Edgar Filing: GRIFFON CORP

GFF 06-30-2014 10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



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

For the quarterly period ended June 30, 2014



o	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)

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. ý Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). ý Yes o No

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



Large accelerated filer o	Accelerated filer	ý
Non-accelerated filer o	Smaller reporting company	o
(Do not check if a smaller reporting company)

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

The number of shares of common stock outstanding at June 30, 2014 was 53,708,690.

Griffon Corporation and Subsidiaries

Contents



	Page
PART I - FINANCIAL INFORMATION

Item 1 – Financial Statements

Condensed Consolidated Balance Sheets at June 30, 2014 (unaudited) and September 30, 2013	1

Condensed Consolidated Statement of Shareholders’ Equity for the Nine Months Ended June 30, 2014 (unaudited)	2

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended June 30, 2014 and 2013 (unaudited)	3

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2014 and 2013 (unaudited)	4

Notes to Condensed Consolidated Financial Statements (unaudited)	5

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3 - Quantitative and Qualitative Disclosures about Market Risk	47

Item 4 - Controls & Procedures	48

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings	49

Item 1A – Risk Factors	49

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	49

Item 3 – Defaults Upon Senior Securities	49

Item 4 – Mine Safety Disclosures	49

Item 5 – Other Information	49

Item 6 – Exhibits	50

Signatures	51

Exhibit Index	52

Table of Contents

Part I – Financial Information

Item 1 – Financial Statements

GRIFFON CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)



	(Unaudited)
	June 30, 2014		September 30, 2013
CURRENT ASSETS
Cash and equivalents	$	87,437	$	178,130
Accounts receivable, net of allowances of $7,176 and $6,136	269,669		256,215
Contract costs and recognized income not yet billed, net of progress payments of $16,985 and $6,941	104,877		109,828
Inventories, net	278,462		230,120
Prepaid and other current assets	74,290		48,903
Assets of discontinued operations	1,209		1,214
Total Current Assets	815,944		824,410
PROPERTY, PLANT AND EQUIPMENT, net	365,376		353,593
GOODWILL	381,315		357,730
INTANGIBLE ASSETS, net	235,092		221,391
OTHER ASSETS	30,491		28,580
ASSETS OF DISCONTINUED OPERATIONS	3,032		3,075
Total Assets	$	1,831,250	$	1,788,779

CURRENT LIABILITIES
Notes payable and current portion of long-term debt	$	11,886	$	10,768
Accounts payable	181,052		163,610
Accrued liabilities	103,721		106,743
Liabilities of discontinued operations	2,959		3,288
Total Current Liabilities	299,618		284,409
LONG-TERM DEBT, net of debt discount of $10,532 and $13,246	797,180		678,487
OTHER LIABILITIES	162,103		170,675
LIABILITIES OF DISCONTINUED OPERATIONS	4,008		4,744
Total Liabilities	1,262,909		1,138,315
COMMITMENTS AND CONTINGENCIES - See Note 19
SHAREHOLDERS’ EQUITY
Total Shareholders’ Equity	568,341		650,464
Total Liabilities and Shareholders’ Equity	$	1,831,250	$	1,788,779

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GRIFFON CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(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		CAPITAL IN EXCESS OF PAR VALUE		RETAINED EARNINGS			SHARES	COST			ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)			DEFERRED COMPENSATION			Total
Balance at September 30, 2013	77,616	$	19,404	$	494,412	$	434,363		18,527	$	(274,602	)	$	(3,339	)	$	(19,774	)	$	650,464
Net loss	—	—		—		(8,125		)	—	—			—			—			(8,125		)
Dividend	—	—		—		(4,841		)	—	—			—			—			(4,841		)
Tax effect from exercise/vesting of equity awards, net	—	—		273		—			—	—			—			—			273
Amortization of deferred compensation	—	—		—		—			—	—			—			1,586			1,586
Common stock acquired	—	—		—		—			6,237	(72,518		)	—			—			(72,518		)
Stock grants and equity awards, net	857	214		302		—			—	—			—			—			516
ESOP purchase of common stock	—	—		—		—			—	—			—			(10,000		)	(10,000		)
ESOP allocation of common stock	—	—		225		—			—	—			—			—			225
Stock-based compensation	—	—		8,133		—			—	—			—			—			8,133
Other comprehensive income, net of tax	—	—		—		—			—	—			2,628			—			2,628
Balance at June 30, 2014	78,473	$	19,618	$	503,345	$	421,397		24,764	$	(347,120	)	$	(711	)	$	(28,188	)	$	568,341

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

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GRIFFON CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share data)

(Unaudited)



	Three Months Ended June 30,						Nine Months Ended June 30,
	2014			2013			2014			2013
Revenue	$	505,039		$	509,826		$	1,466,184		$	1,422,318
Cost of goods and services	386,732			401,515			1,132,387			1,110,840
Gross profit	118,307			108,311			333,797			311,478

Selling, general and administrative expenses	96,135			86,345			273,437			254,623
Restructuring and other related charges	358			1,604			1,892			12,048
Total operating expenses	96,493			87,949			275,329			266,671

Income from operations	21,814			20,362			58,468			44,807

Other income (expense)
Interest expense	(11,661		)	(13,279		)	(37,184		)	(39,446		)
Interest income	120			142			181			321
Loss from debt extinguishment, net	—			—			(38,890		)	—
Other, net	2,621			607			4,310			1,515
Total other expense, net	(8,920		)	(12,530		)	(71,583		)	(37,610		)

Income (loss) before taxes	12,894			7,832			(13,115		)	7,197
Provision (benefit) for income taxes	(1,570		)	4,229			(4,990		)	3,855
Net income (loss)	$	14,464		$	3,603		$	(8,125	)	$	3,342

Basic income (loss) per common share	$	0.30		$	0.07		$	(0.16	)	$	0.06
Weighted-average shares outstanding	48,370			54,265			50,038			54,588

Diluted income (loss) per common share	$	0.29		$	0.06		$	(0.16	)	$	0.06
Weighted-average shares outstanding	49,836			56,204			50,038			56,735

Dividends paid per common share	$	0.03		$	0.025		$	0.09		$	0.075

Net income (loss)	$	14,464		$	3,603		$	(8,125	)	$	3,342
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustments	2,809			(7,884		)	896			(10,805		)
Pension and other post retirement plans	317			490			1,732			4,839
Gain (loss) on cash flow hedge	—			(158		)	—			13
Total other comprehensive income (loss), net of taxes	3,126			(7,552		)	2,628			(5,953		)
Comprehensive income (loss), net	$	17,590		$	(3,949	)	$	(5,497	)	$	(2,611	)

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

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GRIFFON CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)



	Nine Months Ended June 30,
	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(8,125	)	$	3,342

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation and amortization	50,027			52,787
Stock-based compensation	8,133			9,327
Asset impairment charges - restructuring	191			3,122
Provision for losses on accounts receivable	420			824
Amortization of deferred financing costs and debt discounts	4,789			4,651
Loss from debt extinguishment, net	38,890			—
Deferred income taxes	(314		)	(897		)
(Gain) loss on sale/disposal of assets	78			(788		)
Change in assets and liabilities, net of assets and liabilities acquired:
(Increase) decrease in accounts receivable and contract costs and recognized income not yet billed	7,443			(81,381		)
(Increase) decrease in inventories	(33,195		)	36,588
(Increase) decrease in prepaid and other assets	(3,439		)	2,890
Decrease in accounts payable, accrued liabilities and income taxes payable	(15,754		)	(28,767		)
Other changes, net	712			856
Net cash provided by operating activities	49,856			2,554

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment	(54,859		)	(45,886		)
Acquired businesses, net of cash acquired	(62,306		)	—
Proceeds from sale of assets	491			1,326
Investment purchases	(8,402		)	—
Net cash used in investing activities	(125,076		)	(44,560		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock	584			—
Dividends paid	(4,841		)	(4,384		)
Purchase of shares for treasury	(72,518		)	(25,689		)
Proceeds from long-term debt	682,913			303
Payments of long-term debt	(602,134		)	(12,842		)
Change in short-term borrowings	3,138			2,408
Financing costs	(10,928		)	(759		)
Purchase of ESOP shares	(10,000		)	—
Tax benefit from exercise/vesting of equity awards, net	273			150
Other, net	194			261
Net cash used in financing activities	(13,319		)	(40,552		)

CASH FLOWS FROM DISCONTINUED OPERATIONS:
Net cash used in operating activities	(1,018		)	(486		)
Net cash used in discontinued operations	(1,018		)	(486		)

Effect of exchange rate changes on cash and equivalents	(1,136		)	(506		)

NET DECREASE IN CASH AND EQUIVALENTS	(90,693		)	(83,550		)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD	178,130			209,654
CASH AND EQUIVALENTS AT END OF PERIOD	$	87,437		$	126,104

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

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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” or “Griffon”) 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. Griffon, to further diversify, also seeks out, evaluates and, when appropriate, will acquire additional businesses that offer potentially attractive returns on capital.

Griffon currently conducts its operations through three segments:


•	Home & Building Products (“HBP”) consists of two companies, The Ames Companies, Inc. (“Ames”) and Clopay Building Products Company, Inc. (“CBP”):

- Ames is a global provider of non-powered landscaping products that make work easier for homeowners and professionals.

- CBP is a leading manufacturer and marketer of residential, commercial and industrial garage doors to professional installing dealers and major home center retail chains.


•	Telephonics Corporation (“Telephonics”) designs, develops and manufactures high-technology integrated information, communication and sensor system solutions to military and commercial markets worldwide.


•	Clopay Plastic Products Company, Inc. (“Plastics”) is an international leader in the development and production of embossed, laminated and printed specialty plastic films used in a variety of hygienic, health-care and industrial applications.

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 (“U.S. GAAP”) for interim financial information and with 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 U.S. GAAP for complete financial statements. As such, they should be read with reference to Griffon’s Annual Report on Form 10-K for the year ended September 30, 2013, 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 HBP 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, 2013 was derived from the audited financial statements included in Griffon’s Annual Report on Form 10-K for the year ended September 30, 2013.

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

The preparation of financial statements in conformity with U.S. GAAP 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 allowances for doubtful accounts receivable and returns, net realizable value of inventories, restructuring reserves, valuation of goodwill and intangible assets, percentage of completion method of accounting, pension assumptions, useful lives associated with depreciation and amortization of intangible and fixed assets, warranty reserves, sales incentive accruals, stock based compensation assumptions, income taxes and tax valuation reserves, environmental reserves, legal reserves, insurance reserves

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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)

and the valuation of discontinued assets and liabilities, 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.

NOTE 2 – FAIR VALUE MEASUREMENTS

The carrying values of cash and equivalents, accounts receivable, accounts and notes payable and revolving credit 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 debt is based upon current market rates.

The fair values of Griffon’s senior notes due 2022 and 2017 4% convertible notes approximated $594,000 and $113,400, respectively, on June 30, 2014. Fair values were based upon quoted market prices (level 1 inputs).

Items Measured at Fair Value on a Recurring Basis

Insurance contracts with values of $3,594 (level 2 inputs) at June 30, 2014, are measured and recorded at fair value based upon quoted prices in active markets for similar assets. Trading securities with values of $11,160 (level 1 inputs) at June 30, 2014, are measured and recorded at fair value based upon quoted prices in active markets for identical assets.

At June 30, 2014, Griffon had $4,172 and $1,750 of Australian dollar contracts and Canadian dollar contracts, respectively, at a weighted average rate of $1.06 and $1.07, respectively. The contracts, which protect Australia and Canada operations from currency fluctuations for U.S. dollar based purchases, do not qualify for hedge accounting and a fair value loss of $192 and $125 was recorded in Other assets and to Other income for the outstanding contracts, based on similar contract values (level 2 inputs), for the quarter and nine months ended June 30, 2014, respectively. All contracts expire in 24 to 114 days.

NOTE 3 – ACQUISITIONS

On May 21, 2014, Ames acquired the Australian Garden and Tools business of Illinois Tool Works, Inc. (“Cyclone”) for approximately $40,000, including a $4,000 working capital adjustment. Cyclone, which was integrated with Ames, offers a full range of quality garden and hand tool products sold under various leading brand names including Cyclone®, Nylex® and Trojan®, designed to meet the requirements of both the Do-it-Yourself and professional trade segments. Cyclone is expected to generate approximately $65,000 of annualized revenue. Selling, General and Administrative ("SG&A") expenses in the current quarter included $1,600 of acquisition costs.

On December 31, 2013, Ames acquired Northcote Pottery (“Northcote”), founded in 1897 and a leading brand in the Australian outdoor planter and decor market, for approximately $22,000. Northcote complements Southern Patio, acquired in 2011, and adds to Ames’ existing lawn and garden operations in Australia. Northcote, which was integrated with Ames, is expected to generate approximately $28,000 of annualized revenue. First quarter 2014 SG&A expenses included $798 of acquisition costs.

The accounts of the acquired companies, after adjustment to reflect fair market values (level 3 inputs) assigned to assets purchased, have been included in the consolidated financial statements from the date of acquisition; in each instance, acquired inventory was not significant. Griffon is in the process of finalizing the adjustments to the purchase price, if any, for Cyclone and Northcote, primarily related to working capital, and gathering data as of the closing date to complete the purchase price allocation; accordingly, management has used their best estimates in the initial purchase price allocation as of the date of these financial statements.

The following table summarizes the fair values of the Cyclone and Northcote assets and liabilities as of the date of acquisition:

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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)



	Cyclone			Northcote			Total
Current Assets, net of cash acquired	$	23,936		$	7,921		$	31,857
PP&E	491			1,376			1,867
Goodwill	10,072			11,617			21,689
Amortizable intangible assets	9,844			6,023			15,867
Indefinite life intangible assets	1,874			1,686			3,560
Total assets acquired	46,217			28,623			74,840
Total liabilities assumed	(6,692		)	(6,842		)	(13,534		)
Net assets acquired	$	39,525		$	21,781		$	61,306

The amounts assigned to major intangible asset classifications, none of which are tax deductible, for the Cyclone and Northcote acquisitions are as follows:



	Cyclone		Northcote		Total	Amortization Period (Years)
Goodwill	$	10,072	$	11,617	21,689	N/A
Tradenames	1,874		1,686		3,560	Indefinite
Customer relationships	9,844		6,023		15,867	25
	$	21,790	$	19,326	41,116

NOTE 4 – INVENTORIES

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

The following table details the components of inventory:



	At June 30, 2014		At September 30, 2013
Raw materials and supplies	$	71,533	$	65,560
Work in process	69,884		63,930
Finished goods	137,045		100,630
Total	$	278,462	$	230,120

NOTE 5 – PROPERTY, PLANT AND EQUIPMENT

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



	At June 30, 2014			At September 30, 2013
Land, building and building improvements	$	131,270		$	130,905
Machinery and equipment	715,805			661,094
Leasehold improvements	38,792			35,884
	885,867			827,883
Accumulated depreciation and amortization	(520,491		)	(474,290		)
Total	$	365,376		$	353,593

Depreciation and amortization expense for property, plant and equipment was $14,766 and $15,781 for the quarters ended June 30, 2014 and 2013, respectively, and $44,163 and $46,846 for the nine months ended June 30, 2014 and 2013, respectively. Depreciation included in SG&A expenses was $2,507 and $3,128 for the quarters ended June 30, 2014 and 2013, respectively,

and $7,743 and $9,402 for the nine months ended June 30, 2014 and 2013, respectively. The remaining components of depreciation, attributable to manufacturing operations, are included in Cost of goods and services.

No event or indicator of impairment occurred during the quarter ended June 30, 2014, which would require additional impairment testing of property, plant and equipment.

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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 6 – GOODWILL AND OTHER INTANGIBLES

The following table provides changes in the carrying value of goodwill by segment during the nine months ended June 30, 2014:



	At September 30, 2013		Goodwill from 2014 acquisitions		Other adjustments including currency translations		At June 30, 2014
Home & Building Products	$	269,802	$	21,689	$	948	$	292,439
Telephonics	18,545		—		—		18,545
Plastics	69,383		—		948		70,331
Total	$	357,730	$	21,689	$	1,896	$	381,315

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



	At June 30, 2014					At September 30, 2013
	Gross Carrying Amount		Accumulated Amortization		Average Life (Years)	Gross Carrying Amount		Accumulated Amortization
Customer relationships	$	183,152	$	34,543	25	$	166,985	$	29,049
Unpatented technology	6,708		3,290		13	6,804		2,916
Total amortizable intangible assets	189,860		37,833			173,789		31,965
Trademarks	83,065		—			79,567		—
Total intangible assets	$	272,925	$	37,833		$	253,356	$	31,965

Amortization expense for intangible assets was $2,028 and $1,969 for the quarters ended June 30, 2014 and 2013, respectively, and $5,864 and $5,941 for the nine months ended June 30, 2014 and 2013, respectively.

No event or indicator of impairment occurred during the quarter ended June 30, 2014, which would require impairment testing of long-lived intangible assets including goodwill.

NOTE 7 – INCOME TAXES

The Company reported pretax income for the quarter and a pretax loss for the nine months ended June 30, 2014, compared to pretax income for the quarter and nine months ended June 30, 2013. The Company recognized tax benefits of 12.2% and 38.0% for the quarter and nine months ended June 30, 2014, respectively, compared to provisions of 54.0% and 53.6%, respectively, in the comparable prior year periods. The current and prior year tax rates reflect the impact of permanent differences not deductible in determining taxable income, mainly limited deductibility of restricted stock, tax reserves and changes in earnings mix between domestic and non-domestic operations, which are material relative to the level of pretax results and the impact of discrete items reported.

The quarter and nine months ended June 30, 2014 include $1,860 and $1,540, respectively, of benefits from discrete items resulting primarily from the conclusion of tax audits, the filing of tax returns in various jurisdictions, the release of previously established reserves for uncertain tax positions and the impact of tax law changes enacted in the second quarter of 2014. The comparable prior year periods included $1,495 and $1,859, respectively, of benefits from discrete items, primarily resulting from the release of previously established reserves for uncertain tax positions on conclusion of tax audits, benefits arising on the filing of tax returns in various jurisdictions and the retroactive extension of the federal R&D credit signed into law January 2, 2013.

Excluding discrete items, the effective tax rates for the quarter and nine months ended June 30, 2014 were a provision of 27.0% and a benefit of 26.3%, respectively, compared to provisions of 73.1% and 79.4% in the comparable prior year periods, respectively.

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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 8 – LONG-TERM DEBT



		At June 30, 2014													At September 30, 2013
		Outstanding Balance			Original Issuer Discount			Balance Sheet			Capitalized Fees & Expenses		Coupon Interest Rate (1)		Outstanding Balance			Original Issuer Discount			Balance Sheet			Capitalized Fees & Expenses		Coupon Interest Rate (1)
Senior notes due 2018	(a)	$	—		$	—		$	—		$	—	n/a		$	550,000		$	—		$	550,000		$	7,328	7.10	%
Senior notes due 2022	(a)	600,000			—			600,000			9,529		5.25	%	—			—			—			—		n/a
Revolver due 2019	(a)	25,000			—			25,000			2,122		n/a		—			—			—			2,425		n/a
Convert. debt due 2017	(b)	100,000			(10,532		)	89,468			1,145		4.00	%	100,000			(13,246		)	86,754			1,478		4.00	%
Real estate mortgages	(c)	16,603			—			16,603			612		n/a		13,212			—			13,212			185		n/a
ESOP Loans	(d)	29,583			—			29,583			233		n/a		21,098			—			21,098			24		n/a
Capital lease - real estate	(e)	8,798			—			8,798			188		5.00	%	9,529			—			9,529			207		5.00	%
Non U.S. lines of credit	(f)	7,754			—			7,754			—		n/a		4,606			—			4,606			—		n/a
Non U.S. term loans	(f)	30,612			—			30,612			189		n/a		3,115			—			3,115			27		n/a
Other long term debt	(g)	1,248			—			1,248			27		n/a		941			—			941			—		n/a
Totals		819,598			(10,532		)	809,066			$	14,045			702,501			(13,246		)	689,255			$	11,674
less: Current portion		(11,886		)	—			(11,886		)					(10,768		)	—			(10,768		)
Long-term debt		$	807,712		$	(10,532	)	$	797,180						$	691,733		$	(13,246	)	$	678,487

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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)



		Three Months Ended June 30, 2014												Three Months Ended June 30, 2013
		Effective Interest Rate (1)		Cash Interest			Amort. Debt Discount		Amort. Deferred Cost & Other Fees		Total Interest Expense			Effective Interest Rate (1)		Cash Interest			Amort. Debt Discount		Amort. Deferred Cost & Other Fees		Total Interest Expense
Senior notes due 2018	(a)	n/a		$	—		$	—	$	—	$	—		7.4	%	$	9,797		$	—	$	406	$	10,203
Senior notes due 2022	(a)	5.5	%	7,875			—		310		8,185			n/a		—			—		—		—
Revolver due 2019	(a)	n/a		309			—		144		453			n/a		179			—		131		310
Convert. debt due 2017	(b)	9.1	%	1,000			921		112		2,033			9.1	%	1,000			846		110		1,956
Real estate mortgages	(c)	3.8	%	124			—		35		159			4.9	%	133			—		22		155
ESOP Loans	(d)	2.9	%	192			—		25		217			2.8	%	151			—		2		153
Capital lease - real estate	(e)	5.3	%	112			—		5		117			5.3	%	125			—		6		131
Non U.S. lines of credit	(f)	n/a		307			—		27		334			n/a		155			—		—		155
Non U.S. term loans	(f)	n/a		273			—		13		286			n/a		109			—		26		135
Other long term debt	(g)	n/a		6			—		9		15			n/a		272			—		—		272
Capitalized interest				(138		)	—		—		(138		)			(191		)	—		—		(191		)
Totals				$	10,060		$	921	$	680	$	11,661				$	11,730		$	846	$	703	$	13,279

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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)



		Nine Months Ended June 30, 2014												Nine Months Ended June 30, 2013
		Effective Interest Rate (1)		Cash Interest			Amort. Debt Discount		Amort. Deferred Cost & Other Fees		Total Interest Expense			Effective Interest Rate (1)		Cash Interest			Amort. Debt Discount		Amort. Deferred Cost & Other Fees		Total Interest Expense
Senior notes due 2018	(a)	7.4	%	$	15,930		$	—	$	667	$	16,597		7.4	%	$	29,391		$	—	$	1,217	$	30,608
Senior notes due 2022	(a)	5.5	%	10,675			—		421		11,096			n/a		—			—		—		—
Revolver due 2019	(a)	n/a		782			—		422		1,204			n/a		603			—		444		1,047
Convert. debt due 2017	(b)	9.1	%	3,000			2,713		333		6,046			9.2	%	3,000			2,491		332		5,823
Real estate mortgages	(c)	4.0	%	376			—		108		484			4.9	%	407			—		65		472
ESOP Loans	(d)	3.2	%	524			—		32		556			2.9	%	476			—		6		482
Capital lease - real estate	(e)	5.4	%	345			—		19		364			5.3	%	381			—		19		400
Non U.S. lines of credit	(f)	n/a		724			—		27		751			n/a		415			—		—		415
Non U.S. term loans	(f)	n/a		426			—		17		443			n/a		415			—		77		492
Other long term debt	(g)	n/a		17			—		30		47			n/a		523			—		—		523
Capitalized interest				(404		)	—		—		(404		)			(816		)	—		—		(816		)
Totals				$	32,395		$	2,713	$	2,076	$	37,184				$	34,795		$	2,491	$	2,160	$	39,446

(1) not applicable = n/a

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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)

On February 27, 2014, in an unregistered offering through a private placement under Rule 144A, Griffon issued, at par, $600,000 of 5.25% Senior Notes due 2022 (“Senior Notes”); interest is payable semi-annually on March 1 and September 1, starting September 1, 2014. Proceeds from the Senior Notes were used to redeem $550,000 of 7.125% senior notes due 2018, to pay a tender offer premium of $31,530 and to make interest payments of $16,716, with the balance used to pay a portion of the transaction fees and expenses. The Senior Notes are senior unsecured obligations of Griffon guaranteed by certain domestic subsidiaries, and subject to certain covenants, limitations and restrictions. On June 18, 2014, Griffon exchanged all of the Senior Notes for substantially identical Senior Notes registered under the Securities Act of 1933 via an exchange offer.

In connection with these transactions, Griffon capitalized $9,950 of underwriting fees and other expenses incurred related to issuance of the Senior Notes, which will amortize over the term of such notes. Griffon recognized a loss on the early extinguishment of debt on the 7.125% senior notes aggregating $38,890, comprised of the $31,530 tender offer premium, the write-off of $6,574 of remaining deferred financing fees and $786 of prepaid interest on defeased notes.

On February 14, 2014, Griffon amended its $225,000 Revolving Credit Facility (“Credit Agreement”) to extend its maturity date from March 28, 2018 to March 28, 2019, and to revise certain financial maintenance and negative covenants to improve Griffon's financial and operating flexibility. The facility includes a letter of credit sub-facility with a limit of $60,000, a multi-currency sub-facility of $50,000 and a swing line sub-facility with a limit of $30,000. Borrowings under the Credit Agreement may be repaid and re-borrowed at any time, subject to final maturity of the facility or the occurrence of a default or an event of default under the Credit Agreement. Interest is payable on borrowings at either a LIBOR or base rate benchmark rate, in each case without a floor, plus an applicable margin, which adjusts based on financial performance. The current margins are 1.25% for base rate loans and 2.25% for LIBOR loans. The Credit Agreement has certain financial maintenance tests including a maximum total leverage ratio, a maximum senior secured leverage ratio and a minimum interest coverage ratio as well as customary affirmative and negative covenants and events of default. The Credit Agreement also includes certain restrictions, such as limitations on the ability of Griffon to incur indebtedness and liens and to make restricted payments and investments. Borrowings under the Credit Agreement are guaranteed by Griffon’s material domestic subsidiaries and are secured, on a first priority basis, by substantially all assets of the Company and the guarantors and a pledge of not greater than 65% of the equity interest in each of Griffon’s material, first-tier foreign subsidiaries (except that a lien on the assets of Griffon and its material domestic subsidiaries securing a limited amount of the debt under the ESOP credit agreement ranks pari passu with the lien granted on such assets under the Credit Agreement; see footnote (d) below).

At June 30, 2014, outstanding borrowings and standby letters of credit were $25,000 and $20,365, respectively; $179,635 was available for borrowing at that date.

(b)

On December 21, 2009, Griffon issued $100,000 principal of 4% convertible subordinated notes due 2017 (the “2017 Notes”). The current conversion rate of the 2017 Notes is 68.6238 shares of Griffon’s common stock per $1,000 principal amount of notes, corresponding to a conversion price of $14.53 per share. When a cash dividend is declared that would result in an adjustment to the conversion ratio of less than 1%, any adjustment to the conversion ratio is deferred until the first to occur of (i) actual conversion; (ii) the 42nd trading day prior to maturity of the notes; and (iii) such time as the cumulative adjustment equals or exceeds 1%. As of June 30, 2014, aggregate dividends since the last conversion price adjustment of $0.03 per share would have resulted in an adjustment to the conversion ratio of approximately .27%. At both June 30, 2014 and 2013, the 2017 Notes had a capital in excess of par component, net of tax, of $15,720.


(c)	On October 21, 2013, Griffon refinanced two properties’ real estate mortgages to secure loans totaling $17,175. The loans mature in October 2018, are collateralized by the related properties and are guaranteed by Griffon. The loans bear interest at a rate of LIBOR plus 2.75%. At June 30, 2014, $16,603 was outstanding.

(d)

In December 2013, Griffon’s Employee Stock Ownership Plan (“ESOP”) entered into a credit agreement which refinanced the two existing ESOP loans into one new Term Loan in the amount of $21,098. The agreement also provided a Line Note with $10,000 available to purchase shares of Griffon common stock in the open market through September 29, 2014. As of June 30, 2014, 749,977 shares of Griffon common stock, for a total of $10,000, were purchased with proceeds from the Line Note. In March 2014, the Line Note was combined with the Term Loan to form one new term loan. The loan bears interest at a) LIBOR plus 2.25% or b) the lender’s prime rate, at Griffon’s option. The loan requires quarterly principal payments of $505 through September 30, 2014 and $419 per quarter thereafter, with a balloon payment of approximately $22,400 due at maturity in December 2018. The loan is secured by shares purchased with the proceeds of the loan and with a lien on the assets of Griffon and its material domestic

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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)

subsidiaries securing a limited amount of the loan (which lien ranks pari passu with the lien granted on such assets securing the debt under Griffon’s revolving credit facility; see footnote (a) above), and Griffon guarantees repayment. As of June 30, 2014, $29,583 was outstanding.

In July 2014, Griffon's ESOP entered into an amendment to the existing agreement which provides for an additional $10,000 Line Note available to purchase shares in the open market. The new Line Note will bear interest at a) LIBOR plus 2.75% or b) the lender’s prime rate, at Griffon’s option, through its expiration date on June 30, 2015. Upon expiration or at an earlier date, at Griffon’s option, the new Line Note will be combined with the Term Loan and require quarterly principal payments based on the remaining amortization schedule at a weighted average interest rate of the combined loans, with a balloon payment due at the final maturity date of December 31, 2018, based on the new amortization schedule. The new Line Note and the Term Loan are secured by shares purchased with the proceeds of the loan and with a lien on the assets of Griffon and its material domestic subsidiaries securing a limited amount of the loan (which lien ranks pari passu with the lien granted on such assets securing the debt under Griffon’s revolving credit facility; see footnote (a) above), and Griffon guarantees repayment.


(e)	In October 2006, CBP entered into a capital lease totaling $14,290 for real estate in Troy, Ohio. The lease matures in 2022, bears interest at a fixed rate of 5.0%, is secured by a mortgage on the real estate and is guaranteed by Griffon. At June 30, 2014, $8,798 was outstanding.

(f)

In November 2010, Clopay Europe GmbH (“Clopay Europe”) entered into a €10,000 revolving credit facility and a €20,000 term loan. The term loan was paid off in December 2013 and the revolver had borrowings of $4,093 at June 30, 2014. The revolving facility matures in November 2014, but is renewable upon mutual agreement with the bank. The revolving credit facility accrues interest at EURIBOR plus 2.20% per annum (2.41% at June 30, 2014). Clopay Europe is required to maintain a certain minimum equity to assets ratio and keep leverage below a certain level, defined as the ratio of total debt to EBITDA.

Clopay do Brazil maintains lines of credit of approximately $5,700. Interest on borrowings accrues at a rate of Brazilian CDI plus 6.0% (16.80% at June 30, 2014). At June 30, 2014 there was $3,660 borrowed under the lines. Clopay Plastic Products Company, Inc. guarantees the loan and lines.

In November 2012, Garant G.P. (“Garant”) entered into a CAD $15,000 revolving credit facility. The facility accrues interest at LIBOR (USD) or the Bankers Acceptance Rate (CDN) plus 1.3% per annum (1.46% LIBOR USD and 2.51% Bankers Acceptance Rate CDN as of June 30, 2014). The revolving facility matures in November 2015. Garant is required to maintain a certain minimum equity. At June 30, 2014, there were no borrowings under the revolving credit facility with CAD $15,000 available for borrowing.

In December 2013 and May 2014, Northcote Holdings Pty Ltd entered into two term loans in the outstanding amounts of AUD $12,500 and AUD $20,000, respectively. The AUD $12,500 and AUD $20,000 term loans are unsecured and require quarterly interest payments, with quarterly principal payments of $625 beginning in August 2015 on the AUD $20,000 term loan. Remaining principal is due at maturity in December 2016 and May 2017, respectively. The loans accrue interest at Bank Bill Swap Bid Rate “BBSY” plus 2.8% per annum (5.5% at June 30, 2014 for each loan). As of June 30, 2014, Griffon had an outstanding combined balance of $30,612 on the term loans. Subsidiaries of Northcote Holdings Pty Ltd also maintain two lines of credit of AUD $3,000 and AUD $5,000 which accrue interest at BBSY plus 2.25% per annum (5.00% at June 30, 2014) and 2.50% per annum (5.25% at June 30, 2014), respectively. At June 30, 2014, there were no outstanding borrowings under the lines. Griffon Corporation guarantees the term loans and the AUD $3,000 line of credit; the assets of a subsidiary of Northcote Holdings Pty Ltd secures the AUD $5,000 line of credit.

(g) Other long-term debt primarily consists of capital leases.

At June 30, 2014, Griffon and its subsidiaries were in compliance with the terms and covenants of its credit and loan agreements.

NOTE 9 — SHAREHOLDERS’ EQUITY

During 2013, the Company declared and paid quarterly dividends of $0.025 per share, totaling $0.10 per share for the year. During 2014, the Board of Directors approved and paid a quarterly cash dividend of $0.03 per share in each quarter, totaling $0.09 per share for the nine months ended June 30, 2014. Dividends paid on allocated shares in the ESOP were used to pay down the ESOP loan and recorded as a reduction in expense. A dividend payable was established for the holders of restricted shares; such dividends will be released upon vesting of the underlying restricted shares.

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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)

On July 30, 2014, the Board of Directors declared a quarterly cash dividend of $0.03 per share, payable on September 24, 2014 to shareholders of record as of the close of business on August 21, 2014.

Compensation expense for restricted stock is recognized ratably over the required service period based on the fair value of the grant calculated as the number of shares granted multiplied by the stock price on the date of grant and, for performance shares, the likelihood of achieving the performance criteria. Compensation cost related to stock-based awards with graded vesting is amortized using the straight-line attribution method.

In February 2011, shareholders approved the Griffon Corporation 2011 Equity Incentive Plan under which awards of performance shares, performance units, stock options, stock appreciation rights, restricted shares, deferred shares and other stock-based awards may be granted. On January 30, 2014, shareholders approved an amendment and restatement of the Incentive Plan (as amended, the “Incentive Plan”), which, among other things, added 1,200,000 shares to the Incentive Plan. Options granted under the Incentive Plan may be either “incentive stock options” or nonqualified stock options, generally expire ten years after the date of grant and are granted at an exercise price of not less than 100% of the fair market value at the date of grant. The maximum number of shares of common stock available for award under the Incentive Plan is 4,200,000 (600,000 of which may be issued as incentive stock options), plus any shares underlying awards outstanding on the effective date of the Incentive Plan under the 2006 Incentive Plan that are subsequently cancelled or forfeited. As of June 30, 2014, 989,895 shares were available for grant.

All grants outstanding under the Griffon Corporation 2001 Stock Option Plan, 2006 Equity Incentive Plan and Outside Director Stock Award Plan will continue under their terms; no additional awards will be granted under such plans.

During the first quarter of 2014, Griffon granted 599,328 restricted stock awards with vesting periods up to four years, 554,498 of which are also subject to certain performance conditions, with a total fair value of $7,426, or a weighted average fair value of $12.39 per share. During the second quarter of 2014, Griffon granted 518,490 restricted stock awards with vesting periods up to four years, 461,827 of which are also subject to certain performance conditions, with a total fair value of $7,074, or a weighted average fair value of $13.64 per share.

In connection with the Northcote acquisition, Griffon entered into certain retention arrangements with Northcote management. Under these arrangements, on January 10, 2014, Griffon issued 44,476 shares of common stock to Northcote management for an aggregate purchase price of $584 or $13.13 per share, and for each share of common stock purchased, Northcote management received one restricted stock unit (included in the detail in the prior paragraph), that vests in three equal installments over 3 years, subject to the attainment of specified performance criteria.

For the quarters ended June 30, 2014 and 2013, stock based compensation expense totaled $3,137 and $3,029, respectively. For the nine months ended June 30, 2014 and 2013, stock based compensation expenses totaled $8,133 and $9,327, respectively.

In each of August 2011 and May 2014, Griffon’s Board of Directors authorized the repurchase of up to $50,000 of Griffon’s outstanding common stock for each program. Under both repurchase programs, the Company may purchase shares, depending upon market conditions, in open market or privately negotiated transactions, including pursuant to a 10b5-1 plan. During the quarter ended June 30, 2014, Griffon purchased 750,000 shares of common stock under these programs, for a total of $8,784 or $11.71 per share. In the nine months ended June 30, 2014, Griffon purchased 1,348,481 shares of common stock under these programs, for a total of $16,285 or $12.08 per share. Since the resumption of share repurchases in 2011 through the end of the third quarter of 2014, Griffon has repurchased 6,436,712 shares of common stock, for a total of $65,315 or $10.15 per share, under Board authorized repurchase programs (which repurchases included exhausting the remaining availability under a Board authorized repurchase program that was in existence prior to 2011). As of June 30, 2014, the August 2011 program was completed and $45,742 remains under the May 2014 authorization.

During the quarter and nine months ended June 30, 2014, 33,046 shares, with a market value of $364 or $11.02 per share, and 444,110 shares, with a market value of $5,631 or $12.68 per share, respectively, were withheld to settle employee taxes due to the vesting of restricted stock and were added to treasury.

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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)

On December 10, 2013, Griffon repurchased 4,444,444 shares of its common stock for $50,000 from GS Direct, L.L.C. (“GS Direct”), an affiliate of The Goldman Sachs Group, Inc. The repurchase was effected in a private transaction at a per share price of $11.25, an approximate 9.2% discount to the stock’s closing price on November 12, 2013, the day before announcement of the transaction. The transaction was exclusive of the Company’s August 2011 $50,000 authorized share repurchase program. After closing the transaction, GS Direct continued to hold approximately 5.56 million shares (approximately 10%) of Griffon’s common stock. GS Direct also agreed that, subject to certain exceptions, if it intends to sell its remaining shares of Griffon common stock at any time prior to December 31, 2014, it will first negotiate in good faith to sell such shares to the Company.

In December 2013, Griffon’s Board of Directors authorized the ESOP to purchase up to $10,000 of Griffon’s outstanding common stock, depending upon market conditions, in open market or privately negotiated transactions, including pursuant to a 10b5-1 plan. During the first quarter of 2014, the ESOP purchased 120,000 shares of common stock, for a total of $1,591 or $13.26 per share. During the second quarter of 2014, the ESOP purchased 629,977 shares of common stock, for a total of $8,409 or $13.35 per share. In total, during the nine months ended June 30, 2014, the ESOP purchased 749,977 shares of common stock, for a total of $10,000 or $13.33 per share, exhausting the $10,000 authorization. In July 2014, Griffon's ESOP entered into an amendment of the existing Agreement, which provides an additional $10,000 Line Note available to purchase shares in the open market.

NOTE 10 – EARNINGS PER SHARE (EPS)

Basic EPS (and diluted EPS in periods where a loss exists) was calculated by dividing income available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted EPS was calculated by dividing income available to common shareholders by the weighted average number of shares of common stock outstanding plus additional common shares that could be issued in connection with stock based compensation. The 2017 Notes were anti-dilutive due to the conversion price being greater than the weighted-average stock price during the periods presented.

The following table is a reconciliation of the share amounts (in thousands) used in computing earnings per share:



	Three Months Ended June 30,		Nine Months Ended June 30,
	2014	2013	2014	2013
Weighted average shares outstanding - basic	48,370	54,265	50,038	54,588
Incremental shares from stock based compensation	1,466	1,939	—	2,147

Weighted average shares outstanding - diluted	49,836	56,204	50,038	56,735

Anti-dilutive options excluded from diluted EPS computation	643	715	643	715
Anti-dilutive restricted stock excluded from diluted EPS computation	—	—	1,609	—

Griffon has the intent and ability to settle the principal amount of the 2017 Notes in cash, and as such, the potential issuance of shares related to the principal amount of the 2017 Notes does not affect diluted shares.

NOTE 11 – BUSINESS SEGMENTS

Griffon’s reportable business segments are as follows:


•	HBP is a leading manufacturer and marketer of residential, commercial and industrial garage doors to professional installing dealers and major home center retail chains, as well as a global provider of non-powered landscaping products that make work easier for homeowners and professionals.


•	Telephonics develops, designs and manufactures high-technology integrated information, communication and sensor system solutions to military and commercial markets worldwide.


•	Plastics is an international leader in the development and production of embossed, laminated and printed specialty plastic films used in a variety of hygienic, health-care and industrial applications.

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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)

Information on Griffon’s business segments is as follows:



	For the Three Months Ended June 30,				For the Nine Months Ended June 30,
REVENUE	2014		2013		2014		2013
Home & Building Products:
Ames	$	132,179	$	128,332	$	389,492	$	341,878
CBP	121,814		112,285		334,494		314,651
Home & Building Products	253,993		240,617		723,986		656,529
Telephonics	102,446		129,997		302,656		347,678
Plastics	148,600		139,212		439,542		418,111
Total consolidated net sales	$	505,039	$	509,826	$	1,466,184	$	1,422,318

The following table reconciles segment operating profit to Loss before taxes:



	For the Three Months Ended June 30,						For the Nine Months Ended June 30,
INCOME (LOSS) BEFORE TAXES	2014			2013			2014			2013
Segment operating profit:
Home & Building Products	$	9,747		$	11,549		$	27,958		$	22,655
Telephonics	13,134			10,592			34,463			38,990
Plastics	8,075			5,401			23,252			8,959
Total segment operating profit	30,956			27,542			85,673			70,604
Net interest expense	(11,541		)	(13,137		)	(37,003		)	(39,125		)
Unallocated amounts	(6,521		)	(6,573		)	(22,895		)	(22,140		)
Loss from debt extinguishment, net	—			—			(38,890		)	—
Loss on pension settlement	—			—			—			(2,142		)
Income (loss) before taxes	$	12,894		$	7,832		$	(13,115	)	$	7,197

Griffon evaluates performance and allocates resources based on each segment's operating results before interest income and expense, income taxes, depreciation and amortization, unallocated amounts (mainly corporate overhead), restructuring charges, acquisition-related expenses, and gains (losses) from pension settlement and debt extinguishment, as applicable (“Segment adjusted EBITDA”). Griffon believes this information is useful to investors for the same reason.

The following table provides a reconciliation of Segment adjusted EBITDA to Income (loss) before taxes:

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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)



	For the Three Months Ended June 30,						For the Nine Months Ended June 30,
	2014			2013			2014			2013
Segment adjusted EBITDA:
Home & Building Products	$	19,596		$	21,478		$	55,787		$	56,272
Telephonics	15,087			13,146			40,018			45,015
Plastics	14,922			12,161			43,881			33,832
Total Segment adjusted EBITDA	49,605			46,785			139,686			135,119
Net interest expense	(11,541		)	(13,137		)	(37,003		)	(39,125		)
Segment depreciation and amortization	(16,691		)	(17,639		)	(49,723		)	(52,467		)
Unallocated amounts	(6,521		)	(6,573		)	(22,895		)	(22,140		)
Loss from debt extinguishment, net	—			—			(38,890		)	—
Restructuring charges	(358		)	(1,604		)	(1,892		)	(12,048		)
Acquisition costs	(1,600		)	—			(2,398		)	—
Loss on pension settlement	—			—			—			(2,142		)
Income (loss) before taxes	$	12,894		$	7,832		$	(13,115	)	$	7,197

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)

Unallocated amounts typically include general corporate expenses not attributable to a reportable segment.



	For the Three Months Ended June 30,				For the Nine Months Ended June 30,
DEPRECIATION and AMORTIZATION	2014		2013		2014		2013
Segment:
Home & Building Products	$	7,891	$	9,075	$	23,539	$	27,092
Telephonics	1,953		1,804		5,555		5,275
Plastics	6,847		6,760		20,629		20,100
Total segment depreciation and amortization	16,691		17,639		49,723		52,467
Corporate	104		110		304		320
Total consolidated depreciation and amortization	$	16,795	$	17,749	$	50,027	$	52,787

CAPITAL EXPENDITURES
Segment:
Home & Building Products	$	8,194	$	6,534	$	23,384	$	22,352
Telephonics	6,082		2,401		14,969		5,853
Plastics	5,063		5,947		15,213		17,648
Total segment	19,339		14,882		53,566		45,853
Corporate	675		9		1,293		33
Total consolidated capital expenditures	$	20,014	$	14,891	$	54,859	$	45,886



ASSETS	At June 30, 2014		At September 30, 2013
Segment assets:
Home & Building Products	$	1,020,849	$	908,386
Telephonics	299,058		296,919
Plastics	421,892		422,730
Total segment assets	1,741,799		1,628,035
Corporate	85,210		156,455
Total continuing assets	1,827,009		1,784,490
Assets of discontinued operations	4,241		4,289
Consolidated total	$	1,831,250	$	1,788,779

NOTE 12 – DEFINED BENEFIT PENSION EXPENSE

Defined benefit pension expense was as follows:



	Three Months Ended June 30,						Nine Months Ended June 30,
	2014			2013			2014			2013
Service cost	$	—		$	51		$	90		$	149
Interest cost	2,416			2,427			7,415			7,274
Expected return on plan assets	(2,820		)	(3,139		)	(8,590		)	(9,413		)
Amortization:
Prior service cost	4			5			11			15
Recognized actuarial loss	485			840			1,463			2,520
Loss on pension settlement	—			—			—			2,142
Net periodic expense	$	85		$	184		$	389		$	2,687

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)

During the second quarter of 2014, the company contributed €1,300 (U.S. $1,776), which equaled the net balance sheet liability, in settlement of all remaining obligations for a non U.S. Pension liability. There were no gains or losses recorded for this settlement.

First quarter of 2013 SG&A expenses included a $2,142 pension settlement loss resulting from the lump-sum buyout of certain participant’s balances in the Company’s defined benefit plan. The buyouts, funded by the pension plan, reduced the Company’s net pension liability by $3,472 and increased Accumulated Other Comprehensive Income by $3,649.

NOTE 13 – RECENT ACCOUNTING PRONOUNCEMENTS

In February 2013, the FASB issued guidance requiring enhanced disclosures for items reclassified out of accumulated other comprehensive income (loss). The guidance does not amend any existing requirements for reporting net income (loss) or other comprehensive income (loss) in the financial statements. This guidance is effective prospectively for annual reporting periods beginning after December 15, 2012, with early adoption permitted. As this new guidance is related to presentation only, the implementation of this guidance in the first quarter of fiscal year 2014 did not have a material effect on the Company’s financial condition or results of operations.

In April 2014, the FASB issued guidance changing the requirements for reporting discontinued operations where a disposal of a component of an entity or group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results when either classified as held for sale, or disposed of by sale or otherwise disposed. The amendment also requires enhanced disclosures about the discontinued operation and disclosure information for other significant dispositions. This guidance is effective prospectively for annual reporting periods beginning after December 15, 2014, with early adoption permitted for disposals that have not been previously reported. The implementation of this guidance is not expected to have a material effect on the Company’s financial condition or results of operations.

In May 2014, the FASB issued guidance on revenue from contracts with customers. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved, in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers. This guidance permits the use of either the retrospective or cumulative effect transition method and is effective for annual reporting periods beginning after December 15, 2016; early adoption is not permitted. We have not yet selected a transition method and are currently evaluating the impact of the guidance on the Company's financial condition, results of operations and related disclosures.

The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.

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 14 – DISCONTINUED OPERATIONS

The following amounts related to the Installation Services segment, discontinued in 2008, and other businesses discontinued several years ago, which have been segregated from Griffon’s continuing operations, and are reported as assets and liabilities of discontinued operations in the condensed consolidated balance sheets:



	At June 30, 2014	At September 30, 2013
Assets of discontinued operations: