Griffon Corporation — Q3 FY2022 Form 10-Q
Reporting period: Three and nine months ended June 30, 2022. Amounts are in U.S. dollars; financial statement figures are in thousands except per-share data. Griffon reports continuing operations through Consumer and Professional Products (CPP) and Home and Building Products (HBP). Telephonics is presented as a discontinued operation following its sale.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue, 2022 / 2021 | $768.2 million / $584.2 million; up 31% | $2,139.5 million / $1,700.4 million; up 26% |
| Income from continuing operations, 2022 / 2021 | $52.8 million / $14.8 million | $127.6 million / $57.7 million |
| Net income, 2022 / 2021 | $140.3 million / $16.7 million | $225.3 million / $63.3 million |
| Diluted EPS from continuing operations, 2022 / 2021 | $0.98 / $0.28 | $2.38 / $1.08 |
| Gross margin, 2022 / 2021 | 33.9% / 27.4% | 32.1% / 28.5% |
| Operating margin, 2022 / 2021 | 13.4% / 7.2% | 11.4% / 8.1% |
| Adjusted EBITDA, 2022 / 2021 | $134.8 million / $60.1 million | $333.3 million / $193.3 million |
| Cash from continuing operations, 2022 / 2021 | Used $65.0 million / provided $13.3 million |
Net income includes $87.5 million of after-tax discontinued-operation income in the quarter, including an $89.0 million after-tax preliminary gain on the Telephonics sale. The gain makes total net income materially different from continuing-operations earnings.
Segments and material changes
- CPP: Quarterly revenue rose 12% to $362.6 million, including $105.8 million from Hunter, acquired January 24, 2022. Excluding Hunter, revenue fell 3%. Adjusted EBITDA was $28.4 million, down 3%; excluding Hunter’s contribution, it fell 61%, reflecting lower volume and higher materials, labor, transportation, and supply-chain costs. Management cited approximately $6.5 million of quarterly demurrage and detention costs, primarily related to Hunter.
- HBP: Quarterly revenue rose 56% to $405.5 million and adjusted EBITDA increased to $119.8 million from $42.2 million. Higher pricing and favorable mix supported results; residential volume was affected by labor and supply disruptions. For the nine-month period, HBP revenue rose 44% and adjusted EBITDA rose 115%.
- Excluding Hunter, consolidated revenue increased 13% for the quarter and 15% for the nine-month period. Griffon attributed volume pressure in CPP mainly to weaker consumer demand and customer inventory rebalancing in North America and the U.K.; price and mix partly offset the decline.
- Adjusted EBITDA is a non-GAAP measure. For the quarter, its increase was driven largely by HBP; CPP’s underlying results weakened. Higher interest expense and one-time items also affected GAAP earnings.
Cash, debt and liquidity
- At June 30, 2022, cash and equivalents were $144.7 million, versus $248.7 million at September 30, 2021. Total debt was $1.611 billion and debt net of cash was $1.466 billion, compared with $1.061 billion and $811.9 million, respectively, at fiscal year-end.
- Revolver borrowings were $97.8 million; $289.9 million of capacity remained available, subject to covenants. Griffon reported 3.2x gross debt to EBITDA under its credit agreement and compliance with its debt covenants.
- Nine-month continuing-operations cash use included $65.0 million from operations, chiefly reflecting increased receivables and inventory, and $574.3 million from investing activities. Investing included $851.5 million for Hunter, partly offset by $295.7 million of proceeds from the Telephonics sale. Financing provided $513.8 million, including net debt proceeds, while Griffon also prepaid $300 million of Term Loan B principal.
- Interest expense was $24.0 million for the quarter and $61.1 million for nine months, up from $15.8 million and $47.4 million in the respective 2021 periods. The January 2022 Term Loan B was floating-rate debt; its spread was scheduled to step down in Q4 FY2022 after Griffon met a leverage threshold.
- Griffon accrued $104.1 million for a $2.00-per-share special dividend declared June 27 and paid July 20, 2022. Regular quarterly dividends were $0.09 per share. Future dividends remain at the board’s discretion.
Outlook, management commentary and risks
- No formal revenue or earnings guidance is provided in the filing. Management said Hunter was expected to contribute approximately $360 million in revenue during its first twelve months after acquisition.
- The CPP business-platform initiative was accelerated and reduced in scope, with completion targeted by the end of FY2022. Management revised expected annual cash savings to $25 million from $30–35 million, estimated one-time charges to approximately $50 million from $65 million, and capital investment to approximately $15 million from $65 million, net of expected proceeds from exited facilities. These are estimates, not guaranteed outcomes.
- On May 16, 2022, the board began reviewing strategic alternatives, including a sale, merger, divestiture, recapitalization or other transaction. The filing states there is no timeline and no assurance of a transaction.
- Management cited supply-chain and labor constraints, commodity-cost inflation, uncertain consumer demand and customer inventory levels, foreign-exchange movements, seasonality, and dependence on major customers. Home Depot represented 14% of consolidated nine-month revenue. COVID-19-related disruption remained uncertain, though all facilities were reported fully operational.
- Environmental matters include the Hunter Memphis site, where the company stated liability was probable while the extent of contamination and remediation remained unknown. Griffon also disclosed other environmental matters and stated management did not expect their resolution to materially adversely affect consolidated results, financial position or cash flows.
Most important facts for investors to verify
- How the board’s strategic-alternatives review develops and whether it results in a transaction.
- Hunter’s ongoing revenue, profitability, integration progress, and contribution to CPP after acquisition-related costs and disruption expenses.
- Whether CPP’s demand, volume, input-cost, and demurrage pressures ease, and whether the revised savings and implementation estimates are achieved.
- Working-capital conversion and operating cash flow, particularly inventory and receivables, alongside leverage, floating-rate exposure, and covenant headroom.
- Final Telephonics sale adjustments and tax effects, and the scope and potential cost of environmental contingencies, especially the Hunter Memphis site.