Griffon Corporation — Q1 FY2015 Form 10-Q
Reporting period: Three months ended December 31, 2014; comparisons are with the three months ended December 31, 2013. Dollar figures below are in millions unless stated otherwise. Griffon is a diversified holding company with Home & Building Products (HBP), Telephonics and Plastics segments.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Revenue | $502.2 | $453.5 |
| Gross profit / margin | $118.0 / 23.5% | $105.5 / 23.3% |
| Operating income / margin | $24.1 / 4.8% | $17.0 / 3.7% |
| Net income | $7.5 | $3.2 |
| Diluted EPS | $0.16 | $0.06 |
| Operating cash flow | $(8.1) | $(26.3) |
| Capital expenditures | $18.9 | $17.9 |
Revenue rose 11% year over year, or 13% excluding foreign-currency translation. Net income more than doubled. Interest expense declined to $11.8 million from $13.1 million; the effective tax rate rose to 37.8% from 32.4%, including a $0.35 million net discrete tax provision. Prior-year results included restructuring charges and acquisition costs, while the current quarter had none. Griffon’s adjusted net income, a company-defined non-GAAP measure, was $7.8 million versus $4.0 million; adjusted diluted EPS was $0.16 versus $0.07.
Segments and material changes
| Segment | Revenue | Operating profit | Year-over-year highlights |
|---|---|---|---|
| HBP | $271.7 million, up 24% | $16.4 million, up 74% | Growth reflected Cyclone and Northcote acquisitions, stronger organic sales and CBP volume; prior-year profit included restructuring and acquisition costs. |
| Telephonics | $90.7 million, down 6% | $7.5 million, down 29% | Lower revenue and less favorable product mix, primarily associated with timing of Multi-Mode Radar work. |
| Plastics | $139.8 million, up 1% | $8.0 million, up 38% | Profit benefited from resin-price pass-through, improved operations and volume, partly offset by foreign exchange. |
HBP’s AMES facility consolidation was completed during the quarter. Management expects annual cash savings exceeding $10 million at current operating levels, with savings beginning in Q2 FY2015. Griffon’s Home & Building Products operations are seasonal, so interim results may not indicate full-year performance.
Cash, debt and liquidity
- Cash and equivalents were $46.6 million at December 31, down from $92.4 million at September 30, 2014. Total debt was $818.1 million, compared with $822.6 million; debt net of cash increased to $771.5 million from $730.2 million.
- Cash declined $45.8 million during the quarter. Operating cash use improved year over year, but remained negative; working-capital movements included a $32.7 million inventory increase and a $30.1 million combined decrease in accounts payable, accrued liabilities and income taxes payable.
- The $225 million revolving facility had $25.0 million drawn and $19.3 million in standby letters of credit; $180.7 million remained available. Griffon reported compliance with debt covenants.
- Debt includes $600 million of 5.25% senior notes due 2022 and $100 million of 4% convertible notes due 2017. The revolver matures in 2019.
- Financing cash use included $13.2 million of share repurchases and $1.9 million of dividends. The quarterly dividend was $0.04 per share; a further $0.04 dividend was declared for payment in March 2015.
Outlook, risks and contingencies
No consolidated revenue or earnings guidance is provided. Management says it believes liquidity is sufficient for reinvestment and strategic acquisitions, while continuing to pursue growth and diversification. Telephonics reported $496 million of funded backlog at quarter-end, with 69% expected to be fulfilled within 12 months; it received about $93.3 million of new awards and incremental funding during the quarter.
- Customer concentration is significant: the U.S. Government represented 12% of consolidated revenue and 67% of Telephonics revenue; Procter & Gamble represented 15% of consolidated revenue and 53% of Plastics revenue; Home Depot represented 10% of consolidated revenue and 19% of HBP revenue. Loss or reduced business from a major customer could materially affect results.
- Telephonics is responding to a government inquiry and has received an administrative subpoena. No claim had been asserted, and the company reported no known material financial exposure; adverse government-contract findings could affect its ability to win or perform contracts.
- Environmental matters include the Peekskill, New York site, where Griffon disclaims responsibility for remediation, and ongoing investigation and remediation work at an AMES site in Frankfort, New York. An AMES customer could also seek indemnity in litigation involving Union Tools advertising; the potential amount, if any, was not estimable.
- Foreign-currency translation contributed a $15.5 million loss in other comprehensive income; total comprehensive loss was $8.7 million despite net income. Management cited currency movements, raw-material costs, housing and weather conditions, government spending, customer demand and acquisition integration among forward-looking risks.
Most important facts for investors to verify
- Whether the completed AMES consolidation delivers the projected annual cash savings of more than $10 million, and whether manufacturing inefficiencies abate.
- Whether operating cash flow improves sustainably given inventory growth, other working-capital uses and the sharp decline in cash.
- Whether Telephonics revenue and margins recover, and whether backlog converts as expected amid government-budget and contract risks.
- How customer concentration, foreign-exchange movements and Plastics’ delayed resin-price pass-through affect future margins.
- Developments in the government inquiry and environmental matters, and Griffon’s capacity to service debt while funding repurchases and dividends.