Griffon Corporation (NYSE: GFF) — FY2018 Form 10-K
Reporting period: Fiscal year ended September 30, 2018. Unless otherwise noted, financial figures below are in U.S. dollars; amounts converted from the filing’s thousands are shown in millions. Continuing-operations results exclude Clopay Plastic Products, which was sold in February 2018 and reported as discontinued operations.
Business context and reporting period
Griffon is a diversified holding company with two continuing segments: Home & Building Products (HBP), comprising AMES and Clopay Building Products (CBP), and Defense Electronics, comprising Telephonics. FY2018 included multiple acquisitions, notably ClosetMaid (October 2017) and CornellCookson (June 2018), as well as the sale of Clopay Plastics for approximately $475 million.
Key financial metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Continuing revenue | $1,977.9 million | $1,525.0 million |
| Gross profit / margin | $529.6 million / 26.8% | $408.1 million / 26.8% |
| Operating income from continuing operations | $96.5 million | $69.0 million |
| Income before taxes, continuing operations | $33.8 million | $16.7 million |
| Income from continuing operations / diluted EPS | $33.3 million / $0.78 | $17.8 million / $0.41 |
| Adjusted continuing income / adjusted diluted EPS | $32.1 million / $0.76 | $19.0 million / $0.44 |
| Net income / diluted EPS, including discontinued operations | $125.7 million / $2.96 | $14.9 million / $0.35 |
| Cash from continuing operating activities | $66.4 million | $49.2 million |
| Capital expenditures | $50.1 million | $34.9 million |
| Cash and equivalents at year-end | $69.8 million | $47.7 million |
| Total debt, net of cash | $1,064.9 million | $944.7 million |
Cash flow from continuing operations less capital expenditures was approximately $16.3 million, a simple derived measure. Continuing operating cash flow was partly offset by higher working capital, particularly inventory, and $14.8 million of cash expenditures on items affecting comparability. Total cash increased $22.1 million during the year, while discontinued operations used $78.9 million of cash.
At September 30, 2018, debt included $1.0 billion of 5.25% senior notes due 2022. The revolving facility had $25 million outstanding and $310.4 million available, subject to covenants; management reported compliance with debt agreements. Credit-agreement net debt to EBITDA was 5.5x.
Material changes versus the prior comparable period
- Continuing revenue rose 30%, mainly from acquisitions and organic growth in HBP, partly offset by lower Telephonics revenue. The comparison is affected by the acquisitions and the discontinued-operations classification.
- HBP revenue increased 48% to $1,651.6 million; reported organic growth was 7%. Segment operating profit rose 46% to $130.5 million. HBP adjusted EBITDA was $177.4 million, versus $126.8 million; its margin declined to 10.7% from 11.4%.
- Defense Electronics revenue fell 21% to $326.3 million. Segment operating profit decreased to $25.3 million from $29.9 million; FY2017 included a $5.1 million contract settlement charge. FY2018 operating profit also reflected lower sales and revised estimates on certain contract obligations.
- Interest expense increased 27% to $65.6 million, primarily following the $275 million senior-note add-on offering and higher debt levels.
- Reported net income included $92.4 million from discontinued operations, including a $113.0 million pretax gain on the Clopay Plastics sale. It should not be treated as recurring continuing earnings.
- Gross margin was unchanged at 26.8%. SG&A increased to $433.1 million, although it decreased as a share of revenue to 21.9% from 22.2%.
Outlook, management commentary, risks and unusual items
- Outlook: The filing gives no consolidated numerical earnings or revenue guidance. Management said it believes liquidity is sufficient for investment and strategic acquisitions. CornellCookson was expected to contribute approximately $200 million in annual sales; 69% of Telephonics’ $344.9 million funded backlog was expected to be fulfilled in FY2019.
- Market and operating risks: HBP depends on housing, construction, renovation, retail customers, and weather-sensitive demand. Steel, resin and other input-cost inflation, tariffs, sourcing exposure (including China), supplier disruptions, and competitive pricing may pressure performance. Home Depot represented 19% of consolidated revenue; the U.S. Government and its agencies represented 10% of consolidated revenue and 62% of Telephonics revenue.
- Defense exposure: Telephonics faces uncertainty in government budgets, contract funding and awards, audits, program execution, and government shutdowns. Backlog declined from $350.9 million to $344.9 million, partly due to timing of contract awards.
- Leverage and liquidity: Debt increased year over year and leverage was 5.5x under the credit agreement. Revolver availability is subject to covenant compliance; the filing identifies refinancing, interest expense and debt-covenant compliance as risks.
- Taxes: The FY2018 continuing-operations tax rate was 1.6%, affected by $9.4 million of discrete and other net tax benefits. TCJA accounting remained provisional: Griffon recorded a $20.6 million deferred-tax remeasurement benefit and a $13.1 million transition-tax charge, net of foreign tax credits. Management expected further adjustments during the measurement period.
- Other items and contingencies: FY2018 included acquisition costs of $7.6 million, special-dividend ESOP charges of $3.2 million, secondary-offering costs of $1.2 million, and a life-insurance-benefit cost of $2.6 million. Telephonics had approximately $40 million of outstanding foreign offset agreements, some extending through 2029; penalties were not considered estimable or probable. Management said the resolution of disclosed legal and environmental matters was not expected to materially affect consolidated results, financial position or cash flows.
- Capital returns: Griffon paid regular dividends of $0.28 per share and a $1.00 special dividend in FY2018, and repurchased approximately $41.1 million of shares. Future dividends remain at the board’s discretion.
Important facts for investors to verify
- Separate recurring continuing-operations earnings and cash generation from the Clopay Plastics disposal gain and other discontinued-operation cash uses.
- Assess whether HBP’s organic growth and acquisition integration can offset input-cost, tariff, weather and customer-concentration risks, and whether segment margins stabilize.
- Track Telephonics contract awards, backlog conversion, program estimates and customer/government funding concentration.
- Review debt maturities, covenant headroom, 5.5x leverage and the sustainability of cash flow after capital expenditures, dividends and buybacks.
- Confirm final TCJA tax measurements, including the transition-tax estimate and any related adjustments to earnings or cash taxes.
- Consider that CornellCookson was acquired during FY2018 and excluded from the external auditor’s and management’s internal-control assessment for the year; the auditor otherwise issued an unqualified opinion on the financial statements and internal control over financial reporting.