All improvement: Griffon Management Discusses Q1 2014 Results

Executives

Douglas J. Wetmore - Chief Financial Officer and Executive Vice President

Ronald J. Kramer - Vice Chairman of the Board, Chief Executive Officer and Chairman of Finance Committee

Analysts

Robert Labick - CJS Securities, Inc.

Martin Pollack - NWQ Investment Management Company, LLC

Philip Volpicelli - Deutsche Bank AG, Research Division

Justin Bergner - G. Research, Inc.

Griffon (GFF) Q1 2014 Earnings Call January 30, 2014 4:30 PM ET

Operator

Good day, and welcome to the Griffon Corporation First Quarter Fiscal 2014 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. Doug Wetmore, Chief Financial Officer. Please go ahead.

Douglas J. Wetmore

Thank you, Brandon. Good afternoon, everyone. With me on the call is Ron Kramer, our Chief Executive Officer. Before we get into the details of the call, there are certain matters I want to bring to attention.

First, our call is being recorded, as Brandon just said, and will be available for playback, the details of which are in our press release issued earlier today and are also available on our website.

Second, during our call, we may make certain forward-looking statements about the company's performance, and such statements are subject to inherent risks and uncertainties that could cause actual results to differ materially from those expressed. For additional information concerning the factors that could cause actual results to differ from those discussed, you should refer to the cautionary statements contained in today's press release, as well as the risk factors discussed in our various filings with the Securities and Exchange Commission.

And finally, some of today's prepared remarks will adjust for those items that affect comparability between reporting periods. And these items are laid out in our non-GAAP reconciliation, which is included in our press release.

So with that, I'll turn it over to Ron.

Ronald J. Kramer

Good afternoon. First quarter was an excellent start to the year. Our results reflect the continued improvement of our operations. Each of our businesses is well positioned for enhanced growth and future profitability.

During the quarter, we repurchased 50 million of common stock, and our subsidiary, Ames True Temper, acquired Northcote Pottery, a leading brand in the Australian outdoor planter and decor market. Both transactions are immediately accretive and create shareholder value.

Revenue of $453 million increased 7% over the prior-year quarter, and segment adjusted EBITDA of $44 million increased 3% despite a difficult comparable quarter for Telephonics.

I'll now comment on each of the operating segments, and then Doug will take you through the financial results in a bit more detail. For Home and Building Products, our revenues totaled $218 million, increasing 15% over the prior-year quarter. Ames' revenue increased 25%, primarily due to improved snow tool sales. Door revenue increased 8%, primarily through improved volume. Segment adjusted EBITDA was $19.1 million, increasing 11% compared to the prior-year quarter.

We continue to believe we're in the early stages of a multi-year housing recovery, with new residential construction and repair and remodel levels in the United States improving. This bodes well for both our doors and tool businesses. As housing recovers, relatively small increments of additional revenue will carry significant improvement in profitability for the home and building product segment.

Earlier this month, we strengthened our management team with the hiring of Michael Sarrica as President of Ames True Temper. Mike joins us from DRS Network and Imaging, where he served most recently as President. He has extensive experience in operations, manufacturing and innovation and is an excellent hire for us. We're all very excited about the impact he's going to have on the Ames business going forward.

Telephonics had revenue for the quarter of $96 million, which was roughly the same as it was last year. EBITDA of $12.4 million decreased compared to $16.4 million in the prior-year quarter. This was exactly what we had expected budgeting into this year. We're actually ahead for the quarter from what we internally had thought we were going to be.

Prior-year quarter have benefited from a combination of favorable program mix and manufacturing efficiencies, which we cautioned that the time would not be repeated. Our experience suggests that demand and funding for programs in which Telephonics participates, the intelligence, surveillance and reconnaissance, remain well-funded relative to other areas of the defense business. We expect continued growth in airborne ISR equipment and should see the benefit from both the continued upgrade and recapitalization of the existing platforms, as well as growth from selected new platforms, including the Fire Scout program.

Telephonics is operating in a business environment with strong commercial and international market opportunities. We believe that over time, these markets can offer significant opportunities to mitigate any U.S. budgetary pressure. One of the opportunities we've discussed in the past is India and the joint venture entered into with Mahindra & Mahindra. We just recently opened the first private sector space and electronics manufacturing facility in India, in [ph] Patiala, which is 45 minutes outside of Delhi.

As we stated in the past, the joint venture will license technology from Telephonics for use on a wide range of products that have both defense and civil applications. Joint venture will provide the Indian Ministry of Defense and the Indian civil aviation sector with radar and surveillance systems, identification Friend or Foe devices, and communications systems. The joint venture also plans to provide systems for air traffic management services, homeland security and other emerging surveillance requirements. While still in its infancy, this joint venture has the opportunity to contribute significantly to Telephonics' future.

Our funded backlog remains strong, ending the quarter at $416 million compared to $444 million at the prior year end. With this funded backlog, we continue to have excellent visibility for the upcoming year.

Telephonics is well positioned to succeed in the coming years and enhance its industry leadership position. It's been a terrific business for us and we expect it to be for many, many years to come.

Our Plastics business, Clopay revenue totaled $139 million, increasing 1% from the prior-year quarter. EBITDA increased 37% to $12.7 million from $9.3 million in the prior-year quarter. The improvement was driven by favorable product mix, continued efficiency improvements and the positive impact of restructuring initiatives undertaken during the past year.

We've made tremendous progress improving our operations and servicing our customers. Our expanded capacity has made us a stronger global competitor and is enabling us to service and sustain our industry leadership position. I couldn't be happier with the performance of Plastics over the last 2 years and yet continue to expect it to improve significantly in the years ahead.

Corporate items. Previously mentioned, 50 million repurchase of shares excludes our $50 million board-authorized share repurchase program. Since initiating this program in 2011, we've repurchased 3.8 million shares of common stock for a total of $39 million or $10.25 a share. And at December 31, 2013, there's still $11 million remaining under that plan. Earlier today, the board declared a regular quarterly cash dividend of $0.03 per share payable on March 27 to shareholders of record close of business February 27.

Doug will now will take you through the quarter in a little more detail, and then I'll come back for closing remarks.

Douglas J. Wetmore

Thank you, Ron. Consolidated revenue totaled $453 million in the quarter, increasing 77% or $30 million in comparison to the prior year. Home and Building Products led the surge in revenue. Home and Building Products had revenue of $218 million, increasing 15% compared to the prior-year quarter. Ames' revenue increased 25% to $97 million, mainly due to improved snow tool volume that benefited greatly from significant snowfall in the various markets we serve.

Door revenue increased 8% to $122 million, mainly because of improved volume. segment adjusted EBITDA was $19.1 million, increasing 11% compared to the prior-year quarter, and the increase resulted primarily from the higher volume at both Ames True Temper and the door business.

The operating improvement was partially offset by a decline in Byrd Amendment receipts. Byrd Amendment receipts are anti-dumping compensation from the federal government. And in the prior quarter, we've received $1 million in such reimbursements, while this year, Byrd receipts were not significant.

Ames continues to incur manufacturing inefficiencies in connection with its plant consolidation initiative. And as we said before, these inefficiencies are expected to continue until the initiative is complete at the end of calendar 2014. Our manufacturing consolidation plans for Ames remain on schedule and on spending budget. We continue to expect the annual cash savings exceeding $10 million based on current operating levels on completion of this initiative.

Telephonics revenue of $96 million was in line with the prior-year quarter. The current quarter saw increased international radar program sales, but the benefit of that improvement was offset by reduced MH-60 Romeo radar sales.

Telephonics segment adjusted EBITDA decreased to $12.4 million from the year-ago quarter. The margin was 13% in the quarter compared to 17% in the prior-year quarter, mainly driven by product mix. The prior year also benefited from a combination of favorable program mix and manufacturing efficiencies. The current quarter margin is in line with previous long-term guidance for the business.

Plastics revenue totaled $139 million, increasing 1% compared to the prior-year quarter. That increase reflected the benefit of favorable mix, the pass-through of higher resin costs and customer selling prices and favorable foreign exchange translation, partially offset by a decrease in volume. A significant portion of the volume decline was attributable to the European operations exiting certain low-margin products in the second half of fiscal 2013. We'll continue to have a difficult volume comparison as a result of the European restructuring last year through completion of the next quarter.

Segment adjusted EBITDA was $12.7 million, increasing 37% from the prior-year quarter, driven primarily by continued efficiency improvements and a $600,000 favorable resin benefit, partially offset by the impact of the lower volume. Segment adjusted EBITDA margin reached 9.2% compared to 6.8% in the prior-year quarter. And at Plastics, we're well on our way to returning to the historic margins in excess of 10%. And as we've also stated before, our goal is to continue to improve margin beyond this historical standard.

Our consolidated gross profit was $106 million in the quarter, representing a margin of 23.3%, essentially in line with the prior-year quarter. Consolidated selling, general and administrative expenses were $88 million or approximately 19% of sales, again, in line with last year's quarter. Net income was $3.2 million or $0.06 per share compared to $600,000 or $0.01 per share in the prior-year quarter.

Current quarter results include a restructuring cost of $800,000 or $0.01 per share, acquisition costs of $800,000 related to the Northcote acquisition, also representing $0.01 per share, and discrete tax benefits of $0.01 per share. The prior-year quarter included restructuring of $1.1 million or $0.01 per share, a loss on pension settlement of $2.1 million or $0.02 per share and discrete tax benefits of a nominal amount that adds no per-share impact.

Excluding these items, current quarter adjusted income from operations was $4 million or $0.07 per share compared to $2.6 million or $0.05 per share in the prior-year quarter. As I mentioned before, the reconciliation of GAAP results and earnings per share to the adjusted results is included in our press release.

The effective tax rates for the current and prior-year quarters were 32.4% and 68%, respectively, and those rates included the discrete benefits I mentioned a moment ago, those primarily related to release of previously established reserves for uncertain tax positions on the conclusion of tax audits. Excluding the discrete items, the effective tax rates for the current and prior year were 38.4% and 71.3%, respectively.

As we've mentioned in prior calls, rates in both years reflect the impact of permanent differences not deductible in determining taxable income, mainly limited deductibility restricted stock, tax reserves and changes in earnings mix between domestic and nondomestic operations, all of which are material relative to the level of the pre-tax result. By having said that, the impact of the permanent differences diminished in the current quarter, primarily as a result of the improved pre-tax results.

As expected, our tax rate is declining. As pre-tax results improve and the impact of the permanent differences, particularly the limited deductibility of restricted stock diminish, I continue to expect the rate, excluding any discrete period items, to be in the range of 40% to 42% for fiscal 2014. As I mentioned before, geographic mix can significantly influence our consolidated effective rate, and the rate may also fluctuate due to legislative actions undertaken with respect to the U.S. corporate tax rate. We'll provide additional commentary in future earnings calls as 2014 year unfolds.

Capital spending in the current quarter was just under $18 million. We continue to expect capital spending of about $70 million in fiscal 2014, and this expectation contemplates the remaining capital to be incurred in connection with the Ames planned consolidation initiative.

Depreciation and amortization was about $17 million in the quarter, and we expect depreciation in 2014 to be about $64 million and amortization to be in line with 2013, about $8 million.

As Ron mentioned, we completed the acquisition of 4.5 million shares of stock from Goldman Sachs for $50 million in cash or $11.25 per share. And at present, Goldman continues to own approximately 5.6 million shares, roughly 10% of Griffon's common stock.

We purchased Northcote for approximately $24 million through -- financed through a combination of local Australian-based financing and some cash from the United States, and Northcote is included in our balance sheet at December 31. Details of that will be in the 10-Q that will be filed tomorrow.

At December 31, 2013, we had $95 million in cash and total debt outstanding net of discount of $733 million, resulting in a net debt position of $638 million. We have $180 million available for borrowing, subject to certain loan covenants under our revolving credit facility. And with respect to our full year 2014 guidance, we continue to expect consolidated revenue to be between $1.9 million and $2 billion, with each of the individual operating segments expected to grow in the low single digits.

In providing this guidance, we continue to be mindful of the various risks that may affect results. Ames' business continues to be that, which is most subject to the weather, which can dramatically affect point-of-sale at many of our customers and directly impact our revenue.

Snow this winter has been great so far, but we need a good spring, lawn and garden season as well as that represents the largest portion of Ames' overall portfolio of business. We continue to see a gradual recovery in housing, including the repair and renovation market, which will benefit overall our Home and Building Products segment.

While Telephonics' backlog is solid, we do continue to remain mindful of the risks that Department of Defense budgetary constraints pose for us, and it will also take some time to develop the international opportunities that Telephonics has targeted.

And finally, Plastics guidance is susceptible to variation due to a combination of resin pricing and foreign currency. And we're also mindful that more than half of our Plastics business is in Europe and Latin America, where macroeconomic conditions remain a bit uncertain.

So based on the revenue expectations outlined, we continue to expect our segment adjusted EBITDA to approximate $190 million, a 5% increase over 2013. Corporate non-allocated expenses are expected to be in the range of $31 million to $32 million, including all equity compensation for the company, which will be between $12 million and $13 million.

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

Ronald J. Kramer

Thanks, Doug. We're executing well on our strategy of improving the operations of each of our segments. This quarter highlights the meaningful progress we've made. Our businesses are well positioned for continued growth and profitability. We have ample resources to invest in these businesses to support their growth and are optimistic about their prospects.

We're confident that we can make acquisitions, make investments for organic growth, pursue the return of capital to our shareholders via the quarterly dividends and share repurchases. And as we look out over the next few years, we believe that we can sustain revenue growth, expand our EBITDA margin and significantly increase our EPS.

Our common stock is just beginning to reflect the earnings power of our businesses. I'm very pleased with our performance this quarter, and I'm quite confident about our future.

With that, operator, we'll take any questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go first to Bob Labick with CJS Securities.