Griffon(GFF) - 2021 Q4 - Annual Report

PART I Business Overview Griffon Corporation, a diversified holding company, operates through CPP and HBP segments, focusing on market leadership and strategic acquisitions, with Defense Electronics now a discontinued operation Business Strategy and Recent Transformations Griffon's strategy focuses on operating a diverse business portfolio to mitigate market variability, acquiring businesses, and strengthening customer relationships[10][11] - Transformative transactions over the past four years include divesting specialty plastics and acquiring ClosetMaid and CornellCookson to expand AMES and Clopay businesses[13] - As of September 27, 2021, Griffon is exploring strategic alternatives for its Defense Electronics segment (Telephonics), now classified as a discontinued operation[14] COVID-19 Business Update Griffon's operations remain fully functional despite supply chain disruptions and increased costs, maintaining strong liquidity - All Griffon facilities are fully operational with new safety policies, experiencing normal or improved order patterns compared to pre-pandemic levels[15][17] - The company faces supply chain disruptions, labor shortages, and increased commodity prices, leading to longer delivery times and restricted manufacturing capacity[15][16] - Griffon maintains adequate liquidity, supported by a $400 million revolving credit facility, $1 billion in refinanced senior notes, and $248.7 million in cash as of September 30, 2021[20] Reportable Segments Griffon's continuing operations are structured into Consumer and Professional Products (CPP) and Home and Building Products (HBP) segments - Griffon's continuing operations are conducted through two reportable segments: Consumer and Professional Products (CPP) and Home and Building Products (HBP)[45] - The Consumer and Professional Products (CPP) segment, via AMES, is a leading North American manufacturer of home storage, organization, and landscaping tools under key brands[45] - The Home and Building Products (HBP) segment, through Clopay, is North America's largest manufacturer of garage and rolling steel doors under prominent brands[45] - The Defense Electronics segment (Telephonics) is classified as a discontinued operation while the company explores strategic alternatives[44][84] Corporate Information Griffon employs approximately 6,700 people, faces customer concentration and seasonality, and has formalized its ESG commitment - As of September 30, 2021, Griffon and its subsidiaries employed approximately 6,700 people, excluding 700 from the discontinued Telephonics operation[110] - The Home Depot accounted for 19% of consolidated revenue, 26% of CPP's, and 10% of HBP's revenue in fiscal 2021, indicating customer concentration[116] - The company's business is seasonal, with revenue and income typically lowest in the first and fourth quarters and highest in the second and third quarters due to AMES and Clopay seasonality[118] - Griffon formalized its ESG commitment by subscribing to the United Nations Global Compact and plans to publish its inaugural FY21 ESG Report[125][126] Risk Factors Griffon faces significant risks including COVID-19 impacts, economic uncertainty, customer concentration, supply chain volatility, indebtedness, acquisition challenges, and government contract dependency for discontinued operations - Ongoing COVID-19 impacts may cause supply chain disruptions, labor shortages, and increased commodity prices, affecting operations[139] - Adverse economic trends, especially in construction and renovation, could negatively impact CPP and HBP segments[146] - Loss of a major customer like The Home Depot, representing 19% of 2021 consolidated revenue, could significantly harm financial results[150] - Reliance on third-party suppliers and price volatility for raw materials like resin, wood, and steel pose profitability risks[154] - Debt agreement covenants may restrict corporate actions, with significant cash flow potentially allocated to debt service, limiting other investments[181] - Inability to successfully identify, complete, and integrate strategic acquisitions could hinder the company's growth plan[178] - The Telephonics business, now discontinued, is highly dependent on U.S. government defense budgets and contracts, subject to termination or modification[167] - Cybersecurity threats, especially for the defense segment, could compromise sensitive information and disrupt operations[174] - Inability to protect proprietary intellectual property rights, including trademarks and patents, could harm the business[200] - The company is subject to product liability and warranty claims arising in the ordinary course of business[202] Properties Griffon occupies approximately 9.5 million square feet of global office, factory, and warehouse space, owning major manufacturing facilities and leasing distribution centers Major Facilities Overview | Location | Business Segment | Primary Use | Approx. Square Footage (sq ft) | Owned/Leased | | :--- | :--- | :--- | :--- | :--- | | New York, NY | Corporate | Headquarters | 13,000 | Leased | | Troy, OH | Home and Building Products | Manufacturing | 1,230,000 | Owned | | Mountain Top, PA | Home and Building Products | Manufacturing | 279,000 | Owned | | Carlisle, PA | Consumer and Professional Products | Manufacturing, Distribution | 1,409,000 | Leased | | Reno, NV | Consumer and Professional Products | Manufacturing, Distribution | 774,000 | Leased | | Ocala, FL | Consumer and Professional Products | Manufacturing | 676,000 | Leased | Legal Proceedings Griffon is involved in routine litigation and environmental claims, including the Peekskill Site and Union Fork and Hoe property, not expecting a material adverse financial impact - The company is involved in litigation, investigations, and claims arising from the normal course of business[212] - Specific environmental matters include the Peekskill Site, under EPA investigation, and the former Union Fork and Hoe site, where AMES is conducting remediation[612][614] PART II Market for Common Equity and Stockholder Matters Griffon's common stock trades on the NYSE under 'GFF', with a history of quarterly dividends and $58.0 million available for share repurchases as of September 30, 2021 - Griffon's common stock is listed on the NYSE under the symbol 'GFF'[217] Annual Dividends Declared Per Share | Fiscal Year | Dividend per Share ($) | | :--- | :--- | | 2021 | $0.32 | | 2020 | $0.30 | | 2019 | $0.29 | - As of September 30, 2021, $57.955 million remained available for purchase under the company's authorized share repurchase programs[224] Management's Discussion and Analysis (MD&A) In fiscal 2021, consolidated revenue from continuing operations grew 10% to $2.27 billion, with income rising to $71.2 million, supported by strong liquidity, while Defense Electronics was reclassified as discontinued Consolidated Results of Operations Consolidated revenue from continuing operations increased 10% in FY2021, with significant growth in income and diluted EPS Consolidated Financial Performance (Continuing Operations) | Metric | FY 2021 ($ millions) | FY 2020 ($ millions) | % Change | | :--- | :--- | :--- | :--- | | Revenue | $2,270.6 | $2,066.5 | 10% | | Gross Profit | $641.1 | $584.0 | 9.8% | | Income from Continuing Operations | $71.2 | $42.4 | 67.9% | | Diluted EPS from Continuing Operations | $1.33 | $0.94 | 41.5% | - Adjusted income from continuing operations for FY2021 was $90.6 million, or $1.70 per share, up from $60.6 million, or $1.35 per share, in FY2020, primarily excluding restructuring charges[252][263] - SG&A expenses increased in 2021 due to higher distribution and shipping costs, though SG&A as a percentage of revenue decreased from 21.0% to 20.1% on an adjusted basis[248] Reportable Segments Performance Both Consumer and Professional Products (CPP) and Home and Building Products (HBP) segments demonstrated revenue and EBITDA growth in FY2021 Consumer and Professional Products (CPP) Performance | Metric | FY 2021 ($ millions) | FY 2020 ($ millions) | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | $1,229.5 | $1,139.2 | 8% | | Adjusted EBITDA | $115.7 | $104.1 | 11% | | Adjusted EBITDA Margin | 9.4% | 9.1% | +30 bps | - CPP revenue growth in 2021 was driven by 3% volume increase, 1% from price/mix, and 4% favorable foreign exchange impact[268] Home and Building Products (HBP) Performance | Metric | FY 2021 ($ millions) | FY 2020 ($ millions) | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | $1,041.1 | $927.3 | 12% | | Adjusted EBITDA | $181.0 | $153.6 | 18% | | Adjusted EBITDA Margin | 17.4% | 16.6% | +80 bps | - HBP revenue growth in 2021 was driven by 8% favorable mix and pricing and 4% increased volume, with growth across residential and commercial markets[284] Discontinued Operations (Defense Electronics) The Defense Electronics segment experienced revenue and EBITDA declines in FY2021 due to reduced volume and delayed contract awards Defense Electronics (DE) Performance | Metric | FY 2021 ($ millions) | FY 2020 ($ millions) | % Change | | :--- | :--- | :--- | :--- | | Revenue | $271.1 | $341.0 | -21% | | Adjusted EBITDA | $20.5 | $25.2 | -19% | - The DE segment's revenue decrease was due to reduced volume from delayed Surveillance Systems awards and decreased Communications Systems deliveries[294] - Telephonics' contract backlog was approximately $352.2 million at September 30, 2021, down from $370.0 million in 2020, primarily due to contract award timing[96][297] Liquidity and Capital Resources Operating cash flow decreased in FY2021 due to increased working capital, while the company maintained strong liquidity and debt covenant compliance Cash Flow Summary (Continuing Operations) | Cash Flow | FY 2021 ($ millions) | FY 2020 ($ millions) | | :--- | :--- | :--- | | From Operating Activities | $71.0 | $107.8 | | From Investing Activities | ($56.2) | ($51.5) | | From Financing Activities | ($28.2) | $68.2 | - Operating cash flow decreased primarily due to increased working capital, mainly inventory, partially offset by higher income and increased accounts payable[309] Debt Summary (Net of Cash) | Metric | Sept 30, 2021 ($ millions) | Sept 30, 2020 ($ millions) | | :--- | :--- | :--- | | Cash and equivalents | $248.7 | $218.1 | | Total debt | $1,060.5 | $1,064.4 | | Debt, net of cash | $811.9 | $846.3 | - As of September 30, 2021, Griffon had $370.9 million available under its $400 million revolving credit facility and was in compliance with all debt covenants[307][321][322] Market Risk Disclosures Griffon's market risk exposures primarily stem from interest rate fluctuations on variable-rate debt and foreign currency exchange rates from international operations - The company is exposed to market risk from interest rate changes, primarily related to its variable interest rate debt under its revolving credit facility[376][377] - Griffon faces foreign exchange risk from operations in Canada, Australia, the UK, Ireland, New Zealand, and China, with a 10% currency change not expected to have a material effect[378] Financial Statements and Supplementary Data This section presents Griffon Corporation's audited consolidated financial statements for fiscal years 2021, 2020, and 2019, including balance sheets, statements of operations, cash flows, and detailed notes Consolidated Balance Sheet Highlights (As of Sept 30, 2021) | Account | Amount (in thousands) | | :--- | :--- | | Total Current Assets | $1,366,279 | | Total Assets | $2,604,685 | | Total Current Liabilities | $531,636 | | Total Liabilities | $1,797,527 | | Total Shareholders' Equity | $807,158 | Consolidated Statement of Operations Highlights (Year Ended Sept 30, 2021) | Account | Amount (in thousands) | | :--- | :--- | | Revenue | $2,270,626 | | Gross Profit | $641,113 | | Income from Continuing Operations | $71,239 | | Net Income | $79,211 | Controls and Procedures Griffon's management concluded that disclosure controls and internal control over financial reporting were effective as of September 30, 2021, with an unqualified auditor opinion - Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2021[652] - Management assessed and concluded internal control over financial reporting was effective based on the 2013 COSO framework, with Grant Thornton LLP issuing an unqualified opinion[653][654] - No material changes in internal control over financial reporting occurred during the fourth quarter of fiscal 2021[655] PART III Directors, Executive Officers, Corporate Governance, and Other Matters Information for Part III, including directors, executive compensation, and security ownership, is incorporated by reference from Griffon's definitive proxy statement - Information for Items 10 through 14 is incorporated by reference from the company's definitive proxy statement, to be filed within 120 days of the fiscal year-end[661] PART IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including key corporate governance and financing documents - This section contains a list of all financial statements, schedules, and exhibits filed with the Form 10-K, including key corporate governance and financing documents[663]