Greetings. Welcome to the Griffon Corporation Fiscal Third Quarter 2018 Earnings Conference Call. At this time, all participants will be 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 from your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to Brian Harris, Chief Financial Officer. Please go ahead.
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 Griffon'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 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. I'll turn the call over to Ron.
Good afternoon. Thanks for joining us today. This was an excellent quarter. Our results reflect the benefits of our portfolio reshaping and strong operational performance, with a 44% increase in revenue to $517 million and a 47% increase in segment adjusted EBITDA to $59 million. The revenue increase, driven by organic growth in the Home and Building Products segment, contribution from our acquisitions and pricing, was partially offset by the reduced revenue in Telephonics, which we were expecting. The improvement in EBITDA was driven by additional revenue, partially offset by higher input costs. Over the last year, we've undertaken significant steps to reshape and energize our portfolio of businesses, which include the acquisition of ClosetMaid in October, the sale of Plastics in February, and the acquisition of CornellCookson in June.
These actions, along with the bolt-on AMES acquisitions made over the last 18 months, created an operating structure with a stronger free cash flow profile and a diversified portfolio of highly attractive leading brands in their respective categories. We are currently focused on integrating these businesses, in particular AMES with ClosetMaid and CornellCookson with Clopay. We have opportunities to improve margins further by leveraging procurement, distribution and warehousing, manufacturing and administrative functions, as well as revenue enhancement opportunities. To provide further context on initiatives we're executing, our Clopay doors and CornellCookson businesses have over 2,500 dealers between them. We're working to integrate their respective products into this dealer network to leverage increased cross-selling opportunities while enhancing our product offerings to customers and into new markets. We've received feedback from our dealers, who are excited to have new leading products to offer their customers.
Our ClosetMaid and CornellCookson businesses provide supply chain opportunities, which will make us even more efficient. These are just a couple of the examples of what we're working on to share resources, leverage our new and existing footprint, and drive efficiencies on both a cost and operational basis. Moving to capital allocation, we're focused on using our improved free cash flow profile to reduce leverage while giving us flexibility to execute on bolt-on acquisitions and to continue our quarterly dividend program. We expect free cash flow to exceed 100% of net income with a significantly reduced capital expenditure profile. During the three and nine months ended June 30, 2018, we repurchased 650,000 shares and 2.1 million shares, respectively, of our common stock, for a total of $12.7 million and $41 million, or $19.51 and $19.68 per share, respectively.
At June 30, 2018, $8 million remained under our existing board authorizations, including the $50 million additional authorization approved by our board earlier today, we have a total of $58 million of board authorizations available. From August 2011 to June 30, 2018, we've repurchased 22.5 million shares of our common stock for a total of $303 million or $13.44 per share. Further, we announced earlier today our regular quarterly dividend of $0.07 per share, payable on September 20, 2018, to shareholders of record on August 23, 2018. Since inception in 2011, we've steadily increased our dividend at a 23% compound annual growth rate. I'm going to provide a little update on the segments before turning it over to Brian for a bit more financial discussion. Let's start with Home and Building Products.
Sales increased 59% to $440 million due to both the benefits from recent acquisitions and organic growth. Segment adjusted EBITDA improved 51% to $50 million, driven by the increase in revenue, partially offset by increased input costs. We continue to see underlying strength in the U.S. housing market with the steady multi-year housing recovery. Our leading products in doors and ClosetMaid businesses are well positioned to capture increased residential remodel and new residential and commercial construction activity while rising homeownership rates support our AMES business. As the U.S. economy continues to improve, we see further organic growth. Turning to Telephonics, fiscal third quarter revenue was $76 million, down 6% compared to the prior year period of $82 million. Segment adjusted EBITDA from continuing operations was up 29% to $9 million.
Orders for the third quarter totaled $64 million, 30% over the prior year. Year-to-date, we've secured $220 million in orders, up 9% over the same period last year. We remain optimistic in Telephonics' long-term prospects. We continue to see opportunities from an expansion of the U.S. Navy fleet, increased funding for operational readiness, international commercial sales, and building on our market-leading positions in maritime surveillance radar, identification friend or foe communication systems, and commercial transit communication systems. I'm going to turn it over to Brian, who will go through the financials in a bit more detail. Brian?
Thanks, Ron. Gross profit for the quarter was $139 million compared to $98 million in the prior year. Gross margin in the third quarter decreased 50 basis points to $26.9 million compared to the prior year period, primarily due to the addition of ClosetMaid, which, as we have stated in the past, initially has a lower margin than our base Home and Building Products businesses. Third quarter selling general administrative expenses, excluding items that affect comparability, were $106 million or 20.6% of sales, compared to the prior year period of $81 million or 22.5% of sales. The dollar increase is primarily the result of the acquisitions. Third quarter of 2018 income from operations increased to $7.4 million or $0.18 per share, compared to the prior year period of $4.5 million or $0.10 per share.
Excluding items that affect comparability from both periods, current quarter income from continuing operations was $11.3 million or $0.27 per share, compared to the prior year period of $2 million or $0.04 per share. Third quarter capital spending was $11.5 million compared to the prior year of $7 million. For fiscal 2018, we expect capital spending to be approximately $50 million. Depreciation and amortization totaled $14 million for the quarter, and we expect the full year depreciation and amortization to approximate $56 million. This is subject to us completing our acquisition accounting work, particularly for CornellCookson. As of June 30th, 2018, we had $64 million in cash and total debt outstanding of $1.14 billion, resulting in a net debt position of $1.07 billion. We had $265 million available for borrowing under our revolving credit facility, subject to certain loan covenants.
Finally, regarding our guidance for the full year, we continue to expect 2018 segment adjusted EBITDA of $205 million from our base businesses. We expect an additional $5 million in contribution from CornellCookson, starting from the June 4th date of acquisition through the end of our fiscal year. Therefore, our segment adjusted EBITDA is now expected to be $210 million for fiscal 2018. I'll turn the call back over to Ron.
Thanks, Brian. Before taking questions, let me make a few final remarks. As those of you who regularly participate in these calls know, it's not my practice to comment on the equity markets or the price of our stock. It's not that we don't care, quite the opposite is true. As a substantial investor in Griffon, I'm deviating from the norm because I think it would be informative to discuss the recent offering of our shares by Goldman Sachs' affiliate. The investment that Goldman made in Griffon was made about 10 years ago and was very productive for us and for Goldman, which has been and continues to be supportive of our company. The Goldman investment was never expected to be permanent, and they exercised their registration rights for a public distribution of their shares.
As a result of that offering, over 10% of our common equity reached the market, more significantly, our public float has increased by 25% or more. We believe the market for our shares has not fully adjusted to the substantial increase in the number of shares available for trading. While we believe that the increased liquidity is beneficial, we expect that as the stock migrates into the hands of longer-term investors, the relationship between our stock price and our excellent performance will normalize. Our efforts over the past year have significantly changed Griffon, and I believe the improvements seen in this quarter's operating results are but the beginning of a substantial improvement yet to come.
Our purchase of ClosetMaid marked our entry into Home and Building Products, a highly strategic category for Home and Building Products, where we believe we are now the market leader and well-positioned for additional growth. Our acquisition of CornellCookson added a critical portfolio of commercial door products and an additional 400 professional dealers to Clopay Building Products. We believe our ability to provide a fuller offering of solutions to our customers will position us to increase our market share further. We've also completed a number of smaller strategic acquisitions, which have provided us with new products and complementary categories such as cleaning, and have strengthened our geographic presence in our home markets. We've completed all these transactions at very attractive valuations. These actions are the culmination of 10 years of hard work.
During this time, Griffon has evolved from a decentralized holding company to a more strategic and focused buyer and builder of businesses. We have a talented team at both the corporate and the operating company levels, which is the key to the success of our company. We're well-positioned to capture margin improvement between our existing and our acquired businesses, and we believe we are just starting to see the benefits of these businesses together within our portfolio. We're confident we can expand our segment adjusted EBITDA margins to 12% or better in the near term and accomplish this goal while generating cash in excess of our net income and continuing to grow the business. To sum up, I'm pleased with our performance through the first three quarters of fiscal 2018 and optimistic about our future. Our strategic actions have strengthened our company and will drive long-term shareholder value.
With that, operator, we'll open it up for questions.
Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question, please press *1 on your telephone keypad, and a confirmation tone will indicate that your line is in the question queue. You may press *2 if you'd like to remove your question from the queue. For participants that are 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. Thank you. The first question is coming from the line of Robert Labick with CJS Securities. Please proceed with your questions.
Good afternoon, and congratulations on a terrific quarter.
Thanks, Bob.
Thanks, Bob.
I wanted to start with ClosetMaid. Obviously, you've had it now for a couple of quarters, and there was a nice uptick in the sales. I don't know if that's seasonal, or if that's part of the initial synergies you might expect, but could you talk about what you've learned over the last three quarters, how the integration's going, and the opportunities for growth there?
Sure. The sales uptick is more seasonal. We have third into fourth quarter uptick generally, particularly in the fourth quarter as well for back to school. So far, it is meeting our expectations, and the integration is just beginning. We announced that in March, and we'll see that coming to fruition really into 2019, and the result of that benefit of having those integrated will be coming out into 2020.
Okay.
Bob, it's Ron. I'll add that we couldn't be happier about how the prospects for how ClosetMaid and AMES together will drive incremental growth. We really believe that this was a wonderful strategic addition for AMES and the combination of those two businesses and the ability to both grow revenue and improve margins are still ahead of us.
Okay, great. On the Cornell side, obviously, it's been a couple of months. You did just increase your guidance a little bit. Previously, I think you were being conservative to not include that. Same question, initial impressions in the two months and opportunities and how you think that's working out.
Sure. Similarly, it's meeting our expectations. We have started off well for the June month and see things continuing into July. Again, as Ron was mentioning for ClosetMaid into AMES, CornellCookson into Clopay, there are opportunities ahead of us that we will continue to look at over the next several quarters and carefully integrate those businesses. We see a lot of benefits not only from cost but also revenue-enhancing benefits as we leverage the dealer network between the two companies.
Okay, great. Then just thinking about raw material costs, I think you mentioned that as it relates to Home and Building Products and then the impact of tariffs. Can you talk a little bit about what you're seeing there, your ability to pass through, and then also your ability to bundle your purchasing power coming with the greater scale in Home and Building Products? How do you see all that playing out?
There's a number of issues there. Look, we've been saying, going back to how we set guidance for 2018, there were three pressures which are no surprise to us. Higher input costs, higher labor costs, and higher freight costs. Those were all things that were obvious to us going into this fiscal year. Those things were all playing out during the fiscal year. We continue to see Home and Building Products, particularly in the products, the markets that we're in, doing exactly what we expect them to be doing this year, which is a slow, steady, continued recovery of the housing market. Higher input costs are clearly topical. The ability to pass them through is something that's going to happen by us and every other manufacturer, and ultimately, the question is going to be how much the U.S. consumer is going to be able to absorb those increased costs.
We believe our businesses are extraordinarily well-positioned in each of the products that we're involved with. To your point, we absolutely believe that scale matters. We're going to be a bigger buyer of things like steel and wood, but there's all sorts of pressure along the way. We are clearly a U.S. manufacturer, so tariffs, while it increases input costs, may have the additional benefit of people buying American-made goods. We're hopeful of that. This remains to be seen. From what we see, our businesses are strong, improving, and all the noise that we are watching on all the things that affect us are going to continue to be out there. We're going to keep our head down and keep running the businesses as well as we have been.
Okay, great. Then last one from me. Just obviously with the new composition of the businesses, can you talk a little about the seasonality of your cash flows? Typically, it's been second half of the fiscal year is the strong cash flow period, particularly Q4 in the past. Is that still the expectation or the case now, and uses of cash as I know you do and will have strong free cash flow?
Yeah. Overall, that pattern will continue. CornellCookson coming on has a little bit steadier cash flow, overall, the pattern will remain the same, with Q3 and Q4 being our cash generation quarters.
Okay, great. That's perfect. Thank you very much.
Thank you.
As a reminder, you may press star one to ask a question. The next question comes from the line of Julio Romero with Sidoti. Please proceed with your question.
Julio?
Hi, can you hear me?
Yes, I can hear you now.
Hey. Yeah. Good afternoon, everyone. Just a quick one. Can you talk about Telephonics? You had a nice order number there. Just any commentary on that segment and if you still expect backlog and revenue up in the totality of the second half of the year?
To the second part of your question, yes, we do continue to see backlog up in the second half of the year. That business right now is the same story. It's what we look at it as the bottom of the cycle. We see a lot of opportunity ahead of us with backlog increasing into 2019, and we'll see that converting into revenue and earnings as we turn into 2020. There's a lot of opportunity ahead of us, both here in the U.S. and internationally. We see a lot of interest in our products, particularly in our maritime surveillance and communication products. We're very optimistic for the company. It's a long-cycle company by its nature and currently we're in that lower part, and we'll see that turn around.
Got it. For this particular quarter, did CornellCookson have any revenue contribution this quarter?
Yes, it did.
Yeah. They're running at that run rate. We said, $200 for the year, and they're running more or less one twelfth of that, call it $16.7.
Got it. Just wanted to make sure. You said for your full-year guidance, 205 from the base, $5 million from CornellCookson. I guess you had also acquired Kelkay throughout the year. Would that 205 be inclusive of Kelkay, or would any Kelkay EBITDA be incremental to your full-year guidance?
The 205 includes Kelkay.
Got it. Understood. Yep. Thanks very much. I appreciate you taking my questions.
Okay. Thank you.
Thank you.
Next question is from the line of Justin Bergner with Gabelli & Company. Please proceed with your question.
Oh, hey. Good afternoon, Ron. Good afternoon, Brian.
Hi, Justin.
Hi, Justin.
Nice quarter. Maybe you could just sort of help break down the organic growth of 13% in Home and Building Products a bit more for us, in terms of AMES versus Clopay, price versus volume. Anything that you can sort of add there would be helpful.
Sure. We saw a nice volume across both AMES and Clopay. Building Products organic growth was around 15%, as opposed to AMES' 11% organic. Price was a factor in both of those, where we've gone out to our customers based on what we're seeing with our input costs increasing, and we have gotten price increases. It's a combination of all those.
The only other thing, Justin, I'd add to it, a volatile weather pattern for AMES during the quarter, both the U.S. and the U.K.
That helped?
Oh, no.
No.
No.
Again, weather is a fact with us. It's not an excuse, but we absorbed some significant volatility of weather in the U.S. and the U.K.
Okay.
It does grow.
My bad there. Secondly, on CornellCookson. The $5 million of EBITDA seems like a pretty healthy margin sort of out of the gate, versus that $200 million of annual revenue that you'll be seeing for sort of three months and change. Are the margins tracking ahead of where you expected them, or are the margins also tracking in line to date?
Margin is tracking in line. We've got $5 million on four months. We've put out there in the past that it's $200 million at about 9% margin. I think it's in that range.
We'll steadily improve that over time. For the time of the acquisition to now, it's tracking as we expected. This is a business that as it gets integrated into Clopay, we fully expect to be able to continue to improve the blended margins of our Home and Building Products business.
Okay. Was there any discussion of sort of speaking a little bit more optimistically about your segment Adjusted EBITDA of the $205 million prior to CornellCookson, just sort of given the strong third quarter. Should we still think of that as sort of a midpoint number that you expect to end up close to?
Well, I'll say this, Justin. We give guidance once a year at the beginning of the year. As you've always heard me say, we do it in order to level set really for credit investors. For equity investors, we're nowhere near the peak of our earnings capability. We're not going to change the year guidance nor our practice. We acquired Cornell during the quarter. It has a $5 million positive impact to that guidance for the year. You should use $205 plus 5 as guidance from us. We fully expect that our earnings power within these businesses, that our best days are still ahead of us.
Okay. That's helpful. Just lastly, were there any parts of the business that disappointed during the quarter or where sort of the outlook looks a little bit less sanguine?
Well, I'd say that the Telephonics business is something that you've heard us talk about as this is a bottoming. This is measured in quarters and years, not in any one quarter. We continue to want to see the flow of defense dollars into our products. We're still incumbent. We're still the market share leader on the products that we sell. It's just we see the continued slow pace of money flowing through the defense budget, which we think will take us more than 2018 into 2019. It's going to be 2020 and beyond that we'll start to see the benefits of all the things from an operating efficiency standpoint that we've done to Telephonics. While that's not anything we're disappointed in, we can't make the hands of the clock move any faster.
We're very excited about what's going on in Telephonics in terms of their technology, in terms of their new programs, in terms of the potential for them to get international sales. The core U.S. business, and this isn't just a Telephonics comment, this is an overall defense comment, is slow. The budget turn that started in December is going to get into the economy over a period of years. We're going to be one of the beneficiaries of it. We continue to look at what's going on in the Telephonics business as planning for the future. On a quarter-to-quarter basis, we don't get all that disappointed. I'll get excited when I start to see the backlogs turn into orders, turn into profits. I fully expect that's a 2020 and beyond conversation.
Okay. Thank you for taking all my questions.
Sure. Thanks.
Thank you. At this time, I'll turn the floor back to management for closing remarks.
Thanks for joining us, and we'll look forward to speaking to you at the end of the year.
Bye-bye.
This will conclude today's teleconference. Thank you for your participation. You may now disconnect your lines at this time.