Business context and reporting period
Griffon Corporation (NYSE: GFF) filed this Form 10-K for the fiscal year ended September 30, 2020; amounts below are U.S. dollars in millions unless noted. The company operates Consumer and Professional Products (CPP, AMES), Home and Building Products (HBP, Clopay) and Defense Electronics (DE, Telephonics). The filing also reports fourth-quarter results for the three months ended September 30, 2020.
Key financial results
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $2,407.5 | $2,209.3 |
| Gross profit / margin | $641.4 / 26.6% | $583.5 / 26.4% |
| Income from continuing operations | $53.4 | $45.6 |
| Diluted EPS from continuing operations | $1.19 | $1.06 |
| Operating cash flow | $137.0 | $114.0 |
| Capital expenditures | $49.0 | $45.4 |
| Cash and equivalents at year-end | $218.1 | $72.4 |
| Total debt, as presented in debt note | $1,064.4 | Not clearly comparable in the cited table |
Revenue grew 9% year over year, with 8% organic growth. Net income was $53.4 million, compared with $37.3 million in FY2019, which included an $8.3 million after-tax loss from discontinued operations. FY2020 gross margin was 26.6%. Adjusted EBITDA, a non-GAAP measure, was $235.9 million, or about 9.8% of revenue; adjusted income from continuing operations was $73.0 million and adjusted diluted EPS was $1.62.
FY2020 operating cash flow less capital expenditures was approximately $88.0 million, a simple calculation from reported figures. Current assets were $1,113.5 million and current liabilities were $449.2 million. Net debt, calculated by the company as total debt less cash, was $846.3 million, versus $1,041.8 million in FY2019. Credit-agreement net leverage was 3.4x; Griffon reported compliance with its debt covenants.
Segment performance
| Segment | FY2020 revenue | Year-over-year change | Adjusted EBITDA / margin |
|---|---|---|---|
| CPP | $1,139.2 million | +14% | $104.1 million / 9.1% |
| HBP | $927.3 million | +6% | $153.6 million / 16.6% |
| DE | $341.0 million | +2% | $25.2 million / 7.4% |
CPP growth reflected higher demand and volume for home improvement products, including pandemic-related stay-at-home demand; HBP benefited from higher volume, pricing and mix, and operational efficiencies. DE revenue rose modestly, but adjusted EBITDA fell 28%, reflecting radar-program inefficiencies, unfavorable mix and higher bid, proposal and R&D costs.
For Q4 FY2020, revenue was $660.7 million and income from continuing operations was $20.1 million; diluted EPS was $0.41. Q4 FY2019 revenue was $574.2 million, income from continuing operations was $16.3 million and diluted EPS was $0.37.
Material changes versus the prior period
- Revenue and continuing-operations income increased; reported diluted continuing-operations EPS rose from $1.06 to $1.19.
- Operating cash flow increased by $23.1 million. Cash rose to $218.1 million, while net debt fell by about $195.4 million.
- Griffon refinanced $1.0 billion of 5.25% notes due 2022 with 5.75% senior notes due 2028. The refinancing produced a $7.9 million extinguishment loss. The revolving facility was expanded to $400 million and extended to 2025; $370.3 million was available at year-end, subject to covenants.
- An August 2020 public offering of 8.7 million shares generated $178.2 million net proceeds, partly used to repay revolver borrowings, and increased the share base.
- CPP and HBP improved segment adjusted EBITDA; DE adjusted EBITDA declined. FY2020 included $15.8 million of restructuring charges, $3.0 million of acquisition costs and a $1.7 million contingent-consideration benefit.
Outlook, commentary, risks and contingencies
Management said facilities were operational and order patterns were normal or better than the prior year for most businesses; HBP sectional-door orders fell 18% in April before rebounding. The company reported no significant supply-chain disruption to date, but cautioned that the pandemic’s duration and effects remained uncertain. It stated that available liquidity and cash flows were expected to meet requirements for the foreseeable future. The filing provides no quantified consolidated revenue or earnings guidance.
CPP’s expanded global business-platform initiative is expected to be completed by the end of calendar 2023. Management estimates annual cash savings of $30–35 million and inventory reduction of $30–35 million, with approximately $65 million of one-time charges and $65 million of capital investment over the project. FY2020 CPP restructuring and related exit costs were approximately $13.7 million. Telephonics was exploring strategic options for its Systems Engineering and Analysis business, described as having about $30 million in sales. A voluntary retirement plan and subsequent workforce reduction were expected to reduce Telephonics headcount by about 90 and incur approximately $4.5 million of severance charges; a facilities consolidation was estimated to cost about $4 million, primarily in capital expenditures.
Principal risks include COVID-19-related closures or demand and supply disruptions; housing, renovation and commercial construction cycles; weather-driven seasonality; raw-material cost, tariff and sourcing exposure; customer concentration (Home Depot accounted for 17% of consolidated revenue); and government-contract funding, audit and performance risks at Telephonics. Telephonics funded backlog was $380 million, down from $389.3 million, with about 67% expected to convert within 12 months; international award timing may be uncertain.
Environmental and other legal matters include the Peekskill, New York site, which the EPA added to the National Priorities List and for which investigation discussions were pending. Griffon stated it does not acknowledge responsibility for remediation. The company also described remediation at a former Frankfort, New York site, with its insurer covering a substantial portion of costs. Management said currently known legal and environmental matters were not expected to have a material adverse effect, while noting uncertainty. No goodwill or indefinite-lived intangible impairment was recorded after interim and year-end assessments.
Important facts for investors to verify
- Whether the FY2020 demand surge in home-improvement markets persists, and whether segment margins and cash generation hold up as pandemic conditions change.
- Progress, implementation costs and realized savings from CPP’s expanded platform initiative, including its revised timetable and capital requirements.
- DE program execution, contract-estimate adjustments, backlog conversion and the outcome of any strategic review of the SEG business.
- Debt service capacity, covenant headroom and the cost implications of refinancing at 5.75%; confirm the reported availability under the revolver and leverage calculation.
- Customer concentration, receivables exposure and the status and potential cost of environmental and other contingencies, particularly the Peekskill site.
- Share dilution from the 2020 equity offering and the sustainability of dividends; the board declared a subsequent $0.08-per-share dividend in November 2020.