Business context and reporting period
Griffon Corporation is a diversified holding company operating through Consumer and Professional Products (CPP/AMES), Home and Building Products (HBP/Clopay), and Defense Electronics (DE/Telephonics). This Form 10-Q covers the fiscal quarter and nine months ended June 30, 2020. Unless noted, financial figures below are in U.S. dollars; amounts are converted to millions from the filing’s thousands.
Financial performance and position
| Metric | Three months ended June 30, 2020 | Prior-year quarter | Nine months ended June 30, 2020 | Prior-year period |
|---|---|---|---|---|
| Revenue | $632.1m | $575.0m | $1,746.8m | $1,635.1m |
| Gross profit / margin | $165.0m / 26.1% | $154.5m / 26.9% | $467.0m / 26.7% | $435.0m / 26.6% |
| Operating income / margin | $51.5m / 8.1% | $36.5m / 6.3% | $109.2m / 6.3% | $91.5m / 5.6% |
| Income from continuing operations | $21.8m | $14.1m | $33.3m | $29.4m |
| Diluted EPS | $0.50 | $0.31 | $0.76 | $0.69 |
| Adjusted diluted EPS (non-GAAP) | $0.59 | $0.31 | $1.18 | $0.68 |
- Quarterly revenue rose 10% (9% organic); nine-month revenue rose 7% (6% organic). Quarterly adjusted EBITDA was $69.5m versus $53.1m; nine-month adjusted EBITDA was $172.6m versus $140.9m.
- Quarter segment revenue and adjusted EBITDA: CPP $328.9m and $37.1m, versus $273.7m and $24.0m; HBP $219.2m and $39.3m, versus $221.5m and $33.9m; DE $84.0m and $4.1m, versus $79.7m and $7.3m.
- Operating cash flow for the nine months was $55.9m versus $15.0m. Capital expenditures were $34.8m, leaving approximately $21.2m of operating cash flow after capital expenditures. Cash and equivalents were $72.0m at June 30, 2020.
- Total debt was $1.150bn and net debt was $1.078bn at June 30, 2020, compared with $1.114bn and $1.042bn at September 30, 2019. Credit-agreement-defined net debt to EBITDA leverage was 4.4x. Debt includes $1.0bn of 2028 senior notes bearing 5.75% interest.
- Working capital included current assets of $988m and current liabilities of $436m. The amended $400m revolving facility had $104.2m drawn, $21.6m of standby letters of credit, and $274.2m available, subject to covenants. Griffon reported compliance with debt covenants.
Material changes versus comparable periods
- CPP’s quarterly revenue increased 20%, reflecting stronger home-improvement demand in North America and Australia; adjusted EBITDA rose 55%. HBP revenue dipped 1% for the quarter, while adjusted EBITDA increased 16%. DE revenue rose 5%, but adjusted EBITDA fell 43% on unfavorable program mix and program inefficiencies.
- For the nine-month period, CPP revenue rose 9%, HBP 6%, and DE 3%. DE adjusted EBITDA declined 24% year over year.
- Griffon refinanced its $1.0bn 5.25% notes due 2022 with $1.0bn of 5.75% notes due 2028, extending maturity but increasing the stated coupon. It also extended and expanded its revolving credit facility to $400m, maturing in 2025.
- The company recorded a $7.9m loss on debt extinguishment in the nine-month period. Nine-month GAAP results also included $11.2m of restructuring charges and $3.0m of acquisition costs. The prior-year nine-month period included an $11.0m discontinued-operations charge.
Outlook, commentary, risks and contingencies
- Management said facilities were operational as of the filing date and supply chains had not experienced significant disruption. Since the end of Q3, order patterns were normal or better than the prior year in most businesses; HBP residential sectional door orders fell 18% in April but recovered to prior-year levels by quarter-end. Management emphasized that the pandemic’s future effects remain uncertain. No quantified full-year revenue or earnings guidance is provided.
- The CPP platform initiative is expected to run through calendar 2022. Management estimates $15m–$20m in annual cash savings and a $20m–$25m inventory reduction when fully implemented. Expected program costs are about $35m of one-time charges and $40m of capital investment; $11.2m of charges and $3.7m of capital investment had been incurred through June 30, 2020.
- Backlog was $350.4m, down from $389.3m at September 30, 2019; about 72% was expected to convert to revenue within one year. Backlog and timing of government awards are subject to budget, political, negotiation, and approval risks.
- COVID-19 risks include further facility closures, reduced customer or supplier capacity, and broader economic weakness. Other disclosed risks include high leverage and debt-service needs, customer concentration, tariffs and input costs, government contract audits and funding, foreign exchange, and environmental matters.
- Home Depot represented 18% of consolidated nine-month revenue; the U.S. Government and its agencies represented 9% of consolidated revenue and 65% of DE revenue. The EPA has placed the Peekskill site on the National Priorities List and expects to select a remedy in 2022; Griffon disclaims responsibility for remediation, and ultimate exposure is uncertain. Management stated it did not expect the disclosed legal and environmental matters to materially affect consolidated results or cash flows.
- The board declared a $0.075-per-share dividend in July 2020. Future dividends remain subject to board discretion.
Important facts for investors to verify
- Whether CPP’s demand strength and planned savings persist, and whether the restructuring meets its cost, investment, and timing estimates.
- Whether HBP’s recovered orders continue and whether DE can improve program execution, mix, and margins.
- Cash conversion, working-capital needs, capital spending, and liquidity available under the revolver, including covenant headroom at 4.4x leverage.
- Effects of the higher 2028 notes coupon, refinancing costs, and debt maturities on interest expense and future refinancing capacity.
- Developments in COVID-19, concentrated-customer demand, government contract funding and audits, and environmental contingencies, especially the Peekskill site.