UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2014

 

£ 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. S Yes £ 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). S Yes £ 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 £   Accelerated filer x
Non-accelerated filer  £   Smaller reporting company £
(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). £ Yes S No

 

The number of shares of common stock outstanding at April 30, 2014 was 54,512,132.

 

Griffon Corporation and Subsidiaries

 

Contents

 

  Page
PART I - FINANCIAL INFORMATION  
   
Item 1 – Financial Statements  
   
Condensed Consolidated Balance Sheets at March 31, 2014 (unaudited) and September 30, 2013 1
   
Condensed Consolidated Statement of Shareholders’ Equity for the Six Months Ended March 31, 2014 (unaudited) 1
   
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended March 31, 2014 and 2013 (unaudited) 2
   
Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2014 and 2013 (unaudited) 3
   
Notes to Condensed Consolidated Financial Statements (unaudited) 4
   
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations 26
   
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 38
   
Item 4 - Controls & Procedures 39
   
PART II – OTHER INFORMATION  
   
Item 1 – Legal Proceedings 39
   
Item 1A – Risk Factors 39
   
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds 40
   
Item 3 – Defaults Upon Senior Securities 40
   
Item 4 – Mine Safety Disclosures 40
   
Item 5 – Other Information 40
   
Item 6 – Exhibits 40
   
Signatures 42
   
Exhibit Index 43
 

Part I – Financial Information

Item 1 – Financial Statements

 

GRIFFON CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

 

   (Unaudited)
At March 31,
2014
   At September
30, 2013
 
CURRENT ASSETS        
Cash and equivalents  $69,933   $178,130 
Accounts receivable, net of allowances of $6,481 and $6,136   309,162    256,215 
Contract costs and recognized income not yet billed, net of progress payments of $ 13,173 and $6,941   107,825    109,828 
Inventories, net   256,690    230,120 
Prepaid and other current assets   51,212    48,903 
Assets of discontinued operations   1,217    1,214 
Total Current Assets   796,039    824,410 
PROPERTY, PLANT AND EQUIPMENT, net   357,882    353,593 
GOODWILL   370,172    357,730 
INTANGIBLE ASSETS, net   224,226    221,391 
OTHER ASSETS   30,774    28,580 
ASSETS OF DISCONTINUED OPERATIONS   3,107    3,075 
Total Assets  $1,782,200   $1,788,779 
           
CURRENT LIABILITIES          
Notes payable and current portion of long-term debt  $13,393   $10,768 
Accounts payable   182,505    163,610 
Accrued liabilities   82,472    106,743 
Liabilities of discontinued operations   3,069    3,288 
Total Current Liabilities   281,439    284,409 
LONG-TERM DEBT, net of debt discount of $11,454 and $13,246   773,579    678,487 
OTHER LIABILITIES   165,071    170,675 
LIABILITIES OF DISCONTINUED OPERATIONS   4,359    4,744 
Total Liabilities   1,224,448    1,138,315 
COMMITMENTS AND CONTINGENCIES - See Note 19          
SHAREHOLDERS’ EQUITY          
Total Shareholders’ Equity   557,752    650,464 
Total Liabilities and Shareholders’ Equity  $1,782,200   $1,788,779 

 

GRIFFON CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(Unaudited)

 

   COMMON STOCK   CAPITAL IN
EXCESS OF
   RETAINED   TREASURY SHARES   ACCUMULATED
OTHER
COMPREHENSIVE
   DEFERRED     
(in thousands)  SHARES   PAR VALUE   PAR VALUE   EARNINGS   SHARES   COST   INCOME (LOSS)   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               (22,589)                   (22,589)
Dividend               (3,290)                   (3,290)
Tax effect from exercise/vesting of equity awards, net           273                        273 
Amortization of deferred compensation                               1,043    1,043 
Common stock acquired                   5,454    (63,370)           (63,370)
Stock grants and equity awards, net   877    219    300                        519 
ESOP purchase of common stock                               (10,000)   (10,000)
ESOP allocation of common stock           204                        204 
Stock-based compensation           4,996                        4,996 
Other comprehensive loss, net of tax                           (498)       (498)
Balance at March 31, 2014   78,493   $19,623   $500,185   $408,484    23,981   $(337,972)  $(3,837)  $(28,731)  $557,752 

 

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

1

GRIFFON CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share data)

(Unaudited)

 

   Three Months Ended March 31,   Six Months Ended March 31, 
   2014   2013   2014   2013 
Revenue  $507,687   $488,743   $961,145   $912,492 
Cost of goods and services   397,700    383,246    745,655    709,325 
Gross profit   109,987    105,497    215,490    203,167 
                     
Selling, general and administrative expenses   89,622    86,059    177,302    168,278 
Restructuring and other related charges   692    9,336    1,534    10,444 
Total operating expenses   90,314    95,395    178,836    178,722 
                     
Income from operations   19,673    10,102    36,654    24,445 
                     
Other income (expense)                    
Interest expense   (12,389)   (13,060)   (25,523)   (26,167)
Interest income   28    151    61    179 
Loss from debt extinguishment, net   (38,890)       (38,890)    
Other, net   783    422    1,689    908 
Total other expense, net   (50,468)   (12,487)   (62,663)   (25,080)
                     
Loss before taxes   (30,795)   (2,385)   (26,009)   (635)
Benefit for income taxes   (4,970)   (1,566)   (3,420)   (374)
Net loss  $(25,825)  $(819)  $(22,589)  $(261)
                     
Basic loss per common share  $(0.53)  $(0.02)  $(0.44)  $(0.00)
Weighted-average shares outstanding   48,990    54,345    50,872    54,749 
                     
Diluted loss per common share  $(0.53)  $(0.02)  $(0.44)  $(0.00)
Weighted-average shares outstanding   48,990    54,345    50,872    54,749 
                     
Net loss  $(25,825)  $(819)  $(22,589)  $(261)
Other comprehensive income (loss), net of taxes:                    
Foreign currency translation adjustments   1,224    (5,924)   (1,913)   (2,921)
Pension and other post retirement plans   1,099    489    1,415    4,349 
Gain on cash flow hedge       171        171 
Total other comprehensive income (loss), net of taxes   2,323    (5,264)   (498)   1,599 
Comprehensive income (loss), net  $(23,502)  $(6,083)  $(23,087)  $1,338 

 

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

2

GRIFFON CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

   Six Months Ended March 31, 
   2014   2013 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(22,589)  $(261)
           
Adjustments to reconcile net loss to net cash used in operating activities:          
           
Depreciation and amortization   33,232    35,038 
Stock-based compensation   4,996    6,298 
Asset impairment charges - restructuring   169    3,122 
Provision for losses on accounts receivable   132    440 
Amortization of deferred financing costs and debt discounts   3,188    3,102 
Loss from debt extinguishment, net   38,890     
Deferred income taxes   (57)   (592)
(Gain) loss on sale/disposal of assets   180    (801)
Change in assets and liabilities, net of assets and liabilities acquired:          
Increase in accounts receivable and contract costs and recognized income not yet billed   (46,834)   (87,531)
(Increase) decrease in inventories   (23,858)   90 
Decrease in prepaid and other assets   3,482    411 
(Decrease) increase in accounts payable, accrued liabilities and income taxes payable   (18,713)   7,080 
Other changes, net   1,145    (379)
Net cash used in operating activities   (26,637)   (33,983)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Acquisition of property, plant and equipment   (34,845)   (30,995)
Acquired business, net of cash acquired   (22,720)    
Proceeds from sale of assets   294    1,216 
Net cash used in investing activities   (57,271)   (29,779)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from issuance of common stock   584     
Dividends paid   (3,290)   (2,938)
Purchase of shares for treasury   (63,370)   (22,109)
Proceeds from issuance of long-term debt   644,514    303 
Payments of long-term debt   (586,310)   (5,400)
Change in short-term borrowings   4,908    2,157 
Financing costs   (10,687)   (759)
Purchase of ESOP shares   (10,000)    
Tax benefit from exercise/vesting of equity awards, net   273    150 
Other, net   144    242 
Net cash used in financing activities   (23,234)   (28,354)
           
CASH FLOWS FROM DISCONTINUED OPERATIONS:          
Net cash used in operating activities   (640)   (478)
Net cash used in discontinued operations   (640)   (478)
           
Effect of exchange rate changes on cash and equivalents   (415)   (138)
           
NET DECREASE IN CASH AND EQUIVALENTS   (108,197)   (92,732)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD   178,130    209,654 
CASH AND EQUIVALENTS AT END OF PERIOD  $69,933   $116,922 

 

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

3

GRIFFON CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(US dollars and non US currencies in thousands, except share and 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.

4

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 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 $591,000 and $111,300, respectively, on March 31, 2014. Fair values were based upon quoted market prices (level 1 inputs).

 

Items Measured at Fair Value on a Recurring Basis

 

Insurance contracts and trading securities with values of $3,644 and $1,321 at March 31, 2014, respectively, are measured and recorded at fair value based upon quoted prices in active markets for identical assets (level 2 inputs).

 

At March 31, 2014, Griffon had $3,861 of Australian dollar contracts at a weighted average rate of $1.10. The contracts, which protect Australia operations from currency fluctuations for U.S. dollar based purchases, do not qualify for hedge accounting and a fair value gain of $16 and $54 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 six months ended March 31, 2014, respectively. All contracts expire in 15 to 80 days.

 

NOTE 3 – ACQUISITION

 

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 will be integrated with Ames, is expected to generate approximately $28,000 of annualized revenue. Included in selling, general and administrative expenses are $798 of acquisition costs, incurred by Griffon, related to this transaction in the first quarter of 2014.

 

The accounts of the acquired company, after adjustment to reflect fair market values (level 2 inputs) assigned to assets purchased, have been included in the consolidated financial statements from date of acquisition; acquired inventory was not significant.

5

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

 

   2014 
Current Assets, net of cash acquired  $7,921 
PP&E   1,376 
Goodwill   11,617 
Amortizable intangible assets   6,023 
Indefinite life intangible assets   1,686 
Total assets acquired   28,623 
Total liabilities assumed   (6,903)
Net assets acquired  $21,720 

 

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

 

       Amortization 
   2014   Period (Years) 
 Goodwill  $11,617    N/A 
 Tradenames   1,686    Indefinite 
 Customer relationships   6,023    25 
   $19,326      

 

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 March 31,   At September 30, 
   2014   2013 
Raw materials and supplies  $73,152   $65,560 
Work in process   68,795    63,930 
Finished goods   114,743    100,630 
Total  $256,690   $230,120 

 

NOTE 5 – PROPERTY, PLANT AND EQUIPMENT

 

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

 

   At March 31,   At September 30, 
   2014   2013 
Land, building and building improvements  $130,974   $130,905 
Machinery and equipment   697,621    661,094 
Leasehold improvements   36,454    35,884 
    865,049    827,883 
Accumulated depreciation and amortization   (507,167)   (474,290)
Total  $357,882   $353,593 

 

Depreciation and amortization expense for property, plant and equipment was $14,491 and $15,695 for the quarters ended March 31, 2014 and 2013, respectively, and $29,396 and $31,066 for the six months ended March 31, 2014 and 2013, respectively.

6

No event or indicator of impairment occurred during the quarter ended March 31, 2014, which would require additional impairment testing of property, plant and equipment.

 

NOTE 6 – GOODWILL AND OTHER INTANGIBLES

 

The following table provides changes in the carrying value of goodwill by segment during the six months ended March 31, 2014:

 

   At September 30,
2013
   Goodwill from
2014 acquisitions
   Other
adjustments
including currency
translations
   At March 31,
2014
 
Home & Building Products  $269,802   $11,617   $244   $281,663 
Telephonics   18,545            18,545 
Plastics   69,383        581    69,964 
Total  $357,730   $11,617   $825   $370,172 

 

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

 

   At March 31, 2014       At September 30, 2013 
   Gross Carrying Amount   Accumulated Amortization   Average
Life
(Years)
   Gross Carrying Amount   Accumulated Amortization 
Customer relationships  $172,191   $32,515    25   $166,985   $29,049 
Unpatented technology   6,804    3,177    13    6,804    2,916 
Total amortizable intangible assets   178,995    35,692         173,789    31,965 
Trademarks   80,923             79,567     
Total intangible assets  $259,918   $35,692        $253,356   $31,965 

 

Amortization expense for intangible assets was $1,949 and $1,986 for the quarters ended March 31, 2014 and 2013, respectively, and $3,836 and $3,972 for the six months ended March 31, 2014 and 2013, respectively.

 

No event or indicator of impairment occurred during the quarter ended March 31, 2014, which would require impairment testing of long-lived intangible assets including goodwill.

 

NOTE 7 – INCOME TAXES

 

In the quarter and six-month periods ended March 31, 2014 and 2013, the Company incurred pretax losses. The Company recognized tax benefits of 16.1% and 13.2% for the quarter and six-month periods ended March 31, 2014, respectively, compared to benefits of 65.7% and 59.0%, respectively, in the comparable prior year periods. The current and prior year benefit 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 result.

 

The current quarter and six-month periods include $609 and $320, respectively, of provisions for discrete items resulting primarily from the conclusion of tax audits in certain jurisdictions, and the impact of tax law changes enacted in the current quarter. The comparable prior year periods included $309 and $364, respectively, of benefits from discrete items, primarily the retroactive extension of the federal R&D credit signed into law January 2, 2013.

 

Excluding discrete items, the effective tax benefit rates for the quarter and six month periods ended March 31, 2014 were 18.1% and 14.4%, respectively, compared to benefit rates of 52.7% and 1.7% in the comparable prior year periods, respectively.

7

NOTE 8 – LONG-TERM DEBT

 

      At March 31, 2014   At September 30, 2013 
        Outstanding Balance    Original Issuer Discount    Balance Sheet    Capitalized Fees & Expenses    Coupon Interest Rate    Outstanding Balance    Original Issuer Discount    Balance Sheet    Capitalized Fees & Expenses    Coupon Interest Rate 
Senior notes due 2018  (a)  $   $   $   $    n/a   $550,000   $   $550,000   $7,328    7.10%
Senior notes due 2022  (a)   600,000        600,000    9,839    5.25%                   n/a 
Revolver due 2019  (a)   20,000        20,000    2,227    n/a                2,425    n/a 
Convert. debt due 2017  (b)   100,000    (11,454)   88,546    1,256    4.00%   100,000    (13,246)   86,754    1,478    4.00%
Real estate mortgages  (c)   16,818        16,818    657    n/a    13,212        13,212    185    n/a 
ESOP Loans  (d)   30,087        30,087    79    n/a    21,098        21,098    24    n/a 
Capital lease - real estate  (e)   9,042        9,042    194    5.00%   9,529        9,529    207    5.00%
Non U.S. lines of credit  (f)   9,443        9,443        n/a    4,606        4,606        n/a 
Non U.S. term loans  (f)   11,559        11,559    88    n/a    3,115        3,115    27    n/a 
Other long term debt  (g)   1,477        1,477    29    n/a    941        941        n/a 
Totals      798,426    (11,454)   786,972   $14,369         702,501    (13,246)   689,255   $11,674      
less: Current portion      (13,393)       (13,393)             (10,768)       (10,768)          
Long-term debt     $785,033   $(11,454)  $773,579             $691,733   $(13,246)  $678,487           

 

      Three Months Ended March 31, 2014   Three Months Ended March 31, 2013 
      Effective Interest Rate   Cash Interest   Amort. Debt
Discount
   Amort.
Deferred Cost
& Other Fees
   Total Interest Expense   Effective Interest Rate   Cash Interest   Amort. Debt
Discount
   Amort.
Deferred Cost
& Other Fees
   Total Interest Expense 
Senior notes due 2018  (a)   7.1%  $6,133   $   $261   $6,394    7.5%  $9,797   $   $405   $10,202 
Senior notes due 2022  (a)   5.3%   2,800        111    2,911    n/a                 
Revolver due 2019  (a)   n/a    306        142    448    n/a    206        157    363 
Convert. debt due 2017  (b)   9.3%   1,000    909    110    2,019    9.3%   1,000    834    111    1,945 
Real estate mortgages  (c)   3.8%   122        37    159    5.4%   135        22    157 
ESOP Loans  (d)   3.4%   180        5    185    2.9%   158        2    160 
Capital lease - real estate  (e)   5.3%   114        7    121    5.2%   125        7    132 
Non U.S. lines of credit  (f)   n/a    224            224    n/a    147            147 
Non U.S. term loans  (f)   n/a    101            101    n/a    133        25    158 
Other long term debt  (g)   n/a                    n/a    136            136 
Capitalized interest           (173)           (173)        (340)           (340)
Totals          $10,807   $909   $673   $12,389        $11,497   $834   $729   $13,060 

 

      Six Months Ended March 31, 2014   Six Months Ended March 31, 2013 
      Effective Interest Rate   Cash Interest   Amort. Debt Discount   Amort. Deferred Cost & Other Fees   Total Interest Expense   Effective Interest Rate   Cash Interest   Amort. Debt Discount   Amort. Deferred Cost & Other Fees   Total Interest Expense 
Senior notes due 2018  (a)   7.1%  $15,930   $   $667   $16,597    7.4%  $19,594   $   $811   $20,405 
Senior notes due 2022  (a)   5.3%   2,800        111    2,911    n/a                 
Revolver due 2019  (a)   n/a    473        278    751    n/a    424        313    737 
Convert. debt due 2017  (b)   9.1%   2,000    1,792    221    4,013    9.2%   2,000    1,645    222    3,867 
Real estate mortgages  (c)   4.0%   252        73    325    5.4%   274        43    317 
ESOP Loans  (d)   3.2%   332        7    339    2.9%   325        4    329 
Capital lease - real estate  (e)   5.3%   233        14    247    5.3%   256        13    269 
Non U.S. lines of credit  (f)   n/a    417            417    n/a    260            260 
Non U.S. term loans  (f)   n/a    153        4    157    n/a    306        51    357 
Other long term debt  (g)   n/a    11        21    32    n/a    251            251 
Capitalized interest           (266)           (266)        (625)           (625)
Totals          $22,335   $1,792   $1,396   $25,523        $23,065   $1,645   $1,457   $26,167 

 

(a)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 related 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. At the time of issuance of the Senior Notes, Griffon agreed that, within certain time periods after the issue date, it would offer to each noteholder, pursuant to a registration statement filed with and to be declared effective by the SEC, the opportunity to exchange its Senior Notes for new notes that have substantially identical terms to those of the Senior Notes (the only material difference being that the new notes are registered with the SEC).
8

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”) extending its maturity date from March 28, 2018 to March 28, 2019, amending certain financial maintenance ratio test thresholds and increasing certain baskets for permitted debt, guaranties, liens, asset sales, foreign acquisitions, investments and restricted payments. 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.

 

At March 31, 2014, outstanding borrowings and standby letters of credit were $20,000 and $20,352, respectively; $184,648 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 $14.57 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 March 31, 2014, the above conversion price included dividends paid through March 27, 2014. At both March 31, 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 new 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 March 31, 2014, $16,818 was outstanding.

 

(d)In December 2013, Griffon’s Employee Stock Ownership Plan (“ESOP”) entered into an 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 March 31, 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 $19,000 due at maturity in December 2018. The loan is secured by shares purchased with the proceeds of the loan and with a lien on a specific amount of Griffon assets, and Griffon guarantees repayment. As of March 31, 2014, approximately $30,087 was outstanding.
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(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.

 

(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 $5,500 at March 31, 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. 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% (16.55% at March 31, 2014). At March 31, 2014 there was approximately $3,943 borrowed under the lines. Clopay Plastic Products Co., 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 (1.45% LIBOR USD and 2.47% Bankers Acceptance Rate CDN as of March 31, 2014). The revolving facility matures in November 2015. Garant is required to maintain a certain minimum equity.  At March 31, 2014, there were no borrowings under the revolving credit facility with CAD $15,000 available for borrowing.

 

In December 2013, Northcote Holdings Pty. Ltd entered into an AUD $12,500 term loan. The term loan is unsecured, requires quarterly interest payments and principal is due at maturity (December 2016). The loan accrues interest at Bank Bill Swap Bid Rate “BBSY” plus 2.8% per annum (5.5% at March 31, 2014). As of March 31, 2014, Griffon had an outstanding balance of $11,559. Subsidiaries of Northcote Holdings maintain a line of credit of approximately $2,800. The line of credit accrues interest at BBSY plus 2.25% per annum (4.95% at March 31, 2014). At March 31, 2014, there were no outstanding borrowings under the line. Griffon Corporation guarantees both the term loan and the line of credit.

 

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

 

At March 31, 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 the first and second quarter of 2014, the Board of Directors approved and paid a quarterly cash dividend of $0.03 per share. 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.

 

On May 1, 2014, the Board of Directors declared a quarterly cash dividend of $0.03 per share, payable on June 26, 2014 to shareholders of record as of the close of business on May 23, 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 March 31, 2014, 963,657 shares were available for grant.

10

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.

 

For the quarters ended March 31, 2014 and 2013, stock based compensation expense totaled $3,321 and $3,338, respectively. For the six months ended March 31, 2014 and 2013, stock based compensation expenses totaled $4,996 and $6,298, respectively.

 

In August 2011, Griffon’s Board of Directors authorized the repurchase of up to $50,000 of Griffon’s outstanding common stock. Under this repurchase program, the Company may purchase shares, depending upon market conditions, in open market or privately negotiated transactions, including pursuant to a 10b5-1 plan. In the six months ended March 31, 2014, Griffon purchased 598,481 shares of common stock under the authorized program, for a total of $7,501 or $12.53 per share. To date, Griffon has purchased 4,320,712 shares of common stock, for a total of $45,474 or $10.52 per share under this repurchase authorization. As of March 31, 2014, $4,525 remains under this $50,000 authorization.

 

On May 1, 2014, Griffon’s Board of Directors authorized the repurchase of up to an additional $50,000 of Griffon’s outstanding common stock. Under this repurchase program, 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 first quarter, 288,012 shares, with a market value of $3,764 or $13.07 per share, withheld to settle employee taxes due upon the vesting of restricted stock, were added to treasury stock. During the second quarter, 123,052 shares, with a market value of $1,502 or $12.21 per share, withheld to settle employee taxes due upon the vesting of restricted stock, were added to treasury.

 

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.

 

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.

11

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 six month ended March 31, 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.

 

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 March 31,   Six Months Ended March 31, 
   2014   2013   2014   2013 
Weighted average shares outstanding - basic   48,990    54,345    50,872    54,749 
Incremental shares from stock based compensation                
                     
Weighted average shares outstanding - diluted   48,990    54,345    50,872    54,749 
                     
Anti-dilutive options excluded from diluted EPS computation   644    856    644    856 
Anti-dilutive restricted stock excluded from diluted EPS computation   1,507    2,421    1,682    2,259 

 

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.
12

Information on Griffon’s business segments is as follows:

 

   For the Three Months Ended March 31,   For the Six Months Ended March 31, 
REVENUE  2014   2013   2014   2013 
Home & Building Products:                    
Ames  $160,705   $136,237   $257,313   $213,546 
CBP   90,838    89,499    212,680    202,366 
Home & Building Products   251,543    225,736    469,993    415,912 
Telephonics   104,185    121,631    200,210    217,681 
Plastics   151,959    141,376    290,942    278,899 
Total consolidated net sales  $507,687   $488,743   $961,145   $912,492 

 

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

 

   For the Three Months Ended March 31,   For the Six Months Ended March 31, 
LOSS BEFORE TAXES  2014   2013   2014   2013 
Segment operating profit:                    
Home & Building Products  $8,818   $3,835   $18,211   $11,106 
Telephonics   10,677    13,753    21,329    28,398 
Plastics   9,352    916    15,177    3,558 
Total segment operating profit   28,847    18,504    54,717    43,062 
Net interest expense   (12,361)   (12,909)   (25,462)   (25,988)
Unallocated amounts   (8,391)   (7,980)   (16,374)   (15,567)
Loss from debt extinguishment, net   (38,890)       (38,890)    
Loss on pension settlement               (2,142)
Loss before taxes  $(30,795)  $(2,385)  $(26,009)  $(635)

 

Griffon evaluates performance and allocates resources based on each segments’ 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 Loss before taxes:

 

   For the Three Months Ended March 31,   For the Six Months Ended March 31, 
   2014   2013   2014   2013 
Segment adjusted EBITDA:                    
Home & Building Products  $17,124   $17,555   $36,191   $34,794 
Telephonics   12,535    15,505    24,931    31,869 
Plastics   16,216    12,352    28,959    21,671 
Total Segment adjusted EBITDA   45,875    45,412    90,081    88,334 
Net interest expense   (12,361)   (12,909)   (25,462)   (25,988)
Segment depreciation and amortization   (16,336)   (17,572)   (33,032)   (34,828)
Unallocated amounts   (8,391)   (7,980)   (16,374)   (15,567)
Loss from debt extinguishment, net   (38,890)       (38,890)    
Restructuring charges   (692)   (9,336)   (1,534)   (10,444)
Acquisition costs           (798)    
Loss on pension settlement               (2,142)
Loss before taxes  $(30,795)  $(2,385)  $(26,009)  $(635)
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Unallocated amounts typically include general corporate expenses not attributable to a reportable segment.

 

  For the Three Months Ended March 31,   For the Six Months Ended March 31, 
DEPRECIATION and AMORTIZATION  2014   2013   2014   2013 
Segment:                
Home & Building Products  $7,614   $9,157   $15,648   $18,017 
Telephonics   1,858    1,752    3,602    3,471 
Plastics   6,864    6,663    13,782    13,340 
Total segment depreciation and amortization   16,336    17,572    33,032    34,828 
Corporate   103    109    200    210 
Total consolidated depreciation and amortization  $16,439   $17,681   $33,232   $35,038 
                     
CAPITAL EXPENDITURES                    
Segment:                    
Home & Building Products  $6,722   $6,711   $15,190   $15,804 
Telephonics   5,520    2,630    8,887    3,452 
Plastics   4,390    4,333    10,150    11,701 
Total segment   16,632    13,674    34,227    30,957 
Corporate   297    33    618    38 
Total consolidated capital expenditures  $16,929   $13,707   $34,845   $30,995 

 

ASSETS  At March 31,
2014
   At September 30,
2013
 
Segment assets:        
Home & Building Products  $995,765   $908,386 
Telephonics   299,820    296,919 
Plastics   426,563    422,730 
Total segment assets   1,722,148    1,628,035 
Corporate   55,728    156,455 
Total continuing assets   1,777,876    1,784,490 
Assets of discontinued operations   4,324    4,289 
Consolidated total  $1,782,200   $1,788,779 

 

NOTE 12 – DEFINED BENEFIT PENSION EXPENSE

 

Defined benefit pension expense was as follows:

 

   Three Months Ended
March 31,
   Six Months Ended
March 31,
 
   2014   2013   2014   2013 
Service cost  $45   $48   $90   $98 
Interest cost   2,500    2,422    5,000    4,847 
Expected return on plan assets   (2,885)   (3,136)   (5,770)   (6,274)
Amortization:                    
Prior service cost   4    5    8    10 
Recognized actuarial loss   489    840    978    1,680 
Loss on pension settlement               2,142 
Net periodic expense  $153   $179   $306   $2,503 

 

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.

14

First quarter of 2013, Selling, general and administrative expenses included a $2,142, non-cash, 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 (Loss) by $3,649.

 

NOTE 13 – RECENT ACCOUNTING PRONOUNCEMENTS

 

In February 2013, the FASB issued new accounting 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.

 

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.

 

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 March 31,
2014
  At September 30,
2013
 
Assets of discontinued operations:          
Prepaid and other current assets  $1,217   $1,214 
Other long-term assets   3,107    3,075 
Total assets of discontinued operations  $4,324   $4,289 
           
Liabilities of discontinued operations:          
Accrued liabilities, current  $3,069   $3,288 
Other long-term liabilities   4,359    4,744 
Total liabilities of discontinued operations  $7,428   $8,032 

 

There was no Installation Services revenue or income for the quarter or six months ended March 31, 2014 or 2013.

 

NOTE 15 – RESTRUCTURING AND OTHER RELATED CHARGES

 

In January 2013, Ames announced its intention to close certain manufacturing facilities, and to consolidate affected operations primarily into its Camp Hill and Carlisle, PA locations. The intended actions, to be completed by the end of calendar 2014, will improve manufacturing and distribution efficiencies, allow for in-sourcing of certain production currently performed by third party suppliers, and improve material flow and absorption of fixed costs.

 

Ames anticipates incurring pre-tax restructuring and related exit costs approximating $8,000, comprised of cash charges of $4,000 and non-cash, asset-related charges of $4,000; the cash charges will include $2,500 for one-time termination benefits and other personnel-related costs and $1,500 for facility exit costs. Ames expects $20,000 in capital expenditures in connection with this initiative and, to date, has incurred $7,583 and $15,269 in restructuring costs and capital expenditures, respectively.

15

HBP recognized $692 and $1,534, respectively, for the three and six months ended March 31, 2014, and $4,563 and $5,671, respectively, for the three and six months ended March 31, 2013 in restructuring and other related exit costs; such charges primarily related to one-time termination benefits, facility and other personnel costs, and asset impairment charges related to the Ames plant consolidation initiatives. The 2013 period also included charges related to a CBP plant consolidation.

 

In February 2013, Plastics undertook a restructuring project, primarily in Europe, to exit low margin business and to eliminate approximately 80 positions, resulting in restructuring charges of $4,773, primarily related to one-time termination benefits and other personnel costs. The project was completed in 2013.

 

A summary of the restructuring and other related charges included in the line item “Restructuring and other related charges” in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) were recognized as follows:

 

   Workforce
Reduction
   Facilities &
Exit Costs
   Other
Related
Costs
   Non-cash
Facility and
Other
   Total  
Amounts incurred in:                         
Quarter ended December 31, 2012  $994   $39   $75   $   $1,108 
Quarter ended March 31, 2013   3,795    523    1,517    3,501    9,336 
Six Months Ended March 31, 2013  $4,789   $562   $1,592   $3,501   $10,444 
                          
Quarter ended December 31, 2013  $638   $95   $109   $   $842 
Quarter ended March 31, 2014   495    137    60        692 
Six Months Ended March 31, 2014  $1,133   $232   $169   $   $1,534 

 

The activity in the restructuring accrual recorded in accrued liabilities consisted of the following:

 

   Workforce
Reduction
   Facilities &
Exit Costs
   Other
Related
   Total  
Accrued liability at September 30, 2013  $3,057   $393   $407   $3,857 
Charges   1,133    232    169    1,534 
Payments   (2,094)   (552)   (425)   (3,071)
Accrued liability at March 31, 2014  $2,096   $73   $151   $2,320 

 

NOTE 16 – OTHER EXPENSE

 

For the quarters ended March 31, 2014 and 2013, Other income (expense) included $436 and ($479), respectively, of net currency exchange (losses) in connection with the translation of receivables and payables denominated in currencies other than the functional currencies of Griffon and its subsidiaries as well as $15 and $321, respectively, of net investment income.

 

For the six months ended March 31, 2014 and 2013, Other income (expense) included $679 and ($467), respectively, of net currency exchange (losses) in connection with the translation of receivables and payables denominated in currencies other than the functional currencies of Griffon and its subsidiaries as well as $127 and $353, respectively, of net investment income.

 

NOTE 17 – WARRANTY LIABILITY

 

Telephonics offers warranties against product defects for periods generally ranging from one to two years, depending on the specific product and terms of the customer purchase agreement. Typical warranties require Telephonics to repair or replace the defective products during the warranty period at no cost to the customer. At the time revenue is recognized, Griffon records a liability for warranty costs, estimated based on historical experience, and periodically assesses its warranty obligations and adjusts the liability as necessary. Ames offers an express limited warranty for a period of ninety days on all products unless otherwise stated on the product or packaging from the date of original purchase.

16

Changes in Griffon’s warranty liability, included in Accrued liabilities, were as follows:

 

   Three Months Ended March 31,   Six Months Ended March 31, 
   2014   2013   2014   2013 
Balance, beginning of period  $6,929   $7,743   $6,649   $8,856 
Warranties issued and changes in
estimated pre-existing warranties
   1,135    662    2,101    656 
Actual warranty costs incurred   (953)   (981)   (1,639)   (2,088)
Balance, end of period  $7,111   $7,424   $7,111   $7,424 

 

NOTE 18 – OTHER COMPREHENSIVE INCOME (LOSS)

 

The amounts recognized in other comprehensive income (loss) were as follows:

 

   Three Months Ended March 31, 2014   Three Months Ended March 31, 2013 
   Pre-tax   Tax   Net of tax   Pre-tax   Tax   Net of tax 
Foreign currency translation adjustments  $1,224   $   $1,224   $(5,924)  $   $(5,924)
Pension and other defined benefit plans   1,698    (599)   1,099    845    (356)   489 
Gain on cash flow hedge               171        171 
Total other comprehensive income (loss)  $2,922   $(599)  $2,323   $(4,908)  $(356)  $(5,264)

 

   Six Months Ended March 31, 2014   Six Months Ended March 31, 2013 
   Pre-tax   Tax   Net of tax   Pre-tax   Tax   Net of tax 
Foreign currency translation adjustments  $(1,913)  $   $(1,913)  $(2,921)  $   $(2,921)
Pension and other defined benefit plans   2,191    (776)   1,415    7,304    (2,955)   4,349 
Gain on cash flow hedge               171        171 
Total other comprehensive income (loss)  $278   $(776)  $(498)  $4,554   $(2,955)  $1,599 

 

Amounts reclassified from accumulated other comprehensive income (loss) to income (loss) were as follows:

 

   Three Months Ended March 31,   Six Months Ended March 31, 
   2014   2013   2014   2013 
Pension amortization  $493   $845   $986   $1,690 
Pension settlement               2,142 
Total before tax   493    845    986    3,832 
Tax   (168)   (296)   (345)   (1,341)
Net of tax  $325   $549   $641   $2,491 

 

NOTE 19 — COMMITMENTS AND CONTINGENCIES

 

Legal and environmental

 

Department of Environmental Conservation of New York State (“DEC”), with ISC Properties, Inc. Lightron Corporation (“Lightron”), a wholly-owned subsidiary of Griffon, once conducted operations at a location in Peekskill in the Town of Cortlandt, New York (the “Peekskill Site”) owned by ISC Properties, Inc. (“ISC”), a wholly-owned subsidiary of Griffon. ISC sold the Peekskill Site in November 1982.

17

Subsequently, Griffon was advised by the DEC that random sampling at the Peekskill Site and in a creek near the Peekskill Site indicated concentrations of solvents and other chemicals common to Lightron’s prior plating operations. ISC then entered into a consent order with the DEC in 1996 (the “Consent Order”) to perform a remedial investigation and prepare a feasibility study. After completing the initial remedial investigation pursuant to the Consent Order, ISC was required by the DEC, and did conduct accordingly over the next several years, supplemental remedial investigations, including soil vapor investigations, under the Consent Order.

 

In April 2009, the DEC advised ISC’s representatives that both the DEC and the New York State Department of Health had reviewed and accepted an August 2007 Remedial Investigation Report and an Additional Data Collection Summary Report dated January 30, 2009. With the acceptance of these reports, ISC completed the remedial investigation required under the Consent Order and was authorized, accordingly, by the DEC to conduct the Feasibility Study required by the Consent Order.  Pursuant to the requirements of  the Consent Order and its obligations thereunder, ISC, without acknowledging any responsibility to perform any remediation at the Site, submitted to the DEC in August 2009, a draft feasibility study which recommended for the soil, groundwater and sediment medias, remediation alternatives having a current net capital cost value, in the aggregate, of approximately $5,000. In February 2011, the DEC advised ISC it has accepted and approved the feasibility study.  Accordingly, ISC has no further obligations under the consent order.

 

Upon acceptance of the feasibility study, the DEC issued a Proposed Remedial Action Plan (“PRAP”) that sets forth the proposed remedy for the site.  The PRAP accepted the recommendation contained in the feasibility study for remediation of the soil and groundwater medias, but selected a different remediation alternative for the sediment medium.  The approximate cost and the current net capital cost value of the remedy proposed by the DEC in the PRAP is approximately $10,000.  After receiving public comments on the PRAP, the DEC issued a Record of Decision (“ROD”) that set forth the specific remedies selected and responded to public comments.  The remedies selected by the DEC in the ROD are the same remedies as those set forth in the PRAP.

 

It is now expected that the DEC will enter into negotiations with potentially responsible parties to request they undertake performance of the remedies selected in the ROD, and if such parties do not agree to implement such remedies, then the State may use State Superfund money to remediate the Peekskill site and seek recovery of costs from such parties.  Griffon does not acknowledge any responsibility to perform any remediation at the Peekskill Site.

 

Improper Advertisement Claim involving Union Tools Products.  Since December 2004, a customer of Ames has been named in various litigation matters relating to certain Union Tools products. The plaintiffs in those litigation matters have asserted causes of action against the customer of Ames for improper advertisement to end consumers. The allegations suggest that advertisements led the consumers to believe that Union Tools’ hand tools were wholly manufactured within boundaries of the United States. The complaints assert various causes of action against the customer of Ames under federal and state law, including common law fraud. At some point, likely once the litigation against the customer of Ames ends, the customer may seek indemnity (including recovery of its legal fees and costs) against Ames for an unspecified amount. Presently, Ames cannot estimate the amount of loss, if any, if the customer were to seek legal recourse against Ames.

 

Department of Environmental Conservation of New York State, regarding Frankfort, NY site. During fiscal 2009, an underground fuel tank with surrounding soil contamination was discovered at the Frankfort, N.Y. site, which is the result of historical facility operations prior to Ames’ ownership. While Ames was actively working with the DEC and the New York State Department of Health to define remediation requirements relative to the underground fuel tank, the DEC took the position that Ames was responsible to remediate other types of contamination on the site. After negotiations with the DEC, on August 15, 2011, Ames executed an Order on Consent with the DEC.  The Order is without admission or finding of liability or acknowledgement that there has been a release of hazardous substances at the site.  Importantly, the Order does not waive any rights that Ames has under a 1991 Consent Judgment entered into between the DEC and a predecessor of Ames relating to the site.  The Order requires that Ames identify Areas of Concern at the site, and formulate a strategy to investigate and remedy both on and off site conditions in compliance with applicable environmental law. At the conclusion of the remedy phase of the remediation to the satisfaction of the DEC, the DEC will issue a Certificate of Completion. On August 1, 2012, a fire occurred during the course of demolition of certain structures at the Frankfort, NY site, requiring cleanup and additional remediation under the oversight of the DEC. Demolition of the structures on the property has been substantially completed.  The DEC has inspected the progress of the work and is satisfied with the results thus far.  On February 12, 2013, the DEC issued comments to the Remedial Investigation Work Plan previously submitted by Ames in October 2011, and in response, Ames issued a Revised Remedial Investigation Work Plan.  Completion of the remedial investigation is dependent on timing of the DEC approval; no additional comments have been provided by the DEC to date. On October 21, 2013 Ames filed its revised Remedial Investigation Report (“RIR”) with the DEC. On February 3, 2014, the DEC accepted Ames’ RIR as a draft and requested certain revisions.  Ames is currently reviewing the requested revisions and will either revise the RIR as requested or negotiate alternate action acceptable to the DEC. On March 31, 2014, the DEC approved Ames Preliminary Schedule for “Additional Remedial Investigation/Feasibility Study Activities” (RI/FS) that identifies remedial investigations and remedial actions through to a Record of Decision. In accordance with the approved RI/FS schedule, Ames filed its work plan for Supplemental Remedial Investigation Activities with the DEC on April 3, 2014.

18

U.S. Government investigations and claims

 

Defense contracts and subcontracts, including Griffon’s contracts and subcontracts, are subject to audit and review by various agencies and instrumentalities of the United States government, including among others, the Defense Contract Audit Agency (“DCAA”), the Defense Criminal Investigative Service (“DCIS”), and the Department of Justice (“DOJ”) which has responsibility for asserting claims on behalf of the U.S. government.  In addition to ongoing audits, pursuant to subpoenas Griffon is currently providing information to the U.S. Department of Defense Office of the Inspector General and the DOJ.  No claim has been asserted against Griffon, and Griffon is unaware of any material financial exposure in connection with the inquiry.

 

In general, departments and agencies of the U.S. Government have the authority to investigate various transactions and operations of Griffon, and the results of such investigations may lead to administrative, civil or criminal proceedings, the ultimate outcome of which could be fines, penalties, repayments or compensatory or treble damages.  U.S. Government regulations provide that certain findings against a contractor may lead to suspension or debarment from future U.S. Government contracts or the loss of export privileges for a company or an operating division or subdivision.  Suspension or debarment could have material adverse effect on Telephonics because of its reliance on government contracts.

 

General legal

 

Griffon is subject to various laws and regulations relating to the protection of the environment and is a party to legal proceedings arising in the ordinary course of business. Management believes, based on facts presently known to it, that the resolution of the matters above and such other matters will not have a material adverse effect on Griffon’s consolidated financial position, results of operations or cash flows.

 

NOTE 20 — CONSOLIDATING GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION

 

Griffon’s Senior Notes are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by the domestic assets of Clopay Building Products Company, Inc., Clopay Plastic Products Company, Inc., Telephonics Corporation, The Ames Companies, Inc., ATT Southern, Inc. and Clopay Ames True Temper Holding Corp, each of which are 100%, indirectly, owned by Griffon. In accordance with Rule 3-10 of Regulation S-X promulgated under the Securities Act of 1933, presented below are condensed consolidating financial information as of March 31, 2014 and September 30, 2013 and for the quarter and six-month period ended March 31, 2014 and 2013. The financial information may not necessarily be indicative of results of operations or financial position had the guarantor companies or non-guarantor companies operated as independent entities. The guarantor companies and the non-guarantor companies include the consolidated financial results of their wholly-owned subsidiaries accounted for under the equity method.

19

The indenture relating to the Senior Notes (the “Indenture”) contains terms providing that, under certain limited circumstances, a guarantor will be released from its obligations to guarantee the Senior Notes.  These circumstances include (i) a sale of at least a majority of the stock, or all or substantially all the assets, of the subsidiary guarantor as permitted by the Indenture; (ii) a public equity offering of a subsidiary guarantor that qualifies as a “Minority Business” as defined in the Indenture (generally, a business the EBITDA of which constitutes less than 50% of the segment adjusted EBITDA of the Company for the most recently ended four fiscal quarters), and that meets certain other specified conditions as set forth in the Indenture; (iii) the designation of a guarantor as an “unrestricted subsidiary” as defined in the Indenture, in compliance with the terms of the Indenture; (iv) Griffon exercising its right to defease the Senior Notes, or to otherwise discharge its obligations under the Indenture, in each case in accordance with the terms of the Indenture; and (v) upon obtaining the requisite consent of the holders of the Senior Notes.

 

CONDENSED CONSOLIDATING BALANCE SHEETS

At March 31, 2014

 

   Parent Company   Guarantor Companies   Non-Guarantor Companies   Elimination   Consolidation 
CURRENT ASSETS                         
Cash and equivalents  $4,199   $25,259   $40,475   $   $69,933 
Accounts receivable, net of allowances       258,037    82,765    (31,640)   309,162 
Contract costs and recognized income not yet billed, net of progress payments       107,388    437        107,825 
Inventories, net       197,947    58,814    (71)   256,690 
Prepaid and other current assets   4,273    21,059    15,319    10,561    51,212 
Assets of discontinued operations           1,217        1,217 
Total Current Assets   8,472    609,690    199,027    (21,150)   796,039 
                          
PROPERTY, PLANT AND EQUIPMENT, net   1,424    255,330    101,128        357,882 
GOODWILL       290,761    79,411        370,172 
INTANGIBLE ASSETS, net       158,950    65,276        224,226 
INTERCOMPANY RECEIVABLE   558,505    886,492    83,046    (1,528,043)    
EQUITY INVESTMENTS IN SUBSIDIARIES   787,103    549,256    1,783,996    (3,120,355)    
OTHER ASSETS   47,410    51,142    7,435    (75,213)   30,774 
ASSETS OF DISCONTINUED OPERATIONS           3,107        3,107 
Total Assets  $1,402,914   $2,801,621   $2,322,426   $(4,744,761)  $1,782,200 
                          
CURRENT LIABILITIES                         
Notes payable and current portion of long-term debt  $1,847   $1,098   $10,448   $   $13,393 
Accounts payable and accrued liabilities   22,247    194,512    70,153    (21,935)   264,977 
Liabilities of discontinued operations           3,069        3,069 
Total Current Liabilities   24,094    195,610    83,670    (21,935)   281,439 
                          
LONG-TERM DEBT, net of debt discounts   736,786    8,298    28,495        773,579 
INTERCOMPANY PAYABLES   21,318    772,390    707,295    (1,501,003)    
OTHER LIABILITIES   62,964    153,635    22,804    (74,332)   165,071 
LIABILITIES OF DISCONTINUED OPERATIONS           4,359        4,359 
Total Liabilities   845,162    1,129,933    846,623    (1,597,270)   1,224,448 
                          
SHAREHOLDERS’ EQUITY   557,752    1,671,688    1,475,803    (3,147,491)   557,752 
Total Liabilities and Shareholders’ Equity  $1,402,914   $2,801,621   $2,322,426   $(4,744,761)  $1,782,200 
20

CONDENSED CONSOLIDATING BALANCE SHEETS
At September 30, 2013

 

   Parent
Company
   Guarantor
Companies
   Non-Guarantor
Companies
   Elimination   Consolidation 
                          
CURRENT ASSETS                         
Cash and equivalents  $68,994   $25,343   $83,793   $   $178,130 
Accounts receivable, net of allowances       213,506    76,241    (33,532)   256,215 
Contract costs and recognized income not yet billed, net of progress payments       109,683    145        109,828 
Inventories, net       173,406    56,723    (9)   230,120 
Prepaid and other current assets   (712)   21,854    17,330    10,431    48,903 
Assets of discontinued operations           1,214        1,214 
Total Current Assets   68,282    543,792    235,446    (23,110)   824,410 
                          
PROPERTY, PLANT AND EQUIPMENT, net   972    248,973    103,648        353,593 
GOODWILL       288,146    69,584        357,730 
INTANGIBLE ASSETS, net       160,349    61,042        221,391 
INTERCOMPANY RECEIVABLE   547,903    911,632    573,269    (2,032,804)    
EQUITY INVESTMENTS IN SUBSIDIARIES   772,374    533,742    2,718,956    (4,025,072)    
OTHER ASSETS   45,968    50,423    7,423    (75,234)   28,580 
ASSETS OF DISCONTINUED OPERATIONS           3,075        3,075 
Total Assets  $1,435,499   $2,737,057   $3,772,443   $(6,156,220)  $1,788,779 
                          
CURRENT LIABILITIES                         
Notes payable and current portion of long-term debt  $1,000   $1,079   $8,689   $   $10,768 
Accounts payable and accrued liabilities   41,121    183,665    70,427    (24,860)   270,353 
Liabilities of discontinued operations           3,288        3,288 
Total Current Liabilities   42,121    184,744    82,404    (24,860)   284,409 
                          
LONG-TERM DEBT, net of debt discounts   656,852    9,006    12,629        678,487 
INTERCOMPANY PAYABLES   20,607    796,741    1,188,017    (2,005,365)    
OTHER LIABILITIES   65,455    153,970    25,578    (74,328)   170,675 
LIABILITIES OF DISCONTINUED OPERATIONS           4,744        4,744 
Total Liabilities   785,035    1,144,461    1,313,372    (2,104,553)   1,138,315 
                          
SHAREHOLDERS’ EQUITY   650,464    1,592,596    2,459,071    (4,051,667)   650,464 
Total Liabilities and Shareholders’ Equity  $1,435,499   $2,737,057   $3,772,443   $(6,156,220)  $1,788,779 
21

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended March 31, 2014

 

($ in thousands)  Parent Company   Guarantor Companies   Non-Guarantor Companies   Elimination   Consolidation 
                          
Revenue  $   $396,505   $127,782   $(16,600)  $507,687 
Cost of goods and services       305,191    107,555    (15,046)   397,700 
Gross profit       91,314    20,227    (1,554)   109,987 
                          
Selling, general and administrative expenses   7,161    68,234    15,833    (1,606)   89,622 
Restructuring and other related charges       728    (36)       692 
Total operating expenses   7,161    68,962    15,797    (1,606)   90,314 
                          
Income (loss) from operations   (7,161)   22,352    4,430    52    19,673 
                          
Other income (expense)                         
Interest income (expense), net   (2,885)   (7,329)   (2,147)       (12,361)
Loss from debt extinguishment, net   (38,890)               (38,890)
Other, net   15    1,014    (194)   (52)   783 
Total other income (expense)   (41,760)   (6,315)   (2,341)   (52)   (50,468)
                          
Income (loss) before taxes   (48,921)   16,037    2,089        (30,795)
Provision (benefit) for income taxes   (11,045)   6,053    22        (4,970)
Income (loss) before equity in net income of subsidiaries   (37,876)   9,984    2,067        (25,825)
Equity in net income (loss) of subsidiaries   12,051    1,982    9,984    (24,017)    
Net income (loss)  $(25,825)  $11,966   $12,051   $(24,017)  $(25,825)
                          
Net Income (loss)  $(25,825)  $11,966   $12,051   $(24,017)  $(25,825)
Other comprehensive income (loss), net of taxes   170    80    2,073        2,323 
Comprehensive income (loss)  $(25,655)  $12,046   $14,124   $(24,017)  $(23,502)

 

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended March 31, 2013

 

($ in thousands)  Parent Company   Guarantor Companies   Non-Guarantor Companies   Elimination   Consolidation 
                          
Revenue  $   $379,846   $123,599   $(14,702)  $488,743 
Cost of goods and services       292,369    104,011    (13,134)   383,246 
Gross profit       87,477    19,588    (1,568)   105,497 
                          
Selling, general and administrative expenses   3,821    67,936    15,912    (1,610)   86,059 
Restructuring and other related charges       5,372    3,964        9,336 
Total operating expenses   3,821    73,308    19,876    (1,610)   95,395 
                          
Income (loss) from operations   (3,821)   14,169    (288)   42    10,102 
                          
Other income (expense)                         
Interest income (expense), net   (3,610)   (6,824)   (2,475)       (12,909)
Other, net   322    1,546    (1,404)   (42)   422 
Total other income (expense)   (3,288)   (5,278)   (3,879)   (42)   (12,487)
                          
Income (loss) before taxes   (7,109)   8,891    (4,167)       (2,385)
Provision (benefit) for income taxes   (4,393)   2,750    77        (1,566)
Income (loss) before equity in net income of subsidiaries   (2,716)   6,141    (4,244)       (819)
Equity in net income (loss) of subsidiaries   1,897    (4,235)   6,981    (4,643)    
Net income (loss)  $(819)  $1,906   $2,737   $(4,643)  $(819)
                          
Net Income (loss)  $(819)  $1,906   $2,737   $(4,643)  $(819)
Other comprehensive income (loss), net of taxes   (1,181)   (1,422)   (2,661)       (5,264)
Comprehensive income (loss)  $(2,000)  $484   $76   $(4,643)  $(6,083)
22

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the Six Months Ended March 31, 2014

 

   Parent Company   Guarantor Companies   Non-Guarantor Companies   Elimination   Consolidation 
                          
Revenue  $   $741,149   $249,534   $(29,538)  $961,145 
Cost of goods and services       565,174    206,949    (26,468)   745,655 
Gross profit       175,975    42,585    (3,070)   215,490 
                          
Selling, general and administrative expenses   13,491    136,615    30,408    (3,212)   177,302 
Restructuring and other related charges       1,492    42        1,534 
Total operating expenses   13,491    138,107    30,450    (3,212)   178,836 
                          
Income (loss) from operations   (13,491)   37,868    12,135    142    36,654 
                          
Other income (expense)                         
Interest income (expense), net   (6,490)   (14,579)   (4,393)       (25,462)
Loss from debt extinguishment, net   (38,890)               (38,890)
Other, net   127    3,072    (1,368)   (142)   1,689 
Total other income (expense)   (45,253)   (11,507)   (5,761)   (142)   (62,663)
                          
Income (loss) before taxes   (58,744)   26,361    6,374        (26,009)
Provision (benefit) for income taxes   (15,579)   11,692    467        (3,420)
Income (loss) before equity in net income of subsidiaries   (43,165)   14,669    5,907        (22,589)
Equity in net income (loss) of subsidiaries   20,576    5,748    14,669    (40,993)    
Net income (loss)  $(22,589)  $20,417   $20,576   $(40,993)  $(22,589)
                          
Net Income (loss)  $(22,589)  $20,417   $20,576   $(40,993)  $(22,589)
Other comprehensive income (loss), net of taxes   340    1,869    (2,707)       (498)
Comprehensive income (loss)  $(22,249)  $22,286   $17,869   $(40,993)  $(23,087)

 

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the Six Months Ended March 31, 2013

 

   Parent Company   Guarantor Companies   Non-Guarantor Companies   Elimination   Consolidation 
                          
Revenue  $   $700,904   $238,510   $(26,922)  $912,492 
Cost of goods and services       531,186    202,365    (24,226)   709,325 
Gross profit       169,718    36,145    (2,696)   203,167 
                          
Selling, general and administrative expenses   11,278    129,586    30,534    (3,120)   168,278 
Restructuring and other related charges       6,480    3,964        10,444 
Total operating expenses   11,278    136,066    34,498    (3,120)   178,722 
                          
Income (loss) from operations   (11,278)   33,652    1,647    424    24,445 
                          
Other income (expense)                         
Interest income (expense), net   (7,222)   (13,703)   (5,063)       (25,988)
Other, net   355    3,765    (2,788)   (424)   908 
Total other income (expense)   (6,867)   (9,938)   (7,851)   (424)   (25,080)
                          
Income (loss) before taxes   (18,145)   23,714    (6,204)       (635)
Provision (benefit) for income taxes   (9,759)   8,948    437        (374)
Income (loss) before equity in net income of subsidiaries   (8,386)   14,766    (6,641)       (261)
Equity in net income (loss) of subsidiaries   8,125    (6,596)   14,766    (16,295)    
Net income (loss)  $(261)  $8,170   $8,125   $(16,295)  $(261)
                          
Net Income (loss)  $(261)  $8,170   $8,125   $(16,295)  $(261)
Other comprehensive income (loss), net of taxes   422    3,457    (2,280)       1,599 
Comprehensive income (loss)  $161   $11,627   $5,845   $(16,295)  $1,338 
23

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

For the Six Months Ended March 31, 2014

 

   Parent Company   Guarantor Companies   Non-Guarantor Companies   Elimination   Consolidation 
                          
CASH FLOWS FROM OPERATING ACTIVITIES:                         
Net income (loss)  $(22,589)  $20,417   $20,576   $(40,993)  $(22,589)
                          
Net cash provided by (used in) operating activities   (30,836)   (27,389)   31,588        (26,637)
                          
CASH FLOWS FROM INVESTING ACTIVITIES:                         
Acquisition of property, plant and equipment   (618)   (29,921)   (4,306)       (34,845)
Acquired business, net of cash acquired       (1,000)   (21,720)       (22,720)
Intercompany distributions   10,000    (10,000)            
Proceeds from sale of assets       230    64        294 
Net cash provided by (used in) investing activities   9,382    (40,691)   (25,962)       (57,271)
                          
CASH FLOWS FROM FINANCING ACTIVITIES:                         
Proceeds from issuance of common stock   584                584 
Purchase of shares for treasury   (63,370)               (63,370)
Proceeds from issuance of long-term debt   629,568    10,939    4,007        644,514 
Payments of long-term debt   (582,108)   (12,097)   7,895        (586,310)
Change in short-term borrowings           4,908        4,908 
Financing costs   (10,142)       (545)       (10,687)
Purchase of ESOP shares   (10,000)               (10,000)
Tax effect from exercise/vesting of equity awards, net   273                273 
Dividend   (8,290)   5,000            (3,290)
Other, net   144    43,140    (43,140)       144 
Net cash provided by (used in) financing activities   (43,341)   46,982    (26,875)       (23,234)
                          
CASH FLOWS FROM DISCONTINUED OPERATIONS:                         
Net cash used in discontinued operations           (640)       (640)
                          
Effect of exchange rate changes on cash and equivalents           (415)       (415)
                          
NET DECREASE IN CASH AND EQUIVALENTS   (64,795)   (21,098)   (22,304)       (108,197)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD   68,994    46,357    62,779        178,130 
CASH AND EQUIVALENTS AT END OF PERIOD  $4,199   $25,259   $40,475   $   $69,933 
24

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

For the Six Months Ended March 31, 2013

 

   Parent Company   Guarantor Companies   Non-Guarantor Companies   Elimination   Consolidation 
                          
CASH FLOWS FROM OPERATING ACTIVITIES:                         
Net income (loss)  $(261)  $8,170   $8,125   $(16,295)  $(261)
                          
Net cash provided by (used in) operating activities   (43,968)   (26,900)   36,885        (33,983)
                          
CASH FLOWS FROM INVESTING ACTIVITIES:                         
Acquisition of property, plant and equipment   (24)   (28,624)   (2,347)       (30,995)
Intercompany distributions   10,000    (10,000)            
Proceeds from sale of assets       1,171    45        1,216 
Net cash provided by (used in) investing activities   9,976    (37,453)   (2,302)       (29,779)
                          
CASH FLOWS FROM FINANCING ACTIVITIES:                         
Purchase of shares for treasury   (22,109)               (22,109)
Proceeds from issuance of long-term debt       303            303 
Payments of long-term debt   (813)   (514)   (4,073)       (5,400)
Change in short-term borrowings           2,157        2,157 
Financing costs   (759)               (759)
Tax effect from exercise/vesting of equity awards, net   150                150 
Dividend   (2,938)               (2,938)
Other, net   242    44,885    (44,885)       242 
Net cash provided by (used in) financing activities   (26,227)   44,674    (46,801)       (28,354)
                          
CASH FLOWS FROM DISCONTINUED OPERATIONS:                         
Net cash used in discontinued operations           (478)       (478)
                          
Effect of exchange rate changes on cash and equivalents           (138)       (138)
                          
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS   (60,219)   (19,679)   (12,834)       (92,732)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD   125,093    34,782    49,779        209,654 
CASH AND EQUIVALENTS AT END OF PERIOD  $64,874   $15,103   $36,945   $   $116,922 
25

(Unless otherwise indicated, US dollars and non US currencies are in thousands, except per share data)

 

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

 

BUSINESS OVERVIEW

 

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 businesses: Home & Building Products (“HBP”), Telephonics Corporation (“Telephonics”) and Clopay Plastic Products Company (“Plastics”).

 

  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 designs, develops and manufactures high-technology integrated information, communication and sensor system solutions for 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. 

 

On May 1, 2014, Griffon’s Board of Directors authorized the repurchase of up to an additional $50,000 of Griffon’s outstanding common stock. Under this repurchase program, the Company may purchase shares, depending upon market conditions, in open market or privately negotiated transactions, including pursuant to a 10b5-1 plan.

 

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 related 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.  

 

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”), extending its maturity date from March 28, 2018 to March 28, 2019, amending certain financial maintenance ratio test thresholds and increasing certain baskets for permitted debt, guaranties, liens, asset sales, foreign acquisitions, investments and restricted payments.

26

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 will be integrated with Ames, is expected to generate approximately $28,000 of annualized revenue. Griffon incurred $798 of acquisition costs related to this transaction in the first quarter of 2014.

 

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 January 2013, Ames announced its intention to close certain manufacturing facilities and consolidate affected operations primarily into its Camp Hill and Carlisle, PA locations. The intended actions, to be completed by the end of calendar 2014, will improve manufacturing and distribution efficiencies, allow for in-sourcing of certain production currently performed by third party suppliers, and improve material flow and absorption of fixed costs. Management estimates that, upon completion, these actions will result in annual cash savings exceeding $10,000, based on current operating levels; these savings are consistent with those anticipated at the onset of the initiative.

 

Ames anticipates incurring pre-tax restructuring and related exit costs approximating $8,000, comprised of cash charges of $4,000 and non-cash, asset-related charges of $4,000; the cash charges will include $2,500 for one-time termination benefits and other personnel-related costs and $1,500 for facility exit costs. Ames expects $20,000 in capital expenditures in connection with this initiative and, to date, has incurred $7,583 and $15,269 in restructuring costs and capital expenditures, respectively.

 

First quarter 2013, Selling, general and administrative expenses included a $2,142, non-cash, 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.

 

OVERVIEW

 

Revenue for the quarter ended March 31, 2014 was $507,687 compared to $488,743 in the prior year quarter. Net loss was $25,825 or $0.53 per share, compared to a net loss of $819 or $0.02 per share, in the prior year quarter.

 

The current quarter included:

  - Restructuring charges of $692 ($429, net of tax or $0.01 per share);
  - Loss from debt extinguishment of $38,890 ($24,964, net of tax or $0.51 per share);
  - Discrete tax provisions, net, of $609 or $0.01 per share; and
  - Impact of debt extinguishment on full year effective tax rate of $5,848 or $0.12 per share.

 

The prior year quarter included:

  - Restructuring charges of $9,336 ($5,788, net of tax or $0.10 per share); and
  - Discrete tax provisions, net, of $309 or $0.01 per share.  

 

Excluding these items from the respective quarterly results, net income would have been $6,025 or $0.12 per share in the current quarter compared to $4,660 or $0.08 per share in the prior year quarter.

 

Revenue for the six months ended March 31, 2014 was $961,145 compared to $912,492 in the prior year period. Net loss was $22,589 or $0.44 per share, compared to a net loss of $261 or $0.00 per share, in the prior year period.

27

Results for the six months ended March 31, 2014 included:

  - Restructuring charges of $1,534 ($951, net of tax or $0.02 per share);
  - Loss from debt extinguishment of $38,890 ($24,964, net of tax or $0.49 per share);
  - Acquisition costs of $798 ($495, net of tax or $0.01 per share);
  - Discrete tax provisions, net, of $320 or $0.01 per share; and
  - Impact of debt extinguishment on full year effective tax rate of $5,848 or $0.12 per share.

 

Results for the six months ended March 31, 2013 included:

  - Restructuring charges of $10,444 ($6,508, net of tax or $0.11 per share);
  - Loss on pension settlement of $2,142 ($1,392, net of tax or $0.02 per share); and
  - Discrete tax benefits, net, of $364 or $0.01 per share.  

 

Excluding these items from the respective periods, net income would have been $9,989 or $0.20 per share in the six months ended March 31, 2014 compared to $7,275 or $0.13 per share in the six months ended March 31, 2013.

 

Griffon evaluates performance based on Earnings (loss) per share and Net income (loss) excluding restructuring charges, acquisition-related expenses, gains (losses) from pension settlement and debt extinguishment and discrete tax items, as applicable. Griffon believes this information is useful to investors. The following table provides a reconciliation of Net loss to adjusted net income and Earnings (loss) per share to Adjusted earnings per share:

 

GRIFFON CORPORATION AND SUBSIDIARIES

RECONCILIATION OF NET LOSS

TO ADJUSTED NET INCOME

(Unaudited)

 

   For the Three Months Ended
March 31,
   For the Six Months Ended March
31,
 
   2014   2013   2014   2013 
                 
Net loss  $(25,825)  $(819)  $(22,589)  $(261)
                     
Adjusting items, net of tax:                    
Loss from debt extinguishment, net   24,964        24,964     
Restructuring and related   429    5,788    951    6,508 
Acquisition costs           495     
Loss on pension settlement               1,392 
Extinguishment impact on period tax ratea   5,848        5,848     
Discrete tax provisions (benefits)   609    (309)   320    (364)
                     
Adjusted net income  $6,025   $4,660   $9,989   $7,275 
                     
Diluted loss per common share  $(0.53)  $(0.02)  $(0.44)  $(0.00)
                     
Adjusting items, net of tax:                    
Loss from debt extinguishment, net   0.51        0.49     
Restructuring   0.01    0.10    0.02    0.11 
Acquisition costs           0.01     
Loss on pension settlement               0.02 
Extinguishment impact on period tax ratea   0.12        0.12     
Discrete tax provisions (benefits)   0.01    (0.01)   0.01    (0.01)
                     
Adjusted earnings per common share  $0.12   $0.08   $0.20   $0.13 
                     
Weighted-average shares outstanding (in thousands)   48,990    54,345    50,872    54,749 

 

a) Prior to refinancing the debt and resultant loss on debt extinguishment, the Company anticipated its full year 2014 effective tax rate to approximate 40%.  As a result of the loss from debt extinguishment, the Company anticipates it will now incur a pretax loss for the full year 2014, and recognize a corresponding tax benefit at an effective rate approximating 13.0%.  In the current quarter, the impact of debt extinguishment on the full year effective tax rate was estimated to be a benefit of $5,848 or $0.12 per share.
28

Note: Due to rounding, the sum of earnings per common share and adjusting items, net of tax, may not equal adjusted earnings per common share.

 

RESULTS OF OPERATIONS

 

Quarters ended March 31, 2014 and 2013

 

Griffon evaluates performance and allocates resources based on each segments’ 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 operating profit to Loss before taxes:

 

   For the Three Months Ended March 31,   For the Six Months Ended March 31, 
   2014   2013   2014   2013 
Segment operating profit:                
Home & Building Products  $8,818   $3,835   $18,211   $11,106 
Telephonics   10,677    13,753    21,329    28,398 
Plastics   9,352    916    15,177    3,558 
Total segment operating profit   28,847    18,504    54,717    43,062 
Net interest expense   (12,361)   (12,909)   (25,462)   (25,988)
Unallocated amounts   (8,391)   (7,980)   (16,374)   (15,567)
Loss from debt extinguishment, net   (38,890)       (38,890)    
Loss on pension settlement               (2,142)
Loss before taxes  $(30,795)  $(2,385)  $(26,009)  $(635)

 

The following table provides a reconciliation of Segment adjusted EBITDA to Loss before taxes:

 

   For the Three Months Ended March 31,   For the Six Months Ended March 31, 
   2014   2013   2014   2013 
Segment adjusted EBITDA:                    
Home & Building Products  $17,124   $17,555   $36,191   $34,794 
Telephonics   12,535    15,505    24,931    31,869 
Plastics   16,216    12,352    28,959    21,671 
Total Segment adjusted EBITDA   45,875    45,412    90,081    88,334 
Net interest expense   (12,361)   (12,909)   (25,462)   (25,988)
Segment depreciation and amortization   (16,336)   (17,572)   (33,032)   (34,828)
Unallocated amounts   (8,391)   (7,980)   (16,374)   (15,567)
Loss from debt extinguishment, net   (38,890)       (38,890)    
Restructuring charges   (692)   (9,336)   (1,534)   (10,444)
Acquisition costs           (798)    
Loss on pension settlement               (2,142)
Loss before taxes  $(30,795)  $(2,385)  $(26,009)  $(635)
29

Home & Building Products

 

   Three Months Ended March 31,   For the Six Months Ended March 31, 
   2014   2013   2014   2013 
Revenue:                                    
Ames  $160,705       $136,237       $257,313       $213,546     
CBP   90,838        89,499        212,680        202,366     
Home & Building Products  $251,543       $225,736       $469,993       $415,912     
Segment operating profit  $8,818   3.5%  $3,835   1.7%  $18,211   3.9%  $11,106   2.7%
Depreciation and amortization   7,614        9,157        15,648        18,017     
Restructuring charges   692        4,563        1,534        5,671     
Acquisition costs                   798             
Segment adjusted EBITDA  $17,124   6.8%  $17,555   7.8%  $36,191   7.7%  $34,794   8.4%

 

For the quarter ended March 31, 2014, revenue increased $25,807 or 11%, compared to the prior year quarter. Ames revenue increased 18% compared to the prior year quarter primarily due to improved U.S. and Canada snow tool and planter sales, and the inclusion of Northcote results, while CBP revenue increased 1%, primarily due to favorable mix, partially offset by lower volume influenced by inclement weather conditions.

 

For the quarter ended March 31, 2014, Segment operating profit was $8,818 compared to $3,835 in the prior year quarter. Excluding restructuring charges, primarily related to the manufacturing and operations consolidation initiative at Ames, current and prior year Segment operating profit was $9,510 and $8,398, respectively. Excluding restructuring, the increase in Segment operating profit was primarily from improved volume at Ames and favorable product mix at CBP, partially offset by higher distribution and selling costs. Ames also continued to experience manufacturing inefficiencies in connection with its plant consolidation initiative, which are expected to continue until the initiative is completed. The impact of Northcote in the quarter was not significant. Segment depreciation and amortization decreased $1,543 from the prior year period.

 

For the six months ended March 31, 2014, revenue increased $54,081 or 13%, compared to the prior year period. Ames revenue increased 20% mainly driven by improved US and Canadian snow tool and planter sales, and the inclusion of Northcote results. CBP revenue increased 5% due to higher volume and favorable product mix.

 

For the six months ended March 31, 2014, Segment operating profit was $18,211 compared to $11,106 in the prior year period. Excluding restructuring charges, primarily related to the consolidation initiative at Ames, and acquisition costs related to the Northcote transaction, current and prior year Segment operating profit was $20,543 and $16,777, respectively. Excluding restructuring and acquisition costs, the increase was primarily from improved volume at Ames and CBP, partially offset by higher distribution costs. Ames also continued to experience manufacturing inefficiencies in connection with its plant consolidation initiative, which are expected to continue until the initiative is completed. The impact of Northcote in the quarter was not significant. The prior year period benefitted from $1,000 in Byrd Amendment receipts (anti-dumping compensation from the government); current period Byrd Amendment receipts were not significant. Segment depreciation and amortization decreased $2,369 from the prior year period.

 

On December 31, 2013, Ames acquired Northcote, 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 will be integrated with Ames, is expected to generate approximately $28,000 of annualized revenue.

 

In January 2013, Ames announced its intention to close certain manufacturing facilities and consolidate affected operations primarily into its Camp Hill and Carlisle, PA locations. The intended actions, to be completed by the end of calendar 2014, will improve manufacturing and distribution efficiencies, allow for in-sourcing of certain production currently performed by third party suppliers, and improve material flow and absorption of fixed costs. Management estimates that, upon completion, these actions will result in annual cash savings exceeding $10,000, based on current operating levels; these savings are consistent with those anticipated at the onset of the initiative.

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Ames anticipates incurring pre-tax restructuring and related exit costs approximating $8,000, comprised of cash charges of $4,000 and non-cash, asset-related charges of $4,000; the cash charges will include $2,500 for one-time termination benefits and other personnel-related costs and $1,500 for facility exit costs. Ames expects $20,000 in capital expenditures in connection with this initiative and, to date, has incurred $7,583 and $15,269 in restructuring costs and capital expenditures, respectively.

 

HBP recognized $692 and $1,534, respectively, for the three and six months ended March 31, 2014, and $4,563 and $5,671, respectively, for the three and six months ended March 31, 2013 in restructuring and other related exit costs; such charges primarily related to one-time termination benefits, facility and other personnel costs, and asset impairment charges related to the Ames plant consolidation initiatives. The 2013 period also included charges related to a CBP plant consolidation.

 

Telephonics

 

   Three Months Ended March 31,    For the Six Months Ended March 31,  
   2014    2013    2014    2013  
Revenue  $104,185       $121,631       $200,210      $217,681     
Segment operating profit  $10,677   10.2%  $13,753   11.3%  $21,329  10.7%  $28,398  13.0 %
Depreciation and amortization   1,858        1,752        3,602       3,471     
Segment adjusted EBITDA  $12,535   12.0%  $15,505   12.7%  $24,931  12.5%  $31,869  14.6 %

 

For the quarter ended March 31, 2014, revenue decreased $17,446 or 14% compared to the prior year quarter. The 2013 quarter included $13,225 of electronic warfare program revenue where Telephonics serves as a contract manufacturer; there was no such revenue in the current year quarter. Excluding revenue from these programs, current quarter revenue decreased 4% from the 2013 quarter, primarily due to lower mobile surveillance systems sales, partially offset by higher Identification Friend or Foe systems sales.

 

For the quarter ended March 31, 2014, Segment operating profit decreased $3,076 or 22%, and operating profit margin decreased 110 basis points compared to the prior year quarter; the prior year quarter benefitted from the electronic warfare programs, favorable program mix and manufacturing efficiencies, none of which were repeated in the current quarter.

 

For the six months ended March 31, 2014, revenue decreased $17,471 or 8%, compared to the prior year period. The prior year period included $13,225 of electronic warfare program revenue where Telephonics serves as a contract manufacturer; there was no such revenue in the current year period. Excluding revenue from these programs, revenue decreased 2% primarily due to reduced airborne intercommunication products and mobile surveillance systems sales, partially offset by higher Identification Friend or Foe products sales.

 

For the six months ended March 31, 2014, Segment operating profit decreased $7,069 or 25%, and operating margin decreased 230 basis points compared to the prior year period. The prior year period benefitted from the electronic warfare programs, favorable program mix and manufacturing efficiencies, which were not repeated in the current year period.

 

During the six months ended March 31, 2014, Telephonics was awarded several new contracts and incremental funding on existing contracts approximating $241,800. Contract backlog was $486,000 at March 31, 2014 with 66% expected to be fulfilled in the next 12 months. Backlog was $444,000 at September 30, 2013 and $416,000 at December 31, 2013. Backlog is defined as unfilled firm orders for products and services for which funding has been both authorized and appropriated by the customer or Congress, in the case of the U.S. government agencies.

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Plastics

 

   Three Months Ended March 31,    For the Six Months Ended March 31, 
   2014    2013    2014    2013 
Revenue  $151,959       $141,376      $290,942      $278,899    
Segment operating profit  $9,352   6.2%  $916  0.6%  $15,177  5.2%  $3,558  1.3%
Depreciation and amortization   6,864        6,663       13,782       13,340    
Restructuring charges           4,773              4,773    
Segment adjusted EBITDA  $16,216   10.7%  $12,352  8.7%  $28,959  10.0%  $21,671  7.8%

 

For the quarter ended March 31, 2014, revenue increased $10,583, or 7%, compared to the prior year quarter. The increase reflected the benefit of favorable mix (6%), the pass through of higher resin costs in customer selling prices (1%) and higher volume (1%), partially offset by the impact of unfavorable foreign exchange translation (1%); the 1% volume increase was net of volume lost as a result of Plastics exiting certain low margin products in the second half of 2013. Plastics adjusts selling prices based on underlying resin costs on a delayed basis.

 

For the quarter ended March 31, 2014, Segment operating profit increased $8,436 compared to the prior year quarter; the prior year quarter included restructuring charges of $4,773. Excluding restructuring charges, Segment operating profit increased $3,663 primarily due to favorable mix, continued efficiency improvements and the positive impact of restructuring initiatives undertaken over the past year. Resin did not have a material impact on profit for the quarter.

 

For the six months ended March 31, 2014, revenue increased $12,043, or 4%, compared to the prior year quarter. The increase reflected the benefit of favorable mix (5%) and the pass through of higher resin costs in customer selling prices (1%), partially offset by the impact of lower volume (2%), the majority of which was attributable to Plastics exiting certain low margin products in the second half of 2013.

 

For the six months ended March 31, 2014, Segment operating profit increased $11,619 compared to the prior year period; the prior year period included restructuring charges of $4,773. Excluding restructuring charges, Segment operating profit increased $6,846 primarily due to continued efficiency improvements, favorable mix and an $800 favorable resin benefit, partially offset by the impact of reduced volume.

 

In February 2013, Plastics undertook a restructuring project, primarily in Europe, to exit low margin business and to eliminate approximately 80 positions, resulting in restructuring charges of $4,773, primarily related to one-time termination benefits and other personnel costs. The project was completed in 2013.

 

Unallocated

 

For the quarter ended March 31, 2014, unallocated amounts totaled $8,391 compared to $7,980 in the prior year; for the six months ended March 31, 2014, unallocated amounts totaled $16,374 compared to $15,567 in the prior year. The increase in the current quarter and six-month period compared to the respective prior year periods primarily related to increased compensation and incentive costs.

 

Segment Depreciation and Amortization

 

Segment depreciation and amortization decreased $1,236 and $1,796, respectively, for the quarter and six-month periods ended March 31, 2014 compared to the prior year periods primarily due to assets fully amortizing, partially offset by the onset of depreciation for new assets placed in service.

 

Other Expense

 

For the quarters ended March 31, 2014 and 2013, Other income (expense) included $436 and ($479), respectively, of net currency exchange gains (losses) in connection with the translation of receivables and payables denominated in currencies other than the functional currencies of Griffon and its subsidiaries as well as $15 and $321, respectively, of net investment income.

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For the six months ended March 31, 2014 and 2013, Other income (expense) included $679 and ($467), respectively, of net currency exchange gains (losses) in connection with the translation of receivables and payables denominated in currencies other than the functional currencies of Griffon and its subsidiaries as well as $127 and $353, respectively, of net investment income.

 

Provision (benefit) for income taxes

 

In the quarter and six-month periods ended March 31, 2014 and 2013, the Company incurred pretax losses. The Company recognized tax benefits of 16.1% and 13.2% for the quarter and six-month periods ended March 31, 2014, respectively, compared to benefits of 65.7% and 59.0%, respectively, in the comparable prior year periods. The current and prior year benefit 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 result.  

 

The current quarter and six-month periods include $609 and $320, respectively, of provisions for discrete items resulting primarily from the conclusion of tax audits in certain jurisdictions, and the impact of tax law changes enacted in the current quarter.  The comparable prior year periods included $309 and $364, respectively, of benefits from discrete items, primarily the retroactive extension of the federal R&D credit signed into law January 2, 2013. Excluding discrete items, the effective tax benefit rates for the quarter and six month periods ended March 31, 2014 were 18.1% and 14.4%, respectively, compared to benefit rates of 52.7% and 1.7% in the comparable prior year periods, respectively.

 

Prior to refinancing the debt and resultant loss on debt extinguishment, the Company anticipated its full year 2014 effective tax rate to approximate 40%. As a result of the loss from debt extinguishment, the Company anticipates it will now incur a pretax loss for the full year 2014, and recognize a corresponding tax benefit at an effective rate approximating 13.0%. In the current quarter, the impact of debt extinguishment on the full year effective tax rate was estimated to be a benefit of $5,848 or $0.12 per share, as detailed in the Company’s Reconciliation of Net Income to Adjusted Net Income.

 

Stock based compensation

 

For the quarters ended March 31, 2014 and 2013, stock based compensation expense totaled $3,321 and $3,338, respectively. For the six months ended March 31, 2014 and 2013, stock based compensation expenses totaled $4,996 and $6,298, respectively.

 

Comprehensive income (loss)

 

For the quarter ended March 31, 2014, total other comprehensive income, net of taxes, of $2,323, included a $1,224 gain from Foreign currency translation adjustments primarily due to the strengthening of the Australian and Brazilian currencies, partially offset by the weakening of the Canadian currency and Euro, all in comparison to the U.S. Dollar, and a $1,099 benefit from Pension and other post retirement plans, primarily due to settling a non U.S. pension plan and amortization of actuarial losses.

 

For the six months ended March 31, 2014, total other comprehensive loss, net of taxes, of $498, included a $1,913 loss from Foreign currency translation adjustments primarily due to the weakening of the Canadian currency, partially offset by the strengthening of the Euro and the Australian currency, all in comparison to the U.S. Dollar, and a $1,415 benefit from Pension and other post retirement plans, primarily due to settling a non U.S. pension plan and amortization of actuarial losses.

 

Discontinued operations – Installation Services

 

There was no revenue or income from the Installation Services’ business for the quarters and six-month periods ended March 31, 2014 and 2013.

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LIQUIDITY AND CAPITAL RESOURCES

 

Management assesses Griffon’s liquidity in terms of its ability to generate cash to fund its operating, investing and financing activities. Significant factors affecting liquidity include: cash flows from operating activities, capital expenditures, acquisitions, dispositions, bank lines of credit and the ability to attract long-term capital under satisfactory terms. Griffon remains in a strong financial position with sufficient liquidity available for reinvestment in existing businesses and strategic acquisitions while managing its capital structure on both a short-term and long-term basis.

 

The following table is derived from the Condensed Consolidated Statements of Cash Flows:

 

Cash Flows from Continuing Operations  Six Months Ended March 31, 
(in thousands)  2014   2013 
Net Cash Flows Used In:          
Operating activities  $(26,637)  $(33,983)
Investing activities   (57,271)   (29,779)
Financing activities   (23,234)   (28,354)

 

Cash used in continuing operations for the six months ended March 31, 2014 was $26,637 compared to $33,983 in the prior year. The current year included $16,716 of interest payments made in conjunction with the redemption of the $550,000 7.125% senior notes due 2018; in prior years, such payments would have been made April 1. Excluding this payment, cash flow used in operating activities would have approximated $9,921. Current assets net of current liabilities, excluding short-term debt and cash, increased to $458,060 at March 31, 2014 compared to $372,639 at September 30, 2013, primarily due to increased inventory, contract costs and recognized income not yet billed and a decrease in accounts payable and accrued liabilities.

 

During the six months ended March 31, 2014, Griffon used cash for investing activities of $57,271 compared to $29,779 in the prior year; the acquisition of Northcote for approximately $22,000 impacted the current year. Current quarter capital expenditures totaled $34,845, an increase of $3,850 from the prior year quarter.

 

During the six months ended March 31, 2014, cash used in financing activities totaled $23,234 compared to $28,354 in the prior year. On May 1, 2014, Griffon’s Board of Directors authorized the repurchase of up to an additional $50,000 of Griffon’s outstanding common stock. Under this repurchase program, 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 six months ended March 31, 2014, the Board of Directors approved two quarterly cash dividends of $0.03 per share. 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., in a private transaction. This purchase was exclusive of the Company’s August 2011 $50,000 authorized share repurchase program, of which $4,525 remains at March 31, 2014. In the six months ended March 31, 2014, Griffon purchased 598,481 shares of common stock under the August 2011 authorized program, for a total of $7,501 or $12.53 per shares. To date, Griffon has purchased 4,320,712 shares of common stock, for a total of $45,474 or $10.52 per share under the August 2011 share repurchase authorization. In December 2013, Griffon’s Employee Stock Ownership Plan (“ESOP”) entered into an 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. In the six months ended March 31, 2014, 749,977 shares of Griffon common stock, for a total of $10,000, were purchased with proceeds from the Line Note. In the six months ended March 31, 2014, 411,064 shares, with a market value of $5,266 or $12.81 per share, withheld to settle employee taxes due upon the vesting of restricted stock, were added to treasury stock.

 

On May 1, 2014, the Board of Directors declared a quarterly cash dividend of $0.03 per share, payable on June 26, 2014 to shareholders of record as of the close of business on May 23, 2014.

34

Payments related to Telephonics revenue are received in accordance with the terms of development and production subcontracts; certain of such receipts are progress or performance based payments. Plastics customers are generally substantial industrial companies whose payments have been steady, reliable and made in accordance with the terms governing such sales. Plastics sales satisfy orders that are received in advance of production, and where payment terms are established in advance. With respect to HBP, there have been no material adverse impacts on payment for sales.

 

A small number of customers account for, and are expected to continue to account for, a substantial portion of Griffon’s consolidated revenue. For the six months ended March 31, 2014:

 

The United States Government and its agencies, through either prime or subcontractor relationships, represented 15% of Griffon’s consolidated revenue and 73% of Telephonics’ revenue.
Procter & Gamble Co. represented 13% of Griffon’s consolidated revenue and 44% of Plastics’ revenue.
The Home Depot represented 11% of Griffon’s consolidated revenue and 22% of HBP’s revenue.

 

No other customer exceeded 7% of consolidated revenue. Future operating results will continue to substantially depend on the success of Griffon’s largest customers and our ongoing relationships with them. Orders from these customers are subject to fluctuation and may be reduced materially. The loss of all or a portion of volume from any one of these customers could have a material adverse impact on Griffon’s liquidity and operations.

 

Cash and Equivalents and Debt  At March 31,   At September 30, 
(in thousands)  2014   2013 
Cash and equivalents  $69,933   $178,130 
Notes payables and current portion of long-term debt   13,393    10,768 
Long-term debt, net of current maturities   773,579    678,487 
Debt discount   11,454    13,246 
Total debt   798,426    702,501 
Debt, net of cash and equivalents  $728,493   $524,371 

 

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 related 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. At the time of issuance of the Senior Notes, Griffon agreed that, within certain time periods after the issue date, it would offer to each noteholder, pursuant to a registration statement filed with and to be declared effective by the SEC, the opportunity to exchange its Senior Notes for new notes that have substantially identical terms to those of the Senior Notes (the only material difference being that the new notes are registered with the SEC). The fair value of the Senior Notes approximated $591,000 on March 31, 2014 based upon quoted market prices (level 1 inputs).

 

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 remaining deferred financing fees of $6,574 and $786 of prepaid interest on defeased notes.

35

On February 14, 2014, Griffon amended its $225,000 Credit Agreement extending its maturity date from March 28, 2018 to March 28, 2019, amending certain financial maintenance ratio test thresholds and increasing certain baskets for permitted debt, guaranties, liens, asset sales, foreign acquisitions, investments and restricted payments. 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.

 

At March 31, 2014, outstanding borrowings and standby letters of credit were $20,000 and $20,352, respectively; $184,648 was available for borrowing at that date.

 

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 $14.57 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 March 31, 2014, the above conversion price included dividends paid through March 27, 2014. At both March 31, 2014 and 2013, the 2017 Notes had a capital in excess of par component, net of tax, of $15,720. The fair value of the 2017 Notes approximated $112,600 on March 31, 2014 based upon quoted market prices (level 1 inputs).

 

On October 21, 2013, Griffon refinanced two properties’ real estate mortgages to secure new 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 March 31, 2014, $16,818 was outstanding.

 

In December 2013, Griffon’s ESOP entered into an 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 March 31, 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 $19,000 due at maturity in December 2018. The loan is secured by shares purchased with the proceeds of the loan and with a lien on a specific amount of Griffon assets, and Griffon guarantees repayment. At March 31, 2014, $30,087 was outstanding.

 

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 December 31, 2013, $9,289 was outstanding.

 

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 $5,500 at March 31, 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. 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% (16.55% at March 31, 2014). At March 31, 2014 there was approximately $3,943 borrowed under the lines. Clopay Plastic Products Co., Inc. guarantees the loan and lines.

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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 (1.45% LIBOR USD and 2.47% Bankers Acceptance Rate CDN as of March 31, 2014). The revolving facility matures in November 2015. Garant is required to maintain a certain minimum equity.  At March 31, 2014, there were no borrowings under the revolving credit facility with CAD $15,000 available.

 

In December 2013, Northcote Holdings Pty. Ltd entered into an AUD $12,500 term loan. The term loan is unsecured, requires quarterly interest payments and principal is due at maturity (December 2016). The loan accrues interest at Bank Bill Swap Bid Rate “BBSY” plus 2.8% per annum (5.5% at March 31, 2014). As of March 31, 2014, Griffon had an outstanding balance of $11,559. Subsidiaries of Northcote Holdings maintain a line of credit of approximately $2,800. The line of credit accrues interest at BBSY plus 2.25% per annum (4.95% at March 31, 2014). At March 31, 2014, there were no outstanding borrowings under the line. Griffon Corporation guarantees both the term loan and the line of credit.

 

At March 31, 2014, Griffon and its subsidiaries were in compliance with the terms and covenants of its credit and loan agreements.

 

During the six month period ended March 31, 2014 and 2013, Griffon used cash for discontinued operations of $640 and $478, respectively, primarily related to settling remaining Installation Services liabilities and environmental costs.

 

CRITICAL ACCOUNTING POLICIES

 

The preparation of Griffon’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires the use of estimates, assumptions, judgments and subjective interpretations of accounting principles that have an impact on assets, liabilities, revenue and expenses. These estimates can also affect supplemental information contained in public disclosures of Griffon, including information regarding contingencies, risk and its financial condition. These estimates, assumptions and judgments are evaluated on an ongoing basis and based on historical experience, current conditions and various other assumptions, and form the basis for estimating the carrying values of assets and liabilities, as well as identifying and assessing the accounting treatment for commitments and contingencies. Actual results may materially differ from these estimates.

There have been no changes in Griffon’s critical accounting policies from September 30, 2013.

 

Griffon’s significant accounting policies and procedures are explained in the Management Discussion and Analysis section in the Annual Report on Form 10-K for the year ended September 30, 2013. In the selection of the critical accounting policies, the objective is to properly reflect the financial position and results of operations for each reporting period in a consistent manner that can be understood by the reader of the financial statements. Griffon considers an estimate to be critical if it is subjective and if changes in the estimate using different assumptions would result in a material impact on the financial position or results of operations of Griffon.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

The Financial Accounting Standards Board issues, from time to time, new financial accounting standards, staff positions and emerging issues task force consensus. See the Notes to Condensed Consolidated Financial Statements for a discussion of these matters.

37

FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q, especially “Management’s Discussion and Analysis”, contains certain “forward-looking statements” within the meaning of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Such statements relate to, among other things, income (loss), earnings, cash flows, revenue, changes in operations, operating improvements, industries in which Griffon Corporation (the “Company” or “Griffon”) operates and the United States and global economies. Statements in this Form 10-Q that are not historical are hereby identified as “forward-looking statements” and may be indicated by words or phrases such as “anticipates,” “supports,” “plans,” “projects,” “expects,” “believes,” “should,” “would,” “could,” “hope,” “forecast,” “management is of the opinion,” “may,” “will,” “estimates,” “intends,” “explores,” “opportunities,” the negative of these expressions, use of the future tense and similar words or phrases. Such forward-looking statements are subject to inherent risks and uncertainties that could cause actual results to differ materially from those expressed in any forward-looking statements. These risks and uncertainties include, among others: current economic conditions and uncertainties in the housing, credit and capital markets; Griffon’s ability to achieve expected savings from cost control, integration and disposal initiatives; the ability to identify and successfully consummate and integrate value-adding acquisition opportunities; increasing competition and pricing pressures in the markets served by Griffon’s operating companies; the ability of Griffon’s operating companies to expand into new geographic and product markets and to anticipate and meet customer demands for new products and product enhancements and innovations; reduced military spending by the government on projects for which Griffon’s Telephonics Corporation supplies products, including as a result of sequestration at such time as the budgetary cuts mandated by sequestration begin to take effect; the ability of the federal government to fund and conduct its operations; increases in the cost of raw materials such as resin and steel; changes in customer demand or loss of a material customer at one of Griffon’s operating companies; the potential impact of seasonal variations and uncertain weather patterns on certain of Griffon’s businesses; political events that could impact the worldwide economy; a downgrade in Griffon’s credit ratings; changes in international economic conditions including interest rate and currency exchange fluctuations; the reliance by certain of Griffon’s businesses on particular third party suppliers and manufacturers to meet customer demands; the relative mix of products and services offered by Griffon’s businesses, which impacts margins and operating efficiencies; short-term capacity constraints or prolonged excess capacity; unforeseen developments in contingencies, such as litigation; unfavorable results of government agency contract audits of Telephonics Corporation; Griffon’s ability to adequately protect and maintain the validity of patent and other intellectual property rights; the cyclical nature of the businesses of certain of Griffon’s operating companies; and possible terrorist threats and actions and their impact on the global economy. Additional important factors that could cause the statements made in this Quarterly Report on Form 10-Q or the actual results of operations or financial condition of Griffon to differ are discussed under the caption “Item 1A. Risk Factors” and “Special Notes Regarding Forward-Looking Statements” in Griffon’s Annual Report on Form 10-K for the year ended September 30, 2013. Readers are cautioned not to place undue reliance on these forward-looking statements. These forward-looking statements speak only as of the date made. Griffon undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

Item 3 - Quantitative and Qualitative Disclosure About Market Risk

 

Griffon’s business’ activities necessitates the management of various financial and market risks, including those related to changes in interest rates, foreign currency rates and commodity prices.

 

Interest Rates

 

Griffon’s exposure to market risk for changes in interest rates relates primarily to variable interest rate debt and investments in cash and equivalents.

 

The revolving credit facility and certain other of Griffon’s credit facilities have a LIBOR-based variable interest rate. Due to the current and expected level of borrowings under these facilities, a 100 basis point change in LIBOR would not have a material impact on Griffon’s results of operations or liquidity.

38

Foreign Exchange

 

Griffon conducts business in various non-U.S. countries, primarily in Canada, Germany, Brazil, United Kingdom, Turkey, China, Sweden, Australia and Mexico; therefore, changes in the value of the currencies of these countries affect the financial position and cash flows when translated into U.S. Dollars. Griffon has generally accepted the exposure to exchange rate movements relative to its non-U.S. operations. Griffon may, from time to time, hedge its currency risk exposures. A change of 10% or less in the value of all applicable foreign currencies would not have a material effect on Griffon’s financial position and cash flows.

 

Item 4 - Controls and Procedures

 

Under the supervision and with the participation of Griffon’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), Griffon’s disclosure controls and procedures, as defined by Exchange Act Rule 13a-15(e) and 15d-15(e), were evaluated as of the end of the period covered by this report. Based on that evaluation, Griffon’s CEO and CFO concluded that Griffon’s disclosure controls and procedures were effective at the reasonable assurance level.

 

During the period covered by this report, there were no changes in Griffon’s internal control over financial reporting which materially affected, or are reasonably likely to materially affect, Griffon’s internal control over financial reporting.

 

Limitations on the Effectiveness of Controls

 

Griffon believes that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all controls issues and instances of fraud, if any, within a company have been detected. Griffon’s disclosure controls and procedures, as defined by Exchange Act Rule 13a-15(e) and 15d-15(e), are designed to provide reasonable assurance of achieving their objectives.

 

PART II - OTHER INFORMATION

 

Item 1 Legal Proceedings
 

None

 

Item 1A Risk Factors
   
 

In addition to the other information set forth in this report, carefully consider the factors discussed in Item 1A to Part I in Griffon’s Annual Report on Form 10-K for the year ended September 30, 2013, which could materially affect Griffon’s business, financial condition or future results. The risks described in Griffon’s Annual Report on Form 10-K are not the only risks facing Griffon. Additional risks and uncertainties not currently known to Griffon or that Griffon currently deems to be immaterial also may materially adversely affect Griffon’s business, financial condition and/or operating results.

39
Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

 

(a) Recent sales of unregistered securities.

On January 10, 2014, Griffon sold 44,476 shares of common stock to Ames management for an aggregate of $584 in a private offering pursuant to the exemption provided for in Section 4(2) of, and Regulation D promulgated pursuant to, the Securities Act of 1933.

 

(c)

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period  (a) Total Number
of Shares (or
Units) Purchased
   (b) Average Price
Paid Per Share (or
Unit)
   (c) Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs (1)
   (d) Maximum Number (or
Approximate Dollar
Value) of Shares (or Units)
That May Yet Be
Purchased Under the
Plans or Programs(1)
 
                 
January 1 - 31, 2014      $          
February 1 - 28, 2014   294,200(2)   12.39    171,148      
March 1 - 31, 2014   361,633    12.55    361,633      
                     
Total   655,833   $12.47    532,781   $4,525 
                     
  1. On August 2, 2011, the Company’s Board of Directors authorized the repurchase of up to an additional $50,000 of Griffon common stock; as of March 31, 2014, $4,525 remained available for the purchase of Griffon common stock under this program. On May 1, 2014, the Company’s Board of Directors authorized the repurchase of up to an additional $50,000 of Griffon common stock.
  2. Includes 123,052 shares acquired by the Company from holders of restricted stock upon vesting of the restricted stock, to satisfy tax-withholding obligations of the holders.

 

Item 3

 

 

Item 4

 

Defaults Upon Senior Securities

None

 

Mine Safety Disclosures

Not applicable

   
Item 5 Other Information
  None
   
Item 6 Exhibits

 

4.1

Indenture (relating to the 5.25% Senior Notes due 2022), dated as of February 27, 2014, among Griffon Corporation, the Guarantors named on the signature pages thereto and Wells Fargo Bank, National Association, as Trustee (Exhibit 4.1 to the Current Report on Form 8-K filed February 27, 2014 (Commission File No. 1-06620)).

   
4.2

Registration Rights Agreement (relating to the 5.25% Senior Notes due 2022), dated as of February 27, 2014, by and among Griffon Corporation, the Guarantors party thereto and Deutsche Bank Securities Inc., as the Representative of the several Initial Purchasers (Exhibit 4.2 to the Current Report on Form 8-K filed February 27, 2014 (Commission File No. 1-06620)).

   
4.3

Supplemental Indenture (relating to the 7.125% Senior Notes due 2018), dated as of February 27, 2014, between Griffon Corporation and Wells Fargo Bank, National Association, as Trustee (Exhibit 4.3 to the Current Report on Form 8-K filed February 27, 2014 (Commission File No. 1-06620)).

40
10.1

Purchase Agreement, dated as of February 12, 2014, by and among Griffon Corporation, the Guarantors named therein and Deutsche Bank Securities Inc., as Representative of the several Initial Purchasers named therein (Exhibit 99.1 to the Current Report on Form 8-K filed February 13, 2014 (Commission File No. 1-06620)).

   
10.2

Fourth Amendment to Amended and Restated Credit Agreement, dated as of February 14, 2014, to that certain Amended and Restated Credit Agreement, dated as of March 28, 2013 among Griffon Corporation, JPMorgan Chase Bank, N.A., as administrative agent, Deutsche Bank Securities Inc., as syndication agent, Wells Fargo Bank, National Association, HSBC Bank USA, N.A and RBS Citizens, N.A., as co-documentation agents, and the other lenders party thereto (Exhibit 99.1 to the Current Report on Form 8-K filed February 14, 2014 (Commission File No. 1-06620))

   
10.3

Griffon Corporation 2011 Equity Incentive Plan, as amended and restated through January 30, 2014 (incorporated by reference to Exhibit A to the Registrant’s Proxy Statement relating to the 2014 Annual Meeting of Shareholders, filed with the Securities and Exchange Commission on December 20, 2013).

   
31.1

Certification pursuant to Rule 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

   

31.2

Certification pursuant to Rule 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

   
32 Certifications pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101.INS XBRL Instance Document*
   
101.SCH XBRL Taxonomy Extension Schema Document*
   
101.CAL XBRL Taxonomy Extension Calculation Document*
   
101.DEF XBRL Taxonomy Extension Definitions Document*
   
101.LAB XBRL Taxonomy Extension Labels Document*
   
101.PRE XBRL Taxonomy Extension Presentations Document*
   
* In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be “furnished” and not “filed”.
41

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  GRIFFON CORPORATION  
     
  /s/ Douglas J. Wetmore  
  Douglas J. Wetmore  
  Executive Vice President and Chief Financial Officer  
  (Principal Financial Officer)  
     
  /s/ Brian G. Harris</