Griffon Corp (GFF) Q2 2021 Earnings Call Transcript

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Griffon Corp (GFF 0.98%)
Q2 2021 Earnings Call
Apr 29, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to Griffon Corporation's Second Quarter 2021 Earnings Conference Call. [Operator Instructions] [Operator Instructions]

I would now like to turn the conference over to your host, Brian Harris. Thank you. You may begin.

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

Hey, Gerard. Good afternoon, everyone. With me on the call is Ron Kramer, our Chairman and Chief Executive Officer. [Operator Instructions] 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 our various Securities and Exchange Commission filings. Finally, from today's remarks will adjust for those items that affect comparability between reporting 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. Good afternoon, everyone. We're off to a great start in the first half of fiscal 2021 with our second quarter revenue increasing 12%, adjusted EBITDA up 41%, and adjusted EPS up 109% compared to the prior year quarter. These results were driven by continued demand for our comprehensive consumer product categories and supported by a strong housing market and repair and remodel activity. Our strategic actions to optimize our business remain on plan and we are realizing the early benefits of this work today. Highlighting this success is our increased cash generation profile coupled with our EBITDA margin expansion in both CPP and HBP, which increased 220 and 190 basis points, respectively over the prior year period. Our AMES strategic initiative is progressing on plan and on budget. As previously announced, this investment will consolidate operations, increase automation, support e-commerce growth, and create new data and analytics platform for AMES globally by the end of 2023. We expect this to further improve margins in the years ahead. As we move into our second year of managing our business during a global pandemic, we prioritize protecting our employees and we'll continue to do so as restrictions in the United States begin to ease.

Turning to our segments. In Consumer and Professional Products, we saw continued retail demand across all geographies and product lines. The AMES strategic initiative remains on schedule for completion by the end of 2023 and we reiterate our expectation to realize annual cash savings of $30 million to $35 million, and inventory reductions of the same magnitude when the benefits of the initiative are fully realized. In Home and Building Products segment, we continue to see healthy demand for both residential and commercial door products and we continue to see demand outstripping supply. In Defense Electronics, telephonics revenue and profitability decreased from the prior year primarily driven by reduced volume due to the timing of work performed and deliveries on certain communications and surveillance programs as well as the divestiture of our SEG. Telephonic's actions to improve its operational efficiency continue with the work to consolidate three facilities into two, which will be completed in our fiscal fourth quarter. Earlier this month Telephonics was awarded $162 million five-year support contract from Lockheed Martin for our multi-mode maritime surveillance radars for the U.S. Navy's MHR-60R (sic) MH-60R maritime helicopters. We continue to see additional opportunities for our products in domestic applications as well as through the MH-60 Romeo foreign military sales to countries like South Korea and Greece. Backlog in the quarter was $354 million with trailing 12-month book-to-bill of 1.1 times.

Turning to our balance sheet. We continue to have excellent flexibility in our capital structure to execute on organic and acquisition opportunities and return cash to shareholders through our quarterly dividends. We've delevered to 3.1 times net debt-to-EBITDA marking two full turns of improvement over the prior year period. Additionally, we have $176 million in cash and $363 million available on our revolving credit facility providing ample liquidity and putting us in an excellent position to capitalize on our active pipeline of acquisition opportunities. Earlier today, our Board authorized an $0.08 per share dividend payable on June 17, 2021 to shareholders of record on May 20, 2021. This marks the 39th consecutive quarterly dividend to shareholders, which has grown at an annualized compound rate of 17% since we initiated in 2012. Griffons evolved over the past decade from a decentralized holding company to a highly centralized operating focus conglomerate. We see growth through acquisitions driving our future capitalizing on our strong bench of management talent.

And regarding our management, Steve Lynch, the President of Clopay Corporation will retire at the end of our fiscal year. Steve has served as the President of Clopay with distinction for the past 12 years, and has been part of Clopay since 2001. During his tenure, Steve navigated Clopay through the financial crisis of 2009 and subsequently has transformed the business into the industry leader it is today through building the company's facilities, equipment products, technologies, people and culture. Steve will continue working with Clopay as a consultant after his retirement. And effective with Steve's retirement, Vic Weldon will be appointed the new President of Clopay. Vic is a 20-year veteran of Clopay having served in leadership roles across the business including supply chain, logistics, sales and operations, and has been Clopay's Chief Operating Officer since 2019. Vic has played an instrumental role in making Clopay the company that it is today, including leading the integration activities of the Cornell acquisition, which we completed in 2018. Vic is the ideal candidate to assume the role of President where he can apply his wealth of company, customer and industry knowledge to the role. We're looking forward to Vic continuing Clopay's success.

Let me turn it over to Brian who will take you through some of the financials.

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

Thank you, Ron. I'll start by highlighting our second quarter consolidated performance. Revenue increased by 12% to $635 million and adjusted EBITDA increased 41% to $67.8 million, both in comparison to the prior year quarter. Adjusted EBITDA margin increased 220 basis points to 10.7%. Gross profit on a GAAP basis for the quarter was $170 million, increasing 12% over the prior year quarter. Excluding restructuring-related charges, gross profit was $174 million increasing 13.2% over the prior year quarter with gross margin increasing 30 basis points to 27.4%. Second quarter GAAP selling, general, administrative expenses were $127 million compared to $226 million in the prior year quarter. Excluding restructuring-related charges from both periods selling, general and administrative expenses were $123 million or 19.3% of revenue compared to $122 million or 21.5% in the prior year quarter.

Second quarter GAAP net income was $17 million or $0.32 per share compared to the prior year period of $1 million or $0.02 per share. Excluding items that affect comparability from both periods, current quarter adjusted net income was $25 million or $0.48 per share compared to $10 million in the prior year or $0.23 per share. Corporate and unallocated expenses excluding depreciation were $12 million in the current year quarter in line with the prior year second quarter. Our effective tax rate excluding items that affect comparability from all periods for the quarter was 30% and for the year-to-date period it was 31.1%. Capital spending was $12 million in the second quarter compared to $9 million in the prior year quarter. Depreciation and amortization totaled $15.9 million for the second quarter compared to $15.7 million in the prior year second quarter.

Regarding our segment performance, Q2 revenue for CPP and HBP increased over the prior-year quarter by 21% and 16%, respectively while DE decreased 26% or 19% excluding the impact of SEG disposition. Adjusted EBITDA for CPP and HBP increased over the prior year by 50% and 31%, respectively, Defense Electronics decreased 48%. During the second quarter AMES incurred pre-tax restructuring-related charges were approximately $7.5 million supporting the AMES strategic initiative, capital expenditure supporting the initiative was $3.2 million in the quarter. At Telephonics, we are executing on our efficiency initiatives. We have reduced headcount and we expect to complete the consolidation of our three Long Island-based facilities into two company-owned facilities by the end of this fiscal year. The total cost for the facility consolidation will be approximately $4 million, which will primarily consist of capital expenditures occurring in 2021.

Regarding our balance sheet and liquidity, as of March 31, 2021, we had net debt of $883 million and leverage of 3.1 times as calculated based on our debt covenants. This is a two turn reduction from our prior year second quarter and a 0.3 turn reduction from our fiscal year-end. As a reminder, Griffon uses cash in the first six months of its fiscal year, which will be more than offset by the generation of significant cash flow in the second half of the year. Our cash and equivalents were $176 million and debt outstanding was $1.06 billion. Borrowing availability under the revolving credit facility was $360 million subject to certain loan covenants.

So regarding our 2021 guidance, as most of you know, we typically provide guidance once a year during our November earnings call and generally do not update that guidance during the course of the year. The guidance provided on our November call was revenue of approximately $2.4 billion and adjusted EBITDA, excluding unallocated one-time charges related to AMES and Telephonics initiative of $285 million or better. With our second quarter behind us, we are continuing to see healthy demand for products across our portfolio, recovery in consumer activity and a strong housing market are contributing to a constructive macroeconomic environment and homeowner focus on outdoor living and repair and remodel projects continue. While we are seeing the expected headwinds from cost inflation, some supply chain disruptions and a tight labor market, we are managing through those effects. As a result of our substantial outperformance in the first half of the year and with consideration to this year's Q3 and Q4 comparatives to strong prior year quarter results, we are expecting our fiscal 2021 performance will be substantially above our original guidance and in line with our trailing-12 months. That produced approximately $2.5 billion of revenue and $320 million of adjusted EBITDA, excluding unallocated and one-time charges.

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

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

Thanks, Brian. We expect continued growth in the second half of fiscal 2021 driven by a strengthening global economy, a strong housing and repair and remodel environment coupled with our industry-leading product portfolio. We are active in evaluating potential acquisitions and opportunities to invest in our existing businesses and are actively exploring ways to further diversify and grow. We're pleased with the progress we've made on driving long-term shareholder value however, there still are significant benefits to come from completing our strategic initiatives. Finally, I'd like to thank our 7,500 employees for their exceptional dedication, performance and perseverance throughout this challenging period.

Operator, we'll take any questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Bob Labick with CJS Securities. Please proceed with your question.

Bob Labick -- CJS Securities -- Analyst

Thank you. Good afternoon and congratulations on the fantastic first half of the fiscal year.

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

Thanks, Bob.

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

Thanks, Bob.

Bob Labick -- CJS Securities -- Analyst

Did I -- this is, I guess, rhetorical. Did I hear you correctly, you're actually raising guidance? Crazy, but anyway I'll get to my question. Very strong margins you pointed it out in CPP and HBP up nicely year-over-year, how does that play out? Obviously, you mentioned that you see some raw material and supply chain headwinds you guys I think are better positioned than most in these situations but can you just talk a little bit about how we should think about the margin profile, and what you are able to due to mitigate some of the raw material or supply chain issues out there.

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

Sure. I'll take this one. A couple of things. We continue to work on our efficiencies as always and work with our vendors. In addition, we have been working on passing price through. Some of that work continues and will continue into Q3 and will have or should have the full benefit of that into our fourth quarter.

Bob Labick -- CJS Securities -- Analyst

Got it. Okay. Great. And then obviously you're still relatively early on in the AMES initiative, but I think you're still suggesting that there is still room to run in those margins as well, I mean, obviously some fluctuations aside from short-term things, but is that right we should still expect continued margin expansion from CPP over the next several years?

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

Absolutely. We're continuing to work that initiative and you'll continue to see the benefits from that initiative, and that's really our best scorecard for the work we're doing. And we are -- we've already started to realize some of those benefits even with the additional costs we saw in Q2. Our margin overall across the businesses was still -- our gross margin rather still up 300 basis points give or take.

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

Bob, it's Ron. I'll just add to that. We've always talked about building for the long run and that we never worry about things that are happening in the short run that are out of our control. We try to stay focused on all the things that are. So managing through the initiative that we kicked off for margin improvement was obviously before we went into the COVID pandemic. We've been able to not just manage our way through, but we've been able to somewhat prosper as a result of demand. We are very optimistic about what we have to do on a multi-year journey to both improve the margins in the AMES business and the continued margin improvement story that if you look at where we were when Steve Lynch became President of Clopay and where we are today as we pass the baton. Margin improvement is part of the core DNA of what makes Griffon an ability to buy and improve businesses. We're going to continue to do the work on our Telephonics business and get that back into shape, that will happen as both the top line improves. But we see, across our businesses, margin improvement as the core of what we're doing.

Operator

Our next question comes from the line of Julio Romero with Sidoti and Company. Please proceed with your question.

Julio Romero -- Sidoti and Company -- Analyst

Hey, good afternoon Ron and Brian.

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

Hi Julio.

Julio Romero -- Sidoti and Company -- Analyst

So I wanted to ask about your Home and Building Products segment. So I know that you turn inventory about four times annually there and I think you value inventory at lower cost or market. Just wondering on the margin dynamic there over the next few quarters, would you be in a position to benefit in the near term and then have margins moderate in that segment heading into the next fiscal year, just maybe if you could speak to how margin should play out in that segment?

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

Well, in general and for the third quarter as we continue to work and the timing of the price increase, the lag of price increases come into play Q3 could see some pressure, and we'll see the offset of that once we get into Q4 and beyond.

Julio Romero -- Sidoti and Company -- Analyst

Okay. Got it. So they should -- so then it would be near-term potential moderation while they're lagging price increases and then feel confident about your ability to pass that or?

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

Exactly.

Julio Romero -- Sidoti and Company -- Analyst

Okay. And I think...

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

That's really going to play out more toward the back end of this fiscal year. So -- but with clearly a confidence level that we chose to take this moment to increase our guidance for the year.

Julio Romero -- Sidoti and Company -- Analyst

Absolutely. And I guess just my follow up is, if you could just give us a reminder on the seasonality within that segment. Typically, as I understand it, this is your weakest quarter, is that correct, in that segment?

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

Sure. Generally Q2 and Q3 of the strongest quarters for CPP though, honestly during the pandemic things have been different, and we -- the demand has been strong and we expect it to remain strong through the balance of the year.

Operator

Our next question comes from the line of Josh Chan with Baird. Please proceed with your question.

Josh Chan -- Baird -- Analyst

Good afternoon Ron and Brian. Congrats on a strong quarter.

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

Thanks, Josh, and how are you?

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

Thank you.

Josh Chan -- Baird -- Analyst

Thanks. Good. I appreciate the comments about the expected performance. I think that shows kind of confidence on continued strong execution, so that's good to see. I guess my first question is on the sort of the headwinds that you're mitigating, I mean you talked about offsetting raw materials in the HBP business, but how are you thinking about the same dynamics in the CPP businesses, any difference in terms of cadence and price and when that kind of offsets the raw materials?

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

Yes. It's similar, so we're still working the price increases into the third quarter and there'll be a lag so we'll expect to have that done in full benefit of it in the fourth quarter. I will also just remind you that we had very good weather last year in Q3 and very strong comps last year Q3 and Q4 for that matter, but our guidance overall says we'll be in line on the second half of the year.

Josh Chan -- Baird -- Analyst

That's right. Okay. And then my second question is on your internal inventory I guess, has stepped up from Q1 to Q2, which I think has happened before but that's not that typical, so anything in particular that drove that kind of a higher inventory there?

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

Yes, there is a couple of things. One you have higher commodity costs that are pulling in inventory. There was FX impact from Australia and the U.K. There's also been some advance ordering for our international locations out of China and for the U.S. as well to get material -- get product in place because as most of us are aware, and I'm sure you are as well, there are some lags in getting things from China and our ports are backed up. So we're making sure we're ahead of that, so we continue to supply our customers and they -- to which they are accustomed.

Operator

Our next question comes from Justin Bergner with Gabelli and Company. Please proceed with your question.

Justin Bergner -- Gabelli and Company -- Analyst

Good afternoon Ron. Good afternoon Brian.

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

Hi Justin.

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

Hi Justin.

Justin Bergner -- Gabelli and Company -- Analyst

Few questions here. I guess just to pick up on the last question, so what are the primary products or materials that you're importing from China, and just sort of remind me how U.S. centric you are sort of in your manufacturing for CPP versus what you rely on internal -- sorry external imports for it?

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

Sure. So CPP 90% of what we sell in North America we make in North America. So when I talk about imports, that's the other 10%. A lot of that is either components, small components and some pots and planters. The other part of what I was speaking of is Australia and the U.K. also get products from China in particular and also from other places.

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

But the core of the company, as Brian said, this is about American manufacturing and 90% that's sold in North America is manufactured in North America.

Justin Bergner -- Gabelli and Company -- Analyst

Got it. Sort of taking that point over to Home and Building Products, I mean you mentioned that demand is exceeding supply maybe if you could just elaborate on that a bit, and are there any imports there of note that are sort of being challenged by supply chain issues, which give you an opportunity to take share given a greater ability to make -- to meet demand and some of your competitors?

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

We're actually suggesting that in that comment we have a backlog, and that there is such robust consumer and commercial demand that we are able to build a backlog for this business that gives us some confidence about what we see is the trends that are playing out and have played out. And that's balanced against the obvious inflationary pressures of steel, wood, freight, labor is tight across the country but we are experiencing very strong demand and we couldn't be happier about it.

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

Yes, and the majority of HBP, all of their components steel and everything is sourced from U.S.

Operator

[Operator Instructions] Our next question comes from the line of Keith Hughes with Truist Securities. Please proceed with your question.

Keith Hughes -- Truist Securities -- Analyst

Thank you. Question on CPP, another strong growth quarter. We -- I was going to start -- coming against the difficult comps in the next several quarters, if you look at the pace of business and maybe your sales in April, not really looking for guidance here but just was the retrenchment in sales in those tough comps or is it just that none of them to pull it through for the next several quarters?

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

It was a little broken up what you said, but I believe you are just asking what we're seeing demand-wise. Demand continues to be strong.

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

Across the board. And what we're equally saying is that we expect those trends in pricing pressures to hit more in the third quarter and for us to be able to pass along some of those into the fourth quarter.

Keith Hughes -- Truist Securities -- Analyst

Got you.

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

And as a reminder our Q3 last year was very strong with very good weather, particularly affecting CPP's excellent results last year just as a note. [Technical Issues] Hello?

Operator

Our next question comes from the line of Trey Grooms with Stephens.

Trey Grooms -- Stephens -- Analyst

Hey, good afternoon Ron and Brian and I have to also give you my congrats on a strong first half.

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

Thanks, Trey.

Trey Grooms -- Stephens -- Analyst

So I think most of the questions around costs have been kind of beaten to death here, I think I pretty well get it, but I guess if we're thinking about kind of switching gears over to the DE Defense Electronics business timing issue in the quarter, should we expect this to continue in the fiscal third quarter and fourth quarter? Also, how should we be thinking about the timing of the new contract win when it flows through and the cadence there?

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

Sure. In general, we are expecting our second half to recover from our first half. There is just some delays in certain contracts coming in and timing of materials coming in and getting things back out the door. But the business is doing fine. Nothing strange there, it's just by nature -- by its nature a bit of a lumpy business.

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

We continue to have some confidence in the product category, intelligence, surveillance, reconnaissance. This is about building Telephonics for the future. The consolidation of plant facility that we've been doing will show through as we get through this year into next year, but we remain very optimistic about Telephonic's core positioning, its products, where it stands with its incumbent position, and in the ability to garner some of the foreign military sales that are just less predictable on timing. This is again, about building the company and trying to grow into tomorrow.

Trey Grooms -- Stephens -- Analyst

Got it. And then just for kind of modeling purposes, as the topline kind of comes back here in the back half with these kind of being lumpy and the timing issues, what do you expect the margins to kind of also kind of rebound back to kind of historical type expectations?

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

Yes, we would expect the margins to improve into the end of the year.

Trey Grooms -- Stephens -- Analyst

Perfect. That's it for me. Thanks, guys.

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

Thank you.

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

Thank you.

Operator

We have reached the end of the question-and-answer session. At this time, I'd like to turn the call back over to Ron Kramer for closing comments.

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

Thank you all for joining us. We'll be working hard and look forward to talking to you in August. Stay safe, stay healthy, everyone. Bye, bye.

Operator

[Operator Closing Remarks]

Duration: 29 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 and Company -- Analyst

Josh Chan -- Baird -- Analyst

Justin Bergner -- Gabelli and Company -- Analyst

Keith Hughes -- Truist Securities -- Analyst

Trey Grooms -- Stephens -- Analyst

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