BUSINESS
Overview
Griffon Corporation (the "Company", "Griffon", "we" or "us") is a diversified management and holding company that conducts business through wholly-owned subsidiaries. The Company was founded in 1959, is aDelaware corporation headquartered inNew York, N.Y. and is listed on theNew York Stock Exchange (NYSE:GFF). Business Strategy We own and operate, and seek to acquire, businesses in multiple industries and geographic markets. Our objective is to maintain leading positions in the markets we serve by providing innovative, branded products with superior quality and industry-leading service. We place emphasis on our iconic and well-respected brands, which helps to differentiate us and our offerings from our competitors and strengthens our relationship with our customers and those who ultimately use our products. Through operating a diverse portfolio of businesses, we expect to reduce variability caused by external factors such as market cyclicality, seasonality, and weather. We achieve diversity by providing various product offerings and brands through multiple sales and distribution channels and conducting business across multiple countries which we consider our home markets. Griffon's businesses, in particular its CPP operations, are seasonal; for this and other reasons, the financial results of the Company for any interim period are not necessarily indicative of the results for the full year. Griffon oversees the operations of its subsidiaries, allocates resources among them and manages their capital structures. Griffon provides direction and assistance to its subsidiaries in connection with acquisition and growth opportunities as well as in connection with divestitures. As long-term investors, having substantial experience in a variety of industries, our intent is to continue the growth and strengthening of our existing businesses, and to diversify further through investments in our businesses and through acquisitions. Over the past five years, we have undertaken a series of transformative transactions. We divested our specialty plastics business in 2018 to focus on our core markets and improve our free cash flow conversion. In our Consumer and Professional Products ("CPP") segment, we expanded the scope of our brands through the acquisition ofHunter Fan Company ("Hunter") onJanuary 24, 2022 andClosetMaid, LLC ("ClosetMaid") in 2018. In our Home and Building Products ("HBP") segment, we acquiredCornellCookson, Inc. ("CornellCookson") in 2018, which has been integrated intoClopay Corporation ("Clopay"), creating a leading North American manufacturer and marketer of residential garage doors and sectional commercial doors, and rolling steel doors and grille products under brands that includeClopay , Ideal, Cornell and Cookson. We established an integrated headquarters for CPP inOrlando, Florida for our portfolio of leading brands that includesAMES ,Hunter , True Temper andClosetMaid . CPP is well positioned to fulfill its ongoing mission of Bringing Brands Together™ with the leading brands in consumer and professional tools; residential, industrial and commercial fans; home storage and organization products; and products that enhance indoor and outdoor lifestyles. OnSeptember 27, 2021 , we announced we were exploring strategic alternatives for our Defense Electronics ("DE") segment, which consisted of ourTelephonics Corporation ("Telephonics") subsidiary. OnJune 27, 2022 , we completed the sale of Telephonics to TTM Technologies, Inc. (NASDAQ:TTMI) ("TTM") for$330,000 in cash. Griffon classified the results of operations of our Telephonics business as a discontinued operation in the Consolidated Statements of Operations for all periods presented and classified the related assets and liabilities associated with the discontinued operation in the consolidated balance sheets. Accordingly, all references made to results and information in this Quarterly Report on Form 10-Q are to Griffon's continuing operations, unless noted otherwise. OnMay 16, 2022 , Griffon announced that its Board of Directors initiated a process to review a comprehensive range of strategic alternatives to maximize shareholder value including a sale, merger, divestiture, recapitalization or other strategic transaction. While the process remains ongoing, there is no assurance that the process will result in any transaction being entered into or consummated. 32
--------------------------------------------------------------------------------
Table of Contents OnJanuary 24, 2022 , Griffon acquiredHunter , a market leader in residential ceiling, commercial, and industrial fans, fromMidOcean Partners ("MidOcean") for a contractual purchase price of$845,000 .Hunter , part of our CPP segment, complements and diversifies our portfolio of leading consumer brands and products. We financed the acquisition ofHunter with a new$800,000 seven year Term Loan B facility; we used a combination of cash on hand and revolver borrowings to fund the balance of the purchase price and related acquisition and debt expenditures.
Update on COVID-19 on our Business
The health and safety of our employees, our customers and their families is always a high priority for Griffon. As of the date of this filing, all of Griffon's facilities are fully operational. When COVID-19 struck, we implemented a variety of new policies and procedures, including additional cleaning, social distancing, staggered shifts and prohibiting or significantly restricting on-site visitors, to minimize the risk to our employees of contracting COVID-19. While many of these precautions have been relaxed or eliminated as the health risk of COVID-19 has decreased, we would not hesitate to reinstitute and/or modify these policies and procedures as necessary should the health risk return to an unacceptable level. In such event, our businesses or our suppliers could be required by government authorities to temporarily cease operations; might be limited in their production capacity due to complying with restrictions relating to the operation of businesses to mitigate the impacts of COVID-19; or could suffer their own supply chain disruptions, impacting their ability to continue to supply us with the quantity of materials required by us. While we are unable to determine or predict the nature, duration or scope of the overall impact COVID-19 will have on our businesses, results of operations, liquidity or capital resources, we believe it is important to discuss where our company stands today, how we have responded (and will continue to respond) to COVID 19 and how our operations and financial condition may change as COVID-19 evolves. Griffon believes it has adequate liquidity to invest in its existing businesses and execute its business plan, while managing its capital structure on both a short-term and long-term basis. AtDecember 31, 2022 ,$342,613 of revolver capacity was available under Griffon's Credit Agreement and Griffon had cash and equivalents of$120,558 . Other Business Highlights InAugust 2020 Griffon completed the Public Offering of 8,700,000 shares of our common stock for total net proceeds of$178,165 . The Company used a portion of the net proceeds to repay outstanding borrowings under its Credit Agreement. The Company used the remainder of the proceeds for working capital and general corporate purposes. During 2020, Griffon issued, at par,$1,000,000 of 5.75% Senior Notes due in 2028 (the "2028 Senior Notes"). Proceeds from the 2028 Senior Notes were used to redeem the$1,000,000 of 5.25% Senior Notes due 2022. InJanuary 2020 , Griffon amended its credit agreement to increase the total amount available for borrowing from$350,000 to$400,000 , extend its maturity date fromMarch 22, 2021 toMarch 22, 2025 and modify certain other provisions of the facility (the "Credit Agreement"). InNovember 2019 , Griffon announced the development of a next-generation business platform for CPP to enhance the growth, efficiency, and competitiveness of itsU.S. operations, and onNovember 12, 2020 , Griffon announced that CPP is broadening this strategic initiative to include additional North American facilities, theAMES United Kingdom (U.K. ) andAustralia businesses, and a manufacturing facility inChina . OnApril 28, 2022 , Griffon announced a reduced scope and accelerated timeline for the initiative, which was completed in fiscal 2022. We continue to expect that this initiative will result in annual cash savings of$25,000 . Realization of expected cash savings began in the current quarter. The cost to implement this new business platform, over the duration of the project, included one-time charges of approximately$51,869 and capital investments of approximately$15,000 , net of future proceeds from the sale of exited facilities.
In
33 -------------------------------------------------------------------------------- Table of Contents InMarch 2018 , we announced the combination of theClosetMaid operations with those ofAMES , which improved operational efficiencies by leveraging the complementary products, customers, warehousing and distribution, manufacturing, and sourcing capabilities of the two businesses. InFebruary 2018 , we closed on the sale of our Clopay Plastics Products ("Plastics") business toBerry Global, Inc. ("Berry"), thus exiting the specialty plastics industry that the Company had entered when it acquiredClopay Corporation in 1986. This transaction provided immediate liquidity and improved Griffon's cash flow given the historically higher capital needs of the Plastics operations as compared to Griffon's remaining businesses. InOctober 2017 , we acquiredClosetMaid from Emerson Electric Co. (NYSE:EMR).ClosetMaid , founded in 1965, is a leading North American manufacturer and marketer of wood and wire closet organization, general living storage and wire garage storage products, and sells to some of the largest home center retail chains, mass merchandisers, and direct-to-builder professional installers inNorth America . We believe thatClosetMaid is the leading brand in its category, with excellent consumer recognition.
We believe these actions have established a solid foundation for growth in sales, profit, and cash generation and bolster Griffon's platforms for opportunistic strategic acquisitions.
Other Acquisitions and Dispositions
OnDecember 22, 2020 ,AMES acquiredQuatro Design Pty Ltd ("Quatro"), a leading Australian manufacturer and supplier of glass fiber reinforced concrete landscaping products for residential, commercial, and public sector projects for a purchase price of AUD$3,500 (approximately$2,700 ). Quatro contributed approximately$5,000 in revenue in the first twelve months after the acquisition. OnNovember 29, 2019 ,AMES acquiredVatre Group Limited ("Apta"), a leadingU.K. supplier of innovative garden pottery and associated products sold to leadingU.K. andIreland garden centers. This acquisition broadensAMES' product offerings in theU.K. market and increases its in-country operational footprint. OnFebruary 13, 2018 ,AMES acquired Kelkay, a leadingU.K. manufacturer and distributor of decorative outdoor landscaping products sold to garden centers, retailers and grocers in theU.K. andIreland . This acquisition broadenedAMES' product offerings in the market and increased its in-country operational footprint.
In
During fiscal 2017, Griffon also completed a number of other acquisitions to expand and enhanceAMES' global footprint, including the acquisitions of La Hacienda, an outdoor living brand of unique heating and garden décor products in theUnited Kingdom . The acquisition of La Hacienda, together with theFebruary 2018 acquisition of Kelkay andNovember 2020 acquisition of Apta, providesAMES with additional brands and a platform for growth in theU.K. market and access to leading garden centers, retailers, and grocers in theUK andIreland . InAustralia , Griffon acquired Hills Home Living, the iconic brand of clotheslines and home products, from Hills Limited (ASX:HIL) inDecember 2016 , and inSeptember 2017 Griffon acquired Tuscan Path, an Australian provider of pots, planters, pavers, decorative stone, and garden décor products. The Hills, Tuscan Path and December, 2020 Quatro acquisitions broadenedAMES' outdoor living and lawn and garden business, strengtheningAMES' portfolio of brands and its market position inAustralia and New Zealand .
Further Information
Griffon posts and makes available, free of charge through its website at www.griffon.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as well as press releases, as soon as reasonably practicable after such materials are published or filed with or furnished to theSecurities and Exchange Commission (the "SEC"). The information found on Griffon's website is not part of this or any other report it files with or furnishes to theSEC .
For information regarding revenue, profit and total assets of each segment, see the Business Segments footnote in the Notes to Consolidated Financial Statements.
34
--------------------------------------------------------------------------------
Table of Contents
Reportable Segments:
Griffon conducts its operations through two reportable segments:
•Consumer and Professional Products ("CPP") is a leading North American manufacturer and a global provider of branded consumer and professional tools; residential, industrial and commercial fans; home storage and organization products; and products that enhance indoor and outdoor lifestyles. CPP sells products globally through a portfolio of leading brands includingAMES , since 1774,Hunter , since 1886, True Temper, andClosetMaid . •Home and Building Products ("HBP") conducts its operations throughClopay . Founded in 1964,Clopay is the largest manufacturer and marketer of garage doors and rolling steel doors inNorth America . Residential and commercial sectional garage doors are sold through professional dealers and leading home center retail chains throughoutNorth America under the brandsClopay , Ideal, andHolmes . Rolling steel door and grille products designed for commercial, industrial, institutional, and retail use are sold under the Cornell and Cookson brands. 35
--------------------------------------------------------------------------------
Table of Contents
OVERVIEW
Revenue for the quarter endedDecember 31, 2022 was$649,384 compared to$591,749 in the prior year comparable quarter, an increase of 10%. Revenue increased at HBP by 29% but decreased at CPP by 11%.Hunter contributed$54,117 of revenue for the quarter, excludingHunter revenue increased 1% to$595,267 . Income from continuing operations was$48,702 or$0.88 per share, compared to$16,704 , or$0.31 per share, in the prior year quarter.
The current year quarter results from operations included the following:
- Strategic review - retention and other of$8,232 ($6,222 , net of tax, or$0.11 per share); - Proxy contest costs of$1,503 ($1,153 , net of tax, or$0.02 per share); - Gain on sale of building of$10,852 ($8,323 , net of tax, or$0.15 per share); - Discrete and certain other tax benefits, net, of$333 or$0.01 per share.
The prior year quarter results from operations included the following:
- Restructuring charges of
Excluding these items from the respective quarterly results, Income from
continuing operations would have been
36 -------------------------------------------------------------------------------- Table of Contents Griffon evaluates performance based on Net income and the related Earnings per share excluding restructuring charges, loss from debt extinguishment, acquisition related expenses and discrete and certain other tax items, as well as other items that may affect comparability, as applicable. Griffon believes this information is useful to investors for the same reason. The following table provides a reconciliation of Income from continuing operations to Adjusted income from continuing operations and Earnings per share from continuing operations to Adjusted earnings per share from continuing operations: For the Three Months Ended December 31, 2022 2021 (Unaudited) Income from continuing operations$ 48,702 $ 16,704 Adjusting items: Restructuring charges - 1,716 Gain on sale of building (10,852) - Acquisition costs - 2,595 Strategic review - retention and other 8,232 - Proxy expenses 1,503 2,291 Tax impact of above items 169 (1,501) Discrete and certain other tax benefits, net (333) (891) Adjusted income from continuing operations
Earnings per common share from continuing operations
Adjusting items, net of tax: Restructuring charges - 0.02 Gain on sale of building (0.15) - Acquisition costs - 0.04 Strategic review - retention and other 0.11 - Proxy expenses 0.02 0.03 Discrete and certain other tax benefits, net (0.01) (0.02) Adjusted earnings per common share from continuing operations
Weighted-average shares outstanding (in thousands) 55,298 53,753
Note: Due to rounding, the sum of earnings per common share from continuing operations and adjusting items, net of tax, may not equal adjusted earnings per common share from continuing operations.
The tax impact for the above reconciling adjustments from GAAP to non-GAAP Net income and EPS is determined by comparing the Company's tax provision, including the reconciling adjustments, to the tax provision excluding such adjustments. 37 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS
Three months ended
Griffon evaluates performance and allocates resources based on each segment's operating results before interest income and expense, income taxes, depreciation and amortization, unallocated amounts (primarily corporate overhead), restructuring charges, loss on debt extinguishment and acquisition related expenses, as well as other items that may affect comparability, as applicable ("Adjusted EBITDA", a non-GAAP measure). Griffon believes this information is useful to investors for the same reason. See table provided in Note 13 - Business Segments for a reconciliation of Segment Adjusted EBITDA to Income before taxes from continuing operations.
Consumer and Professional Products
For the
Three Months Ended
2022 2021 United States$ 153,667 $ 164,899 Europe 4,696 18,330 Canada 23,116 22,628 Australia 66,217 74,349 All other countries 5,115 2,967 Total Revenue$ 252,811 $ 283,173 Adjusted EBITDA (1,809) (0.7) % 16,214 5.7 % Depreciation and amortization 13,127 8,606 For the quarter endedDecember 31, 2022 , revenue decreased$30,362 , or 11%, compared to the prior year period due to a 34% reduction in volume primarily in theU.S. , theUnited Kingdom (U.K. ) andAustralia and a 3% unfavorable currency impact, partially offset by a 19% or$54,117 contribution from theHunter acquisition, and favorable price and mix of 7%. For the quarter endedDecember 31, 2022 , Adjusted EBITDA loss of$1,809 compared to Adjusted EBITDA of$16,214 in the prior year quarter. The current quarter included Adjusted EBITDA of$4,428 from theHunter acquisition. Excluding theHunter contribution, Adjusted EBITDA loss of$6,237 compared to Adjusted EBITDA of$16,214 in the prior year quarter. The variance to prior year was primarily due to the unfavorable impact of the reduced volume noted above and the related impact on manufacturing absorption, and increased material costs inAustralia andCanada , partially offset by the benefits of price and mix.
For the quarter ended
OnJanuary 24, 2022 , Griffon completed the acquisition ofHunter Fan Company ("Hunter"), a market leader in residential ceiling, commercial, and industrial fans for a contractual purchase price of$845,000 .Hunter adds to Griffon's CPP segment, complementing and diversifying our portfolio of leading consumer brands and products. Home and Building Products For the Three Months Ended December 31, 2022 2021 Residential$ 227,059 $ 177,787 Commercial 169,514 130,789 Total Revenue$ 396,573 $ 308,576 Adjusted EBITDA$ 124,145 31.3 %$ 56,297 18.2 % Depreciation and amortization$ 3,846 $ 4,338 For the quarter endedDecember 31, 2022 , HBP revenue increased$87,997 , or 29%, compared to the prior year period due to favorable pricing and mix of 23% and volume of 6% driven by both residential and commercial. Residential and commercial sectional backlog and overall lead times continued to normalize during the quarter. 38 -------------------------------------------------------------------------------- Table of Contents For the quarter endedDecember 31, 2022 , Adjusted EBITDA increased 121% to$124,145 compared to$56,297 in the prior year period. Adjusted EBITDA benefited from the increased revenue noted above and reduced material costs, partially offset by increased labor and transportation costs.
For the quarter ended
Unallocated
For the quarter ended
Proxy expenses
During the quarters endedDecember 31, 2022 and 2021, we incurred$1,503 ($1,153 , net of tax) and$2,291 ($1,768 , net of tax) of proxy expenses (including legal and advisory fees) in SG&A, respectively. During the quarter endedDecember 31, 2021 , proxy expenses related to a proxy contest initiated by a shareholder which was completed at the shareholder meeting onFebruary 17, 2022 . During the quarter endedDecember 31, 2022 , proxy expenses related to a settlement entered into with a shareholder that had submitted a slate of director nominees.
Segment Depreciation and Amortization
Segment depreciation and amortization increased$4,029 for the quarter endedDecember 31, 2022 compared to the comparable prior year period, primarily due to depreciation and amortization on theHunter assets acquired and new assets placed in service.
Other Income (Expense)
For the quarters endedDecember 31, 2022 and 2021, Other income (expense) of$607 and$1,075 , respectively, includes$67 and ($394 ), respectively, of net currency exchange gains (losses) in connection with the translation of receivables and payables denominated in currencies other than the functional currencies of Griffon and its subsidiaries, net periodic benefit plan income (expense) of$(216) and$948 , respectively, and$33 and$374 , respectively, of net investment income. Other income (expense) also includes rental income of$212 and$156 for the three months endedDecember 31, 2022 and 2021, respectively. Additionally, it includes royalty income of$549 for the three months endedDecember 31, 2022 .
Provision for income taxes
During the quarter endedDecember 31, 2022 , the Company recognized a tax provision of$19,318 on income before taxes from continuing operations of$68,020 , compared to a tax provision of$7,213 on income before taxes from continuing operations of$23,917 in the comparable prior year quarter. The current year quarter results include a gain on the sale of a building of$10,852 ($8,323 , net of tax), strategic review (retention and other) of$8,232 ($6,222 , net of tax), proxy costs of$1,503 ($1,153 , net of tax), and discrete and certain other tax benefits, net, that affect comparability of$333 . The prior year quarter results included restructuring charges of$1,716 ($1,330 , net of tax), acquisition costs of$2,595 ($2,003 , net of tax), proxy contest costs of$2,291 ($1,768 , net of tax) and discrete and certain other tax benefits, net, that affect comparability of$891 . Excluding these items, the effective tax rates for the quarters endedDecember 31, 2022 and 2021 were 29.1% and 31.5%, respectively. Stock-based compensation
For the quarters ended
Comprehensive income (loss)
For the quarter endedDecember 31, 2022 , total other comprehensive gain, net of taxes, of$12,219 included a gain of$11,937 from foreign currency translation adjustments primarily due to the strengthening of the Euro, Australian Dollars and British Pound, all in comparison to the US Dollar; a$862 benefit from pension amortization; and a$580 loss on cash flow hedges. For the quarter endedDecember 31, 2021 , total other comprehensive loss, net of taxes, of$2,751 included a loss of$2,319 from foreign currency translation adjustments primarily due to the weakening of the Euro and British Pound, all in comparison to the US Dollar; a$668 benefit from pension amortization; and a$1,100 loss on cash flow hedges. 39
--------------------------------------------------------------------------------
Table of Contents DISCONTINUED OPERATIONS Defense Electronics OnSeptember 27, 2021 , Griffon announced it was exploring strategic alternatives for its Defense Electronics segment, which consisted ofTelephonics Corporation ("Telephonics"), and onJune 27, 2022 , Griffon completed the sale of Telephonics to TTM for$330,000 . Griffon classified the results of operations of the Telephonics business as a discontinued operation in the Consolidated Statements of Operations for all periods presented and classified the related assets and liabilities associated with the discontinued operation in the consolidated balance sheets. Accordingly, all references made to results and information in this Quarterly Report on Form 10-Q are to Griffon's continuing operations unless noted otherwise. AtDecember 31, 2022 andSeptember 30, 2022 , Griffon's discontinued assets and liabilities includes the Company's obligation of$5,288 and$8,846 , respectively, in connection with the sale of Telephonics primarily related to certain customary post-closing adjustments, primarily working capital and stay bonuses. AtDecember 31, 2022 andSeptember 30, 2022 , Griffon's liabilities for Installations Services and other discontinued operations primarily relate to insurance claims, income taxes, product liability, warranty and environmental reserves total$7,062 and$8,072 , respectively. 40 -------------------------------------------------------------------------------- Table of Contents LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Management assesses Griffon's liquidity in terms of its ability to generate cash to fund its operating, investing and financing activities. Significant factors affecting liquidity include cash flows from operating activities, capital expenditures, acquisitions, dispositions, bank lines of credit and the ability to attract long-term capital under satisfactory terms. Griffon believes it has sufficient liquidity available to invest in existing businesses and strategic acquisitions while managing its capital structure on both a short-term and long-term basis. As ofDecember 31, 2022 , the amount of cash, cash equivalents and marketable securities held by foreign subsidiaries was$49,600 . Our intent is to permanently reinvest these funds outside theU.S. , and we do not currently anticipate that we will need funds generated from foreign operations to fund our domestic operations. In the event we determine that funds from foreign operations are needed to fund operations in theU.S. , we will be required to accrue and payU.S. taxes to repatriate these funds (unless applicableU.S. taxes have already been paid). Griffon's primary sources of liquidity are cash flows generated from operations, cash on hand and ourJanuary 2025 five-year secured$400,000 revolving credit facility ("Credit Facility"). AtDecember 31, 2022 ,$342,613 of revolver capacity was available, subject to certain loan covenants, for borrowing under the Credit Agreement and we had cash and cash equivalents of$120,558 .
The following table is derived from the Condensed Consolidated Statements of Cash Flows:
© Edgar Online, source