GRIFFON CORP [GFF] Filings

10-Q 1 gff-20221231.htm 10-Q gff-20221231

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-06620

GRIFFON CORPORATION

(Exact name of registrant as specified in its charter)


Delaware			11-1893410
(State or other jurisdiction of			(I.R.S. Employer
incorporation or organization)			Identification No.)

712 Fifth Ave, 18th Floor	New York	New York	10019
(Address of principal executive offices)			(Zip Code)

(212) 957-5000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.25 par value

GFF

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act:

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

The number of shares of common stock outstanding at January 27, 2023 was 57,186,222.

Griffon Corporation and Subsidiaries

Contents


			Page
PART I - FINANCIAL INFORMATION

Item 1 – Financial Statements

Condensed Consolidated Balance Sheets at December 3 1 , 2022 (unaudited) and September 30, 20 2 2			1

Condensed Consolidated Statement of Shareholders’ Equity for the Three Months Ended December 3 1 , 2022 and 2021 (unaudited)			2

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended December 3 1 , 2022 and 2021 (unaudited)			3

Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 3 1 , 2022 and 2021 (unaudited)			4

Notes to Condensed Consolidated Financial Statements (unaudited)			6

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations			32

Item 3 - Quantitative and Qualitative Disclosures about Market Risk			46

Item 4 - Controls & Procedures			47

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings			47

Item 1A – Risk Factors			47

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds			47

Item 3 – Defaults Upon Senior Securities			48

Item 4 – Mine Safety Disclosures			48

Item 5 – Other Information			48

Item 6 – Exhibits			49

Signatures			50

Table of Contents

Part I – Financial Information

Item 1 – Financial Statements

GRIFFON CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)


	(Unaudited)
	December 31, 2022		September 30, 2022
CURRENT ASSETS
Cash and equivalents	$	120,558	$	120,184
Accounts receivable, net of allowances of $13,636 and $12,137	350,625		361,653

Inventories	646,352		669,193
Prepaid and other current assets	64,108		62,453

Assets of discontinued operations	1,122		1,189
Total Current Assets	1,182,765		1,214,672
PROPERTY, PLANT AND EQUIPMENT, net	290,505		294,561
OPERATING LEASE RIGHT-OF-USE ASSETS	182,799		183,398
GOODWILL	333,982		335,790
INTANGIBLE ASSETS, net	761,126		761,914
OTHER ASSETS	21,490		21,553
ASSETS OF DISCONTINUED OPERATIONS	4,571		4,586
Total Assets	$	2,777,238	$	2,816,474

CURRENT LIABILITIES
Notes payable and current portion of long-term debt	$	12,840	$	12,653
Accounts payable	160,441		194,793
Accrued liabilities	178,154		171,797
Current portion of operating lease liabilities	31,283		31,680

Liabilities of discontinued operations	8,141		12,656
Total Current Liabilities	390,859		423,579
LONG-TERM DEBT, net	1,507,681		1,560,998
LONG-TERM OPERATING LEASE LIABILITIES	160,664		159,414
OTHER LIABILITIES	186,977		190,651
LIABILITIES OF DISCONTINUED OPERATIONS	4,209		4,262
Total Liabilities	2,250,390		2,338,904
COMMITMENTS AND CONTINGENCIES - See Note 22
SHAREHOLDERS’ EQUITY
Total Shareholders’ Equity	526,848		477,570
Total Liabilities and Shareholders’ Equity	$	2,777,238	$	2,816,474

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

Table of Contents

GRIFFON CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

For the Three Months Ended December 31, 2022 and 2021

(Unaudited)


	COMMON STOCK			CAPITAL IN EXCESS OF PAR VALUE		RETAINED EARNINGS		TREASURY SHARES			ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)		DEFERRED COMPENSATION
(in thousands)	SHARES	PAR VALUE						SHARES	COST						TOTAL
Balance at September 30, 2022	84,746	$	21,187	$	627,982	$	344,060	27,682	$	(420,116)	$	(82,738)	$	(12,805)	$	477,570
Net income	—	—		—		48,702		—	—		—		—		48,702

Dividend	—	—		—		(6,145)		—	—		—		—		(6,145)
Shares withheld on employee taxes on vested equity awards	—	—		(180)		—		333	(12,554)		—		—		(12,734)
Amortization of deferred compensation	—	—		—		—		—	—		—		571		571


Equity awards granted, net	—	—		(6,902)		—		(455)	6,902		—		—		—



ESOP allocation of common stock	—	—		1,127		—		—	—		—		—		1,127
Stock-based compensation	—	—		5,538		—		—	—		—		—		5,538

Other comprehensive income, net of tax	—	—		—		—		—	—		12,219		—		12,219
Balance at December 31, 2022	84,746	$	21,187	$	627,565	$	386,617	27,560	$	(425,768)	$	(70,519)	$	(12,234)	$	526,848


	COMMON STOCK			CAPITAL IN EXCESS OF PAR VALUE		RETAINED EARNINGS		TREASURY SHARES			ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)		DEFERRED COMPENSATION
(in thousands)	SHARES	PAR VALUE						SHARES	COST						TOTAL
Balance at September 30, 2021	84,375	$	21,094	$	602,181	$	669,998	27,762	$	(416,850)	$	(45,977)	$	(23,288)	$	807,158
Net income	—	—		—		19,298		—	—		—		—		19,298

Dividend	—	—		—		(4,739)		—	—		—		—		(4,739)
Shares withheld on employee taxes on vested equity awards	—	—		—		—		422	(10,886)		—		—		(10,886)
Amortization of deferred compensation	—	—		—		—		—	—		—		591		591


Equity awards granted, net	113	28		(28)		—		—	—		—		—		—



ESOP allocation of common stock	—	—		848		—		—	—		—		—		848
Stock-based compensation	—	—		2,866		—		—	—		—		—		2,866

Other comprehensive income, net of tax	—	—		—		—		—	—		(2,751)		—		(2,751)
Balance at December 31, 2021	84,488	$	21,122	$	605,867	$	684,557	28,184	$	(427,736)	$	(48,728)	$	(22,697)	$	812,385

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

Table of Contents

GRIFFON CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share data)

(Unaudited)


	Three Months Ended December 31,
		2022		2021
Revenue		$	649,384	$	591,749
Cost of goods and services		415,559		425,907
Gross profit		233,825		165,842

Selling, general and administrative expenses		152,720		127,352



Income from operations		81,105		38,490

Other income (expense)
Interest expense		(24,648)		(15,681)
Interest income		104		33
Gain on sale of building		10,852		—

Other, net		607		1,075
Total other expense, net		(13,085)		(14,573)

Income before taxes from continuing operations		68,020		23,917
Provision for income taxes		19,318		7,213
Income from continuing operations		$	48,702	$	16,704

Discontinued operations:
Income from operations of discontinued operations		—		3,320
Provision for income taxes		—		726
Income from discontinued operations		—		2,594
Net income		$	48,702	$	19,298

Basic earnings per common share:
Income from continuing operations		$	0.93	$	0.33
Income from discontinued operations		—		0.05
Basic earnings per common share		$	0.93	$	0.38

Basic weighted-average shares outstanding		52,579		51,178

Diluted earnings per common share:
Income from continuing operations		$	0.88	$	0.31
Income from discontinued operations		—		0.05
Diluted earnings per common share		$	0.88	$	0.36

Diluted weighted-average shares outstanding		55,298		53,753

Dividends paid per common share		$	0.10	$	0.09

Net income		$	48,702	$	19,298
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustments		11,937		(2,319)
Pension and other post retirement plans		862		668
Change in cash flow hedges		(580)		(1,100)

Total other comprehensive income (loss), net of taxes		12,219		(2,751)
Comprehensive income, net		$	60,921	$	16,547

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

Table of Contents

GRIFFON CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	Three Months Ended December 31,
	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	48,702	$	19,298
Net income from discontinued operations	—		(2,594)
Adjustments to reconcile net income to net cash provided by (used in) operating activities of continuing operations:

Depreciation and amortization	17,113		13,081
Stock-based compensation	6,742		4,867
Asset impairment charges - restructuring	—		289
Provision for losses on accounts receivable	482		352
Amortization of debt discounts and issuance costs	1,023		654


Deferred income taxes	—		2,883
Gain on sale of assets and investments	(10,923)		(154)

Change in assets and liabilities, net of assets and liabilities acquired:
(Increase) decrease in accounts receivable	13,689		(53,030)
(Increase) decrease in inventories	22,931		(59,478)
Increase in prepaid and other assets	100		329
Decrease in accounts payable, accrued liabilities, income taxes payable and operating lease liabilities	(26,333)		(12,164)
Other changes, net	1,954		662
Net cash provided by (used in) operating activities - continuing operations	75,480		(85,005)

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment	(4,726)		(10,573)



Payments related to sale of Telephonics	(2,568)		—
Proceeds from investments	—		575
Proceeds from the sale of property, plant and equipment	11,815		29

Net cash provided by (used in) investing activities - continuing operations	4,521		(9,969)

CASH FLOWS FROM FINANCING ACTIVITIES:

Dividends paid	(7,126)		(5,260)
Purchase of shares for treasury	(12,735)		(10,886)
Proceeds from long-term debt	29,823		10,815
Payments of long-term debt	(87,539)		(2,500)


Financing costs	(744)		(753)


Other, net	(42)		(28)
Net cash used in financing activities - continuing operations	(78,363)		(8,612)

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

Table of Contents

GRIFFON CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	Three Months Ended December 31,
	2022		2021















































CASH FLOWS FROM DISCONTINUED OPERATIONS:
Net cash provided by (used in) operating activities	(1,953)		7,916
Net cash used in investing activities	—		(853)


Net cash provided by (used in) discontinued operations	(1,953)		7,063

Effect of exchange rate changes on cash and equivalents	689		(910)

NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS	374		(97,433)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD	120,184		248,653
CASH AND EQUIVALENTS AT END OF PERIOD	$	120,558	$	151,220

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

Table of Contents

GRIFFON CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(US dollars and non US currencies in thousands, except per share data)

(Unaudited)

(Unless otherwise indicated, references to years or year-end refer to Griffon’s fiscal period ending September 30)

NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

About Griffon Corporation

Griffon Corporation (the “Company”, “Griffon”, "we" or "us") is a diversified management and holding company that conducts business through wholly-owned subsidiaries. Griffon oversees the operations of its subsidiaries, allocates resources among them and manages their capital structures. Griffon provides direction and assistance to its subsidiaries in connection with acquisition and growth opportunities as well as in connection with divestitures. In order to further diversify, Griffon also seeks out, evaluates and, when appropriate, will acquire additional businesses that offer potentially attractive returns on capital.

The Company was founded in 1959, is a Delaware corporation headquartered in New York, N.Y. and is listed on the New York Stock Exchange (NYSE:GFF).

On June 27, 2022, we completed the sale of our Defense Electronics segment which consisted of our Telephonics subsidiary for $330,000 in cash. As a result, the results of operations of our Telephonics business is classified as a discontinued operation in the Consolidated Statements of Operations for all periods presented and classified the related assets and liabilities associated with the discontinued operation in the consolidated balance sheets. Accordingly, all references made to results and information in this Quarterly Report on Form 10-Q are to Griffon's continuing operations, unless noted otherwise.

On May 16, 2022, Griffon announced that its Board of Directors initiated a process to review a comprehensive range of strategic alternatives to maximize shareholder value including a sale, merger, divestiture, recapitalization or other strategic transaction. While the process remains ongoing, there is no assurance that the process will result in any transaction being entered into or consummated.

On January 24, 2022, Griffon acquired Hunter Fan Company (“Hunter”), a market leader in residential ceiling, commercial, and industrial fans, from MidOcean Partners (“MidOcean”) for a contractual purchase price of approximately $845,000. Hunter, which is part of Griffon's Consumer and Professional Products segment, complements and diversifies our portfolio of leading consumer brands and products. We financed the acquisition of Hunter with a new $800,000 seven year Term Loan B facility; we used a combination of cash on hand and revolving credit facility borrowings to fund the balance of the purchase price and related acquisition and debt expenditures.

Griffon conducts its operations through two reportable segments:

•Consumer and Professional Products (“CPP”) is a leading North American manufacturer and a global provider of branded consumer and professional tools; residential, industrial and commercial fans; home storage and organization products; and products that enhance indoor and outdoor lifestyles. CPP sells products globally through a portfolio of leading brands including AMES, since 1774, Hunter, since 1886, True Temper, and ClosetMaid.

•Home and Building Products ("HBP") conducts its operations through Clopay Corporation ("Clopay"). Founded in 1964, Clopay is the largest manufacturer and marketer of garage doors and rolling steel doors in North America. Residential and commercial sectional garage doors are sold through professional dealers and leading home center retail chains throughout North America under the brands Clopay, Ideal, and Holmes. Rolling steel door and grille products designed for commercial, industrial, institutional, and retail use are sold under the Cornell and Cookson brands.

GRIFFON CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(US dollars and non US currencies in thousands, except per share data)

(Unaudited)

Update on COVID-19 on our Business

The health and safety of our employees, our customers and their families is always a high priority for Griffon. As of the date of this filing, all of Griffon's facilities are fully operational. When COVID-19 struck, we implemented a variety of new policies and procedures, including additional cleaning, social distancing, staggered shifts and prohibiting or significantly restricting on-site visitors, to minimize the risk to our employees of contracting COVID-19. While many of these precautions have been relaxed or eliminated as the health risk of COVID-19 has decreased, we would not hesitate to reinstitute and/or modify these policies and procedures as necessary should the health risk return to an unacceptable level. In such event, our businesses or our suppliers could be required by government authorities to temporarily cease operations; might be limited in their production capacity due to complying with restrictions relating to the operation of businesses to mitigate the impacts of COVID-19; or could suffer their own supply chain disruptions, impacting their ability to continue to supply us with the quantity of materials required by us. While we are unable to determine or predict the nature, duration or scope of the overall impact COVID-19 will have on our businesses, results of operations, liquidity or capital resources, we believe it is important to discuss where our company stands today, how we have responded (and will continue to respond) to COVID 19 and how our operations and financial condition may change as COVID-19 evolves. See information provided in Part 1, Item 1A, “Risk Factors” our Form 10-K filed on November 18, 2022.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information, and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not include all the information and footnotes required by US GAAP for complete financial statements. As such, they should be read together with Griffon’s Annual Report on Form 10-K for the fiscal year ended September 30, 2022, which provides a more complete explanation of Griffon’s accounting policies, financial position, operating results, business, properties and other matters. In the opinion of management, these financial statements reflect all adjustments considered necessary for a fair statement of interim results. Griffon’s businesses, in particular its CPP operations, are seasonal; for this and other reasons, the financial results of the Company for any interim period are not necessarily indicative of the results for the full year.

The condensed consolidated balance sheet information at September 30, 2022 was derived from the audited financial statements included in Griffon’s Annual Report on Form 10-K for the year ended September 30, 2022.

The condensed consolidated financial statements include the accounts of Griffon and all subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. These estimates may be adjusted due to changes in economic, industry or customer financial conditions, as well as changes in technology or demand. Significant estimates include expected loss allowances for credit losses and returns, net realizable value of inventories, restructuring reserves, valuation of goodwill and intangible assets, sales, assumptions associated with pension benefit obligations and income or expenses, useful lives associated with depreciation and amortization of intangible and fixed assets, warranty reserves, sales incentive accruals, assumption associated with stock based compensation valuation, income taxes and tax valuation reserves, environmental reserves, legal reserves, insurance reserves, the valuation of assets and liabilities of discontinued operations, assumptions associated with valuation of acquired assets and assumed liabilities of acquired companies and the accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions Griffon may undertake in the future. Actual results may ultimately differ from these estimates.

Certain amounts in the prior year have been reclassified to conform to current year presentation.

GRIFFON CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(US dollars and non US currencies in thousands, except per share data)

(Unaudited)

NOTE 2 – FAIR VALUE MEASUREMENTS

The carrying values of cash and equivalents, accounts receivable, accounts and notes payable, and revolving credit and variable interest rate debt approximate fair value due to either the short-term nature of such instruments or the fact that the interest rate of the revolving credit and variable rate debt is based upon current market rates.

Applicable accounting guidance establishes a fair value hierarchy requiring the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. The accounting guidance establishes three levels of inputs that may be used to measure fair value, as follows:

•Level 1 inputs are measured and recorded at fair value based upon quoted prices in active markets for identical assets.

•Level 2 inputs include inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities.

•Level 3 inputs are unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

On December 31, 2022, the fair values of Griffon’s 2028 senior notes and Term Loan B facility approximated $877,298 and $485,355, respectively. Fair values were based upon quoted market prices (level 1 inputs).

Insurance contracts with values of $3,466 at December 31, 2022 are measured and recorded at fair value based upon quoted prices in active markets for similar assets (level 2 inputs) and are included in Prepaid and other current assets on the Consolidated Balance Sheets.

Items Measured at Fair Value on a Recurring Basis

At December 31, 2022, marketable debt and equity securities, measured at fair value based on quoted prices in active markets for similar assets (level 2 inputs), with a fair value of $67 ($83 cost basis) were included in Prepaid and other current assets on the Consolidated Balance Sheets. Realized and unrealized gains and losses on marketable debt and equity securities are included in Other income in the Consolidated Statements of Operations and Comprehensive Income (Loss).

In the normal course of business, Griffon’s operations are exposed to the effects of changes in foreign currency exchange rates. To manage these risks, Griffon may enter into various derivative contracts such as foreign currency exchange contracts, including forwards and options. As of December 31, 2022, Griffon entered into several such contracts in order to lock into a foreign currency rate for planned settlements of trade liabilities payable in U.S. dollars.

At December 31, 2022, Griffon had $15,000 of Australian dollar contracts at a weighted average rate of $1.46 which qualified for hedge accounting (level 2 inputs). These hedges were all deemed effective as cash flow hedges with gains and losses related to changes in fair value deferred and recorded in Accumulated other comprehensive income (loss) ("AOCI") and Prepaid and other current assets, or Accrued liabilities, until settlement. Upon settlement, gains and losses are recognized in the Consolidated Statements of Operations and Comprehensive Income (Loss) in Cost of goods and services ("COGS"). AOCI included deferred gains of $188 ($132, net of tax) at December 31, 2022. Upon settlement, gains of $2,261 were recorded in COGS during the quarter ended December 31, 2022, respectively. All contracts expire in 30 to 90 days.

At December 31, 2022, Griffon had $71,500 of Chinese Yuan contracts at a weighted average rate of $6.88 which qualified for hedge accounting (level 2 inputs). These hedges were all deemed effective as cash flow hedges with gains and losses related to changes in fair value deferred and recorded in Accumulated other comprehensive income (loss) ("AOCI") and Prepaid and other current assets, or Accrued liabilities, until settlement. Upon settlement, gains and losses are recognized in the Consolidated Statements of Operations and Comprehensive Income (Loss) in Cost of goods and services ("COGS"). AOCI

GRIFFON CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(US dollars and non US currencies in thousands, except per share data)

(Unaudited)

included deferred gains of $109 ($79, net of tax) at December 31, 2022. Upon settlement, losses of $1,257 were recorded in COGS during the quarter ended December 31, 2022. All contracts expire in 4 to 334 days.

At December 31, 2022, Griffon had $6,900 of Canadian dollar contracts at a weighted average rate of $1.26. The contracts, which protect Canadian operations from currency fluctuations for U.S. dollar based purchases, do not qualify for hedge accounting. For the three months ended December 31, 2022, fair value gains of $217, respectively, were recorded to Other liabilities and to Other income for the outstanding contracts, based on similar contract values (level 2 inputs). Realized gains of $174 was recorded in Other income during the three months ended December 31, 2022, respectively for all settled contracts. All contracts expire in 30 to 300 days.

NOTE 3 – REVENUE

The Company recognizes revenue when performance obligations identified under the terms of contracts with its customers are satisfied. A performance obligation is a promise in a contract to transfer a distinct good or service, or a bundle of goods or services, to the customer, and is the unit of accounting. A contract with a customer is an agreement which both parties have approved, that creates enforceable rights and obligations, has commercial substance and with respect to which payment terms are identified and collectability is probable. Once the Company has entered into a contract or purchase order, it is evaluated to identify performance obligations. For each performance obligation, revenue is recognized when control of the promised products is transferred to the customer, or services are satisfied under the contract or purchase order, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those products or services (the transaction price).

The Company’s performance obligations are recognized at a point in time related to the manufacture and sale of a broad range of products and components, and revenue is recognized when title, and risk and rewards of ownership, have transferred to the customer, which is generally upon shipment.

For a complete explanation of Griffon’s revenue accounting policies, this note should be read in conjunction with Griffon’s Annual Report on Form 10-K for the year ended September 30, 2022. See Note 13 - Business Segments for revenue from contracts with customers disaggregated by end markets, segments and geographic location.

NOTE 4 – ACQUISITIONS

Griffon continually evaluates potential acquisitions that strategically fit within its portfolio or expand its portfolio into new product lines or adjacent markets. Griffon has completed a number of acquisitions that have been accounted for as business combinations, in which assets acquired and liabilities assumed are recorded at fair value as of the date of acquisition and have resulted in the recognition of goodwill. The operating results of the business acquisitions are included in Griffon’s consolidated financial statements from the date of acquisition; in each instance, Griffon is in the process of finalizing the initial purchase price allocation unless otherwise noted.

On January 24, 2022, Griffon acquired Hunter, a market leader in residential ceiling, commercial, and industrial fans, from MidOcean for a contractual purchase price of $845,000. The acquisition was primarily financed with a new $800,000 seven year Term Loan B facility; we used a combination of cash on hand and revolver borrowings to fund the balance of the purchase price and related acquisition and debt expenditures. Hunter complements and diversifies Griffon's portfolio of leading consumer brands and products. For the three months ended December 31, 2022, Hunter's revenue and Segment Adjusted EBITDA was $54,117 and $4,428, respectively. The goodwill recognized was $256,728, which was assigned to the CPP segment, and is not deductible for income tax purposes. The preliminary purchase price allocation is based on appraisals and other analysis of fair values of acquired assets and liabilities. The following unaudited proforma summary from continuing operations presents consolidated information as if the Company acquired Hunter on October 1, 2020:

GRIFFON CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(US dollars and non US currencies in thousands, except per share data)

(Unaudited)


	Proforma For the Three Months Ended December 31, (unaudited)
	2021

Revenue	$	670,839
Income from continuing operations	19,974

Griffon did not include any material, nonrecurring proforma adjustments directly attributable to the business combination in the proforma revenue and earnings. These proforma amounts have been compiled by adding the historical results from continuing operations of Griffon, restated for classifying the results of operations of the Telephonics business as a discontinued operation, to the historical results of Hunter after applying Griffon’s accounting policies and the following proforma adjustments:

•Depreciation and amortization that would have been charged assuming the preliminary fair value adjustments to property, plant, and equipment, and intangible assets had been applied from October 1, 2021.

•Additional interest and related expenses from the new $800,000 seven year Term Loan B facility that Griffon used to acquire Hunter Fan reduced by historical Hunter interest expense.

•The tax effects on the above adjustments using the statutory tax rate of 25.7% for Griffon and 27.1% for Hunter.

The calculation of the preliminary purchase price allocation is as follows:



Accounts receivable (1)	$	64,602
Inventories(2)	110,299
Other current assets	7,940
Property, plant and equipment	15,007
Operating lease right-of-use assets	12,447
Goodwill	256,728
Intangible assets	616,000

Total assets acquired	$	1,083,023

Accounts payable and accrued liabilities	$	69,789
Current portion of operating lease liabilities	3,323
Deferred tax liability(3)	145,486
Long-term operating lease liabilities	9,123
Other long-term liabilities	3,848
Total liabilities assumed	$	231,569
Total net assets acquired	$	851,454

(1) Includes $67,201 of gross accounts receivable of which $2,599 was not expected to be collected. The fair value of accounts receivable approximated book value acquired.

(2) Includes $113,287 of gross inventory of which $2,988 was reserved for obsolete items.

(3) Deferred tax liability recorded on intangibles assets.

GRIFFON CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(US dollars and non US currencies in thousands, except per share data)

(Unaudited)

The amounts assigned to goodwill and major intangible asset classifications for the Hunter acquisition are as follows:


	Average Life (Years)
Goodwill		$	256,728	N/A
Indefinite-lived intangibles (Hunter and Casablanca brands)	356,000	N/A
Definite-lived intangibles (Customer relationships)	250,000	20
Total goodwill and intangible assets		$	862,728

During the quarter ended December 31, 2022, there were no acquisition costs. During the quarter ended December 31, 2021, the Company incurred acquisition costs of $2,595.

NOTE 5 – INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out or average cost) or net realizable value.

The following table details the components of inventory:


	At December 31, 2022		At September 30, 2022
Raw materials and supplies	$	163,118	$	173,520
Work in process	34,484		50,963
Finished goods	448,750		444,710
Total	$	646,352	$	669,193

NOTE 6 – PROPERTY, PLANT AND EQUIPMENT

The following table details the components of property, plant and equipment, net:


	At December 31, 2022		At September 30, 2022
Land, building and building improvements	$	157,626	$	159,693
Machinery and equipment	518,478		511,779
Leasehold improvements	35,814		35,489
	711,918		706,961
Accumulated depreciation and amortization	(421,413)		(412,400)
Total	$	290,505	$	294,561

Depreciation and amortization expense for property, plant and equipment was $11,489 and $10,694 for the quarters ended December 31, 2022 and 2021, respectively. Depreciation and amortization expense included in Selling, general and administrative ("SG&A") expenses was $4,239 and $3,400 for the quarters ended December 31, 2022 and 2021, respectively. Remaining components of depreciation, attributable to manufacturing operations, are included in Cost of goods and services.

GRIFFON CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(US dollars and non US currencies in thousands, except per share data)

(Unaudited)

NOTE 7 – CREDIT LOSSES

The Company is exposed to credit losses primarily through sales of products and services. Trade receivables are recorded at their stated amount, less allowances for discounts, credit losses and returns. The Company’s expected loss allowance methodology for trade receivables is primarily based on the aging method of the accounts receivables balances and the financial condition of its customers. The allowances represent estimated uncollectible receivables associated with potential customer defaults on contractual obligations (usually due to customers’ potential insolvency), discounts related to early payment of accounts receivables by customers and estimates for returns. The allowance for credit losses includes amounts for certain customers in which a risk of default has been specifically identified, as well as an amount for customer defaults, based on a formula, when it is determined the risk of some default is probable and estimable, but cannot yet be associated with specific customers. Allowance for discounts and returns are recorded as a reduction of revenue and the provision related to the allowance for credit losses is recorded in SG&A expenses.

The Company also considers current and expected future economic and market conditions when determining any estimate of credit losses. Generally, estimates used to determine the allowance are based on assessment of anticipated payment and all other historical, current and future information that is reasonably available. All accounts receivable amounts are expected to be collected in less than one year.

Based on a review of the Company's policies and procedures across all segments, including the aging of its trade receivables, recent write-off history and other factors related to future macroeconomic conditions, Griffon determined that its method to determine credit losses and the amount of its allowances for bad debts is in accordance with the accounting guidance for credit losses on financial instruments, including trade receivables, in all material respects.

The following table provides a roll-forward of the allowance for credit losses that is deducted from the amortized cost basis of accounts receivable to present the net amount expected to be collected:


	Three months ended December 31,
	2022		2021
Beginning Balance, October 1	$	12,137	$	8,787

Provision for expected credit losses	1,457		1,039
Amounts written off charged against the allowance	(48)		(4)
Other, primarily foreign currency translation	90		(35)
Ending Balance, December 31	$	13,636	$	9,787

GRIFFON CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(US dollars and non US currencies in thousands, except per share data)

(Unaudited)

NOTE 8 – GOODWILL AND OTHER INTANGIBLES

The following table provide a summary of the carrying value of goodwill by segment as of September 30, 2022 and December 31, 2022, as follows:


	At September 30, 2022		Hunter Acquisition (1)		At December 31, 2022
Consumer and Professional Products	$	144,537	$	(1,808)	$	142,729
Home and Building Products	191,253		—		191,253


Total	$	335,790	$	(1,808)	$	333,982
(1) The decrease is due to the preliminary allocation of the purchase price for the Hunter acquisition.

The following table provides the gross carrying value and accumulated amortization for each major class of intangible assets:


	At December 31, 2022					At September 30, 2022
	Gross Carrying Amount		Accumulated Amortization		Average Life (Years)	Gross Carrying Amount		Accumulated Amortization
Customer relationships & other	$	443,915	$	97,316	23	$	442,085	$	91,143
Technology and patents	14,648		3,197		13	14,326		3,022
Total amortizable intangible assets	458,563		100,513			456,411		94,165
Trademarks	403,076		—			399,668		—
Total intangible assets	$	861,639	$	100,513		$	856,079	$	94,165

The gross carrying amount of intangible assets was impacted by $5,560 related to favorable foreign currency translation.

Amortization expense for intangible assets was $5,624 and $2,387 for the quarters ended December 31, 2022 and 2021, respectively. The increase in intangible assets and amortization is related to the Hunter acquisition.

Amortization expense for the remainder of 2023 and the next five fiscal years and thereafter, based on current intangible balances and classifications, is estimated as follows: remaining in 2023 - $16,161; 2024 - $21,305; 2025 - $21,305; 2026 - $21,305; 2027 - $21,305; 2028 - $21,305; thereafter $235,364.

During the quarter ended December 31, 2022, the Company determined that there were no triggering events and, as a result, there was no impairment to either its goodwill or indefinite-lived intangible assets at December 31, 2022.

NOTE 9 – INCOME TAXES

During the quarter ended December 31, 2022, the Company recognized a tax provision of $19,318 on income before taxes from continuing operations of $68,020, compared to a tax provision of $7,213 on income before taxes from continuing operations of $23,917 in the comparable prior year quarter. The current year quarter results include a gain on the sale of a building of $10,852 ($8,323, net of tax), strategic review (retention and other) of $8,232 ($6,222, net of tax), proxy costs of $1,503 ($1,153, net of tax), and discrete and certain other tax benefits, net, that affect comparability of $333. The prior year quarter results included restructuring charges of $1,716 ($1,330, net of tax), acquisition costs of $2,595 ($2,003, net of tax), proxy contest costs of $2,291 ($1,768, net of tax) and discrete and certain other tax benefits, net, that affect comparability of $891. Excluding these items, the effective tax rates for the quarters ended December 31, 2022 and 2021 were 29.1% and 31.5%, respectively.

GRIFFON CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(US dollars and non US currencies in thousands, except per share data)

(Unaudited)

NOTE 10 – LONG-TERM DEBT


		At December 31, 2022									At September 30, 2022
		Outstanding Balance		Original Issuer Premium/(Discount)		Capitalized Fees & Expenses	Balance Sheet		Coupon Interest Rate			Outstanding Balance		Original Issuer Premium/(Discount)		Capitalized Fees & Expenses		Balance Sheet		Coupon Interest Rate
Senior notes due 2028	(a)	$	974,775	$	254	(10,434)	$	964,595	5.75	%		$	974,775	$	266	$	(10,939)	$	964,102	5.75	%
Term Loan B due 2029	(b)	494,000		(1,101)		(8,472)	484,427		Variable			496,000		(1,144)		(8,823)		486,033		Variable
Revolver due 2025	(b)	45,100		—		(1,104)	43,996		Variable			97,328		—		(1,227)		96,101		Variable
Finance lease - real estate	(c)	12,751		—		—	12,751		Variable			13,091		—		—		13,091		Variable
Non US lines of credit	(d)	—		—		(4)	(4)		Variable			—		—		(2)		(2)		Variable
Non US term loans	(d)	12,663		—		(21)	12,642		Variable			12,090		—		(27)		12,063		Variable
Other long term debt	(e)	2,127		—		(