Edgar Filing: GRIFFON CORP

Document

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 December 31, 2018



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 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). ý Yes o 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. (Check one):



Large accelerated filer ý	Accelerated filer	o
Non-accelerated filer o
	Smaller reporting company	o
	Emerging growth company	o
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. o

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 December 31, 2018 was 46,763,601.

Griffon Corporation and Subsidiaries

Contents



	Page
PART I - FINANCIAL INFORMATION

Item 1 – Financial Statements

Condensed Consolidated Balance Sheets at December 31, 2018 (unaudited) and September 30, 2018	1

Condensed Consolidated Statement of Shareholders’ Equity for the Three Months Ended December 31, 2018 (unaudited)	2

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended December 31, 2018 and 2017 (unaudited)	3

Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2018 and 2017 (unaudited)	4

Notes to Condensed Consolidated Financial Statements (unaudited)	5

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	38

Item 3 - Quantitative and Qualitative Disclosures about Market Risk	49

Item 4 - Controls & Procedures	49

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings	51

Item 1A – Risk Factors	51

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	51

Item 3 – Defaults Upon Senior Securities	51

Item 4 – Mine Safety Disclosures	51

Item 5 – Other Information	51

Item 6 – Exhibits	52

Signatures	53

Table of Contents

Part I – Financial Information

Item 1 – Financial Statements

GRIFFON CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)



	(Unaudited)
	December 31, 2018		September 30, 2018
CURRENT ASSETS
Cash and equivalents	$	81,752	$	69,758
Accounts receivable, net of allowances of $7,892 and $6,408	253,351		280,509
Contract costs and recognized income not yet billed, net of progress payments of $4,037 and $3,172	89,232		121,803
Inventories	452,362		398,359
Prepaid and other current assets	39,615		42,121
Assets of discontinued operations	325		324
Total Current Assets	916,637		912,874
PROPERTY, PLANT AND EQUIPMENT, net	336,490		342,492
GOODWILL	438,428		439,395
INTANGIBLE ASSETS, net	365,381		370,858
OTHER ASSETS	14,944		16,355
ASSETS OF DISCONTINUED OPERATIONS	2,909		2,916
Total Assets	$	2,074,789	$	2,084,890

CURRENT LIABILITIES
Notes payable and current portion of long-term debt	$	12,872	$	13,011
Accounts payable	209,202		233,658
Accrued liabilities	138,368		139,192
Liabilities of discontinued operations	6,882		7,210
Total Current Liabilities	367,324		393,071
LONG-TERM DEBT, net	1,142,079		1,108,071
OTHER LIABILITIES	91,315		106,710
LIABILITIES OF DISCONTINUED OPERATIONS	2,510		2,647
Total Liabilities	1,603,228		1,610,499
COMMITMENTS AND CONTINGENCIES - See Note 19
SHAREHOLDERS’ EQUITY
Total Shareholders’ Equity	471,561		474,391
Total Liabilities and Shareholders’ Equity	$	2,074,789	$	2,084,890

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

Table of Contents

GRIFFON CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(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, 2018	81,520	$	20,380	$	503,396		$	550,523		35,846	$	(534,830	)	$	(34,112	)	$	(30,966	)	$	474,391
Net income	—	—		—			8,753			—	—			—			—			8,753
Cumulative catch-up adjustment related to adoption of ASC 606⁽¹⁾	—	—		—			(5,673		)	—	—			—			—			(5,673		)
Dividend	—	—		—			(3,143		)	—	—			—			—			(3,143		)
Shares withheld on employee taxes on vested equity awards	—	—		—			—			83	(1,058		)	—			—			(1,058		)
Amortization of deferred compensation	—	—		—			—			—	—			—			856			856
Common stock acquired	—	—		—			—			29	(290		)	—			—			(290		)
Equity awards granted, net	1,201	300		(300		)	—			—	—			—			—			—
ESOP allocation of common stock	—	—		(8		)	—			—	—			—			—			(8		)
Stock-based compensation	—	—		2,933			—			—	—			—			—			2,933
Stock-based consideration	—	—		250			—			—	—			—			—			250
Other comprehensive income, net of tax	—	—		—			—			—	—			(5,450		)	—			(5,450		)
Balance at December 31, 2018	82,721	$	20,680	$	506,271		$	550,460		35,958	$	(536,178	)	$	(39,562	)	$	(30,110	)	$	471,561

^{(1) See Note 14 - Recent Accounting Pronouncements and Note 3 - Revenue for additional information.}

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

Table of Contents

GRIFFON CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share data)

(Unaudited)



	Three Months Ended December 31,
	2018			2017
Revenue	$	510,522		$	437,303
Cost of goods and services	367,476			316,524
Gross profit	143,046			120,779

Selling, general and administrative expenses	113,754			106,624

Income from operations	29,292			14,155

Other income (expense)
Interest expense	(16,529		)	(16,839		)
Interest income	198			197
Other, net	1,004			414
Total other expense, net	(15,327		)	(16,228		)

Income (loss) before taxes from continuing operations	13,965			(2,073		)
Provision (benefit) from income taxes	5,212			(24,904		)
Income from continuing operations	$	8,753		$	22,831

Discontinued operations:
Income from operations of discontinued operations	—			11,466
Provision for income taxes	—			3,308
Income from discontinued operations	—			8,158
Net income	$	8,753		$	30,989

Income from continuing operations	$	0.21		$	0.54
Income from discontinued operations	—			0.19
Basic earnings per common share	$	0.21		$	0.74

Weighted-average shares outstanding	40,750			41,923

Income from continuing operations	$	0.21		$	0.53
Income from discontinued operations	—			0.19
Diluted earnings per common share	$	0.21		$	0.72

Weighted-average shares outstanding	41,888			43,336

Dividends paid per common share	$	0.0725		$	0.07

Net income	$	8,753		$	30,989
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustments	(5,736		)	(1,289		)
Pension and other post retirement plans	184			9,559
Change in cash flow hedges	102			88
Total other comprehensive income (loss), net of taxes	(5,450		)	8,358
Comprehensive income, net	$	3,303		$	39,347

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

Table of Contents

GRIFFON CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)



	Three Months Ended December 31,
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES - CONTINUING OPERATIONS:
Net income	$	8,753		$	30,989
Net (income) from discontinued operations	—			(8,158		)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	15,085			12,958
Stock-based compensation	2,933			2,555
Provision (recovery) for losses on accounts receivable	158			(220		)
Amortization of debt discounts and issuance costs	1,229			1,243
Deferred income taxes	(1,380		)	(23,186		)
(Gain) loss on sale of assets and investments	(91		)	209
Change in assets and liabilities, net of assets and liabilities acquired:
Decrease in accounts receivable and contract costs and recognized income not yet billed	37,181			38,909
Increase in inventories	(33,958		)	(28,073		)
Increase in prepaid and other assets	(444		)	(8,459		)
Decrease in accounts payable, accrued liabilities and income taxes payable	(29,622		)	(24,973		)
Other changes, net	1,197			552
Net cash provided by (used in) operating activities - continuing operations	1,041			(5,654		)
CASH FLOWS FROM INVESTING ACTIVITIES - CONTINUING OPERATIONS:
Acquisition of property, plant and equipment	(8,397		)	(10,785		)
Acquired businesses, net of cash acquired	(9,219		)	(198,683		)
Proceeds from sale of assets	51			439
Net cash used in investing activities - continuing operations	(17,565		)	(209,029		)
CASH FLOWS FROM FINANCING ACTIVITIES - CONTINUING OPERATIONS:
Dividends paid	(3,143		)	(2,990		)
Purchase of shares for treasury	(1,348		)	(4,332		)
Proceeds from long-term debt	38,965			326,094
Payments of long-term debt	(4,322		)	(52,973		)
Change in short-term borrowings	38			35
Financing costs	(67		)	(7,392		)
Contingent consideration for acquired businesses	(1,686		)	—
Other, net	137			84
Net cash provided by financing activities - continuing operations	28,574			258,526
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Net cash provided by (used in) operating activities	(458		)	1,261
Net cash used in investing activities	—			(8,076		)
Net cash provided by financing activities	—			396

Net cash used in discontinued operations	(458		)	(6,419		)
Effect of exchange rate changes on cash and equivalents	402			(685		)
NET INCREASE IN CASH AND EQUIVALENTS	11,994			36,739
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD	69,758			47,681
CASH AND EQUIVALENTS AT END OF PERIOD	$	81,752		$	84,420

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

Table of Contents

GRIFFON CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

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

NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

About Griffon Corporation

Griffon Corporation (the “Company” 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. 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).

Griffon currently conducts its operations through two reportable segments:


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

AMES, founded in 1774, is the leading North American manufacturer and a global provider of branded consumer and professional tools, landscaping products, and outdoor lifestyle solutions. In 2018, we acquired ClosetMaid LLC ("ClosetMaid"), a leader in wood and wire closet organization, general living storage and wire garage storage products for homeowners and professionals.

CBP, since 1964, is a leading manufacturer and marketer of residential and commercial garage doors and sells to professional dealers and some of the largest home center retail chains in North America. In 2018, we acquired CornellCookson, a leading U.S. manufacturer and marketer of rolling steel door and grille products designed for commercial, industrial, institutional, and retail use.


•	Defense Electronics segment consists of Telephonics Corporation ("Telephonics"), founded in 1933, a globally recognized leading provider of highly sophisticated intelligence, surveillance and communications solutions for defense, aerospace and commercial customers.

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 year ended September 30, 2018, 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, 2018 was derived from the audited financial statements included in Griffon’s Annual Report on Form 10-K for the year ended September 30, 2018.

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 US 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 fixed and intangible assets, warranty reserves, sales incentive accruals, stock based compensation assumptions, income taxes and tax valuation reserves, environmental reserves, legal reserves, insurance reserves and the valuation of assets and liabilities of discontinued operations, acquisition assumptions used 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 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.

The fair values of Griffon’s 2022 senior notes approximated $910,000 on December 31, 2018. Fair values were based upon quoted market prices (level 1 inputs).

Insurance contracts with values of $1,975 at December 31, 2018 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, 2018, trading securities, measured at fair value based on quoted prices in active markets for similar assets (level 2 inputs), with a fair value of $2,567 ($2,086 cost basis), were included in Prepaid and other current assets on the Consolidated Balance Sheets. Realized and unrealized gains and losses on trading 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, 2018, Griffon entered into several such contracts in order to lock into a foreign currency rate for planned settlements of trade and inter-company liabilities payable in US dollars.

At December 31, 2018, Griffon had $16,000 of Australian dollar contracts at a weighted average rate of $1.42 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 $881 ($574, net of tax) at December 31, 2018 and a gain of $692 was recorded in COGS during the three months ended December 31, 2018, respectively, for all settled contracts. All contracts expire in 30 to 150 days.

At December 31, 2018, Griffon had $940 of Canadian dollar contracts at a weighted average rate of $1.36. The contracts, which protect Canadian operations from currency fluctuations for US dollar based purchases, do not qualify for hedge accounting. For the three months ended December 31, 2018, fair value losses of $41 was recorded to Other liabilities and to Other income for the outstanding contracts, based on similar contract values (level 2 inputs). Realized losses of $10 were recorded in Other income during the three months ended December 31, 2018, respectively, for all settled contracts. All contracts expire in 30 to 210 days.

NOTE 3 – REVENUE

On October 1, 2018, the Company adopted the requirements of Accounting Standard Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers”, using the modified retrospective method applied to those contracts that were not completed as of October 1, 2018. The Company’s comparative consolidated results over the prior period have not been adjusted and continue to be reported under previously issued guidance, ASC 605 - Revenue Recognition, which required that revenue was accounted for when the earnings process was complete.

This accounting standard did not materially impact the Company’s revenue recognition practices in our Home and Building Products (“HBP”) Segment, however, it impacted revenue recognition practices in our Defense Electronics Segment. The impact of adopting this accounting standard was not material to the Company’s consolidated financial statements as of and for the three months ended December 31, 2018. Under the modified retrospective method, the Company recognized the cumulative effect of initially applying this accounting standard as an adjustment to the opening balance in retained earnings of approximately $5,673, primarily relating to certain contracts in the Defense Electronics Segment containing provisions for radar and communication products that have an alternative use and / or no right to payment. For these contracts, the Company now recognizes revenue at a point in time, rather than over time as this measure more accurately depicts the transfer of control to the customer relative to the goods or services promised under the contract.

The cumulative effect of the changes made to the Company's Consolidated October 1, 2018 Balance Sheet for the adoption of ASC 606 is as follows:



Balance Sheet	As Reported at September 30, 2018		Adjustments			Balance as of October 1, 2018
CURRENT ASSETS
Contract costs and recognized income not yet billed, net of progress payments	$	121,803	$	(20,982	)	$	100,821
Inventories	398,359		22,025			420,384
Total Current Assets	912,874		1,043			913,917
Total Assets	2,084,890		1,043			2,085,933

CURRENT LIABILITIES
Accounts payable	233,658		8,282			241,940
Billings in excess of costs ⁽¹⁾	17,559		8,282			25,841
Total Current Liabilities	393,071		8,282			401,353
OTHER LIABILITIES	106,710		(1,566		)	105,144
Total Liabilities	1,610,499		6,716			1,617,215

SHAREHOLDERS' EQUITY
Retained Earnings	550,523		(5,673		)	544,850
Total Shareholders' Equity	474,391		(5,673		)	468,718
Total Liabilities and Shareholders’ Equity	$	2,084,890	$	1,043		$	2,085,933

⁽¹⁾ Billings in excess of costs is reported in Accounts payable on the Company's Consolidated Balance Sheets.

The impact to the Company's Consolidated Statement of Operations and Balance Sheet as of and for the quarter ended December 31, 2018 was as follows:



	For the Period Ended December 31, 2018
Income Statement	As Reported		Balances Without Adoption of ASC 606		Effect of Adoption Higher/(Lower)
Net sales	$	510,522	$	505,916	$	4,606
Cost of goods and services	367,476		364,210		3,266
Income (loss) before taxes from continuing operations	13,965		12,625		1,340
Provision (benefit) from income taxes	5,212		4,920		292
Income from continuing operations	8,753		7,705		1,048



	As of December 31, 2018
Balance Sheet	As Reported		Balances Without Adoption of ASC 606		Effect of Adoption Higher/(Lower)
CURRENT ASSETS
Contract costs and recognized income not yet billed, net of progress payments	$	89,232	$	105,608	$	(16,376	)
Inventories	452,362		433,603		18,759
Total Current Assets	916,637		914,254		2,383
Total Assets	2,074,789		2,072,406		2,383

CURRENT LIABILITIES
Accounts payable	209,202		200,920		8,282
Billings in excess of costs	29,113		20,831		8,282
Total Current Liabilities	367,324		359,042		8,282
OTHER LIABILITIES	91,315		92,589		(1,274		)
Total Liabilities	1,603,228		1,596,220		7,008

SHAREHOLDERS' EQUITY
Retained Earnings	550,460		555,085		(4,625		)
Total Shareholders' Equity	471,561		476,186		(4,625		)
Total Liabilities and Shareholders’ Equity	$	2,074,789	$	2,072,406	$	2,383

The Company’s accounting policy has been updated to align with the new standard to recognize revenue when the following criteria are met: 1) Contract with the customer has been identified; 2) Performance obligations in the contract have been identified; 3) Transaction price has been determined; 4) Transaction price has been allocated to the performance obligations; and 5) Revenue is recognized when (or as) performance obligations are satisfied.

See Note 12 - Business Segments for revenue from contracts with customers disaggregated by end markets, segments and geographic location.

Performance Obligations

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 under ASC Topic 606. A contract with a customer is an agreement which both parties have approved, that creates enforceable rights and obligations, has commercial substance and where payment terms are identified and collectability is probable. Once the Company has entered 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).

A contracts transaction price is allocated to each distinct performance obligation and recognized as revenue when each performance obligation is satisfied. A majority of the Company’s contracts have a single performance obligation which represents, in most cases, the product being sold to the customer. To a lesser extent, some contracts include multiple performance obligations such as a product, the related installation and, extended warranty services. These contracts require judgment in determining the number

of performance obligations.

Over 80% of the Company’s performance obligations are recognized at a point in time that relate to the manufacture and sale of a broad range of products and components within the HBP Segment, and revenue is recognized when title, and risk and rewards of ownership have transferred to the customer. Less than 20% of the Company’s performance obligations are recognized over time or under the percentage-of-completion method relating to prime or subcontractors from contract awards with the U.S. Government, as well as foreign governments and other commercial customers within our Defense Electronics Segment. Sales recognized over time are generally accounted for using an input measure to determine progress completed at the end of the period. We believe that cumulative costs incurred to date as a percentage of estimated total contract costs at completion is an appropriate measure of progress towards satisfaction of performance obligations, as it most accurately depicts the progress of our work and transfer of control to our customers.

Revenue from HBP Segment

A majority of the HBP Segment revenue is short cycle in nature with shipments occurring within one year from order and does not include a material long-term financing component, implicitly or explicitly. Payment terms generally range between 15 to 90 days and vary by the location of the business, the type of products manufactured to be sold and the volume of products sold, among other factors.

The Company’s HBP Segment recognizes revenue from product sales when all factors are met, including when control of a product transfers to the customer upon its shipment, completion of installation, testing, certification or other substantive acceptance required under the contract. Other than standard product warranty provisions, sales arrangements provide for no other significant post-shipment obligations on the Company. From time-to-time and for certain customers, rebates and other sales incentives, promotional allowances or discounts are offered, typically related to customer purchase volumes, all of which are fixed or determinable and are classified as a reduction of revenue and recorded at the time of sale. Griffon provides for sales returns and allowances based upon historical returns experience.

The majority of the Company’s contracts in the HBP Segment offers assurance-type warranties in connection with the sale of a product to a customer. Assurance-type warranties provide a customer with assurance that the related product will function as the parties intended because it complies with agreed-upon specifications. Such warranties do not represent a separate performance obligation.

Payment terms in the HBP Segment vary depending on the type and location of the customer and the products or services offered. Generally, the period between the time revenue is recognized and the time payment is due is not significant. Shipping and handling charges are not considered a separate performance obligation. If revenue is recognized for a good before it is shipped and handled, the related shipping and handling costs must be accrued. Additionally, all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected from a customer (e.g., sales, use, value added, and some excise taxes) are excluded from revenue. The Company's policies related to shipping, handling and taxes have not changed with the adoption of ASC 606.

Revenue from Defense Electronics Segment

The Company’s Defense Electronics segment earns a substantial portion of its revenue as either a prime contractor or subcontractor from contract awards with the U.S. Government, as well as foreign governments and other commercial customers. These contracts are typically long-term in nature, usually greater than one year and do not include a material long-term financing component, either implicitly or explicitly. Revenue and profits from such contracts are recognized under the percentage-of-completion (over time) method of accounting. Revenue and profits on fixed-price contracts that contain engineering as well as production requirements are recorded based on the ratio of total actual incurred costs to date to the total estimated costs for each contract (cost-to-cost method).

Using the cost-to-cost method, revenue is recorded at amounts equal to the ratio of actual cumulative costs incurred divided by total estimated costs at completion, multiplied by the total estimated contract revenue, less the cumulative revenue recognized in prior periods. The profit recorded on a contract using this method is equal to the current estimated total profit margin multiplied by the cumulative revenue recognized, less the amount of cumulative profit previously recorded for the contract in prior periods. As this method relies on the substantial use of estimates, these projections may be revised throughout the life of a contract. Components of this formula and ratio that may be estimated include gross profit margin and total costs at completion. The cost performance and estimates to complete long-term contracts are reviewed, at a minimum, on a quarterly basis, as well as when information becomes available that would necessitate a review of the current estimate. Adjustments to estimates for a contracts estimated costs at completion and estimated profit or loss are often required as experience is gained, more information is obtained (even though the scope of work required under the contract may or may not change) and contract modifications occur. The impact

of such adjustments to estimates is made on a cumulative basis in the period when such information has become known. For the three months ended December 31, 2018 and 2017, income from operations included net favorable/(unfavorable) catch-up adjustments approximating $(2,500) and $500, respectively. Gross profit is affected by a variety of factors, including the mix of products, systems and services, production efficiencies, price competition and general economic conditions.

Revenue and profits on cost-reimbursable type contracts are recognized as allowable costs are incurred on the contract at an amount equal to the allowable costs plus the estimated profit on those costs. The estimated profit on a cost-reimbursable contract may be fixed or variable based on the contractual fee arrangement. Incentive and award fees on these contracts are recorded as revenue when the criteria under which they are earned are reasonably assured of being met and can be estimated.

For contracts with multiple performance obligations, judgment is required to determine whether performance obligations specified in these contacts are distinct and should be accounted for as separate revenue transactions for recognition purposes. In these types of contracts, the Company allocates the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. The Company uses an observable price to determine the stand-alone selling price for separate performance obligations or a cost plus margin approach when one is not available.

For contracts in which anticipated total costs exceed the total expected revenue, an estimated loss is recognized in the period when identifiable. A provision for the entire amount of the estimated loss is recorded on a cumulative basis. The estimated remaining costs to complete loss contracts as of December 31, 2018 and September 30, 2018 was approximately $9,700 and $12,200, respectively, and is recorded as a reduction to gross margin on the Consolidated Statements of Operations and Comprehensive Income (Loss). This loss had an immaterial impact on Griffon's Consolidated Financial Statements.

Amounts representing contract change orders or claims are included in revenue only when they can be reliably estimated and their realization is probable, and are determined on a percentage-of-completion basis measured by the cost-to-cost method.

Substantially all of Telephonics’ U.S. Government end-user contracts contain a termination for convenience clause, regardless whether Telephonics is the prime contractor or the subcontractor. This clause generally entitles Telephonics, upon a termination for convenience, to receive the purchase price for delivered items, reimbursement of allowable work-in-process costs, and an allowance for profit. Allowable costs would include the costs to terminate existing agreements with suppliers.

From time to time, Telephonics may combine contracts if they are negotiated together, have specific requirements to combine, or are otherwise closely related.

Transaction Price Allocated to the Remaining Performance Obligations

On December 31, 2018, we had $366,700 of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 70% of our remaining performance obligations as revenue by year-end 2019, with the balance to be completed thereafter.

Backlog represents the dollar value of funded orders for which work has not been performed. Backlog generally increases with bookings, and converts into revenue as we incur costs related to contractual commitments or the shipment of product. Given the nature of our business and a larger dependency on international customers, our bookings, and therefore our backlog, is impacted by the longer maturation cycles resulting in delays in the timing and amounts of such awards, which are subject to numerous factors, including fiscal constraints placed on customer budgets; political uncertainty; the timing of customer negotiations; and the timing of governmental approvals.

Contract Balances

Contract assets were $89,232 as of December 31, 2018 compared to $121,803 as of September 30, 2018. The $32,571 decrease in our contract assets balance was primarily due to the implementation of ASC 606. Excluding the impact of ASC 606, the decrease was primarily due to the timing of billings and work performed on various radar and surveillance programs. Contract assets primarily relate to the Company's right to consideration for work completed but not billed at the reporting date and are recorded in Contract costs and recognized income not yet billed, net of progress payments in the Consolidated Balance Sheets. Contract assets are transferred to receivables when the right to consideration becomes unconditional. Contract costs and recognized income not yet billed consists of amounts accounted for under the percentage of completion method of accounting, recoverable costs and accrued profit that cannot yet be invoiced under the terms of certain long-term contracts. Amounts will be invoiced when applicable contract terms, such as the achievement of specified milestones or product delivery, are met. At December 31, 2018 and September 30, 2018, approximately $31,400 and $29,500, respectively, of contract costs and recognized income not yet billed were expected to be collected after one year. As of December 31, 2018 and September 30, 2018, the unbilled receivable balance included $793 and $400, respectively, of reserves for contract risk.

Contract liabilities were $29,113 as of December 31, 2018 compared to $17,559 as of September 30, 2018. The $11,554 increase in our contract liabilities balance was primarily due to the implementation of ASC 606. Contract liabilities relate to advance consideration received from customers for which revenue has not been recognized. The Company often receives cash payments from customers in advance of the Company’s performance resulting in contract liabilities. These contract liabilities are classified as either current or long-term in the Consolidated Condensed Balance Sheet based on the timing of when the Company expects to recognize revenue. Current contract liabilities are recorded in Accounts payable and non-current contract liabilities are recorded in Other liabilities on the Consolidated Balance Sheets. Contract liabilities are reduced when the associated revenue from the contract is recognized.

NOTE 4 – ACQUISITIONS

Griffon accounts for acquisitions under the acquisition method, in which assets acquired and liabilities assumed are recorded at fair value as of the date of acquisition using a method substantially similar to the goodwill impairment test methodology (level 3 inputs). The operating results of the acquired companies 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 June 4, 2018, CBP completed the acquisition of 100% of the outstanding stock of CornellCookson, a leading US manufacturer and marketer of rolling steel door and grille products designed for commercial, industrial, institutional and retail use, for $180,000, excluding the estimated present value of tax benefits, and $12,426 of post-closing adjustments, primarily consisting of a working capital adjustment, of which $9,219 was paid in October 2018. The acquisition of CornellCookson substantially expanded CBP’s non-residential product offerings, and added an established professional dealer network focused on rolling steel door and grille products for commercial, industrial, institutional and retail use. There is no other contingent consideration arrangement relative to the acquisition of CornellCookson.

CornellCookson’s accounts, affected for adjustments to reflect fair market values assigned to assets purchased and liabilities assumed, and results of operations are included in the Company’s consolidated financial statements from the date of acquisition. The Company has recorded a preliminary allocation of the purchase price to the Company’s tangible and identifiable intangible assets acquired and liabilities assumed based on their fair market values (level 3 inputs) at the acquisition date. The excess of the purchase price over the fair value of the net tangible and intangible assets was recorded as goodwill and is deductible for tax purposes. Goodwill recognized at the acquisition date represents the other intangible benefits that the Company will derive from the ownership of CornellCookson, however, such intangible benefits do not meet the criteria for recognition of separately identifiable intangible assets.

The calculation of the preliminary purchase price allocation, which is pending finalization of tax-related items and completion of the related final valuation, is as follows:




Accounts receivable ⁽¹⁾	$	30,400
Inventories ⁽²⁾	12,336
Property, plant and equipment	49,426
Goodwill	43,183
Intangible assets	67,600
Other current and non-current assets	2,648
Total assets acquired	205,593

Accounts payable and accrued liabilities	12,507
Long-term liabilities	660
Total liabilities assumed	13,167
Total	$	192,426

⁽¹⁾ Includes $30,818 of gross accounts receivable of which $418 was not expected to be collected. The fair value of accounts receivable approximated book value acquired.

⁽²⁾Includes $13,434 of gross inventory of which $1,098 was reserved for obsolete inventory.

The preliminary amounts assigned to goodwill and major intangible asset classifications, all of which are tax deductible, for the CornellCookson acquisition are as follows:



			Average Life (Years)
Goodwill	$	43,183	N/A
Indefinite-lived intangibles	53,500		N/A
Definite-lived intangibles	14,100		12
Total goodwill and intangible assets	$	110,783

On February 13, 2018, AMES acquired 100% of the outstanding stock of Kelkay Limited ("Kelkay"), a leading United Kingdom manufacturer and distributor of decorative outdoor landscaping products sold to garden centers, retailers and grocers in the UK and Ireland for $56,118 (GBP 40,452), subject to contingent consideration of up to GBP 7,000. This acquisition broadened AMES' product offerings in the market and increased its in-country operational footprint. The purchase price was primarily allocated to tradenames of GBP 19,000, customer related intangibles of GBP 6,640, accounts receivable and inventory of GBP 8,894 and fixed asset and land of GBP 8,241.

On November 6, 2017, AMES acquired 100% of the outstanding stock of Harper Brush Works ("Harper"), a division of Horizon Global, for $4,383, inclusive of post-closing adjustments. Harper is a leading U.S. manufacturer of cleaning products for professional, home, and industrial use. The acquisition expanded AMES’ long-handled tool offering in North America to include brooms, brushes, and other cleaning tools and accessories. The purchase price was primarily allocated to intangible assets of $2,300, inventory and accounts receivable of $3,900 and fixed assets of $900.

On October 2, 2017, Griffon Corporation completed the acquisition of 100% of the outstanding stock of ClosetMaid, a market leader in home storage and organization products, for approximately $185,700, inclusive of certain post-closing adjustments and excluding the present value of net tax benefits from the transaction. The acquisition of ClosetMaid expanded Griffon’s Home and Building Products segment into the highly complementary home storage and organization category with a leading brand and product portfolio.

ClosetMaid's accounts, affected for adjustments to reflect fair market values assigned to assets purchased and liabilities assumed, and results of operations, are included in the Company’s consolidated financial statements from the date of acquisition. The Company has recorded an allocation of the purchase price to the Company’s tangible and identifiable intangible assets acquired and liabilities assumed based on their fair market values (level 3 inputs) at the acquisition date. The excess of the purchase price over the fair value of the net tangible and intangible assets was recorded as goodwill and is deductible for tax purposes. Goodwill recognized at the acquisition date represents the other intangible benefits that the Company will derive from the ownership of ClosetMaid, however, such intangible benefits do not meet the criteria for recognition of separately identifiable intangible assets.

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




Accounts receivable ⁽¹⁾	$	32,234
Inventories ^{(2), (3)}	28,411
Property, plant and equipment	47,464
Goodwill	70,159
Intangible assets	74,580
Other current and non-current assets	3,852
Total assets acquired	256,700

Accounts payable and accrued liabilities	68,251
Long-term liabilities	2,720
Total liabilities assumed	70,971
Total	$	185,729

⁽¹⁾ Includes $32,956 of gross accounts receivable of which $722 was not expected to be collected. The fair value of accounts receivable approximated book value acquired.

⁽²⁾Includes $29,079 of gross inventory of which $668 was reserved for obsolete inventory. The fair value of inventory approximated book value acquired.

⁽³⁾ Includes $1,500 in inventory basis step-up, which was charged to cost of goods sold over the inventory turns of the acquired entity.

The amounts assigned to goodwill and major intangible asset classifications, all of which are tax deductible, for the ClosetMaid acquisition are as follows:



			Average Life (Years)
Goodwill	$	70,159	N/A
Indefinite-lived intangibles	47,740		N/A
Definite-lived intangibles	26,840		21
Total goodwill and intangible assets	$	144,739

The Company did not incur any acquisition costs during the three months ended December 31, 2018. During the three months ended December 31, 2017, SG&A and Cost of goods and services included acquisition costs of $1,685 and $1,500, respectively.

NOTE 5 – 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 December 31, 2018		At September 30, 2018
Raw materials and supplies	$	99,993	$	97,645
Work in process	112,914		83,578
Finished goods	239,455		217,136
Total	$	452,362	$	398,359

NOTE 6 – PROPERTY, PLANT AND EQUIPMENT

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



	At December 31, 2018			At September 30, 2018
Land, building and building improvements	$	130,007		$	130,296
Machinery and equipment	550,336			544,875
Leasehold improvements	50,272			50,111
	730,615			725,282
Accumulated depreciation and amortization	(394,125		)	(382,790		)
Total	$	336,490		$	342,492

Depreciation and amortization expense for property, plant and equipment was $12,667 and $10,702 for the quarters ended December 31, 2018 and 2017, respectively. Depreciation included in SG&A expenses was $4,681 and $3,472 for the quarters ended December 31, 2018 and 2017, respectively. 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 three months ended December 31, 2018 which would require additional impairment testing of property, plant and equipment.

NOTE 7 – GOODWILL AND OTHER INTANGIBLES

The following table provides changes in the carrying value of goodwill by segment during the nine months ended December 31, 2018:



	At September 30, 2018		Goodwill from acquisitions		Other adjustments including currency translations			At December 31, 2018
Home & Building Products	$	420,850	$	300	$	(1,267	)	$	419,883
Telephonics	18,545		—		—			18,545
Total	$	439,395	$	300	$	(1,267	)	$	438,428

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



	At December 31, 2018					At September 30, 2018
	Gross Carrying Amount		Accumulated Amortization		Average Life (Years)	Gross Carrying Amount		Accumulated Amortization
Customer relationships & other	$	183,841	$	51,473	23	$	186,031	$	49,822
Technology and patents	19,358		6,517		13	19,004		6,238
Total amortizable intangible assets	203,199		57,990			205,035		56,060
Trademarks	220,172		—			221,883		—
Total intangible assets	$	423,371	$	57,990		$	426,918	$	56,060

Amortization expense for intangible assets was $2,418 and $2,256 for the quarters ended December 31, 2018 and 2017, respectively. Amortization expense for the remainder of 2019 and the next five fiscal years and thereafter, based on current intangible balances and classifications, is estimated as follows: 2019 - $6,900; 2020 - $8,825; 2021 - $8,825; 2022 - $8,825; 2023 - $8,746; 2024 - $8,700; thereafter $94,388.

No event or indicator of impairment occurred during the three months ended December 31, 2018 which would require impairment testing of long-lived intangible assets including goodwill.

NOTE 8 – INCOME TAXES

During the three months ended December 31, 2018, the Company recognized a tax provision of $5,212 on income before taxes from continuing operations of $13,965, compared to a tax benefit of $24,904 on a Loss before taxes from continuing operations of $2,073 in the comparable prior year period. The three month period ended December 31, 2018 included net tax provisions that affect comparability of $467. The three month period ended December 31, 2017 included net tax benefits that affect comparability of $23,018 primarily from approximately $23,941 related to the December 22, 2017 tax reform bill associated with the revaluation of deferred tax liabilities, $3,185 ($2,348 net of tax) of acquisition costs and $2,614 ($248 net of tax) charges related to cost of life insurance benefits. Excluding these items, the effective tax rates for the three months ended December 31, 2018 and 2017 were 34.0% and 35.4%, respectively.

On December 22, 2017, the “Tax Cuts and Jobs Act” (“TCJA”) was signed into law, and, among other changes, reduced the federal statutory tax rate from 35.0% to 21.0%. In accordance with U.S. GAAP for income taxes, as well as SEC Staff Accounting Bulletin No. 118 (“SAB 118”), the Company made a reasonable estimate of the impacts of the TCJA and recorded this estimate in its results for the year ended September 30, 2018. SAB 118 allows for a measurement period of up to one year, from the date of enactment, to complete the Company’s accounting for the impacts of the TCJA. As of December 31, 2018, our analysis under SAB 118 is complete and resulted in no material adjustments to the provision amounts recorded as of September 30, 2018.

NOTE 9 – LONG-TERM DEBT



		At December 31, 2018													At September 30, 2018
		Outstanding Balance			Original Issuer Premium		Capitalized Fees & Expenses			Balance Sheet			Coupon Interest Rate		Outstanding Balance			Original Issuer Premium		Capitalized Fees & Expenses			Balance Sheet			Coupon Interest Rate
Senior notes due 2022	(a)	$	1,000,000		$	1,131	$	(12,017	)	$	989,114		5.25	%	$	1,000,000		$	1,220	$	(12,968	)	$	988,252		5.25	%
Revolver due 2021	(b)	57,500			—		(1,272		)	56,228			Variable		25,000			—		(1,413		)	23,587			Variable
ESOP Loans	(d)	34,125			—		(155		)	33,970			Variable		34,694			—		(186		)	34,508			Variable
Capital lease - real estate	(e)	6,743			—		(74		)	6,669			5.00	%	7,503			—		(80		)	7,423			5.00	%
Non US lines of credit	(f)	14,084			—		(12		)	14,072			Variable		7,951			—		(16		)	7,935			Variable
Non US term loans	(f)	49,573			—		(204		)	49,369			Variable		53,533			—		(148		)	53,385			Variable
Other long term debt	(g)	5,548			—		(19		)	5,529			Variable		6,011			—		(19		)	5,992			Variable
Totals		1,167,573			1,131		(13,753		)	1,154,951					1,134,692			1,220		(14,830		)	1,121,082
less: Current portion		(12,872		)	—		—			(12,872		)			(13,011		)	—		—			(13,011		)
Long-term debt		$	1,154,701		$	1,131	$	(13,753	)	$	1,142,079				$	1,121,681		$	1,220	$	(14,830	)	$	1,108,071



		Three Months Ended December 31, 2018										Three Months Ended December 31, 2017
		Effective Interest Rate (1)		Cash Interest		Amort. Debt Discount		Amort. Debt Issuance Costs & Other Fees		Total Interest Expense		Effective Interest Rate		Cash Interest		Amort. Debt Premium		Amort. Debt Issuance Costs & Other Fees		Total Interest Expense
Senior notes due 2022	(a)	5.7	%	$	13,125	$	68	$	951	$	14,144	5.6	%	$	13,125	$	67	$	939	$	14,131
Revolver due 2021	(b)	Variable		933		—		141		1,074		Variable		1,356		—		141		1,497
Real estate mortgages	(c)	n/a		—		—		—		—		2.4	%	185		—		17		202
ESOP Loans	(d)	5.5