price allocation.
- Telephonics’ profit recovery, contract execution and backlog conversion, particularly given government-customer concentration.
- Cash generation and working-capital needs, the higher net debt position, facility availability and continued covenant compliance.
- Exposure and potential outcomes from environmental, legal and government-review matters, and any change in major-customer demand.