Griffon Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2017. Dollar amounts below are in millions unless otherwise stated. Continuing-operations results exclude Clopay Plastic Products Company (PPC), which is reported as discontinued operations.
Financial performance and liquidity
| Metric | Q1 FY2018 | Prior-year quarter |
|---|---|---|
| Revenue | $437.3 | $352.3 |
| Gross profit / gross margin | $120.8 / 27.6% | $96.7 / 27.5% |
| Operating income / margin | $15.0 / 3.4% | $17.9 / 5.1% |
| Income from continuing operations | $22.8; $0.53 diluted EPS | $7.0; $0.17 diluted EPS |
| Adjusted continuing income / diluted EPS | $2.4 / $0.06 | $2.6 / $0.06 |
| Net income / diluted EPS | $31.0 / $0.72 | $12.3 / $0.29 |
| Segment adjusted EBITDA | $43.7 | $39.9 |
| Operating cash flow from continuing operations | $(5.7) | $0.3 |
| Cash and equivalents at quarter end | $84.4 | $47.7 at September 30, 2017 |
Revenue rose 24%, primarily reflecting acquisitions and organic growth in Home & Building Products (HBP). Higher SG&A and interest expense contributed to lower operating income. Reported continuing income benefited substantially from a $24.9 tax benefit, including a provisional $23.9 benefit from remeasuring deferred tax balances under the Tax Cuts and Jobs Act. Excluding the specified acquisition, life-insurance and tax items, management reported adjusted continuing income of $2.4 million, versus $2.6 million a year earlier.
Investing activities used $209.0 million, principally for acquisitions, including ClosetMaid. Financing activities provided $258.5 million, including proceeds from additional 5.25% senior notes. Total debt was $1,267.8 million and debt net of cash was $1,183.4 million at December 31. The company had $147.7 million drawn on its revolving credit facility and $187.3 million available, subject to covenants. Management reported compliance with debt covenants.
Material changes and business developments
- HBP revenue increased 40% to $371.0 million; segment operating profit rose 23% to $27.8 million. HBP segment adjusted EBITDA was $39.5 million, compared with $31.8 million.
- Telephonics revenue declined 25% to $66.3 million, and segment operating profit fell 73% to $1.5 million, mainly due to lower maritime surveillance radar and airborne intercommunications systems revenue. Backlog was $332.0 million, down from $350.9 million at September 30; 70% was expected to be fulfilled within 12 months.
- ClosetMaid was acquired on October 2, 2017 for approximately $185.7 million, and contributed $76.8 million of quarterly revenue. Management expected approximately $300 million of revenue in its first 12 months after acquisition. AMES acquired Harper Brush Works for approximately $5 million.
- PPC was classified as discontinued operations. Griffon agreed to sell it to Berry Global for $475 million in cash, subject to regulatory approval and customary closing conditions; closing was expected in the first calendar quarter of 2018. PPC generated $120.4 million of revenue and $8.2 million of after-tax income from discontinued operations in the quarter.
Outlook, risks and unusual items
The filing provides no formal consolidated earnings or revenue guidance. Management cited HBP seasonality and cautioned that interim results may not indicate full-year performance. The expected PPC sale proceeds and management’s ClosetMaid revenue estimate are transaction- and business-specific expectations, not consolidated guidance.
- Customer concentration is material: Home Depot accounted for 19% of consolidated revenue, while the U.S. Government and its agencies accounted for 9% overall and 60% of Telephonics revenue. Management warned that changes in orders or loss of a major customer could adversely affect operations and liquidity.
- Debt covenants, variable-rate borrowing, acquisition integration, housing-market cyclicality, raw-material costs, currency movements, and government-contract funding or audits are among the risks discussed. The company also disclosed unresolved environmental matters and other contingencies; management did not expect their resolution to materially adversely affect consolidated results, financial position or cash flows based on information then known.
- The tax-reform benefit is provisional; Griffon said estimates could change as implementation guidance becomes available. It could not yet reasonably estimate effects of certain provisions, including the mandatory repatriation tax and state tax impacts.
- Unusual quarterly items included acquisition costs of $3.2 million, a $2.6 million life-insurance-benefit cost, and pension settlement expense reflected in pension expense. The filing reports net pension expense of $13.0 million, compared with net pension income of $0.5 million in the prior-year quarter.
Most important facts for investors to verify
- Whether the PPC sale closed on the expected timetable and whether the stated $475 million proceeds were realized, including any closing adjustments or debt and tax effects.
- How recurring earnings compare with GAAP results after the large, provisional tax benefit and other unusual items.
- Whether Telephonics revenue, margins and funded backlog stabilize, and how concentrated customer exposure affects performance.
- Post-acquisition performance and integration of ClosetMaid and other acquired businesses, alongside increased leverage and interest expense.
- Liquidity and covenant headroom, including the conditions attached to the $187.3 million of reported revolver availability.