GRIFFON CORP annual report, FY2022

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Griffon Corporation — FY2022 Form 10-K

Reporting period: Fiscal year ended September 30, 2022. Dollar amounts are USD millions unless stated otherwise. Griffon’s continuing operations comprise Consumer and Professional Products (CPP) and Home and Building Products (HBP); figures exclude the divested Telephonics business unless noted.

Business context

Griffon is a diversified holding company whose continuing businesses sell branded tools, fans, storage and outdoor-lifestyle products (CPP) and residential and commercial garage doors (HBP, through Clopay). Griffon acquired Hunter Fan in January 2022 for a contractual purchase price of $845 million and sold Telephonics in June 2022 for $330 million, subject to customary post-closing adjustments. The Board’s review of strategic alternatives, including a possible sale, merger, divestiture or recapitalization, remained active, with no assurance of a transaction.

Financial performance and liquidity

  • Revenue: $2,848.5, up 25% from $2,270.6. Hunter contributed $246.5 after its acquisition. CPP revenue rose 9% to $1,341.6; HBP rose 45% to $1,506.9.
  • Profit and margins: Gross profit was $936.9 and gross margin 32.9%, versus $641.1 and 28.2% in FY2021. Griffon reported a continuing-operations loss of $287.7, or $5.57 per diluted share, versus income of $70.3, or $1.32 per diluted share. The FY2022 loss included $517.0 of non-cash goodwill and intangible impairment charges. On Griffon’s non-GAAP adjusted basis, continuing-operations income was $219.8, or $4.07 per share, versus $89.7, or $1.68, in FY2021.
  • Segment profitability: Adjusted EBITDA was $99.3 for CPP (7.4% of revenue), down from $115.7 (9.4%); and $412.7 for HBP (27.4%), up from $181.0 (17.4%). Consolidated Adjusted EBITDA was $458.2, compared with $246.4. These are non-GAAP measures.
  • Cash flow: Continuing operating cash flow was $59.2, down from $69.8. Investing activities used $583.2, primarily reflecting Hunter acquisition payments, partly offset by Telephonics sale proceeds. Financing activities provided $393.3. Capital expenditures were $42.5.
  • Debt and liquidity: Total debt was $1,595.6 and cash was $120.2 at year-end, resulting in debt net of cash of $1,475.4, versus $811.9 a year earlier. Griffon reported $290.4 of available Revolver capacity, subject to covenants, and a 2.89x Credit Agreement net-debt-to-EBITDA leverage ratio. The company said it was in compliance with its debt covenants.
  • Other: FY2022 interest expense was $84.4, up from $63.2. Home Depot accounted for 13% of consolidated revenue. Griffon paid regular dividends of $0.36 per share and a special dividend of $2.00 per share during the year.

Material changes versus FY2021

  • HBP’s sharp revenue and Adjusted EBITDA growth was driven mainly by price and mix; volume declined 2%. CPP’s revenue increase included Hunter, but CPP Adjusted EBITDA fell 14%; excluding Hunter’s contribution, the company reported a 52% decrease in CPP EBITDA, citing lower volume, weaker manufacturing absorption and higher input, labor and transportation costs.
  • The $517.0 impairment charge followed lower comparable-company market multiples and higher interest rates. It reduced reported continuing-operations EPS by $8.43, net of tax. The filing notes that a 100-basis-point increase in the discount rate would have caused an additional $34.0 intangible impairment.
  • Hunter acquisition financing materially increased debt and interest expense. Griffon prepaid $300.0 of the Term Loan B during the year; the remaining reported Term Loan B balance was $496.0.
  • Working capital weighed on operating cash flow: inventory increased to $669.2 from $472.8, while accounts receivable increased to $361.7 from $294.8. Cash and equivalents declined to $120.2 from $248.7.
  • Telephonics contributed $96.2 of discontinued-operations income, including a preliminary $107.5 gain on sale. The cash-flow statement reports $295.7 of proceeds from sale of business; the difference from the stated $330 million sale price reflects the filing’s presentation and adjustments, which investors should review in the transaction disclosures.

Outlook, commentary and risks

  • Griffon provided no specific consolidated FY2023 revenue or earnings guidance in the supplied filing text. It expects its CPP business-platform initiative to generate annual cash savings of approximately $25.0, with savings realization beginning in FY2023’s first quarter. The initiative was completed in FY2022 after its scope was reduced and timeline accelerated; cumulative one-time charges were approximately $51.9.
  • Management described facilities as fully operational but noted lingering supply-chain disruption, labor constraints, longer lead times and restricted manufacturing capacity for some products. CPP also incurred approximately $15.2 of demurrage and detention costs in FY2022, including $9.5 related to Hunter.
  • Key exposures include economic and housing-market weakness, high inflation and interest rates, raw-material and freight costs, competitive pricing pressure, weather and seasonality, reliance on major retailers, and international sourcing and tariffs. The filing discusses U.S.-China trade and forced-labor enforcement risks; Griffon said it did not source from the Uyghur region but acknowledged possible shipment detention.
  • Debt service, refinancing access and Revolver covenant compliance remain important risks. The $400 million Revolver matures in 2025; the $974.8 million 2028 Senior Notes carry a 5.75% coupon, and the Term Loan B matures in 2029.
  • Contingencies include environmental matters, including the former Hunter Memphis site, and a supplier-related intellectual-property dispute involving a product used by HBP. Management said currently known legal and environmental matters were not expected to have a material adverse effect, while acknowledging uncertainty around the Memphis site and other matters.
  • The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Hunter, acquired during the year, was excluded from management’s and the auditor’s FY2022 internal-control assessment; Griffon expected to include Hunter in its FY2023 assessment.

Important facts for investors to verify

  • Progress and potential outcome of the strategic-alternatives review, and any effects on customers, employees, suppliers or operating performance.
  • Hunter integration, final purchase-price allocation, acquired-asset valuations and the assumptions underlying the large CPP goodwill and trademark impairments.
  • Whether CPP’s volume, margins and working-capital levels stabilize, and whether the stated $25.0 annual savings are achieved.
  • Debt balances, variable-rate exposure, covenant headroom, upcoming maturities and the effect of cash distributions on liquidity.
  • Telephonics sale proceeds, post-closing working-capital adjustments and remaining discontinued-operation liabilities.
  • Customer concentration, supply-chain and tariff exposure, and developments in the Memphis environmental matter and supplier IP proceeding.