Griffon Corporation (NYSE: GFF) — FY2019 Form 10-K
Reporting period: Fiscal year ended September 30, 2019; the filing also reports the fourth quarter ended September 30, 2019. Amounts below are in U.S. dollars; financial figures are generally shown in millions.
Business context
Griffon is a diversified holding company with three reportable segments: Consumer and Professional Products (CPP, AMES tools, outdoor products and ClosetMaid storage); Home and Building Products (HBP, Clopay residential and commercial doors, including CornellCookson); and Defense Electronics (Telephonics). The segment structure was revised in fiscal Q4 2019, and prior-year segment data was recast. The Plastics business, sold in February 2018, is reported as discontinued operations.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $2,209.3 | $1,977.9 |
| Gross profit / gross margin | $595.3 / 26.9% | $529.2 / 26.8% |
| Operating income | $135.3 | $92.8 |
| Interest expense | $68.1 | $65.6 |
| Income from continuing operations | $45.6; diluted EPS $1.06 | $33.3; diluted EPS $0.78 |
| Net income | $37.3; diluted EPS $0.87 | $125.7; diluted EPS $2.96 |
| Operating cash flow, continuing operations | $114.0 | $58.2 |
| Capital expenditures | $45.4 | $50.1 |
Revenue grew 12%, including 5% organic growth. Net income fell sharply from 2018 because that year included a $113.0 million pretax gain on the Plastics sale; FY2019 also included an $11.1 million discontinued-operations charge, primarily a sale-related purchase-price adjustment and an additional legacy environmental reserve. FY2019 continuing-operations income included a $1.6 million pretax benefit from reversing Kelkay contingent consideration and $2.0 million of net discrete and other tax provisions. The effective tax rate was 36.8%, versus 1.6% in FY2018, which benefited from discrete tax benefits.
FY2019 continuing-operations cash flow less capital expenditures was approximately $68.6 million. Operating cash flow improved year over year, while inventory increased and was a principal working-capital use. The filing reports a current ratio of approximately 2.4x, based on current assets of $925.2 million and current liabilities of $390.1 million.
Segments and material changes
| Segment | FY2019 revenue | FY2019 Adjusted EBITDA and margin | Change versus FY2018 |
|---|---|---|---|
| CPP | $1,000.6 | $90.7 / 9.1% | Revenue +5%; Adjusted EBITDA +18% |
| HBP | $873.6 | $120.2 / 13.8% | Revenue +25%; Adjusted EBITDA +20% |
| Defense Electronics | $335.0 | $35.1 / 10.5% | Revenue +3%; Adjusted EBITDA −3% |
CPP growth reflected pricing and mix, volume and acquisitions; tariff and material costs partly offset earnings gains. HBP growth included a full year of CornellCookson revenue ($202.7 million); higher material, tariff and freight costs partly offset growth. Telephonics revenue benefited from radar volume, but unfavorable product mix and efficiencies reduced Adjusted EBITDA. Its funded backlog was $389.3 million at year-end, up from $374.2 million, with 72% expected to be fulfilled in FY2020.
In fiscal Q4, revenue was $574.2 million versus $545.5 million in the prior-year quarter; gross profit was $160.2 million versus $148.3 million; and income from continuing operations was $16.3 million versus $1.0 million. Q4 included the Kelkay contingent-consideration benefit.
Debt, liquidity and capital allocation
At September 30, 2019, cash and equivalents were $72.4 million. Reported debt, net of discounts and issuance costs, was $1,104.3 million; debt net of cash was $1,041.8 million. The company’s $1.0 billion of 5.25% senior notes mature in 2022. Its $350 million revolving facility matures in 2021, had $50.0 million drawn, and had $278.7 million available after standby letters of credit, subject to covenants. Management reported covenant compliance and credit-agreement net debt to EBITDA of 4.8x.
FY2019 dividends were $0.29 per share, and the board declared a $0.075 per-share dividend after year-end. The board-authorized repurchase programs had $58.0 million remaining at year-end; the company purchased 37,500 shares for $0.4 million during FY2019.
Outlook, risks and unusual items
- No consolidated revenue, earnings or cash-flow guidance is provided. Management said it believes liquidity is sufficient for investment in existing businesses and strategic acquisitions.
- CPP’s planned U.S. operating-platform initiative is expected to finish by the end of calendar 2022. Management estimates annual cash savings of $15–20 million and a $20–25 million inventory reduction at current operating levels, against about $35 million of one-time charges and $40 million of capital investment over three years.
- Clopay planned a $14 million Mountain Top, Pennsylvania expansion; $6.3 million had been spent by September 30, 2019, with completion expected by calendar year-end 2019.
- Key risks include housing, renovation and construction cycles; weather and seasonality; customer concentration (Home Depot was 18% of consolidated revenue); raw-material and tariff costs; supplier dependence; and the ability to service or refinance debt. U.S. Government-related sales were 10% of consolidated revenue and 63% of Telephonics revenue; defense awards and funding can be delayed or reduced.
- Telephonics had approximately $40 million of outstanding international offset commitments, some extending through 2029; penalties were not considered estimable or probable at year-end. A former operating site in Peekskill, New York, was added to the EPA National Priorities List in May 2019; Griffon stated it did not acknowledge responsibility for remediation, and the eventual action and cost were uncertain.
- ASC 606 adoption reduced opening retained earnings by $5.6 million; management said the overall FY2019 impact was not material. Adoption of the lease standard on October 1, 2019 was expected to increase assets and liabilities by approximately $160–170 million, before deferred taxes, without a material income-statement or cash-flow impact.
Investor verification priorities
- Confirm the sustainability of reported organic growth and segment margins, separating acquisition contributions, pricing, volume, tariffs and freight costs.
- Track cash conversion, inventory levels, capital spending and delivery of the CPP initiative’s projected savings and inventory reduction.
- Assess leverage, the 2022 senior-note maturity, the 2021 revolver maturity, covenant headroom and refinancing options.
- Monitor Telephonics contract estimates, backlog conversion, international award timing and any cost-to-complete revisions; FY2019 included approximately $4.5 million of unfavorable catch-up adjustments.
- Follow the resolution and cash costs of the Plastics sale adjustment and environmental matters, including the Peekskill site and the discontinued-operations reserve.
- Distinguish recurring earnings from tax items and discontinued operations; FY2018 net income included the Plastics divestiture gain and significant tax benefits.
The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Defense contract revenue recognition and goodwill and indefinite-lived intangible impairment testing were identified as critical audit matters.