Griffon Corporation — Q1 FY2022 Form 10-Q
Reporting period: Three months ended December 31, 2021. Financial amounts below are in millions of U.S. dollars unless noted. Griffon reports Consumer and Professional Products (CPP) and Home and Building Products (HBP) as continuing operations; Defense Electronics (Telephonics) is presented as discontinued operations while the company explores strategic alternatives, including a sale.
Financial results and liquidity
| Metric | Q1 FY2022 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue from continuing operations | $591.7 | $541.5 | +9% |
| Gross profit / gross margin | $165.8 / 28.0% | $164.1 / 30.3% | Margin down 2.3 percentage points |
| Operating income / operating margin | $38.5 / 6.5% | $52.4 / 9.7% | Lower |
| Income from continuing operations | $16.9 | $25.4 | Lower |
| Net income, including discontinued operations | $19.3 | $29.5 | Lower |
| Diluted EPS, total / continuing operations | $0.36 / $0.31 | $0.55 / $0.48 | Lower |
| Adjusted continuing income / diluted EPS | $21.1 / $0.39 | $26.7 / $0.50 | Lower; non-GAAP |
| Adjusted EBITDA | $59.6 | $68.5 | Lower; non-GAAP |
Gross profit rose slightly despite lower gross margin; SG&A increased to $127.4 million from $111.7 million. The quarter included restructuring charges of $1.7 million, acquisition costs of $2.6 million, proxy-contest costs of $2.3 million, and $0.9 million of discrete and other net tax benefits. Management’s adjusted results exclude specified items and are non-GAAP measures.
Segment performance: CPP revenue declined 3% to $283.2 million and adjusted EBITDA fell 50% to $16.2 million (5.7% margin, versus 11.2%). HBP revenue increased 23% to $308.6 million and adjusted EBITDA increased 16% to $56.3 million (18.2% margin, versus 19.3%). HBP growth reflected favorable pricing and mix; CPP faced lower U.S. volume.
Cash flow and liquidity: Continuing-operations operating cash flow was negative $84.9 million, versus positive $12.3 million a year earlier, primarily because of seasonal increases in receivables and inventory. Continuing-operations investing cash use was $10.0 million and financing cash use was $8.6 million. Cash and equivalents fell to $151.2 million from $248.7 million at September 30, 2021. At quarter-end, $364.6 million of revolver capacity was available, subject to covenants.
Debt: Reported total debt was $1.068 billion, compared with $1.061 billion at September 30, 2021; debt net of cash was $916.4 million. The $1.0 billion of 5.75% senior notes mature in 2028. Reported gross debt to EBITDA under the credit agreement was 3.3x at quarter-end. Griffon stated it was in compliance with its debt covenants.
Material changes and significant developments
- HBP’s higher revenue and EBITDA contrasted with weaker CPP results. CPP cited a 14% volume decline, mainly in the U.S., partly offset by 11% favorable price and mix; increased material and transportation costs, labor constraints, and supply-chain disruptions pressured results.
- On January 24, 2022, after quarter-end, Griffon acquired Hunter Fan Company for approximately $845 million. It was financed with a new $800 million, seven-year Term Loan B facility plus cash and revolver borrowings. Hunter is expected to contribute approximately $385 million of revenue in its first 12 months under Griffon’s ownership. The filing does not provide complete acquisition pro forma financial information.
- Telephonics’ results remain in discontinued operations. For the quarter, it reported $54.0 million revenue and $2.4 million after-tax income; related assets held for sale were $261.5 million and liabilities were $74.3 million.
Outlook, risks and contingencies
- No broad consolidated earnings or revenue guidance is provided. Griffon expects the AMES business-platform initiative to be completed by the end of calendar 2023. It targets AMES EBITDA margins above 12%, annual cash savings of $30–35 million, and inventory reduction of $30–35 million, based on fiscal 2020 operating levels and excluding Hunter. Estimated program charges and capital investment are approximately $65 million each; these are targets and estimates, not guaranteed outcomes.
- Management said facilities were fully operational but cited COVID-related supply-chain and transportation disruption, labor shortages, restricted capacity, and rising commodity costs. The company may not be able to pass through cost increases promptly or completely.
- Home Depot represented 14% of consolidated revenue. Management noted that changes in major-customer orders or loss of a significant customer could materially affect results and liquidity.
- Griffon disclosed ongoing proxy-contest costs and anticipated additional related costs during fiscal 2022. Environmental matters include the Peekskill site and the former Union Fork and Hoe site; management did not expect resolution of disclosed legal and environmental matters to materially affect consolidated results, financial position, or cash flows.
- Other disclosed risks include acquisition integration and financing, interest-rate and foreign-currency exposure, seasonality, raw-material availability and pricing, and the proposed strategic alternatives for Telephonics.
Key facts for investors to verify
- Whether CPP pricing, cost recovery, labor availability, and supply-chain performance improve, and whether HBP can sustain growth and margins.
- Hunter’s realized revenue, integration costs, financing impact, and resulting leverage; the quarter-end leverage figure predates the acquisition financing.
- Cash conversion and working-capital trends, particularly seasonal inventory and receivables, alongside revolver availability and covenant headroom.
- Progress and remaining cost of the AMES initiative, including whether its margin, savings, inventory, and completion targets remain achievable.
- Developments in the Telephonics strategic-alternatives process and the terms and timing of any disposition.