GRIFFON CORPORATION BUSINESS
Overview
Griffon Corporation (the "Company", "Griffon", "we" or "us") is a diversified management and holding company that conducts business through wholly-owned subsidiaries. The Company was founded in 1959, is aDelaware corporation headquartered inNew York, N.Y. and is listed on theNew York Stock Exchange (NYSE:GFF). Business Strategy We own and operate, and seek to acquire, businesses in multiple industries and geographic markets. Our objective is to maintain leading positions in the markets we serve by providing innovative, branded products with superior quality and industry-leading service. We place emphasis on our iconic and well-respected brands, which helps to differentiate us and our offerings from our competitors and strengthens our relationship with our customers and those who ultimately use our products. Through operating a diverse portfolio of businesses, we expect to reduce variability caused by external factors such as market cyclicality, seasonality, and weather. We achieve diversity by providing various product offerings and brands through multiple sales and distribution channels, and conducting business across multiple countries which we consider our home markets. 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. As long-term investors, having substantial experience in a variety of industries, our intent is to continue the growth and strengthening of our existing businesses, and to diversify further through investments in our businesses and through acquisitions. As described in greater detail below, over the past three years, we have undertaken a series of transformative transactions. This year we integrated our most significant acquisitions into our wholly owned subsidiaries,The AMES Companies, Inc. ("AMES") andClopay Corporation ("Clopay"), expanding the scope of both AMES andClopay . In particular,CornellCookson has been integrated intoClopay , so that our leading company in residential garage doors and sectional commercial doors now includes a leading manufacturer of rolling steel doors and grille products.ClosetMaid was combined with AMES, and we established an integrated headquarters for AMES inOrlando, Florida . AMES is now positioned to fulfill its mission of Bringing Brands Together™ with the leading brands in home and garage organization, outdoor décor, and lawn, garden and cleaning tools. As a result of the expanded scope of the AMES andClopay businesses, effective with our 2019 10-K filing onNovember 22, 2019 , we now report each as a separate segment.Clopay remains in the Home and Building Products ("HBP") segment and AMES now constitutes our new Consumer and Professional Products ("CPP") segment.
Impact of COVID-19 on Our Business
Our first priority is the health and safety of our employees, our customers and their families. As of the date of this filing, all North American and Australian operating locations have been deemed essential and are fully operational, except AMES' plant inReynosa, Mexico , which will reopen in early May. In March, the AMESUK ,Ireland andNew Zealand facilities entered into a furlough with theUK expected to resume operations in July. All of Griffon's facilities have implemented a variety of new policies and procedures, including additional cleaning, social distancing, staggered shifts and prohibiting or significantly restricting on-site visitors, to minimize the risk to our employees of contracting COVID-19. Since the end of the second quarter of fiscal 2020 and through the date of this filing, our CPP North American and Australian sales continue to be at normal levels; HBP commercial sectional and rolling steel sales have continued at normal levels; HBP residential sectional garage door sales have been negatively impacted by approximately 15-20%; and sales in our DE segment have not been significantly impacted. Our supply chains have generally not experienced significant disruption, and at this time we do not anticipate any such material disruption in the near term. ManyU.S. states have issued executive orders requiring all workers to remain at home unless their work is critical, essential, or life-sustaining. We believe that, based on the various standards published to date, the work our employees are performing are either critical, essential and/or life-sustaining for the following reasons: 1) DE is a defense and national security-related operation supporting theU.S. Government , with a portion of its business being directly with 42
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theU.S. Government ; 2) HBP residential and commercial garage doors, rolling steel doors and related products (a) provide protection and support for the efficient and safe movement of people, goods, and equipment in and out of residential and commercial facilities, (b) help prevent fires from spreading from one location to another, and (c) protect warehouses and homes, and their contents, from damage caused by strong weather events such as hurricanes and tornadoes; and 3) CPP tools and storage products provide critical support for the national infrastructure including construction, maintenance and manufacturing and is part of the essential supply base to many of its largest customers including Home Depot, Lowe's and Menards. Our AMES Canadian andAustralia facilities are operational, as they meet the applicable standards in their respective countries; and our AMESChina facility is operating as well. Griffon believes it has adequate liquidity to invest in its existing businesses and execute its business plan, while managing its capital structure on both a short-term and long-term basis. InJanuary 2020 , Griffon increased total borrowing capacity under its revolving credit facility ("Credit Agreement") by$50,000 , to$400,000 (of which$195,100 was available atMarch 31, 2020 ), and extended maturity of the facility to 2025. In addition the Credit Agreement has a$100,000 accordion feature (subject to lender consent). InFebruary 2020 , Griffon refinanced$850,000 of its$1,000,000 of senior notes due 2022 with new senior notes with a maturity of 2028. While the first half of Griffon's fiscal year is typically a net cash usage period, April typically begins Griffon's period of strong cash generation, which usually continues through the end of the fiscal year. We will continue to actively monitor the situation and may take further actions that impact our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, suppliers and shareholders. While we are unable to determine or predict the nature, duration or scope of the overall impact the COVID-19 pandemic will have on our business, results of operations, liquidity or capital resources, we believe it is important to discuss where our company stands today, how our response to COVID-19 is progressing and how our operations and financial condition may change as the fight against COVID-19 progresses. Please see Part II, item 1A "Risk Factors" in this Form 10-Q.
Business Highlights
In
InJanuary 2020 , Griffon amended its Credit Agreement to increase the total amount available for borrowing from$350,000 to$400,000 , extend its maturity date fromMarch 22, 2021 toMarch 22, 2025 and modify certain other provisions of the facility.
In
This initiative includes three key development areas. First, multiple independent information systems will be unified into a single data and analytics platform which will serve the whole CPPU.S. enterprise. Second, certain CPPU.S. operations will be consolidated to optimize facilities footprint and talent. Third, strategic investments in automation and facilities expansion will be made to increase the efficiency of our manufacturing and fulfillment operations, and support e-commerce growth. The roll-out of the new business platform will occur over approximately a three-year period, with completion expected by the end of calendar 2022. When fully implemented, these actions will result in an annual cash savings of$15,000 to$20,000 , and a$20,000 to$25,000 reduction in inventory, both based on operating levels at the beginning of the initiative. The cost to implement this new business platform, over the three-year duration of the project, will include approximately$35,000 of one-time charges and approximately$40,000 in capital investments. The one-time charges are comprised of$16,000 of cash charges, which includes$12,000 personnel-related costs such as training, severance, and duplicate personnel costs and$4,000 of facility and lease exit costs. The remaining$19,000 of charges are non-cash and are primarily related to asset write-downs. OnNovember 29, 2019 , AMES acquiredVatre Group Limited ("Apta"), a leadingUnited Kingdom supplier of innovative garden pottery and associated products sold to leadingUK andIreland garden centers for approximately$10,500 (GBP 8,750 ), inclusive of a post-closing working capital adjustment, net of cash acquired. This acquisition broadens AMES' product offerings in theUK market and increases its in-country operational footprint.
On
InOctober 2017 , we acquiredClosetMaid from Emerson Electric Co. (NYSE:EMR) for an effective purchase price of approximately$165,000 .ClosetMaid , founded in 1965, is a leading North American manufacturer and marketer of wood and wire closet organization, general living storage and wire garage storage products, and sells to some of the largest home center 43
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retail chains, mass merchandisers, and direct-to-builder professional installers
in
InFebruary 2018 , we closed on the sale of our Plastics business to Berry Global, Inc. ("Berry") for approximately$465,000 , net of certain post-closing adjustments, thus exiting the specialty plastics industry that the Company had entered when it acquiredClopay in 1986. This transaction provided immediate liquidity and positions the Company to improve its cash flow conversion given the historically higher capital needs of Plastics' operations as compared to Griffon's remaining businesses. InMarch 2018 , we announced the combination of theClosetMaid operations with those of AMES.ClosetMaid generated over$300,000 in revenue in the first twelve months after the acquisition, and we anticipate the integration with AMES will unlock additional value given the complementary products, customers, warehousing and distribution, manufacturing, and sourcing capabilities of the two businesses.
In
During fiscal 2017 and 2018, Griffon also completed a number of other acquisitions to expand and enhance AMES' global footprint. In theUnited Kingdom , Griffon acquiredLa Hacienda , an outdoor living brand of unique heating and garden décor products, inJuly 2017 , and Kelkay, a manufacturer and distributor of decorative outdoor landscaping, inFebruary 2018 . These two businesses provided AMES with additional brands and a platform for growth in theUK market and access to leading garden centers, retailers, and grocers in theUK andIreland . InAustralia , Griffon acquired Hills Home Living, the iconic brand of clotheslines and home products, from Hills Limited (ASX:HIL) inDecember 2016 . InSeptember 2017 , Griffon acquired Tuscan Path, an Australian provider of pots, planters, pavers, decorative stone, and garden décor products. These acquisitions broadened AMES' outdoor living and lawn and garden business, strengthening AMES' portfolio of brands and its market position inAustralia and New Zealand .
In
We believe these actions have established a solid foundation for continuing organic growth in sales, profit, and cash generation and bolsters Griffon's platforms for opportunistic strategic acquisitions.
In 2019, Griffon modified its reportable segment structure to provide investors with improved visibility after a series of portfolio repositioning actions which included the divestiture of the Plastics business, the acquisition ofClosetMaid and its subsequent integration into AMES, and the acquisition ofCornellCookson byClopay . Griffon now reports its operations through three reportable segments: the newly formedConsumer and Professional Productions segment, which consists of AMES; Home and Building Products , which consists ofClopay ; and Defense Electronics, which consists ofTelephonics Corporation .
Further Information
Griffon posts and makes available, free of charge through its website at www.griffon.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as well as press releases, as soon as reasonably practicable after such materials are published or filed with or furnished to theSecurities and Exchange Commission (the "SEC"). The information found on Griffon's website is not part of this or any other report it files with or furnishes to theSEC .
For information regarding revenue, profit and total assets of each segment, see the Reportable Segments footnote in the Notes to Consolidated Financial Statements.
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Reportable Segments:
Griffon currently conducts its operations through three reportable segments:
• CPP conducts its operations through AMES. Founded in 1774, AMES is the
leading North American manufacturer and a global provider of branded
consumer and professional tools and products for home storage and
organization, landscaping, and enhancing outdoor lifestyles. CPP sells
products globally through a portfolio of leading brands including True
Temper, AMES, and ClosetMaid .
• HBP conducts its operations through
largest manufacturer and marketer of garage doors and rolling steel doors in
through professional dealers and leading home center retail chains
throughout
steel door and grille products designed for commercial, industrial,
institutional, and retail use are sold under the CornellCookson brand.
• DE conducts its operations through
a globally recognized leading provider of highly sophisticated intelligence,
surveillance and communications solutions for defense, aerospace and
commercial customers.
OVERVIEW
Revenue for the quarter ended March 31, 2020 was $566,350 compared to $549,633
in the prior year comparable quarter, an increase of approximately 3%, primarily
driven by increased revenue at HBP and DE, partially offset by decreased revenue
at CPP. Organic growth was 2%. Income from continuing operations was $895 or
$0.02 per share, compared to $6,490 , or $0.15 per share, in the prior year
quarter. The current year quarter results from continuing operations included
the following:
- Restructuring charges of $3,104 ($3,005 , net of tax, or $0.07 per share);
- Loss from debt extinguishment $6,690 ($5,245 , net of tax, or $0.12 per
share);
- Acquisition costs of $2,960 ($2,321 , net of tax, or $0.05 per share); and
- Discrete and certain other tax benefits, net, of $1,413 or $0.03 per share.
The prior year quarter results from continuing operations included discrete and
certain other tax benefits, net, of
Excluding these items from the respective quarterly results, Income from
continuing operations would have been
Revenue for the six months endedMarch 31, 2020 was$1,114,788 compared to$1,060,155 in the prior year period, an increase of 5%, primarily driven by increased revenue from all segments, primarily HBP from organic growth. Organic growth was 5%. Income from continuing operations was$11,507 or$0.26 per share, compared to$15,243 , or$0.36 per share, in the prior year period. The current year-to-date results from continuing operations included the following: - Restructuring charges of$9,538 ($7,153 , net of tax, or$0.16 per share); - Loss from debt extinguishment$6,690 ($5,245 , net of tax, or$0.12 per share); - Acquisition costs of$2,960 ($2,321 , net of tax, or$0.05 per share); and - Discrete and certain other tax benefits, net, of$580 or$0.01 per share.
The prior year-to-date results from continuing operations included discrete and
certain other tax provisions, net, of
Excluding these items from the respective periods, Income from continuing
operations would have been
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Griffon evaluates performance based on Net income and the related Earnings per
share excluding restructuring charges, loss from debt extinguishment,
acquisition related expenses and discrete and certain other tax items, as well
as other items that may affect comparability, as applicable. Griffon believes
this information is useful to investors for the same reason. The following table
provides a reconciliation of Income from continuing operations to Adjusted
income from continuing operations and Earnings per share from continuing
operations to Adjusted earnings per share from continuing operations:
GRIFFON CORPORATION AND SUBSIDIARIES
RECONCILIATION OF INCOME FROM CONTINUING OPERATIONS
TO ADJUSTED INCOME FROM CONTINUING OPERATIONS
(Unaudited)
For the Three Months Ended March 31, For the Six Months Ended March 31,
2020 2019 2020 2019
Income from continuing operations
$ 11,507 $ 15,243 Adjusting items: Restructuring charges 3,104 - 9,538 - Loss from debt extinguishment 6,690 - 6,690 - Acquisition costs 2,960 - 2,960 - Tax impact of above item (2,183 ) - (4,469 ) - Discrete and certain other tax provisions (benefits), net (1,413 ) (97 ) (580 ) 370 Adjusted income from continuing operations$ 10,053 $ 6,393
$ 25,646 $ 15,613
Diluted earnings per common share$ 0.02 $ 0.15 $ 0.26 $ 0.36 Adjusting items, net of tax: Restructuring charges 0.07 - 0.16 - Loss from debt extinguishment 0.12 - 0.12 - Acquisition costs 0.05 - 0.05 - Discrete and certain other tax provisions (benefits), net (0.03 ) - (0.01 ) 0.01 Adjusted earnings per common share$ 0.23 $ 0.15 $ 0.59 $ 0.37 Weighted-average shares outstanding (in thousands) 43,734 42,832 43,826 42,376
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.
The tax impact for the above reconciling adjustments from GAAP to non-GAAP Net
income and EPS is determined by comparing the Company's tax provision, including
the reconciling adjustments, to the tax provision excluding such adjustments.
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RESULTS OF CONTINUING OPERATIONS
Three and Six months ended
In the fourth quarter of fiscal 2019, Griffon modified its reportable segment structure to provide investors with improved visibility after a series of portfolio repositioning actions which included the divestiture of the Plastics business, the acquisition ofClosetMaid and its subsequent integration into AMES, and the acquisition ofCornellCookson byClopay . Griffon now reports its operations through three reportable segments: the newly formed CPP segment, which consists of AMES; HBP, which consists ofClopay ; and DE, which consists of Telephonics. Griffon evaluates performance and allocates resources based on each segment's operating results before interest income and expense, income taxes, depreciation and amortization, unallocated amounts (primarily corporate overhead), restructuring charges, loss on debt extinguishment and acquisition related expenses, as well as other items that may affect comparability, as applicable ("Adjusted EBITDA", a non-GAAP measure). Griffon believes this information is useful to investors for the same reason.
See table provided in Note 12 - Business Segments for a reconciliation of Segment Adjusted EBITDA to Income before taxes from continuing operations.
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Consumer and Professional Products
For the Three Months Ended March 31 ,
For the Six Months Ended
2020 2019 2020 2019
Revenue $ 274,912 $ 287,732 $ 515,988 $ 504,206
Adjusted
EBITDA 25,027 9.1 % 28,616 9.9 % 46,953 9.1 % 49,181 9.8 %Depreciation and amortization 8,222 8,184 16,453 15,990 For the quarter endedMarch 31, 2020 , revenue decreased$12,820 or 4%, compared to the prior year period, driven by decreased volume of 7%, primarily due to prior year new product load-ins and the unfavorable impact of COVID-19 in theUK , and an unfavorable impact of foreign exchange of 1%, partially offset by favorable price and mix of 2% and incremental revenue from theApta acquisition of 2%. For the quarter endedMarch 31, 2020 , Adjusted EBITDA decreased 13% to$25,027 compared to$28,616 in the prior year period. The unfavorable variance resulted from the reduced revenue noted above and increased tariffs. For the quarter endedMarch 31, 2020 , EBITDA reflects an unfavorable foreign exchange impact of 1%. For the six months endedMarch 31, 2020 , revenue increased$11,782 or 2%, compared to the prior year period, with 3% due from favorable pricing and mix and incremental revenue from theApta acquisition of 1%, partially offset by a 1% decrease in volume due to prior year new product load-ins and the unfavorable impact of COVID-19 in theUK , and an 1% unfavorable impact due to foreign exchange. For the six months endedMarch 31, 2020 , Adjusted EBITDA decreased 5% to$46,953 compared to$49,181 in the prior year period. The unfavorable variance resulted from increased tariff costs, partially offset by the increased revenue noted above, including the benefit of the incremental revenue contributed by theApta acquisition. For the six months endedMarch 31, 2020 , EBITDA reflects an unfavorable foreign exchange impact of 2%. Segment depreciation and amortization remained consistent with the prior year comparable quarter and increased$463 from the year-to-date comparable period primarily due to the onset of depreciation for new assets placed in service. OnNovember 29, 2019 , AMES acquiredVatre Group Limited ("Apta"), a leadingUnited Kingdom supplier of innovative garden pottery and associated products sold to leadingUK andIreland garden centers for approximately$10,500 (GBP 8,750 ), inclusive of a post-closing working capital adjustment, net of cash acquired. This acquisition broadens AMES' product offerings in theUK market and increases its in-country operational footprint. Strategic Initiative and Restructuring Charges InNovember 2019 , Griffon announced the development of a next-generation business platform for CPP to enhance the growth, efficiency, and competitiveness of itsU.S. operations. This initiative includes three key development areas. First, multiple independent information systems will be unified into a single data and analytics platform which will serve the whole CPPU.S. enterprise. Second, certain CPPU.S. operations will be consolidated to optimize facilities footprint and talent. Third, strategic investments in automation and facilities expansion will be made to increase the efficiency of our manufacturing and fulfillment operations, and support e-commerce growth. The roll-out of the new business platform will occur over approximately a three-year period, with completion expected by the end of calendar 2022. When fully implemented, these actions will result in an annual cash savings of$15,000 to$20,000 , and a$20,000 to$25,000 reduction in inventory, both based on operating levels at the beginning of the initiative. The cost to implement this new business platform, over the three-year duration of the project, will include approximately$35,000 of one-time charges and approximately$40,000 in capital investments. The one-time charges are comprised of$16,000 of cash charges, which includes$12,000 personnel-related costs such as training, severance, and duplicate personnel costs and$4,000 of facility and lease exit costs. The remaining$19,000 of charges are non-cash and are primarily related to asset write-downs. In connection with this initiative, during the six months endedMarch 31, 2020 , CPP incurred pre-tax restructuring and related exit costs approximating$9,538 , comprised of cash charges of$4,846 and non-cash, asset-related charges of$4,692 ; the cash charges included$3,792 for one-time termination benefits and other personnel-related costs and$1,054 for facility exit costs. 48
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Cash Charges Non-Cash Charges
Personnel related Facilities, exit costs
costs and other Facility and other Total Capital Investments
Anticipated Charges $ 12,000 $ 4,000 $ 19,000 $ 35,000 $ 40,000
Q1 FY2020 Activity (2,134 ) (140 ) (4,160 ) (6,434 ) -
Q2 FY2020 Activity (1,658 ) (914 ) (532 ) (3,104 ) (300 )
Total charges (3,792 ) (1,054 ) (4,692 ) (9,538 ) (300 )
Estimate to Complete $ 8,208 $ 2,946 $ 14,308 $ 25,462 $ 39,700
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Home and Building Products
For the Three Months Ended March 31 ,
For the Six Months Ended
2020 2019 2020 2019
Revenue $ 209,829 $ 186,799 $ 451,210 $ 410,094
Adjusted EBITDA 30,635 14.6 % 20,137 10.8 % 71,336 15.8 % 51,432 12.5 %
Depreciation
and
amortization 4,668 4,548 9,468 9,057
For the quarter ended March 31, 2020 , revenue increased $23,030 or 12%, compared
to the prior year period, due to increased volume of 9% with an additional 3%
due to favorable mix and pricing.
For the quarter ended March 31, 2020 , Adjusted EBITDA increased 52% to $30,635
compared to $20,137 in the prior year period. The favorable variance resulted
primarily from the increased revenue noted above including mix, pricing and
volume related benefits on absorption, as well as improved operational
efficiencies.
For the six months ended
For the six months ended
Segment depreciation and amortization increased$120 and$411 , respectively, from the prior year quarter and year-to-date period, respectively, primarily due to the onset of depreciation for new assets placed in service. OnJanuary 31, 2019 , HBP announced a$14,000 investment in facilities infrastructure and equipment at itsCornellCookson location inMountain Top, Pennsylvania . This project includes a 90,000 square foot expansion to the already existing 184,000 square foot facility, along with the addition of state of the art manufacturing equipment. Through this expansion, the CornellCookson Mountain Top location will improve its manufacturing efficiency and shipping operations, as well as increase manufacturing capacity to support full-rate production of new and core products. The project was substantially completed by the end of calendar 2019. Defense Electronics For the Three Months EndedMarch 31 , For
the Six Months Ended
2020 2019 2020 2019
Revenue $ 81,609 $ 75,102 $ 147,590 $ 145,855
Adjusted
EBITDA 4,248 5.2 % 4,936 6.6 % 8,723 5.9 % 9,721 6.7%
Depreciation
and
amortization 2,676 2,621 5,320 5,257
For the quarter ended
For the quarter endedMarch 31, 2020 , Adjusted EBITDA decreased$688 , or 14%, compared to the prior year comparable period, driven by product mix, increased operating expenses associated with the timing of bid and proposal efforts and commissions expense, partially offset by the increased sales volume noted above.
For the six months ended
For the six months endedMarch 31, 2020 , Adjusted EBITDA decreased$998 , or 10%, compared to the prior year comparable period due to product mix and increased operating expenses, partially offset by the increased sales volume noted above. 50
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Segment depreciation and amortization remained consistent with both the prior year comparable quarter and year-to-date period.
During the six months endedMarch 31, 2020 , DE was awarded several new contracts and received incremental funding on existing contracts approximating$90,000 . Contract backlog was$331,740 atMarch 31, 2020 , with 73% expected to be fulfilled in the next 12 months. Backlog was$389,300 atSeptember 30, 2019 . Backlog is defined as unfilled firm orders for products and services for which funding has been both authorized and appropriated by the customer, or byCongress , in the case of US government agencies.
Unallocated
For the quarter endedMarch 31, 2020 , unallocated amounts, excluding depreciation, consisted primarily of corporate overhead costs totaled$11,947 compared to$11,208 in the prior year quarter. For the six months endedMarch 31, 2020 , unallocated amounts, excluding depreciation, consisted primarily of corporate overhead costs totaled$23,889 compared to$22,472 in the prior year quarter. The increase in the current quarter and six months compared to the respective prior year quarter primarily relates to consulting, compensation and incentive costs.
Segment Depreciation and Amortization
Segment depreciation and amortization increased$213 and$937 for the quarter and six months endedMarch 31, 2020 , respectively, compared to the comparable prior year period, primarily due to the onset of depreciation for new assets placed in service. Other Income (Expense) For the quarters endedMarch 31, 2020 and 2019, Other income (expense) includes$745 and ($118 ), 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, net periodic benefit plan income of$389 and$787 , respectively, as well as$(230) and$108 , respectively, of net investment (loss) income. For the six months endedMarch 31, 2020 and 2019, Other income (expense) includes$369 and$384 , 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, net periodic benefit plan income of$778 and 1,574, respectively, as well as$(149) and$31 , respectively, of net investment (loss) income. During the six months endedMarch 31, 2020 , Other income (expense) also includes a one-time contract award of$700 . Provision for income taxes During the quarter endedMarch 31, 2020 , the Company recognized a tax provision of$2,034 on income before taxes from continuing operations of$2,929 , compared to a tax provision of$3,194 on income before taxes from continuing operations of$9,684 in the comparable prior year quarter. The current year quarter included restructuring charges of$3,104 ($3,005 , net of tax), acquisition costs of$2,960 ($2,321 , net of tax), loss from debt extinguishment of$6,690 ($5,245 , net of tax) and net discrete tax and certain other tax benefits, net of$1,413 , that affect comparability. The prior year quarter included net discrete tax and certain other tax benefits of$97 that affect comparability. Excluding these items, the effective tax rates for the quarters endedMarch 31, 2020 and 2019 were 35.9% and 34.0%, respectively. During the six months endedMarch 31, 2020 , the Company recognized a tax provision of$8,373 on Income before taxes from continuing operations of$19,880 , compared to a tax provision of$8,406 on Income before taxes from continuing operations of$23,649 in the comparable prior year period. The six month period endedMarch 31, 2020 included restructuring charges of$9,538 ($7,153 , net of tax), acquisition costs of$2,960 ($2,321 , net of tax), loss from debt extinguishment of$6,690 ($5,245 , net of tax) and net discrete tax benefits of$580 . The six month period endedMarch 31, 2019 included net discrete tax provisions of$370 . Excluding these items, the effective tax rates for the six months endedMarch 31, 2020 and 2019 were 34.4% and 34.0%, respectively. In response to the COVID-19 outbreak, legislation concerning taxes was passed inMarch 2020 . While we are still assessing the impact of the legislation, we do not expect there to be a material impact to our consolidated financial statements at this time. 51
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Stock based compensation
For the quarters endedMarch 31, 2020 and 2019, stock based compensation expense, which includes expenses for both restricted stock grants and the ESOP, totaled$4,320 and$3,914 , respectively. For the six months endedMarch 31, 2020 and 2019, stock based compensation expense, which includes expenses for both restricted stock grants and the ESOP totaled$8,302 and$7,500 , respectively.
Comprehensive income (loss)
For the quarter endedMarch 31, 2020 , total other comprehensive loss, net of taxes, of$14,834 included a loss of$16,471 from foreign currency translation adjustments primarily due to the weakening of the British Pound, and Canadian and Australian Dollars all in comparison to the US Dollar; a$669 benefit from pension amortization of actuarial losses; and a$968 gain on cash flow hedges. For the six months endedMarch 31, 2020 , total other comprehensive loss, net of taxes, of$7,993 , included a loss of$10,001 from foreign currency translation adjustments primarily due to the weakening of the Canadian and Australian Dollar currencies, all in comparison to the US Dollar, a$1,341 benefit from pension amortization of actuarial losses and a$667 gain on cash flow hedges. For the quarter endedMarch 31, 2019 , total other comprehensive income, net of taxes, of$2,880 , included a gain of$2,885 from foreign currency translation adjustments primarily due to the strengthening of the British Pound and Canadian Dollar, partially offset by the weakening of the Euro, all in comparison to the US Dollar, a$184 benefit from pension amortization of actuarial losses and a$189 loss on cash flow hedges. For the six months endedMarch 31, 2019 , total other comprehensive loss, net of taxes, of$2,570 , included a loss of$2,851 from foreign currency translation adjustments primarily due to the weakening of the Euro and the Canadian and Australian Dollars, all in comparison to the US Dollar, a$368 benefit from pension amortization of actuarial losses and a$87 loss on cash flow hedges. Discontinued operations During the quarter endedMarch 31, 2019 , Griffon recorded an$11,000 charge ($7,646 , net of tax) to discontinued operations. The charge consisted primarily of a purchase price adjustment to resolve a claim related to the$475,000 PPC divestiture and included an additional reserve for a legacy environmental matter.
At
LIQUIDITY AND CAPITAL RESOURCES
Management assesses Griffon's liquidity in terms of its ability to generate cash to fund its operating, investing and financing activities. Significant factors affecting liquidity are: cash flows from operating activities, capital expenditures, acquisitions, dispositions, bank lines of credit and the ability to attract long-term capital under satisfactory terms. Griffon believes it has sufficient liquidity available to invest in its existing businesses and execute strategic acquisitions, while managing its capital structure on both a short-term and long-term basis. The following table is derived from the Condensed Consolidated Statements of Cash Flows: Cash Flows from Continuing Operations For the Six Months Ended March 31, (in thousands) 2020 2019 Net Cash Flows Provided by (Used In): Operating activities$ (60,843 ) $ (55,006 ) Investing activities (32,760 ) (37,328 ) Financing activities 94,351 84,059 Cash used in operating activities from continuing operations for the six months endedMarch 31, 2020 was$60,843 compared to$55,006 cash used in the comparable prior year period. Cash provided by income from continuing operations, adjusted for non-cash expenditures, was more than offset by a net increase in working capital predominately consisting of a net increase in accounts 52
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receivable, an increase in inventory, primarily to meet seasonal demands, and a decrease in accounts payable and current liabilities, due to the timing of payments.
During the six months endedMarch 31, 2020 , Griffon used$32,760 of cash in investing activities from continuing operations compared to$37,328 used in the prior year comparable period. Payments for acquired businesses totaled$10,531 compared to$9,219 in the prior year comparable period. OnNovember 29, 2019 , AMES acquired 100% of the outstanding stock ofApta , a leadingUnited Kingdom supplier of innovative garden pottery and associated products sold to leadingUK andIreland garden centers for approximately$10,500 (GBP 8,750 ), inclusive of a post-closing working capital adjustment, net of cash acquired. Payments for acquired businesses in the prior year consisted solely of a final purchase price adjustment forCornellCookson . Payments in the prior year comparable period also included an insurance payment of$10,604 pertaining to the settlement of a certain life insurance benefit. Capital expenditures, net of proceeds from the sale of assets, for the six months endedMarch 31, 2020 totaled$22,229 , an increase of$4,873 from the prior year period. During the six months endedMarch 31, 2020 , cash provided by financing activities from continuing operations totaled$94,351 as compared to$84,059 provided in the comparable prior year period. Cash provided by financing activities from continuing operations in the current year period consisted primarily of net borrowings of long term debt. AtMarch 31, 2020 , there were$183,548 in outstanding borrowings under the Credit Agreement, compared to$157,936 in outstanding borrowings at the same date in the prior year. Cash provided by financing activities in the current period included financing payments of$13,176 primarily associated with the redemption of 85% of the$1,000,000 of 5.25% Senior Notes due 2022 with the proceeds from the issuance of$850,000 of 5.75% Senior Notes due 2028; and the amendment and extension of the Company's revolving credit facility increasing the maximum borrowing availability from$350,000 to$400,000 and extending its maturity date fromMarch 22, 2021 toMarch 22, 2025 . During the six months endedMarch 31, 2020 , the Board of Directors approved two quarterly cash dividends of$0.075 per share each. OnApril 27, 2020 , the Board of Directors declared a quarterly cash dividend of$0.075 per share, payable onJune 18, 2020 to shareholders of record as of the close of business onMay 21, 2020 . During the quarter and six months endedMarch 31, 2020 , 261,223 shares, with a market value of$5,721 , or$21.90 per share, and 340,775 shares, with a market value of$7,409 , or$21.74 per share, respectively, were withheld to settle employee taxes due upon the vesting of restricted stock, and were added to treasury stock. Furthermore, during the six months endedMarch 31, 2020 , an additional 3,307 shares, with a market value of$70 , or$21.22 per share, were withheld from common stock issued upon the vesting of restricted stock units to settle employee taxes due upon vesting. OnAugust 3, 2016 andAugust 1, 2018 , Griffon's Board of Directors authorized the repurchase of up to$50,000 of Griffon's outstanding common stock. Under these share repurchase programs, the Company may, from time to time, purchase shares of its common stock in the open market, including pursuant to a 10b5-1 plan, or in privately negotiated transactions. During the quarter and six months endedMarch 31, 2020 , Griffon did not purchase any shares of common stock under these repurchase programs. As ofMarch 31, 2020 , an aggregate of$57,955 remains under Griffon's Board authorized repurchase programs. ThroughMarch 31, 2020 , COVID-19 has not had a material impact on our operations, and we anticipate our current cash balances, cash flows from operations and sources of liquidity will be sufficient to meet our cash requirements. Payments related to Telephonics revenue are received in accordance with the terms of development and production subcontracts; certain of such receipts are progress or performance based payments. With respect to CPP and HBP, there have been no material adverse impacts on payment for sales. A small number of customers account for, and are expected to continue to account for, a substantial portion of Griffon's consolidated revenue. For the six months endedMarch 31, 2020 :
• The United States Government and its agencies, through either prime or
subcontractor relationships, represented 9% of Griffon's consolidated
revenue and 65% of Telephonics' revenue.
• The Home Depot represented 17% of Griffon's consolidated revenue, 26% of
CPP's revenue and 13% of HBP's revenue.
No other customer exceeded 10% of consolidated revenue. Future operating results
will continue to depend substantially on the success of Griffon's largest
customers and our ongoing relationships with them. Orders from these customers
are subject to change and may fluctuate materially. The loss of all or a portion
of the volume from any one of these customers could have a material adverse
impact on Griffon's liquidity and results of operations.
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Table of Contents Cash and Equivalents and Debt March 31, September 30, (in thousands) 2020 2019 Cash and equivalents$ 69,024 $ 72,377 Notes payables and current portion of long-term debt 9,470
10,525
Long-term debt, net of current maturities 1,216,226
1,093,749
Debt discount/premium and issuance costs 16,804
9,857
Total debt 1,242,500
1,114,131
Debt, net of cash and equivalents$ 1,173,476 $
1,041,754
OnFebruary 19, 2020 , in an unregistered offering through a private placement under Rule 144A and Regulation S, Griffon issued, at par,$850,000 of 5.75% Senior Notes due 2028 (the "2028 Senior Notes"). Proceeds from the 2028 Senior Notes were used to redeem 85% of the$1,000,000 of 5.25% Senior Notes due 2022 (the "2022 Senior Notes" and collectively with the 2028 Senior Notes, the "Senior Notes"). Following the sale and issuance of the 2028 Notes,$150,000 aggregate principal amount of the 2022 Notes remained outstanding. As ofMarch 31, 2020 , outstanding Senior Notes due totaled$1,000,000 ; interest is payable semi-annually onMarch 1 andSeptember 1 . The Senior Notes are senior unsecured obligations of Griffon guaranteed by certain domestic subsidiaries, and subject to certain covenants, limitations and restrictions. OnApril 22, 2020 , Griffon exchanged substantially all of the 2028 Senior Notes for substantially identical 2028 Senior Notes registered under the Securities Act of 1933 (the "Securities Act") via an exchange offer. The remaining 2022 Senior Notes outstanding are registered under the Securities Act, having been issued pursuant to similar prior exchange offers. The fair value of the 2022 and 2028 Senior Notes approximated$139,500 and$799,000 , respectively, onMarch 31, 2020 based upon quoted market prices (level 1 inputs). In connection with these transactions, Griffon capitalized$12,989 of underwriting fees and other expenses incurred related to the issuance and exchange of the 2028 Senior Notes. Furthermore, 85% of the obligations associated with the 2022 Senior Notes were discharged leaving remaining fees of$1,145 . AtMarch 31, 2020 , a combined total amount of$13,952 remained to be amortized. Remaining capitalized fees for the 2022 Senior Notes and all capitalized fees for the 2028 Senior Notes will amortize over the term of each respective note. Additionally, Griffon recognized a$6,690 loss on the early extinguishment of debt on 85% of the 5.25%$1,000,000 senior notes due 2022, comprised primarily of the write-off of$5,873 of remaining deferred financing fees,$607 of tender offer net premium expense and$210 of redemption interest expense. OnJanuary 30, 2020 , Griffon amended its revolving credit facility (as amended, the "Credit Agreement") to increase the maximum borrowing availability from$350,000 to$400,000 and extend its maturity date fromMarch 22, 2021 toMarch 22, 2025 , except that if the 2022 Senior Notes are not repaid, refinanced or replaced prior toDecember 1, 2021 , then the Credit Agreement will mature onDecember 1, 2021 . The amended agreement also modified certain other provisions of the facility. The facility includes a letter of credit sub-facility with a limit of$100,000 (increased from$50,000 ); a multi-currency sub-facility of$200,000 (increased from$100,000 ); and contains a customary accordion feature that permits us to request, subject to each lender's consent, an increase in the maximum aggregate amount that can be borrowed by up to an additional$100,000 (increased from$50,000 ). Borrowings under the Credit Agreement may be repaid and re-borrowed at any time. Interest is payable on borrowings at either a LIBOR or base rate benchmark rate, plus an applicable margin, which adjusts based on financial performance. Current margins are 1.00% for base rate loans and 2.00% 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 negative covenants place limits on Griffon's ability to, among other things, incur indebtedness, incur liens, and 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 domestic assets of the Company and the guarantors, and a pledge of not greater than 65% of the equity interest in Griffon's material, first-tier foreign subsidiaries. AtMarch 31, 2020 , there were$183,548 of outstanding borrowings under the Credit Agreement; outstanding standby letters of credit were$21,390 ; and$195,062 was available, subject to certain loan covenants, for borrowing at that date. InAugust 2016 , and as amended onJune 30, 2017 , Griffon's ESOP entered into a Term Loan with a bank (the "ESOP Agreement"). The Term Loan interest rate was LIBOR plus 3.00%. The Term Loan required quarterly principal payments of$569 with a balloon payment due at maturity. The Term Loan was secured by shares purchased with the proceeds of the loan and with a lien on a specific amount of Griffon assets (which ranked pari passu with the lien granted on such assets under the Credit Agreement) and was guaranteed by Griffon. OnMarch 13, 2019 , the ESOP Term Loan was refinanced with an internal loan from Griffon, which was funded with cash and a draw under its Credit Agreement. The internal loan interest rate is fixed at 2.91%, matures in June 54
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2033 and requires quarterly payments of principal, currently$635 , and interest. The internal loan is secured by shares purchased with the proceeds of the loan. The amount outstanding on the internal loan atMarch 31, 2020 was$31,148 . Two of Griffon's subsidiaries have finance leases outstanding for real estate located inTroy, Ohio andOcala, Florida . The leases mature in 2021 and 2025, respectively, and bear interest at fixed rates of approximately 5.0% and 2.9%, respectively. TheTroy, Ohio lease is secured by a mortgage on the underlying real estate and is guaranteed by Griffon. TheOcala, Florida lease contains one five-year renewal option. AtMarch 31, 2020 ,$12,364 was outstanding, net of issuance costs. InNovember 2012 , Garant G.P. ("Garant") entered into aCAD 15,000 ($10,628 as ofMarch 31, 2020 ) revolving credit facility. The facility accrues interest at LIBOR (USD) or the Bankers Acceptance Rate (CDN) plus 1.3% per annum (2.29% LIBOR USD and 2.30% Bankers Acceptance Rate CDN as ofMarch 31, 2020 ). The revolving facility matures inOctober 2022 . Garant is required to maintain a certain minimum equity. AtMarch 31, 2020 , there were no borrowings under the revolving credit facility withCAD 15,000 ($10,628 as ofMarch 31, 2020 ) available for borrowing. InJuly 2016 and as amended inMarch 2019 ,Griffon Australia Holdings Pty Ltd and its Australian subsidiaries (collectively, "Griffon Australia") entered into an AUD 29,625 term loan, AUD 20,000 revolver and AUD 10,000 receivable purchase facility agreement. The term loan requires quarterly principal payments of AUD 1,250 plus interest with a balloon payment of AUD 13,375 due upon maturity inMarch 2022 , and accrues interest at Bank Bill Swap Bid Rate "BBSY" plus 1.90% per annum (2.39% atMarch 31, 2020 ). As ofMarch 31, 2020 , the term loan had an outstanding balance of AUD 23,375 ($14,378 as ofMarch 31, 2020 ). The revolving facility and receivable purchase facility mature inMarch 2022 , but are renewable upon mutual agreement with the lender. The revolving facility and receivable purchase facility accrue interest at BBSY plus 1.8% and 1.25%, respectively, per annum (2.20% and 1.65%, respectively, atMarch 31, 2020 ). AtMarch 31, 2020 , there were no borrowings under the revolver and the receivable purchase facilities had an outstanding balance of AUD 10,000 ($6,151 as ofMarch 31, 2020 ). The revolver, receivable purchase facility and the term loan are all secured by substantially all of the assets of Griffon Australia and its subsidiaries. GriffonAustralia is required to maintain a certain minimum equity level and is subject to a maximum leverage ratio and a minimum fixed charges cover ratio. InJuly 2018 , theAMES Companies UK Ltd and its subsidiaries (collectively, "AMESUK ") entered into aGBP 14,000 term loan,GBP 4,000 mortgage loan andGBP 5,000 revolver. The term loan and mortgage loan require quarterly principal payments ofGBP 350 andGBP 83 plus interest, respectively, and have balloon payments due upon maturity,July 2023 , ofGBP 7,000 andGBP 2,333 , respectively. The Term Loan and Mortgage Loans accrue interest at the GBP LIBOR Rate plus 2.25% and 1.8%, respectively (2.49% and 2.04% atMarch 31, 2020 , respectively). The revolving facility matures inJune 2020 , but is renewable upon mutual agreement with the lender, and accrues interest at theBank of England Base Rate plus 1.5% (1.60% as ofMarch 31, 2020 ). As ofMarch 31, 2020 , the revolver had an outstanding balance ofGBP 2,728 ($3,381 as ofMarch 31, 2020 ) while the term and mortgage loan balances amounted toGBP 15,398 ($19,084 as ofMarch 31, 2020 ). The revolver and the term loan are both secured by substantially all of the assets of AMESUK and its subsidiaries. AMESUK is subject to a maximum leverage ratio and a minimum fixed charges cover ratio. An invoice discounting arrangement was canceled and replaced by the above loan facilities.
Other long-term debt primarily consists of a loan with the
At
On each ofAugust 3, 2016 andAugust 1, 2018 , Griffon's Board of Directors authorized the repurchase of$50,000 of Griffon's outstanding common stock. Under these share repurchase programs, the Company may, from time to time, purchase shares of its common stock in the open market, including pursuant to a 10b5-1 plan, or in privately negotiated transactions. As ofMarch 31, 2020 , an aggregate of$57,955 remains under Griffon's Board authorized repurchase programs. During the quarter and six months endedMarch 31, 2020 , 261,223 shares, with a market value of$5,721 , or$21.90 per share, and 340,775 shares, with a market value of$7,409 , or$21.74 per share, respectively, were withheld to settle employee taxes due upon the vesting of restricted stock, and were added to treasury stock. Furthermore, during the six months endedMarch 31, 2020 , an additional 3,307 shares, with a market value of$70 , or$21.22 per share, were withheld from common stock issued upon the vesting of restricted stock units to settle employee taxes due upon vesting. During 2019, the Company declared and paid regular cash dividends totaling$0.29 per share. During the six months endedMarch 31, 2020 , the Board of Directors approved and paid two quarterly cash dividends of$0.075 per share each. The Company 55
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currently intends to pay dividends each quarter; however, payment of dividends is determined by the Board of Directors at its discretion based on various factors, and no assurance can be provided as to the payment of future dividends.
OnApril 27, 2020 , the Board of Directors declared a quarterly cash dividend of$0.075 per share, payable onJune 18, 2020 to shareholders of record as of the close of business onMay 21, 2020 .
During the six months ended
CRITICAL ACCOUNTING POLICIES
The preparation of Griffon's consolidated financial statements in conformity with accounting principles generally accepted inthe 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 fromSeptember 30, 2019 . 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 endedSeptember 30, 2019 . 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 FASB 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.
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, 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 whichGriffon Corporation (the "Company" or "Griffon") operates andthe 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, restructuring, 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 Telephonics supplies products, including as a result of defense budget cuts or other government actions; the ability of the federal government to fund and conduct its operations; increases in the cost or lack of availability of raw materials such as resin, wood and steel, components or purchased finished goods, including any potential impact on costs or availability resulting from tariffs; 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 56
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litigation, regulatory and environmental matters; unfavorable results of government agency contract audits of Telephonics; 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; possible terrorist threats and actions and their impact on the global economy; the impact of COVID-19 on theU.S. and the global economy, including business disruptions, reductions in employment and an increase in business and operating facility failures, specifically among our customers and suppliers; Griffon's ability to service and refinance its debt; and the impact of recent and future legislative and regulatory changes, including, without limitation, the Tax Cuts Jobs Act of 2017. 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 endedSeptember 30, 2019 . 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.
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