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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Greetings and welcome to the Griffon Corporation First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] 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, sir, you may begin.
Thank you, Donna. 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 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 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 morning, everyone. We're off to a great start to fiscal '21, with our first quarter revenue increasing 11%, adjusted EBITDA up 35% and adjusted EPS up 56% compared to the prior-year quarter. We saw a strong demand across all our consumer product categories supported by a robust housing market and a healthy repair and remodel activity.
Our portfolio repositioning, strategic initiatives and operational improvements continue to drive enhanced free cash flow generation, as well as margin expansion and our cash performance for the quarter was exceptional. During the first quarter, all three of our segments increased adjusted EBITDA and adjusted EBITDA margin compared to the prior-year quarter. This improved performance also resulted in significantly improved free cash flow generation. Recall our first quarter typically results in cash usage due to the seasonality of our businesses, this year we increased our free cash flow by $40 million, generating $9 million in cash compared to a cash usage of $31 million in the prior year period.
Our net leverage is now 3.1 times EBITDA compared to 3.4 times at September 30, 2020 and is down by 1.7 turns when compared to the 4.8 times leverage at the end of the first quarter in fiscal 2020. We've made good progress with the AMES strategic initiative, which remains on schedule and on budget. This investment will consolidate operations, increase automation, support e-Commerce growth and create a new data and analytics platform for AMES globally by the end of 2023. We expect this to further improve margins in the years ahead.
In the quarter, we also executed 2 strategic portfolio actions. First, we closed the divestiture of our Systems Engineering Group, SEG, which was non-core for Telephonics’ primary business of defense electronics products and systems. The sale of SEG creates immediate value to Griffon shareholders, allows Telephonics to focus more of its resources on growing its core defense electronics and systems product lines and provides SEG with the benefit of being part of a parent organization that's more focused on government technical services. The SEG team did an outstanding job growing this business as part of Telephonics and we wish them well in their future.
Our second portfolio action in the quarter was the acquisition of Quatro Design in Australia, a leading manufacturer and supplier of large landscaping products made from glass fiber-reinforced concrete. These products are used in residential, commercial and public sector projects, helping to diversify our AMES Australia operations with an expanded set of products and new sales channels. This is our 6th acquisition in Australia in the last 7 years. And expect more.
Health and safety update: since the onset of the COVID-19 pandemic last March, ensuring the health and safety of our employees and our customers has been continues to be our top priority. We've proactively implemented health and safety measures across all of our global facilities and as local and national authorities have circulated and incorporated additional guidelines for employee health and safety. We reacted immediately, decisively and we've spared no expense in dealing with the COVID-19 risk. All of our facilities are operational. However, we remain mindful of the continued seriousness of the situation in both Europe and the United States. In the previous shutdown all of our US facilities were deemed essential businesses and we expect that to continue.
Turning to the segments; Consumer and Professional Products, we saw continued retail demand across all geographies including early spring orders from customers in North America and increased demand in Australia. The AMES strategic initiative remains on schedule for completion by the end of 2023 and we reiterate our expectation to realize annual cash savings of $30 million to $35 million and inventory reductions of the same magnitude when the benefits of the initiative are fully realized. Brian will provide more detail about the status of the initiative during his comments.
Moving to Home and Building Products segment; we continue to see healthy demand for both the residential and commercial door products and a favorable mix for rolling steel products in particular.
In Defense Electronics, Telephonics revenue and profitability increased over the prior year and order demand was strong in the quarter with a book to bill of almost 1.3 times. Backlog increased as well ending the quarter at $389 million. Telephonics is taking actions to improve its operational efficiencies by streamlining its organization and consolidating facilities which Brian will also discuss in a little more detail.
Turning to the balance sheet, we're in an excellent financial position with ample liquidity to fund our growth in all of our segments, while pursuing opportunistic acquisitions and with leverage down to 3.1 times. Finally, earlier today, our Board authorized an $0.08 per share dividend payable on March 18th, 2021 to shareholders of record on February 18th, 2021. This marks the 38th consecutive quarterly dividend to shareholders, which has grown at an annualized compound rate of 17% since we initiated in 2012.
Let me turn it over to Brian, who will take you through some of the financials.
Thank you, Ron. I'll start by highlighting our first quarter consolidated performance. Revenue increased 11% to $609 million and adjusted EBITDA increased 35% to $75 million, both in comparison to the prior year quarter. Normalized gross profit for the quarter was $177 million, increasing 16% over the prior year quarter, while gross margin expanded 120 basis points to 29%. First quarter normalized selling, general, administrative expenses were $117 million or 19.2% of revenue compared to $114 million or 20.8% in the prior year quarter. First quarter GAAP net income was $29.5 million or $0.55 per share compared to the prior-year period of $10.6 million or $0.24 per share.
Excluding items that affect comparability from both periods, current quarter adjusted net income was $29.8 million or $0.56 per share compared to the prior year at $15.6 million or $0.36 per share. Corporate unallocated expenses excluding depreciation were $12 million in the quarter, in line with the prior year first quarter. Effective tax rate excluding items that affect comparability for the quarter was 32% compared to 32.2% for the full fiscal year 2020. Capital spending was $12 million in the first quarter compared to $13 million in the prior year quarter. Depreciation and amortization totaled $15.3 million for the first quarter compared to $15.8 million in the prior year first quarter.
Regarding our segment performance, revenue for CPP, HBP and DE increased over the prior year with increases of 21%, 4% and 3% respectively. Adjusted EBITDA for CPP, HBP and DE also increased over the prior year with increases of 49%, 19% and 25% respectively. As Ron stated earlier, the extended AMES initiative announced in November 2020 will extend the project by one year with expected completion now by the end of 2023. When fully implemented, these actions will result in annual cash savings of $30 million to $35 million with an equivalent reduction in inventory both based on fiscal 2020 operating levels.
The cost -- implement this new business platform will include one-time charges and capital investments of approximately $65 million each. During the first quarter, AMES incurred pre-tax restructuring-related exit costs of approximately $3 million supporting the AMES strategic initiative, capital expenditure supporting initiatives were $2 million in the quarter.
At Telephonics we began executing on our efficiency initiative and footprint consolidation in the fourth quarter last year. We implemented a Voluntary Employee Retirement Plan and had a subsequent reduction in forced announced in the fourth quarter last year, which resulted in a total headcount reduction of 90 people. In the first quarter, we incurred severance charges of $2.1 million, coupled with an additional charge of $5.6 million primarily related to valuing inventory to expected recovery amounts due to exiting older weather radar product lines. Additionally, we are working on consolidating 3 Long Island based facilities into two company-owned facilities. The total cost of the facility consolidation will be approximately $4 million, which primarily consist of capital expenditures occurring in 2021.
Regarding our balance sheet and liquidity as of Dec 31, 2020, we had net debt of $815 million and leverage of 3.1 times as calculated based on our debt covenants. This reflects 1.7 turns of delevering from the prior year first quarter. Our cash and equivalents were $234 million and debt outstanding was $1.05 billion. Borrowing availability under the revolving credit facility was $370 million subject to certain loan covenants.
Regarding our '21 financial guidance, as most of you know, we give guidance once a year during our November earnings call and do not update that guidance during the course of the year. The guidance provided at our last November call was revenue of approximately $2.4 billion and adjusted EBITDA excluding unallocated and one-time charges related to AMES and Telephonics initiative of $285 million or better. With our first quarter behind us and with a look into January '21, we continue to believe there is upside potential to our guidance.
Now, I'll turn the call back over to Ron.
Thanks, Brian. First, I'd like to highlight that we recently published our commitment to an environmental social and governance program on our website. We believe ESG practices are important to drive sustainable and long-term growth. We will continue to enhance our ESG reporting and communication and are in the process of further organizing and formalizing our efforts, expect to hear more from us on this topic.
I'd like to emphasize that Griffon's top priority continues to be ensuring the health and safety of our employees, our customers and our communities. I give a special thanks to our 7,500 employees who as a team have helped us to continue business operations, while maintaining a safe working environment and their efforts are incredibly appreciated.
In closing, Griffon is in excellent shape in a very uncertain world. We have strengthened our balance sheet, we've taken strategic actions to streamline and enhance our portfolio. We continue to believe the diversity of our businesses, our emphasis on US manufacturing and our focus on leading brands and essential products has created a platform for growth and sustainable competitive advantages. Griffon continues to be a compelling investment story. As we realize the margin potential embedded in our strategic initiatives, coupled with deploying cash on the balance sheet to capitalize on opportunistic acquisitions, we're creating a clear and actionable path to significantly increase shareholder value. Our best is yet to come.
Operator, we'll take any questions.
Thank you. [Operator Instructions] Our first question this morning is coming from Bob Labick of CJS Securities. Please go ahead.
Good morning. Congratulations on a great start to fiscal '21. So for the first question, I wanted to ask if we could dig in a little bit, you've had very significant margin expansion both at CPP and HBP and it is really impressive. On CPP obviously you have the AMES initiative to come on top of this, but what's been the primary drivers behind HBP margins and CPP's current strength as well? Just give us a kind of sense of where that's been and are they sustainable, do you still have levers to pull to keep going and how you're thinking about the strong margins you showed?
I'll remind you that our margin improvement story has been evolving over the last several years and this has been a steady continuation of things that we've been talking about for the last several years. So pre-COVID our businesses were doing well. We have laid out a continuous improvement about improving margins and in both the AMES business and the Clopay business we were integrating significant acquisitions, the purchase of ClosetMaid into AMES and the purchase of CornellCookson into Clopay. That story has been evolving quarter-over-quarter. This is starting to showcase a lot of the things that were already in process over the last 2 years and we've been talking about this being a multi-year journey of margin improvement and we're nowhere near finished with both businesses in getting to levels that we want to get to over the next few years.
Okay, great. And then just kind of taking that over to Telephonics, you said book-to-bill approached 1.3 times. Can you just talk about the kind of drivers behind the strong bookings and where margins can go in that business as well?
Sure. I'll take this one, Bob. So we have a healthy pipeline in Telephonics evidenced by a good bookings quarter. As far as the margins we continue to believe that we'll exit this year at an annualized 10% margin. As we've mentioned in the last call and it continues to be the case, several more challenging programs are sunsetting, some sunset last year and some will sunset this year, that coupled with the initiatives we've taken there to reduce headcount and optimize the business, we should see continued improvement in margin throughout the year.
Thank you. Our next question is coming from Julio Romero of Sidoti & Company. Please go ahead.
Hey, good morning. I wanted to dig a little more into HBP, you are tracking well above your 15% EBITDA margin target there and I think it's been that way for a couple of quarters. And I know you've called out some of the drivers in the past and I think Ron I heard you mention that you still think there is upside to margins in HBP, maybe if you could just talk about what potentially could continue to bring margins up going forward in HBP.
We continue to see robust demand across both the residential and the commercial business. We obviously are still in the early days of the integration of the CornellCookson business into the Clopay footprint of manufacturing. We're going to continue to make the investments in the business to support the demand that we see for both homebuilding and for repair and remodel, as well as commercial. And the margin improvement story is going to be one that is going to evolve based on both volume and mix and there will always be issues like the price of steel that will be a pass-through item for us and for most of corporate America. There are input cost pressures that are building, there is inflation. We take that as a positive for recovering economy and the ability to mitigate those input costs continue to pass along price increases as a result is what the balance of this year is going to look like. And we continue to believe that we can do that successfully, maintain and/or improve our margins by doing it.
Yes, I'd just like to add to that we saw a good product mix particularly on our commercial side this quarter, which is really the result of the investment we made in expanding the Mountain Top facility by 50% and the reason we did that was to meet not only core demand, but to allow us to support the rollout of new products which are being accepted well by the marketplace for such things like our Entry Defender product.
Got it. And I guess my follow-up, if you could just talk about the Quatro Design acquisition, any color into the margin profile there. And then just a quick refresher on what attracts you to the Australian market in general? Thanks.
Sure. So in general, we've been investing in the Australian market for the last 7 or 8 years since we started expanding there. It went from a $10 million or so dollar business to business (that's in Australian dollars), to a business pushing $250 million to $300 million Australian dollar business. It's an excellent marketplace. In this case, this acquisition diversifies our customers. So this customer is more of a construction or the government or for residential buildings that they build, large pots and planters and park benches at their facilities. And yes, the margin of the business is generally, at least at the beginning and we'll improve it, reasonably within our margins at our other businesses.
Thank you. Our next question is coming from Josh Chan of Baird. Please go ahead.
Hi, good morning, Ron and Brian, congrats on a good quarter.
Thanks. How you doing Josh?
Good, doing well. So my first question is on the AMES business very strong growth. Could you talk a little bit about sell through rates versus sell-in in any sense of where retail inventory is at the channel currently?
Sure, general demand is very high and it's outstripping supply. So, sell-through rates have been very strong. Generally, I would say inventory at the home centers and out in the marketplace is relatively low.
All right, that's good to hear. So just presumably there will be kind of an opportunity in the coming quarters as you kind of re-stock?
Exactly, yes, we continue to see as you saw not only in the first quarter but even through January, we continue to see strong demand in the business and restocking should be occurring and continue to occur as those things go in and then back out to customers through the remainder at least for the second quarter if not beyond.
All right, that's great. And then my -- I guess my follow-up question is, Ron kind of alluded to this earlier about the steel pricing and could you kind of just walk through how long it takes for the higher steel price just to kind of hit your P&L and to what extent you think that the price increases could match the timing there or will there be a lag, can you just kind of walk through the different businesses and what would you expect from that dynamic there? Thanks.
Sure, you know it varies by product and by product line, but in general there will be a little bit of a lag and as has been in the past, but we do expect that we'll be able to pass through price increases in a reasonable amount of time and we don't expect at this point a significant impact. As a result of the price increases because of steel price increases, we will pass through price increases in at least a reasonable amount of time.
And I just add to it, this is building up throughout the economy, the component prices are part of the recovery as both fiscal policy starts to put people back to work and as infrastructure spending, which has been talked about for the better part of the last decade actually starts to come to fruition. We believe the demand side for products is going to continue to improve and we'll do everything we can with increased input cost to pass them along to our customers we'll ultimately will pass them along to the consumer and the consumer is going to have to get the stimulus in the recovery and we're very optimistic about what we see going on.
Thank you. Our next question is coming from Justin Bergner of G Research. Please go ahead.
Good morning, Ron. Good morning, Brian.
Good morning, Justin.
Good morning.
Nice quarter, just wanted to delve into couple of things, other analysts have asked about. On Home and Building Products you mentioned that the commercial business mixed strong in the portfolio, is that the rolling steel doors business that you acquired with CornellCookson or is that typical doors just sold into the commercial setting because if it's CornellCookson business that's obviously much if it mixed up to be much higher than the margin you had there.
Yes. So we are seeing improved margins in the CornellCookson business and it's being driven by the new products, it's both by the integration of the businesses and the overall improvement of operations, as well as the new CornellCookson products had been rolled out over the last year or so.
Okay. And I guess what would cause you to lift the 15% plus margin target for Home and Building Products at some point in the future. I realize there might be some hesitancy to publish to high of a number, but would you consider using that target at some point?
We're never done improving our businesses and we will continue to make the investments build for long-term and the margin expansion story was one that happens over time. We bought CornellCookson, I think when we bought it, we had talked about it running at an 8% or 9% EBITDA margin. Our story is about operational improvement. We're in a world that has more capital than opportunity and our edge is our ability to buy businesses, fix them and operate them increasingly better. And this story of what we've done with Clopay not just this quarter and not over the last year, but over the last 10 plus years has been about investing and building a business, adding on acquisitions, margin improvement story is still ahead of us and you mark moments in time getting to 15% target a few years ago was aspirational. We're clearly above that at the moment. We continue to believe there is upside to that business, it will be slow, it will be steady, but we knew spending the time and the money would make each of these businesses better.
Thank you. Our next question is coming from Keith Hughes of Truist. Please go ahead.
Thank you. Building on some questions here on your commercial doors and you talked to -- it's a positive comments on this, but in total units and commercial doors, how did they compare to prior year?
So, in the commercial business units vary as how you look at those. So, overall the units were up slightly, but the mix was much stronger. So there were some volume benefit, but mostly mix benefited that side of the business.
Okay. And if we go to the residential side of doors, we've all seen the shortage of homebuilding and the pick-up, but the orders for home is picking up. Have you -- do you feel like in this quarter did you feel any of the influence of this sort of orders or is that something to come in the future and when do you think you would feel if that's the case?
We continue to see good demand in that business. It's been going on for quite a few quarters and continues through the first quarter and into January. So certainly, the housing market strength and the need for housing and the fact that home prices are steady and growing really, those all contribute to a healthy garage door and for that matter overall economy and then Consumer Professional Products business as well.
Okay, thank you.
[Operator Instructions] Our next question is coming from Trey Grooms of Stephens. Please go ahead.
Hi, good morning. This is actually Noah Merkousko for Trey. Just wanted to say congrats on a great quarter.
Thank you.
So my first question here, I wanted to dig in a little bit more on the AMES and CCP sales growth, 20% organic was really impressive. You talked about I believe if I heard correctly strong sell-through, opportunity to continue fill the retail channel. I'm just wondering if you kind of break that out, do you think any of that was demand put forward or do you still feel really good about the growth for that business going forward?
So, we see a very good demand for the products overall. We can't put a finger whether demand is pull forward or not, but the demand for our products actually started before the overall marketplace got strong, urban to suburban, people moving out to cities, into the suburbs, started before the pandemic, got stronger during the pandemic and will continue. Household formations are up, people invest in their homes when home prices are up, they have confidence to invest in their homes, all those things we expect to continue.
And I just add to it, a recovering economy, infrastructure spending all of those things that are going to happen when we come out of COVID are going to be incremental demand drivers. So I don't buy the pull forward argument for us or for most of the economy.
All right, that makes sense. And then a quick follow-up here, there's been a lot of talk about steel cost inflation, but I'm wondering if you're seeing any other buckets of inflation in either the AMES or Clopay business, whether it's other materials, freight, labor or anything like that?
So in a word, yes.
Yes. And there is always, there is always something. So labor is clearly scarce and expensive and that's something that we've been dealing with over many years, that's part of the initiative to streamline and automate in facilities. Freight, that is an ongoing challenge. And so input costs across the board have been building, that's part of the mitigation that you try to do each year and then pass through those costs is part of the ongoing challenge for us as we go into the balance of this year.
Ladies and gentlemen, that brings us to the end of our Q&A session. Mr. Kramer, I would like to turn the floor back over to you for any closing comments.
Thanks, everyone. Stay safe, stay healthy. Bye-bye.
Ladies and gentlemen, thank you for your participation, you may disconnect your lines or log off the webcast at this time and have a wonderful day.