Griffon Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2016, the three months ended December 31, 2015; comparison is with the three months ended December 31, 2014. Amounts are in millions of U.S. dollars unless otherwise noted. Griffon operates Home & Building Products (HBP), Telephonics and Clopay Plastic Products (PPC).
Financial performance and liquidity
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Revenue | $494.1 | $502.2 |
| Gross profit / margin | $116.1 / 23.5% | $118.0 / 23.5% |
| Operating income / margin | $24.8 / 5.0% | $24.1 / 4.8% |
| Net income | $8.6 | $7.5 |
| Diluted EPS | $0.19 | $0.16 |
| Segment adjusted EBITDA | $52.0 | $49.1 |
| Cash used in operating activities | $19.6 | $8.1 |
| Capital expenditures | $25.0 | $18.9 |
- Cash and equivalents were $50.0 at quarter-end, down from $52.0 at September 30, 2015. Current assets were $771.4 and current liabilities $280.6.
- Cash used in investing activities was $26.5, including capital expenditures and a $2.7 investment in a joint venture. Financing provided $44.8, principally reflecting increased revolver borrowings. Cash declined by $2.0 overall.
- Debt totaled $917.2 before unamortized discounts and issuance costs; reported debt carrying value was $901.2. Debt net of cash was $867.2. The $250.0 revolving facility had $95.0 drawn, $15.9 of letters of credit and $139.1 available, subject to covenants.
- Interest expense was $12.0. Management reported compliance with credit and loan covenants. The $100.0 convertible notes mature January 15, 2017; the company stated it intended and was able to refinance their principal.
Changes versus the prior-year quarter
- Revenue fell 2% as reported, but increased 3% excluding unfavorable currency effects. Net income rose 15%, and diluted EPS increased from $0.16 to $0.19. Results included a $0.4 discrete tax benefit in the current quarter versus a $0.3 discrete tax provision in the prior-year quarter; excluding these items, adjusted net income was $8.2 versus $7.8 and adjusted diluted EPS was $0.18 versus $0.16.
- HBP revenue declined 4% to $261.2, while segment operating profit rose 29% to $21.2. AMES was affected by mild weather and lower snow-tool sales; CBP grew on higher volume and favorable mix. AMES efficiency improvements and cost controls supported profitability.
- Telephonics revenue grew 20% to $109.0, mainly from timing of radar work and system deliveries. Operating profit rose 4% to $7.8, but margin declined 110 basis points amid program mix and cost growth on certain contracts.
- PPC revenue declined 11% to $123.9 and operating profit fell 25% to $6.0, reflecting currency, lower volume, resin-price pass-through timing and European equipment maintenance inefficiencies.
- Segment adjusted EBITDA increased to $52.0 from $49.1, but unallocated costs rose to $9.6 from $8.3, primarily due to compensation and incentive costs. Operating cash use increased, reflecting working-capital movements, including payments of accounts payable and accrued expenses and increased inventory and unbilled contract costs.
Outlook, risks and unusual items
- The filing provides no specific numerical revenue or earnings guidance. Management said it believed liquidity was sufficient to support existing businesses and strategic acquisitions; interim results may not indicate full-year performance, in part because HBP is seasonal.
- Telephonics reported $459.0 of funded backlog at December 31, 2015, with 70% expected to be fulfilled within 12 months. It received approximately $125.1 of new contract awards and incremental funding during the quarter.
- Customer concentration is material: the U.S. Government represented 17% of consolidated revenue and 76% of Telephonics revenue; Procter & Gamble represented 13% of consolidated revenue and 53% of PPC revenue; Home Depot represented 11% of consolidated revenue and 21% of HBP revenue. The filing warns that reduced orders or loss of a major customer could adversely affect operations and liquidity.
- Other stated risks include government spending and contract audits, housing and weather conditions, competition and pricing, raw-material costs, foreign exchange, interest rates, customer demand, and the ability to achieve savings or integrate acquisitions. A 100-basis-point LIBOR change and a 10% or smaller currency move were not expected by management to materially affect results or liquidity.
- Contingencies include environmental matters at the Peekskill and Frankfort, New York sites, a possible future indemnity claim involving Union Tools advertising litigation, and discussions with the U.S. Department of Justice concerning government-contract amounts. No claim had been asserted in the DOJ matter; management said it did not believe it had material financial exposure. Management did not expect the disclosed legal and environmental matters to materially affect consolidated results, financial position or cash flows.
- Foreign-currency translation losses were $3.3 and cash-flow hedge losses were $1.0 in other comprehensive income. The quarter also included $0.4 of net currency-exchange gains in other income. Griffon repurchased 432,419 shares under authorized programs for $7.2 and paid a $0.05-per-share dividend; a further $50.7 remained available under repurchase authorizations.
Important facts for investors to verify
- Whether Telephonics’ backlog converts to revenue and profit as expected, given contract timing and reported cost growth on certain programs.
- Whether HBP’s weather-sensitive AMES sales recover and whether PPC can address lower volume and European operating inefficiencies.
- How working-capital requirements and capital spending affect cash generation; operating cash use was $19.6 despite positive net income.
- Debt levels, revolver availability and covenant headroom, particularly ahead of the 2017 convertible-note maturity and related liquidity covenant period.
- Developments in major-customer demand, government-contract audits, and the environmental and other legal contingencies disclosed in the filing.
- The sustainability of earnings growth after accounting for discrete tax items, currency effects and higher unallocated costs.