Griffon Corporation — Form 10-Q Summary
Business context and reporting period
Griffon is a diversified holding company operating through Home & Building Products (HBP, including Ames and Clopay Building Products), Telephonics, and Clopay Plastic Products (Plastics). This unaudited report covers the quarter and six months ended March 31, 2014; amounts below are in U.S. dollars unless noted. HBP is seasonal, so interim results may not indicate full-year performance.
Financial performance and liquidity
| Metric | Three months ended March 31, 2014 | Six months ended March 31, 2014 |
|---|---|---|
| Revenue | $507.7 million, up 3.9% | $961.1 million, up 5.3% |
| Gross profit / margin | $110.0 million / 21.7% | $215.5 million / 22.4% |
| Operating income / margin | $19.7 million / 3.9% | $36.7 million / 3.8% |
| Net loss / loss per share | $25.8 million / $0.53 | $22.6 million / $0.44 |
| Segment adjusted EBITDA | $45.9 million | $90.1 million |
For the six-month period, operating cash flow was negative $26.6 million, investing cash flow was negative $57.3 million, and financing cash flow was negative $23.2 million. Operating cash use included $16.7 million of interest paid in connection with the 2018-note redemption; management said operating cash use would have been approximately $9.9 million excluding that payment. Capital expenditures were $34.8 million, and the Northcote acquisition used approximately $22.7 million. Cash declined to $69.9 million from $178.1 million at September 30, 2013.
At March 31, total debt was $798.4 million, compared with $702.5 million at September 30; debt net of cash was $728.5 million, compared with $524.4 million. Long-term debt on the balance sheet was $773.6 million. The $225 million revolver had $20.0 million drawn, $20.4 million of standby letters of credit, and $184.6 million available. The company reported compliance with debt covenants. Current assets were $796.0 million and current liabilities $281.4 million.
Material changes versus prior period
- Revenue and gross profit increased year over year, and operating income improved. Consolidated net loss widened primarily because of a $38.9 million loss on extinguishment of debt.
- Griffon issued $600 million of 5.25% senior notes due 2022 and used the proceeds principally to redeem $550 million of 7.125% notes due 2018. The refinancing lowered the coupon on those notes but generated a large one-time extinguishment charge, including a $31.5 million tender premium.
- HBP revenue rose 11% for the quarter, led by Ames; segment operating profit increased. Telephonics revenue fell 14% and operating profit fell 22%, partly because prior-year revenue included electronic-warfare contract manufacturing work that did not recur. Plastics revenue rose 7%, with higher segment operating profit, partly reflecting the absence of prior-year restructuring charges.
- Ames acquired Australian planter and decor company Northcote for approximately $22 million. Northcote is expected to generate approximately $28 million in annualized revenue.
- Cash declined amid debt refinancing payments, share repurchases, dividends, capital spending, and the acquisition. Griffon repurchased 4.44 million shares from GS Direct for $50 million in December 2013, in addition to other repurchases and ESOP share purchases.
Outlook, management commentary, risks, and contingencies
- Management said the debt-extinguishment loss changes the expected full-year 2014 result from an anticipated effective tax rate near 40% to a pretax loss with a tax benefit at an effective rate of approximately 13%. This is not a full-year earnings forecast.
- Ames’ facility-consolidation program was expected to be completed by the end of calendar 2014. Management estimated annual cash savings exceeding $10 million upon completion, with approximately $8 million of restructuring and exit costs and $20 million of related capital expenditures. Manufacturing inefficiencies were expected to continue during the initiative.
- Telephonics reported $486 million in contract backlog at March 31, with 66% expected to be fulfilled within 12 months. Backlog was $444 million at September 30, 2013.
- Customer concentration is significant: the U.S. Government and its agencies represented 15% of consolidated six-month revenue; Procter & Gamble 13%; and Home Depot 11%. The filing warns that reduced orders or loss of a major customer could materially affect operations and liquidity.
- Other stated risks include seasonality and weather, raw-material prices, competition and pricing, military spending and government funding, foreign exchange and interest rates, execution of cost-saving and acquisition plans, and government contract audits. Griffon said it was providing information to the U.S. Defense Department Inspector General and Department of Justice under subpoenas; no claim had been asserted and the company was unaware of material financial exposure. Environmental matters include the Peekskill and Frankfort, New York sites; the company said outcomes of disclosed legal and environmental matters were not expected to materially affect consolidated results, while noting some losses could not be estimated.
- On May 1, 2014, the board authorized an additional $50 million share-repurchase program and declared a $0.03 quarterly dividend. These were subsequent events, after the March 31 quarter-end.
Most important facts for investors to verify
- Whether underlying earnings improvement is sustained after separating the debt-extinguishment charge, restructuring, acquisition costs, and tax effects; reported adjusted net income was $6.0 million for the quarter and $10.0 million for six months, versus $4.7 million and $7.3 million in the comparable periods.
- Debt and liquidity after refinancing, including the higher net debt, revolver availability, covenant headroom, and cash requirements for interest, investment, dividends, and repurchases.
- Whether Ames achieves the stated savings and completes its consolidation on schedule without prolonged manufacturing inefficiencies or cost overruns.
- Telephonics’ conversion of backlog to revenue and profit, given government-customer concentration and the absence of prior-year electronic-warfare work.
- Northcote integration and performance against the approximately $28 million annualized-revenue expectation.
- Developments in the government inquiry and environmental matters, including any claims, remediation obligations, or material changes to estimated exposure.