Diversify with Griffon Corporation, Over 7% YTM, Bonds Mature March 2022

  • 44% increase in revenues year-over-year.
  • Home and Building Products sales increased 59% over third quarter 2017.
  • Business orders for the company’s Telephonics business were up 30% year-over-year.
  • The Defense Electronics segment has accumulated Contract backlog of $346 million.

This week’s bond review looks at a diversified conglomerate that has been reshaping its portfolio of companies to grow and increase synergies. Griffon Corporation has spent the past few years strengthening its business segments, particularly its Home and Building Products segment, acquiring leading brands like ClosetMaid and CornellCookson. Griffon had a fantastic third quarter. Some of the highlights include:

 

  • A 44% increase in revenues year-over-year.

  • Home and Building Products sales increased 59% over third quarter 2017.

  • Business orders for the company’s Telephonics business were up 30% year-over-year.

  • The Defense Electronics segment has accumulated Contract backlog of $346 million.

After realizing additional synergies within its newly acquired businesses, Griffon should continue to build momentum within its two main business segments. Griffon’s 2022 bonds, with a current, competitive yield-to-maturity of about 7.25%, are an ideal tool for investors looking to add diversification to their portfolios. Due to Griffon’s excellent results in its most recent quarter, Durig Capital has marked these bonds for addition to its FX2 Managed Income Portfolio, the most recent performance of which is shown below.

 

 

Third Quarter Results

 

Griffon posted outstanding results for its third fiscal quarter (three months ended June 30, 2018). The company has been reshaping its portfolio of companies and the favorable results are evident in its latest numbers.

 

  • Revenue was $516.6 million as compared to $358.1 million a year ago, an increase of 44%.

  • Income from continuing operations was $7.4 million versus $4.5 million in the prior year quarter, an increase of 64%.

  • Segment adjusted EBITDA increased 47% year-over- year, growing from $39.9 million to $58.8 million.

  • In the company’s Home and Building Products segment, sales increased 59% to $440 million

  • The company’s Telephonics business saw orders in the third quarter totaling $64 million, a 30% increase over the prior year quarter.

     

Ronald Kramer, Griffon’s Chairman and CEO commented on the company’s stellar quarterly performance. “This is an excellent quarter and reflects the beginning of the benefits we expect from our transformative portfolio reshaping. I am very pleased with our performance and optimistic about our outlook for the future.”

 

(Source: Griffon Corporation, October 2018)

 

About the Issuer

 

Founded in 1959, Griffon is a diversified management and holding company that conducts business through wholly-owned subsidiaries. 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. In order to further diversify, Griffon also seeks out, evaluates and, when appropriate, will acquire additional businesses that offer potentially attractive returns on capital. Griffon currently conducts its operations through two reportable segments: Home & Building Products and Defense Electronics.

Home & Building Products segment consists of three companies, AMES, ClosetMaid, and CBP. AMES is the leading U.S. manufacturer and a global provider of long-handled tools and landscaping products for homeowners and professionals. ClosetMaid is a leading North American manufacturer and marketer of closet organization, home storage, and garage storage products. CBP is a leading manufacturer and marketer of residential and commercial garage doors and sells to professional dealers and some of the largest home center retail chains in North America. Under the CornellCookson brand, CBP is a leading U.S. manufacturer and marketer of rolling steel door and grille products designed for commercial, industrial, institutional, and retail use.

The Defense Electronics segment consists of Telephonics, a globally recognized leading provider of highly sophisticated intelligence, surveillance and communications solutions for defense, aerospace and commercial customers.

 

Growth in HBP and Defense Segments

 

Griffon has done a masterful job in reshaping and enhancing its portfolio of companies. In its HBP segment (Home Building Products) segment, Griffon acquired ClosetMaid last October, sold its Plastics segment in February and also acquired CornellCookson in June. These changes have created much stronger cash flow as well as a diversified portfolio of companies that are leading brands in their respective categories. Sales in this segment increased 59% in Q3 over the same period in 2017. This growth came from both recent acquisitions as well as organic growth.  In addition, there are further opportunities for Griffon to improve margins further through synergies in procurement, distribution and warehousing, manufacturing and administrative functions.

 

In the company’s Defense Electronics segment, segment adjusted EBITDA for the third quarter was up 29% to $9 million. Orders were also up in the third quarter, 30% year-over-year, totaling $64 million.  For the nine months ending June 30, 2018, orders are up 9%, totaling $220 million. Two of those orders include a $23.5 million contract from Naval Air Systems, and a $31.8 million contract for radar equipment for the United States Coast Guard. Contract backlog as of June 30, 2018, was $346 million, with roughly 67% of that expected to be fulfilled within the next year.

 

Interest Coverage and Liquidity

 

While Griffon has been working hard to improve its cash flow and profitability, it shows a healthy level of interest coverage and liquidity. Interest coverage is of paramount importance to bondholders as it indicates a company’s ability to service its existing debt. For the most recent quarter, Griffon had operating income of $24.5 million and interest expense of $16.3 million for an interest coverage ratio of 1.5x.  Another item that bondholders should note is that since 2011, Griffon has paid its shareholders regular quarterly dividends. If the company should experience increased cash flows, this would be an additional source of funds to pay bondholder interest.

 

The company’s liquidity for the most recent quarter includes cash of $64.4 million and $264.9 million available on the company’s revolving credit facility, for a total liquidity of $328.9 million.

 

Risks

 

The risk for bondholders is whether Griffon can maintain the early momentum it has built with its new and improved portfolio of companies. The recent acquisitions the company has made in its Home and Building Products segment have proven to be accretive and should continue to provide additional revenues and profits. In addition, the company is projecting continued cost synergies which should reduce expenses and also contribute to the bottom line.  Griffon’s Defense Electronics segment has continued to win contracts and build its backlog. In consideration of Griffon’s recent outstanding results, the company’s 2022 bonds, with a yield-to-maturity of about 7.25%, are an ideal portfolio addition for investors seeking additional diversification.

 

In general, bond prices rise when interest rates fall and vice versa. This effect tends to be more pronounced for lower couponed, longer-term debt instruments.  Any fixed income security sold or redeemed prior to maturity may be subject to a gain or loss. Higher yielding bonds typically have lower credit ratings, if any, and therefore involve higher degrees of risk and may not be suitable for all investors.

 

 

 

Summary and Conclusion

 

Griffon Corporation has spent the past few years redesigning its portfolio of companies to provide better synergies as well as increase revenues and profitability. Its Home Building Projects segment has shown tremendous growth since its key acquisitions of ClosetMaid and CornellCookson. Its Defense Electronics segment has continued to acquire new contracts and build its backlog, which means nearly certain income for the future. The company has maintained sufficient cash flow to support its increasing quarterly dividends, which should reassure bondholders. Its 2022 bonds are currently trading at a slight discount which translates to a competitive yield-to-maturity of about 7.25%. For investors looking to diversify their portfolio, Griffon Corporation provides exposure in the home improvement and defense industries. For these reasons, Durig Capital has identified these bonds as an ideal addition to its FX2 Managed Income Portfolio, the most recent performance of which is shown above.

 

Issuer:  Griffon Corporation

Ticker: NYSE:GFF

Coupon: 5.250%

Maturity: 03/01/2022

Ratings: B2 / B+

Pays: Semiannually

Price:  ~94.0

Yield to Maturity: ~7.25%

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Disclosure: Durig Capital and certain clients may hold positions in Griffon Corporation’s 2022 bonds.

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