GRIFFON CORP quarterly report, Q3 FY2017

Griffon Corporation — Form 10-Q Summary

Reporting period: Fiscal third quarter and nine months ended June 30, 2017. Unless noted, amounts are in millions of U.S. dollars. Griffon is a diversified holding company operating in Home & Building Products (HBP), Telephonics, and specialty plastic films (PPC).

Financial performance

Metric	Q3 2017	Q3 2016	Nine months 2017	Nine months 2016
Revenue	$473.3	$462.2	$1,436.2	$1,456.5
Gross profit	$116.0	$119.4	$347.6	$349.6
Income from operations	$25.2	$24.6	$74.7	$72.0
Net income	$9.6	$7.6	$26.9	$24.5
Diluted EPS	$0.22	$0.18	$0.63	$0.55

Q3 gross margin was approximately 24.5%, down from 25.8%; operating margin was approximately 5.3%, broadly unchanged. Nine-month gross margin was approximately 24.2%, versus 24.0%.
Management’s adjusted net income, excluding specified discrete tax benefits and, in 2016, restructuring charges, was $7.4 million ($0.17 per diluted share) for Q3 versus $11.0 million ($0.26) a year ago; nine-month adjusted net income was $21.7 million ($0.51) versus $25.4 million ($0.57).
Operating cash flow for the nine months was $65.5 million, compared with $59.7 million. Investing activities used $65.0 million, including $59.2 million of capital expenditures. Financing activities used $2.3 million. Cash declined to $69.4 million from $72.6 million at September 30, 2016.
At June 30, total debt was $1,010.5 million and debt net of cash was $941.0 million, compared with $952.9 million and $880.3 million, respectively, at September 30, 2016. Long-term debt on the balance sheet was $980.7 million. Revolver borrowings were $163.7 million; $171.9 million remained available, subject to covenants. The company reported compliance with debt covenants.
Current assets were $800.1 million and current liabilities $294.2 million. Shareholders’ equity was $394.1 million, down from $410.9 million at fiscal year-end.

Changes versus prior periods

Q3 revenue grew 2%, led by HBP, partly offset by lower Telephonics sales. Nine-month revenue declined 1%, as HBP growth was outweighed by declines at Telephonics and PPC.
HBP Q3 revenue rose 8% and segment operating profit increased 2%; higher volume and pricing were partly offset by steel costs. Nine-month HBP revenue increased 4% and operating profit 4%.
Telephonics Q3 revenue fell 11% and operating profit fell 57%; nine-month revenue declined 13% and operating profit fell $6.6 million. Lower multi-mode radar revenue, program mix, and revised estimates to complete certain contracts weighed on results. Backlog was $355 million, down from $420 million at September 30, 2016.
PPC Q3 revenue was essentially flat. Operating profit increased versus the prior year, which included $5.9 million of restructuring charges; excluding those charges, current-quarter operating profit declined $1.2 million. Nine-month revenue fell 3%; operating profit was approximately level excluding prior-year restructuring charges.
Reported earnings benefited from lower effective tax rates: 17.4% for Q3 and 22.8% for nine months, versus 35.4% and 30.0%. Management cited discrete tax benefits; excluding specified tax items, effective rates were 36.4% and 37.5%.

Outlook, risks and notable items

The filing provides no consolidated earnings or revenue guidance. Management said liquidity was sufficient to fund operations and strategic acquisitions. HBP results are seasonal, and interim performance may not indicate full-year results.
AMES acquired Hills in December 2016 for approximately $6.1 million; it was expected to generate about AUD 10 million in revenue in its first 12 months. After quarter-end, AMES acquired La Hacienda on July 31, 2017 for approximately $11.4 million, including a contingent earn-out; expected first-12-month revenue was about $18 million.
PPC’s approximately $50 million breathable-film investment was expected to be completed in fiscal 2018. The company cited raw-material costs, weather and seasonality, customer concentration, defense spending and contract outcomes, foreign exchange, interest rates, competition, and acquisition execution among key risks.
Three customers represented significant shares of nine-month revenue: the U.S. Government and agencies 13% (68% of Telephonics revenue), Procter & Gamble 12% (49% of PPC revenue), and Home Depot 13% (23% of HBP revenue). Management warned that changes in orders or loss of a major customer could materially affect results.
Telephonics was discussing certain government-contract amounts with the U.S. Department of Justice; no claim had been asserted, and Griffon believed material exposure was unlikely. Environmental matters include the Peekskill and Frankfort, New York sites; the company did not acknowledge responsibility at Peekskill. Management did not expect the disclosed matters to materially affect consolidated results or cash flows.
The $100 million 4% convertible notes were settled in January 2017 for $173.9 million: $125 million cash, funded with revolver borrowings, and $48.9 million in treasury shares. The notes are no longer outstanding. The board declared a $0.06-per-share dividend after quarter-end, payable September 21, 2017.
Disclosure controls were reported effective; management reported no material change in internal control over financial reporting during the quarter.

Investor verification priorities

Assess whether Telephonics’ lower revenue, margins, and backlog reflect timing or a sustained decline; review contract mix and revised estimates to complete.
Evaluate the increase in net debt and revolver usage following the convertible-note cash settlement, alongside available borrowing capacity, covenants, and upcoming maturities.
Separate recurring earnings from discrete tax benefits and compare reported results with management’s adjusted measures.
Monitor HBP steel costs and seasonal demand, PPC resin pass-through and capacity investment, and whether expected acquisition contributions materialize.
Review major-customer concentration, government-contract audit or claim developments, and environmental contingencies for changes in exposure.