Griffon Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2014. Unless stated otherwise, financial figures below are in millions of U.S. dollars. Griffon operates Home & Building Products (HBP), Telephonics and Plastics.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $505.0 | $509.8 | $1,466.2 | $1,422.3 |
| Gross profit / margin | $118.3 / 23.4% | $108.3 / 21.2% | $333.8 / 22.8% | $311.5 / 21.9% |
| Operating income / margin | $21.8 / 4.3% | $20.4 / 4.0% | $58.5 / 4.0% | $44.8 / 3.2% |
| Net income (loss) | $14.5 | $3.6 | $(8.1) | $3.3 |
| Diluted EPS | $0.29 | $0.06 | $(0.16) | $0.06 |
| Operating cash flow | Not separately shown for the quarter | $49.9 | $2.6 |
Quarterly revenue declined about 1%, while nine-month revenue increased about 3%. Nine-month net loss included a $38.9 million pretax loss on early debt extinguishment. Griffon’s non-GAAP adjusted net income was $9.5 million, or $0.19 per diluted share, for Q3 and $19.5 million, or $0.39 per diluted share, for the nine months; these measures exclude specified restructuring, acquisition, debt-extinguishment, pension and tax items.
For the nine months, investing activities used $125.1 million, including $62.3 million for acquisitions and $54.9 million of capital expenditures. Financing activities used $13.3 million. Cash fell to $87.4 million from $178.1 million at September 30, 2013.
Segments and material changes
- HBP: Q3 revenue rose 6% to $254.0 million, but segment adjusted EBITDA declined to $19.6 million from $21.5 million. Nine-month revenue rose 10% to $724.0 million; adjusted EBITDA was $55.8 million versus $56.3 million. Ames faced manufacturing inefficiencies, freight and distribution costs, and unfavorable currency effects; CBP benefited from volume and product mix.
- Telephonics: Q3 revenue fell 21% to $102.4 million, partly because the prior-year quarter included $20.0 million of contract-manufacturing revenue that did not recur. Adjusted EBITDA increased to $15.1 million from $13.1 million. Nine-month revenue declined 13% and adjusted EBITDA declined to $40.0 million from $45.0 million. Backlog was $457 million at June 30, with 67% expected to be fulfilled within 12 months.
- Plastics: Q3 revenue increased 7% to $148.6 million and adjusted EBITDA increased to $14.9 million from $12.2 million, reflecting volume and efficiency gains. Nine-month adjusted EBITDA rose to $43.9 million from $33.8 million, including the benefit of no repeat of prior-year restructuring charges.
- Griffon acquired Northcote Pottery for approximately $22 million and Cyclone for approximately $40 million. Management estimated annualized revenue of about $28 million and $65 million, respectively; their contributions were not significant in the periods reported.
Debt, liquidity and capital allocation
At June 30, total debt was $819.6 million, compared with $702.5 million at September 30, 2013; debt net of cash was $732.2 million, versus $524.4 million. Griffon issued $600 million of 5.25% senior notes due 2022, using proceeds principally to redeem $550 million of 7.125% notes due 2018. The refinancing generated the $38.9 million extinguishment loss. The $225 million revolving facility was extended to March 2019; $25.0 million was drawn, $20.4 million of letters of credit were outstanding, and $179.6 million remained available. Griffon reported compliance with debt covenants.
The company repurchased $16.3 million of shares under board-authorized programs during the nine months and paid $0.09 per share in dividends. At June 30, $45.7 million remained under the May 2014 $50 million repurchase authorization. In July, the ESOP received an additional $10 million borrowing line for share purchases.
Outlook, risks and unusual items
- No specific consolidated revenue or earnings guidance is provided. Management expected Ames’s facility consolidation, planned for completion by the end of calendar 2014, to generate annual cash savings exceeding $10 million at current operating levels. The initiative was expected to cost about $8 million in restructuring and exit charges and require about $20 million in capital expenditures.
- Management attributed the nine-month reported loss to the debt refinancing charge and expected a full-year pretax loss, with a corresponding tax benefit at an effective rate of approximately 23%. Quarterly and year-to-date tax results included discrete benefits, so reported tax rates may not indicate underlying rates.
- Customer concentration is material: for the nine months, Procter & Gamble represented 16% of consolidated revenue, the U.S. Government and its agencies 15%, and Home Depot 12%. Telephonics depends substantially on government contracts; the filing identifies government funding, audits and possible suspension or debarment as risks.
- Other disclosed risks include seasonal and weather-sensitive HBP demand, raw-material costs, foreign-exchange movements, customer volume or mix changes, and execution of acquisitions and cost-saving initiatives. The filing describes environmental matters at Peekskill and Frankfort and an ongoing government inquiry involving Telephonics; no government claim had been asserted, and management said it was unaware of material financial exposure from the inquiry. Management believed the disclosed legal and environmental matters would not materially adversely affect consolidated results, position or cash flows, while noting outcomes remain uncertain.
Important facts for investors to verify
- How much of the reported improvement in quarterly earnings reflects operating performance versus discrete tax benefits and other adjustments; reconcile the company’s non-GAAP adjusted results to GAAP.
- Whether HBP consolidation achieves the stated savings and is completed on schedule, and how persistent Ames operating inefficiencies and weather-related demand effects prove to be.
- Telephonics’ replacement of nonrecurring contract-manufacturing revenue, its funded backlog conversion, and exposure to government budgets and contract review.
- Debt service, covenant headroom and liquidity after acquisitions, share repurchases and dividends; assess the increase in net debt and the terms of ESOP-related borrowing.
- Integration and realized performance of Northcote and Cyclone, including the extent to which their expected annualized revenue translates into profitable growth.
- Developments, potential costs and timing concerning environmental remediation and the government inquiry, for which the filing does not provide a clear quantified exposure.