Griffon Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2019. Financial statement amounts are in thousands of dollars, except per-share data. Griffon operates through Home & Building Products (HBP) and Defense Electronics; prior-year continuing-operations comparisons exclude the sold Clopay Plastics Products business.
Financial performance
| Metric | Three months ended June 30, 2019 | Prior-year quarter | Nine months ended June 30, 2019 | Prior-year period |
|---|---|---|---|---|
| Revenue | $575.0 million | $516.6 million | $1,635.1 million | $1,432.4 million |
| Gross profit | $154.5 million | $138.7 million | $435.0 million | $380.8 million |
| Operating income | $36.5 million | $23.6 million | $91.5 million | $54.6 million |
| Income from continuing operations | $14.1 million | $7.4 million | $29.4 million | $32.2 million |
| Net income | $13.6 million | $5.8 million | $21.2 million | $127.1 million |
| Diluted EPS | $0.31 total; $0.33 from continuing operations | $0.14 total; $0.18 from continuing operations | $0.50 total; $0.69 from continuing operations | $2.98 total; $0.76 from continuing operations |
- Quarterly revenue increased 11%; management reported 5% organic growth. Gross margin was approximately 26.9% versus 26.8%; operating margin was approximately 6.3% versus 4.6%.
- Nine-month revenue increased 14%, with reported organic growth of 5%. Gross margin was approximately 26.6% in both periods; operating margin rose to approximately 5.6% from 3.8%.
- Nine-month net income fell sharply year over year mainly because the prior-year period included a $117.6 million pretax gain on the PPC sale. Continuing-operations income also reflects prior-year tax benefits, including TCJA-related benefits. On Griffon’s adjusted basis, continuing-operations diluted EPS was $0.31 versus $0.27 for the quarter and $0.68 versus $0.38 for nine months.
Segments and operating changes
- HBP: Quarterly revenue was $495.2 million, up 13%; segment operating profit was $45.0 million, up 16%. Nine-month revenue was $1,409.5 million, up 17%, and operating profit was $120.6 million, up 27%. Growth included CornellCookson acquisition contribution, favorable pricing and mix, and volume; higher material and tariff costs partially offset gains.
- Defense Electronics: Quarterly revenue was $79.7 million, up 4%, while operating profit declined to $4.6 million from $6.1 million. Nine-month revenue was essentially flat at $225.6 million; operating profit was $9.1 million versus $8.9 million. Management cited product-mix pressure and ASC 606 timing effects.
- Segment adjusted EBITDA was $65.1 million for the quarter versus $58.8 million, and $175.4 million for nine months versus $146.2 million.
Cash flow, debt and liquidity
- Nine-month operating cash flow from continuing operations was $15.0 million, compared with $5.5 million used in the prior-year period. Working capital absorbed cash, including increases in receivables and contract assets and inventory, and a decrease in accounts payable.
- Investing activities used $57.2 million, including $27.8 million of capital expenditures and $9.2 million of acquisition-related payments, mainly a CornellCookson working-capital adjustment. Financing activities provided $33.9 million. Cash declined to $58.1 million from $69.8 million at September 30, 2018.
- Total debt was $1,181.4 million, up from $1,134.7 million at September 30, 2018; debt net of cash was $1,123.3 million. The $1.0 billion senior notes bear a 5.25% coupon and mature in 2022. Revolver borrowings were $122.8 million, with $206.6 million available subject to covenants. Reported Credit Agreement net debt to EBITDA leverage was 5.4x.
- Current assets were $961.4 million and current liabilities $367.2 million. Griffon reported compliance with its debt covenants. Nine-month dividends were $0.2175 per share; the board declared another $0.0725 quarterly dividend payable in September 2019.
Outlook, risks and unusual items
- The filing gives no specific full-year revenue or earnings guidance. Management said the ASC 606 adoption’s effect was expected to be immaterial to full-year revenue and segment operating profit.
- Backlog was $384.4 million at June 30, 2019, with approximately 76% expected to be recognized within one year. Management noted that awards can be delayed by customer budget constraints, political uncertainty, negotiations and government approvals.
- A $14 million CornellCookson facility and equipment investment, including a 90,000-square-foot expansion, was expected to be completed by calendar year-end 2019.
- Griffon recorded an $11.0 million discontinued-operations charge related primarily to a PPC sale claim and a legacy environmental reserve; $9.5 million was paid during the quarter. Separately, the EPA added the Peekskill site to the National Priorities List in May 2019; the company said further EPA action and potential costs were uncertain and did not acknowledge remediation responsibility.
- Other risks include customer concentration (Home Depot represented 17% of consolidated nine-month revenue; the U.S. Government and its agencies represented 8%), tariff and raw-material costs, housing and seasonal demand, foreign exchange, government-contract audits and the ability to service or refinance substantial debt. Telephonics’ contracts are exposed to potential suspension or debarment following adverse government findings.
- ASC 606 was adopted using the modified retrospective method, reducing opening retained earnings by approximately $5.7 million. The filing reports no material effect on consolidated results for the quarter or nine months.
Important facts for investors to verify
- Whether HBP organic growth, pricing and integration benefits can continue to offset tariffs, materials inflation and seasonality.
- Cash conversion and working-capital trends, given positive but modest operating cash flow and cash outflows for investment and discontinued-operation matters.
- Debt repayment capacity and covenant headroom at reported 5.4x leverage, including exposure to variable-rate borrowings and refinancing needs.
- Progress on the PPC claim and environmental matters, particularly the EPA’s next steps at the Peekskill site and any resulting liability.
- Telephonics backlog conversion, contract cost estimates and customer funding; the filing reported unfavorable cumulative contract estimate adjustments of approximately $6.0 million for the nine-month period.
- Reconciliation of GAAP and adjusted earnings, especially the prior-year disposal gain and tax-related items affecting comparisons.