Document
UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2018

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from          to
 
Commission File Number: 1-06620
 
GRIFFON CORPORATION
(Exact name of registrant as specified in its charter) 
DELAWARE
 
11-1893410
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
712 Fifth Ave, 18th Floor, New York, New York
 
10019
(Address of principal executive offices)
 
(Zip Code)
 
(212) 957-5000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý Yes o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ý

 
Accelerated filer
 o
Non-accelerated filer  o (Do not check if a smaller reporting company)
 
 
Smaller reporting company
o
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes ý No

The number of shares of common stock outstanding at July 31, 2018 was 45,615,377.




Griffon Corporation and Subsidiaries
 
Contents
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents

Part I – Financial Information
Item 1 – Financial Statements
 
GRIFFON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)


(Unaudited)


 
June 30,
2018

September 30,
2017
CURRENT ASSETS
 

 
Cash and equivalents
$
63,766


$
47,681

Accounts receivable, net of allowances of $6,183 and $5,966
311,129


208,229

Contract costs and recognized income not yet billed, net of progress payments of $4,808 and $4,407
110,138


131,662

Inventories, net
395,813


299,437

Prepaid and other current assets
56,955


40,067

Assets of discontinued operations held for sale


370,724

Assets of discontinued operations not held for sale
326


329

Total Current Assets
938,127


1,098,129

PROPERTY, PLANT AND EQUIPMENT, net
325,078


232,135

GOODWILL
502,055


319,139

INTANGIBLE ASSETS, net
316,956


205,127

OTHER ASSETS
16,505


16,051

ASSETS OF DISCONTINUED OPERATIONS NOT HELD FOR SALE
2,930


2,960

Total Assets
$
2,101,651


$
1,873,541







CURRENT LIABILITIES
 


 

Notes payable and current portion of long-term debt
$
10,739


$
11,078

Accounts payable
228,394


183,951

Accrued liabilities
150,602


83,258

Liabilities of discontinued operations held for sale


84,450

Liabilities of discontinued operations not held for sale
25,795


8,342

Total Current Liabilities
415,530


371,079

LONG-TERM DEBT, net
1,124,981


968,080

OTHER LIABILITIES
90,127


132,537

LIABILITIES OF DISCONTINUED OPERATIONS NOT HELD FOR SALE
4,926


3,037

Total Liabilities
1,635,564


1,474,733

COMMITMENTS AND CONTINGENCIES - See Note 18





SHAREHOLDERS’ EQUITY
 


 

Total Shareholders’ Equity
466,087


398,808

Total Liabilities and Shareholders’ Equity
$
2,101,651


$
1,873,541


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


1

Table of Contents

GRIFFON CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(Unaudited)
 
 
COMMON STOCK
 
CAPITAL IN
EXCESS OF
PAR VALUE
 
RETAINED
EARNINGS
 
TREASURY SHARES
 
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME (LOSS)
 
DEFERRED
COMPENSATION
 
 
(in thousands)
SHARES
 
PAR VALUE
 
 
 
SHARES
 
COST
 
 
 
TOTAL
Balance at September 30, 2017
80,663

 
$
20,166

 
$
487,077

 
$
480,347

 
33,557

 
$
(489,225
)
 
$
(60,481
)
 
$
(39,076
)
 
$
398,808

Net income

 

 

 
127,096

 

 

 

 

 
127,096

Dividend

 

 

 
(52,521
)
 

 

 

 

 
(52,521
)
Shares withheld on employee taxes on vested equity awards

 

 

 

 
199

 
(4,478
)
 

 

 
(4,478
)
Amortization of deferred compensation

 

 

 

 

 

 

 
6,088

 
6,088

Common stock acquired

 

 

 

 
2,089

 
(41,110
)
 

 

 
(41,110
)
Equity awards granted, net
797

 
199

 
(199
)
 









 

ESOP allocation of common stock

 

 
3,906

 

 

 

 

 

 
3,906

Stock-based compensation

 

 
7,372

 

 

 

 

 

 
7,372

Stock-based consideration

 

 
972

 

 

 

 

 

 
972

Other comprehensive income, net of tax

 

 

 

 

 

 
19,954

 

 
19,954

Balance at June 30, 2018
81,460

 
$
20,365

 
$
499,128

 
$
554,922

 
35,845

 
$
(534,813
)
 
$
(40,527
)
 
$
(32,988
)
 
$
466,087

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


2

Table of Contents

GRIFFON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
(Unaudited) 
 
Three Months Ended June 30,

Nine Months Ended June 30,
 
2018

2017

2018

2017
Revenue
$
516,550


$
358,114


$
1,432,413


$
1,094,198

Cost of goods and services
377,758


260,130


1,051,304


800,601

Gross profit
138,792


97,984


381,109


293,597













Selling, general and administrative expenses
114,294


80,555


323,776


241,372













Income from operations
24,498


17,429


57,333


52,225













Other income (expense)
 


 


 


 

Interest expense
(16,328
)

(12,679
)

(49,973
)

(38,694
)
Interest income
532


17


1,491


38

Other, net
300


(220
)

1,266


(422
)
Total other expense, net
(15,496
)

(12,882
)

(47,216
)

(39,078
)












Income before taxes from continuing operations
9,002


4,547


10,117


13,147

Provision (benefit) from income taxes
1,560


95


(22,107
)

(299
)
Income from continuing operations
$
7,442


$
4,452


$
32,224


$
13,446













Discontinued operations:











Income (loss) from operations of discontinued operations (including a gain on sale of $117,625 in 2018)
$
(200
)
 
$
7,024


124,642


21,639

Provision for income taxes (including tax on gain on sale of $31,268 in 2018)
1,415

 
1,922


29,770


8,222

Income (loss) from discontinued operations (including a gain on sale, net of tax of $86,357 in 2018)
$
(1,615
)
 
$
5,102


94,872


13,417

Net income
$
5,827

 
$
9,554


$
127,096


$
26,863


 
 
 






Income from continuing operations
$
0.18

 
$
0.11


$
0.78


$
0.33

Income (loss) from discontinued operations
(0.04
)
 
0.12


2.30


0.33

Basic earnings per common share
$
0.14

 
$
0.23


$
3.08


$
0.66


 
 
 






Weighted-average shares outstanding
40,295

 
41,683


41,232


40,765


 
 
 






Income from continuing operations
$
0.18

 
$
0.10


$
0.76


$
0.31

Income (loss) from discontinued operations
(0.04
)
 
0.12


2.23


0.31

Diluted earnings per common share
$
0.14

 
$
0.22


$
2.98


$
0.63


 
 
 






Weighted-average shares outstanding
41,742

 
43,255


42,620


42,934


 
 
 






Dividends paid per common share
$
1.07

 
$
0.06


$
1.21


$
0.18


 
 
 






Net income
$
5,827

 
$
9,554


$
127,096


$
26,863

Other comprehensive income (loss), net of taxes:
 

 
 


 


 

Foreign currency translation adjustments
(9,136
)
 
6,414


9,289


1,344

Pension and other post retirement plans
247

 
544


10,053


1,632

Change in cash flow hedges
84

 
198


612


801

Total other comprehensive income (loss), net of taxes
(8,805
)
 
7,156


19,954


3,777

Comprehensive income (loss), net
$
(2,978
)
 
$
16,710


$
147,050


$
30,640

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

3

Table of Contents

GRIFFON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
Nine Months Ended June 30,
 
2018

2017
CASH FLOWS FROM OPERATING ACTIVITIES - CONTINUING OPERATIONS:
 


 

Net income
$
127,096


$
26,863

Net (income) from discontinued operations
(94,872
)

(13,417
)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 


 

Depreciation and amortization
40,318


36,356

Stock-based compensation
7,372


7,200

Provision (recovery) for losses on accounts receivable
49


(70
)
Amortization of debt discounts and issuance costs
3,981


3,705

Deferred income taxes
(24,612
)

1,675

(Gain) loss on sale of assets and investments
136


(98
)
Change in assets and liabilities, net of assets and liabilities acquired:
 


 

(Increase) decrease in accounts receivable and contract costs and recognized income not yet billed
(16,290
)

7,555

Increase in inventories
(49,474
)

(29,400
)
Decrease in prepaid and other assets
5,777


543

Decrease in accounts payable, accrued liabilities and income taxes payable
(4,088
)

(18,215
)
Other changes, net
7,398


2,705

Net cash provided by operating activities - continuing operations
2,791


25,402

CASH FLOWS FROM INVESTING ACTIVITIES - CONTINUING OPERATIONS:
 


 

Acquisition of property, plant and equipment
(33,148
)

(22,575
)
Acquired businesses, net of cash acquired
(429,545
)

(6,051
)
Proceeds from sale of business
473,977

 

Proceeds from sale of assets
482


146

Net cash provided by (used in) investing activities - continuing operations
11,766


(28,480
)
CASH FLOWS FROM FINANCING ACTIVITIES - CONTINUING OPERATIONS:
 


 

Dividends paid
(46,816
)

(7,766
)
Purchase of shares for treasury
(45,588
)

(15,796
)
Proceeds from long-term debt
419,645


211,097

Payments of long-term debt
(262,031
)

(147,729
)
Share premium payment on settled debt


(24,997
)
Financing costs
(7,671
)

(363
)
Purchase of ESOP shares


(10,908
)
Other, net
139


(112
)
Net cash provided by financing activities - continuing operations
57,678


3,426

CASH FLOWS FROM DISCONTINUED OPERATIONS:
 


 

Net cash provided by (used in) operating activities
(28,970
)

38,867

Net cash used in investing activities
(10,762
)

(36,559
)
Net cash used in financing activities
(22,541
)

(5,689
)






Net cash used in discontinued operations
(62,273
)

(3,381
)
Effect of exchange rate changes on cash and equivalents
6,123


(72
)
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS
16,085


(3,105
)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD
47,681


72,553

CASH AND EQUIVALENTS AT END OF PERIOD
$
63,766


$
69,448

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

4

Table of Contents
GRIFFON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(US dollars and non US currencies in thousands, except per share data)
(Unaudited)
(Unless otherwise indicated, references to years or year-end refer to Griffon’s fiscal period ending September 30)



NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
 
About Griffon Corporation
 
Griffon Corporation (the “Company” or “Griffon”) is a diversified management and holding company that conducts business through wholly-owned subsidiaries. Griffon oversees the operations of its subsidiaries, allocates resources among them and manages their capital structures. Griffon provides direction and assistance to its subsidiaries in connection with acquisition and growth opportunities as well as in connection with divestitures. In order to further diversify, Griffon also seeks out, evaluates and, when appropriate, will acquire additional businesses that offer potentially attractive returns on capital.

Headquartered in New York, N.Y., the Company was founded in 1959 and is incorporated in Delaware. Griffon is listed on the New York Stock Exchange and trades under the symbol GFF.

On June 4, 2018, Clopay Building Products Company, Inc. ("CBP") acquired CornellCookson, Inc. ("CornellCookson"), a leading US manufacturer and marketer of rolling steel door and grille products designed for commercial, industrial, institutional and retail use, for $180,000, subject to certain post-closing adjustments and excluding the present value of net tax benefits under current tax law resulting from the transaction. The accounts, affected for preliminary adjustments to reflect fair market values assigned to assets purchased and liabilities assumed, and results of operations of CornellCookson, are included in the Company’s consolidated financial statements from the date of acquisition of June 4, 2018. See Note 3, Acquisitions.

On November 16, 2017, Griffon announced it entered into a definitive agreement to sell Clopay Plastic Products Company, Inc. ("PPC") and on February 6, 2018, completed the sale to Berry Global, Inc. (NYSE:BERY) ("Berry") for $475,000 in cash, subject to certain post-closing adjustments. As a result, Griffon classified the results of operations of the PPC business as discontinued operations in the Consolidated Statements of Operations for all periods presented and classified the related assets and liabilities associated with the discontinued operations in the consolidated balance sheets. All results and information presented exclude PPC unless otherwise noted. See Note 14, Discontinued Operations.

On October 2, 2017, Griffon acquired ClosetMaid LLC ("ClosetMaid") for approximately $185,700, subject to certain post-closing adjustments and excluding the present value of net tax benefits under current tax law resulting from the transaction. ClosetMaid, founded in 1965, is a leading North American manufacturer and marketer of closet organization, home storage, and garage storage products, and sells to some of the largest home center retail chains, mass merchandisers, and direct-to-builder professional installers in North America. The accounts, affected for preliminary adjustments to reflect fair market values assigned to assets purchased and liabilities assumed, and results of operations of ClosetMaid are included in the Company’s consolidated financial statements from the date of acquisition of October 2, 2017. See Note 3, Acquisitions.

Griffon currently conducts its operations through two reportable segments:
 
Home & Building Products (“HBP”) segment consists of three companies, The AMES Companies, Inc. (“AMES”), ClosetMaid and CBP:

- AMES, founded in 1774, is the leading U.S. manufacturer and a global provider of long-handled tools and landscaping products for homeowners and professionals.

- ClosetMaid, founded in 1965, is a leading North American manufacturer and marketer of closet organization, home storage, and garage storage products, and sells to some of the largest home center retail chains, mass merchandisers, and direct-to-builder professional installers.

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


5


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

Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not include all the information and footnotes required by US GAAP for complete financial statements. As such, they should be read together with Griffon’s Annual Report on Form 10-K for the year ended September 30, 2017, 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, 2017 was derived from the audited financial statements included in Griffon’s Annual Report on Form 10-K for the year ended September 30, 2017.
 
The condensed consolidated financial statements include the accounts of Griffon and all subsidiaries. Intercompany accounts and transactions have been eliminated on consolidation.

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. These estimates may be adjusted due to changes in economic, industry or customer financial conditions, as well as changes in technology or demand. Significant estimates include allowances for doubtful accounts receivable and returns, net realizable value of inventories, restructuring reserves, valuation of goodwill and intangible assets, percentage of completion method of accounting, pension assumptions, useful lives associated with depreciation and amortization of fixed and intangible assets, warranty reserves, sales incentive accruals, stock based compensation assumptions, income taxes and tax valuation reserves, environmental reserves, legal reserves, insurance reserves and the valuation of assets and liabilities of discontinued operations, acquisition assumptions used and the accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions Griffon may undertake in the future. Actual results may ultimately differ from these estimates.
 
Certain amounts in the prior year have been reclassified to conform to current year presentation.

NOTE 2 – FAIR VALUE MEASUREMENTS
 
The carrying values of cash and equivalents, accounts receivable, accounts and notes payable, and revolving credit and variable interest rate debt approximate fair value due to either the short-term nature of such instruments or the fact that the interest rate of the revolving credit and variable rate debt is based upon current market rates.

Applicable accounting guidance establishes a fair value hierarchy requiring the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. The accounting guidance establishes three levels of inputs that may be used to measure fair value, as follows:

Level 1 inputs are measured and recorded at fair value based upon quoted prices in active markets for identical assets.

Level 2 inputs include inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities.

Level 3 inputs are unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
 

6



The fair values of Griffon’s 2022 senior notes approximated $972,500 on June 30, 2018. Fair values were based upon quoted market prices (level 1 inputs).

On January 17, 2017, Griffon's 4% convertible subordinated notes settled for a total of $173,855. The total settlement value for the convertible notes was based on the sum of the daily Volume Weighted Average Price multiplied by the conversion rate over a 40-day observation period (level 1 inputs).  The settlement value was split between $125,000 in cash and 1,954,993 shares, of common stock issued from treasury.
 
Insurance contracts with values of $2,948 at June 30, 2018 are measured and recorded at fair value based upon quoted prices in active markets for similar assets (level 2 inputs) and are included in Prepaid and other current assets on the Consolidated Balance Sheets.
 
Items Measured at Fair Value on a Recurring Basis

At June 30, 2018, trading securities, measured at fair value based on quoted prices in active markets for similar assets (level 2 inputs), with a fair value of $3,469 ($3,086 cost basis), were included in Prepaid and other current assets on the Consolidated Balance Sheets. Realized and unrealized gains and losses on trading securities are included in Other income in the Consolidated Statements of Operations and Comprehensive Income (Loss).

In the normal course of business, Griffon’s operations are exposed to the effects of changes in foreign currency exchange rates. To manage these risks, Griffon may enter into various derivative contracts such as foreign currency exchange contracts, including forwards and options. As of June 30, 2018, Griffon entered into several such contracts in order to lock into a foreign currency rate for planned settlements of trade and inter-company liabilities payable in US dollars.

At June 30, 2018, Griffon had $8,500 of Australian dollar contracts at a weighted average rate of $1.36 which qualified for hedge accounting (level 2 inputs). These hedges were all deemed effective as cash flow hedges with gains and losses related to changes in fair value deferred and recorded in Accumulated other comprehensive income (loss) ("AOCI") and Prepaid and other current assets, or Accrued liabilities, until settlement. Upon settlement, gains and losses are recognized in the Consolidated Statements of Operations and Comprehensive Income (Loss) in Cost of goods and services ("COGS"). AOCI included deferred gains of $864 ($612, net of tax) at June 30, 2018 and gains of $207 and $174 was recorded in COGS during the quarter and nine months ended June 30, 2018, respectively, for all settled contracts. All contracts expire in 30 to 88 days.

At June 30, 2018, Griffon had $1,651 of Canadian dollar contracts at a weighted average rate of $1.31. The contracts, which protect Canadian operations from currency fluctuations for US dollar based purchases, do not qualify for hedge accounting. For the quarter and nine months ended June 30, 2018, fair value losses and gains of $11 and $81, respectively, was recorded to Other liabilities and to Other income for the outstanding contracts, based on similar contract values (level 2 inputs). Realized losses and gains of $31 and $11, respectively, were recorded in Other income during the quarter and nine months ended June 30, 2018, respectively, for all settled contracts. All contracts expire in 30 to 88 days.

NOTE 3 – ACQUISITIONS

Griffon accounts for acquisitions under the acquisition method, in which assets acquired and liabilities assumed are recorded at fair value as of the date of acquisition using a method substantially similar to the goodwill impairment test methodology (level 3 inputs). The operating results of the acquired companies are included in Griffon’s consolidated financial statements from the date of acquisition; in each instance, Griffon is in the process of finalizing the initial purchase price allocation.

On June 4, 2018, CBP completed the acquisition of CornellCookson, a leading US manufacturer and marketer of rolling steel door and grille products designed for commercial, industrial, institutional and retail use, for $180,000, subject to certain post-closing adjustments and excluding the present value of net tax benefits under current tax law resulting from the transaction.  The acquisition of CornellCookson substantially expanded CBP’s non-residential product offerings, and added an established professional dealer network focused on rolling steel door and grille products for commercial, industrial, institutional and retail use. There is no other contingent consideration arrangement relative to the acquisition of CornellCookson.

CornellCookson’s accounts, affected for preliminary adjustments to reflect fair market values assigned to assets purchased and liabilities assumed, and results of operations are included in the Company’s consolidated financial statements from the date of acquisition. The Company has recorded a preliminary allocation of the purchase price to the Company’s tangible and identifiable intangible assets acquired and liabilities assumed based on their fair market values (level 3 inputs) at the acquisition date. The excess of the purchase price over the fair value of the net tangible and intangible assets was recorded as goodwill and is deductible

7


for tax purposes. Goodwill recognized at the acquisition date represents the other intangible benefits that the Company will derive from the ownership of CornellCookson, however, such intangible benefits do not meet the criteria for recognition of separately identifiable intangible assets.

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

 
 
Accounts receivable (1)
$
30,400

Inventories
12,586

Property, plant and equipment
35,226

Goodwill (2)
81,634

Intangible assets (2)
36,000

Other current and non-current assets
2,541

Total assets acquired
198,387

 
 
Accounts payable and accrued liabilities
12,000

Long-term liabilities
680

Total liabilities assumed
12,680

Total
$
185,707

(1) Includes $30,818 of gross accounts receivable of which $418 was not expected to be collected. The fair value of accounts receivable approximated book value acquired.
(2)As of June 30, 2018, the Company did not recognize an estimate of identifiable indefinite lived intangible assets apart from goodwill but preliminarily allocated $36,000 to identifiable definite lived intangible assets and recognized amortization expense consistent with an estimated ten year life from the date of acquisition through June 30, 2018. The company expects to finalize the valuation of the acquired identifiable indefinite and definite lived intangible assets during the fourth quarter.

On February 13, 2018, AMES acquired Kelkay Limited ("Kelkay"), a leading United Kingdom manufacturer and distributor of decorative outdoor landscaping products sold to garden centers, retailers and grocers in the UK and Ireland for $56,118 (GBP $40,452), subject to contingent consideration of up to GBP 7,000. This acquisition broadened AMES' product offerings in the market and increased its in-country operational footprint. The purchase price was primarily allocated to fixed assets and land of GBP 8,241, tradenames of GBP 6,739 and accounts receivable and inventory of GBP 8,894.

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

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

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


8


The following unaudited proforma summary from continuing operations presents consolidated information as if the Company acquired ClosetMaid on October 1, 2016:
 
Proforma
 For the three months ended June 30, 2017
(unaudited)
Proforma
For the nine months ended June 30, 2017
(unaudited)
Revenue
$
433,625

$
1,322,110

Income from continuing operations
3,630

13,268


Griffon did not include any material, nonrecurring proforma adjustments directly attributable to the business combination in the proforma revenue and earnings. These proforma amounts have been compiled by adding the historical results from continuing operations of Griffon, restated for classifying the results of operations of the PPC business as a discontinued operation, to the historical results of ClosetMaid after applying Griffon’s accounting policies and the following proforma adjustments:

Additional depreciation and amortization that would have been charged assuming the preliminary fair value adjustments to property, plant, and equipment, and intangible assets had been applied from October 1, 2016.
Elimination of intercompany interest income recorded on ClosetMaid’s financial statements earned on an intercompany receivable due from ClosetMaid’s former parent.
Additional interest and related expenses from the add-on offering of $275,000 for the aggregate principal amount of 5.25% senior notes due 2022 that Griffon used to acquire ClosetMaid.
Removal of $700 of restructuring costs from ClosetMaid's historical results for the nine months ended June 30, 2017.
The consequential tax effects of the above adjustments using a 57.5% and 47.0% tax rate for the quarter and nine months ended June 30, 2017, respectively.

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

 

Accounts receivable (1)
$
32,234

Inventories (2)
28,411

Property, plant and equipment
48,072

Goodwill
69,551

Intangible assets
74,580

Other current and non-current assets
3,852

Total assets acquired
256,700

 
 
Accounts payable and accrued liabilities
68,251

Long-term liabilities
2,720

Total liabilities assumed
70,971

Total
$
185,729

(1) Includes $32,956 of gross accounts receivable of which $722 was not expected to be collected. The fair value of accounts receivable approximated book value acquired.
(2) Includes $1,500 in inventory basis step-up, which was charged to cost of goods sold over the inventory turns of the acquired entity.


9


The amounts assigned to goodwill and major intangible asset classifications, all of which are tax deductible, for the ClosetMaid acquisition are as follows:
 
 
 
 
Average
Life
(Years)
Goodwill
 
$
69,551

 
N/A
Indefinite-lived intangibles
 
47,740

 
N/A
Definite-lived intangibles
 
26,840

 
21
Total goodwill and intangible assets
 
$
144,131

 
 

On May 10, 2017, Griffon entered into an engagement letter with Goldman Sachs & Co. LLC  (“Goldman Sachs”) pursuant to which Goldman Sachs agreed to act as Griffon’s financial advisor in connection with the acquisition of ClosetMaid. Griffon subsequently paid a customary financial advisory fee to Goldman Sachs under the terms of this engagement letter following consummation of the acquisition.

On September 29, 2017, AMES Australia completed the acquisition of Tuscan Landscape Group Pty, Ltd. ("Tuscan Path") for approximately $18,000 (AUD 22,250). Tuscan Path is a leading Australian provider of pots, planters, pavers, decorative stone, and garden decor products, which broadened AMES' outdoor living and lawn and garden business, and strengthened AMES' industry leading position in Australia. The purchase price was primarily allocated to intangible assets of AUD 3,900 and inventory and accounts receivable of AUD 7,900.

On July 31, 2017, The AMES Companies, Inc. acquired La Hacienda Limited ("La Hacienda"), a leading United Kingdom outdoor living brand of unique heating and garden decor products, for approximately $10,610 (GBP 8,575), subject to contingent earn out payments of up to $790 (GBP 600). The acquisition of La Hacienda broadened AMES' global outdoor living and lawn and garden business and supported AMES' UK expansion strategy with an in-country presence. The purchase price allocation was primarily allocated to intangible assets of approximately GBP 3,100 and inventory and accounts receivable of GBP 4,200.
On December 30, 2016, AMES Australia acquired Hills Home Living ("Hills") for approximately $6,051 (AUD 8,400). The purchase price has been allocated to acquired assets and assumed liabilities and primarily consists of inventory, tooling and identifiable intangible assets, including trademarks, intellectual property and customer relationships. Hills, founded in 1946, is a market leader in the supply of clothesline, laundry and garden products. The Hills acquisition adds to AMES' existing broad category of products and enhances our lawn and garden product offerings in Australia. The purchase price was primarily allocated to intangible assets of approximately AUD 6,400 with the remainder primarily inventory.
On February 14, 2016, AMES Australia acquired substantially all of the Intellectual Property (IP) assets of Australia-based Nylex Plastics Pty Ltd. ("Nylex")for approximately $1,744 (AUD 2,452). Through this acquisition, AMES and Griffon secured the ownership of the trademark “Nylex” for certain categories of AMES products, principally in the country of Australia.  Previously, the Nylex name was licensed.  The acquisition of the Nylex IP was contemplated as a post-closing activity following the Cyclone acquisition and supports AMES' Australian watering products strategy.  The purchase price was allocated to indefinite lived trademarks and is not deductible for income taxes.

During the three months ended June 30, 2018, SG&A included acquisition costs of $3,598. During the nine months ended June 30, 2018, SG&A and Cost of goods and services included acquisition costs of $6,097 and $1,500, respectively. Acquisition costs were not recorded in the prior year comparable periods.


10



NOTE 4 – INVENTORIES
 
Inventories are stated at the lower of cost (first-in, first-out or average) or market.
 
The following table details the components of inventory:
 
At June 30, 2018
 
At September 30, 2017
Raw materials and supplies
$
91,400

 
$
67,990

Work in process
88,261

 
78,846

Finished goods
216,152

 
152,601

Total
$
395,813

 
$
299,437

 
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT

The following table details the components of property, plant and equipment, net:
 
At June 30, 2018
 
At September 30, 2017
Land, building and building improvements
$
129,905

 
$
71,764

Machinery and equipment
550,714

 
462,173

Leasehold improvements
49,041

 
43,040


729,660

 
576,977

Accumulated depreciation and amortization
(404,582
)
 
(344,842
)
Total
$
325,078

 
$
232,135

Depreciation and amortization expense for property, plant and equipment was $11,738 and $10,528 for the quarters ended June 30, 2018 and 2017, respectively, and $33,970 and $31,379 for the nine months ended June 30, 2018 and 2017, respectively. Depreciation included in SG&A expenses was $4,171 and $3,332 for the quarters ended June 30, 2018 and 2017, respectively, and $11,747 and $9,622 for the nine months ended June 30, 2018 and 2017, respectively. Remaining components of depreciation, attributable to manufacturing operations, are included in Cost of goods and services.

No event or indicator of impairment occurred during the three and nine months ended June 30, 2018 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 nine months ended June 30, 2018:

 
At September 30, 2017

Goodwill from acquisitions

Other
adjustments
including currency
translations

At June 30, 2018
Home & Building Products
$
300,594

 
$
185,405

 
$
(2,489
)
 
$
483,510

Telephonics
18,545

 

 

 
18,545

Total
$
319,139

 
$
185,405

 
$
(2,489
)
 
$
502,055


11



The following table provides the gross carrying value and accumulated amortization for each major class of intangible assets:
 
 
At June 30, 2018
 
 
 
At September 30, 2017
 
Gross Carrying Amount
 
Accumulated
Amortization
 
Average
Life
(Years)
 
Gross Carrying Amount
 
Accumulated
Amortization
Customer relationships
$
200,835

 
$
47,583

 
25
 
$
152,025

 
$
43,421

Technology and patents
17,210

 
5,866

 
12.5
 
6,193

 
4,719

Total amortizable intangible assets
218,045

 
53,449

 
 
 
158,218

 
48,140

Trademarks
152,360

 

 
 
 
95,049

 

Total intangible assets
$
370,405

 
$
53,449

 
 
 
$
253,267

 
$
48,140

 
Amortization expense for intangible assets was $2,309 and $1,694 for the quarters ended June 30, 2018 and 2017, respectively, and $6,348 and $4,977 for the nine months ended June 30, 2018 and 2017, respectively.
 
No event or indicator of impairment occurred during the three and nine months ended June 30, 2018 which would require impairment testing of long-lived intangible assets including goodwill.
 
NOTE 7 – INCOME TAXES

On December 22, 2017, the "Tax Cuts and Jobs Act" ("TCJA") was signed into law, significantly impacting several sections of the Internal Revenue Code. ASC 740, Accounting for Income Taxes, requires companies to recognize the effect of tax law changes in the period of enactment even though the effective date for most provisions is for tax years beginning after December 31, 2017, or in the case of certain other provisions, January 1, 2018. Though certain key aspects of the TCJA are effective January 1, 2018 and have an immediate accounting effect, other significant provisions are not effective or may not result in accounting effects for September 30 fiscal year companies until October 1, 2018.
Given the significance of the TCJA, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows registrants to record provisional amounts during a one year “measurement period”. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared or analyzed.
Among the significant changes to the U.S. Internal Revenue Code, the TCJA lowers the U.S. federal corporate income tax rate (“Federal Tax Rate”) from 35% to 21% effective January 1, 2018. The Company will compute its income tax expense for the September 30, 2018 fiscal year using a blended Federal Tax Rate of 24.5%. The 21% Federal Tax Rate will apply to fiscal years ending September 30, 2019 and each year thereafter.

The Company has recorded provisional amounts for the effects of the TCJA where accounting is not complete, but a reasonable estimate has been determined. The company recorded a $23,941 benefit on the revaluation of deferred tax liabilities as a provisional amount for the re-measurement of deferred tax assets and liabilities, as well as an amount for deductible executive compensation expense, both of which have been reflected in the tax benefit for the nine months ended June 30, 2018.

A reasonable estimate cannot yet be made and therefore taxes are reflected based on the law in effect prior to the enactment of the Tax Cuts and Jobs Act for the impact of the one-time mandatory repatriation transition tax on the net accumulated earnings and profits of a U.S. taxpayer’s foreign subsidiaries, bonus depreciation expensing for qualified property placed in service after September 27, 2017 and the impact on state income taxes.

The provisional amounts incorporate assumptions made based upon the Company’s current interpretation of the TCJA and may change as the Company receives additional clarification and implementation guidance.

In accordance with SAB 118 adjustments recorded to the provisional amounts will be reflected within the measurement period through the quarter ended December 31, 2018 and will be included in income from continuing operations and net income as an adjustment to tax expense.


12



During the quarter ended June 30, 2018, the Company recognized a tax provision of $1,560 on income before taxes from continuing operations of $9,002, compared to a tax provision of $95 on Income before taxes from continuing operations of $4,547, in the comparable prior year quarter. The current quarter results included acquisition costs of $3,598 ($2,320, net of tax), special dividend ESOP charges of $3,220 ($2,125, net of tax), secondary equity offering costs of $1,205 ($795, net of tax) and discrete and certain other tax benefits, net, of $1,430. The prior year quarter included discrete and certain other tax benefits, net, of $2,522. Excluding these items that affect comparability, the effective tax rates for the quarters ended June 30, 2018 and 2017 were 33.9% and 57.5%, respectively.
During the nine months ended June 30, 2018, the Company recognized a tax benefit of $22,107 on income before taxes from continuing operations of $10,117, compared to a tax benefit of $299 on Income before taxes from continuing operations of $13,147 in the comparable prior year period. The nine month period ended June 30, 2018 included net tax benefits of $24,080 primarily from the December 22, 2017 tax reform bill related to revaluation of deferred tax liabilities, $7,597 ($5,046 net of tax) of acquisition costs, $3,220 ($2,125 net of tax) special dividend ESOP charges, $1,205 ($795, net of tax) secondary equity offering costs and $2,614 ($248, net of tax) charges related to cost of life insurance benefits.  The nine month period ended June 30, 2017 included discrete benefits of $6,478 primarily from the adoption of Financial Accounting Standards Board guidance which requires the Company to recognize excess tax benefits from the vesting of equity awards within income tax expense. Excluding these items that affect comparability, the effective tax rates for the nine months ended June 30, 2018 and 2017 were 33.9% and 47.0%, respectively.



13


NOTE 8 – LONG-TERM DEBT
 
 
 
At June 30, 2018
 
At September 30, 2017
  
 
Outstanding Balance

Original Issuer Premium

Capitalized Fees & Expenses
 
Balance Sheet

Coupon Interest Rate (1)

Outstanding Balance

Original Issuer Discount
 
Capitalized Fees & Expenses
 
Balance Sheet

Coupon Interest Rate (1)
Senior notes due 2022
(a)
$
1,000,000

 
$
1,308

 
$
(13,932
)
 
$
987,376

 
5.25
%
 
725,000

 
$
(1,177
)
 
$
(9,220
)
 
$
714,603

 
5.25
%
Revolver due 2021
(b)
69,912

 

 
(1,556
)
 
68,356

 
Variable

 
144,216

 

 
(1,951
)
 
142,265

 
Variable

Real estate mortgages
(d)

 

 

 

 
Variable

 
23,642

 

 
(320
)
 
23,322

 
Variable

ESOP Loans
(e)
35,263

 

 
(217
)
 
35,046

 
Variable

 
42,675

 

 
(310
)
 
42,365

 
Variable

Capital lease - real estate
(f)
8,248

 

 
(86
)
 
8,162

 
5.00
%
 
5,312

 

 
(105
)
 
5,207

 
5.00
%
Non US lines of credit
(g)

 

 
(19
)
 
(19
)
 
Variable

 
9,402

 

 
(31
)
 
9,371

 
Variable

Non US term loans
(g)
30,953

 

 
(69
)
 
30,884

 
Variable

 
35,943

 

 
(108
)
 
35,835

 
Variable

Other long term debt
(h)
5,935

 

 
(20
)
 
5,915

 
Variable

 
6,211

 

 
(21
)
 
6,190

 
Variable

Totals
 
1,150,311

 
1,308

 
(15,899
)
 
1,135,720

 
 

 
992,401

 
(1,177
)
 
(12,066
)
 
979,158

 
 

less: Current portion
 
(10,739
)
 

 

 
(10,739
)
 
 

 
(11,078
)
 

 

 
(11,078
)
 
 

Long-term debt
 
$
1,139,572

 
$
1,308

 
$
(15,899
)
 
$
1,124,981

 
 

 
$
981,323

 
$
(1,177
)
 
$
(12,066
)
 
$
968,080

 
 

 (1) n/a = not applicable

 
 
Three Months Ended June 30, 2018
 
Three Months Ended June 30, 2017
 
 
Effective Interest Rate (1)

Cash Interest

Amort. Debt
Discount

Amort. Debt Issuance Costs
& Other Fees

Total Interest Expense

Effective Interest Rate (1)

Cash Interest

Amort. Debt
Discount

Amort.
Debt Issuance Costs
& Other Fees

Total Interest Expense
Senior notes due 2022
(a)
5.7
%
 
13,125

 
67

 
957

 
14,149

 
5.5
%
 
9,516

 
67

 
462

 
10,045

Revolver due 2021
(b)
Variable

 
1,239

 

 
141

 
1,380

 
Variable

 
1,629

 

 
140

 
1,769

Real estate mortgages
(d)
n/a

 

 

 

 

 
2.4
%
 
142

 

 
46

 
188

ESOP Loans
(e)
5.5
%
 
472

 

 
31

 
503

 
3.3
%
 
414

 

 
29

 
443

Capital lease - real estate
(f)
5.6
%
 
42

 

 
6

 
48

 
5.4
%
 
72

 

 
7

 
79

Non US lines of credit
(g)
Variable

 
22

 

 
4

 
26

 
Variable

 
45

 

 
75

 
120

Non US term loans
(g)
Variable

 
338

 

 
18

 
356

 
Variable

 
102

 

 
68

 
170

Other long term debt
(h)
Variable

 
33

 

 
1

 
34

 
Variable

 
64

 

 
1

 
65

Capitalized interest
 
 

 
(168
)
 

 

 
(168
)
 
 

 
(200
)
 

 

 
(200
)
Totals
 
 

 
$
15,103

 
$
67

 
$
1,158

 
$
16,328

 
 

 
$
11,784

 
$
67

 
$
828

 
$
12,679


14


 
 
Nine Months Ended June 30, 2018
 
Nine Months Ended June 30, 2017
 
 
Effective Interest Rate (1)
 
Cash Interest
 
Amort. Debt
Discount
 
Amort. Debt Issuance Costs
& Other Fees
 
Total Interest Expense
 
Effective Interest Rate (1)
 
Cash Interest
 
Amort. Debt
Discount
 
Amort.
Debt Issuance Costs
& Other Fees
 
Total Interest Expense
Senior notes due 2022
(a)
5.7
%
 
39,375


202


2,839

 
42,416

 
5.6
%
 
28,547

 
202

 
1,396

 
30,145

Revolver due 2021
(b)
Variable

 
3,517



 
422

 
3,939

 
Variable

 
3,280

 

 
422

 
3,702

Convert. debt due 2017
(c)
n/a

 





 

 
8.9
%
 
1,167

 
1,248

 
148

 
2,563

Real estate mortgages
(d)
n/a

 
351




320

 
671

 
2.4
%
 
420

 

 
56

 
476

ESOP Loans
(e)
4.7
%
 
1,327




93

 
1,420

 
4.1
%
 
1,147

 

 
94

 
1,241

Capital lease - real estate
(f)
5.5
%
 
533




19

 
552

 
5.4
%
 
227

 

 
19

 
246

Non US lines of credit
(g)
Variable

 
33




11

 
44

 
Variable

 
70

 

 
85

 
155

Non US term loans
(g)
Variable

 
1,002




69

 
1,071

 
Variable

 
560

 

 
97

 
657

Other long term debt
(h)
Variable

 
262




4

 
266

 
Variable

 
186

 

 
7

 
193

Capitalized interest
 
 

 
(406
)




 
(406
)
 
 

 
(684
)
 

 

 
(684
)
Totals
 
 

 
$
45,994

 
$
202

 
$
3,777

 
$
49,973

 
 

 
$
34,920

 
$
1,450

 
$
2,324

 
$
38,694

(1) n/a = not applicable


15



(a)
On October 2, 2017, in an unregistered offering through a private placement under Rule 144A, Griffon completed the add-on offering of $275,000 principal amount of its 5.25% senior notes due 2022, at 101.00% of par, to Griffon's previously issued $125,000 principal amount of its 5.25% senior notes due 2022, at 98.76% of par, completed on May 18, 2016 and $600,000 5.25% senior notes due 2022, at par, completed on February 27, 2014 (collectively the “Senior Notes”). As of June 30, 2018, outstanding Senior Notes due totaled $1,000,000; interest is payable semi-annually on March 1 and September 1. The net proceeds of the $275,000 add-on offering were used to acquire ClosetMaid with the remaining proceeds used to pay down outstanding loan borrowings under Griffon's revolving credit facility (the "Credit Agreement"). The net proceeds of the previously issued $125,000 add-on offering were used to pay down outstanding revolving loan borrowings under the Credit Agreement.

The Senior Notes are senior unsecured obligations of Griffon guaranteed by certain domestic subsidiaries, and subject to certain covenants, limitations and restrictions. On February 5, 2018 and June 18, 2014, Griffon exchanged all of the $275,000, $125,000 and $600,000 Senior Notes, respectively, for substantially identical Senior Notes registered under the Securities Act of 1933 via an exchange offer. The fair value of the Senior Notes approximated $972,500 on June 30, 2018 based upon quoted market prices (level 1 inputs). In connection with the issuance and exchange of the $275,000 senior notes, Griffon capitalized $8,472 of underwriting fees and other expenses; Griffon capitalized $3,016 of underwriting fees and other expenses in connection with the $125,000 senior notes; and Griffon capitalized $10,313 in connection with the previously issued $600,000 senior notes. All capitalized fees will amortize over the term of the notes.

(b)
On March 22, 2016, Griffon amended the Credit Agreement to increase the credit facility from $250,000 to $350,000, extend its maturity date from March 13, 2020 to March 22, 2021 and modify certain other provisions of the facility. On October 2, 2017 and on May 31, 2018, Griffon amended the Credit Agreement in association with the ClosetMaid acquisition and the CornellCookson acquisition, respectively, to modify the net leverage covenant. The facility includes a letter of credit sub-facility with a limit of $50,000 and a multi-currency sub-facility of $50,000. The Credit Agreement provides for same day borrowings of base rate loans. 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 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. Current margins are 1.75% for base rate loans and 2.75% 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 (except that a lien on the assets of Griffon's material domestic subsidiaries securing a limited amount of the debt under the Credit Agreement relating to Griffon's Employee Stock Ownership Plan ("ESOP") ranks pari passu with the lien granted on such assets under the Credit Agreement; see footnote (e) below). At June 30, 2018, under the Credit Agreement, there were $69,912 in outstanding borrowings; standby letters of credit were $15,166; and $264,922 was available, subject to certain loan covenants, for borrowing at that date.

(c)
On December 21, 2009, Griffon issued $100,000 principal amount of 4% convertible subordinated notes due 2017 (the “2017 Notes”). On July 14, 2016, Griffon announced that it would settle, upon conversion, up to $125,000 of the conversion value of the 2017 Notes in cash, with amounts in excess of $125,000, if any, to be settled in shares of Griffon common stock. On January 17, 2017, Griffon settled the convertible debt for $173,855 with $125,000 in cash, utilizing borrowings under the Credit Agreement, and $48,858, or 1,954,993 shares, of common stock issued from treasury.

(d)
In September 2015 and March 2016, Griffon entered into mortgage loans in the amounts of $32,280 and $8,000, respectively. The mortgage loans were secured by four properties occupied by Griffon's subsidiaries. The loans were due to mature in September 2025 and April 2018, respectively, were collateralized by the specific properties financed and were guaranteed by Griffon. The loans had an interest rate of LIBOR plus 1.50%. The loans were paid off during the quarter ended March 31, 2018.

(e)
In August 2016, Griffon’s ESOP entered into an agreement that refinanced the existing ESOP loan into a new Term Loan in the amount of $35,092 (the "Agreement"). The Agreement also provided for a Line Note with $10,908 available to purchase shares of Griffon common stock in the open market. During 2017, Griffon's ESOP purchased 621,875 shares of common stock for a total of $10,908 or $17.54 per share, under a borrowing line that has now been fully utilized. On June 30, 2017, the Term Loan and Line Note were combined into a single Term Loan. The Term Loan bears interest at LIBOR plus 2.50%. The Term Loan requires a quarterly principal payment of $569 with a balloon payment due at maturity on March 22, 2020.

16


As a result of the special cash dividend of $1.00 per share, paid on April 16, 2018, the outstanding balance of Term Loan was reduced by $5,705. As of June 30, 2018, $35,046, net of issuance costs, was outstanding under the Term Loan. The Term Loan is secured by shares purchased with the proceeds of the loan and with a lien on a specific amount of Griffon assets (which lien ranks pari passu with the lien granted on such assets under the Credit Agreement) and is guaranteed by Griffon.

(f)
Two Griffon subsidiaries have capital leases outstanding for real estate located in Troy, Ohio and Ocala, Florida. The leases mature in 2021 and 2022, respectively, and bear interest at fixed rates of approximately 5.0% and 8.0%, respectively. The Troy, Ohio lease is secured by a mortgage on the real estate and is guaranteed by Griffon. The Ocala, Florida lease contains two five-year renewal options. At June 30, 2018, $8,162 was outstanding, net of issuance costs.
 
(g)
In November 2012, Garant G.P. (“Garant”) entered into a CAD $15,000 ($11,282 as of June 30, 2018) revolving credit facility.  The facility accrues interest at LIBOR (USD) or the Bankers Acceptance Rate (CDN) plus 1.3% per annum (3.63% LIBOR USD and 3.00% Bankers Acceptance Rate CDN as of June 30, 2018). The revolving facility matures in October 2019. Garant is required to maintain a certain minimum equity.  At June 30, 2018, there were no borrowings under the revolving credit facility with CAD 15,000 ($11,282 as of June 30, 2018) available for borrowing.

In July 2016, Griffon Australia Holdings Pty Ltd and its Australian subsidiaries ("Griffon Australia") entered into an AUD 30,000 term loan and an AUD 10,000 revolver. The term loan refinanced two existing term loans and the revolver replaced two existing lines. In December 2016, the amount available under the revolver was increased from AUD 10,000 to AUD 20,000 and, in March 2017, the term loan commitment was increased by AUD 5,000. In September 2017, the term commitment was further increased by AUD 15,000. The term loan requires quarterly principal payments of AUD 1,250 plus interest, with a balloon payment of AUD 37,125 due upon maturity in June 2019, and accrues interest at Bank Bill Swap Bid Rate “BBSY” plus 2.00% per annum (4.16% at June 30, 2018). As of June 30, 2018, the term loan had an outstanding balance of AUD 42,125 ($30,953 as of June 30, 2018). The revolving facility matures in November 2018, but is renewable upon mutual agreement with the bank, and accrues interest at BBSY plus 2.0% per annum (3.93% at June 30, 2018). At June 30, 2018, there were no borrowings under the revolving credit facility with AUD 20,000($14,696 as of June 30, 2018) available for borrowing. The revolver and the term loan are both secured by substantially all of the assets of Griffon Australia and its subsidiaries. Griffon guarantees the term loan. Griffon Australia is required to maintain a certain minimum equity level and is subject to a maximum leverage ratio and a minimum fixed charges cover ratio.

A UK subsidiary of Griffon maintains an invoice discounting arrangement secured by trade receivables. Interest is variable at 2.0% over the Sterling base rate (2.5% as of June 30, 2018). At June 30, 2018, there were no amounts outstanding under this facility.

In July 2018, the AMES Companies UK Ltd and its subsidiaries ("Ames UK") entered into a GBP 14,000 term loan, GBP 4,000 mortgage loan and GBP 5,000 revolver. The term loan and mortgage loan require quarterly principal payments of GBP 350 and GBP 83 plus interest, respectively, and have balloon payments due upon maturity, July 2023, of GBP 7,000 and GBP 2,333, respectively. The Term Loan and Mortgage Loans accrue interest at the GBP LIBOR Rate plus 2.25% and 1.8%, respectively (3.04% and 2.59%). The revolving facility matures in July 2019, but is renewable upon mutual agreement with the bank, and accrues interest at the Bank of England Base Rate plus 1.5% (2.0%). The revolver and the term loan are both secured by substantially all of the assets of Ames UK and its subsidiaries. Ames UK is subject to a maximum leverage ratio and a minimum fixed charges cover ratio. The invoice discounting arrangement was canceled and replaced by the above loan facilities.

(h)
Other long-term debt consists primarily of a loan with the Pennsylvania Industrial Development Authority, with the balance consisting of capital leases.
At June 30, 2018, Griffon and its subsidiaries were in compliance with the terms and covenants of all credit and loan agreements.

NOTE 9 — SHAREHOLDERS’ EQUITY
 
During 2018, the Company paid a quarterly cash dividend of $0.07 per share in each quarter and a special cash dividend of $1.00 paid in the third quarter, totaling $1.21 per share for the nine months ended June 30, 2018. During 2017, the Company paid quarterly cash dividends of $0.06 per share, totaling $0.24 per share for the year. Dividends paid on shares in the ESOP were used to offset ESOP loan payments and recorded as a reduction of debt service payments and compensation expense. A dividend payable was established for the holders of restricted shares; such dividends will be released upon vesting of the underlying restricted shares.


17


On August 1, 2018, the Board of Directors declared a quarterly cash dividend of $0.07 per share, payable on September 20, 2018 to shareholders of record as of the close of business on August 23, 2018.

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, generally over a period of three to four years, is recognized using the straight-line attribution method and recorded within SG&A expenses.
 
On January 29, 2016, shareholders approved the Griffon Corporation 2016 Equity Incentive Plan ("Incentive Plan") under which awards of performance shares, performance units, stock options, stock appreciation rights, restricted shares, restricted stock units, deferred shares and other stock-based awards may be granted. On January 31, 2018, shareholders approved Amendment No. 1 to the Incentive Plan pursuant to which, among other things, 1,000,000 shares were added 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 3,350,000 (600,000 of which may be issued as incentive stock options), plus (i) any shares reserved for issuance under the 2011 Equity Incentive Plan as of the effective date of the Incentive Plan, and (ii) any shares underlying awards outstanding on such effective date under the 2011 Incentive Plan that are canceled or forfeited. As of June 30, 2018, there were 1,200,755 shares available for grant.

All grants outstanding under former equity plans will continue under their terms; no additional awards will be granted under such plans.
 
During the first quarter of 2018, Griffon granted 1,008,756 shares of restricted stock and restricted stock units. This included 480,756 shares of restricted stock and restricted stock units, subject to certain performance conditions, with vesting periods of three years, with a total fair value of $9,980, or a weighted average fair value of $20.76 per share. This also included 528,000 shares of restricted stock granted to two senior executives with a vesting period of four years and a two year post-vesting holding period, subject to the achievement of certain absolute and relative performance conditions relating to the price of Griffon's common stock. So long as the minimum performance condition is attained, the amount of shares that can vest will range from 384,000 to 528,000. The total fair value of these restricted shares is approximately $7,008, or a weighted average fair value of $13.27. Also, during the second quarter, Griffon granted 250,170 shares with a vesting period of three years and a fair value of $4,739, or a weighted average fair value of $18.94 per share. During the third quarter of 2018, no grants were issued.

For the quarters ended June 30, 2018 and 2017, stock based compensation expense totaled $2,452 and $2,405, respectively. For the nine months ended June 30, 2018 and 2017, such expense totaled $7,372 and $7,200, respectively.

During the quarter and nine months ended June 30, 2018, 1,592 shares, with a market value of $33 or $20.85 per share, and 199,044 shares, with a market value of $4,478 or $22.50 per share, respectively, were withheld to settle employee taxes due to the vesting of restricted stock, and were added to treasury.

On December 21, 2009, Griffon issued $100,000 principal amount of 4% convertible subordinated notes due 2017 (the “2017 Notes”). On July 14, 2016, Griffon announced that it would settle, upon conversion, up to $125,000 of the conversion value of the 2017 Notes in cash, with amounts in excess of $125,000, if any, to be settled in shares of Griffon common stock. On January 17, 2017, Griffon settled the convertible debt for $173,855 with $125,000 in cash, utilizing borrowing under the Credit Agreement, and $48,858, or 1,954,993 shares of common stock issued from treasury.

On August 3, 2016, Griffon’s Board of Directors authorized the repurchase of up to $50,000 of Griffon’s outstanding common stock. Under this share repurchase program, the Company may purchase shares in the open market, including pursuant to a 10b5-1 plan, or in privately negotiated transactions. During the quarter and nine months ended June 30, 2018, Griffon purchased 650,500 and 2,088,739 shares, respectively, of common stock under the August 2016 program, for a total of $12,694 and $41,110, respectively, or $19.51 and $19.68, respectively. As of June 30, 2018, $8,327 remains under the August 3, 2016 Board authorization. On August 1, 2018, Griffon's Board of Directors authorized the repurchase of an additional $50,000 of Griffon's outstanding common stock.

From August 2011 through June 30, 2018, Griffon repurchased 22,518,037 shares of its common stock, for a total of $302,730 or $13.44 per share. This included the repurchase of 18,073,593 shares on the open market under Griffon's Board of Directors authorized repurchase pr

18


ograms for a total of $252,730 or $13.98 per shares, as well as the December 10, 2013 repurchase of 4,444,444 shares from GS Direct for $50,000, or $11.25 per share.

On June 19, 2018, GS Direct completed an underwritten secondary offering to sell 5,583,375 shares of Griffon’s common stock, inclusive of the underwriters’ 30-day option to purchase additional shares. Following the closing of the offering, GS Direct no longer owns any shares of Griffon. GS Direct's initial 10,000,000 share investment was in 2008.

NOTE 10 – EARNINGS PER SHARE (EPS)
 
Basic EPS (and diluted EPS in periods when 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 were issued in connection with stock based compensation and upon the settlement of the 2017 convertible notes.
 
The following table is a reconciliation of the share amounts (in thousands) used in computing earnings per share:
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Weighted average shares outstanding - basic
40,295

 
41,683

 
41,232

 
40,765

Incremental shares from stock based compensation
1,447

 
1,572

 
1,388

 
1,683

Convertible debt matured 2017

 

 

 
486

 
 
 
 
 
 
 
 
Weighted average shares outstanding - diluted
41,742

 
43,255

 
42,620

 
42,934

 
 
 
 
 
 
 
 
 
On July 14, 2016, Griffon announced that it would settle, upon conversion, up to $125,000 of the conversion value of the 2017 Notes in cash, with amounts in excess of $125,000, if any, to be settled in shares of Griffon common stock. During the quarter ended March 31, 2017, Griffon settled the 2017 Notes for $173,855 with $125,000 in cash and 1,954,993 shares of common stock issued from treasury. Prior to settlement, Griffon had the intent and ability to settle the principal amount of the 2017 Notes in cash, and as such, the issuance of shares related to the principal amount of the 2017 Notes did not affect diluted shares.

NOTE 11 – BUSINESS SEGMENTS

Griffon’s reportable segments from continuing operations are as follows:

HBP is a global provider of long-handled tools and landscaping products for homeowners and professionals; a leading North American manufacturer and marketer of closet organization, home storage, and garage storage products to home center retail chains, mass merchandisers, and direct-to builder professional installers; a leading manufacturer and marketer of residential and commercial garage doors to professional dealers and to some of the largest home center retail chains in North America as well as a leading U.S. manufacturer and marketer of rolling steel door and grille products designed for commercial, industrial, institutional, and retail use.

Defense Electronics segment consists of Telephonics a globally recognized leading provider of highly sophisticated intelligence, surveillance and communications solutions for defense, aerospace and commercial customers.

On November 16, 2017, Griffon announced it entered into a definitive agreement to sell PPC and on February 6, 2018, completed the sale to Berry for $475,000 in cash, subject to certain post-closing adjustments. As a result, Griffon classified the results of operations of the PPC business as discontinued operations in the Consolidated Statements of Operations for all periods presented and classified the related assets and liabilities associated with the discontinued operations in the consolidated balance sheets. All results and information presented exclude PPC unless otherwise noted. See Note 14, Discontinued Operations to the Notes of the Financial Statements.

On October 2, 2017, Griffon acquired ClosetMaid. ClosetMaid, founded in 1965, is a leading North American manufacturer and marketer of closet organization, home storage, and garage storage products, and sells to some of the largest home center retail

19


chains, mass merchandisers, and direct-to-builder professional installers in North America. The accounts of ClosetMaid, affected for preliminary adjustments to reflect fair market values assigned to assets purchased and liabilities assumed, are included in the Company’s consolidated financial statements from the date of acquisition.

On June 4, 2018, CBP acquired CornellCookson, a leading US manufacturer and marketer of rolling steel door and grille products designed for commercial, industrial, institutional and retail use. The accounts, affected for preliminary adjustments to reflect fair market values assigned to assets purchased and liabilities assumed, and results of operations of CornellCookson, are included in the Company’s consolidated financial statements from the date of acquisition.

Information on Griffon’s reportable segments from continuing operations is as follows:
 
For the Three Months Ended June 30,
 
For the Nine Months Ended June 30,
REVENUE
2018
 
2017
 
2018
 
2017
Home & Building Products:
 

 
 

 
 

 
 

AMES
$
180,834

 
$
136,132

 
$
503,744

 
$
419,763

ClosetMaid
81,564

 

 
233,592

 

CBP
177,723

 
140,349

 
470,071

 
406,437

Home & Building Products
440,121

 
276,481

 
1,207,407

 
826,200

Telephonics
76,429

 
81,633

 
225,006

 
267,998

Total consolidated net sales
$
516,550

 
$
358,114

 
$
1,432,413

 
$
1,094,198


The following table reconciles segment operating profit to income before taxes from continuing operations:
 
For the Three Months Ended June 30,
 
For the Nine Months Ended June 30,
INCOME BEFORE TAXES FROM CONTINUING OPERATIONS
2018
 
2017
 
2018
 
2017
Segment operating profit:
 

 
 

 
 

 
 

Home & Building Products
$
38,753

 
$
23,708

 
$
94,982

 
$
64,661

Telephonics
6,084

 
4,114

 
8,866

 
18,521

Segment operating profit from continuing operations
44,837

 
27,822

 
103,848

 
83,182

Net interest expense
(15,796
)
 
(12,662
)
 
(48,482
)
 
(38,656
)
Unallocated amounts
(12,016
)
 
(10,613
)
 
(32,993
)
 
(31,379
)
Acquisition costs
(3,598
)
 

 
(5,217
)
 

Special dividend ESOP charges
(3,220
)
 

 
(3,220
)
 

Secondary equity offering costs
(1,205
)
 
 
 
(1,205
)
 
 
Cost of life insurance benefit

 

 
(2,614
)
 

Income before taxes from continuing operations
$
9,002

 
$
4,547

 
$
10,117

 
$
13,147

 
Griffon evaluates performance and allocates resources based on each segment's operating results before interest income and expense, income taxes, depreciation and amortization, unallocated amounts (mainly corporate overhead), restructuring charges, loss on debt extinguishment and acquisition related expenses, as well as other items that may affect comparability, as applicable (“Segment adjusted EBITDA”). Griffon believes this information is useful to investors for the same reason.

20



The following table provides a reconciliation of Segment adjusted EBITDA to Income before taxes from continuing operations:
 
For the Three Months Ended June 30,
 
For the Nine Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Segment adjusted EBITDA:
 

 
 

 
 

 
 

Home & Building Products
$
50,004

 
$
33,134

 
$
129,250

 
$
92,506

Telephonics
8,760

 
6,784

 
16,956

 
26,678

Total Segment adjusted EBITDA
58,764

 
39,918

 
146,206

 
119,184

Net interest expense
(15,796
)
 
(12,662
)
 
(48,482
)
 
(38,656
)
Segment depreciation and amortization
(13,927
)
 
(12,096
)
 
(39,978
)
 
(36,002
)
Unallocated amounts
(12,016
)
 
(10,613
)
 
(32,993
)
 
(31,379
)
Acquisition costs
(3,598
)
 

 
(7,597
)
 

Special dividend ESOP charges
(3,220
)
 

 
(3,220
)
 

Secondary equity offering costs
(1,205
)
 

 
(1,205
)
 

Cost of life insurance benefit

 

 
(2,614
)
 

Income before taxes from continuing operations
$
9,002

 
$
4,547

 
$
10,117

 
$
13,147


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

For the Three Months Ended June 30,

For the Nine Months Ended June 30,
DEPRECIATION and AMORTIZATION
2018

2017

2018

2017
Segment:
 

 

 

 
Home & Building Products
$
11,251

 
$
9,426

 
$
31,888

 
$
27,845

Telephonics
2,676

 
2,670

 
8,090

 
8,157

Total segment depreciation and amortization
13,927

 
12,096

 
39,978

 
36,002

Corporate
120

 
125

 
340

 
354

Total consolidated depreciation and amortization
$
14,047

 
$
12,221

 
$
40,318

 
$
36,356













CAPITAL EXPENDITURES
 


 


 


 

Segment:
 


 


 


 

Home & Building Products
$
9,761

 
$
5,853

 
$
24,611

 
$
16,012

Telephonics
1,632

 
1,161

 
6,017

 
4,274

Total segment
11,393

 
7,014

 
30,628

 
20,286

Corporate
127

 
23

 
2,520

 
2,289

Total consolidated capital expenditures
$
11,520

 
$
7,037

 
$
33,148

 
$
22,575


21


ASSETS
At June 30, 2018

At September 30, 2017
Segment assets:
 

 
Home & Building Products
$
1,660,665

 
$
1,084,103

Telephonics
337,352

 
343,445

Total segment assets
1,998,017

 
1,427,548

Corporate
100,378

 
71,980

Total continuing assets
2,098,395

 
1,499,528

Assets of discontinued operations
3,256

 
374,013

Consolidated total
$
2,101,651

 
$
1,873,541


NOTE 12 – EMPLOYEE BENEFIT PLANS

Defined benefit pension expense (income) was as follows:
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Interest cost
$
1,407

 
$
1,402

 
$
4,221

 
$
4,206

Expected return on plan assets
(2,684
)
 
(2,735
)
 
(8,052
)
 
(8,207
)
Amortization:
 

 
 

 
 

 
 

Prior service cost
4

 
4

 
12

 
12

Recognized actuarial loss
525

 
832

 
1,575

 
2,496

Net periodic expense (income)
$
(748
)
 
$
(497
)
 
$
(2,244
)
 
$
(1,493
)

As a result of the recent passing of our Chairman of the Board, who participated in a Supplemental Executive Retirement Plan relating to his tenure as Chief Executive Officer (a position from which he retired in 2008), the pension benefit liability was reduced by $13,715 at December 31, 2017, with the offset, net of tax, recorded in Other Comprehensive Income.

NOTE 13 – RECENT ACCOUNTING PRONOUNCEMENTS
In March 2018, the FASB issued ASU 2018-05, Income Taxes Amendments to SEC Paragraphs Pursuant to the SEC SAB 118. This ASU provides guidance on income tax accounting implications under the Tax Reform Act. SAB 118 addressed the application of GAAP to situations when a registrant does not have the necessary information available, prepared and analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act and allows companies to record provisional amounts during the re-measurement period not to exceed one year after the enactment date while the accounting impact remains under analysis. This guidance was effective immediately upon issuance. See Note 7 Income Taxes for further details.
Issued but not yet effective accounting pronouncements

In February 2018, the FASB issued guidance that allows companies to reclassify stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act (the Tax Act), from accumulated other comprehensive income to retained earnings. This guidance is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The new standard is effective for the Company beginning in 2020, with early adoption permitted. We are currently evaluating the effects that the adoption of this guidance will have on our consolidated financial statements and the related disclosures.

In May 2017, the FASB issued guidance to address the situation when a company modifies the terms of a stock compensation award previously granted to an employee. This guidance is effective, and should be applied prospectively, for fiscal years beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period. The new guidance is effective for

22


the Company beginning in 2019. We are currently evaluating the impact of the guidance on the Company's financial condition, results of operations and related disclosures.

In March 2017, the FASB issued amendments to the Compensation - Retirement Benefits guidance which requires companies to retrospectively present the service cost component of net periodic benefit cost for pension and retiree medical plans along with other compensation costs in operating income and present the other components of net periodic benefit cost below operating income in the income statement. The guidance also allows only the service cost component of net periodic benefit cost to be eligible for capitalization within inventory or fixed assets on a prospective basis. This guidance is effective, and should be applied retroactively, for fiscal years beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period. The new guidance is effective for the Company beginning in 2019. We are currently evaluating the impact of the guidance on the Company's financial condition, results of operations and related disclosures.

In January 2017, the FASB issued guidance that simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. This guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those periods and will be effective for the Company beginning in 2020. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact of the guidance on the Company's financial condition, results of operations and related disclosures.

In January 2017, the FASB issued guidance that clarifies the definition of a business, which will impact many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The new standard is intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods and will be effective for the Company beginning in 2019. We are currently evaluating the impact of the guidance on the Company's financial condition, results of operations and related disclosures.

In August 2016, the FASB issued guidance on the Statement of Cash Flows Classification of certain cash receipts and cash payments (a consensus of the FASB Emerging Issues Task Force). This guidance addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. This guidance will be effective for the Company beginning in 2019. We are currently evaluating the impact of the guidance on the Company's financial condition, results of operations and related disclosures.

In February 2016, the FASB issued guidance on lease accounting requiring lessees to recognize a right-of-use asset and a lease liability for long-term leases. The liability will be equal to the present value of lease payments. This guidance must be applied using a modified retrospective transition approach to all annual and interim periods presented and is effective for the Company beginning in 2020. We are currently evaluating the impact of the guidance on the Company's financial condition, results of operations and related disclosures.

In May 2014, the FASB issued an Accounting Standards Update related to new revenue recognition guidance that supersedes the existing revenue recognition guidance and most industry-specific guidance applicable to revenue recognition. According to the new guidance, an entity will apply a principles-based five step model to recognize revenue upon the transfer of promised goods or services to customers and in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. Subsequently, the FASB has issued amendments to certain aspects of the guidance including the effective date. The Company will adopt this guidance using the modified retrospective method.

The Company commenced its assessment during the second half of fiscal 2016 and developed a project plan to assess the impact, including impacts to the Company’s processes, controls, and financial statement disclosures. The Company is in the process of completing this project plan, in which the Company has surveyed its businesses, completed contract reviews, compared its historical accounting policies and practices to the new requirements, identified potential differences and provided trainings. The Company currently does not expect impacts at its Home and Building Products Segment. The Company does however expect impacts at its Defense Electronics Segment, but believes that those impacts will be immaterial to the Company’s overall Financial Statements.


23


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
 
PPC

On November 16, 2017, Griffon announced it entered into a definitive agreement to sell PPC and on February 6, 2018, completed the sale to Berry for $475,000 in cash, subject to certain post-closing adjustments. As a result, Griffon classified the results of operations of the PPC business as discontinued operations in the Consolidated Statements of Operations for all periods presented and classified the related assets and liabilities associated with the discontinued operations in the consolidated balance sheets. All results and information presented exclude PPC unless otherwise noted. PPC is a global leader in the development and production of embossed, laminated and printed specialty plastic films for hygienic, health-care and industrial products and sells to some of the world's largest consumer products companies. In connection with the sale of PPC, the Company recorded a gain of $117,625 ($86,357, net of tax) during the quarter ended June 30, 2018. The tax computed on the PPC gain is preliminary and is subject to finalization.
  

Summarized results of the Company’s discontinued operations are as follows:

 
 
For the Three Months Ended June 30,
 
For the Nine Months Ended June 30,
 
 
2018
2017
 
2018
 
2017
 
Revenue
 
$

$
115,206

 
$
166,262

 
$
341,986

 
Cost of goods and services
 

97,233

 
132,100

 
287,948

 
Gross profit
 

17,973

 
34,162

 
54,038

 
Selling, general and administrative expenses
 
200

10,184

 
26,303

 
31,600

 
Income (loss) from discontinued operations
 
(200
)
7,789

 
7,859

 
22,438

 
Other income (expense)
 
 
 
 
 

 
 

 
Gain on sale of business
 


 
117,625

 

 
Interest expense, net
 

(50
)
 
(155
)
 
(45
)
 
Other, net
 

(715
)
 
(687
)
 
(754
)
 
Total other income (expense)
 

(765
)
 
116,783

 
(799
)
 
Income from operations of discontinued operations
 
$
(200
)
$
7,024

 
$
124,642

 
$
21,639

 

24


The Company has no assets or liabilities classified as held for sale as of June 30, 2018. The following amounts related to the PPC segment have been segregated from Griffon's continuing operations and are reported as assets and liabilities of discontinued operations held for sale in the consolidated balance sheet at September 30, 2017:
 
 
At September 30, 2017
 
ASSETS
 
 

 
Accounts receivable, net
 
$
51,768

 
Inventories, net
 
45,742

 
Prepaid and other current assets
 
11,000

 
PROPERTY, PLANT AND EQUIPMENT, net
 
185,940

 
GOODWILL
 
57,087

 
INTANGIBLE ASSETS, net
 
12,298

 
OTHER ASSETS
 
6,889

 
Total Assets Held for Sale
 
370,724

 
LIABILITIES
 
 

 
Notes payable and current portion of long-term debt
 
$
11,163

 
Accounts payable
 
36,619

 
Accrued liabilities
 
14,553

 
LONG-TERM DEBT, net
 
10,549

 
OTHER LIABILITIES
 
11,566

 
Total Liabilities Held for Sale
 
$
84,450

 
 
In connection with the sale transaction, the Company recorded liabilities of $46,968 as of March 31, 2018 primarily for income taxes payable, stay and transaction bonuses, and other remaining accrued liabilities. Since that time, $21,938 has been paid primarily for income taxes payable and bonuses.

On September 5, 2017, Griffon entered into an engagement letter with Goldman Sachs pursuant to which Goldman Sachs agreed to act as Griffon’s financial advisor in connection with the exploration of strategic alternatives for Clopay Plastics. On November 15, 2017, Griffon signed an agreement to sell Clopay Plastics for $475,000 to Berry Global Group, Inc. Griffon subsequently paid a customary financial advisory fee to Goldman Sachs under the terms of this engagement letter upon closing of the transaction.

Installation Services and Other Discontinued Activities

In 2008, as a result of the downturn in the residential housing market, Griffon exited substantially all operating activities of its Installation Services segment which sold, installed and serviced garage doors and openers, fireplaces, floor coverings, cabinetry
and a range of related building products, primarily for the new residential housing market. In 2008, Griffon sold eleven units, closed one unit and merged two units into CBP. Griffon substantially concluded its remaining disposal activities in 2009.

Installation Services operating results have been reported as discontinued operations in the Consolidated Statements of Operations and Comprehensive Income (Loss) for all periods presented; Installation Services is excluded from segment reporting. There was no reported revenue in the quarters and nine months ended June 30, 2018 and 2017.
 
During the year ended September 30, 2017, Griffon recorded $5,700 of reserves in discontinued operations related to historical environmental remediation efforts and to increase the reserve for homeowner association claims (HOA) related to the Clopay Services Corporation discontinued operations in 2008.

25



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 not held for sale in the Condensed Consolidated Balance Sheets:
 
At June 30, 2018

At September 30, 2017
Assets of discontinued operations not held for sale:
 


 

Prepaid and other current assets
$
326

 
$
329

Other long-term assets
2,930

 
2,960

Total assets of discontinued operations not held for sale
$
3,256

 
$
3,289

 
 
 
 
Liabilities of discontinued operations not held for sale:
 

 
 

Accrued liabilities, current
$
3,705

 
$
8,342

Other long-term liabilities
5,078

 
3,037

Total liabilities of discontinued operations not held for sale
$
8,783

 
$
11,379


There was no Installation Services revenue or income for the quarter and nine months ended June 30, 2018 or 2017.

NOTE 15 – OTHER INCOME (EXPENSE)
 
For the quarters ended June 30, 2018 and 2017, Other income (expense) primarily consisted of $(17) and ($133), 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 $104 and $55, respectively, of net investment income (loss).

For the nine months ended June 30, 2018 and 2017, Other income (expense) primarily consisted of $(236) and $(556), 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 $1,365 and $210, respectively, of net investment income.


NOTE 16 – 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. CBP also offers warranties against product defects for periods generally ranging from one to ten years, with limited lifetime warranties on certain door models. Typical warranties require CBP, ClosetMaid and 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 from the date of original purchase unless otherwise stated on the product or packaging and subject to certain disclaimers and limitations.

Changes in Griffon’s warranty liability, included in Accrued liabilities, were as follows:
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Balance, beginning of period
$
6,258

 
$
5,803

 
$
6,236

 
$
6,322

Warranties issued and changes in estimated pre-existing warranties
2,777

 
803

 
5,889

 
3,310

Actual warranty costs incurred
(1,450
)
 
(1,457
)
 
(5,376
)
 
(4,483
)
Other warranty liabilities assumed from acquisitions

 

 
836

 
$

Balance, end of period
$
7,585

 
$
5,149

 
$
7,585

 
$
5,149



26


NOTE 17 – OTHER COMPREHENSIVE INCOME (LOSS)
 
The amounts recognized in other comprehensive income (loss) were as follows:
 
 
Three Months Ended June 30, 2018
 
Three Months Ended June 30, 2017
 
Pre-tax
 
Tax
 
Net of tax
 
Pre-tax
 
Tax
 
Net of tax
Foreign currency translation adjustments
$
(9,136
)
 
$

 
$
(9,136
)
 
$
6,414

 
$

 
$
6,414

Pension and other defined benefit plans
376

 
(129
)
 
247

 
836

 
(292
)
 
544

Cash flow hedges
118

 
(34
)
 
84

 
277

 
(79
)
 
198

Total other comprehensive income (loss)
$
(8,642
)
 
$
(163
)
 
$
(8,805
)
 
$
7,527

 
$
(371
)
 
$
7,156

 
Nine Months Ended June 30, 2018
 
Nine Months Ended June 30, 2017
 
Pre-tax
 
Tax
 
Net of tax
 
Pre-tax
 
Tax
 
Net of tax
Foreign currency translation adjustments
$
9,289

 
$

 
$
9,289

 
$
1,344

 
$

 
$
1,344

Pension and other defined benefit plans
14,996

 
(4,943
)
 
10,053

 
2,508

 
(876
)
 
1,632

Cash flow hedges
864

 
(252
)
 
612

 
1,121

 
(320
)
 
801

Total other comprehensive income (loss)
$
25,149

 
$
(5,195
)
 
$
19,954

 
$
4,973

 
$
(1,196
)
 
$
3,777


The components of Accumulated other comprehensive income (loss) are as follows:
 
June 30, 2018
 
September 30, 2017
Foreign currency translation adjustments
$
(22,938
)
 
$
(32,227
)
Pension and other defined benefit plans
(18,087
)
 
(28,140
)
Change in Cash flow hedges
498

 
(114
)
 
$
(40,527
)
 
$
(60,481
)

Amounts reclassified from accumulated other comprehensive income (loss) to income were as follows:
 
For the Three Months Ended June 30,
 
For the Nine Months Ended June 30,
Gain (Loss)
2018
 
2017
 
2018
 
2017
Pension amortization
$
(529
)
 
$
(836
)
 
$
(1,587
)
 
$
(2,508
)
Cash flow hedges
177

 
(88
)
 
185

 
(910
)
Removal of PPC translation adjustment

 

 
14,866

 

Total gain (loss)
(352
)
 
(924
)
 
13,464

 
(3,418
)
Tax benefit (expense)
106

 
277

 
(3,222
)
 
1,025

Total
$
(246
)
 
$
(647
)
 
$
10,242

 
$
(2,393
)

NOTE 18 — 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.


27


Subsequently, ISC 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 accordingly conduct 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 media, remediation alternatives having a current net capital cost value, in the aggregate, of approximately $5,000.  In February 2011, 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, 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 media, but selected a different remediation alternative for the sediment medium. After receiving public comments on the PRAP, the DEC issued a Record of Decision (“ROD”) in June 2011 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. At the time of adoption of the ROD, the approximate cost of the remedy proposed by DEC in the PRAP was approximately $10,000.
 
It is now expected that 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 of New York 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. Beginning in December 2004, a customer of AMES had been named in various litigation matters relating to certain Union Tools products. The plaintiffs in those litigation matters asserted causes of action against the customer of AMES for improper advertisement to end consumers. The allegations suggested that advertisements led the consumers to believe that Union Tools’ hand tools were wholly manufactured within boundaries of the United States. The complaints asserted various causes of action against the customer of AMES under federal and state law, including common law fraud. At some point, 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.

Union Fork and Hoe, Frankfort, NY site. The former Union Fork and Hoe property in Frankfort, NY was acquired by Ames in 2006 as part of a larger acquisition, and has historic site contamination involving chlorinated solvents, petroleum hydrocarbons and metals. AMES has entered into an Order on Consent with the New York State Department of Environmental Conservation. While the Order is without admission or finding of liability or acknowledgment that there has been a release of hazardous substances at the site, AMES is required to perform a remedial investigation of certain portions of the property and to recommend a remediation option. At the conclusion of the remediation phase to the satisfaction of the DEC, the DEC will issue a Certificate of Completion. AMES has performed significant investigative and remedial activities in the last few years under work plans approved by the DEC, and the DEC has approved the final remedial investigation and feasibility study reports. AMES’ recommended remedial option of excavation and offsite disposal of lead contaminated soils, capping of other areas of the site impacted by other metals and performing limited groundwater monitoring was accepted by the DEC in a Record of Decision issued March 1, 2018. Implementation of the selected remedial alternative is expected to be completed in 2019. AMES has a number of defenses to liability in this matter, including its rights under a previous Consent Judgment entered into between the DEC and a predecessor of AMES relating to the site.


28


US Government investigations and claims

In general, departments and agencies of the US 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. US Government regulations provide that certain findings against a contractor may lead to suspension or debarment from future US Government contracts or the loss of export privileges for a company or an operating division or subdivision. Suspension or debarment could have a 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 19 — 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., Telephonics Corporation, The AMES Companies, Inc., ATT Southern, Inc., Clopay Ames True Temper Holding Corp., ClosetMaid, LLC, CornellCookson, LLC and Cornell Real Estate Holdings, LLC, all of which are indirectly 100% 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 June 30, 2018 and September 30, 2017 and for the three and nine months ended June 30, 2018 and 2017. The financial information may not necessarily be indicative of the results of operations or financial position of the guarantor companies or non-guarantor companies had they 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.

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.


29


CONDENSED CONSOLIDATING BALANCE SHEETS
At June 30, 2018
 
($ in thousands)
Parent Company
 
Guarantor Companies
 
Non-Guarantor Companies
 
Elimination
 
Consolidation
CURRENT ASSETS
 

 
 

 
 

 
 

 
 

Cash and equivalents
$
8,589

 
$
18,470

 
$
36,707

 
$

 
$
63,766

Accounts receivable, net of allowances

 
270,289

 
64,953

 
(24,113
)
 
311,129

Contract costs and recognized income not yet billed, net of progress payments

 
109,655

 
483

 

 
110,138

Inventories, net

 
334,225

 
61,675

 
(87
)
 
395,813

Prepaid and other current assets
19,966

 
20,385

 
10,591

 
6,013

 
56,955

Assets of discontinued operations not held for sale

 

 
326

 

 
326

Total Current Assets
28,555

 
753,024

 
174,735

 
(18,187
)
 
938,127

PROPERTY, PLANT AND EQUIPMENT, net
921

 
283,228

 
40,929

 

 
325,078

GOODWILL

 
431,934

 
70,121

 

 
502,055

INTANGIBLE ASSETS, net
93

 
238,691

 
78,172

 

 
316,956

INTERCOMPANY RECEIVABLE
120,061

 
293,261

 
(110,351
)
 
(302,971
)
 

EQUITY INVESTMENTS IN SUBSIDIARIES
1,481,220

 
969,246

 
3,305,421

 
(5,755,887
)
 

OTHER ASSETS
7,057

 
12,897

 
(1,954
)
 
(1,495
)
 
16,505

ASSETS OF DISCONTINUED OPERATIONS NOT HELD FOR SALE

 

 
2,930

 

 
2,930

Total Assets
$
1,637,907

 
$
2,982,281

 
$
3,560,003

 
$
(6,078,540
)
 
$
2,101,651

CURRENT LIABILITIES
 

 
 

 
 

 
 

 
 

Notes payable and current portion of long-term debt
$
2,276

 
$
3,351

 
$
5,112

 
$

 
$
10,739

Accounts payable and accrued liabilities
43,385

 
274,687

 
69,493

 
(8,569
)
 
378,996

Liabilities of discontinued operations not held for sale

 
9,071

 
16,724

 

 
25,795

Total Current Liabilities
45,661

 
287,109

 
91,329

 
(8,569
)
 
415,530

 
 
 
 
 
 
 
 
 
 
LONG-TERM DEBT, net
1,088,501

 
6,953

 
29,527

 

 
1,124,981

INTERCOMPANY PAYABLES
54,070

 
(45,790
)
 
303,269

 
(311,549
)
 

OTHER LIABILITIES
(16,412
)
 
72,827

 
16,800

 
16,912

 
90,127

LIABILITIES OF DISCONTINUED OPERATIONS NOT HELD FOR SALE

 

 
4,926

 

 
4,926

Total Liabilities
1,171,820

 
321,099

 
445,851

 
(303,206
)
 
1,635,564

SHAREHOLDERS’ EQUITY
466,087

 
2,661,182

 
3,114,152

 
(5,775,334
)
 
466,087

Total Liabilities and Shareholders’ Equity
$
1,637,907

 
$
2,982,281

 
$
3,560,003

 
$
(6,078,540
)
 
$
2,101,651



30


CONDENSED CONSOLIDATING BALANCE SHEETS
At September 30, 2017

($ in thousands)
Parent
Company
 
Guarantor
Companies
 
Non-Guarantor
Companies
 
Elimination
 
Consolidation
CURRENT ASSETS
 

 
 

 
 

 
 

 
 

Cash and equivalents
$
3,240

 
$
8,066

 
$
36,375

 
$

 
$
47,681

Accounts receivable, net of allowances

 
168,731

 
59,929

 
(20,431
)
 
208,229

Contract costs and recognized income not yet billed, net of progress payments

 
131,383

 
279

 

 
131,662

Inventories, net

 
246,605

 
52,759

 
73

 
299,437

Prepaid and other current assets
21,131

 
15,854

 
3,002

 
80

 
40,067

Assets of discontinued operations held for sale

 
168,306

 
202,418

 

 
370,724

Assets of discontinued operations not held for sale

 

 
329

 

 
329

Total Current Assets
24,371

 
738,945

 
355,091

 
(20,278
)
 
1,098,129

 
 
 
 
 
 
 
 
 
 
PROPERTY, PLANT AND EQUIPMENT, net
645

 
200,362

 
31,128

 

 
232,135

GOODWILL

 
280,797

 
38,342

 

 
319,139

INTANGIBLE ASSETS, net
93

 
143,415

 
61,619

 

 
205,127

INTERCOMPANY RECEIVABLE
552,017

 
757,608

 
915,551

 
(2,225,176
)
 

EQUITY INVESTMENTS IN SUBSIDIARIES
863,149

 
877,641

 
1,613,891

 
(3,354,681
)
 

OTHER ASSETS
12,171

 
12,054

 
(1,002
)
 
(7,172
)
 
16,051

ASSETS OF DISCONTINUED OPERATIONS NOT HELD FOR SALE

 

 
2,960

 

 
2,960

Total Assets
$
1,452,446

 
$
3,010,822

 
$
3,017,580

 
$
(5,607,307
)
 
$
1,873,541

CURRENT LIABILITIES
 

 
 

 
 

 
 

 
 

Notes payable and current portion of long-term debt
$
2,854

 
$
1,471

 
$
6,753

 
$

 
$
11,078

Accounts payable and accrued liabilities
14,683

 
199,784

 
46,111

 
6,631

 
267,209

Liabilities of discontinued operations held for sale

 
47,426

 
37,024

 

 
84,450

Liabilities of discontinued operations not held for sale

 

 
8,342

 

 
8,342

Total Current Liabilities
17,537

 
248,681

 
98,230

 
6,631

 
371,079

LONG-TERM DEBT, net
903,609

 
6,044

 
58,427

 

 
968,080

INTERCOMPANY PAYABLES
84,068

 
1,259,413

 
854,518

 
(2,197,999
)
 

OTHER LIABILITIES
48,424

 
76,036

 
14,135

 
(6,058
)
 
132,537

LIABILITIES OF DISCONTINUED OPERATIONS NOT HELD FOR SALE

 

 
3,037

 

 
3,037

Total Liabilities
1,053,638

 
1,590,174

 
1,028,347

 
(2,197,426
)
 
1,474,733

SHAREHOLDERS’ EQUITY
398,808

 
1,420,648

 
1,989,233

 
(3,409,881
)
 
398,808

Total Liabilities and Shareholders’ Equity
$
1,452,446

 
$
3,010,822

 
$
3,017,580

 
$
(5,607,307
)
 
$
1,873,541



31


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended June 30, 2018
 
($ in thousands)
Parent Company
 
Guarantor Companies
 
Non-Guarantor Companies
 
Elimination
 
Consolidation
Revenue
$

 
$
431,997

 
$
90,285

 
$
(5,732
)
 
$
516,550

Cost of goods and services

 
323,098

 
60,719

 
(6,059
)
 
377,758

Gross profit

 
108,899

 
29,566

 
327

 
138,792

Selling, general and administrative expenses
14,670

 
77,820

 
21,896

 
(92
)
 
114,294

Income (loss) from operations
(14,670
)
 
31,079

 
7,670

 
419

 
24,498

Other income (expense)
 

 
 

 
 

 
 

 
 

Interest income (expense), net
(5,891
)
 
(2,282
)
 
(7,623
)
 

 
(15,796
)
Other, net
108

 
(9,766
)
 
10,420

 
(462
)
 
300

Total other income (expense)
(5,783
)
 
(12,048
)
 
2,797

 
(462
)
 
(15,496
)
Income (loss) before taxes
(20,453
)
 
19,031

 
10,467

 
(43
)
 
9,002

Provision (benefit) for income taxes
(4,741
)
 
21,046

 
12,939

 
(27,684
)
 
1,560

Income (loss) before equity in net income of subsidiaries
(15,712
)
 
(2,015
)
 
(2,472
)
 
27,641

 
7,442

Equity in net income (loss) of subsidiaries
21,539

 
(5,307
)
 
(2,015
)
 
(14,217
)
 

Income from continuing operations
$
5,827

 
$
(7,322
)
 
$
(4,487
)
 
$
13,424

 
$
7,442

Income from operations of discontinued businesses

 
(200
)
 

 

 
(200
)
Provision from income taxes

 
1,415

 

 

 
1,415

Income from discontinued operations

 
(1,615
)
 

 

 
(1,615
)
 
 
 
 
 
 
 
 
 
 
Net Income (loss)
$
5,827

 
$
(8,937
)
 
$
(4,487
)
 
$
13,424

 
$
5,827

Comprehensive income (loss)
$
(2,978
)
 
$
668

 
$
(14,092
)
 
$
13,424

 
$
(2,978
)


32


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended June 30, 2017

($ in thousands)
Parent Company
 
Guarantor Companies
 
Non-Guarantor Companies
 
Elimination
 
Consolidation
Revenue
$

 
$
303,167

 
$
61,676

 
$
(6,729
)
 
$
358,114

Cost of goods and services

 
225,566

 
41,836

 
(7,272
)
 
260,130

Gross profit

 
77,601

 
19,840

 
543

 
97,984

Selling, general and administrative expenses
7,038

 
57,566

 
16,044

 
(93
)
 
80,555

Income (loss) from operations
(7,038
)
 
20,035

 
3,796

 
636

 
17,429

Other income (expense)
 

 
 

 
 

 
 

 
 

Interest income (expense), net
(3,266
)
 
(6,070
)
 
(3,326
)
 

 
(12,662
)
Other, net
229

 
262

 
(75
)
 
(636
)
 
(220
)
Total other income (expense)
(3,037
)
 
(5,808
)
 
(3,401
)
 
(636
)
 
(12,882
)
Income (loss) before taxes
(10,075
)
 
14,227

 
395

 

 
4,547

Provision (benefit) for income taxes
(6,080
)
 
5,562

 
613

 

 
95

Income (loss) before equity in net income of subsidiaries
(3,995
)
 
8,665

 
(218
)
 

 
4,452

Equity in net income (loss) of subsidiaries
13,549

 
(4,015
)
 
8,665

 
(18,199
)
 

Income (loss) from continuing operations
9,554

 
4,650

 
8,447

 
(18,199
)
 
4,452

Income from operation of discontinued businesses

 
5,033

 
1,991

 

 
7,024

Provision (benefit) from income taxes

 
1,347

 
575

 

 
1,922

Income (loss) from discontinued operations

 
3,685

 
1,417

 

 
5,102

Net Income (loss)
$
9,554

 
$
8,335

 
$
9,864

 
$
(18,199
)
 
$
9,554

 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
$
16,710

 
$
15,899

 
$
2,300

 
$
(18,199
)
 
$
16,710



33


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the Nine Months Ended June 30, 2018

($ in thousands)
Parent Company
 
Guarantor Companies
 
Non-Guarantor Companies
 
Elimination
 
Consolidation
Revenue
$

 
$
1,181,068

 
$
272,714

 
$
(21,369
)
 
$
1,432,413

Cost of goods and services

 
891,498

 
182,125

 
(22,319
)
 
1,051,304

Gross profit

 
289,570

 
90,589

 
950

 
381,109

Selling, general and administrative expenses
32,021

 
216,750

 
75,282

 
(277
)
 
323,776

Income (loss) from operations
(32,021
)
 
72,820

 
15,307

 
1,227

 
57,333

Other income (expense)
 

 
 

 
 

 
 

 
 

Interest income (expense), net
(18,626
)
 
(16,497
)
 
(13,359
)
 

 
(48,482
)
Other, net
1,376

 
1,157

 
119

 
(1,386
)
 
1,266

Total other income (expense)
(17,250
)
 
(15,340
)
 
(13,240
)
 
(1,386
)
 
(47,216
)
Income (loss) before taxes
(49,271
)
 
57,480

 
2,067

 
(159
)
 
10,117

Provision (benefit) for income taxes
(44,601
)
 
13,744

 
8,793

 
(43
)
 
(22,107
)
Income (loss) before equity in net income of subsidiaries
(4,670
)
 
43,736

 
(6,726
)
 
(116
)
 
32,224

Equity in net income (loss) of subsidiaries
131,766

 
(65,666
)
 
43,736

 
(109,836
)
 

Income from continuing operations
$
127,096

 
$
(21,930
)
 
$
37,010

 
$
(109,952
)
 
$
32,224

 
 
 
 
 
 
 
 
 
 
Income from operations of discontinued businesses
$

 
$
109,028

 
$
15,614

 
$

 
$
124,642

Provision (benefit) from income taxes
 
 
31,856

 
(2,086
)
 

 
29,770

Income (loss) from discontinued operations
$

 
$
77,172

 
$
17,700

 
$

 
$
94,872

Net income (loss)
$
127,096

 
$
(21,930
)
 
$
37,010

 
$
(109,952
)
 
$
32,224

 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
$
147,050

 
$
36,634

 
$
73,318

 
$
(109,952
)
 
$
147,050



34


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the Nine Months Ended June 30, 2017

($ in thousands)
Parent Company
 
Guarantor Companies
 
Non-Guarantor Companies
 
Elimination
 
Consolidation
Revenue
$

 
$
922,996

 
$
194,985

 
$
(23,783
)
 
$
1,094,198

Cost of goods and services

 
694,670

 
130,778

 
(24,847
)
 
800,601

Gross profit

 
228,326

 
64,207

 
1,064

 
293,597

Selling, general and administrative expenses
20,759

 
171,171

 
49,720

 
(278
)
 
241,372

Restructuring and other related charges

 

 

 

 

Total operating expenses
20,759

 
171,171

 
49,720

 
(278
)
 
241,372

Income (loss) from operations
(20,759
)
 
57,155

 
14,487

 
1,342

 
52,225

Other income (expense)
 

 
 

 
 

 
 

 
 

Interest income (expense), net
(10,616
)
 
(18,093
)
 
(9,947
)
 

 
(38,656
)
Other, net
172

 
1,263

 
(515
)
 
(1,342
)
 
(422
)
Total other income (expense)
(10,444
)
 
(16,830
)
 
(10,462
)
 
(1,342
)
 
(39,078
)
Income (loss) before taxes
(31,203
)
 
40,325

 
4,025

 

 
13,147

Provision (benefit) for income taxes
(16,643
)
 
16,018

 
326

 

 
(299
)
Income (loss) before equity in net income of subsidiaries
(14,560
)
 
24,307

 
3,699

 

 
13,446

Equity in net income (loss) of subsidiaries
41,423

 
(12,631
)
 
24,307

 
(53,099
)
 

Income from continuing operations
$
26,863

 
$
11,676

 
$
28,006

 
$
(53,099
)
 
$
13,446

Income from operations of discontinued businesses

 
13,826

 
7,813

 

 
21,639

Provision from income taxes

 
3,987

 
4,235

 

 
8,222

Income from discontinued operations

 
9,839

 
3,578

 

 
13,417

Net income (loss)
$
26,863

 
$
21,515

 
$
31,584

 
$
(53,099
)
 
$
26,863

 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
$
30,640

 
$
23,651

 
$
29,448

 
$
(53,099
)
 
$
30,640



35


CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Nine Months Ended June 30, 2018

($ in thousands)
Parent Company
 
Guarantor Companies
 
Non-Guarantor Companies
 
Elimination
 
Consolidation
CASH FLOWS FROM OPERATING ACTIVITIES:
 

 
 

 
 

 
 

 
 

Net income (loss)
$
127,096

 
$
55,242

 
$
54,710

 
$
(109,952
)
 
$
127,096

Net (income) loss from discontinued operations

 
(77,172
)
 
(17,700
)
 

 
(94,872
)
Net cash provided by (used in) operating activities:
309,342

 
(536,893
)
 
230,342

 

 
2,791

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

 
 

 
 

 
 

Acquisition of property, plant and equipment
(455
)
 
(27,230
)
 
(5,463
)
 

 
(33,148
)
Acquired businesses, net of cash acquired
(368,937
)
 
(4,490
)
 
(56,118
)
 

 
(429,545
)
Intercompany distributions

 

 

 

 

Proceeds from sale of investments

 

 

 

 

Proceeds from sale of business

 
473,977

 

 

 
473,977

Proceeds from sale of assets

 
46

 
436

 

 
482

Net cash provided by investing activities
(369,392
)
 
442,303

 
(61,145
)
 

 
11,766

CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

 
 

 
 

 
 

Purchase of shares for treasury
(45,588
)
 

 

 

 
(45,588
)
Proceeds from long-term debt
411,718

 
2,232

 
5,695

 

 
419,645

Payments of long-term debt
(223,998
)
 
(4,564
)
 
(33,469
)
 

 
(262,031
)
Change in short-term borrowings

 

 

 

 

Share premium payment on settled debt

 

 

 

 

Financing costs
(7,671
)
 

 

 

 
(7,671
)
Purchase of ESOP shares

 

 

 

 

Dividends paid
(46,816
)
 

 

 

 
(46,816
)
Other, net
(22,246
)
 
(19,855
)
 
42,240

 

 
139

Net cash provided by (used in) financing activities
65,399

 
(22,187
)
 
14,466

 

 
57,678

CASH FLOWS FROM DISCONTINUED OPERATIONS:
 

 
 

 
 

 
 

 
 

Net cash used in discontinued operations

 
127,312

 
(189,585
)
 

 
(62,273
)
Effect of exchange rate changes on cash and equivalents

 
(131
)
 
6,254

 

 
6,123

NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS
5,349

 
10,404

 
332

 

 
16,085

CASH AND EQUIVALENTS AT BEGINNING OF PERIOD
3,240

 
8,066

 
36,375

 

 
47,681

CASH AND EQUIVALENTS AT END OF PERIOD
$
8,589

 
$
18,470

 
$
36,707

 
$

 
$
63,766



36


CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Nine Months Ended June 30, 2017
 
($ in thousands)
Parent Company
 
Guarantor Companies
 
Non-Guarantor Companies
 
Elimination
 
Consolidation
CASH FLOWS FROM OPERATING ACTIVITIES:
 

 
 

 
 

 
 

 
 

Net income (loss)
$
26,863

 
$
21,515

 
$
31,584

 
$
(53,099
)
 
$
26,863

Net (income) loss from discontinued operations

 
(9,839
)
 
(3,578
)
 

 
(13,417
)
Net cash provided by (used in) operating activities:
(14,445
)
 
29,754

 
14,586

 
(4,493
)
 
25,402

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

 
 

 
 

 
 

Acquisition of property, plant and equipment
(12
)
 
(17,593
)
 
(4,970
)
 

 
(22,575
)
Acquired businesses, net of cash acquired

 

 
(6,051
)
 

 
(6,051
)
Proceeds from sale of assets

 
146

 

 

 
146

Net cash provided by (used in) investing activities
(12
)
 
(17,447
)
 
(11,021
)
 

 
(28,480
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

 
 

 
 

 
 

Purchase of shares for treasury
(15,796
)
 

 

 

 
(15,796
)
Proceeds from long-term debt
200,656

 

 
10,441

 

 
211,097

Payments of long-term debt
(128,365
)
 
(940
)
 
(18,424
)
 

 
(147,729
)
Share premium payment on settled debt
(24,997
)
 

 
 
 

 
(24,997
)
Financing costs
(363
)
 

 

 

 
(363
)
Purchase of ESOP shares
(10,908
)
 

 

 

 
(10,908
)
Dividends paid
(7,766
)
 

 

 

 
(7,766
)
Other, net
16,710

 
(16,745
)
 
(4,570
)
 
4,493

 
(112
)
Net cash provided by (used in) financing activities
29,171

 
(17,685
)
 
(12,553
)
 
4,493

 
3,426

CASH FLOWS FROM DISCONTINUED OPERATIONS:
 

 
 

 
 

 
 

 
 

Net cash used in discontinued operations

 
(10,764
)
 
7,383

 

 
(3,381
)
Effect of exchange rate changes on cash and equivalents

 

 
(72
)
 

 
(72
)
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS
14,714

 
(16,142
)
 
(1,677
)
 

 
(3,105
)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD
6,517

 
27,692

 
38,344

 

 
72,553

CASH AND EQUIVALENTS AT END OF PERIOD
$
21,231

 
$
11,550

 
$
36,667

 
$

 
$
69,448



37

Table of Contents

(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. In order to further diversify, Griffon also seeks out, evaluates and, when appropriate, will acquire additional businesses that offer potentially attractive returns on capital.

Headquartered in New York, N.Y., the Company was founded in 1959 and is incorporated in Delaware. Griffon is listed on the New York Stock Exchange and trades under the symbol GFF.

On June 4, 2018, Clopay Building Products Company, Inc. ("CBP") acquired CornellCookson, Inc. ("CornellCookson"), a leading US manufacturer and marketer of rolling steel door and grille products designed for commercial, industrial, institutional and retail use, for $180,000, subject to certain post-closing adjustments. After taking into account the estimated present value of tax benefits under current tax law resulting from the transaction, the effective purchase price is approximately $170,000. CornellCookson is expected to generate approximately $200,000 in revenue in the first full year of operations. The accounts, affected for preliminary adjustments to reflect fair market values assigned to assets purchased and liabilities assumed, and results of operations of CornellCookson, are included in the Company’s consolidated financial statements from the date of acquisition of June 4, 2018. See Note 3, Acquisitions.

On November 16, 2017, Griffon announced it entered into a definitive agreement to sell Clopay Plastic Products Company, Inc. ("PPC") and on February 6, 2018, completed the sale to Berry Global, Inc. (NYSE:BERY) ("Berry") for $475,000 in cash, subject to certain post-closing adjustments. As a result, Griffon classified the results of operations of the PPC business as discontinued operations in the Consolidated Statements of Operations for all periods presented and classified the related assets and liabilities associated with the discontinued operations in the consolidated balance sheets. All results and information presented exclude PPC unless otherwise noted. See Note 14, Discontinued Operations.

On October 2, 2017, Griffon acquired ClosetMaid LLC ("ClosetMaid") for approximately $185,700, inclusive of post-closing adjustments, or $165,000 net of the estimated present value of tax benefits under the current tax law resulting from the transaction. ClosetMaid, founded in 1965, is a leading North American manufacturer and marketer of closet organization, home storage, and garage storage products, and sells to some of the largest home center retail chains, mass merchandisers, and direct-to-builder professional installers in North America. ClosetMaid is expected to generate approximately $300,000 in revenue in the first twelve months after the acquisition. The accounts, affected for preliminary adjustments to reflect fair market values assigned to assets purchased and liabilities assumed, and results of operations of ClosetMaid are included in the Company’s consolidated financial statements from the date of acquisition of October 2, 2017. See Note 3, Acquisitions.

Griffon currently conducts its operations through two reportable segments:
 
Home & Building Products (“HBP”) segment consists of three companies, The AMES Companies, Inc. (“AMES”), ClosetMaid, and CBP:

- AMES, founded in 1774, is the leading U.S. manufacturer and a global provider of long-handled tools and landscaping products for homeowners and professionals.

- ClosetMaid, founded in 1965, is a leading North American manufacturer and marketer of closet organization, home storage, and garage storage products, and sells to some of the largest home center retail chains, mass merchandisers, and direct-to-builder professional installers.

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


38

Table of Contents

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

We are focused on acquiring, owning and operating businesses in a variety of industries. We are long-term investors that have substantial experience in a variety of industries. Our intent is to continue the growth of our existing segments and diversify further through investments and acquisitions.

As a result of the decline in the U.S. housing market, in May 2008, we announced the divestiture of our Installation Services business, which was consummated by September 2008. In September 2008, Griffon strengthened its balance sheet by raising $248,600 in equity through a common stock rights offering and a related investment by GS Direct L.L.C., an affiliate of The Goldman Sachs Group, Inc. Since that time, Griffon has continued to refine and enhance the strategic direction and operating performance of its companies, while strengthening its balance sheet, increasing revenue and earnings through organic growth, cost containment and acquisitions, and returning capital to its shareholders through dividends and stock buybacks. On June 19, 2018, GS Direct completed an underwritten secondary offering to sell 5,583,375 shares of Griffon's common stock, inclusive of the underwriters’ 30-day option to purchase additional shares. Following the closing of the offering, GS Direct no longer owns any shares of Griffon.

From October 2008 through May 10, 2017, Griffon's Employee Stock Ownership Plan ("ESOP") purchased 4,562,371 shares of Griffon's common stock, for a total of $54,186 or $11.88 per share. During the year ended September 30, 2017, Griffon's ESOP purchased 621,875 shares of common stock for a total of $10,908 or $17.54 per share. As of June 30, 2018, the ESOP holds 5,679,662 allocated and unallocated shares, or 12% of Griffon's outstanding shares, with a related loan balance of $35,046, net of issuance costs.

On September 30, 2010, Griffon purchased AMES for $542,000. Subsequently, Griffon acquired eight businesses complementary to AMES: the pots and planters business of Southern Sales & Marketing ("Southern Patio"), Northcote Pottery ("Northcote"), the Australian Garden and Tools division of Illinois Tool Works, Inc. ("Cyclone"), Hills Home Living ("Hills"), La Hacienda Limited ("La Hacienda"), Tuscan Landscape Group Ltd ("Tuscan Path"), Harper Brush Works (“Harper”) and Kelkay Limited ("Kelkay").

On October 17, 2011, AMES acquired Southern Patio for approximately $23,000. Southern Patio, a leading designer, manufacturer and marketer of landscape accessories, expanded AMES' product portfolio in the category.

On December 31, 2013, AMES acquired Northcote for approximately $22,000. Northcote, founded in 1897 and a leading brand in the Australian outdoor planter and decor market, established AMES' presence in this product category in the Australian market.
 
On May 21, 2014, AMES Australia acquired Cyclone for approximately $40,000. Cyclone offers a full range of quality garden and hand tool products sold under various leading brand names including Cyclone®, Nylex® and Trojan®, designed to meet the requirements of both the Do-it-Yourself and professional trade segments. The Cyclone acquisition substantially expanded AMES' product portfolio in Australia.

On December 30, 2016, AMES Australia acquired Hills for approximately $6,051 (AUD 8,400). Hills, founded in 1946, is a market leader in the supply of clothesline, laundry and garden products. The Hills acquisition added to AMES' existing broad category of products and enhanced its lawn and garden product offerings in Australia.

On July 31, 2017 AMES acquired La Hacienda, a leading United Kingdom outdoor living brand of unique heating and garden decor products, for approximately $10,610 (GBP 8,575). The acquisition of La Hacienda broadened AMES' global outdoor living and lawn and garden business and supported AMES' UK expansion strategy with an in-country presence. La Hacienda is expected to generate approximately GBP 14,000 of revenue in the first twelve months after the acquisition.
On September 29, 2017, AMES Australia acquired Tuscan Path for approximately $18,000 (AUD 22,250). Tuscan Path is a leading Australian provider of pots, planters, pavers, decorative stone, and garden decor products, which broadened AMES' outdoor living and lawn and garden business, and strengthened AMES' industry leading position in Australia. Tuscan Path is expected to generate approximately AUD 25,000 in revenue in the first twelve months after the acquisition.

On November 6, 2017, AMES acquired Harper, a division of Horizon Global, for approximately $5,000. Harper is a leading U.S. manufacturer of cleaning products for professional, home, and industrial use. The acquisition expanded AMES’ long-handled tool offering in North America to include brooms, brushes, and other cleaning tools and accessories. The acquisition is expected to contribute approximately $10,000 in revenue in the first twelve months after the acquisition.


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Table of Contents

On February 13, 2018, AMES acquired Kelkay, a leading United Kingdom manufacturer and distributor of decorative outdoor landscaping products sold to garden centers, retailers and grocers in the UK and Ireland for approximately $56,118 (GBP 40,452). This acquisition broadened AMES' product offerings in the market and increased its in-country operational footprint. Kelkay is expected to contribute approximately $40,000 in revenue in the first twelve months after the acquisition.

From August 2011 through June 30, 2018, Griffon repurchased 22,518,037 shares of its common stock, for a total of $302,730 or $13.44 per share. This included the repurchase of 18,073,593 shares on the open market, as well as the December 10, 2013 repurchase of 4,444,444 shares from GS Direct for $50,000, or $11.25 per share. In each of August 2011, May 2014, March 2015, July 2015 and August 2016, Griffon’s Board of Directors authorized the repurchase of up to $50,000 of Griffon’s outstanding common stock. Under these programs, the Company may purchase shares in the open market, including pursuant to a 10b5-1 plan, or in privately negotiated transactions. At June 30, 2018, $8,327 remains under the August 2016 Board authorization. On August 1, 2018, Griffon's Board of Directors authorized the repurchase of an additional $50,000 of Griffon's outstanding common stock.

On November 17, 2011, the Company began declaring quarterly dividends. During the nine months ended June 30, 2018, and during 2017, 2016 and 2015, the Company declared and paid dividends per share of $0.21, $0.24, $0.20 and $0.16, respectively, for total quarterly dividends of $35,520 paid during this period. In addition, on March 7, 2018, the Board of Directors declared a special cash dividend of $1.00 per share, totaling $38,073 paid on April 16, 2018 to shareholders of record as of the close of business on March 29, 2018.

On August 1, 2018, the Board of Directors declared a quarterly cash dividend of $0.07 per share, payable on September 20, 2018 to shareholders of record as of the close of business on August 23, 2018.

As of June 30, 2018, Griffon had outstanding $1,000,000 of 5.25% Senior Notes due 2022 ("Senior Notes"), which were issued in three tranches and under the same indenture.  During 2014, Griffon issued $600,000 of Senior Notes, the proceeds of which were primarily used to redeem $550,000 of 7.125% senior notes due 2018.  In May 2016, the Company completed an add-on offering of $125,000 principal amount of Senior Notes, the proceeds of which were used to pay down outstanding revolving loan borrowings under the Credit Agreement.  On October 2, 2017, Griffon completed an add-on offering of $275,000 aggregate principal amount of Senior Notes, the proceeds of which were used to purchase ClosetMaid and to pay down outstanding revolving loan borrowings under the Credit Agreement.

On October 15, 2015, CBP announced plans to expand its manufacturing facility in Troy, Ohio. The expansion reflects increased customer demand for its core products, and its success in bringing new technologies to market. The project included improvements to its existing one million square foot building, as well as adding 250,000 square feet and new manufacturing equipment. The project was completed in the second quarter of 2017.

In January 2016, Griffon launched its new website, www.griffon.com.

On March 22, 2016, Griffon amended its Credit Agreement to increase the credit facility from $250,000 to $350,000, extend its maturity date from March 13, 2020 to March 22, 2021 and modify certain other provisions of the facility.

On January 17, 2017, Griffon settled its $100,000 principal amount of 4% convertible subordinated notes due 2017 for $173,855, with $125,000 in cash and $48,858, or 1,954,993 shares of common stock issued from treasury.

On October 2, 2017, Griffon completed the acquisition of ClosetMaid, a market leader of home storage and organization products, for approximately $185,700, inclusive of post-closing adjustments, or $165,000 net of the estimated present value of tax benefits under the current tax law. The acquisition of ClosetMaid expanded Griffon’s Home and Building Products segment into the highly complementary home storage and organization category with a leading brand and product portfolio.

On November 16, 2017, Griffon announced it entered into a definitive agreement to sell PPC, and on February 6, 2018, completed the sale to Berry for $475,000 in cash, subject to certain post-closing adjustments.

On June 4, 2018, CBP completed the acquisition of CornellCookson, a leading US manufacturer and marketer of rolling steel door and grille products designed for commercial, industrial, institutional and retail use, for $180,000, subject to certain post-closing adjustments. After taking into account the net of the estimated present value of tax benefits under current tax law resulting from the transaction, the effective purchase price is approximately $170,000. The acquisition of CornellCookson substantially expanded CBP’s non-residential product offerings, and added an established professional dealer network focused on rolling steel door and grille products for commercial, industrial, institutional and retail use.


40

Table of Contents


OVERVIEW
 
Revenue for the quarter ended June 30, 2018 was $516,550 compared to $358,114 in the prior year quarter, an increase of approximately 44%, primarily driven by increased revenue at Home & Building Products from both recent acquisitions and organic growth, partially offset by decreased revenue at Telephonics. Income from continuing operations was $7,442 or $0.18 per share, compared to $4,452 or $0.10 per share, in the prior year quarter. The quarter results from continuing operations included the following:

–    Acquisition costs of $3,598 ($2,320, net of tax, or $0.06 per share);
–    Special dividend ESOP charges of $3,220 ($2,125, net tax, or $0.05);
–    Secondary equity offering costs of $1,205 ($795, net tax, or $0.02); and
–    Discrete and certain other tax benefits, net, of $1,430 or $0.03 per share.

The prior year quarter included discrete and certain other tax provisions, net, of $2,522 or $0.06 per share, primarily related to discrete tax benefits from the federal domestic production activities deduction.

Excluding these items from the respective quarterly results, Income from continuing operations would have been $11,252 or $0.27 per share in the current quarter compared to $1,930 or $0.04 per share in the prior year quarter.

Revenue for the nine months ended June 30, 2018 was $1,432,413 compared to $1,094,198 in the prior year period, an increase of 31%, primarily driven by increased revenue at Home & Building Products from both recent acquisitions and organic growth, partially offset by decreased revenue at Telephonics. Income from continuing operations was $32,224 or $0.76 per share, compared to $13,446 or $0.31 per share, in the prior year period. The year-to-date results from continuing operations included the following:

–    Acquisition costs of $7,597 ($5,046, net of tax, or $0.12 per share);
–    Special dividend ESOP charges of $3,220 ($2,125, net tax, or $0.05);
–    Secondary equity offering costs of $1,205 ($795, net tax, or $0.02);
–    Cost of life insurance benefit of $2,614 ($248, net tax, or $0.01); and
–    Discrete and certain other tax benefits, net, of $24,080 or $0.56 per share, primarily from the revaluation of deferred tax liabilities related to the December 22, 2017 tax reform bill.

The prior year included net tax benefits of $6,478 or $0.15 per share, primarily related to discrete benefits for the adoption of recent Financial Accounting Standards Board guidance, which requires the Company to recognize excess tax benefits from the vesting of equity awards within income tax expense and benefits related to the federal domestic production activities deduction.

Excluding these items from the respective periods, Income from continuing operations would have been $16,358 or $0.38 per share in the current year period ended June 30, 2018 compared to $6,968 or $0.16 per share in the comparable prior year period.


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Griffon evaluates performance based on Income from Continuing operations and the related Earnings per share excluding restructuring charges, loss on 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 June 30,

For the Nine Months Ended June 30,
 
2018

2017

2018

2017
Income from continuing operations
$
7,442


$
4,452


$
32,224


$
13,446













Adjusting items, net of tax:
 


 


 


 

Acquisition costs
2,320




5,046



Special dividend ESOP charges
2,125




2,125



Secondary equity offering costs
795




795



Cost of life insurance benefit




248



Discrete and certain other tax benefits
(1,430
)

(2,522
)

(24,080
)

(6,478
)












Adjusted income from continuing operations
$
11,252


$
1,930


$
16,358


$
6,968













Diluted earnings per common share from continuing operations
$
0.18


$
0.10


$
0.76


$
0.31













Adjusting items, net of tax:
 


 


 


 

Acquisition costs
0.06




0.12



Special dividend ESOP charges
0.05




0.05



Secondary equity offering costs
0.02




0.02



Cost of life insurance benefit




0.01



Discrete and certain other tax benefits
(0.03
)

(0.06
)

(0.56
)

(0.15
)












Adjusted earnings per common share from continuing operations
$
0.27


$
0.04


$
0.38


$
0.16













Weighted-average shares outstanding (in thousands)
41,742


43,255


42,620


42,934

 
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.

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RESULTS OF CONTINUING OPERATIONS
 
Three and Nine months ended June 30, 2018 and 2017
 
Griffon evaluates performance and allocates resources based on each segment's operating results before interest income and expense, income taxes, depreciation and amortization, and unallocated amounts (mainly corporate overhead), restructuring charges, loss on debt extinguishment and acquisition related expenses, as well as other items that may affect comparability, 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 from continuing operations to Income before taxes from continuing operations:

 
For the Three Months Ended June 30,
 
For the Nine Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Segment operating profit:
 

 

 

 
Home & Building Products
$
38,753

 
$
23,708

 
$
94,982

 
$
64,661

Telephonics
6,084

 
4,114

 
8,866

 
18,521

Segment operating profit from continuing operations
44,837

 
27,822

 
103,848

 
83,182

Net interest expense
(15,796
)
 
(12,662
)
 
(48,482
)
 
(38,656
)
Unallocated amounts
(12,016
)
 
(10,613
)
 
(32,993
)
 
(31,379
)
Acquisition costs
(3,598
)
 

 
(5,217
)
 

Special dividend ESOP charges
(3,220
)
 

 
(3,220
)
 

Cost of life insurance benefit

 

 
(2,614
)
 

Secondary equity offering costs
(1,205
)
 

 
(1,205
)
 

Income before taxes from continuing operations
$
9,002

 
$
4,547

 
$
10,117

 
$
13,147

 
The following table provides a reconciliation of Segment adjusted EBITDA from continuing operations to Income before taxes from continuing operations:
 
 
For the Three Months Ended June 30,
 
For the Nine Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Segment adjusted EBITDA:
 

 
 

 
 

 
 

Home & Building Products
$
50,004

 
$
33,134

 
$
129,250

 
$
92,506

Telephonics
8,760

 
6,784

 
16,956

 
26,678

Total Segment adjusted EBITDA
58,764

 
39,918

 
146,206

 
119,184

Net interest expense
(15,796
)
 
(12,662
)
 
(48,482
)
 
(38,656
)
Segment depreciation and amortization
(13,927
)
 
(12,096
)
 
(39,978
)
 
(36,002
)
Unallocated amounts
(12,016
)
 
(10,613
)
 
(32,993
)
 
(31,379
)
Acquisition costs
(3,598
)
 

 
(7,597
)
 

Special dividend ESOP charges
(3,220
)
 

 
(3,220
)
 

Secondary equity offering costs
(1,205
)
 

 
(1,205
)
 

Cost of life insurance benefit

 

 
(2,614
)
 

Income before taxes from continuing operations
$
9,002

 
$
4,547

 
$
10,117

 
$
13,147




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Table of Contents

Home & Building Products
 
For the Three Months Ended June 30,
 
For the Nine Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenue:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

AMES
$
180,834

 
 

 
$
136,132

 
 

 
$
503,744

 
 

 
$
419,763

 
 

ClosetMaid
81,564

 
 
 

 
 
 
233,592

 
 
 

 
 
CBP
177,723

 
 

 
140,349

 
 

 
470,071

 
 

 
406,437

 
 

Home & Building Products
$
440,121

 
 

 
$
276,481

 
 

 
$
1,207,407

 
 

 
$
826,200

 
 

Segment operating profit
$
38,753

 
8.8
%
 
$
23,708

 
8.6
%
 
$
94,982

 
7.9
%
 
$
64,661

 
7.8
%
Depreciation and amortization
11,251

 
 

 
9,426

 
 

 
31,888

 
 

 
27,845

 
 

Acquisition costs

 
 

 

 
 

 
2,380

 
 

 

 
 

Segment adjusted EBITDA
$
50,004

 
11.4
%
 
$
33,134

 
12.0
%
 
$
129,250

 
10.7
%
 
$
92,506

 
11.2
%

For the quarter ended June 30, 2018, revenue increased $163,640 or 59%, compared to the prior year quarter due to the acquisition of ClosetMaid ("CM"), AMES' acquisitions of La Hacienda, Tuscan Path, Harper and Kelkay, CBP's acquisition of CornellCookson, as well as improved volume, favorable mix and price at CBP, and at AMES, increased North American sales and price. Organic growth for the quarter was 13%.
For the quarter ended June 30, 2018, Segment operating profit of $38,753 increased 63% from $23,708 in the prior year quarter, primarily driven by the increased revenue as noted above, partially offset by increased input costs. Segment depreciation and amortization increased $1,825 from the prior year quarter primarily from acquisitions.

For the nine months ended June 30, 2018, revenue increased $381,207 or 46%, compared to the prior year period, primarily driven by the acquisition of CM, AMES' acquisitions of La Hacienda, Tuscan Path, Hills, Harper and Kelkay, and CBP's acquisition of CornellCookson, as well as favorable mix and price at CBP, and at AMES, improved sales of pots and planters, increased sales in Canada and Ireland, and price. Organic growth for the period was 8%.

For the nine months ended June 30, 2018, Segment operating profit increased 47% to $94,982 compared to $64,661 in the prior year period. Excluding the impact of acquisition related costs, Segment operating profit would have been $97,362, increasing 51% from the prior year period, primarily driven by the increased revenue as noted above, partially offset by increased input costs. Segment depreciation and amortization increased $4,043 from the prior year period primarily from acquisitions.

On June 4, 2018, CBP completed the acquisition of CornellCookson, a leading US manufacturer and marketer of rolling steel door and grille products designed for commercial, industrial, institutional and retail use, for $180,000, subject to certain post-closing adjustments. After taking into account the net of the estimated present value of tax benefits under current tax law resulting from the transaction, the effective purchase price is approximately $170,000. The acquisition of CornellCookson substantially expanded CBP’s non-residential product offerings, and added an established professional dealer network focused on rolling steel door and grille products for commercial, industrial, institutional and retail use.

On February 13, 2018, AMES acquired Kelkay, a leading United Kingdom manufacturer and distributor of decorative outdoor landscaping products sold to garden centers, retailers and grocers in the UK and Ireland for approximately $56,118 (GBP 40,452). This acquisition broadened AMES' product offerings in the market and increased its in-country operational footprint. Kelkay is expected to contribute approximately $40,000 in revenue in the first twelve months after the acquisition.

On November 6, 2017, AMES acquired Harper, a division of Horizon Global, for approximately $5,000. Harper is a leading U.S. manufacturer of cleaning products for professional, home, and industrial use. The acquisition expanded AMES’ long-handled tool offering in North America to include brooms, brushes, and other cleaning tools and accessories. The acquisition is expected to contribute approximately $10,000 in revenue in the first twelve months after the acquisition.

On October 2, 2017, Griffon completed the acquisition of ClosetMaid, a market leader of home storage and organization products, for approximately $185,700, inclusive of post-closing adjustments, or $165,000 net of the estimated present value of tax benefits under the current tax law. The acquisition of ClosetMaid expanded Griffon’s Home and Building Products segment into the highly complementary home storage and organization category with a leading brand and product portfolio.




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Table of Contents

Prior year acquisitions

On September 29, 2017, AMES Australia acquired Tuscan Path for approximately $18,000 (AUD 22,250). Tuscan Path is a leading Australian provider of pots, planters, pavers, decorative stone, and garden decor products, which broadened AMES' outdoor living and lawn and garden business, and strengthened AMES' industry leading position in Australia. Tuscan Path is expected to generate approximately AUD 25,000 in revenue in the first twelve months after the acquisition.

On July 31, 2017 AMES acquired La Hacienda, a leading United Kingdom outdoor living brand of unique heating and garden decor products, for approximately $10,610 (GBP 8,575). The acquisition of La Hacienda broadened AMES' global outdoor living and lawn and garden business and supported AMES' UK expansion strategy with an in-country presence. La Hacienda is expected to generate approximately GBP 14,000 of revenue in the first twelve months after the acquisition. On December 30, 2016, AMES Australia acquired Hills for approximately $6,051 (AUD 8,400). Hills, founded in 1946, is a market leader in the supply of clothesline, laundry and garden products. The Hills acquisition added to AMES' existing broad category of products and enhanced its lawn and garden product offerings in Australia.


Telephonics 
 
For the Three Months Ended June 30,
 
For the Nine Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenue
$
76,429

 
 

 
$
81,633

 
 

 
$
225,006

 
 

 
$
267,998

 
 
Segment operating profit
$
6,084

 
8.0
%
 
$
4,114

 
5.0
%
 
$
8,866

 
3.9
%
 
$
18,521

 
6.9%
Depreciation and amortization
2,676

 
 

 
2,670

 
 

 
8,090

 
 

 
8,157

 
 
Segment adjusted EBITDA
$
8,760

 
11.5
%
 
$
6,784

 
8.3
%
 
$
16,956

 
7.5
%
 
$
26,678

 
10.0%
 
For the quarter ended June 30, 2018, revenue decreased $5,204 or 6% compared to the prior year quarter, primarily due to decreased surveillance radar systems revenue.

For the quarter ended June 30, 2018, Segment operating profit increased $1,970 compared to the prior year quarter due to favorable program mix and reduced costs.

For the nine months ended June 30, 2018, revenue decreased $42,992, or 16%, compared to the prior year period, primarily due to decreased maritime surveillance radar revenue and work performed on various international radar and airborne intercommunications systems.

For the nine months ended June 30, 2018, Segment operating profit decreased $9,655 primarily due to the decreased revenue noted above and the impact of revised estimates to complete remaining performance obligations on certain airborne intercommunications systems and various international radar programs, partially offset by reduced costs.

During the nine months ended June 30, 2018, Telephonics was awarded several new contracts and received incremental funding on existing contracts approximating $220,300. Contract backlog was $346,200 at June 30, 2018, with 67% expected to be fulfilled in the next 12 months. Backlog was $350,900 at September 30, 2017. 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 US government agencies.

Unallocated
 
For the quarter ended June 30, 2018, unallocated amounts totaled $12,016 compared to $10,613 in the prior year; for the nine months ended June 30, 2018, unallocated amounts totaled $32,993 compared to $31,379 in the prior year. The increase in the current quarter and nine months compared to the respective prior year period primarily relates to compensation, incentive and relocation expenses, partially offset by investment income. The nine months ended June 30, 2018 also includes severance for a segment executive.


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Table of Contents

Segment Depreciation and Amortization
 
Segment depreciation and amortization increased $1,831 and $3,976 for the quarter and nine months ended June 30, 2018, respectively, compared to the comparable prior year periods, primarily due to depreciation and amortization on assets acquired in acquisitions.

Other Income (Expense)

For the quarters ended June 30, 2018 and 2017, Other income (expense) primarily consisted of $(17) and ($133), 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 $104 and $55, respectively, of net investment income.

For the nine months ended June 30, 2018 and 2017, Other income (expense) primarily consisted of $(236) and $(556), 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 $1,365 and $210, respectively, of net investment income.

Provision for income taxes
 
On December 22, 2017, the “Tax Cuts and Jobs Act” ("TCJA") was signed into law, significantly impacting several sections of the Internal Revenue Code. ASC 740, Accounting for Income Taxes, requires companies to recognize the effect of tax law changes in the period of enactment even though the effective date for most provisions is for tax years beginning after December 31, 2017, or in the case of certain other provisions, January 1, 2018. Though certain key aspects of the TCJA are effective January 1, 2018 and have an immediate accounting effect, other significant provisions are not effective or may not result in accounting effects for September 30 fiscal year companies until October 1, 2018.
Given the significance of the TCJA, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows registrants to record provisional amounts during a one year “measurement period”. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared or analyzed.
Among the significant changes to the U.S. Internal Revenue Code, the TCJA lowers the U.S. federal corporate income tax rate (“Federal Tax Rate”) from 35% to 21% effective January 1, 2018. The Company will compute its income tax expense for the September 30, 2018 fiscal year using a blended Federal Tax Rate of 24.5%. The 21% Federal Tax Rate will apply to fiscal years ending September 30, 2019 and each year thereafter.

The Company has recorded provisional amounts for the effects of the TCJA where accounting is not complete but a reasonable estimate has been determined. The company recorded a $23,941 benefit on the revaluation of deferred tax liabilities as a provisional amount for the re-measurement of deferred tax assets and liabilities, as well as an amount for deductible executive compensation expense, both of which have been reflected in the tax benefit for the quarter ended December 31, 2017.

A reasonable estimate cannot yet be made and therefore taxes are reflected based on the law in effect prior to the enactment of the TCJA for the impact of the one-time mandatory repatriation transition tax on the net accumulated earnings and profits of a U.S. taxpayer’s foreign subsidiaries, bonus depreciation expensing for qualified property placed in service after September 27, 2017 and the impact on state income taxes.

The provisional amounts incorporate assumptions made based upon the Company’s current interpretation of the TCJA and may change as the Company receives additional clarification and implementation guidance.

In accordance with SAB 118 adjustments recorded to the provisional amounts will be reflected within the measurement period through the quarter ended December 31, 2018 and will be included in income from continuing operations and net income as an adjustment to tax expense.

During the quarter ended June 30, 2018, the Company recognized a tax provision of $1,560 on income before taxes from continuing operations of $9,002, compared to a tax provision of $95 on Income before taxes from continuing operations of $4,547, in the comparable prior year quarter. The current quarter results included acquisition costs of $3,598 ($2,320, net of tax), special dividend ESOP charges of $3,220 ($2,125, net of tax), secondary equity offering costs of $1,205 ($795, net of tax) and discrete and certain other tax provisions, net, of $1,430. The prior year quarter included discrete and certain other tax benefits, net, of $2,522. Excluding these items that affect comparability, the effective tax rates for the quarters ended June 30, 2018 and 2017 were 33.9% and 57.5%, respectively.

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During the nine months ended June 30, 2018, the Company recognized a tax benefit of $22,107 on income before taxes from continuing operations of $10,117, compared to a tax benefit of $299 on Income before taxes from continuing operations of $13,147 in the comparable prior year period. The nine month period ended June 30, 2018 included net tax benefits of $24,080 primarily from the December 22, 2017 tax reform bill related to revaluation of deferred tax liabilities, $7,597 ($5,046 net of tax) of acquisition costs, $3,220 ($2,125 net of tax) special dividend ESOP charges, $1,205 ($795, net of tax) secondary equity offering costs and $2,614 ($248, net of tax) charges related to cost of life insurance benefits.  The nine month period ended June 30, 2017 included discrete benefits of $6,478 primarily from the adoption of Financial Accounting Standards Board guidance which requires the Company to recognize excess tax benefits from the vesting of equity awards within income tax expense. Excluding these items that affect comparability, the effective tax rates for the nine months ended June 30, 2018 and 2017 were 33.9% and 47.0%, respectively.
Stock based compensation
 
For the quarters ended June 30, 2018 and 2017, stock based compensation expense totaled $2,452 and $2,405, respectively. For the nine months ended June 30, 2018 and 2017, such expense totaled $7,372 and $7,200, respectively.
 
Comprehensive income (loss)
 
For the quarter ended June 30, 2018, total other comprehensive loss, net of taxes, of $8,805, included a loss of $9,136 from foreign currency translation adjustments primarily due to the weakening of the Euro, British pound, Canadian and Australian currencies, all in comparison to the US Dollar, a $247 benefit from pension amortization of actuarial losses and a $84 gain on cash flow hedges.

For the quarter ended June 30, 2017, total other comprehensive income, net of taxes, of $7,156, included a $6,414 gain from foreign currency translation adjustments primarily due to the strengthening of the Euro and Canadian currencies, offset by the weakening of the Australian and Brazilian currencies, all in comparison to the US Dollar, a $544 benefit from pension amortization of actuarial losses and a $198 gain on cash flow hedges.

For the nine months ended June 30, 2018, total other comprehensive income, net of taxes, of $19,954 included a gain of $14,866 related to removal of PPC’s foreign currency translation loss, which was considered in the gain on disposal of discontinued operations, a loss of $5,577 from foreign currency translation adjustments primarily due to the weakening of the Euro, British pound, Canadian and Australian currencies, all in comparison to the US Dollar, a $10,053 SERP benefit related to the passing of our Chairman of the Board, net of pension amortization of actuarial losses and a $612 gain on cash flow hedges.

For the nine months ended June 30, 2017, total other comprehensive income, net of taxes, of $3,777 included a $1,344 gain from foreign currency translation adjustments primarily due to the strengthening of the Euro and Canadian currencies, partially offset by the weakening of the Australian and Brazilian currencies, all in comparison to the US Dollar, and a $1,632 benefit from pension amortization of actuarial losses and $801 gain on cash flow hedges.

Discontinued operations

Plastic Products Company

On November 16, 2017, Griffon announced it entered into a definitive agreement to sell PPC and on February 6, 2018, completed the sale to Berry for $475,000 in cash, subject to certain post-closing adjustments. As a result, Griffon classified the results of operations of the PPC business as discontinued operations in the Consolidated Statements of Operations for all periods presented and classified the related assets and liabilities associated with the discontinued operations in the consolidated balance sheets. All results and information presented exclude PPC unless otherwise noted. PPC is a global leader in the development and production of embossed, laminated and printed specialty plastic films for hygienic, health-care and industrial products and sells to some of the world's largest consumer products companies. See Note 14, Discontinued Operations.

Installation Services and Other Discontinued Activities

In 2008, as a result of the downturn in the residential housing market, Griffon exited substantially all operating activities of its Installation Services segment which sold, installed and serviced garage doors and openers, fireplaces, floor coverings, cabinetry and a range of related building products, primarily for the new residential housing market. Griffon sold eleven units, closed one unit and merged two units into CBP. Operating results of substantially this entire segment have been reported as discontinued operations in the Consolidated Statements of Operations and Comprehensive Income (Loss) for all periods presented; Installation Services is excluded from segment reporting.

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Table of Contents


Griffon substantially concluded remaining disposal activities in 2009. There was no revenue or income from the Installation Services’ business for the quarters and six months ended June 30, 2018 and 2017.

During the year ended September 30, 2017, Griffon recorded $5,700 of reserves in discontinued operations related to historical environmental remediation efforts and to increase the reserve for homeowner association claims (HOA) related to installation services.

At June 30, 2018, Griffon’s assets and liabilities for discontinued operations primarily related to income taxes, product liability, warranty and environmental reserves, and accruals related to PPC transaction expenses. Future net cash outflows to satisfy liabilities related to disposal activities accrued as of June 30, 2018 are estimated to be $30,721.

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 Nine months ended June 30,
(in thousands)
2018
 
2017
Net Cash Flows Provided by (Used In):
 

 
 

Operating activities
$
2,791

 
$
25,402

Investing activities
11,766

 
(28,480
)
Financing activities
57,678

 
3,426


Cash provided by the operating activities of continuing operations for the nine months ended June 30, 2018 was $2,791 compared to $25,402 in the prior year period. Cash provided by the income of continuing operations, adjusted for non-cash expenditures, was offset by a net increase in working capital consisting of increases in inventory and accounts receivable and payments of accounts payable offset, in part, by decreases in prepaid expenses and other current assets. During the nine months ended June 30, 2018, the Company paid $11,870 of acquisition costs compared with $630 in the prior year period..

During the nine months ended June 30, 2018, Griffon generated $11,766 of cash in investing activities from continuing operations compared to $28,480 used in the prior year, with the increase primarily driven by the proceeds from the sale of PPC, offset by acquisitions and capital expenditures. On February 6, 2018, the Company completed the sale of PPC to Berry for $475,000 in cash, subject to certain post-closing adjustments. On October 2, 2017, Griffon completed the acquisition of ClosetMaid, a market leader of home storage and organization products, for approximately $185,700, inclusive of post-closing adjustments, or $165,000 net of the estimated present value of tax benefits under the current tax law. Additionally, on November 6, 2017, AMES acquired Harper, a division of Horizon Global, for approximately $5,000. Harper is a leading U.S. manufacturer of cleaning products for professional, home, and industrial use. Furthermore, on February 13, 2018, AMES acquired Kelkay, a United Kingdom manufacturer and distributor of decorative outdoor landscaping products sold to leading garden centers, retailers and grocers in the UK and Ireland for approximately $56,118 (GBP 40,452). Lastly, on June 4, 2018, CBP acquired CornellCookson, a leading US manufacturer and marketer of rolling steel door and grille products designed for commercial, industrial, institutional and retail use, for $180,000, subject to certain post-closing adjustments. In the nine month period ended June 30, 2017, AMES Australia acquired Hills for approximately $6,051 (AUD 8,400). Capital expenditures for the nine months ended June 30, 2018 totaled $33,148, an increase of $10,573 from the prior year.

During the nine months ended June 30, 2018, cash provided by financing activities from continuing operations totaled $57,678 compared to the $3,426 provided in the prior year. On October 2, 2017, Griffon completed an add-on offering of $275,000 aggregate principal amount of 5.25% senior notes due 2022 in an unregistered offering through a private placement. The $275,000 senior notes were issued under the same indenture pursuant to which Griffon previously issued $725,000 in aggregate principal amount of its 5.25% Senior Notes due 2022. The proceeds were used, among other things, to purchase ClosetMaid and for general corporate purposes (including to reduce the outstanding balance of Griffon's revolving credit facility (the "Credit Agreement")). At June 30, 2018, there were $69,912 in outstanding borrowings under the Credit Agreement, compared to $163,748 in outstanding

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Table of Contents

borrowings at the same date in the prior year. On January 17, 2017, Griffon settled the convertible debt for $173,855 with $125,000 in cash, utilizing borrowings under the Credit Agreement, and $48,858, or 1,954,993 shares of common stock issued from treasury.

On August 3, 2016, Griffon’s Board of Directors authorized the repurchase of up to $50,000 of Griffon’s outstanding common stock. Under the share repurchase program, the Company may purchase shares in the open market, including pursuant to a 10b5-1 plan, or in privately negotiated transactions. During the nine months ended June 30, 2018, Griffon purchased 2,088,739 shares of common stock under the August 2016 Board authorized program, for a total of $41,110 or $19.68 per share. As of June 30, 2018, $8,327 remains under the August 2016 Board authorization. On August 1, 2018, Griffon's Board of Directors authorized the repurchase of an additional $50,000 of Griffon's outstanding common stock.

In addition, during the nine month period ended June 30, 2018, 199,044 shares, with a market value of $4,478, or $22.50 per share, were withheld to settle employee taxes due upon the vesting of restricted stock, and were added to treasury stock.

During the nine months ended June 30, 2018, the Board of Directors approved three quarterly cash dividends of $0.07 per share each, and on March 7, 2018, the Board of Directors declared a special cash dividend of $1.00 per share, paid on April 16, 2018 to shareholders of record as of the close of business on March 29, 2018. Additionally, on August 1, 2018, the Board of Directors declared a quarterly cash dividend of $0.07 per share, payable on September 20, 2018 to shareholders of record as of the close of business on August 23, 2018.
 
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 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 from continuing operations. For the nine months ended June 30, 2018:
 
The United States Government and its agencies, through either prime or subcontractor relationships, represented 10% of Griffon’s consolidated revenue and 62% of Telephonics’ revenue.
The Home Depot represented 20% of Griffon’s consolidated revenue and 24% of HBP’s revenue.

No other customer exceeded 10% 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 change and may fluctuate 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
June 30,
 
September 30,
(in thousands)
2018
 
2017
Cash and equivalents
$
63,766

 
$
47,681

Notes payables and current portion of long-term debt
10,739

 
11,078

Long-term debt, net of current maturities
1,124,981

 
968,080

Debt discount/premium and issuance costs
14,591

 
13,243

Total debt
1,150,311

 
992,401

Debt, net of cash and equivalents
$
1,086,545

 
$
944,720

 
On October 2, 2017, in an unregistered offering through a private placement under Rule 144A, Griffon completed the add-on offering of $275,000 principal amount of its 5.25% senior notes due 2022, at 101.00% of par, to Griffon's previously issued $125,000 principal amount of its 5.25% senior notes due 2022, at 98.76% of par, completed on May 18, 2016 and $600,000 5.25% senior notes due 2022, at par, completed on February 27, 2014 (collectively the “Senior Notes”). As of June 30, 2018, outstanding Senior Notes due totaled $1,000,000; interest is payable semi-annually on March 1 and September 1. The net proceeds of the $275,000 add-on offering were used, among other things, to acquire ClosetMaid with the remaining proceeds used to pay down outstanding loan borrowings under Griffon's Credit Agreement. The net proceeds of the previously issued $125,000 add-on offering were used to pay down outstanding revolving loan borrowings under Griffon's Credit Agreement.

The Senior Notes are senior unsecured obligations of Griffon guaranteed by certain domestic subsidiaries, and subject to certain covenants, limitations and restrictions. On February 5, 2018, July 20, 2016 and June 18, 2014, Griffon exchanged all of the $275,000, $125,000 and $600,000 Senior Notes, respectively, for substantially identical Senior Notes registered under the Securities Act of 1933 via an exchange offer. The fair value of the Senior Notes approximated $972,500 on June 30, 2018 based upon quoted

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market prices (level 1 inputs). In connection with the issuance and exchange of the $275,000 senior notes, Griffon capitalized $8,472 of underwriting fees and other expenses; Griffon capitalized $3,016 of underwriting fees and other expenses in connection with the $125,000 senior notes; and Griffon capitalized $10,313 in connection with the previously issued $600,000 senior notes. All capitalized fees will amortize over the term of the notes.

On March 22, 2016, Griffon amended the Credit Agreement to increase the credit facility from $250,000 to $350,000, extend its maturity from March 13, 2020 to March 22, 2021, and modify certain other provisions of the facility. On October 2, 2017 and on May 31, 2018, Griffon amended the Credit Agreement in association with the ClosetMaid acquisition and the CornellCookson acquisition, respectively, to modify the net leverage covenant. The facility includes a letter of credit sub-facility with a limit of $50,000 and a multi-currency sub-facility of $50,000. The Credit Agreement provides for same day borrowings of base rate loans. 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 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. Current margins are 1.75% for base rate loans and 2.75% 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 (except that a lien on the assets of Griffon's material domestic subsidiaries securing a limited amount of the debt under the Credit Agreement relating to Griffon's Employee Stock Ownership Plan ("ESOP") ranks pari passu with the lien granted on such assets under the Credit Agreement). At June 30, 2018, there were $69,912 in outstanding borrowings and standby letters of credit were $15,166 under the Credit Agreement; $264,922 was available, subject to certain loan covenants, for borrowing at that date.

On December 21, 2009, Griffon issued $100,000 principal amount of 4% convertible subordinated notes due 2017 (the “2017 Notes”). On July 14, 2016, Griffon announced that it would settle, upon conversion, up to $125,000 of the conversion value of the 2017 Notes in cash, with amounts in excess of $125,000, if any, to be settled in shares of Griffon common stock. On January 17, 2017, Griffon settled the convertible debt for $173,855 with $125,000 in cash, utilizing borrowings under the Credit Agreement, and $48,858, or 1,954,993 shares of common stock issued from treasury.

In September 2015 and March 2016, Griffon entered into mortgage loans in the amounts of $32,280 and $8,000, respectively. The mortgage loans were secured by four properties occupied by Griffon's subsidiaries. The loans were due to mature in September 2025 and April 2018, respectively, were collateralized by the specific properties financed and were guaranteed by Griffon. The loans had an interest rate of LIBOR plus 1.50%. The loans were paid off during the quarter ended March 31, 2018.

In August 2016, Griffon’s ESOP entered into an agreement that refinanced the existing ESOP loan into a new Term Loan in the amount of $35,092 (the "Agreement"). The Agreement also provided for a Line Note with $10,908 available to purchase shares of Griffon common stock in the open market. During 2017, Griffon's ESOP purchased 621,875 shares of common stock for a total of $10,908 or $17.54 per share, under a borrowing line that has now been fully utilized. On June 30, 2017, the Term Loan and Line Note were combined into a single Term Loan. The Term Loan bears interest at LIBOR plus 2.50%. The Term Loan requires a quarterly principal payment of $569 with a balloon payment due at maturity on March 22, 2020. As of June 30, 2018, $35,046, net of issuance costs, was outstanding under the Term Loan. The Term Loan is secured by shares purchased with the proceeds of the loan and with a lien on a specific amount of Griffon assets (which lien ranks pari passu with the lien granted on such assets under the Credit Agreement) and is guaranteed by Griffon.

Two Griffon subsidiaries have capital leases outstanding for real estate located in Troy, Ohio and Ocala, Florida. The leases both mature in 2022, and bear interest at a fixed rates of approximately 5.0% and 8.0%, respectively. The Troy, Ohio lease is secured by a mortgage on the real estate and is guaranteed by Griffon. The Ocala, Florida lease contains two five-year renewal options. At June 30, 2018, $8,162 was outstanding, net of issuance costs.

In November 2012, Garant G.P. (“Garant”) entered into a CAD $15,000 ($11,282 as of June 30, 2018) revolving credit facility. The facility accrues interest at LIBOR (USD) or the Bankers Acceptance Rate (CDN) plus 1.3% per annum (3.63% LIBOR USD and 3.00% Bankers Acceptance Rate CDN as of June 30, 2018). The revolving facility matures in October 2019. Garant is required to maintain a certain minimum equity.  At June 30, 2018, there were no borrowings under the revolving credit facility with CAD 15,000 ($11,282 as of June 30, 2018) available for borrowing.


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In July 2016, Griffon Australia Holdings Pty Ltd and its Australian subsidiaries ("Griffon Australia") entered into an AUD 30,000 term loan and an AUD 10,000 revolver. The term loan refinanced two existing term loans and the revolver replaced two existing lines. In December 2016, the amount available under the revolver was increased from AUD 10,000 to AUD 20,000 and, in March 2017, the term loan commitment was increased by AUD 5,000. In September 2017, the term commitment was further increased by AUD 15,000. The term loan requires quarterly principal payments of AUD 1,250 plus interest, with a balloon payment of AUD 37,125 due upon maturity in June 2019, and accrues interest at Bank Bill Swap Bid Rate “BBSY” plus 2.00% per annum (4.16% at June 30, 2018). As of June 30, 2018, the term loan had an outstanding balance of AUD 42,125 ($30,953). The revolving facility matures in November 2018, but is renewable upon mutual agreement with the bank, and accrues interest at BBSY plus 2.0% per annum (3.93% at June 30, 2018). At June 30, 2018, there were no borrowings under the revolving credit facility with AUD 20,000 ($14,696) available for borrowing. The revolver and the term loan are both secured by substantially all of the assets of Griffon Australia and its subsidiaries. Griffon guarantees the term loan. Griffon Australia is required to maintain a certain minimum equity level and is subject to a maximum leverage ratio and a minimum fixed charges cover ratio.

A UK subsidiary of Griffon maintains an invoice discounting arrangement secured by trade receivables. Interest is variable at 2.0% over the Sterling base rate (2.5% as of June 30, 2018). At June 30, 2018, there were no amounts outstanding under this facility.

In July 2018, the AMES Companies UK Ltd and its subsidiaries ("Ames UK") entered into a GBP 14,000 term loan, GBP 4,000 mortgage loan and GBP 5,000 revolver. The term loan and mortgage loan require quarterly principal payments of GBP 350 and GBP 83 plus interest, respectively, and have balloon payments due upon maturity, July 2023, of GBP 7,000 and GBP 2,333, respectively. The Term Loan and Mortgage Loans accrue interest at the GBP LIBOR Rate plus 2.25% and 1.8%, respectively (3.04% and 2.59%). The revolving facility matures in July 2019, but is renewable upon mutual agreement with the bank, and accrues interest at the Bank of England Base Rate plus 1.5% (2.0%). The revolver and the term loan are both secured by substantially all of the assets of Ames UK and its subsidiaries. Ames UK is subject to a maximum leverage ratio and a minimum fixed charges cover ratio. The invoice discounting arrangement was canceled and replaced by the above loan facilities.

Other long-term debt consists primarily of a loan with the Pennsylvania Industrial Development Authority, with the balance consisting of capital leases.

At June 30, 2018, Griffon and its subsidiaries were in compliance with the terms and covenants of its credit and loan agreements.

On August 3, 2016, Griffon’s Board of Directors authorized the repurchase of up to $50,000 of Griffon’s outstanding common stock. Under this share repurchase program, 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 nine months ended June 30, 2018, Griffon purchased 2,088,739 shares, respectively, of common stock under the August 2016 program, for a total of $41,110 or $19.68. From August 2011 through June 30, 2018, Griffon repurchased 22,518,037 shares of its common stock, for a total of $302,730 or $13.44 per share. This included the repurchase of 18,073,593 shares on the open market, as well as the December 10, 2013 repurchase of 4,444,444 shares from GS Direct for $50,000, or $11.25 per share. As of June 30, 2018, $8,327 remains under the August 2016 Board authorization. On August 1, 2018, Griffon's Board of Directors authorized the repurchase of an additional $50,000 of Griffon's outstanding common stock.

The December 10, 2013 repurchase of 4,444,444 shares of common stock from GS Direct 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. On June 19, 2018, GS Direct completed an underwritten secondary offering to sell 5,583,375 shares of Griffon's common stock, inclusive of the underwriters’ 30-day option to purchase additional shares. Following the closing of the offering, GS Direct no longer owns any shares of Griffon.

In addition, during the nine month period ended June 30, 2018, 199,044 shares, with a market value of $4,478, or $22.50 per share, were withheld to settle employee taxes due upon the vesting of restricted stock, and were added to treasury stock.

On November 17, 2011, the Company began declaring quarterly dividends. During 2017, the Company declared and paid dividends totaling $0.24 per share. During the nine months ended June 30, 2018, the Board of Directors approved three quarterly cash dividends of $.07 per share each and a special cash dividend of $1.00 per share. The Company 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.

On August 1, 2018, the Board of Directors declared a quarterly cash dividend of $0.07 per share, payable on September 20, 2018 to shareholders of record as of the close of business on August 23, 2018.


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During the nine months ended June 30, 2018 and 2017, Griffon used cash for discontinued operations from operating, investing and financing activities of $62,273 and $3,381, respectively, primarily related to PPC operations and capital expenditures, as well as the repayment of outstanding debt upon the sale of PPC, and expenditures related to 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, 2017.

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, 2017. 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 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, 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 Griffon’s Telephonics Corporation 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 of raw materials such as resin, wood 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, regulatory and environmental matters; 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

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Griffon’s Annual Report on Form 10-K for the year ended September 30, 2017. 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 Credit Agreement 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.

Foreign Exchange
 
Griffon conducts business in various non-US countries, primarily in Canada, Australia, United Kingdom, Mexico and China; therefore, changes in the value of the currencies of these countries affect Griffon's financial position and cash flows when translated into US Dollars. Griffon has generally accepted the exposure to exchange rate movements relative to its non-US 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.

Griffon is continuing to integrate CornellCookson and ClosetMaid into its existing control procedures. Such integration may lead Griffon to modify certain controls for future period, but Griffon does not expect changes, if any, to significantly affect its internal control over financial reporting

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.
 

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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, 2017, 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.


Item 2    Unregistered Sales of Equity Securities and Use of Proceeds

(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)
April 1 - 30, 2018
525,000

(1)
 
$
19.40

 
525,000

 
 

May 1 - 31, 2018
126,595

(2)
 
20.00

 
125,500

 
 

June 1 - 30, 2018
497

(3)
 

 

 
 

Total
652,092

 
 
$

 
650,500

 
$
8,327


1.
On August 3, 2016, the Company’s Board of Directors authorized the repurchase of up to $50,000 of Griffon common stock; as of June 30, 2018, an aggregate of $8,327 remained available for the purchase of Griffon common stock under the August 3, 2016 Board authorization. Amount consists of 525,000 shares purchased by the Company in open market purchases pursuant to stock repurchased authorized by the Company's Board of Directors. On August 1, 2018, Griffon's Board of Directors authorized the repurchase of an additional $50,000 of Griffon's outstanding common stock.
2.
Includes (a) 125,500 shares purchased by the Company in open market purchases pursuant to stock repurchased authorized by the Company's Board of Directors and (b) 1,095 shares acquired by the Company from holders of restricted stock upon vesting of the restricted stock, to satisfy tax-withholding obligations of the holders.
3.
Consists of 497 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    Defaults Upon Senior Securities
None

Item 4    Mine Safety Disclosures
None

Item 5    Other Information
None



54








Item 6
Exhibits
 
 
10.1
Fourth Amendment to Third Amended and Restated Credit Agreement, dated as of May 31, 2018, to that certain Third Amended and Restated Credit Agreement, dated as of March 22, 2016, among the Company, the several banks and other financial institutions or entities from time to time parties thereto, JPMorgan Chase Bank, N.A., as administrative agent, and the other agents party thereto (Exhibit 99.1 to Current Report on Form 8-K filed June 1, 2018 (Commission File No. 1-06620)).

 
 
31.1
 
 
31.2
 
 
32
 
 
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
 
 
*
Indicates a management contract or compensatory plan or arrangement.

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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/ Brian G. Harris
 
 
Brian G. Harris
 
 
Senior Vice President and Chief Financial Officer
 
 
(Principal Financial Officer)
 
 
 
 
 
/s/ W. Christopher Durborow
 
 
W. Christopher Durborow
 
 
Vice President, Controller and Chief Accounting Officer
 
 
(Principal Accounting Officer)
 
 
Date: August 1, 2018


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