Griffon Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2016; comparative periods ended June 30, 2015. Unless noted, figures below are USD millions. Griffon operates Home & Building Products (AMES and Clopay Building Products), Telephonics, and Clopay Plastic Products (PPC).
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $462.2 | $511.7 | $1,456.5 | $1,513.9 |
| Gross profit / margin | $119.4 / 25.8% | $123.5 / 24.1% | $349.6 / 24.0% | $355.9 / 23.5% |
| Operating income / margin | $24.6 / 5.3% | $27.9 / 5.5% | $72.0 / 4.9% | $72.8 / 4.8% |
| Net income | $7.6 | $10.9 | $22.3 | $23.5 |
| Diluted EPS | $0.18 | $0.23 | $0.50 | $0.50 |
| Operating cash flow | Not separately reported for the quarter | $57.6 | $29.6 | |
| Capital expenditures | Not separately reported for the quarter | $63.2 | $55.4 |
Q3 revenue declined 10% reported and 9% excluding foreign currency; year-to-date revenue fell 4% reported and 1% excluding currency. Q3 adjusted net income was $11.0 million and adjusted diluted EPS $0.26, excluding restructuring costs and discrete tax benefits. Nine-month adjusted net income was $25.4 million and adjusted diluted EPS $0.57; these are non-GAAP measures.
Nine-month operating cash flow less capital expenditures was negative $5.7 million, before acquisitions and other investing items. Cash and equivalents were $68.6 million at June 30, versus $52.0 million at September 30, 2015. Total debt was $949.7 million, with debt net of cash of $881.1 million; balance-sheet long-term debt, net of current portion, was $913.8 million. Current assets were $792.3 million and current liabilities $290.0 million.
Segments and changes versus prior year
- Home & Building Products: Q3 revenue decreased 6% to $255.6 million, chiefly from weather-related declines at AMES; CBP grew 1%. Segment operating profit rose 43% to $23.2 million, supported by efficiencies, cost controls, favorable CBP mix, and lower material costs. Nine-month profit increased 51% to $62.2 million.
- Telephonics: Q3 revenue fell 20% to $91.8 million, primarily due to timing of work on radar and identification systems; operating profit fell 29% to $9.5 million. Nine-month revenue edged up 1%, but operating profit fell 16% to $25.2 million, reflecting unfavorable program mix and cost growth on certain airport-surveillance radar components. Backlog was $415 million, with 71% expected to be fulfilled within 12 months.
- PPC: Q3 revenue fell 7% to $114.9 million and segment operating profit was $1.7 million, including $5.9 million in restructuring charges. Excluding those charges, operating profit was $7.6 million, down 9%. Nine-month revenue fell 12% and operating profit excluding restructuring fell 26%, mainly due to lower baby-care volume and unfavorable product mix.
Consolidated Q3 operating income declined despite improved gross margin, while net income was additionally affected by higher interest expense and PPC restructuring. Nine-month net income decreased slightly; reported EPS was unchanged at $0.50 as the weighted-average diluted share count fell.
Liquidity, financing and capital returns
- In May 2016, Griffon issued $125 million of 5.25% senior notes due 2022, adding to $600 million previously issued; proceeds repaid revolving-credit borrowings. The notes totaled $725 million outstanding at June 30.
- The revolving facility was increased from $250 million to $350 million and extended to March 2021. There were no borrowings at June 30; $334.2 million was available after standby letters of credit, subject to covenants. The company reported compliance with debt covenants.
- Cash interest and total interest expense for the nine months were $32.2 million and $37.5 million, respectively. Nine-month dividends were $0.15 per share. The company repurchased $42.2 million of shares under board programs; the board authorized another $50 million buyback on August 3, 2016.
Outlook, risks and unusual items
- No specific consolidated revenue or earnings guidance was provided. Management cited HBP seasonality and stated interim results are not necessarily indicative of full-year results.
- PPC recorded $5.9 million of restructuring and exit charges, associated with approximately 83 positions, facility changes in Germany and closure costs for its Turkey facility. Management estimates annual cash savings of $4 million at current operating levels. PPC also announced a breathable-film capacity and technology investment expected to be completed in fiscal 2018.
- Telephonics received approximately $279 million of contract awards and incremental funding during the nine months. Results remain exposed to government spending, funding, contract timing, audits, and program cost performance.
- Customer concentration is material: for the nine months, the U.S. Government represented 15% of consolidated revenue, Procter & Gamble 12%, and The Home Depot 13%. Management warned that reduced orders or loss of a major customer could materially affect results and liquidity.
- Other stated risks include weather and seasonality, foreign exchange, raw-material costs, competition and pricing, and execution of cost-saving initiatives. Environmental matters include the Frankfort, New York site, where the state was reviewing remediation alternatives; the company stated it had defenses. Griffon also reported discussions with the DOJ regarding government-contract amounts, but no claim had been asserted and management did not expect material exposure. Management believes the identified legal and environmental matters will not materially affect consolidated results or cash flows.
- After quarter-end, holders could convert the $100 million 4% subordinated notes due 2017. Griffon announced it would settle up to $125 million of conversion value in cash, with any excess potentially settled in shares. A $0.05-per-share quarterly dividend was declared on August 3, 2016.
Important facts for investors to verify
- Whether AMES weather-related demand and PPC volume and mix recover, and whether PPC realizes the stated $4 million annual savings.
- Telephonics contract execution, margin trends, funding, and conversion of its $415 million backlog into revenue.
- Debt and liquidity implications of 2017 convertible-note conversions, including any share settlement, alongside planned buybacks and dividends.
- Customer concentration, working-capital movements, capital spending, and developments in government-contract and environmental matters.