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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
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.
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 | | | | | | | | | | | | | | | | | | |
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Equity awards granted, net | — | | | — | | | (6,902) | | | — | | | (455) | | | 6,902 | | | — | | | — | | | — | | | | | | | | | | | | | | | | | | |
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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 | | | | | | | | | | | | | | | | | | |
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| 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 | |
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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 | |
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Equity awards granted, net | 113 | | | 28 | | | (28) | | | — | | | — | | | — | | | — | | | — | | | — | |
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ESOP allocation of common stock | — | | | — | | | 848 | | | — | | | — | | | — | | | — | | | — | | | 848 | |
Stock-based compensation | — | | | — | | | 2,866 | | | — | | | — | | | — | | | — | | | — | | | 2,866 | |
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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 | |
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The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
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 | |
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Selling, general and administrative expenses | | | | | 152,720 | | | 127,352 | |
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Income from operations | | | | | 81,105 | | | 38,490 | |
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Other income (expense) | | | | | | | |
Interest expense | | | | | (24,648) | | | (15,681) | |
Interest income | | | | | 104 | | | 33 | |
Gain on sale of building | | | | | 10,852 | | | — | |
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Other, net | | | | | 607 | | | 1,075 | |
Total other expense, net | | | | | (13,085) | | | (14,573) | |
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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 | |
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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 | |
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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 | |
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Basic weighted-average shares outstanding | | | | | 52,579 | | | 51,178 | |
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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 | |
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Diluted weighted-average shares outstanding | | | | | 55,298 | | | 53,753 | |
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Dividends paid per common share | | | | | $ | 0.10 | | | $ | 0.09 | |
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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) | |
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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.
GRIFFON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
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| 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: | | | |
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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 | |
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Deferred income taxes | — | | | 2,883 | |
Gain on sale of assets and investments | (10,923) | | | (154) | |
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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) | |
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CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Acquisition of property, plant and equipment | (4,726) | | | (10,573) | |
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Payments related to sale of Telephonics | (2,568) | | | — | |
Proceeds from investments | — | | | 575 | |
Proceeds from the sale of property, plant and equipment | 11,815 | | | 29 | |
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Net cash provided by (used in) investing activities - continuing operations | 4,521 | | | (9,969) | |
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CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
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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) | |
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Financing costs | (744) | | | (753) | |
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Other, net | (42) | | | (28) | |
Net cash used in financing activities - continuing operations | (78,363) | | | (8,612) | |
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The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
GRIFFON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
| | | | | | | | | | | |
| Three Months Ended December 31, |
| 2022 | | 2021 |
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CASH FLOWS FROM DISCONTINUED OPERATIONS: | | | |
Net cash provided by (used in) operating activities | (1,953) | | | 7,916 | |
Net cash used in investing activities | — | | | (853) | |
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Net cash provided by (used in) discontinued operations | (1,953) | | | 7,063 | |
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Effect of exchange rate changes on cash and equivalents | 689 | | | (910) | |
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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.
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 | | | — | | | ( |