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Griffon Corp (NYSE:GFF)
Q3 2020 Earnings Call
Jul 30, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for standing by. This is the conference operator. Welcome to the Griffon Corporation's Third Quarter 2020 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Brian Harris, Chief Financial Officer. Please go ahead.

Brian G. Harris -- Senior Vice President and Chief Financial Officer

Thank you. Good afternoon everyone. With me on the call is Ron Kramer, our Chairman and Chief Executive Officer. Our call is being recorded and will be available for playback, the details of which are in our press release issued earlier today.

As in the past, our comments will include forward-looking statements about the company's performance based on our views of Griffon's businesses and the environments in which they operate. Such statements are subject to inherent risks and uncertainties that can change as the world changes. Please see the cautionary statements in today's press release and in our various Securities and Exchange Commission filings.

Finally, some of today's remarks will adjust for those items that affect comparability between periods. These items are explained in our non-GAAP reconciliations included in our press release. Now, I'll turn the call over to Ron.

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

Thanks, and good afternoon everyone. I hope you and all your families are doing well in these turbulent times. Griffon entered the unprecedented COVID-19 pandemic from a position of strength, both operationally and competitively. Building on our already strong results in this fiscal year prior to March, our businesses have benefited from the stay-at-home nature of the pandemic. Both, existing and new customers, have been investing in home projects such as closet renovations, tending to their lawns and gardens and enhancing their enjoyment of the outdoors, upgrading the exterior of their homes, including their garage doors. We believe these trends will continue to grow in the years ahead.

Our third quarter results were outstanding. Revenues increased 10%. Adjusted EBITDA increased 31% and adjusted earnings per share increased 90% compared to the prior year period. These results are a reflection of the strategic actions taken by Griffon starting with the September 2017 announcement regarding the disposition of our plastics business and the purchase of ClosetMaid, further enhanced by the purchase of CornellCookson in June of 2018, coupled with the home improvement trends that I described. Our pivot out of the capital-intensive commodity-driven plastics business into branded domestically manufactured Consumer and Professional Product businesses positioned us for market share gains, as well as revenue, earnings, and cash flow growth.

Further underscoring this quarter's results, our 2020 nine-month free cash flow increased $34 million over the comparable 2019 nine-month period and builds on the prior year's full year free cash flow of $69 million. As a result of this performance, our net debt to EBITDA leverage has been reduced by one full turn from the prior year quarter to 4.4 times.

Ensuring the health and safety of our employees and our customers continues to be our top priority. Since early March, we have proactively implemented health and safety measures across our global workforce as local and national authorities have circulated additional guidelines for employee health and safety. We've incorporated those as well. All of our facilities are operational and continue to maintain additional safety measures to protect our workers, while maintaining operations. In Consumer and Professional Products and Home and Building Products, all of our U.S., Canadian, and Australian facilities were operational throughout the quarter. This includes all AMES, Closetmaid, Clopay and CornellCookson facilities. Each of these businesses provide critical products supporting national infrastructure. To the extent practical, we continue to permit our employees in these segments to work remotely and as I've mentioned before, all of our manufacturing and distribution facilities have implemented strict protocols to ensure employee health and safety, while at the workplace.

In late March, our AMES U.K. facilities were closed by government directive and our employees were directed to stay at home. By early June, we were able to reopen our facility there, which was ahead of our anticipated July resumption of operations. In Mexico, our ClosetMaid manufacturing facility that supports the U.S. and Canada sales closed for approximately 1.5 weeks in April, but has been operational since.

Turning to our Defense Electronics business. Telephonics continues to operate at all of its sites as it provides critical manufacturing and services supporting the U.S. military and its operations are essential for maintaining our national security.

Let's talk about the quarter and performance. In Consumer and Professional Products, we saw a strong third quarter demand for seasonal lawn and garden tools, storage and organizational solutions at major retailers and home centers across North America and in Australia. Upon reopening in June, there was strong U.K. demand for our product offerings as well. Our AMES strategic initiative remains on track and includes implementing an integrated business intelligence system, supporting all of our AMES operations, rationalizing our distribution and manufacturing facilities, and investing in automation and e-commerce capabilities.

Our Home and Building Products segment revenue declined slightly compared to the prior year quarter. Strong residential sectional garage door sales, later in the quarter, almost completely offset the reduction in sales seen in the first part of the quarter. Sales in our commercial door business increased slightly in the quarter compared to the prior year.

Operations at Telephonics have continued uninterrupted and Q3 revenue exceeded the prior year. The anticipated second tranche of bookings related to the Lockheed Martin MH60 Romeo foreign military sale program with India was funded and $49 million was booked to backlog in the quarter. Telephonics experienced some slowing from suppliers during Q3, which could slow certain customer deliveries and work performed in Q4. We also are announcing today that we're evaluating strategic alternatives for the System Engineering Group, which we call SEG, which is a technical services subsidiary within our Defense Electronics segment, providing advanced simulation and analysis for the U.S. Navy and U.S. Missile Defense Agency. Telephonics' core business focus is on defense electronic systems, products, and systems. We believe that SEG would benefit from being part of a parent organization that is more focused on government technical services.

Additionally, we're cognizant of the government's Organizational Conflict of Interest called OCI standards, and believe that such a sale better aligns our businesses with those standards. SEG is well-run with a strong management team and annual revenues of approximately $30 million. The timing of this process is bolstered by SEG's recent $119 million award from the Naval Surface Warfare Center Dahlgren Division. This is an opportunity for us to provide incremental value to Griffon shareholders, while also positioning SEG for enhanced growth with a suitable acquirer. We've already started the process to sell this business and we're working to get that done in the near future.

Let's turn to our balance sheet. During the quarter, we continued to work on strengthening our balance sheet and positioning the company for future growth. In June, we issued an additional $150 million of senior notes as a tack-on to the 5.75% notes we issued in February 2020. We've now fully refinanced our $1 billion of 5.25% notes due in 2022 with 5.75% notes that have maturity in 2028. As a reminder, in January, we also extended the maturity of our revolving credit facility to 2025 and expanded its borrowing capacity by $50 million to $400 million with an additional $100 million of availability through an accordion feature.

We've established a solid foundation for growing the company and we have ample liquidity to weather any near-term effects of the pandemic and other market uncertainty, while continuing to invest in all of our businesses.

Finally, earlier today, our Board authorized a $0.075 per share dividend payable on September 17, 2020 to shareholders of record on August 20, 2020. This marks the 36th consecutive quarterly dividend to shareholders, which has grown at an annualized compound rate of 17% since we initiated it in 2012.

Let me turn it over to Brian for a little closer look at some of the numbers. Brian?

Brian G. Harris -- Senior Vice President and Chief Financial Officer

Thank you, Ron. I'll start by highlighting our third quarter consolidated performance. Revenue increased 10% to $632 million and adjusted EBITDA increased 31% to $69 million, both in comparison to the prior year quarter. Normalized gross profit for the quarter was $165 million, increasing 6.8% over the prior-year quarter, while gross margin contracted 80 basis points to 26.1%.

Third quarter selling, general and administrative expenses were $114 million including $1.6 million of charges related to the AMES strategic initiative. As a percentage of sale, SG&A, adjusted for the charges, decreased 280 basis points to 17.7%.

Third quarter GAAP income from continuing operations was $22 million or $0.50 per share compared to the prior-year period of $14 million or $0.33 per share. Excluding items that affect comparability from both periods, current quarter adjusted net income was $26 million or $0.59 a share compared to the prior year of $13 million or $0.31 per share.

The effective tax rate, excluding items that affect comparability for the quarter, was 30.8% and year-to-date was 32.6%. Capital spending was $12 million in the third quarter, in line with prior year. Depreciation and amortization totaled $16 million for the third quarter.

Regarding our segments, Consumer and Professional Products' third quarter revenue increased 20% to $329 million over the prior year quarter, driven by increased volume of 19%, propelled by customer demand for home improvement in North America and Australia, favorable price and mix of 1% and incremental revenue from the Apta acquisition was 2%, all partially offset by an unfavorable impact of foreign exchange of 2%. Organic growth was 18%.

Adjusted EBITDA was $37 million, increasing 55% from the prior year quarter due to the increased revenue as mentioned a moment ago, partially offset by increased tariffs and COVID-19 related costs. Adjusted EBITDA margin was 11.3% compared to 8.8% in the prior year quarter. The AMES strategic initiative continues on plan and we expect to close our Belle Vernon, Pennsylvania and Falls City, Nebraska facilities by the end of the fiscal year.

Home and Building Products' third quarter revenue decreased 1% to $219 million over the prior year quarter due primarily to decreased volume of residential sectional garage door orders in April, which were down 18%, but then had subsequent recovery in May and June. Adjusted EBITDA increased 16% to $39 million over the prior year quarter due to the benefits of general operating efficiency improvements, partially offset by the decrease in revenue and COVID-19 related inefficiencies and direct costs. Adjusted EBITDA margin was 17.9% in the quarter compared to 15.3% in the prior year quarter.

Defense Electronics' third quarter revenue increased 5% to $84 million compared to the prior year period, primarily due to increased deliveries and volume of radar and communication systems. Adjusted EBITDA during the period was $4 million compared to the prior year quarter of $7 million impacted by mix and program inefficiencies on radar and communication systems, as well as increased bid and proposal costs. Year-to-date backlog as of June 30, 2020 was $350 million, a $19 million increase from Q2. And we expect to continue to build backlog in the fourth quarter. Corporate and unallocated expenses, excluding depreciation, were $11 million in the third quarter.

Regarding our balance sheet, as of June 30, 2020, we had $72 million in cash and total debt outstanding of $1.13 billion resulting in a net debt position of $1.06 billion and debt-to-EBITDA leverage of 4.4 times as calculated based on our debt covenants. This reflects one full turn of deleveraging from the prior year period. Borrowing availability under the revolving credit facility was $274 million, subject to certain loan covenants.

Moving to our fourth quarter and full-year outlook. Like many other companies, last quarter, we withdrew our guidance because of the uncertainties arising out of the COVID-19 pandemic. We now have a clear picture of the effects of the pandemic's impact for this year. As a result, we are reinstating guidance for fiscal 2020. We normally give guidance once a year and do not update that guidance during the year and we plan to return to that policy. However, given the continued uncertainty resulting resulting from COVID-19, we felt it was appropriate for us to provide an update as an exception in this instance.

We are now providing guidance for the full year 2020 of approximately $2.3 billion in revenue and $270 million plus of adjusted EBITDA before unallocated expenses. Note that our overall guidance, even with the conservative Q4 outlook, is higher than our original guidance for the year of $250 million plus of adjusted EBITDA before unallocated expenses that we provided back in November. Further, our full year fiscal 2020 guidance includes approximately $60 million for capital expenditures, $64 million for depreciation and amortization, $65 million for net interest expense and $45 million for unallocated expenses, with all of these remaining the same as originally communicated during our November 2019 earnings call.

Now, I'll turn the call back over to Ron.

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

Thanks, Brian. Griffon's year-to-date performance is something we are all collectively very proud of. Considering how much we've achieved in just a few short years since we began this portfolio repositioning, it's especially gratifying. At this -- at the time we announced it, we discussed the opportunities for top-line growth and margin expansion through the realization of efficiencies during the integration process of all of our acquired companies. Further, we expect it to become stronger competitively by providing increased value to our customers in terms of our broader product offering, improved service levels, and enhanced efficiency. We continue to believe the diversity of our businesses, our emphasis on domestic manufacturing, and our focus on the leading brands provides a strong foundation for future growth. This quarter in particular brings into focus what our repositioned portfolio can accomplish and the potential upside of following our strategy.

Griffon's performance has been excellent and we believe there is still considerable opportunity for improving the performance of our businesses. In addition, we remain committed to finding strategic acquisitions that expand and strengthen our product portfolio within our home markets. We're getting closer to our objective of 3.5 times net debt to EBITDA leverage, our free cash flow has and will continue to improve and we expect to see our leverage to continue to decline further, as we execute our business plan.

In closing, I'd like to thank our workforce, which has shown exceptional dedication and perseverance throughout this challenging period. We appreciate the importance of their work in order to deliver these excellent results.

Operator, we'll take any questions.

Questions and Answers:

Operator

Certainly. [Operator Instructions] Our first question comes from Bob Labick of CJS Securities. Please go ahead.

Bob Labick -- CJS Securities -- Analyst

Good afternoon and congratulations on some terrific results.

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

Thank you, Bob.

Brian G. Harris -- Senior Vice President and Chief Financial Officer

Thanks, Bob.

Bob Labick -- CJS Securities -- Analyst

Yeah. So I wanted to start obviously particularly in CPP, just outstanding demand. How do you -- I guess, how long do you think this can last and how do you position your products and brands to get more attention and to become repeat purchases and replacement purchases and what do you need to do with this increased focus on your products to fulfill the demand that's out there?

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

Well, I'll start by reminding you that we were having a very good year going into COVID and the strength of our brands, the demand for our product was already ahead of expectations and certainly ahead of last year going into this pandemic. The structural changes that we clearly are seeing of how people are purchasing the types of products that we provide is -- had been moving to a way far more deliberate e-commerce-supported and that's both web searching as well as brick and mortar. And our strategy has been, for some time, that we're going to be the leading brands and the best products in every product that we sell. That was the story around AMES, that was the story around us buying CLosetMaid and then fitting it into AMES. So the strategy was clearly working. What happened with the stay-at-home is things are accelerating. And there is clearly an economy that's functioning quite well even during this incredibly difficult time.

It's not lost on us that we're at record unemployment, It's not lost on us that we're in a recession and yet our business trends are not only surviving, they're prospering. So that result of being at home we view as, it was working going into this, accelerating during it, and are -- the back-end of your question is what we've been doing in terms of investing in the business. The project Bridgewater that we had announced in November was about the future for the company about being able to expand our distribution capability, expand our product offerings. We are believers in brands, we're builders of brands, we've bought companies in every product category. We're at the early stages of what we view as the AMES growth initiative. And what you see in this quarter is clearly a very robust demand. At the same time, aside of operating efficiencies that were already in place, driving increased performance. So our plan going forward is to continue to do exactly what we have been doing in building the brands and supporting the best retailers, both brick and mortar and online for every product that we sell.

Bob Labick -- CJS Securities -- Analyst

Okay, that's great, very helpful. And then, shifting over to Telephonics, the international is coming on and margins were a little late, I guess, in the quarter. How do you see -- is this year kind of the trough? Can we see some growth adjusting for the seg, potential strategic alternatives as you said? And so, how do you kind of look at the next 12 to 24 months on the Telephonics side?

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

Yeah. We've talked about for some time that the Telephonics business was bottoming. We view that process as having played out as we expected. COVID clearly has had an impact on timing of orders, but the demand for the core surveillance and reconnaissance products, particularly radar systems, we continue to see the backlog improving. We expect that to showcase itself in the fourth quarter. The sale of SEG is the conclusion of what's been a very nice piece of Telephonics and the story behind it is we bought it in 2005, we've built it up, the sale of it is really about three things. One, it allows us to focus on the core of what Telephonics does. It should be a margin improvement story prospectively for us and it will be a small but meaningful additional part of our deleveraging story. So it's a gain. It's a business that we have built and the harvesting of it is part of our broader strategy of continuing to grow the core of Telephonics.

Bob Labick -- CJS Securities -- Analyst

Super. Congrats again on the quarter.

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

I appreciate it.

Operator

Our next question comes from Julio Romero of Sidoti & Company. Please go ahead.

Julio Romero -- Sidoti & Company -- Analyst

Hey, good afternoon.

Brian G. Harris -- Senior Vice President and Chief Financial Officer

Hi, Julio.

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

Hi, Julio.

Julio Romero -- Sidoti & Company -- Analyst

So on CPP, the strength you're seeing there, can you give us a little more granularity on what products are leading that growth? I know, you've got a very diverse portfolio and you called out outdoor lawn and garden, but you've also got some indoor lines like ClosetMaid, that I assume would have also done well, given everyone's kind of cooped up indoors. So I was hoping you could give us some specific examples of some product lines that are kind of leading that growth.

Brian G. Harris -- Senior Vice President and Chief Financial Officer

Sure. So, you sort of hit it. We have seen growth in demand of -- in both lawn and garden and the home organization side. Home organization is a -- pretty much a do-it-yourself type item where people can buy the products either at a store or online and install it. Home and garden, of course, is something that's done mostly outside and we are seeing people using their time at home and the fact that they're not spending on other things such as travel or going to restaurants and investing in their homes. And generally speaking, our products are at price points that are affordable. They're not very large ticket items. And that's what's been driving some of that demand.

Julio Romero -- Sidoti & Company -- Analyst

Got it. And could you talk about maybe the sequential trend in CPP? Maybe how that business performed in May and June, and maybe give us a sense of how trends and fill rates are quarter-to-date?

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

We continue to see...

Brian G. Harris -- Senior Vice President and Chief Financial Officer

Sure.

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

We continue to see trends improving. The stabilization had happened after the last time we spoke, which was late April, went into May, accelerated into the end of the quarter and continues into July. We expect this is going to continue that the market share gains of the products that we provide, the domestic, not just manufacturing, but distribution and we've been talking about this for several years that this focus of ours on being able to support the biggest providers of all the products, it's clear that the supply chains are moving to domestically sourced product. We are the leading product, leading market share in every product that we sell and we're going to continue to invest in the brands to make sure that we get increased market share as we go forward.

Julio Romero -- Sidoti & Company -- Analyst

Got it. And you saw a really nice rebound on the residential garage door side. I remember last quarter you called out some customer hesitancy on the retail side, individuals kind of didn't want to stand in line at Home Depot. Do you think there has been more of a change in customer behavior since April or was it more like the dealer side that drove that growth?

Brian G. Harris -- Senior Vice President and Chief Financial Officer

So, yes, correct. We saw a decline in April. Our orders in April were down 18%, mostly being driven by home centers, retail type sales, with some decline in the dealers. As we progressed into May, sales started to normalize on all those channels and then come June and into July, sales accelerated quite well. And the commercial side saw good and normal volume and sales through the entire period.

Julio Romero -- Sidoti & Company -- Analyst

Got it. So across the board, kind of, dealer and retail did well in June.

Brian G. Harris -- Senior Vice President and Chief Financial Officer

Yes, June and continued into July.

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

And we continue to see that trending up. The other point that I'll just make is the commercial side of the business is doing well. We bought CornellCookson, we had talked about the ability to provide the rolling steel doors as part of the warehouse business that was going to grow. Retail was going to continue to go through a transformation. The security part of our business, we're the leading manufacturer of a series of security doors, which is called the Defender Series, continues to show growth. The civil unrest that's going on around the country has actually spurred a level of demand in that business. The Clopay business was already the leading residential manufacturer. Owning CornellCookson gives us a leverage and we're at the early days of the integration of that business, obviously very gratifying to see the recovery from April residentially into May and it's, in our view, a reflection of the stay-at-home trends that are gone.

Julio Romero -- Sidoti & Company -- Analyst

Great. Very nice job, everyone. I'll hop back in the queue.

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

We appreciate it, thanks.

Brian G. Harris -- Senior Vice President and Chief Financial Officer

Thanks, OK.

Operator

[Operator Instructions] Our next question comes from Tim Wojs of Baird. Please go ahead.

Timothy Wojs -- Robert W. Baird -- Analyst

Hey, gentlemen, good afternoon. Nice job.

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

Thanks, Tim.

Brian G. Harris -- Senior Vice President and Chief Financial Officer

Thanks, Tim. How are you doing?

Timothy Wojs -- Robert W. Baird -- Analyst

Good, good, thanks. I guess my first question, just curious on channel inventory, particularly in CPP. How would you characterize that relative to normal? We're hearing some of the categories are pretty tight just in terms of the level of demand, kind of, in May and June and into July. So I'm just curious how you'd characterize some of your partners' channel inventories within your categories?

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

I think that...

Brian G. Harris -- Senior Vice President and Chief Financial Officer

So we have actually -- I didn't mean to speak over you, so we have actually seen good demand for our products as we've already discussed. We have been able to service our customers very well. Our domestic manufacturing capability has really benefited us compared to others. So when Home Depot needs products, we are able to provide it to them or when any other home center or retail are needed. So we have adequate inventory and adequate manufacturing capability to continue to provide those products.

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

I think...

Timothy Wojs -- Robert W. Baird -- Analyst

Okay.

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

I think, in general, the inventory levels that we're seeing across -- and remember we service all of the major retailers from Home Depot to Loews to Menards, the National Hardwares, the big boxes. This is a trend that we continue to see that they're ordering more, and we expect that trend.

Timothy Wojs -- Robert W. Baird -- Analyst

Okay. Okay. And then as you think of the strategic initiatives, could you just talk about kind of where you're at on the process there and just has the pandemic, through the quarter, had any impact on the timing or are you guys ahead or kind of on track there?

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

I think we're...

Brian G. Harris -- Senior Vice President and Chief Financial Officer

We continue to be on track. It's a three-year plan. Things are going on as planned, on budget, on time. Nothing has slowed down from the pandemic.

Timothy Wojs -- Robert W. Baird -- Analyst

Okay, great. And then the free cash flow performance in the quarter was really good. How should we think about free cash flow maybe in the fourth quarter? Should you also have a pretty good quarter, just given the demand strength you've seen?

Brian G. Harris -- Senior Vice President and Chief Financial Officer

Yes. So, our second half of the year, that's our Q3 that we just ended, and our Q4 is our strongest cash flow months, cash generation quarters, I should say. And we continue to expect to increase cash flow into the fourth quarter.

Timothy Wojs -- Robert W. Baird -- Analyst

Okay. Great. Nice work on the quarter and good luck on the rest of the year, guys.

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

Thanks, Tim.

Brian G. Harris -- Senior Vice President and Chief Financial Officer

Thanks,Tim.

Operator

This concludes the question-and-answer session. I would like to turn the conference back over to Ron Kramer for any closing remarks.

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

Thank you all, stay safe, be well, bye-bye.

Operator

[Operator Closing Remarks]

Duration: 32 minutes

Call participants:

Brian G. Harris -- Senior Vice President and Chief Financial Officer

Ronald J. Kramer -- Chairman of the Board and Chief Executive Officer

Bob Labick -- CJS Securities -- Analyst

Julio Romero -- Sidoti & Company -- Analyst

Timothy Wojs -- Robert W. Baird -- Analyst

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