UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2013
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. xYes 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).xYes o No
Large accelerated filer o
Accelerated filer
Non-accelerated filer o
Smaller reporting company
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).o Yesx No
The number of shares of common stock outstanding at July 31, 2013 was 59,651,842.
Griffon Corporation and Subsidiaries
Contents
Page
PART I - FINANCIAL INFORMATION
Item 1 – Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2013 (unaudited) and September 30, 2012
1
Condensed Consolidated Statement of Shareholders’ Equity for the Nine Months Ended June 30, 2013 (unaudited)
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended June 30, 2013 and 2012 (unaudited)
2
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2013 and 2012 (unaudited)
3
Notes to Condensed Consolidated Financial Statements (unaudited)
4
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
26
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
37
Item 4 - Controls & Procedures
PART II – OTHER INFORMATION
Item 1 – Legal Proceedings
38
Item 1A – Risk Factors
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
Item 3 – Defaults Upon Senior Securities
Item 4 – Mine Safety Disclosures
Item 5 – Other Information
Item 6 – Exhibits
39
Signatures
40
Exhibit Index
41
Part I – Financial InformationItem 1 – Financial Statements
GRIFFON CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS(in thousands)
(Unaudited)At June 30,2013
At September 30,2012
CURRENT ASSETS
Cash and equivalents
$
126,104
209,654
Accounts receivable, net of allowances of $5,525 and $5,433
271,743
239,857
Contract costs and recognized income not yet billed, net of progress payments of $4,062 and $3,748
117,273
70,777
Inventories, net
219,329
257,868
Prepaid and other current assets
58,711
47,472
Assets of discontinued operations
554
587
Total Current Assets
793,714
826,215
PROPERTY, PLANT AND EQUIPMENT, net
348,440
356,879
GOODWILL
356,375
358,372
INTANGIBLE ASSETS, net
221,783
230,473
OTHER ASSETS
25,668
31,317
ASSETS OF DISCONTINUED OPERATIONS
2,646
2,936
Total Assets
1,748,626
1,806,192
CURRENT LIABILITIES
Notes payable and current portion of long-term debt
13,384
17,703
Accounts payable
144,438
141,704
Accrued liabilities
94,213
110,337
Liabilities of discontinued operations
1,690
3,639
Total Current Liabilities
253,725
273,383
LONG-TERM DEBT, net of debt discount of $14,116 and $16,607
678,307
681,907
OTHER LIABILITIES
181,589
193,107
LIABILITIES OF DISCONTINUED OPERATIONS
2,631
3,643
Total Liabilities
1,116,252
1,152,040
COMMITMENTS AND CONTINGENCIES - See Note 18
SHAREHOLDERS’ EQUITY
Total Shareholders’ Equity
632,374
654,152
Total Liabilities and Shareholders’ Equity
GRIFFON CORPORATIONCONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY(Unaudited)
COMMON STOCK
CAPITAL INEXCESS OFPAR VALUE
RETAINEDEARNINGS
TREASURY SHARES
ACCUMULATEDOTHERCOMPREHENSIVEINCOME (LOSS)
DEFERREDESOP & OTHERCOMPENSATION
(in thousands)
SHARES
PAR VALUE
COST
Total
Balance at 9/30/2012
76,509
19,127
482,009
436,421
15,621
(242,081
)
(19,559
(21,765
Net income
—
3,342
Dividend
(4,384
Tax effect from exercise/vesting of equity awards, net
150
Amortization of deferred compensation
1,498
Common stock acquired
2,310
(25,689
Equity awards granted, net
1,140
285
(502
(217
ESOP allocation of common stock
148
Stock-based compensation
9,327
Other comprehensive income (loss), net of tax
(5,953
Balance at 6/30/2013
77,649
19,412
491,132
435,379
17,931
(267,770
(25,512
(20,267
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
GRIFFON CORPORATION AND SUBSIDIARIESCONDENSED 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,
2013
2012
Revenue
509,826
480,246
1,422,318
1,413,709
Cost of goods and services
401,515
364,601
1,110,840
1,092,555
Gross profit
108,311
115,645
311,478
321,154
Selling, general and administrative expenses
86,345
87,443
254,623
256,661
Restructuring and other related charges
1,604
12,048
1,795
Total operating expenses
87,949
266,671
258,456
Income from operations
20,362
28,202
44,807
62,698
Other income (expense)
Interest expense
(13,279
(12,932
(39,446
(39,000
Interest income
142
77
321
225
Other, net
607
(354
1,515
723
Total other income (expense)
(12,530
(13,209
(37,610
(38,052
Income before taxes
7,832
14,993
7,197
24,646
Provision for income taxes
4,229
5,945
3,855
11,083
3,603
9,048
13,563
Basic earnings per common share
0.07
0.16
0.06
0.24
Weighted-average shares outstanding
54,265
56,034
54,588
56,032
Diluted earnings per common share
56,204
57,495
56,735
57,311
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustments
(7,884
(18,527
(10,805
(13,479
Pension amortization
490
523
4,839
1,562
Gain on cash flow hedge
(158
13
Total other comprehensive income (loss), net of taxes
(7,552
(18,004
(11,917
Comprehensive income (loss)
(3,949
(8,956
(2,611
1,646
GRIFFON CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
52,787
48,668
7,599
Fixed asset impairment charges - restructuring
3,122
Provision for losses on accounts receivable
824
532
Amortization/write-off of deferred financing costs and debt discounts
4,651
4,497
Deferred income taxes
(897
(1,185
(Gain) loss on sale/disposal of assets
(788
59
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
(81,381
10,601
(Increase) decrease in inventories
36,588
(4,171
(Increase) decrease in prepaid and other assets
2,890
(3,970
Decrease in accounts payable, accrued liabilities and income taxes payable
(28,767
(49,574
Other changes, net
856
3,728
Net cash provided by operating activities
2,554
30,347
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment
(45,886
(57,695
Acquired business, net of cash acquired
(22,432
Proceeds from sale of assets
1,326
281
Net cash used in investing activities
(44,560
(79,846
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid
(3,564
Purchase of shares for treasury
(5,670
Proceeds from issuance of long-term debt
303
4,000
Payments of long-term debt
(12,842
(14,563
Change in short-term borrowings
2,408
(1,262
Financing costs
(759
(97
834
261
67
Net cash used in financing activities
(40,552
(20,255
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Net cash used in operating activities
(486
(1,690
Net cash used in discontinued operations
Effect of exchange rate changes on cash and equivalents
(506
327
NET DECREASE IN CASH AND EQUIVALENTS
(83,550
(71,117
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD
243,029
CASH AND EQUIVALENTS AT END OF PERIOD
171,912
GRIFFON CORPORATION AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(US dollars and non US currencies in thousands, except share and per share data)(Unaudited)
(Unless otherwise indicated, references to years or year-end refer to Griffon’s fiscal period ending September 30)
NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
About Griffon Corporation
Griffon Corporation (the “Company” or “Griffon”) is a diversified management and holding company that conducts business through wholly-owned subsidiaries. Griffon oversees the operations of its subsidiaries, allocates resources among them and manages their capital structures. Griffon provides direction and assistance to its subsidiaries in connection with acquisition and growth opportunities as well as in connection with divestitures. Griffon, to further diversify, also seeks out, evaluates and, when appropriate, will acquire additional businesses that offer potentially attractive returns on capital.
Griffon currently conducts its operations through three segments:
•
Home & Building Products (“HBP”) consists of two companies, Ames True Temper, Inc. (“ATT”) and Clopay Building Products Company, Inc. (“CBP”):
-
ATT is a global provider of non-powered landscaping products that make work easier for homeowners and professionals.
CBP is a leading manufacturer and marketer of residential, commercial and industrial garage doors to professional installing dealers and major home center retail chains.
Telephonics Corporation (“Telephonics”) designs, develops and manufactures high-technology integrated information, communication and sensor system solutions to military and commercial markets worldwide.
Clopay Plastic Products Company, Inc. (“Plastics”) is an international leader in the development and production of embossed, laminated and printed specialty plastic films used in a variety of hygienic, health-care and industrial applications.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not include all the information and footnotes required by U.S. GAAP for complete financial statements. As such, they should be read with reference to Griffon’s Annual Report on Form 10-K for the year ended September 30, 2012, 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, 2012 was derived from the audited financial statements included in Griffon’s Annual Report on Form 10-K for the year ended September 30, 2012.
The 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 U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. These estimates may be adjusted due to changes in economic, industry or customer financial conditions, as well as changes in technology or demand. Significant estimates include allowances for doubtful accounts receivable and returns, net realizable value of inventories, restructuring reserves, valuation of goodwill and intangible assets, percentage of completion method of accounting, pension assumptions, useful lives associated with depreciation and amortization of intangible and fixed assets, warranty reserves, sales incentive accruals, stock based compensation assumptions, income taxes and tax valuation reserves, environmental reserves, legal reserves, insurance reserves and the valuation of discontinued assets and liabilities, and the accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions Griffon may undertake in the future. Actual results may ultimately differ from these estimates.
Certain amounts in the prior year have been reclassified to conform to current year presentation.
NOTE 2 – FAIR VALUE MEASUREMENTS
The carrying values of cash and equivalents, accounts receivable, accounts and notes payable and revolving credit debt approximate fair value due to either the short-term nature of such instruments or the fact that the interest rate of the revolving credit debt is based upon current market rates.
The fair values of Griffon’s 2018 senior notes and 2017 4% convertible notes approximated $594,000 and $106,900, respectively, on June 30, 2013. Fair values were based upon quoted market prices (level 1 inputs).
Insurance contracts and trading securities with values of $3,922 and $2,198 at June 30, 2013, respectively, are measured and recorded at fair value based upon quoted prices in active markets for identical assets (level 1 inputs).
Items Measured at Fair Value on a Recurring Basis
At June 30, 2013, Griffon had $1,000 of Australian dollar contracts at a weighted average rate of $1.09. The contracts, which protect Australia operations from currency fluctuations for U.S. dollar based purchases, do not qualify for hedge accounting and a fair value gain of $135 and $122 was recorded in Other assets and to Other income for the outstanding contracts, based on similar contract values (level 2 inputs), for the three and nine months ended June 30, 2013, respectively. All contracts expire in 15 to 60 days.
In the normal course of business, Griffon’s operations are exposed to the effect of changes in foreign currency exchange rates. In order to manage these risks, Griffon may enter into various derivative contracts such as foreign currency exchange contracts, including forwards and options. During the second and third quarters of 2013, Clopay Europe and Clopay Plastics entered into forward exchange contracts to receive $3,375 USD and $1,313 USD at the fixed exchange rate of 1.35 USD/EUR and 1.31 USD/EUR on April 3, 2013 and July 2, 2013, respectively. These contracts were created in order to lock into a foreign currency rate for a planned settlement of inter-company liabilities payable in USD. At inception, the hedges were deemed effective as cash flow hedges with gains and losses related to changes in fair value deferred and recorded in Other comprehensive income (loss) and Prepaid and other current assets until settlement. Upon settlement, gains and losses are recognized in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) as Other income. A gain of $171 was recorded in Other income in the three and nine months ended June 30, 2013, respectively. Amounts recorded as Prepaid and other current assets in the Condensed Consolidated Balance Sheet were $13 and nil as of June 30, 2013 and September 30, 2012, respectively, for the fair value of these contracts, based on similar contract values (level 2 inputs).
5
NOTE 3 – ACQUISITION
On October 17, 2011, Griffon acquired the pots and planters business of Southern Sales & Marketing Group, Inc. (“SSMG”) for $22,432. The acquired business, which markets its products under the Southern PatioTMbrand (“Southern Patio”), is a leading designer, manufacturer and marketer of landscape accessories. Southern Patio, which was integrated with ATT, had revenue exceeding $40,000 in 2011.
The accounts of the acquired company, after adjustment to reflect fair market values assigned to assets purchased, have been included in the consolidated financial statements from date of acquisition.
The following table summarizes the fair values of the Southern Patio assets as of the date of acquisition:
Inventory
3,673
PP&E
416
Goodwill
4,655
Amortizable intangible assets
11,077
Indefinite life intangible assets
2,611
Total assets acquired
22,432
The amounts assigned to goodwill and major intangible asset classifications, all of which are tax deductible, for the Southern Patio acquisition are as follows:
AmortizationPeriod (Years)
N/A
Tradenames
Indefinite
Customer relationships
25
18,343
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 30,2013
Raw materials and supplies
66,373
63,596
Work in process
56,280
67,077
Finished goods
96,676
127,195
6
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT
The following table details the components of property, plant and equipment, net:
Land, building and building improvements
128,415
125,330
Machinery and equipment
645,023
622,983
Leasehold improvements
35,583
34,890
809,021
783,203
Accumulated depreciation and amortization
(460,581
(426,324
Depreciation and amortization expense for property, plant and equipment was $15,781 and $14,826 for the quarters ended June 30, 2013 and 2012, respectively, and $46,846 and $42,597 for the nine months ended June 30, 2013, and 2012, respectively.
No event or indicator of impairment occurred during the quarter ended June 30, 2013, 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, 2013:
Other adjustmentsincluding currencytranslations
At June 30, 2013
Home & Building Products
269,802
Telephonics
18,545
Plastics
70,025
(1,997
68,028
The following table provides the gross carrying value and accumulated amortization for each major class of intangible assets:
At September 30, 2012
Gross CarryingAmount
AccumulatedAmortization
AverageLife(Years)
165,250
26,837
167,603
21,799
Unpatented technology
6,803
2,770
12.5
6,751
2,334
Total amortizable intangible assets
172,053
29,607
174,354
24,133
Trademarks
79,337
80,252
Total intangible assets
251,390
254,606
Amortization expense for intangible assets was $1,969 and $2,006 for the quarters ended June 30, 2013 and 2012, respectively, and $5,941 and $6,071 for the nine months ended June 30, 2013 and 2012, respectively.
No event or indicator of impairment occurred during the quarter ended June 30, 2013, which would require impairment testing of long-lived intangible assets including goodwill.
7
NOTE 7 – INCOME TAXES
The effective tax rates for the quarter and nine-month period ended June 30, 2013 were 54.0% and 53.6%, respectively, compared to 39.7% and 45.0% in the comparable prior year periods, respectively. The rates include discrete benefits in the current and prior year quarter of $1,495 and $1,626, respectively, and in the current and prior year nine-month periods of $1,859 and $1,626, respectively, primarily resulting from the release of previously established reserves for uncertain tax positions on conclusion of certain tax audits, and benefits arising on the filing of tax returns in various jurisdictions.
Excluding discrete items, the effective tax rates for the quarter and nine-month period ended June 30, 2013 were 73.1% and 79.4%, respectively, compared to 50.5% and 51.6% in the comparable prior year periods, respectively. Rates in all periods reflect the impact of permanent differences not deductible in determining taxable income, mainly limited deductibility of restricted stock, tax reserves and of changes in earnings mix between domestic and non-domestic operations, all of which are material relative to the level of pretax result.
NOTE 8 – LONG-TERM DEBT
OutstandingBalance
OriginalIssuerDiscount
BalanceSheet
CapitalizedFees &Expenses
CouponInterest Rate
Senior notes due 2018
(a)
550,000
7,644
7.100
%
8,862
7.125
Revolver due 2016
2,490
n/a
2,175
Convert. debt due 2017
(b)
100,000
(14,116
85,884
1,588
4.000
(16,607
83,393
1,921
Real estate mortgages
(c)
13,446
206
14,063
271
ESOP Loans
(d)
21,504
22,723
32
Capital lease - real estate
(e)
9,764
213
5.000
10,455
232
Term loan due 2013
(f)
5,203
43
12,873
107
Revolver due 2013
Foreign lines of credit
(g)
4,078
2,064
Foreign term loan
915
8
2,693
19
Other long term debt
(h)
897
1,346
Totals
705,807
691,691
12,218
716,217
699,610
13,619
less: Current portion
(13,384
(17,703
Long-term debt
692,423
698,514
Three Months Ended June 30, 2013
Three Months Ended June 30, 2012
EffectiveInterest Rate
Cash Interest
Amort. DebtDiscount
Amort.Deferred Cost& Other Fees
Total InterestExpense
TotalInterestExpense
7.4
9,797
406
10,203
179
131
310
440
157
597
9.1
1,000
846
110
1,956
9.2
777
111
1,888
4.9
133
22
155
5.6
164
2.8
151
153
3.0
177
5.3
125
136
4.1
58
80
3.4
21
185
16
13.6
139
15.0
10.8
51
55
10.9
101
109
272
30
Capitalized interest
(191
(591
11,730
703
13,279
11,422
733
12,932
Nine Months Ended June 30, 2013
Nine Months Ended June 30, 2012
29,391
1,217
30,608
1,218
30,609
0.0
603
444
1,047
466
906
3,000
2,491
332
5,823
2,286
5,618
407
65
472
436
501
2.9
476
482
536
381
400
417
3.8
66
298
4.8
691
757
12.0
364
9.8
182
10.5
183
11
194
10.6
158
785
34
819
(816
(1,522
34,795
2,160
39,446
34,503
2,211
39,000
On March 17, 2011, in an unregistered offering through a private placement under Rule 144A, Griffon issued, at par, $550,000 of 7.125% Senior Notes due in 2018 (“Senior Notes”); interest is payable semi-annually. On August 9, 2011, Griffon exchanged all of the Senior Notes for substantially identical Senior Notes registered under the Securities Act of 1933 via an exchange offer.
The Senior Notes can be redeemed prior to April 1, 2014 at a price of 100% of principal plus a make-whole premium and accrued interest; on or after April 1, 2014, the Senior Notes can be redeemed at a certain price (declining from 105.344% of principal on or after April 1, 2014 to 100% of principal on or after April 1, 2017), plus accrued interest. Proceeds from the Senior Notes were used to pay down outstanding borrowings under a senior secured term loan facility and two senior secured revolving credit facilities of certain of the Company’s subsidiaries. The Senior Notes are senior unsecured obligations of Griffon guaranteed by certain domestic subsidiaries, and are subject to certain covenants, limitations and restrictions.
On March 28, 2013, Griffon amended and increased the amount available under its Revolving Credit Facility (“Credit Agreement”) from $200,000 to $225,000 and extended its maturity from March 17, 2016 to March 28, 2018. The facility includes a letter of credit sub-facility with a limit of $60,000, a multi-currency sub-facility of $50,000 and a swingline sub-facility with a limit of $30,000. Borrowings under the Credit Agreement may be repaid and re-borrowed at any time, subject to final maturity of the facility or the occurrence of an event of default under the Credit Agreement. Interest is payable on borrowings at either a LIBOR or base rate benchmark rate, in each case without a floor, plus an applicable margin, which adjusts based on financial performance. The current margins are 1.25% for base rate loans and 2.25% for LIBOR loans. The Credit Agreement has certain financial maintenance tests including a maximum total leverage ratio, a maximum senior secured leverage ratio and a minimum interest coverage ratio as well as customary affirmative and negative covenants and events of default. The Credit Agreement also includes certain restrictions, such as limitations on the incurrence of indebtedness and liens and the making of restricted payments and investments. Borrowings under the Credit Agreement are guaranteed by Griffon’s material domestic subsidiaries and are secured, on a first priority basis, by substantially all assets of the Company and the guarantors.
9
At June 30, 2013, there were $25,867 of standby letters of credit outstanding under the Credit Agreement; $199,133 was available, subject to certain covenants, for borrowing at that date.
On December 21, 2009, Griffon issued $100,000 principal of 4% convertible subordinated notes due 2017 (the “2017 Notes”). The current conversion rate of the 2017 Notes is 67.8495 shares of Griffon’s common stock per $1,000 principal amount of notes, corresponding to a conversion price of $14.74 per share. When a cash dividend is declared that would result in an adjustment to the conversion ratio of less than 1%, any adjustment to the conversion ratio is deferred until the first to occur of (i) actual conversion, (ii) the 42nd trading day prior to maturity of the notes, and (iii) such time as the cumulative adjustment equals or exceeds 1%. As of June 30, 2013, aggregate dividends since the last conversion price adjustment of $0.05 per share would have resulted in an adjustment to the conversion ratio of approximately 0.44%. At June 30, 2013 and September 30, 2012, the 2017 Notes had a capital in excess of par component, net of tax, of $15,720.
On December 20, 2010, Griffon entered into two second lien real estate mortgages to secure new loans totaling $11,834. The loans mature in February 2016, are collateralized by the related properties and are guaranteed by Griffon. The loans bear interest at a rate of LIBOR plus 3% with the option to swap to a fixed rate.
Griffon has other real estate mortgages, collateralized by real property, which bear interest at 6.3% and mature in 2016.
Griffon’s Employee Stock Ownership Plan (“ESOP”) entered into a loan agreement in August 2010 to borrow $20,000 over a one-year period. The proceeds were used to purchase 1,874,737 shares of Griffon common stock in the open market for $19,973. The loan bears interest at a) LIBOR plus 2.5% or b) the lender’s prime rate, at Griffon’s option. In November 2011, Griffon exercised an option to convert the outstanding loan to a five-year term loan; principal is payable in quarterly installments of $250, beginning December 2011, with a balloon payment of $15,223 due at maturity (November 2016). The loan is secured by shares purchased with the proceeds of the loan, and repayment is guaranteed by Griffon. At June 30, 2013, $18,223 was outstanding.
In addition, the ESOP is party to a loan agreement which requires quarterly principal payments of $156 and interest through the extended expiration date of December 2013 at which time the $3,125 balance of the loan, and any outstanding interest, will be payable. Griffon has the intent and ability to refinance the December 2013 balance, and has classified the balance in Long-Term Debt. The primary purpose of this loan was to purchase 547,605 shares of Griffon’s common stock in October 2008. The loan is secured by shares purchased with the proceeds of the loan, and repayment is guaranteed by Griffon. The loan bears interest at rates based upon the prime rate or LIBOR. At June 30, 2013, $3,281 was outstanding.
In October 2006, CBP entered into a capital lease totaling $14,290 for real estate in Troy, Ohio. The lease matures in 2021, bears interest at a fixed rate of 5.3%, is secured by a mortgage on the real estate and is guaranteed by Griffon.
In November 2010, Clopay Europe GMBH (“Clopay Europe”) entered into a €10,000 revolving credit facility and a €20,000 term loan. The facility accrues interest at EURIBOR plus 2.45% per annum and the term loan accrues interest at EURIBOR plus 2.20% per annum. The revolving facility matures in November 2013, but is renewable upon mutual agreement with the bank. In July 2011, the full €20,000 was drawn on the Term Loan, with a portion of the proceeds used to repay borrowings under the revolving credit facility. The term loan is payable in ten equal quarterly installments which began in September 2011, with maturity in December 2013. Under the term loan, Clopay Europe is required to maintain a certain minimum equity to assets ratio and keep leverage below a certain level, defined as the ratio of total debt to EBITDA.
In February 2012, Clopay do Brazil, a subsidiary of Plastics, borrowed $4,000 at a rate of 104.5% of Brazilian CDI (7.7% at June 30, 2013). The loan was used to refinance existing loans, is collateralized by accounts receivable and a 50% guaranty by Plastics and is to be repaid in four equal, semi-annual installments of principal plus accrued interest beginning in August 2012. Clopay do Brazil also maintains lines of credit of approximately $5,000.
10
Interest on borrowings accrue at a rate of Brazilian CDI plus 6.0% (13.7%, at June 30, 2013). At June 30, 2013 there was approximately $4,100 borrowed under the lines.
In November 2012, Garant G.P. (“Garant”) entered into a CAD $15,000 revolving credit facility. The facility accrues interest at LIBOR or the Bankers Acceptance Rate plus 1.3% per annum (1.49% and 2.45% as of June 30, 2013). The revolving facility matures in November 2015. Garant is required to maintain a certain minimum equity. At June 30, 2013, there were no borrowings under the revolving credit facility with CAD $15,000 available for borrowing.
At September 30, 2012, Griffon had $532 of 4% convertible subordinated notes due 2023 (“2023 Notes”) outstanding. On April 15, 2013, the 2023 Notes were redeemed at par plus accrued interest. Other long term debt also includes capital leases.
At June 30, 2013, Griffon and its subsidiaries were in compliance with the terms and covenants of its credit and loan agreements.
NOTE 9 — SHAREHOLDERS’ EQUITY
On November 17, 2011, the Company began declaring quarterly cash dividends. During 2012, the Company declared and paid quarterly dividends of $0.02 per share, totaling $0.08 per share for the year. During the first, second and third quarters of 2013, the Board of Directors approved quarterly cash dividends of $0.025 per common share, which were paid on December 26, 2012, March 27, 2013, June 26, 2013, to holders of common stock as of close of business on November 29, 2012, February 27, 2013 and May 28, 2013, respectively. Dividends paid on allocated shares in the ESOP were used to pay down the ESOP loan and recorded as a reduction in expense. A dividend payable was established for the holders of restricted shares; such payable will be released upon vesting of the underlying restricted shares.
On August 6, 2013, the Board of Directors declared a quarterly cash dividend of $0.025 per share, payable on September 25, 2013 to shareholders of record as of the close of business on August 27, 2013.
Compensation expense for restricted stock is recognized ratably over the required service period based on the fair value of the grant calculated as the number of shares granted multiplied by the stock price on the date of grant, and for performance shares, the likelihood of achieving the performance criteria. Compensation cost related to stock-based awards with graded vesting is amortized using the straight-line attribution method.
In February 2011, shareholders approved the Griffon Corporation 2011 Equity Incentive Plan (as amended, the “Incentive Plan”) under which awards of performance shares, performance units, stock options, stock appreciation rights, restricted shares, deferred shares and other stock-based awards may be granted. 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 3,000,000 (600,000 of which may be issued as incentive stock options) plus any shares underlying awards outstanding on the effective date of the Incentive Plan under the 2006 Incentive Plan that are subsequently cancelled or forfeited. As of June 30, 2013, 689,668 shares were available for grant.
All grants outstanding under the Griffon Corporation 2001 Stock Option Plan, 2006 Equity Incentive Plan and Outside Director Stock Award Plan will continue under their terms; no additional awards will be granted under such plans.
During the first quarter of 2013, Griffon granted 883,500 restricted stock awards with vesting periods up to four years, 829,100 of which are also subject to certain performance conditions, with a total fair value of $9,433, or a weighted average fair value of $10.68 per share.
During the second quarter of 2013, Griffon granted 278,330 restricted stock awards with vesting periods up to four years, 241,667 of which are also subject to certain performance conditions, with a total fair value of $3,333, or a weighted average fair value of $11.97 per share.
During the third quarter of 2013, Griffon granted 43,500 restricted stock awards with vesting periods up to four years, which are also subject to certain performance conditions, with a total fair value of $506 or a weighted average fair value of $11.63 per share.
For the three and nine months ended June 30, 2013, stock based compensation expense totaled $3,029 and $9,327, respectively. For the three and nine months ended June 30, 2012, stock based compensation expense totaled $2,691 and $7,599, respectively.
In August 2011, Griffon’s Board of Directors authorized the repurchase of up to $50,000 of Griffon’s outstanding common stock. Under this repurchase program, the Company may purchase shares of its common stock, depending upon market conditions, in open market or privately negotiated transactions, including pursuant to a 10b5-1 plan. In the first quarter of 2013, Griffon purchased 723,630 shares of common stock, for a total of $7,331, or $10.13 per share, pursuant to the repurchase program. In the second quarter of 2013, Griffon purchased 881,998 shares of common stock, for a total of $10,265, or $11.64 per share pursuant to the repurchase program. In the third quarter of 2013, Griffon purchased 272,698 shares of common stock, for a total of $3,014, or $11.05 per share pursuant to the repurchase program. As of June 30, 2013, Griffon has purchased 3,230,771 shares of common stock, for a total of $32,299, or $10.00 per share; $17,701 remains under the $50,000 authorization.
In addition to the repurchases under the $50,000 program, during the third quarter, 53,459 shares, with a market value of $566, or $10.58 per share, were withheld to settle employee taxes due upon the vesting of restricted stock. For the nine months ended June 30, 2013, 432,116 shares, with a market value of $5,079, or $11.75 per share, were withheld to settle employee taxes due upon the vesting of restricted stock.
NOTE 10 – EARNINGS PER SHARE (EPS)
Basic EPS was calculated by dividing income available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted EPS was calculated by dividing income available to common shareholders by the weighted average number of shares of common stock outstanding plus additional common shares that could be issued in connection with stock based compensation. The 2023 Notes and the 2017 Notes were anti-dilutive due to the conversion price being greater than the weighted-average stock price during the periods presented.
The following table is a reconciliation of the share amounts (in thousands) used in computing earnings per share:
Weighted average shares outstanding - basic
Incremental shares from stock based compensation
1,939
1,461
2,147
1,279
Weighted average shares outstanding - diluted
Anti-dilutive options excluded from diluted EPS computation
715
963
Griffon has the intent and ability to settle the principal amount of the 2017 Notes in cash, as such, the potential issuance of shares related to the principal amount of the 2017 Notes does not affect diluted shares.
12
NOTE 11 – BUSINESS SEGMENTS
Griffon’s reportable business segments are as follows:
HBP is a leading manufacturer and marketer of residential, commercial and industrial garage doors to professional installing dealers and major home center retail chains, as well as a global provider of non-powered landscaping products that make work easier for homeowners and professionals.
Telephonics develops, designs and manufactures high-technology integrated information, communication and sensor system solutions to military and commercial markets worldwide.
Plastics is an international leader in the development and production of embossed, laminated and printed specialty plastic films used in a variety of hygienic, health-care and industrial applications.
Information on Griffon’s business segments is as follows:
For the Three Months EndedJune 30,
For the Nine Months EndedJune 30,
REVENUE
Home & Building Products:
ATT
128,332
130,311
341,878
362,374
CBP
112,285
106,910
314,651
309,825
240,617
237,221
656,529
672,199
129,997
101,116
347,678
319,621
139,212
141,909
418,111
421,889
Total consolidated net sales
The following table reconciles segment operating profit to income before taxes:
INCOME BEFORE TAXES
Segment operating profit:
11,549
17,482
22,655
35,412
10,592
14,113
38,990
40,171
5,401
3,506
8,959
7,879
Total segment operating profit
27,542
35,101
70,604
83,462
Net interest expense
(13,137
(12,855
(39,125
(38,775
Unallocated amounts
(6,573
(7,253
(22,140
(20,041
Loss on pension settlement
(2,142
Griffon evaluates performance and allocates resources based on each segments’ operating results before interest income and expense, income taxes, depreciation and amortization, unallocated amounts (mainly corporate overhead), restructuring charges, acquisition-related expenses, and gains (losses) from pension settlement and debt extinguishment, as applicable (“Segment adjusted EBITDA”). Griffon believes this information is useful to investors for the same reason.
The following table provides a reconciliation of Segment adjusted EBITDA to Income before taxes:
Segment adjusted EBITDA:
21,478
25,831
56,272
59,434
13,146
15,886
45,015
46,912
12,161
10,117
33,832
27,462
Total Segment adjusted EBITDA
46,785
51,834
135,119
133,808
Segment depreciation and amortization
(17,639
(16,733
(52,467
(48,373
Restructuring charges
(1,604
(12,048
(1,795
Acquisition costs
(178
Unallocated amounts typically include general corporate expenses not attributable to a reportable segment.
DEPRECIATION and AMORTIZATION
Segment:
9,075
8,349
27,092
23,571
1,804
1,773
5,275
5,219
6,760
6,611
20,100
19,583
Total segment depreciation and amortization
17,639
16,733
52,467
48,373
Corporate
99
320
295
Total consolidated depreciation and amortization
17,749
16,832
CAPITAL EXPENDITURES
6,534
5,974
22,352
20,547
2,401
4,462
5,853
8,246
5,947
7,037
17,648
28,811
Total segment
14,882
17,473
45,853
57,604
17
33
91
Total consolidated capital expenditures
14,891
17,490
45,886
57,695
ASSETS
At September30, 2012
Segment assets:
945,087
943,766
283,723
255,420
415,692
430,395
Total segment assets
1,644,502
1,629,581
100,924
173,088
Total continuing assets
1,745,426
1,802,669
3,200
3,523
Consolidated total
14
NOTE 12 – DEFINED BENEFIT PENSION EXPENSE
Defined benefit pension expense was as follows:
Three Months EndedJune 30,
Nine Months EndedJune 30,
Service cost
46
149
Interest cost
2,427
2,652
7,274
7,988
Expected return on plan assets
(3,139
(2,918
(9,413
(8,782
Amortization:
Prior service cost
84
15
252
Recognized actuarial loss
840
718
2,520
2,154
2,142
Net periodic expense
184
582
2,687
1,762
Effective January 1, 2012, the Clopay Pension Plan merged with the Ames True Temper, Inc. Pension Plan. The merged Pension Plan was renamed the Clopay Ames True Temper Pension Plan.
In the first quarter of 2013, Selling, general and administrative expenses included a $2,142, non-cash, pension settlement loss resulting from the lump-sum buyout of certain participant’s balances in the Company’s defined benefit plan. The buyouts, funded by the pension plan, reduced the Company’s net pension liability by $3,472 and increased Accumulated Other Comprehensive Income (Loss) by $3,649.
NOTE 13 – RECENT ACCOUNTING PRONOUNCEMENTS
In June 2011, the FASB issued new accounting guidance requiring the presentation of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income, or in two separate but consecutive statements. The new accounting rules eliminate the option to present components of other comprehensive income as part of the statement of changes in shareholders’ equity. The new accounting rules were effective for the Company beginning in 2013 and did not have a material effect on the Company’s financial condition or results of operations and the Company presented comparable financial results.
In September 2011, the FASB issued new accounting guidance that allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative impairment testing of goodwill and indefinite life intangibles. This guidance is effective for the Company beginning in 2013 and did not have an impact on the Company’s financial condition or results of operations.
In February 2013, the FASB issued new accounting guidance requiring enhanced disclosures for items reclassified out of accumulated other comprehensive income. The guidance does not amend any existing requirements for reporting net income or other comprehensive income in the financial statements. This guidance is effective prospectively for annual reporting periods beginning after December 15, 2012, with early adoption permitted. As this new guidance is related to presentation only, the implementation of this guidance in the first quarter of fiscal year 2014 will not have a material effect on the Company’s financial condition or results of operations.
The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
NOTE 14 – DISCONTINUED OPERATIONS
The following amounts related to the Installation Services segment, discontinued in 2008, have been segregated from Griffon’s continuing operations, and are reported as assets and liabilities of discontinued operations in the condensed consolidated balance sheets:
Assets of discontinued operations:
Other long-term assets
Total assets of discontinued operations
Liabilities of discontinued operations:
Accrued liabilities, current
Other long-term liabilities
Total liabilities of discontinued operations
4,321
7,282
There was no Installation Services’ operating unit revenue or income for the three or nine months ended June 30, 2013 or 2012.
NOTE 15 – RESTRUCTURING AND OTHER RELATED CHARGES
In January 2013, ATT announced its intention to close certain of its manufacturing facilities and consolidate affected operations primarily into its Camp Hill and Carlisle, PA locations. The intended actions, to be completed by the end of fiscal 2014, will improve manufacturing and distribution efficiencies, allow for in-sourcing of certain production currently performed by third party suppliers, and improve material flow and absorption of fixed costs.
ATT anticipates incurring pre-tax restructuring and related exit costs approximating $8,000, comprised of cash charges of $4,000 and non-cash, asset-related charges of $4,000; the cash charges will include $3,000 for one-time termination benefits and other personnel-related costs and $1,000 for facility exit costs. ATT expects $20,000 in capital expenditures in connection with this initiative and, to date, has incurred $5,388 and $8,385 in restructuring costs and capital expenditures, respectively.
During the second quarter of 2013, BPC completed the consolidation of its Auburn, Washington facility into its Russia, Ohio facility.
HBP recognized $854 and $6,525, respectively, for the three and nine months ended June 30, 2013, and nil and $273, respectively, for the three and nine months ended June 30, 2012, in restructuring and other related exit costs. In 2013, restructuring and other related charges primarily related to one-time termination benefits, facility costs, other personnel costs and asset impairment charges related to the ATT and BPC plant consolidation initiatives. In 2012, restructuring and other related charges primarily related to one-time termination benefits and other personnel costs at ATT.
During the second quarter of 2013, PPC Europe announced plans to exit low margin products and eliminate approximately 80 positions, resulting in a restructuring cash charge of $4,773.
During the third quarter of 2013, Telephonics recognized $750 in restructuring costs in connection with the termination of a facility lease. The facility was vacated as a result of the headcount reductions and changes in organizational structure Telephonics undertook in the past two years. In the first quarter of 2012, Telephonics recognized $1,522 of restructuring and other related charges, primarily for one-time termination benefits and other personnel costs in conjunction with changes to its organizational structure.
A summary of the restructuring and other related charges included in the line item “Restructuring and other related charges” in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) were recognized as follows:
WorkforceReduction
Facilities &Exit Costs
Other RelatedCosts
Non-cashFacility andOther
Amounts incurred in:
Quarter ended December 31, 2011
1,538
257
Quarter ended December 31, 2012
994
75
1,108
Quarter ended March 31, 2013
3,635
683
1,517
3,501
9,336
Quarter ended June 30, 2013
641
926
5,270
1,648
1,629
The activity in the restructuring accrual recorded in accrued liabilities consisted of the following:
Accrued liability at September 30, 2012
3,500
140
3,640
Charges
8,547
Payments
(4,360
(1,352
(1,302
(7,014
Accrued liability at June 30, 2013
4,410
5,173
NOTE 16 – OTHER INCOME
For the quarters ended June 30, 2013 and 2012, Other income (expense) included $168 and ($707) respectively, of currency exchange gains (losses) in connection with the translation of receivables and payables denominated in currencies other than the functional currencies of Griffon and its subsidiaries as well as $12 and ($39), respectively, of investment income (loss).
For the nine months ended June 30, 2013 and 2012, Other income (expense) included ($299) and ($1,375) respectively, of currency exchange gains (losses) in connection with the translation of receivables and payables denominated in currencies other than the functional currencies of Griffon and its subsidiaries as well as $365 and $133, respectively, of investment income (loss).
NOTE 17 – WARRANTY LIABILITY
Telephonics offers warranties against product defects for periods generally ranging from one to two years, depending on the specific product and terms of the customer purchase agreement. Typical warranties require Telephonics to repair or replace the defective products during the warranty period at no cost to the customer. At the time revenue is recognized, Griffon records a liability for warranty costs, estimated based on historical experience and periodically assesses its warranty obligations and adjusts the liability as necessary. ATT offers an express limited warranty for a period of ninety days on all products unless otherwise stated on the product or packaging from the date of original purchase.
Changes in Griffon’s warranty liability, included in Accrued liabilities, were as follows:
Balance, beginning of period
7,424
10,356
8,856
7,963
Warranties issued and changes in estimated pre-existing warranties
1,309
579
1,965
5,525
Actual warranty costs incurred
(1,342
(1,174
(3,430
(3,727
Balance, end of period
7,391
9,761
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.
Subsequently, Griffon was advised by the DEC that random sampling at the Peekskill Site and in a creek near the Peekskill Site indicated concentrations of solvents and other chemicals common to Lightron’s prior plating operations. ISC then entered into a consent order with the DEC in 1996 (the “Consent Order”) to perform a remedial investigation and prepare a feasibility study. After completing the initial remedial investigation pursuant to the Consent Order, ISC was required by the DEC, and did conduct accordingly over the next several years, supplemental remedial investigations, including soil vapor investigations, under the Consent Order.
In April 2009, the DEC advised ISC’s representatives that both the DEC and the New York State Department of Health had reviewed and accepted an August 2007 Remedial Investigation Report and an Additional Data Collection Summary Report dated January 30, 2009. With the acceptance of these reports, ISC completed the remedial investigation required under the Consent Order and was authorized, accordingly, by the DEC to conduct the Feasibility Study required by the Consent Order. Pursuant to the requirements of the Consent Order and its obligations thereunder, ISC, without acknowledging any responsibility to perform any remediation at the Site, submitted to the DEC in August 2009, a draft feasibility study which recommended for the soil, groundwater and sediment medias, remediation alternatives having a current net capital cost value, in the aggregate, of approximately $5,000. In February 2011, 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 medias, but selected a different remediation alternative for the sediment medium. The approximate cost and the current net capital cost value of the remedy proposed by DEC in the PRAP is approximately $10,000. After receiving public comments on the PRAP, the DEC issued a Record of Decision (“ROD”) that set forth the specific remedies selected and responded to public comments. The remedies selected by the DEC in the ROD are the same remedies as those set forth in the PRAP.
It is now expected that DEC will enter into negotiations with potentially responsible parties to request they undertake performance of the remedies selected in the ROD, and if such parties do not agree to implement such remedies, then the State may use State Superfund money to remediate the Peekskill site and seek recovery of costs from such parties. Griffon does not acknowledge any responsibility to perform any remediation at the Peekskill Site.
18
Improper Advertisement Claim involving Union Tools Products. Since December 2004, a customer of ATT has been named in various litigation matters relating to certain Union Tools products. The plaintiffs in those litigation matters have asserted causes of action against the customer of ATT for improper advertisement to end consumers. The allegations suggest that advertisements led the consumers to believe that Union Tools’ hand tools were wholly manufactured within boundaries of the United States. The complaints assert various causes of action against the customer of ATT under federal and state law, including common law fraud. At some point, likely once the litigation against the customer of ATT ends, the customer may seek indemnity (including recovery of its legal fees and costs) against ATT for an unspecified amount. Presently, ATT cannot estimate the amount of loss, if any, if the customer were to seek legal recourse against ATT.
Department of Environmental Conservation of New York State, regarding Frankfort, NY site. During fiscal 2009, an underground fuel tank with surrounding soil contamination was discovered at the Frankfort, N.Y. site, which is the result of historical facility operations prior to ATT’s ownership. While ATT was actively working with the DEC and the New York State Department of Health to define remediation requirements relative to the underground fuel tank, the DEC took the position that ATT was responsible to remediate other types of contamination on the site. After negotiations with the DEC, on August 15, 2011, ATT executed an Order on Consent with the DEC. The Order is without admission or finding of liability or acknowledgement that there has been a release of hazardous substances at the site. Importantly, the Order does not waive any rights that ATT has under a 1991 Consent Judgment entered into between the DEC and a predecessor of ATT relating to the site. The Order requires that ATT identify Areas of Concern at the site, and formulate a strategy to investigate and remedy both on and off site conditions in compliance with applicable environmental law. At the conclusion of the remedy phase of the remediation to the satisfaction of the DEC, the DEC will issue a Certificate of Completion. On August 1, 2012, a fire occurred during the course of demolition of certain structures at the Frankfort, NY site, requiring cleanup and additional remediation under the oversight of the DEC. Demolition of the structures on the property has been substantially completed. The DEC has inspected the progress of the work and is satisfied with the results thus far. On February 12, 2013, the DEC issued comments to the Remedial Investigation Work Plan previously submitted by ATT in October 2011, and in response, ATT issued a Revised Remedial Investigation Work Plan. Completion of the remedial investigation is dependent on timing of the DEC approval; no additional comments have been provided by the DEC to date.
U.S. Government investigations and claims
Defense contracts and subcontracts, including Griffon’s contracts and subcontracts, are subject to audit and review by various agencies and instrumentalities of the United States government, including among others, the Defense Contract Audit Agency (“DCAA”), the Defense Criminal Investigative Service (“DCIS”), and the Department of Justice which has responsibility for asserting claims on behalf of the U.S. government. In addition to ongoing audits, pursuant to an administrative subpoena Griffon is currently providing information to the U.S. Department of Defense Office of the Inspector General. No claim has been asserted against Griffon, and Griffon is unaware of any material financial exposure in connection with the Inspector General’s inquiry.
In general, departments and agencies of the U.S. Government have the authority to investigate various transactions and operations of Griffon, and the results of such investigations may lead to administrative, civil or criminal proceedings, the ultimate outcome of which could be fines, penalties, repayments or compensatory or treble damages. U.S. Government regulations provide that certain findings against a contractor may lead to suspension or debarment from future U.S. Government contracts or the loss of export privileges for a company or an operating division or subdivision. Suspension or debarment could have material adverse effect on Telephonics because of its reliance on government contracts.
General legal
Griffon is subject to various laws and regulations relating to the protection of the environment and is a party to legal proceedings arising in the ordinary course of business. Management believes, based on facts presently known to it, that the resolution of the matters above and such other matters will not have a material adverse effect on Griffon’s consolidated financial position, results of operations or cash flows.
NOTE 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., Clopay Plastic Products Company, Inc., Telephonics Corporation, Ames True Temper, Inc. and ATT Southern, Inc. 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, 2013 and September 30, 2012 and for the three and nine months ended June 30, 2013 and 2012. The financial information may not necessarily be indicative of results of operations or financial position had the guarantor companies or non-guarantor companies operated as independent entities. The guarantor companies and the non-guarantor companies include the consolidated financial results of their wholly-owned subsidiaries accounted for under the equity method. On June 29, 2012, ATT Southern, Inc. was added as a guarantor. On June 30, 2012, to allocate debt related to operations, three guarantors entered into intercompany debt agreements with a non-guarantor to borrow a total of $491,372.
CONDENSED CONSOLIDATING BALANCE SHEETSAt June 30, 2013
Parent Company
Guarantor Companies
Non-Guarantor Companies
Elimination
Consolidation
35,260
23,036
67,808
Accounts receivable, net of allowances
230,970
73,943
(33,170
Contract costs and recognized income not yet billed, net of progress payments
117,281
(8
161,642
57,395
292
1,185
24,258
18,659
14,609
36,445
557,187
218,351
(18,269
987
246,079
101,374
288,147
68,228
161,421
60,362
INTERCOMPANY RECEIVABLE
576,447
889,614
590,955
(2,057,016
EQUITY INVESTMENTS IN SUBSIDIARIES
2,187,091
532,330
2,690,519
(5,409,940
47,265
57,942
7,659
(87,198
2,848,235
2,732,720
3,740,094
(7,572,423
1,156
1,070
11,158
Accounts payable and accrued liabilities
26,463
163,612
67,137
(18,561
238,651
27,619
164,682
79,985
LONG-TERM DEBT, net of debt discounts
656,230
9,277
12,800
INTERCOMPANY PAYABLES
20,519
817,784
1,187,936
(2,026,239
64,419
176,856
27,512
768,787
1,168,599
1,310,864
(2,131,998
2,079,448
1,564,121
2,429,230
(5,440,425
20
CONDENSED CONSOLIDATING BALANCE SHEETSAt September 30, 2012
125,093
34,782
49,779
187,487
81,274
(28,904
69,216
1,561
194,618
63,203
47
(851
23,929
21,968
2,426
124,242
510,032
218,372
(26,431
1,224
244,261
111,394
70,225
164,633
65,840
508,984
648,347
542,025
(1,699,356
2,143,427
528,411
2,650,083
(5,321,921
49,718
60,609
8,188
2,827,595
2,444,440
3,669,063
(7,134,906
1,625
1,032
15,046
44,649
167,230
66,640
(26,478
252,041
46,274
168,262
85,325
655,023
9,782
17,102
558,905
1,149,748
(1,708,653
68,827
183,989
27,489
770,124
920,938
1,283,307
(1,822,329
2,057,471
1,523,502
2,385,751
(5,312,572
3,669,058
(7,134,901
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)For the Three Months Ended June 30, 2013
($ in thousands)
ParentCompany
GuarantorCompanies
Non-GuarantorCompanies
408,371
114,005
(12,550
317,156
95,461
(11,102
91,215
18,544
(1,448
4,141
69,014
14,794
1,565
70,579
14,833
Income (loss) from operations
(4,141
20,636
3,711
156
Interest income (expense), net
(3,559
(6,982
(2,596
2,767
(1,710
(462
(3,547
(4,215
(4,306
Income (loss) before taxes
(7,688
16,421
(595
(306
Provision (benefit) for income taxes
(2,912
6,744
397
Income (loss) before equity in net income of subsidiaries
(4,776
9,677
(992
Equity in net income (loss) of subsidiaries
8,685
(969
(17,393
Net income (loss)
3,909
8,708
(17,699
Other comprehensive income (loss), net of taxes
211
1,092
(8,855
4,120
9,800
(170
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)For the Three Months Ended June 30, 2012
375,836
120,457
(16,047
270,653
104,030
(10,082
105,183
16,427
(5,965
5,420
72,300
15,405
(5,682
(5,420
32,883
1,022
(283
(3,801
(6,094
(2,960
(40
2,761
(2,613
(3,841
(3,333
(5,573
(9,261
29,550
(4,551
(745
(4,824
10,604
165
(4,437
18,946
(4,716
14,231
(4,694
18,947
(28,484
9,794
14,252
(29,229
238
(10,190
(8,052
10,032
4,062
6,179
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)For the Nine Months Ended June 30, 2013
1,109,275
352,514
(39,471
848,342
297,826
(35,328
260,933
54,688
(4,143
15,419
198,601
45,327
(4,724
8,045
4,003
206,646
49,330
(15,419
54,287
5,358
581
(10,781
(20,685
(7,659
367
7,032
(4,498
(1,386
(10,414
(13,653
(12,157
(25,833
40,634
(6,799
(805
(12,672
15,693
(13,161
24,941
(7,633
17,308
(7,565
(34,684
4,147
17,376
(35,489
633
(41,047
34,461
4,780
(23,671
51,769
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)For the Nine Months Ended June 30, 2012
1,077,454
379,617
(43,362
804,521
325,917
(37,883
272,933
53,700
(5,479
14,665
200,474
47,389
(5,867
1,779
202,253
47,405
(14,665
70,680
6,295
388
(10,545
(18,156
(10,074
135
8,350
(6,376
(10,410
(9,806
(16,450
(25,075
60,874
(10,155
(998
(12,583
23,401
265
(12,492
37,473
(10,420
27,053
(10,296
(54,230
14,561
27,177
(55,228
714
22,778
(35,409
15,275
49,955
(8,356
23
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWSFor the Nine Months Ended June 30, 2013
Net cash provided by (used in) operating activities
(67,628
23,214
46,968
(33
(40,324
(5,529
Intercompany distributions
10,000
(10,000
Proceeds from sale of investment
1,172
154
Net cash provided by (used in) investing activities
9,967
(49,152
(5,375
(1,751
(772
(10,319
14,661
(14,661
Net cash provided by (used in) financing activities
(32,172
14,192
(22,572
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS
(89,833
(11,746
18,029
24
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWSFor the Nine Months Ended June 30, 2012
(52,124
48,598
33,873
(91
(51,582
(6,022
98
9,909
(83,831
(5,924
491,372
(491,372
(1,219
(4,101
(9,243
Intercompany debt
(23,000
(468,372
(65
(32
(219,516
219,516
(221,132
221,132
(32,617
46,623
(34,261
(74,832
11,390
(7,675
178,448
15,164
49,417
103,616
26,554
41,742
(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 currently conducts its operations through three businesses: Home & Building Products (“HBP”), Telephonics Corporation (“Telephonics”) and Clopay Plastic Products Company (“Plastics”).
HBP consists of two companies, Ames True Temper, Inc. (“ATT”) and Clopay Building Products Company, Inc. (“CBP”):
Telephonics designs, develops and manufactures high-technology integrated information, communication and sensor system solutions for military and commercial markets worldwide.
In January 2013, ATT announced its intention to close certain of its manufacturing facilities and consolidate affected operations primarily into its Camp Hill and Carlisle, PA locations. The intended actions, to be completed by the end of fiscal 2014, will improve manufacturing and distribution efficiencies, allow for in-sourcing of certain production currently performed by third party suppliers, and improve material flow and absorption of fixed costs. Management estimates that, upon completion, these actions will result in annual cash savings exceeding $10,000, based on current operating levels.
In the first quarter of 2013, Selling, general and administrative expenses included a $2,142, non-cash, pension settlement loss resulting from the lump-sum buyout of certain participant’s balances in the Company’s defined benefit plan. The buyouts, funded by the pension plan, reduced the Company’s net pension liability by $3,472.
On October 17, 2011, Griffon acquired the pots and planters business of Southern Sales & Marketing Group, Inc. for $22,432. The acquired business, which markets its products under the Southern PatioTM brand (“Southern Patio”), is a leading designer, manufacturer and marketer of landscape accessories. Southern Patio’s results of operations are not included in the Griffon consolidated statement of operations or cash flows, or footnotes relating thereto prior to October 17, 2011.
OVERVIEW
Revenue for the quarter ended June 30, 2013 was $509,826 compared to $480,246 in the prior year quarter. Net income was $3,603 or $0.06 per share, compared to $9,048 or $0.16 per share, in the prior year quarter.
Restructuring charges of $1,604 ($994, net of tax or $0.02 per share); and
Discrete tax benefits, net, of $1,495 or $0.03 per share.
The prior year quarter included a discrete tax benefit of $1,626, or $0.03 per share.
Excluding these items from the respective quarter results, net income would have been $3,102 or $0.06 per share in the current quarter compared to $7,422 or $0.13 per share in the prior year quarter.
Revenue for the nine months ended June 30, 2013 was $1,422,318 compared to $1,413,709 in the prior year period. Net income was $3,342 or $0.06 per share, compared to $13,563 or $0.24 per share, in the prior year.
Restructuring charges of $12,048 ($7,502, net of tax or $0.13 per share);
Loss on pension settlement of $2,142 ($1,392, net of tax or $0.02 per share); and
Discrete tax benefits, net, of $1,859 or $0.03 per share.
Restructuring charges of $1,795 ($1,167, net of tax or $0.02 per share);
Acquisition costs of $178 ($116, net of tax, or $0.00 per share); and
Discrete tax benefits of $1,626 or $0.03 per share.
Excluding these items from the respective periods, net income would have been $10,377 or $0.18 per share in the nine months ended June 30, 2013 compared to $13,220 or $0.23 per share in the prior year period.
27
Griffon evaluates performance based on Earnings per share and Net income excluding restructuring charges, acquisition-related expenses, gains (losses) from pension settlement and debt extinguishment and discrete tax items, as applicable. Griffon believes this information is useful to investors for the same reason. The following table provides a reconciliation of Earnings per share and Net income to Adjusted earnings per share and Adjusted net income:
GRIFFON CORPORATION AND SUBSIDIARIESRECONCILIATION OF INCOME (LOSS) TO ADJUSTED INCOME(Unaudited)
For the Three Months Ended
For the Nine Months Ended
June 30,
Adjusting items, net of tax:
Restructuring and related
7,502
1,167
116
1,392
Discrete tax benefits
(1,495
(1,626
(1,859
Adjusted net income
3,102
7,422
10,377
13,220
Earnings per common share
Restructuring
0.02
0.13
0.00
(0.03
Adjusted earnings per share
0.18
0.23
Weighted-average shares outstanding (in thousands)
Note: Due to rounding, the sum of earnings per common share and adjusting items, net of tax, may not equal adjusted earnings per common share.
RESULTS OF OPERATIONS
Three and nine months ended June 30, 2013 and 2012
Griffon evaluates performance and allocates resources based on each segments’ operating results before interest income and expense, income taxes, depreciation and amortization, unallocated amounts (mainly corporate overhead), restructuring charges, acquisition-related expenses and gains (losses) from pension settlement and debt extinguishment, as applicable (“Segment adjusted EBITDA”). Griffon believes this information is useful to investors for the same reason.
28
Revenue:
Segment operating profit
4.8%
7.4%
3.5%
5.3%
854
6,525
273
178
Segment adjusted EBITDA
8.9%
10.9%
8.6%
8.8%
For the quarter ended June 30, 2013, revenue increased $3,396 or 1%, compared to the prior year quarter. ATT revenue decreased 2% in comparison to the prior year quarter primarily due to lower demand, driven by cold and wet weather conditions in North America. For the quarter, CBP revenue increased 5%, primarily due to higher volume and favorable mix.
For the quarter ended June 30, 2013, Segment operating profit was $11,549 compared to $17,482 in the prior year quarter. The decline resulted primarily from the lower ATT revenue, which also affected absorption of manufacturing expenses, partially offset by the benefit of higher volume and favorable mix at CBP. ATT also had manufacturing inefficiencies in connection with its plant consolidation initiative. These inefficiencies are expected to continue until the initiative is completed in 2014. Segment depreciation and amortization increased $726 from the prior year period and the current year quarter included $854 of restructuring charges primarily related to the previously announced manufacturing and operations consolidation initiative at ATT.
For the nine months ended June 30, 2013, revenue decreased $15,670, or 2%, compared to the prior year period. ATT revenue decreased 6%, mainly driven by cold and wet spring weather conditions in North America and reduced snow tool sales. For ATT, both 2012 and 2013 year to date sales were impacted by lack of snow and resultant reduced sales of snow tools; retailers held high levels of snow tool inventory carried over from the prior year, further affecting 2013 snow tool sales. For the nine months ended June 30, 2013, CBP revenue increased 2% from the prior year period, primarily due to somewhat higher volume and favorable mix.
29
For the nine months ended June 30, 2013, Segment operating profit was $22,655 compared to $35,412 in the prior year period. The current year period included $6,525 of restructuring charges primarily related to the previously announced manufacturing and operations consolidation initiative at ATT. Excluding restructuring charges, current year Segment operating profit was $29,180. The decrease from the prior year resulted from the impact of lower ATT revenue, which also affected absorption of manufacturing expenses and manufacturing inefficiencies arising in connection with the plant consolidation initiative, partially offset by reduced ATT warehouse and distribution costs, other cost control initiatives and $873 in Byrd Amendment receipts (anti-dumping compensation from the U.S. government). CBP higher volume, favorable mix and improved distribution and manufacturing efficiencies contributed to the reported profit. Segment depreciation and amortization increased $3,521 from the prior year period.
HBP recognized $854 and $6,525, respectively, for the three and nine months ended June 30, 2013, and nil and $273, respectively, for the three and nine months ended June 30, 2012, in restructuring and other related exit costs. In 2013, restructuring and other related charges primarily related to one-time termination benefits, facility and other personnel costs, and asset impairment charges related to the ATT and BPC plant consolidation initiatives. In 2012, restructuring and other related charges primarily related to one-time termination benefits and other personnel costs at ATT.
8.1%
14.0%
11.2%
12.6%
750
1,522
10.1%
15.7%
12.9%
14.7%
For the quarter ended June 30, 2013, revenue increased $28,881 or 29% compared to the prior year quarter. The current and prior year quarters included $20,033 and $2,733 respectively, of revenue related to electronic warfare programs where Telephonics serves as a contract manufacturer; excluding revenue from these programs, current quarter revenue increased 12% from the prior year quarter, primarily due to the timing of work performed on Multi-mode Surveillance Radar (“MMSR”) contracts.
For the quarter ended June 30, 2013, Segment operating profit decreased $3,521, or 25%, and operating profit margin decreased 590 basis points compared to the prior year quarter. The decrease in Segment operating profit was primarily due to lower gross profit associated with product mix and a restructuring charge, which were partially offset by lower than anticipated expenditures associated with the timing of research and development (“R&D”) initiatives and proposal efforts. The prior year quarter benefitted from higher gross profit and favorable manufacturing efficiencies, both of which were primarily due to an increased level of Light Airborne Multi-purpose Systems Multi Mode Radar (“LAMPS MMR”) deliveries.
For the nine months ended June 30, 2013, revenue increased $28,057 or 9% compared to the prior year period. The current and prior year periods included $33,257 and $22,255, respectively, of revenue related to electronic warfare programs where Telephonics serves as a contract manufacturer; excluding revenue from these programs, current period revenue increased 6% from the prior year period, primarily due to the timing of work performed on MMSR contracts.
For the nine months ended June 30, 2013, Segment operating profit decreased $1,181, or 3%. Excluding the current and prior year restructuring charges, segment operating profit decreased 5% and operating margin decreased 160 basis points compared to the prior year period. The decrease was primarily due to lower gross profit associated with product mix, which was partially offset by lower than anticipated expenditures associated with the timing of R&D initiatives and proposal efforts. The prior year period also benefitted from the LAMPS MMR profitability discussed above.
During the third quarter of 2013, Telephonics recognized $750 in restructuring costs in connection with the termination of a facility lease. The facility was vacated as a result of the headcount reductions and changes in organizational structure Telephonics undertook in the past two years. In 2012 and 2011, Telephonics recognized $3,815 and $3,046 of restructuring charges in connection with two discrete voluntary early retirement plans and other costs related to changes in organizational structure and facilities; such charges were primarily personnel-related, reducing headcount by 185 employees over the two-year period. In the nine months ended June 30, 2012, Telephonics recognized $1,522 of restructuring and other related charges primarily for one-time termination benefits and other personnel costs, in conjunction with changes to its organizational structure.
During the current quarter, Telephonics was awarded several new contracts and incremental funding on existing contracts approximating $93,400. Contract backlog was $440,000 at June 30, 2013 with 67% expected to be realized in the next 12 months. Backlog was $451,000 at September 30, 2012 and $422,000 at June 30, 2012. Backlog is defined as unfilled firm orders for products and services for which funding has been both authorized and appropriated by the customer or Congress, in the case of the U.S. government agencies.
3.9%
2.5%
2.1%
1.9%
4,773
8.7%
7.1%
6.5%
For the quarter ended June 30, 2013, revenue decreased $2,697, or 2%, compared to the prior year quarter. The decrease reflected lower volume (5%), a portion of which was attributable to Plastics exiting certain low margin products, partially offset by favorable mix (2%) and the pass through of higher resin costs in customer selling prices (1%). Plastics adjusts selling prices based on underlying resin costs on a delayed basis.
For the quarter ended June 30, 2013, Segment operating profit increased $1,895 compared to the prior year quarter. The increase was mainly due to product mix, continued efficiency improvements and a $500 favorable resin benefit.
For the nine months ended June 30, 2013, revenue decreased $3,778, or 1%, compared to the prior year period. Excluding the unfavorable impact of foreign exchange translation, revenue increased 1% mainly due to favorable mix (1%) and the pass through of higher resin costs in customer selling prices (1%), partially offset by lower volume (1%), a portion of which was attributable to Plastics exiting certain low margin products.
For the nine months ended June 30, 2013, Segment operating profit increased $1,080 compared to the prior year period. Excluding the restructuring charges, current year Segment operating profit increased $5,853 due to product mix and continued efficiency improvements, partially offset by approximately $4,700 unfavorable impact of higher resin costs, which had not yet been reflected in increased selling prices.
31
In February 2013, Plastics announced a restructuring project, primarily in Europe, to exit low margin products and eliminate approximately 80 positions, resulting in the incurrence of restructuring charges of $4,773, primarily related to one-time termination benefits and other personnel costs. This project is substantially complete.
Unallocated
For the quarter ended June 30, 2013, unallocated amounts totaled $6,573 compared to $7,253 in the prior year; for the nine months ended June 30, 2013, unallocated amounts totaled $22,140 compared to $20,041 in the prior year period. The fluctuations in the current quarter and nine month period compared to the respective prior year periods is primarily related to incentive and stock based compensation costs.
Segment Depreciation and Amortization
Segment depreciation and amortization increased $906 and $4,094, respectively, for the three and nine month periods ended June 30, 2013 in comparison to the comparable prior year periods primarily due to capital spending.
Stock based compensation
Discontinued operations – Installation Services
There was no revenue or income from discontinued operations of the Installation Services’ business for the three and nine months ended June 30, 2013 and 2012.
LIQUIDITY AND CAPITAL RESOURCES
Management assesses Griffon’s liquidity in terms of its ability to generate cash to fund its operating, investing and financing activities. Significant factors affecting liquidity include: cash flows from operating activities, capital expenditures, acquisitions, dispositions, bank lines of credit and the ability to attract long-term capital under satisfactory terms. Griffon remains in a strong financial position with sufficient liquidity available for reinvestment in existing businesses and strategic acquisitions while managing its capital structure on both a short-term and long-term basis.
The following table is derived from the Condensed Consolidated Statements of Cash Flows:
Cash Flows from Continuing Operations
Net Cash Flows Provided by (Used In):
Operating activities
Investing activities
Financing activities
Cash provided by continuing operations for the nine months ended June 30, 2013 was $2,554 compared to $30,347 in the prior year. Current assets net of current liabilities, excluding short-term debt and cash, increased to $427,269 at June 30, 2013 compared to $360,881 at September 30, 2012, primarily due to increases in accounts receivable and contract costs and recognized income not yet billed, and a decrease in accrued liabilities, partially offset by a decrease in inventory.
During the nine months ended June 30, 2013, Griffon used cash for investing activities of $44,560 compared to $79,846 in the prior year; the October 2011 acquisition of Southern Patio for $22,432 was included in the prior year. Current year capital expenditures decreased $11,809 from the comparable prior year period. Griffon expects capital spending to be in the range of $65,000 to $70,000 for 2013.
During the nine months ended June 30, 2013, cash used in financing activities totaled $40,552 compared to $20,255 in the prior year. During the first, second and third quarters of 2013, the Board of Directors approved quarterly cash dividends of $0.025 per common share, which were paid on December 26, 2012, March 27, 2013 and May 28, 2013, to holders of common stock as of close of business on November 29, 2012, February 27, 2013 and June 26, 2013, respectively. Griffon repurchased common stock of $25,689 and $5,670 in the nine months ended June 30, 2013 and 2012, respectively. At June 30, 2013, $17,701 remains under Griffon’s Board authorized repurchase program.
Payments related to Telephonics revenue are received in accordance with the terms of development and production subcontracts; certain of such receipts are progress or performance based payments. Plastics customers are generally substantial industrial companies whose payments have been steady, reliable and made in accordance with the terms governing such sales. Plastics sales satisfy orders that are received in advance of production, and where payment terms are established in advance. With respect to HBP, there have been no material adverse impacts on payment for sales.
A small number of customers account for, and are expected to continue to account for, a substantial portion of Griffon’s consolidated revenue. For the nine months ended June 30, 2013:
The United States Government and its agencies, through either prime or subcontractor relationships, represented 19% of Griffon’s consolidated revenue and 78% of Telephonics’ revenue.
Procter & Gamble Co. represented 14% of Griffon’s consolidated revenue and 46% of Plastics’ revenue.
The Home Depot represented 12% of Griffon’s consolidated revenue and 25% of HBP’s revenue.
No other customer exceeded 9% of consolidated revenue. Future operating results will continue to substantially depend on the success of Griffon’s largest customers and our ongoing relationships with them. Orders from these customers are subject to fluctuation and may be reduced materially. The loss of all or a portion of volume from any one of these customers could have a material adverse impact on Griffon’s liquidity and operations.
Cash and Equivalents and Debt(in thousands)
Notes payables and current portion of long-term debt
Long-term debt, net of current maturities
Debt discount
14,116
16,607
Total debt
Debt, net of cash and equivalents
579,703
506,563
Proceeds from the Senior Notes were used to pay down outstanding borrowings under a senior secured term loan facility and two senior secured revolving credit facilities of certain of the Company’s subsidiaries. The Senior Notes are senior unsecured obligations of Griffon guaranteed by certain domestic subsidiaries, and are subject to certain covenants, limitations and restrictions. The fair value of the Senior Notes approximated $594,000 on June 30, 2013 based upon quoted market prices (level 1 inputs).
On December 21, 2009, Griffon issued $100,000 principal of 4% convertible subordinated notes due 2017 (the “2017 Notes”). The current conversion rate of the 2017 Notes is 67.8495 shares of Griffon’s common stock per $1,000 principal amount of notes, corresponding to a conversion price of $14.74 per share. When a cash dividend is declared that would result in an adjustment to the conversion ratio of less than 1%, any adjustment to the conversion ratio is deferred until the first to occur of (i) actual conversion, (ii) the 42nd trading day prior to maturity of the notes, and (iii) such time as the cumulative adjustment equals or exceeds 1%. As of June 30, 2013, aggregate dividends since the last conversion price adjustment of $0.05 per share would have resulted in an adjustment to the conversion ratio of approximately 0.44%. At June 30, 2013 and September 30, 2012, the 2017 Notes had a capital in excess of par component, net of tax, of $15,720. The fair value of the 2017 Notes approximated $106,900 on June 30, 2013 based upon quoted market prices (level 1 inputs).
In February 2012, Clopay do Brazil, a subsidiary of Plastics, borrowed $4,000 at a rate of 104.5% of Brazilian CDI (7.7% at June 30, 2013). The loan was used to refinance existing loans, is collateralized by accounts receivable and a 50% guaranty by Plastics and is to be repaid in four equal, semi-annual installments of principal plus accrued interest beginning in August 2012. Clopay do Brazil also maintains lines of credit of approximately $5,000. Interest on borrowings accrue at a rate of Brazilian CDI plus 6.0% (13.7% at June 30, 2013). At June 30, 2013 there was approximately $4,100 borrowed under the lines.
At September 30, 2012, Griffon had $532 of 4% convertible subordinated notes due 2023 (“2023 Notes”) outstanding. On April 15, 2013, the 2023 Notes were redeemed at par plus accrued interest.
35
During the nine months ended June 30, 2013 and 2012, Griffon used cash for discontinued operations of $486 and $1,690, respectively, related to settling remaining Installation Services liabilities.
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, 2012.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, 2012. In the selection of the critical accounting policies, the objective is to properly reflect the financial position and results of operations for each reporting period in a consistent manner that can be understood by the reader of the financial statements. Griffon considers an estimate to be critical if it is subjective and if changes in the estimate using different assumptions would result in a material impact on the financial position or results of operations of Griffon.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issues, from time to time, new financial accounting standards, staff positions and emerging issues task force consensus. See the Notes to Condensed Consolidated Financial Statements for a discussion of these matters.
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, earnings, cash flows, revenue, changes in operations, operating improvements, industries in which Griffon Corporation (the “Company” or “Griffon”) operates and the United States and global economies. Statements in this Form 10-Q that are not historical are hereby identified as “forward-looking statements” and may be indicated by words or phrases such as “anticipates,” “supports,” “plans,” “projects,” “expects,” “believes,” “should,” “would,” “could,” “hope,” “forecast,” “management is of the opinion,” “may,” “will,” “estimates,” “intends,” “explores,” “opportunities,” the negative of these expressions, use of the future tense and similar words or phrases. Such forward-looking statements are subject to inherent risks and uncertainties that could cause actual results to differ materially from those expressed in any forward-looking statements. These risks and uncertainties include, among others: current economic conditions and uncertainties in the housing, credit and capital markets; Griffon’s ability to achieve expected savings from cost control, integration and disposal initiatives; the ability to identify and successfully consummate and integrate value-adding acquisition opportunities; increasing competition and pricing pressures in the markets served by Griffon’s operating companies; the ability of Griffon’s operating companies to expand into new geographic and product markets and to anticipate and meet customer demands for new products and product enhancements and innovations; reduced military spending by the government on projects for which Telephonics Corporation supplies products, including as a result of sequestration which took effect in March 2013; increases in the cost of raw materials such as resin and steel; changes in customer demand or loss of a material customer at one of Griffon’s operating companies; the potential impact of seasonal variations and uncertain weather patterns on certain of Griffon’s businesses; political events that could impact the worldwide economy; a downgrade in Griffon’s credit ratings; changes in international economic conditions including interest rate and currency exchange fluctuations; the reliance by certain of Griffon’s businesses on particular third party suppliers and manufacturers to meet customer demands; the relative mix of products and services offered by Griffon’s businesses, which impacts margins and operating efficiencies; short-term capacity constraints or prolonged excess capacity; unforeseen developments in contingencies, such as litigation; unfavorable results of government agency contract audits of Telephonics Corporation; Griffon’s ability to adequately protect and maintain the validity of patent and other intellectual property rights; the cyclical nature of the businesses of certain of Griffon’s operating companies; and possible terrorist threats and actions and their impact on the global economy. Additional important factors that could cause the statements made in this Quarterly Report on Form 10-Q or the actual results of operations or financial condition of Griffon to differ are discussed under the caption “Item 1A. Risk Factors” and “Special Notes Regarding Forward-Looking Statements” in Griffon’s Annual Report on Form 10-K for the year ended September 30, 2012. 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.
36
Item 3 - Quantitative and Qualitative Disclosure About Market Risk
Griffon’s business’ activities necessitates the management of various financial and market risks, including those related to changes in interest rates, foreign currency rates and commodity prices.
Interest Rates
Griffon’s exposure to market risk for changes in interest rates relates primarily to variable interest rate debt and investments in cash and equivalents.
The revolving credit facility and certain other of Griffon’s credit facilities have a LIBOR-based variable interest rate. Due to the current and expected level of borrowings under these facilities, a 100 basis point change in LIBOR would not have a material impact on Griffon’s results of operations or liquidity.
Foreign Exchange
Griffon conducts business in various non-U.S. countries, primarily in Canada, Germany, Brazil, United Kingdom, Turkey, China, Sweden, Australia and Mexico; therefore, changes in the value of the currencies of these countries affect the financial position and cash flows when translated into U.S. Dollars. Griffon has generally accepted the exposure to exchange rate movements relative to its non-U.S. operations. Griffon may, from time to time, hedge its currency risk exposures. A change of 10% or less in the value of all applicable foreign currencies would not have a material effect on Griffon’s financial position and cash flows.
Item 4 - Controls and Procedures
Under the supervision and with the participation of Griffon’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), Griffon’s disclosure controls and procedures, as defined by Exchange Act Rule 13a-15(e) and 15d-15(e), were evaluated as of the end of the period covered by this report. Based on that evaluation, Griffon’s CEO and CFO concluded that Griffon’s disclosure controls and procedures were effective at the reasonable assurance level.During the period covered by this report, there were no changes in Griffon’s internal control over financial reporting which materially affected, or are reasonably likely to materially affect, Griffon’s internal control over financial reporting.
Limitations on the Effectiveness of Controls
Griffon believes that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all controls issues and instances of fraud, if any, within a company have been detected. Griffon’s disclosure controls and procedures, as defined by Exchange Act Rule 13a-15(e) and 15d-15(e), are designed to provide reasonable assurance of achieving their objectives.
PART II - OTHER INFORMATION
Item 1
Legal Proceedings
None
Item 1A
Risk Factors
In addition to the other information set forth in this report, carefully consider the factors discussed in Item 1A to Part I in Griffon’s Annual Report on Form 10-K for the year ended September 30, 2012, 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
ISSUER PURCHASES OF EQUITY SECURITIES
Period
(a) Total Numberof Shares (orUnits) Purchased
(b) AveragePrice Paid PerShare (or Unit)
(c) Total Number ofShares (or Units)Purchased as Part ofPublicly AnnouncedPlans or Programs(1)
(d) Maximum Number(or ApproximateDollar Value) ofShares (or Units) ThatMay Yet Be PurchasedUnder the Plans orPrograms
April 1 - 30, 2013
70,428
11.94
May 1 - 31, 2013
53,459
(2)
10.58
June 1 - 30, 2013
202,270
10.75
326,157
10.98
272,698
17,701
1.
On August 2, 2011, the Company’s Board of Directors authorized the repurchase of up to an additional $50,000 of Griffon common stock; as of June 30, 2013, $17,701 remained available for the purchase of Griffon common stock under this program.
2.
Shares acquired by the Company from holders of restricted stock upon vesting of the restricted stock, to satisfy tax withholding obligations of the holders.
Griffon’s revolving credit facility, as well as the indenture governing Griffon’s 7.125% Senior Notes due 2018, each contain limitations regarding the making of restricted payments (which include cash dividends and share repurchases).
Item 3
Defaults Upon Senior Securities
Item 4
Mine Safety Disclosures
Not applicable
Item 5
Other Information
Indemnification Agreements.
In accordance with the Delaware General Corporation Law, Griffon's Certificate of Incorporation and Griffon’s By-laws, on August 6, 2013, Griffon entered into a customary indemnification agreement with each of its directors and corporate officers. With respect to each of Griffon’s directors, the indemnification agreement replaces the existing agreement between such director and Griffon.
The indemnification agreement provides that Griffon will indemnify each director and officer to the fullest extent permitted by applicable law, and includes provisions relating to the advancement of expenses incurred by or on behalf of each such director and officer. The form of the indemnification agreement is filed as Exhibit 10.2 to this Quarterly Report on Form 10-Q, and is incorporated by reference herein.
Item 6
Exhibits
10.1
First Amendment to Amended and Restated Credit Agreement, dated as of June 11, 2013, to that certain Amended and Restated Credit Agreement, dated as of March 28, 2013, among Griffon Corporation, Deutsche Bank Securities Inc., as syndication agent, Wells Fargo Bank, National Association, HSBC Bank USA, N.A and RBS Citizens, N.A., as co-documentation agents, and JPMorgan Chase Bank, N.A., as administrative agent.
10.2
Form of Indemnification Agreement between Griffon Corporation and each of its directors and officers.
31.1
Certification pursuant to Rule 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certifications pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document*
101.SCH
XBRL Taxonomy Extension Schema Document*
101.CAL
XBRL Taxonomy Extension Calculation Document*
101.DEF
XBRL Taxonomy Extension Definitions Document*
101.LAB
XBRL Taxonomy Extension Labels Document*
101.PRE
XBRL Taxonomy Extension Presentations Document*
*
In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be “furnished” and not “filed”.
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.
/s/ Douglas J. Wetmore
Douglas J. Wetmore
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Brian G. Harris
Brian G. Harris
Vice President, Controller and Chief Accounting Officer
(Principal Accounting Officer)
Date: August 7, 2013
EXHIBIT INDEX