welcome to the Griffin Corporation's First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note that this conference is being recorded. I would now like to turn the conference over to your host, Mr.
Brian Harris, Chief Financial Officer. Thank you. You may begin.
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 Griffin'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, some of 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.
Thanks and good afternoon everyone. We're off to an excellent start for fiscal year 2020. I want to start by discussing the enhanced reporting of our 3 segments in our public filings. We believe this change provides our shareholders increased transparency and further highlights the significant opportunities for each of our businesses by demonstrating the positive impacts of the operational improvements and strategic investments we've undertaken. Our segments are consumer and professional products, consisting primarily of our aims business, inclusive of the ClosetMaid brand Home and Building Products, which is our Clopay business, which includes the CornellCookson brand our Defense Electronics segment, Telephonics, which is unchanged.
Our results, as we are discussing today, reflect this new segmentation. So let's move to the quarter. Couldn't be happier with the start of our fiscal year. 1st quarter revenue increased 7% to $548,000,000 and our adjusted EBITDA increased 21.5 percent to $55,000,000 This was driven by growth across our Clopay and AIMS businesses. We continue to make progress on the AIMS strategic initiative announced in November.
This is a multiyear investment in the AIMS next generation business platform to enhance the growth, efficiency and competitiveness in our AIMS and Closet made U. S. Businesses. This platform will improve business tracking, enable faster decision making and improve AIM's ability to predict and respond to external factors with improved lead times. During the quarter, we began the rationalization process of the distribution and manufacturing facilities.
We continue to make strong progress and our internal milestones for this project remain on track. Additionally, we completed construction on our $14,000,000 Mountaintop Pennsylvania expansion project that serves our CornellCookson line. The team has moved into the expanded facility and is now transitioning operations to take advantage of the new equipment in space. This facility will increase our manufacturing capacity to support organic volume growth, improve operational efficiencies and enable us to bring new products to market. Earlier this month, our Telephonics business was awarded 1st place in the U.
S. Navy MUX Prize Challenge for our MOSAIC AESA radar system. This award is recognition of the strong technical innovation of the next generation radar currently under development at telephonics and also is an indication of the significant value proposition this technology provides to our customers. Moreover, shortly after receiving this prize, we began flight testing the new radar technology with the U. S.
Navy on their MH-60S Seahawk helicopters and initial feedback has been positive. Further, we continue to see progress with the Indian government regarding our MH-60R radar systems and discussions between the parties are highly encouraging. We continue to expect a formal contract award in excess of $50,000,000 for this program within this fiscal year. Overall, Telephonics continues to see a strong pipeline of opportunities on a foreign and domestic basis, leaving us highly optimistic about the organic growth through the balance of the year and beyond. Let's turn to capital allocation.
We continue to benefit from an enhanced free cash flow profile driven by our portfolio reshaping and efficiency initiatives. I'm pleased to report that even with the cash usage required to meet our seasonal demands in our Q1, our leverage ratio remained the same as last quarter at 4.8 times. We continue to focus on deleveraging, working towards our 3.5 times net debt to EBITDA goal. In December, we acquired Apto, a leading U. K.
Supplier of innovative garden pottery and associated products sold to U. K. And Ireland garden centers. Apto strengthens the diversification of our product offerings, while increasing our operational footprint in the region. We expect Apta to be accretive to our earnings in fiscal 2020.
We are active in sourcing and evaluating strategic bolt on acquisitions like Apta to further drive long term growth. We remain disciplined in our approach and are focused on ensuring that any acquisition would be both value enhancing and immediately accretive. Additionally, earlier today, our Board authorized a $0.075 per share dividend payable on March 19, 2020, shareholders of record on February 20, 2020. This marks the 34th consecutive quarterly dividend to shareholders, which has grown at an annualized compound rate of 18% since we initiated it in 2012. Earlier today, we announced the amendment of our revolving credit facility, which now extends until March 2025.
The amended and extended agreement has lower borrowing costs with a reduced spread over LIBOR and reduced fees. Additionally, the amount available was increased to $400,000,000 although the terms are substantially the same. At quarter end, we had approximately $229,000,000 available for borrowing under the revolver subject to certain loan covenants. With the extension of the bank agreement, you could expect us to refinance our $1,000,000,000 or 5.25 percent notes sometime this year. With that, I'm going to turn it over to Brian for details on the financial results.
Thank you, Ron. I'll start by highlighting our Q1 consolidated performance. Revenue increased 7% to $548,000,000 and adjusted EBITDA increased 20 percent to $55,000,000
both in comparison to the
prior year quarter. Gross profit for the quarter was $150,000,000 and it included $2,700,000 of charges related to the AIM strategic initiative. Excluding this charge, gross profit was 153,000,000 dollars increasing 7% over the prior year quarter, with gross margin decreasing 20 basis points primarily due to tariffs. 1st quarter selling, general and administrative expenses of $118,000,000 included a $3,700,000 charge related to the AM strategic initiative. Excluding this charge, SG and A expenses were $114,000,000 essentially flat compared to the prior year Q1.
As a percentage of sales, SG and A adjusted for the charge decreased 150 basis points to 20.8%. First quarter GAAP net income was $10,600,000 or $0.24 per share compared to the prior year period of $8,800,000 or $0.21 per share. Excluding items that affect comparability from both periods, current quarter adjusted net income was $15,600,000 or $0.36 per share compared to the prior year of $9,200,000 or $0.22 per share. Our effective tax rate excluding items that affect comparability for the quarter was 33.3%. Capital spending was $13,000,000 compared to $8,000,000 in the prior year quarter, with the increase primarily due to expenditures for the recently completed Home and Building Products mountaintop top facility expansion.
Depreciation and amortization totaled $16,000,000 for the Q1. As of December 31, 2019, we had $65,000,000 in cash and total debt outstanding of 1,150,000,000 resulting in a net debt position of $1,080,000,000 and debt to EBITDA leverage of 4.8 times as calculated based on our debt covenants. As we've noted previously, the first half of our year is a cash usage period and the second half is our cash generation period. Regarding our segments, Consumer and Professional Products 1st quarter revenue increased 11% to $241,000,000 over the prior year quarter, driven by increased volume and favorable price mix, partially offset by 1% unfavorable impact due to foreign exchange. Adjusted EBITDA was $22,000,000 increasing 7% from the prior year quarter due to leverage on sales, partially offset by increased tariffs.
Home and Building Products' 1st quarter revenue increased 8% to $241,000,000 over the prior year quarter, driven by increased volume and favorable mix in pricing. Adjusted EBITDA 30% to $41,000,000 over the prior year quarter due to the benefit of increased revenue, including volume related benefits on absorption and improved operational efficiencies. Adjusted EBITDA margin was 16.9% in the current quarter compared to 14% in the prior year quarter. Defense Electronics' Q1 revenue was $66,000,000 compared to the prior year period of $71,000,000 primarily due to timing of orders. Adjusted EBITDA during the period was $4,500,000 compared to the prior year quarter of $4,800,000 Our trailing 12 month book to bill ratio was a little over 1x and backlog at December 31 was $370,000,000 Corporate and unallocated expenses, excluding depreciation, were $11,900,000
in the
Q1. We are reiterating our full year 2020 guidance given during our November earnings call, which was total revenue to increase 2% to 3% compared to FY 'nineteen and $250,000,000 plus of EBITDA, excluding both unallocated costs of $45,000,000 and one time charges relating to the A strategic initiative. Capital expenditures, D and A and interest expense guidance remains the same at $60,000,000 $64,000,000 $65,000,000 respectively. We continue to expect to generate free cash flow in excess of net income. Now I'll turn the call back over to Ron.
Thanks. We're off to an excellent start to fiscal 2020. Griffin is well positioned to generate significant cash flow, continue to expand margins through execution of our strategic initiatives. We're excited about the opportunities in front of us and we continue to see a healthy U. S.
Consumer and economy that's supportive of all of our businesses. We remain intensely focused on driving long term shareholder value, and we're really pleased about where the company is. And with that, operator, we'll take any questions.
Thank you. Our first question comes from the line of Bob Labick with CJS Securities. Please proceed with your question.
Good afternoon. Congratulations on a great start to fiscal 2020.
Thank you. Thanks, Bob. Yes.
I wanted to start with
the AIMS initiative. Obviously, it's a really exciting thing you discussed last quarter. You've started to dig in. I was wondering, could you tell us have there been any surprises, good or bad, with the initial stages of the initiative? I know it's a 3 year project, but anything that you've learned so far?
And what are the next kind of milestones and
steps we should expect?
So there really have been no surprises. It started off as expected, and we continue to expect it
to
go as planned. We'll continue each step as we go. So right now, we're working on a couple of facilities and those will be closed by the end of the year. And in the spring, we will begin the process of implementing our business intelligence system.
Okay, great. And then you talked a little about telephonics, some very optimistic things. Could you maybe expand
a little bit on the international opportunity?
I think you gave us the size, but I wasn't able to write it down fast enough. And then also you mentioned the ISO radar. And could you talk a little bit more about that and if that's a medium term opportunity or when that would become part of sales for Telefonix?
Sure. So yes, we continue to see a lot of opportunities internationally. The one we were specifically talking about was India, which is a $50 plus 1,000,000 initial booking opportunity that we expect to have in this fiscal year. We see other opportunities with our allies across the globe and we see a strong pipeline both domestically and internationally. On the active electronically scanned array AESA radar, we will likely start seeing sales in about 2 years.
It will start off slowly and then continue from there. But we're very excited about the technology as our customers. As we mentioned, the Navy we had a test with the Navy. The test was successful and we see a lot of interest in the product. One other note, likely the initial sales of that product will be international.
And Bob, it's Ron. The one other thing I'd add is that we've said that we see the cycle having turned in fiscal 'nineteen and now in 'twenty for Telephonics, we see a 5 year runway here of both improving backlog, orders, the investments that we've made in the business. So coming out of sequestration, the defense budget changes in 2017, we feel like the company is really positioned for multiyear expansion.
Okay. That's great. And then last one for me. Just the we're liking the new segmentation and it's going to take us a little while to get used to it, but the incremental information, particularly on HPP, on CoPay and Cornell, the margins of, I think, 16.9% in the quarter were obviously terrific. Can you talk a little bit about the drivers for the margin?
And what range of margin should be expected going forward?
I'll say I'll start by saying that we have always talked about our business as being accurate reflections of what's going on in the housing market. And our businesses are continuing to show us that the U. S. Housing market is strong and not just at the end of the cycle, but showing volume increases as well as cost reductions in manufacturing, which is really an efficiency story for us and with some level of commodity help. But the business is really strong.
We continue to see growth. We think 2020 is shaping up to be a very good year. We're 1 quarter into it. So we're always cautious about what the balance of any year can bring us, but we see a lot of very positive signs in the housing market. The separate part of the conversation about our consumer and professional products, what it should really showcase to you is that the Bridgewater project at the AIMS initiative that we discussed is the room for 300 plus basis points of margin expansion.
And that is something that has been planned. Segmentation allows you to see the progress we're making on taking the margins on what's now more than $1,000,000,000 of revenue under AIMS and we expect to be able to build that out to our stated goal of more than 12% over the next several years. So we're feeling very optimistic about what's going on, not just in the company, but all signs to us of what the year is shaping up to be for the U. S. Economy are positive.
Yes, I would just
add to that. We have out there that we are building to a 15% margin in the Home and Building Products segment annualized full year margin. So in that business, generally Q1 and Q4 are the strongest quarters with Q2 being the weakest quarter, just the regular cycle of that business and Q3 being a little better than Q2. So I wanted to just point that out. And on our CPP business, ultimately, we see a 12% margin.
And that business, strongest quarters are generally Q2 and Q3.
Got it. Super. Okay. Thank you so much.
Our next question comes from the line of Julio Romero with Sidoti. Please proceed with your question.
Hey, good afternoon. I wanted to ask about the Apta deal. How do you see that fitting in with Telkay? And which product lines attracted you to that business?
So the Apto Geo really expands our global footprint of pots and planters. So Apto is a pots and planters business, and it's our first pots and planters business in the UK. So overall, just like I pointed to what we did in Australia where we built a business from negligible revenue of $10,000,000 to $15,000,000 to $160,000,000 to $170,000,000 business under one management using one distribution footprint. That is what we've started to do in the UK. So Kelke, La Hacienda and now Apta will be combined.
They are under one set of managers and it's another good adjacency for that geography.
Got it. And on the restructuring costs, I think you did about $6,000,000 in the quarter. It's a little higher than the run rate that I had modeled in for you guys. I mean, are you still expecting $35,000,000 in one time items over that 3 year period? And kind of maybe what kind of cadence we should expect that spread out over the next 11 or so quarters?
Sure. No problem. The expenses, yes, still $35,000,000 during the 3 year period. We do expect full year So the balance of this year will be somewhere in that $7,000,000 plus minus range. Nothing particular occurred.
It's just we were able to start on the facilities and we got moving and we had some charges related to it.
Our next question comes from the line of Justin Bergner with Gabelli. Please proceed with your question.
Good afternoon, Ron. Good afternoon, Brian.
Good morning, Justin. Hi, Justin.
Is there any more detail you can provide on sort of the volume acceleration? I mean, looking at the sort of 2% volume print in the September quarter for your combined home and buildings products business under the old reporting versus what looks like an average 6% volume increase this quarter. Was there anything weather related, calendar related, lapped comp related that would explain away some of that acceleration? Or is it all real end market acceleration?
So we are seeing a good market out there in general, but for us specifically, we continue to gain market share is what you're seeing in those volume increases. So we believe we're outperforming the market. And that's across both the Home and Building Products business and the AIMS business, and that includes AIMS and ClosetMaid and both the commercial and residential side of
Okay. And then I guess the price mix element, if I average the 2 new reporting segments, is about 4% consistent with what you reported last quarter. So that dynamic, I guess, is relatively constant, but has the price versus mix components have changed at all within that 4%?
No, there's contributions from both. Actually, it's a little more mix focused this quarter than price. We continue to improve the type of product we're selling. And in the better best categories in the AIM side, Closamade is a very strong brand and we continue to come out with products that people are investing in and investing in to improve their homes. And then on the homebuilding product side, we continue to see people investing in a nicer on the residential side on a nicer door.
It's a very important element to a home. Recent surveys that came out say number 1 and 2 of the benefits you can do to improve the look of your home is the entry door and the garage door. And one other element is we're very focused on the AIM side, the tool side, we're very focused on the Pro, which generally is a higher end product.
Okay. Back to my initial question on the volume acceleration, was there anything weather related that
was going on
in the quarter with the 7% volume in Consumer and Professional Products?
No, nothing particular weather related.
Okay. Capital allocation, have any of your priorities changed over the last 3 to 6 months in terms of your appetite for acquisitions versus debt paydown?
No. No, I mean, the hunt for acquisitions is always topical for us. The reality is there is too much capital chasing assets and we have a very hard time being a disciplined value buyer, finding things that we can improve, that we meet our own standards that we can pay a full price because by definition, the acquisition business is about who's willing to pay the highest price. So we think that our strategy has been to digest the acquisitions that we've made and I'll remind you, we've bought 11 companies in the last 6 years. So you should always expect that there is something in our pipeline.
The reality for us has been that the value has been in tuck in acquisitions and in transactions that are unpredictable as to when and if they come along. So the big acquisitions for us, both CornellCookson, which really is turning out to be every bit as good as we had hoped it was going to be, to be able to diversify what was already the leading residential door business to now have the leading commercial door business and we will build and grow that business for hopefully decades. The ClosetMaid acquisition and the opportunities that it's created for us to consolidate with AIMS are just beginning to be reflected. So the tuck ins that we've done and in this quarter, Apta, are the types of things that we see far more value in smaller deals. But when the reality for us is, we see the benefit of deleveraging and being rewarded in the equity market.
And while we haven't bought back stock, we still think our stock is compelling in value. But we are far better and will continue to go down our deleveraging story from a credit standpoint. And that's how you should be thinking about us from an M and A standpoint going forward.
Okay. And just on the telephonic side, I mean, are you likely to do anything material there, given that we have an election coming up one way or another? Or is that sort of something that you're kind of going to take a little bit of a wait and see approach until after the election?
We love the defense business and telephonics is a gem. We have a multiyear strategic initiative there to grow the business. We have every intention of continuing to build it, grow it. I wish we can find acquisitions to complement it and those tend to be at multiples that make it completely uneconomic. So we'll continue to take that business back to where it was in both revenues and profitability over the next several years.
We've been in that business for a very long time. We've seen lots of presidents come and go. The business that we're in is essential. It's an incumbent position on multiple platforms.
We want
to keep that business for a very long time and build it.
Our next question comes from the line of Tim Wojs with Baird. Please proceed with your question.
Hey, guys. Good afternoon. Nice job.
Hi, Tim. How are you doing?
Good, good. Thanks. There's some snow out here, so that's good. So I guess maybe just thinking about CornellCookson, I'm just curious if Ronny can maybe add a little bit of color now that you've owned the business for close to 18 months now, where the synergy opportunity relative to maybe what your internal benchmark was today and how that's performed relative to your expectations? And then secondly, just kind curious what you're seeing in kind of the overall non res market right now in terms of order activity and backlogs?
So I'll start by telling you that the diversification of the Clopay business was always something that we wanted to accomplish and we were already in the commercial door business. CornellCookson was a unique opportunity for us to be able to not just expand what we already were doing and some of the complementary things that in fact we've been doing together with them. But it was putting 2 cultures together that we thought would lead to synergies. We are beginning to see that everything from purchasing and all the obvious things. But the broader discussion is about being able to leverage our dealer network and to be able to offer far more products on the commercial side, to be able to bid far more jobs by us going and trying to invest in the sales and marketing of Cornell.
And to do all that, that was the first step was to get the physical footprint rationalized. We expanded the facility. We just completed it in December. So the road ahead of us is quite optimistic about both volume expansion and ultimately margin expansion as we're able to leverage the fixed overhead of both the Clopay and the CornellCookson business. Brian, do you
want to add? Yes.
I'll do that as well. We added 400 dealers that we did not have before in either side of the business when we bought CornellCookson. So we have the opportunity and actually have started the process where a dealer who had CornellCookson product but did not have the Clopay commercial product is now starting to buy the Clopay commercial products because they like dealing with 1 customer and vice versa. So that opportunity is in front of us and we've begun changing over some dealers already. In the commercial section, no, we continue to see good volume.
We are not seeing weakness there.
Okay. Okay, great. And then just with when you think about ClosetMaid and some of the expansion opportunities there, I guess, how important or attractive is getting into the garage space?
It's opportunistic. It's not at all reflected in current or projected. It's something that if anybody is going to figure out garage organization on a national basis, it should be us. Stay tuned.
Okay. Okay. Perfect. And then just in terms of the refinancing that you talked about, Ron, on the notes, how would you kind of think about the time line there or just how the debt markets are relative to kind of your current facility?
We are always opportunistic about coming back to the market. Company is in excellent shape. It by all appearances, the credit markets are open and available and at the appropriate time, we'll come back. But sometime this year is what you should be expecting.
Okay. Okay, great. Well, congrats on the Q1 here and good luck for the rest of the year.
Yes. We're very pleased about what we see and appreciate it. Thank you.
Ladies and gentlemen, have reached the end of our question and answer session. And I would like to turn the floor back over to Mr. Ron Kramer for any closing remarks.
Thank you all, and we'll look forward to reporting in May.
This concludes today's teleconference. You may now disconnect your lines at