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Good day and welcome to the Griffon Corporation First Quarter 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Brian Harris, Chief Financial Officer. Please go ahead, sir.
Thank you, Julia. Good morning, everyone. With me on the call is Ron Kramer, our 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. Also, please be reminded that with the prior announcement of the Plastics sales transaction, Plastics is classified as a discontinued operation.
Now, I will turn the call over to Ron.
Good morning and thanks for joining us today. Before discussing the quarter and the businesses, I'd like to take a moment to remember our chairman, Harvey Blau, who passed away on January 19. With more than 50 years of service, including 25 as CEO of the company, Harvey was instrumental in building Griffon into the company that it is today. He was an extraordinary leader, a trusted friend, and a mentor to the entire Griffon team. He will be greatly missed and we are all committed to build on his legacy.
Okay, let's move to the quarter. I'm pleased to report we are off to a strong start to the year as we build on the transformational actions of fiscal 2017. At a consolidated level, our revenue increased 24% from the prior year driven by both the acquisitions and organic growth in our Home & Building products segment, which, as expected was partially offset by reduced revenue at Telephonics. We continue to expect defense orders and revenue to improve throughout the year, particularly in the second half. This morning, I'd like to take a few minutes to walk you through updates to our key strategic actions and then we'll provide comments on our segment performance and outlook before turning the call over to Brian for a closer look at the numbers.
Beginning with our recent acquisition of ClosetMaid, I am pleased that performance in our first quarter of ownership was in-line with our expectations, generating $77 million in revenue in the quarter. We view ClosetMaid as an important growth platform for Griffon, and to that end, we are seeing good incremental demand through new customer relationships. In addition, under our management, we have begun implementing operational improvements and cost controls. We completed the post-closing purchase price adjustment process with Emerson, which resulted in a reduction in the ClosetMaid purchase price of approximately $14 million to $186 million and net of tax benefits to approximately $165 million.
We expect to close on the sale of the Clopay Plastics business to Berry Global for $475 million in cash next week. We expect to pay cash taxes on the sale of Plastics onto $60 million to $65 million due to the benefits of the tax reform bill. This is down from a range of $85 million to $90 million we announced in November. The divestiture Plastics unlocks value for Griffon shareholders and it positions us for growth.
After the closing of the Plastics transaction, we expect to increasingly improve Griffon's operating margins and free cash flow generation. After the Plastics transaction closes, we will evaluate the use of proceeds to either invest in opportunities that diversify Griffon's portfolio of businesses, deleverage our balance sheet, or return capital to Griffon shareholders.
During the first quarter, we did not repurchase any shares. Since 2011, we've repurchased a total of $262 million worth of stock, approximately a third of the capitalization, representing 20.4 million shares at an average of $12.81 per share. As of December 31, we held $49.4 million of repurchase availability under our board authorize plan. We announced this morning a $0.07 per share dividend, which marks a 17% increase over the prior year first quarter dividend. Since its inception, our dividend program has grown at an annual compound rate of 23% per year.
Next, I'd like to provide an update by segment before I turn it over to Brian who will take you through a little more detail.
Let's start with Home & Building products. Sales increased 40% to $371 million from both the benefits of the recent acquisitions of ClosetMaid, Tuscan Path, La Hacienda, Hills and Harper and organic growth. EBITDA improved 24% to $39.5 million, driven by the increase in revenue. We remain positive on the outlook for Home & Building products as we continue to grow sales and improve our profitability through product innovation and category expansion, efficiency initiatives and bolt-on acquisitions.
We continue to see underlying strength in the U.S. housing market with the slow but steady multi-year housing recovery, which we have discussed for some time. Our doors business is well positioned to capture increased new construction and remodeling activity, while rising home ownership rate supports our AMES tool business. Our recent acquisition of ClosetMaid nicely complements the Home & Building product segment as we look to leverage the segment's combined strengths.
Turning to Telephonics, our defense electronics business, fiscal first quarter sales were $66 million as expected compared to the $88 million we had in the prior year quarter. Lower revenue was mostly related to timing of orders and work performed on certain programs compared to the prior year, particularly in our maritime surveillance radar and airborne intercommunication system programs. As a reminder, the U.S. Department of Defense currently remains under sequestration while Congress continues to work on a budget that includes significant increases in military spending.
The U.S. Navy ship fleet is expected to see increased funding, which supports the healthy outlook for Telephonics maritime surveillance radars. The international set of opportunities includes a number of foreign military sales and direct commercial sales to existing customers in Telephonics core defense electronics business areas. The additional areas of new business include building on Telephonics incumbent market position in mobile border security systems, electronic warfare and commercial transit communications systems.
Overall, Telephonics' new business pipeline of domestic and international opportunities look strong with backlog anticipated to grow in the second half of this year.
Overall, this is an exciting time of transition for our company which leads with the progress we've made on all of our strategic initiatives and I'll let Brian take you through the numbers in a little more detail.
Thank you, Ron. First quarter 2018 revenue increased 24% to $437 million, compared to the prior year period of $352 million. Increased revenue in the quarter was driven by strong performance in our Home & Building product segment with both acquisition and organic growth contributing to the increase and partially offset by lower Telephonics revenue.
First quarter 2018 segment adjusted EBITDA from continuing operations was $43.7 million, an increase of 9% over the prior year period.
Moving to our segment results, Home & Building products first quarter revenue increased 40% to $371 million. AMES revenue increased 16% to $140 million compared to the prior year period of $121 million. The increase was driven by acquisition-related revenue from our Tuscan Path, La Hacienda, Hills and Harper Brush Works acquisitions and increased Canadian snow tools and pot and plant sales.
In our doors business, first quarter revenue increased 8% to $154 million. The doors business benefited from favorable mix in pricing. In our ClosetMaid business, first quarter revenue was in-line with our expectations. We continue to expect $300 million of revenue from ClosetMaid in 2018.
Home & Building products' first quarter segment adjusted EBITDA increased 24% to $39.5 million, compared to $31.8 million in the prior year period, driven by the increased revenue and continued operational efficiency improvement.
Turning to Telephonics, as expected, first quarter segment revenue decreased to $66 million compared to $88 million in the first quarter '17, due to lower maritime surveillance radar and airborne and communication systems revenue.
Segment adjusted EBITDA of $4.2 million decreased compared to the prior year period of $8.1 million. At December 31, 2017, backlog was $332 million, compared to $351 million at September 30, 2017. We continue to expect backlog to increase in the second half of the year.
Moving back to our consolidated results, gross profit for the quarter was $120.8 million compared to the prior year level of $96.7 million. Gross margin excluding $1.5 million acquisition inventory amortization impact in the first quarter increased 50 basis points to 28%.
First quarter selling general and administrative expenses excluding items that effect comparability were $101.5 million or 23.2% of sales compared to the prior year period of $78.9 million or 22.4% of sales.
In the quarter ending December 31, 2017, the company recognized a tax benefit of $24.9 million on a loss before taxes on continuing operations of $2.1 million, compared to a tax benefit of $2.6 million on income before taxes for continuing operations of $4.4 million in the comparable prior year quarter.
The quarters ended December 31, 2017 and 2016, tax rates included certain net tax benefits of $23.1 million and $4.4 million respectively. The current year quarter tax benefits included a $24 million benefit from the revaluation of net deferred tax liability, resulting from the December 22, 2017 enactment of the Tax Reform Bill.
Excluding these tax items and the tax effects on other items that effect comparability, the normalized effective tax rates for the quarters ended December 31, 2017 and '16 were 35.4% and 40.8% respectively.
Regarding U.S. tax reform, U.S. government enacted the comprehensive tax legislation commonly referred as the Tax Cuts and Jobs Act. This act reduces the federal corporation tax rate on U.S. earnings to 21% and moves from a global taxation regime to a modified territorial regime.
As Griffon has a September 30 fiscal year end, the lower tax rate will be phased in, resulting in the U.S. statutory federal rate of 24.5% for fiscal year ending September 30, 2018. Subsequent fiscal years will reflect the 21% federal tax rate. Griffon will continue to assess the impacts of the tax reform through the balance of fiscal 2018.
First quarter income from continuing operations was $22.8 million or $0.53 per diluted share compared to the prior year period of $7 million or $0.17 per share. Excluding certain tax items and other items that affect comparability from both periods, current quarter income from continuing operations was $2.4 million or $0.06 per share, both of which are in-line with the prior year adjusted results.
Moving over to our balance sheet. First quarter capital spending was $10.8 million compared to the prior year level of $7.7 million. For fiscal '18, we expect capital spending to be approximately $45 million.
Depreciation and amortization in the first quarter of 2018 was $13 million. As of December 31, 2017, we had $84 million in cash and total debt outstanding of $1.25 billion, resulting in a net debt position of $1.17 billion. This is before the proceeds from the Plastics divestiture. We had $187 million available for borrowing under revolving credit facility, subject to certain loan covenants.
Regarding EBITDA, we continue to expect 2018 segment adjusted EBITDA of $205 million. In providing this guidance, we are mindful of the risks and impacts of weather to AMES, housing market on Home & Building products, the U.S. Department of Defense budgets on Telephonics, and foreign exchange and commodity cost on Home & Building products.
I'll now turn the call back over to Ron for his closing comments.
Thanks. We're off to a good start in fiscal 2018 and we're well positioned to benefit from an improving economy and an improving housing market. We believe that our ongoing efficiency initiatives will enhance our operating margins and the expected increase in U.S. Defense and infrastructure spending will drive incremental growth from profitability, cash flow generation and ultimately shareholder value. There is much for us to be excited about and with the dedication and commitment of our employees around the world, we will continue to build on our success.
With that, operator, we will open it up for questions.
Thank you, sir. [Operator Instructions] We will now take our first question from Mr. Bob Labick from CJS Securities. Please go ahead. Your line is open.
Good morning.
Good morning, Bob.
Good morning.
Hi. I wanted to start with ClosetMaid. Obviously as you said, sales are off to a good start. Could you talk, just expand a little bit about the operations now that you have your first look inside and operating it? I think originally, you said margins will likely coming a little lower than HBP average, but over time, you have the opportunity to grow them. How do you feel about the operations now that you've seen them and just expand on your outlook for that, please?
Very pleased with all of our initial impressions of the business. Believe that it creates both revenue opportunities, as well as cost reductions across HBP. So, while we've said that we expected margins in the first year of ownership to be better than 8% at the ClosetMaid level and I think we have said about approximately $300 million in revenue and that we expected $25 million at the EBITDA level, we believe that this is a better than 10% EBITDA margin business and ultimately a 10% EBIT business over a period of years. Point being that our blended Home & Building product segment, we fully expect to be better than 12% EBITDA margin business over the coming years.
Okay, great. And then on Telephonics, obviously you said that you expect the backlog to pick up in the back half of this year. Can you just talk about the visibility there for the pickup and then other things that maybe are potential drivers that aren't in backlog, latest on border patrol or military spending and how it could impact you? And just the outlook there over a two or three-year period, please.
Yes. I'll remind you, Telephonics has been part of this company for over 50 years, so we've seen more than a few cycles in defense. The current cycle that we're in is entirely an issue related to fiscal policy coming out of the U.S. government and the transition of building up – our military has been something that we've been talking about under the current administration, but you have to go back to – we've been operating under sequestration for over five years and the amount of capital that's getting put into purchase of equipment is still constrained. We believe that Telephonics is going to be a beneficiary when the budgetary's spigot ultimately flows into the border defense industry. In order to build these ships, it takes a number of years. To build the helicopters, backlog them and then to put the radars on the helicopters, backlog of the ships is measured over a five-year cycle. We see Telephonics as being at the bottom of the revenue cycle backlog decline that we've seen, we believe improves quarter-over-quarter and year-over-year.
The outlook that we have on some of the other programs, custom and border patrol where we believe we are part of the solution for border security, in terms of providing electronic mobile surveillance, but again, that's quite often a much larger political debate and funding issue. If and when money flows, we believe we're going to be a beneficiary of it. The outlook for us both domestically is strong and more importantly near term, the foreign sales which have been in process for us over a number of years seem to be coming to the point where we expect, particularly in our third and fourth quarter of this year to see backlog improvement.
Great. Very helpful. Thanks. And then you mentioned obviously earlier on the call, you're expecting to receive the proceeds from the Plastic sale and you'll have over $400 million in cash. You touched on it, but I was hoping you could expand a little bit about the opportunities with that balance sheet? We've seen a number of consumer companies divesting assets recently. So, can you talk about if you're looking for complementary assets or if you're looking for a third leg? What's the current thought processes on redeploying that capital that's about to come in?
We're very busy working on acquisitions, big and small. The timing of them are always unpredictable. We clearly are looking to grow Griffon by redeploying the capital that we're going to receive into higher growth, higher value creating opportunities. We're really excited about the platform of our own businesses. We see complementary tuck in acquisitions to continue around Home & Building products and as you reference there is some really interesting assets that are likely to be coming up in the market over the next year. We think we're very well-positioned to compete for them and our value added is capital and you've heard me say this, there is a tidal wave of capital chasing assets out there. What we bring to the table in addition to capital is our ability to operate businesses and improve them so we're perfectly happy to find something that is big, actionable and for us to be able to grow Griffon either within the businesses that we're already in or find an entirely new leg tied to the stool.
Great. All right, thank you very much.
Thank you. [Operator Instructions] We'll now take our next question from Clark Orsky from Alcentra. Please go ahead, your line is open.
Yes. Thanks. Brian, you've made a comment about an impact to gross margin that I didn't hear. Could you restate that? Because it sounded like a one-time impact.
Sure. As part of acquisition accounting, a gross up of inventory as part of the rules and then that turns as the first inventory turns occur after an acquisition – that impact was $1.5 million and went through our cost of sales in the quarter. So, I removed that $1.5 million in calculating the gross margin.
Okay, thanks. Then there was no comparable impact in the prior period?
There was not.
Okay. Do you take that out in your EBITDA calculation?
Correct.
Okay, great. Thanks. And what was the revolver balance?
It was about $148 million.
Perfect. Thank you.
Thank you. There are no further questions in the queue.
Okay. Thank you.
Thank you. This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.