Griffon(GFF) - 2022 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1 – Financial Statements This section presents Griffon Corporation's unaudited condensed consolidated financial statements for the three months ended December 31, 2021 and 2020, including detailed notes Condensed Consolidated Balance Sheets This section provides a comparative overview of Griffon Corporation's balance sheet at December 31, 2021, and September 30, 2021 Condensed Consolidated Balance Sheets (December 31, 2021 vs. September 30, 2021) | Category | Dec 31, 2021 (in thousands) | Sep 30, 2021 (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Total Current Assets | $1,354,401 | $1,366,279 | | Cash and equivalents | $151,220 | $248,653 | | Accounts receivable, net | $334,040 | $294,804 | | Inventories | $531,182 | $472,794 | | Assets of discontinued operations held for sale | $261,514 | $273,414 | | Total Assets | $2,582,743 | $2,604,685 | | Total Current Liabilities | $512,838 | $531,636 | | Notes payable and current portion of long-term debt | $15,675 | $12,486 | | Accounts payable | $243,611 | $260,140 | | Liabilities of discontinued operations held for sale | $74,256 | $80,748 | | Total Liabilities | $1,770,358 | $1,797,527 | | Total Shareholders' Equity | $812,385 | $807,158 | - Total Assets decreased by $21.9 million from September 30, 2021, to December 31, 2021, primarily due to a significant decrease in cash and equivalents, partially offset by increases in accounts receivable and inventories[9] Condensed Consolidated Statement of Shareholders' Equity This section details the changes in Griffon Corporation's shareholders' equity for the three months ended December 31, 2021 Shareholders' Equity Changes (Three Months Ended December 31, 2021) | Item | Amount (in thousands) | | :------------------------------------ | :-------------------- | | Balance at September 30, 2021 | $807,158 | | Net income | $19,298 | | Dividend | $(4,739) | | Shares withheld on employee taxes | $(10,886) | | Amortization of deferred compensation | $591 | | Equity awards granted, net | $0 | | ESOP allocation of common stock | $848 | | Stock-based compensation | $2,866 | | Other comprehensive income, net of tax | $(2,751) | | Balance at December 31, 2021 | $812,385 | - Total Shareholders' Equity increased by $5.2 million from September 30, 2021, to December 31, 2021, driven by net income and stock-based compensation, partially offset by dividends paid and shares withheld for employee taxes[11] Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) This section presents Griffon Corporation's consolidated statements of operations and comprehensive income (loss) for the three months ended December 31, 2021 and 2020 Condensed Consolidated Statements of Operations (Three Months Ended December 31, 2021 vs. 2020) | Metric | Dec 31, 2021 (in thousands) | Dec 31, 2020 (in thousands) | Change (%) | | :------------------------------------ | :-------------------------- | :-------------------------- | :--------- | | Revenue | $591,749 | $541,523 | 9.3% | | Gross profit | $165,842 | $164,136 | 1.0% | | Income from operations | $38,490 | $52,427 | -26.5% | | Income from continuing operations | $16,905 | $25,430 | -33.6% | | Income from discontinued operations | $2,393 | $4,070 | -41.2% | | Net income | $19,298 | $29,500 | -34.6% | | Basic EPS | $0.38 | $0.58 | -34.5% | | Diluted EPS | $0.36 | $0.55 | -34.5% | | Dividends paid per common share | $0.09 | $0.08 | 12.5% | | Total other comprehensive income (loss), net of taxes | $(2,751) | $13,141 | -120.9% | | Comprehensive income, net | $16,547 | $42,641 | -61.2% | - Revenue increased by 9.3% year-over-year, but net income and EPS saw significant declines, primarily due to increased selling, general and administrative expenses, and lower income from discontinued operations[14] Condensed Consolidated Statements of Cash Flows This section outlines Griffon Corporation's cash flow activities for the three months ended December 31, 2021 and 2020 Condensed Consolidated Statements of Cash Flows (Three Months Ended December 31, 2021 vs. 2020) | Cash Flow Activity | Dec 31, 2021 (in thousands) | Dec 31, 2020 (in thousands) | | :------------------------------------------ | :-------------------------- | :-------------------------- | | Net cash provided by (used in) operating activities - continuing operations | $(84,946) | $12,315 | | Net cash used in investing activities - continuing operations | $(9,969) | $(11,185) | | Net cash used in financing activities - continuing operations | $(8,612) | $(9,297) | | Net cash provided by discontinued operations | $7,004 | $22,662 | | Effect of exchange rate changes on cash and equivalents | $(910) | $1,223 | | NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS | $(97,433) | $15,718 | | Cash and equivalents at end of period | $151,220 | $233,807 | - Operating activities from continuing operations shifted from providing $12.3 million in cash in 2020 to using $84.9 million in 2021, largely due to increased working capital needs (accounts receivable and inventories)[15][18][204] - Net cash provided by discontinued operations significantly decreased from $22.7 million in 2020 to $7 million in 2021, primarily due to the prior year's gain on sale of the SEG business[18][211] Notes to Condensed Consolidated Financial Statements This section provides detailed notes explaining Griffon Corporation's accounting policies, fair value measurements, revenue recognition, and other financial disclosures NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION This note describes Griffon Corporation's business, its recent acquisitions and dispositions, and the impact of the COVID-19 pandemic on its operations - Griffon Corporation is a diversified management and holding company, founded in 1959, listed on the NYSE (GFF), and headquartered in New York, N.Y[20][21] - On January 24, 2022, Griffon acquired Hunter Fan Company for approximately $845 million, integrating it into the Consumer and Professional Products (CPP) segment[22] - Griffon is exploring strategic alternatives, including a sale, for its Defense Electronics (DE) segment (Telephonics Corporation), which has been classified as a discontinued operation[23] - The company now operates through two reportable segments: Consumer and Professional Products (CPP) and Home and Building Products (HBP)[24] - The COVID-19 pandemic continues to impact the business through supply chain disruptions, labor shortages, and increased commodity prices, though all facilities are fully operational[24][25] NOTE 2 – FAIR VALUE MEASUREMENTS This note details Griffon's fair value measurements for financial instruments, including senior notes, marketable securities, and foreign currency contracts - The fair value of Griffon's 2028 senior notes was approximately $1.038 billion at December 31, 2021, based on Level 1 inputs (quoted market prices)[33] - Marketable debt and equity securities with a fair value of $15.4 million (cost basis $15.1 million) were included in Prepaid and other current assets, measured using Level 2 inputs[34] - Griffon uses foreign currency exchange contracts to manage risks, with $21 million of Australian dollar contracts qualifying for hedge accounting (Level 2 inputs) and $6.7 million of Canadian dollar contracts not qualifying[35][36][37] NOTE 3 – REVENUE This note explains Griffon's revenue recognition policies for its continuing and discontinued operations - The majority of the Company's revenue from continuing operations (CPP and HBP segments) is recognized at a point in time, generally upon shipment, when control of products transfers to the customer[38][39] - Revenue from the discontinued Defense Electronics operation is recognized over time, primarily using the cost-to-cost method for contracts with government and commercial customers[40] NOTE 4 – ACQUISITIONS This note provides details on Griffon's recent acquisition activities, including the Hunter Fan Company and Quatro Design Pty Ltd - On January 24, 2022, Griffon acquired Hunter Fan Company for approximately $845 million, which will be part of the CPP segment[43] - On December 22, 2020, AMES acquired Quatro Design Pty Ltd for AUD $3.5 million (approx. $2.7 million), adding to the CPP segment[44] - Acquisition costs incurred during the three months ended December 31, 2021, were $2.6 million, significantly higher than the de minimis costs in the prior year[45] NOTE 5 – INVENTORIES This note details the composition of Griffon's inventories at December 31, 2021, and September 30, 2021 Inventory Components (December 31, 2021 vs. September 30, 2021) | Component | Dec 31, 2021 (in thousands) | Sep 30, 2021 (in thousands) | | :---------------------- | :-------------------------- | :-------------------------- | | Raw materials and supplies | $151,292 | $133,684 | | Work in process | $46,679 | $48,531 | | Finished goods | $333,211 | $290,579 | | Total | $531,182 | $472,794 | - Total inventories increased by $58.4 million from September 30, 2021, to December 31, 2021, primarily driven by increases in raw materials and finished goods[47] NOTE 6 – PROPERTY, PLANT AND EQUIPMENT This note provides a breakdown of Griffon's property, plant and equipment, net, and related depreciation and amortization expenses Property, Plant and Equipment, Net (December 31, 2021 vs. September 30, 2021) | Component | Dec 31, 2021 (in thousands) | Sep 30, 2021 (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Land, building and building improvements | $163,841 | $164,486 | | Machinery and equipment | $525,928 | $520,110 | | Leasehold improvements | $40,111 | $39,913 | | Accumulated depreciation and amortization | $(439,328) | $(431,887) | | Total | $290,552 | $292,622 | - Depreciation and amortization expense for property, plant and equipment increased to $10.7 million for the quarter ended December 31, 2021, from $10.2 million in the prior year[48] NOTE 7 – CREDIT LOSSES This note discusses Griffon's accounting for credit losses, including the adoption of ASU 2016-13 and changes in the allowance for credit losses - The Company adopted ASU 2016-13 for credit losses, requiring consideration of forward-looking information to estimate expected credit losses on financial instruments, including trade receivables[49] - The allowance for credit losses increased to $9.8 million at December 31, 2021, from $8.8 million at October 1, 2021, with a provision for expected credit losses of $1 million[53] NOTE 8 – GOODWILL AND OTHER INTANGIBLES This note provides a breakdown of Griffon's goodwill by segment and its intangible assets, net, including related amortization expenses Goodwill by Segment (December 31, 2021 vs. September 30, 2021) | Segment | Sep 30, 2021 (in thousands) | Foreign Currency Adjustments (in thousands) | Dec 31, 2021 (in thousands) | | :-------------------------------- | :-------------------------- | :---------------------------------------- | :-------------------------- | | Consumer and Professional Products | $234,895 | $535 | $235,430 | | Home and Building Products | $191,253 | — | $191,253 | | Total | $426,148 | $535 | $426,683 | Intangible Assets, Net (December 31, 2021 vs. September 30, 2021) | Class | Dec 31, 2021 Gross Carrying Amount (in thousands) | Dec 31, 2021 Accumulated Amortization (in thousands) | Sep 30, 2021 Gross Carrying Amount (in thousands) | Sep 30, 2021 Accumulated Amortization (in thousands) | | :-------------------------- | :------------------------------------------ | :--------------------------------------------------- | :------------------------------------------ | :--------------------------------------------------- | | Customer relationships & other | $187,409 | $77,939 | $187,732 | $75,794 | | Technology and patents | $13,429 | $2,569 | $13,429 | $2,439 | | Trademarks | $226,472 | — | $227,097 | — | | Total intangible assets | $427,310 | $80,508 | $428,258 | $78,233 | - Amortization expense for intangible assets was $2.4 million for the quarter ended December 31, 2021, up from $2.4 million in the prior year[55] NOTE 9 – INCOME TAXES This note outlines Griffon's income tax provision and effective tax rate for the three months ended December 31, 2021 and 2020 Income Tax Provision (Three Months Ended December 31, 2021 vs. 2020) | Metric | Dec 31, 2021 (in thousands) | Dec 31, 2020 (in thousands) | | :------------------------------------ | :-------------------------- | :-------------------------- | | Income before taxes from continuing operations | $24,223 | $37,138 | | Provision for income taxes | $7,318 | $11,708 | | Effective tax rate (excluding special items) | 31.5% | 33.7% | - The tax provision decreased due to lower income before taxes from continuing operations and a lower effective tax rate (excluding special items) of 31.5% in 2021 compared to 33.7% in 2020[57] NOTE 10 – LONG-TERM DEBT This note provides a summary of Griffon's long-term debt, including senior notes, revolving credit facilities, and recent amendments Long-Term Debt Summary (December 31, 2021 vs. September 30, 2021) | Debt Type | Dec 31, 2021 Balance Sheet (in thousands) | Sep 30, 2021 Balance Sheet (in thousands) | | :-------------------------- | :-------------------------------------- | :-------------------------------------- | | Senior notes due 2028 | $987,527 | $987,022 | | Revolver due 2025 | $18,264 | $11,765 | | Finance lease - real estate | $14,083 | $14,590 | | Non US lines of credit | $6,520 | $2,995 | | Non US term loans | $23,690 | $25,593 | | Other long term debt | $3,346 | $3,718 | | Total Long-Term Debt, net | $1,037,755 | $1,033,197 | - Total long-term debt, net, increased by $4.5 million from September 30, 2021, to December 31, 2021, primarily due to increased revolver borrowings and non-US lines of credit[58] - On January 24, 2022, Griffon amended its Credit Agreement to include a new $800 million seven-year Term Loan B facility to finance the Hunter acquisition, with an initial interest rate of 325 basis points[63][221] - At December 31, 2021, Griffon had $19.9 million outstanding borrowings under its $400 million revolving credit facility, with $364.6 million available for borrowing[61][216] NOTE 11 — SHAREHOLDERS' EQUITY This note details Griffon's shareholders' equity, including dividend payments, stock-based compensation, and share repurchase programs - The Company paid a quarterly cash dividend of $0.09 per share for the three months ended December 31, 2021, and declared another $0.09 per share payable in March 2022[65][66][208] - Stock-based compensation expense totaled $4.9 million for the quarter ended December 31, 2021, up from $4.2 million in the prior year[71][188] - As of December 31, 2021, $58 million remained available under Griffon's Board-authorized share repurchase programs, with no shares repurchased during the quarter[71][209] NOTE 12 – EARNINGS PER SHARE (EPS) This note provides a reconciliation of Griffon's basic and diluted earnings per share for the three months ended December 31, 2021 and 2020 EPS Share Reconciliation (Three Months Ended December 31, 2021 vs. 2020) | Share Metric | Dec 31, 2021 (in thousands) | Dec 31, 2020 (in thousands) | | :------------------------------------ | :-------------------------- | :-------------------------- | | Common shares outstanding | 56,304 | 56,490 | | Weighted average shares outstanding - basic | 51,178 | 50,596 | | Incremental shares from stock based compensation | 2,575 | 2,596 | | Weighted average shares outstanding - diluted | 53,753 | 53,192 | - Basic EPS was $0.38 and diluted EPS was $0.36 for the quarter ended December 31, 2021, compared to $0.58 and $0.55, respectively, in the prior year, reflecting a decrease in net income[14] NOTE 13 – BUSINESS SEGMENTS This note outlines Griffon's reportable segments, including revenue and Adjusted EBITDA performance for Consumer and Professional Products (CPP) and Home and Building Products (HBP) - Griffon operates through two reportable segments: Consumer and Professional Products (CPP) and Home and Building Products (HBP); Defense Electronics (Telephonics) is classified as a discontinued operation[75] Revenue by Segment (Three Months Ended December 31, 2021 vs. 2020) | Segment | Dec 31, 2021 (in thousands) | Dec 31, 2020 (in thousands) | Change (%) | | :-------------------------------- | :-------------------------- | :-------------------------- | :--------- | | Consumer and Professional Products | $283,173 | $291,042 | -2.7% | | Home and Building Products | $308,576 | $250,481 | 23.2% | | Defense Electronics (Discontinued) | $53,993 | $67,768 | -20.3% | | Total revenue | $591,749 | $541,523 | 9.3% | Segment Adjusted EBITDA (Three Months Ended December 31, 2021 vs. 2020) | Segment | Dec 31, 2021 (in thousands) | Dec 31, 2020 (in thousands) | Change (%) | | :-------------------------------- | :-------------------------- | :-------------------------- | :--------- | | Consumer and Professional Products | $16,214 | $32,713 | -50.4% | | Home and Building Products | $56,297 | $48,369 | 16.4% | | Defense Electronics (Discontinued) | $4,472 | $5,585 | -19.9% | | Segment adjusted EBITDA | $72,511 | $81,082 | -10.6% | - HBP revenue increased significantly by 23.2%, while CPP revenue decreased by 2.7% and DE revenue decreased by 20.3%[76] NOTE 14 – EMPLOYEE BENEFIT PLANS This note details Griffon's defined benefit pension expense (income) for the three months ended December 31, 2021 and 2020 Defined Benefit Pension Expense (Income) (Three Months Ended December 31, 2021 vs. 2020) | Component | Dec 31, 2021 (in thousands) | Dec 31, 2020 (in thousands) | | :-------------------------- | :-------------------------- | :-------------------------- | | Interest cost | $796 | $744 | | Expected return on plan assets | $(2,589) | $(2,544) | | Amortization: Recognized actuarial loss | $845 | $1,573 | | Net periodic expense (income) | $(948) | $(227) | - Net periodic benefit plan income increased to $948 thousand in 2021 from $227 thousand in 2020, primarily due to a lower recognized actuarial loss[84][105][186] NOTE 15 – RECENT ACCOUNTING PRONOUNCEMENTS This note discusses recent accounting pronouncements, including ASU No. 2021-08 and other new guidance adopted by the Company - The FASB issued ASU No. 2021-08, effective fiscal 2023, which changes the accounting for contract assets and liabilities in business combinations to align with ASC 606[85] - The Company adopted new guidance on simplifying income tax accounting and clarifying defined benefit pension disclosures, neither of which had a material impact on financial statements[86][87] NOTE 16 – DISCONTINUED OPERATIONS This note provides details on Griffon's discontinued operations, primarily Defense Electronics (Telephonics), including its financial performance and assets held for sale - Defense Electronics (Telephonics) is reported as a discontinued operation, with its assets and liabilities classified as held for sale[89][94] Defense Electronics Operations (Three Months Ended December 31, 2021 vs. 2020) | Metric | Dec 31, 2021 (in thousands) | Dec 31, 2020 (in thousands) | | :------------------------------------ | :-------------------------- | :-------------------------- | | Revenue | $53,993 | $67,768 | | Gross profit | $13,032 | $5,667 | | Income from discontinued operations before taxes | $3,014 | $2,031 | | Income from discontinued operations | $2,393 | $4,070 | - Income from discontinued operations decreased to $2.4 million in 2021 from $4.1 million in 2020, primarily due to a $6.2 million gain on sale of the SEG business in the prior year[90][91][198] - Assets of discontinued operations held for sale decreased to $261.5 million at December 31, 2021, from $273.4 million at September 30, 2021[94] NOTE 17 – RESTRUCTURING CHARGES This note details Griffon's restructuring initiatives, including the next-generation business platform for CPP, its expected benefits, and associated costs - Griffon is implementing a next-generation business platform for CPP, expected to be completed by end of 2023, aiming for 12%+ EBITDA margins (excluding Hunter), $30-35 million annual cash savings, and $30-35 million inventory reduction[97][99][146][177] - The initiative involves consolidating operations, strategic investments in automation and facilities, and unifying information systems[98][145][175][176] - Total project costs are estimated at $65 million in one-time charges ($46 million cash, $19 million non-cash) and $65 million in capital investments[100][147][178] Restructuring Charges (Three Months Ended December 31, 2021 vs. 2020) | Category | Dec 31, 2021 (in thousands) | Dec 31, 2020 (in thousands) | | :-------------------------- | :-------------------------- | :-------------------------- | | Personnel related costs | $260 | $362 | | Facilities, exit costs and other | $1,167 | $2,524 | | Non-cash facility and other | $289 | $193 | | Total restructuring charges | $1,716 | $3,079 | NOTE 18 – OTHER INCOME (EXPENSE) This note details the components of Griffon's other income (expense) for the three months ended December 31, 2021 and 2020 Other Income (Expense) Components (Three Months Ended December 31, 2021 vs. 2020) | Component | Dec 31, 2021 (in thousands) | Dec 31, 2020 (in thousands) | | :-------------------------- | :-------------------------- | :-------------------------- | | Net currency exchange losses | $394 | $699 | | Net periodic benefit plan income | $948 | $227 | | Net investment income | $93 | $330 | | Rental income | $462 | $462 | | Total Other income (expense) | $1,381 | $357 | - Total other income (expense) increased significantly to $1.4 million in 2021 from $357 thousand in 2020, driven by higher net periodic benefit plan income and lower net currency exchange losses[105] NOTE 19 – WARRANTY LIABILITY This note describes Griffon's warranty policies for its products and provides a roll-forward of the warranty liability for the three months ended December 31, 2021 and 2020 - CPP and HBP offer warranties ranging from one to ten years, with limited lifetime warranties on certain door models, requiring repair or replacement of defective products[106] Warranty Liability Roll-forward (Three Months Ended December 31, 2021 vs. 2020) | Item | Dec 31, 2021 (in thousands) | Dec 31, 2020 (in thousands) | | :------------------------------------ | :-------------------------- | :-------------------------- | | Balance, beginning of period | $7,818 | $6,268 | | Warranties issued and changes in estimated pre-existing warranties | $3,461 | $3,576 | | Actual warranty costs incurred | $(1,707) | $(3,612) | | Balance, end of period | $9,572 | $6,232 | - Warranty liability increased to $9.6 million at December 31, 2021, from $6.2 million in the prior year, primarily due to lower actual warranty costs incurred[107] NOTE 20 – OTHER COMPREHENSIVE INCOME (LOSS) This note details the components of Griffon's other comprehensive income (loss) for the three months ended December 31, 2021 and 2020 Other Comprehensive Income (Loss) (Three Months Ended December 31, 2021 vs. 2020) | Component | Dec 31, 2021 Net of Tax (in thousands) | Dec 31, 2020 Net of Tax (in thousands) | | :------------------------------------ | :----------------------------------- | :----------------------------------- | | Foreign currency translation adjustments | $(2,319) | $12,123 | | Pension and other defined benefit plans | $668 | $1,706 | | Cash flow hedges | $(1,100) | $(688) | | Total other comprehensive income (loss) | $(2,751) | $13,141 | - Total other comprehensive income shifted from a gain of $13.1 million in 2020 to a loss of $2.8 million in 2021, primarily due to negative foreign currency translation adjustments[110][189][190] NOTE 21 — LEASES This note outlines Griffon's accounting for leases, including the recognition of ROU assets and lease liabilities, and provides details on operating lease costs - The Company recognizes ROU assets and lease liabilities on the balance sheet for leases longer than twelve months, with fixed lease payments recognized as operating lease cost on a straight-line basis[111][115] Operating Lease Costs (Three Months Ended December 31, 2021 vs. 2020) | Component | Dec 31, 2021 (in thousands) | Dec 31, 2020 (in thousands) | | :-------------------------- | :-------------------------- | :-------------------------- | | Fixed | $9,747 | $9,491 | | Variable | $1,852 | $1,894 | | Short-term | $1,349 | $1,070 | | Total | $12,948 | $12,455 | Lease Liabilities (December 31, 2021 vs. September 30, 2021) | Lease Type | Dec 31, 2021 (in thousands) | Sep 30, 2021 (in thousands) | | :------------------------------------ | :-------------------------- | :-------------------------- | | Operating right-of-use assets | $141,406 | $144,598 | | Total operating lease liabilities | $146,121 | $149,196 | | Property, plant and equipment, net (Finance Leases) | $15,719 | $16,466 | | Total financing lease liabilities | $15,928 | $16,467 | NOTE 22 — COMMITMENTS AND CONTINGENCIES This note addresses Griffon's involvement in legal and environmental matters, and management's assessment of their potential financial impact - Griffon is involved in legal and environmental matters, including the Peekskill Site (CERCLA) and the Union Fork and Hoe site (historic contamination)[121][124] - Management believes the resolution of these matters will not have a material adverse effect on Griffon's consolidated financial position, results of operations, or cash flows[126] Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Griffon Corporation's financial condition and results for the three months ended December 31, 2021, including segment performance and liquidity BUSINESS This section provides an overview of Griffon Corporation's business, strategic initiatives, the impact of COVID-19, and recent acquisitions and dispositions Overview This subsection provides a brief overview of Griffon Corporation's identity and listing information - Griffon Corporation is a diversified management and holding company, founded in 1959, listed on the NYSE (GFF), and headquartered in New York, N.Y[128] Business Strategy This subsection outlines Griffon's core business strategy, focusing on market leadership, diversification, and capital management - Griffon's strategy is to maintain leading market positions by providing innovative, branded products with superior quality and service, emphasizing iconic brands to differentiate from competitors[129] - The company aims to reduce variability from external factors through a diverse portfolio of businesses across multiple industries, product offerings, and geographic markets[130] - Griffon oversees subsidiaries' operations, allocates resources, manages capital structures, and seeks to acquire additional businesses for attractive returns on capital[131] Update of COVID-19 on Our Business This subsection discusses the ongoing impact of the COVID-19 pandemic on Griffon's operations, supply chain, and liquidity - All Griffon facilities are fully operational, with new policies and procedures implemented to minimize COVID-19 risks to employees[135] - The company's supply chain has experienced disruptions, labor shortages, and increased commodity prices, which may continue to impact the business[136] - Griffon believes it has adequate liquidity, with $364.6 million of revolver capacity and $151.2 million in cash and equivalents at December 31, 2021[138] Business Highlights This subsection summarizes key business developments for Griffon, including recent acquisitions, strategic reviews, and operational initiatives - On January 24, 2022, Griffon acquired Hunter Fan Company for $845 million, financed by a new $800 million Term Loan B facility and existing cash/revolver borrowings[140] - Griffon is exploring strategic alternatives for its Defense Electronics business (Telephonics), including a sale, to increase long-term shareholder value[141] - The company issued $1 billion of 5.75% Senior Notes due 2028 in 2020 to redeem prior notes and amended its Credit Agreement in January 2020 to increase borrowing availability to $400 million[143] - A next-generation business platform for CPP is being rolled out, expected to be completed by the end of 2023, with anticipated annual cash savings of $30-35 million and inventory reduction of $30-35 million[144][146] Other Acquisitions and Dispositions This subsection details Griffon's other acquisition and disposition activities, expanding its global footprint and product offerings - On December 22, 2020, AMES acquired Quatro Design Pty Ltd, an Australian manufacturer of landscaping products, for AUD $3.5 million (approx. $2.7 million)[152] - On December 18, 2020, Defense Electronics sold its Systems Engineering Group, Inc. (SEG) business for $15 million[153] - Previous acquisitions include Apta (U.K., 2019), Kelkay (U.K., 2018), Harper Brush Works (U.S., 2017), La Hacienda (U.K., 2017), Hills Home Living (Australia, 2016), and Tuscan Path (Australia, 2017), expanding AMES' global footprint and product offerings[154][155][156][157] Further Information This subsection directs readers to Griffon's website for additional SEC filings and press releases - Griffon makes its SEC filings and press releases available free of charge on its website, www.griffon.com[158](index=158&type=chunk) Reportable Segments This subsection identifies Griffon's current reportable segments and the classification of its Defense Electronics business - Griffon operates through two reportable segments: Consumer and Professional Products (CPP) and Home and Building Products (HBP)[160] - Defense Electronics (Telephonics) is classified as a discontinued operation, providing intelligence, surveillance, and communications solutions[160] OVERVIEW Revenue increased year-over-year, driven by HBP, but net income and EPS declined significantly due to various charges and lower discontinued operations income Key Financial Overview (Three Months Ended December 31, 2021 vs. 2020) | Metric | Dec 31, 2021 (in thousands) | Dec 31, 2020 (in thousands) | Change (%) | | :------------------------------------ | :-------------------------- | :-------------------------- | :--------- | | Revenue | $591,749 | $541,523 | 9.3% | | Income from continuing operations | $16,905 | $25,430 | -33.6% | | Diluted EPS from continuing operations | $0.31 | $0.48 | -35.4% | | Adjusted income from continuing operations | $21,125 | $26,683 | -20.8% | | Adjusted diluted EPS from continuing operations | $0.39 | $0.50 | -22.0% | - Revenue growth was primarily driven by a 23% increase in HBP, partially offset by a 3% reduction in CPP[161] - Current quarter results included $1.7 million in restructuring charges, $2.6 million in acquisition costs, and $2.3 million in proxy contest costs, which negatively impacted income[162][163] RESULTS OF OPERATIONS This section details the operational performance of Griffon's continuing segments, CPP and HBP, for the three months ended December 31, 2021, compared to the prior year Consumer and Professional Products This subsection analyzes the revenue and Adjusted EBITDA performance of the Consumer and Professional Products (CPP) segment, highlighting volume changes and cost impacts CPP Revenue and Adjusted EBITDA (Three Months Ended December 31, 2021 vs. 2020) | Metric | Dec 31, 2021 (in thousands) | Dec 31, 2020 (in thousands) | Change (%) | | :-------------------------- | :-------------------------- | :-------------------------- | :--------- | | Total Revenue | $283,173 | $291,042 | -2.7% | | Adjusted EBITDA | $16,214 | $32,713 | -50.4% | | Adjusted EBITDA Margin | 5.7% | 11.2% | -5.5 pp | - CPP revenue decreased by 3% due to a 14% reduction in U.S. volume, primarily from labor, transportation, and supply chain disruptions, partially offset by increased international volume and favorable mix/price of 11%[169] - Adjusted EBITDA decreased by 50% due to decreased volume, increased U.S. material and transportation costs, and COVID-19 related inefficiencies, partially offset by international volume growth[170] - The CPP next-generation business platform initiative is expected to result in AMES' EBITDA margins improving to 12%+ (excluding Hunter), with annual cash savings of $30-35 million and inventory reduction of $30-35 million by the end of 2023[177] Home and Building Products This subsection analyzes the revenue and Adjusted EBITDA performance of the Home and Building Products (HBP) segment, focusing on pricing, volume, and cost impacts HBP Revenue and Adjusted EBITDA (Three Months Ended December 31, 2021 vs. 2020) | Metric | Dec 31, 2021 (in thousands) | Dec 31, 2020 (in thousands) | Change (%) | | :-------------------------- | :-------------------------- | :-------------------------- | :--------- | | Total Revenue | $308,576 | $250,481 | 23.2% | | Adjusted EBITDA | $56,297 | $48,369 | 16.4% | | Adjusted EBITDA Margin | 18.2% | 19.3% | -1.1 pp | - HBP revenue increased by 23% due to favorable mix and pricing (33%) in both residential and commercial sectors, partially offset by a 10% reduction in residential volume due to labor and supply chain disruptions[181] - Adjusted EBITDA increased by 16%, benefiting from higher revenue, but partially offset by increased material costs and a lag in realizing price increases[182] Unallocated This subsection discusses changes in unallocated corporate overhead costs, including employee benefit and medical claim expenses - Unallocated corporate overhead costs, excluding depreciation, increased to $13 million in Q1 FY2022 from $12.6 million in Q1 FY2021, primarily due to increased Employee Stock Ownership Plan and medical claim expenses[183] Proxy Contest Costs This subsection reports on the legal and advisory fees incurred by the company related to a proxy contest - The company incurred $2.3 million in proxy contest costs (legal and advisory fees) during the three months ended December 31, 2021, with additional costs anticipated in fiscal 2022[184] Segment Depreciation and Amortization This subsection details the increase in segment depreciation and amortization expenses, primarily due to new assets - Segment depreciation and amortization increased by $404 thousand for the quarter ended December 31, 2021, compared to the prior year, mainly due to new assets placed in service[185] Other Income (Expense) This subsection analyzes the changes in other income (expense), driven by benefit plan income and currency exchange fluctuations - Other income (expense) increased to $1.4 million in Q1 FY2022 from $357 thousand in Q1 FY2021, driven by higher net periodic benefit plan income and lower net currency exchange losses[186] Provision for income taxes This subsection provides details on the income tax provision and effective tax rate for continuing operations - The tax provision for continuing operations was $7.3 million on income of $24.2 million in Q1 FY2022, compared to $11.7 million on income of $37.1 million in Q1 FY2021[187] - The effective tax rate, excluding special items, was 31.5% in Q1 FY2022, down from 33.7% in Q1 FY2021[187] Stock based compensation This subsection reports on the increase in stock-based compensation expense for the reporting period - Stock-based compensation expense increased to $4.9 million in Q1 FY2022 from $4.2 million in Q1 FY2021[188] Comprehensive income (loss) This subsection discusses the shift in total other comprehensive income (loss), primarily due to foreign currency translation adjustments - Total other comprehensive income (loss) shifted from a gain of $13.1 million in Q1 FY2021 to a loss of $2.8 million in Q1 FY2022, primarily due to foreign currency translation adjustments[189][190] DISCONTINUED OPERATIONS This section provides an overview of the performance and status of Griffon's discontinued operations, primarily Defense Electronics (Telephonics), highlighting revenue and Adjusted EBITDA changes Defense Electronics This subsection analyzes the financial performance of the Defense Electronics segment, including revenue, Adjusted EBITDA, and contract backlog Defense Electronics Revenue and Adjusted EBITDA (Three Months Ended December 31, 2021 vs. 2020) | Metric | Dec 31, 2021 (in thousands) | Dec 31, 2020 (in thousands) | | :-------------------------- | :-------------------------- | :-------------------------- | | Revenue | $53,993 | $67,768 | | Adjusted EBITDA | $4,472 | $5,585 | | Adjusted EBITDA Margin | 8.3% | 8.2% | - DE revenue decreased by $13.8 million (20.3%) year-over-year, with a $6.7 million impact from the SEG business divestiture in the prior year[191] - DE Adjusted EBITDA decreased by $1.1 million (19.9%), primarily due to reduced revenue, partially offset by favorable program performance[192] - DE was awarded approximately $48 million in new contracts and incremental funding, with a backlog of $346.1 million at December 31, 2021 (66% expected within 12 months)[195] Other Discontinued Operations This subsection clarifies that other discontinued assets and liabilities primarily relate to insurance claims, product liability, and environmental reserves - Other discontinued assets and liabilities primarily relate to insurance claims, product liability, warranty reserves, environmental reserves, and related income taxes[199] LIQUIDITY AND CAPITAL RESOURCES This section discusses Griffon's liquidity position, capital resources, and debt structure, highlighting its ability to fund operations and strategic initiatives Liquidity This subsection assesses Griffon's liquidity position, including available credit, cash on hand, and changes in cash flows from operating, investing, and financing activities - Griffon believes it has adequate liquidity, with $364.6 million of revolver capacity available under its Credit Agreement and $151.2 million in cash and equivalents at December 31, 2021[201] - Cash used in operating activities from continuing operations was $84.9 million in Q1 FY2022, compared to cash provided of $12.3 million in Q1 FY2021, primarily due to increased working capital[204] - Cash used in investing activities from continuing operations decreased to $10 million in Q1 FY2022 from $11.2 million in Q1 FY2021[205] - Cash used in financing activities from continuing operations decreased to $8.6 million in Q1 FY2022 from $9.3 million in Q1 FY2021, primarily due to net proceeds from long-term debt offsetting treasury share purchases and dividends[206] Capital Resource Requirements This subsection outlines Griffon's capital resource requirements, including investments for the CPP business platform and debt obligations - The CPP next-generation business platform project is expected to be completed by the end of calendar year 2023, requiring significant capital investments[224] - Griffon's debt requirements include principal on $1 billion Senior Notes due 2028 (annual interest of approx. $57.5 million) and quarterly payments on the new $800 million Term Loan B facility[225] Customers This subsection highlights Griffon's reliance on major customers and the potential impact of customer relationships on operating results - The Home Depot represented 14% of Griffon's consolidated revenue, 21% of CPP's revenue, and 8% of HBP's revenue for the three months ended December 31, 2021[226] - Future operating results depend substantially on the success and ongoing relationships with major customers, and the loss of any could materially impact liquidity and operations[227] SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION This section provides summarized financial information for Griffon's parent company and guarantor subsidiaries, detailing their respective contributions to net sales, gross profit, and assets - Griffon's Senior Notes are fully and unconditionally guaranteed by certain domestic subsidiaries, including Clopay Corporation, Telephonics Corporation, and The AMES Companies, Inc[228] Summarized Statements of Operations (Three Months Ended December 31, 2021) | Metric | Parent Company (in thousands) | Guarantor Companies (in thousands) | | :-------------------------- | :---------------------------- | :------------------------------- | | Net sales | $0 | $507,553 | | Gross profit | $0 | $123,091 | | Income (loss) from operations | $(12,182) | $28,868 | | Equity in earnings of Guarantor subsidiaries | $14,046 | $0 | | Net income (loss) | $(10,970) | $14,046 | Summarized Balance Sheet Information (December 31, 2021) | Metric | Parent Company (in thousands) | Guarantor Companies (in thousands) | | :-------------------------- | :---------------------------- | :------------------------------- | | Total assets | $82,005 | $2,036,206 | | Total liabilities | $1,099,692 | $542,921 | CRITICAL ACCOUNTING POLICIES This section emphasizes that financial statement preparation requires significant estimates and judgments, and confirms no changes in critical accounting policies - The preparation of financial statements requires significant estimates, assumptions, and judgments that impact reported assets, liabilities, revenue, and expenses[232] - There have been no changes in Griffon's critical accounting policies from September 30, 2021[232] RECENT ACCOUNTING PRONOUNCEMENTS This section directs readers to the Notes to Condensed Consolidated Financial Statements for details on recent accounting standards - Refer to the Notes to Condensed Consolidated Financial Statements for a discussion of recent financial accounting standards, staff positions, and emerging issues task force consensus[234] FORWARD-LOOKING STATEMENTS This section advises that the report contains forward-looking statements subject to inherent risks and uncertainties that could materially affect future results - This report contains forward-looking statements regarding income, earnings, cash flows, revenue, operating improvements, and the impact of the Hunter Fan transaction, among others[235][236] - These statements are subject to inherent risks and uncertainties, including economic conditions, acquisition integration, competition, raw material costs, customer demand, and the impact of COVID-19[236] Item 3 - Quantitative and Qualitative Disclosures about Market Risk This section outlines Griffon's exposure to various financial and market risks, including those related to changes in interest rates and foreign currency exchange rates Interest Rates This subsection discusses Griffon's exposure to interest rate risk, primarily from variable interest rate debt and cash investments - Griffon's exposure to interest rate risk primarily relates to variable interest rate debt and investments in cash and equivalents[238] - The Credit Agreement was amended to replace GBP LIBOR with SONIA; a 100 basis point change in LIBOR is not expected to materially impact results or liquidity due to current borrowing levels[239] Foreign Exchange This subsection addresses Griffon's exposure to foreign currency exchange rate changes due to its international operations - Griffon conducts business in various non-US countries (Canada, Australia, UK, Ireland, New Zealand, China), exposing it to foreign currency exchange rate changes[240] - A 10% or less change in the value of applicable foreign currencies is not expected to have a material effect on Griffon's financial position and cash flows[240] Item 4 - Controls & Procedures This section confirms the effectiveness of Griffon's disclosure controls and procedures and states that there were no material changes in internal control over financial reporting - Griffon's CEO and CFO concluded that disclosure controls and procedures were effective at a reasonable assurance level as of the end of the reporting period[241] - No material changes in internal control over financial reporting occurred during the period covered by this report[242] Limitations on the Effectiveness of Controls This subsection acknowledges that no control system can provide absolute assurance and that evaluations offer reasonable assurance of achieving objectives - The company acknowledges that no control system can provide absolute assurance, and evaluations provide reasonable assurance of achieving objectives[243] PART II – OTHER INFORMATION Item 1 – Legal Proceedings This section states that there are no legal proceedings to report under this item - No legal proceedings are reported under Item 1[245] Item 1A – Risk Factors This section directs readers to review the risk factors detailed in Griffon's Annual Report on Form 10-K for the year ended September 30, 2021 - Readers should consider risk factors from the Annual Report on Form 10-K for the year ended September 30, 2021, as they may materially affect Griffon's business[245] Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds This section reports on issuer purchases of equity securities, indicating no shares were purchased under publicly announced repurchase programs Issuer Purchases of Equity Securities (Three Months Ended December 31, 2021) | Period | Total Number of Shares (or Units) Purchased | Average Price Paid Per Share (or Unit) | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under the Plans or Programs | | :-------------------- | :---------------------------------------- | :------------------------------------- | :---------------------------------------------------------------------------------------- | :-------------------------------------------------------------------------------------------------------------------- | | October 1 - 31, 2021 | — | $— | — | | | November 1 - 30, 2021 | — | $— | — | | | December 1 - 31, 2021 | — | $— | — | | | Total | — | $— | — | $57,955 | - As of December 31, 2021, $58 million remained available for share repurchases under Board-authorized programs[247] Item 3 – Defaults Upon Senior Securities This section states that there are no defaults upon senior securities to report - No defaults upon senior securities are reported[248] Item 4 – Mine Safety Disclosures This section states that there are no mine safety disclosures to report - No mine safety disclosures are reported[248] Item 5 – Other Information This section states that there is no other information to report - No other information is reported[248] Item 6 – Exhibits This section lists the exhibits filed as part of the Form 10-Q, including merger agreements, credit agreement amendments, and certifications - Key exhibits include the Agreement and Plan of Merger for MidOcean Hunter Holdings, Inc., First and Second Amendments to the Fourth Amended and Restated Credit Agreement, and the Debt Commitment Letter[250] - Certifications pursuant to the Sarbanes-Oxley Act (Rules 13a-14(a) and 18 U.S.C. Section 1350) are also included[250] Signatures This section contains the required signatures for the Form 10-Q, confirming its authorization and filing - The report is duly signed on behalf of Griffon Corporation by Brian G. Harris (Senior Vice President and Chief Financial Officer) and W. Christopher Durborow (Vice President and Chief Accounting Officer) on February 1, 2022[252][253]