Griffon Corporation (NYSE: GFF) — Form 10-K Summary
Business context and reporting period
Fiscal year ended September 30, 2014. Griffon is a diversified holding company operating through Home & Building Products (HBP, comprising AMES and Clopay Building Products), Telephonics, and Clopay Plastic Products (Plastics). Amounts below are in U.S. dollars; financial figures are in millions unless otherwise noted.
The filing is an annual report, not a standalone fourth-quarter filing. It includes a September-quarter row, but the quarterly table’s fiscal-year headings and dates are inconsistent; quarter-only comparisons are therefore unclear from the filing text.
Financial performance and liquidity
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $1,991.8 | $1,871.3 |
| Gross profit / margin | $459.4 / 23.1% | $417.6 / 22.3% |
| Income from operations | $78.2 | $63.9 |
| Net income (loss) | $(0.2) | $3.8 |
| Operating cash flow | $93.3 | $85.7 |
| Capital expenditures | $77.1 | $64.4 |
| Cash and equivalents at year-end | $92.4 | $178.1 |
| Total debt, net of discount | $813.0 | $689.3 |
| Debt net of cash | $730.2 | $524.4 |
Reported pretax loss was $5.7 million, compared with pretax income of $14.3 million in 2013. The principal unusual charge was a $38.9 million loss on early debt extinguishment. Griffon reported a $5.5 million income tax benefit, including $4.7 million of discrete tax benefits. Management’s non-GAAP adjusted income from continuing operations was $25.9 million, or $0.51 per share, versus $16.1 million, or $0.29 per share, in 2013; these figures exclude specified debt-extinguishment, restructuring, acquisition, pension-settlement and tax items.
Operating cash flow less capital expenditures was approximately $16.2 million. Current assets were $815.1 million and current liabilities were $331.2 million. The $225 million revolving facility had $181.1 million available at year-end, after $25.0 million of borrowings and $18.9 million of standby letters of credit. The company stated it was in compliance with debt covenants.
Material changes versus the prior year
- Revenue rose 6.4%; gross margin improved by 0.8 percentage points. SG&A increased to $375.1 million from $340.5 million, and interest expense declined to $48.4 million from $52.5 million.
- HBP revenue increased 15% to $979.4 million; segment operating profit rose to $40.5 million from $26.1 million. Growth reflected Northcote and Cyclone acquisitions, stronger AMES sales and higher CBP volume and mix.
- Telephonics revenue declined 8% to $419.0 million and segment operating profit fell to $45.3 million from $55.1 million. The prior year included $33.3 million of ICREW revenue; excluding that program, revenue was described as in line with the prior year.
- Plastics revenue increased 5% to $593.4 million and segment operating profit rose to $28.9 million from $16.6 million. Improvement reflected efficiencies, volume, mix and resin-price pass-through.
- Cash used in investing activities increased to $147.3 million, including $62.0 million for the Northcote and Cyclone acquisitions and $77.1 million of capital expenditures. Cash used in financing was $27.9 million, including share repurchases, ESOP share purchases and dividends.
Outlook, commentary, risks and unusual items
- No specific consolidated revenue or earnings guidance is provided. AMES expected its manufacturing and operations consolidation to finish by the end of calendar 2014; management estimated annual cash savings exceeding $10 million, with expected capital expenditures of $20 million for the initiative. The filing reports $7.9 million of restructuring costs and $17.7 million of capital expenditures incurred to date.
- Telephonics funded backlog was approximately $494 million, up from $444 million a year earlier; about 65% was expected to be fulfilled in fiscal 2015. Management cited defense-budget reductions, sequestration and possible government shutdowns as risks to Telephonics revenue, profit and cash flow.
- Major customer concentration is material: the U.S. Government and its agencies represented 15% of consolidated revenue; P&G 14%; and Home Depot 12%. Loss or reduced orders from major customers could materially affect results and liquidity.
- Other identified risks include housing-market and consumer-demand weakness, seasonality and weather, raw-material price volatility, foreign-exchange movements, competition, reliance on suppliers, and execution of acquisitions and restructuring.
- Griffon issued $600 million of 5.25% senior notes due 2022 and used proceeds principally to redeem $550 million of 7.125% notes due 2018. The refinancing produced the $38.9 million extinguishment loss. The revolving facility maturity was extended to 2019.
- Telephonics was responding to a U.S. Department of Defense Inspector General/Department of Justice inquiry under administrative subpoena. The company said no claim had been asserted and it was unaware of material financial exposure. The filing also describes environmental matters, including the Peekskill and Frankfort sites, and $89 million of Telephonics offset-agreement obligations; management did not consider current contingencies expected to have a material adverse effect based on known facts.
- The board declared a $0.04-per-share dividend on November 12, 2014, payable in December. Future dividends remain subject to board discretion and debt restrictions.
Important facts for investors to verify
- Whether HBP’s acquisition-driven growth and planned cost savings translate into sustained operating-margin improvement after the consolidation is completed.
- Telephonics’ conversion of its higher backlog into revenue and cash flow, and the impact of defense-budget changes and the government inquiry.
- Cash generation and working-capital trends, especially inventory growth, alongside capital spending, acquisitions, dividends and repurchases.
- Debt-service capacity, refinancing terms and covenant headroom given higher year-end net debt and the substantial debt maturities disclosed in the filing.
- The resolution and potential costs of environmental, product-liability, discontinued-operation and other contingencies, for which outcomes or amounts may remain uncertain.