Greetings, and welcome to Griffon Corporation first quarter 2019 earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Brian Harris, Chief Financial Officer. Thank you. You may begin.
Thank you, Michelle. Good morning, 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 the business 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 in 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. Good morning. We're off to an excellent start for fiscal 2019, with double-digit growth in sales and EBITDA, driven by solid underlying demand, coupled with the benefits of our portfolio reshaping initiatives. First quarter 2019 revenue increased 17% to $511 million, and our segment adjusted EBITDA from continuing operations increased 30% to $57 million compared to the prior year. Higher revenue was driven by growth across our Home & Garden business segment, both organically and through acquisitions. Our improved profitability reflects the steady progress we have made with operational efficiency improvements in the integration of ClosetMaid and CornellCookson. In addition, we've mitigated higher input costs by realizing product pricing increases with our customers and continue to make progress.
With respect to our capital allocation strategy, we have been disciplined about directing capital to maximize shareholder value, including making growth investments in our operating businesses, supporting our dividend, opportunistically repurchasing shares, and strategic M&A. Those of you who have followed Griffon know that we have been enthusiastic about our June 2018 acquisition of CornellCookson, which is a North America leader in rolling steel and grill products. This business is proving to be an advantageous addition to Clopay through providing top-notch commercial rolling steel products to be offered alongside our commercial sectional doors, along with adding hundreds of professional dealers to our network. CornellCookson continues to see strong demand for its products and has more than a dozen new products in its pipeline, which are expected to be ready for full-scale production within the next two years.
Today, we're announcing an exciting strategic investment at Clopay Building Products, which will enable us to meet increased customer demand for our core products, as well as support our launch of a wave of new commercial products resulting from our CornellCookson acquisition. To support these activities and sustain product demand, we have launched a $14 million investment in facilities, infrastructure, and equipment at the CornellCookson location in Mountain Top, Pennsylvania, which serves the eastern half of North America. This expansion project includes a 90,000 square foot expansion to the existing 184,000 square foot facility, along with the addition of state-of-the-art manufacturing equipment. Through this expansion, the CornellCookson Mountain Top location will improve its manufacturing efficiency and shipping operations, as well as increase manufacturing capacity to support full-rate production of new products when they're ready to launch.
We have high confidence in our management team's track record, led by Steve Lynch of Clopay, they've executed on and delivered outstanding results related to strategic capital initiatives in the past, we have no doubt they're going to do it in this project. The outlook across all of our businesses is positive, which will allow us to reduce our net debt to EBITDA leverage from the current 5.4 times to 3.5 times over the next few years as we execute our strategic plan. Finally, during the quarter, we repurchased 29,300 shares of common stock for a total of $300,000 at $9.91 per share, which still leaves us $58 million remaining under our existing board authorizations. We'll continue to return cash to shareholders through our dividend policy.
As we announced earlier today, our board authorized a seven and a quarter cent per share dividend payable on March 21, 2019, to shareholders of record on February 21. This marks the 34th consecutive quarterly dividend paid to shareholders, it has grown at an annualized compound rate of 20% since 2012. Let me spend a few minutes and go through each of the segments before I give it to Brian to go through the financials in a bit more detail. Start with Home and Building Products. First quarter revenue increased 19% to $440 million, driven both by the contributions from recent acquisitions and organic growth, paced by favorable mix, pricing, and increased volume, partially offset by lower sales resulting from adverse weather conditions in Australia and Canada, a reduction in storage and organizational sales due to timing.
Segment adjusted EBITDA increased 31% to $52 million, driven by higher revenue and the related drivers of its growth, partially offset by increased input costs and tariffs. We continue to see strong demand for our products across the segment to realize benefits from the diversity of our products and markets served. Turning to Telephonics, our defense electronics business, fiscal first quarter revenue increased $71 million compared to the prior year of $66 million. Segment adjusted EBITDA from continuing operations increased to $4.8 million from $4.2 million in the prior year. Backlog at the end of December was $367 million. During the quarter, Telephonics received two contracts of note. First was for maritime surveillance radars for the US Navy MH-60R Romeo helicopters. Second contract is a replacement upgrade for NASA's existing airport surveillance radar 8, secondary surveillance radar at its Wallops Island Flight Center.
These awards underscore the scope of our product offerings as well as the range of government entities which we can provide value-added systems and services. Overall, we're confident in the outlook in our defense electronics business. We have a healthy pipeline of U.S. and international opportunities. We're seeing increased activity in quotes and bidding, which supports our expectation that Telephonics will return to growth in 2020 and beyond. It's an excellent business. We're really excited about its future. Brian, why don't you take you through the financials a little more.
Thanks, Ron. Beginning with a brief recap of our consolidated performance in the first quarter, revenue of $511 million increased 17%, and gross profit increased 18% to $143 million, both in comparison to the prior year quarter. With the increase driven by a combination of organic growth and contributions from acquisitions. Gross margin increased 40 basis points to 28% compared to the prior year quarter. First quarter selling, general, and administrative expenses, excluding items that affect comparability, were $114 million, up 11% from the prior year, primarily due to acquisitions. As a percentage of sales, SG&A was lower by 110 basis points year-over-year to 22.3%. First quarter GAAP 2019 income from continuing operations was $8.8 million or $0.21 per share compared to the prior year period of $22.8 million or $0.53 per share.
Excluding items that affect comparability from both periods, current quarter adjusted income from continuing operations was $9.2 million or $0.22 per share compared to the prior year of $2.4 million or $0.06 per share. Our effective tax rate, excluding items that affect comparability for the quarter, was 34%. Capital spending was $8.4 million compared to $10.8 million in the prior year quarter. Including the strategic capital investment in the CornellCookson Mountain Top facility that Ron mentioned, we now expect fiscal 2019 capital spending to be approximately $55 million, up $5 million from our previous CapEx target of $50 million. We expect that spending related to the mountaintop project will be $10 million in fiscal 2019, partially offset by a reduction of $5 million in other CapEx. Depreciation and amortization totaled $15.1 million for the first quarter.
As of December 31st, 2018, we had $82 million in cash and total debt outstanding of $1.15 billion, resulting in a net debt position of $1.07 billion. We had approximately $275 million available for borrowing under a revolving credit facility subject to certain loan covenants. Corporate and unallocated expenses excluding depreciation were $11.3 million in the first quarter. Our annual guidance for FY 2019 given during our November earnings call remains unchanged, at $230 million plus of EBITDA on $2.2 billion in revenue. We expect free cash flow to exceed net income for the year. Now I'll turn the call back over to Ron.
I'm very pleased with our performance in the first quarter of fiscal 2019. Griffon's well positioned to generate significant cash flow and continue to increase margin through the consolidation of our 2018 acquisitions and continued efficiency initiatives, which will all drive long-term shareholder value. We think the company's doing very well, and we're really excited about where we're going. Operator, we'll take any questions.
Thank you. We will now be conducting a question and answer session. In the interest of time, we ask that you please limit yourselves to one question, one follow-up, and rejoin the queue for any additional. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question comes from the line of Bob Labick with CJS Securities. Please proceed with your question.
Good morning. Congratulations on a nice start to the year.
Thanks, Bob. Morning.
I just wanted to start. The biggest delta versus our expectations on the positive side was the margins in Home and Building Products . I was hoping you could kind of talk us through in a little more detail the drivers of the margin expansion year-over-year, particularly as we thought that maybe the acquisitions were going to come in a little bit lower and then you were going to get the synergies and then grow over the next 2 years in margin. Talk to us about synergies, where you see the margins and the drivers there, please.
Sure. First, the drivers were mostly mix and volume generated from our Home & Garden business and our Clopay residential garage door business. Our acquisitions are performing well. Their margins are, for the CornellCookson business, in line with our expectations, with our ClosetMaid business starting to exceed the original 8% margin that we would put out there, but still in line with our expectations. All those businesses are on track over the next several years to get to our 12% plus that we've indicated in the past. In short, it's really a mix and volume story that drove the result.
Okay, terrific. I know you've done a lot of work with your customers and your suppliers and stuff as it relates to higher raw materials and tariff impacts. Can you just give us an update as to where that stands, if you think there's future hedging, or if you've gotten it all taken care of or where you stand on the tariff impact expected?
Look, we have done an excellent job of mitigating input costs. Over the last several years, there have been 3 factors that have affected manufacturing in our company and in our view, in the economy. Higher input costs, higher freight costs, and higher labor costs. We have a really good management team that is adept at dealing with market conditions. This is just one more example of our ability to deal with whatever gets thrown at us. We've dealt with whatever tariff impact is out there. We'll continue to deal with it. We're excited about where these businesses are headed.
Okay, great. If I could sneak one last one in. Just as it relates to the increased investment in Cornell Cookson, can you talk about the market opportunity there? I guess how long the project should take and before you start getting some revenues from that project?
Sure. We'll start to see the benefits of the project, which will complete towards the end of calendar 2019. We'll start to see those benefits come through in the second half of 2020 as we ramp up. This is an investment in space for both current products and capacity needs and new products. This project will give us the space for those items, as well as give us additional space to allow us to operate in a much more efficient way.
I'll add to that. Strategically, we bought Cornell Cookson because of what we saw as the opportunity in the commercial door business. We have proven over how we repositioned and built Clopay in the residential side during the depths of the downturn and we now enjoy the benefits of it. We see the commercial business as being a natural adjunct to our residential business. We see Cornell Cookson as being able to improve its profitability. We look at building these businesses long term, we're very excited that by making these investments, we'll be able to grow both revenues, free cash flow, over a long period of time. This is really good business that fits unbelievably well with what we already own, we think the combined company is going to be even more valuable in the future.
Thank you so much.
Okay. Your next question comes from the line of Alvaro Lacayo with Gabelli. Please proceed with your question.
Good morning.
Morning.
Morning.
A question on organic growth and Home & Garden business, just if you could sort of provide more detail on the drivers of organic growth, then maybe in the context of a little bit of the macro volatility we've been seeing, maybe some thoughts on what the drivers will be going forward, if they're the same or if anything changes.
I guess the organic growth is about 5% for the quarter?
That's correct.
The broader comment is, we see our ability to both gain market share, our ability to run the business, is being beneficial. While the negative sentiment around housing has been out there's still very much a functioning economy and there's still a housing market. We are positioned around the repair and remodel market and with a very small exposure throughout all our home and products businesses to new home construction. Consumer spending is really what drives people spending money around their house, and our products and our businesses continue to do well. While we clearly see the headlines, we see no evidence in our businesses that these trends are going to mitigate or slow down this year.
Just the detail around volume versus price mix on that 5% organic number?
We don't break out in specifics. They both contributed to the growth. Mix slightly more than volume.
Okay. Thank you.
Thank you. Our next question comes from the line of Tim Wojs with Baird. Please proceed with your question.
Hey, guys. Good morning. Nice start to the year.
Thank you.
Thanks. Morning.
ClosetMaid, you made some comments in the press release that there were some delays there, and just as you've kind of gotten the business.
No, we didn't.
I thought you said there were some storage delays. Were these storage and organizational volumes due to the timing of orders?
Yeah, it's actually year-over-year. We actually knew that timing. We expected that timing of orders to be delayed a little, or not even delayed, just to be in the second quarter versus the first. It's just a matter-
Got it. Okay.
Working with our customers and seeing that ahead of us.
Okay. You guys, there was a bump on there, it's just kind of normal course of business. Okay. If you could talk to me about the facility, the CornellCookson facility. Any way to think about the payback on that facility, or what type of margin contribution we could see over kind of a multiyear period from just the efficiencies and the things like that you talked about?
Sure. This will help us contribute to getting to our 12%+ that we've been talking about. These products, the new products, will be at margins better than the base business. Yes, the efficiencies will be there, which will help us improve the margin as well and keep us on track in that quest to 12%.
Okay. If we look at just maybe price and mix, then we look at just inflation costs and the tariffs, would you say that price and mix was able to offset the tariff and inflation benefits to the quarter? It looks like it did. I just want to confirm that.
I think it's obvious.
Yeah.
Yeah. That's right.
Okay. On Telephonics, could you talk through what the accounting adjustment was that impacted that quarter?
Sure. We've adopted new revenue recognition guidance in certain products now. You recognize the revenue when they're shipped. In the past, they would be, sorry, c ost- to- cost. You recognize it over time. In the quarter, we had a $4 million+ revenue benefit and a $1 million+ EBITDA benefit from that. Over the course of the year, we expect that to be immaterial, meaning it'll wave up and down as the year goes and be immaterial for the year in total.
Okay. Did that have to do with the commitment to inventory type accounting that's come through aerospace?
I'm not familiar with the term, frankly, so I'll say no.
Okay. I'll talk to you about it later. Okay. Sounds good. Maybe just the last question. You talked about mix, I think, at Clopay a little bit. How do you see mix in AMES and in the storage business either trending over the last 12, 18 months?
We have been able to improve our mix with innovations in our products and in our placements at our customers.
We haven't owned the business for 18 months.
Well, in ClosetMaid, we have it a full year now. Yeah. I'm sorry.
We're at the beginning of what we expect to be the improvement in ClosetMaid. It is meeting and exceeding all of our internal expectations. Very excited about what it's going to be able to do for us, being part of AMES in terms of efficiency, in terms of being able to have a broad range of products with branded consumer benefits. This is a really good acquisition that we see our ability to improve the business that we bought and integrate it into the business that we already own, be able to take the products into new geographies, Australia, Canada, and the U.K., that are all our home markets. Stay tuned.
Yeah. I would just add, in our Clopay business, we continue to see improvements in our mix.
Thank you. Our next question comes from the line of Nishu Sood with Deutsche Bank. Please proceed with your question.
Hi, this is Marius in for Nishu.
Hello?
Hi, can you hear me? This is Marius.
Yes, we can hear you. Can you hear us?
Yes. Quick question. Given that steel and aluminum have come down a bit in the last two months, has your input cost outlook for full year 2019 changed?
We give guidance once a year.
My second question, could you give us maybe an update on the procurement synergies and plant rationalization? Are you still in the planning phase, or have you moved to the implementation phase on this?
I think that our investment into the CornellCookson facility shows you that we're in the implementation stage.
All right. Thank you.
Our next question comes from the line of Andrew Casella with Deutsche Bank. Please proceed with your question.
Hey, guys.
Hi, Andrew.
Nice quarter.
Thank you.
I guess, first, can you just take us through again the cadence of kind of when we think about the guidance that you provided, and I think in the last quarter, I think the indication was that first half would be a little bit weaker than the second half, just as we think about kind of the growth throughout the year. Could you revisit that, if that's changed at all? I mean, obviously, I think you've exceeded expectations, so just how you're kind of thinking about that run rate coming out of the first quarter.
Sure. Generally, we'll see Q1 and Q2 being our lower quarters and the third and fourth quarter being our higher quarters. We were off to a good start. We have really no change through the remainder of the year.
Okay, great. A final question from me. Just as we kind of sit here, obviously you have a 2022 maturity, just any thoughts on strategies around potentially terming that out? Thanks.
Run the business, build up cash flow.
Okay.
Our next question comes from the line of Michael Rehaut with JPMorgan. Please proceed with your question.
Hi, this is Elad Hillman on for Mike Rehaut. One of the things I wanted to just kind of look at a little closer was given the increased margin this quarter in Home and Building Products , which is really encouraging, but at the same time, you've still maintained your full-year margin target. How should I be thinking about the cadence in margin realization throughout the rest of the year? Could this potentially represent some upside to your full-year guidance?
We really do guidance once a year, and we haven't changed it. We're early in the year.
We have always said that we believe the earnings power of our businesses are going to play out over time. We really like the acquisitions that we made. We're early in getting both ClosetMaid and Cornell integrated into the rest of our Home and Building Products segment . We feel really good about where we're headed. We're building this company, and have over a long period of time, building shareholder value. We don't get distracted by year-to-year guidance.
Thank you. We have reached the end of our question and answer session. I would like to turn the call back over to Mr. Kramer for any closing remarks.
Thank you all. We'll look forward to reporting our second quarter in May. Thank you and goodbye.
Thank you. This concludes today's call conference. You may disconnect your lines at this time.