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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended December 31, 2019
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, $0.25 par value
 
GFF
 
New York Stock Exchange
 
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. ☒ Yes ☐ No
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). ☒ Yes ☐ No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer
 
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☒ No

The number of shares of common stock outstanding at December 31, 2019 was 46,908,654.




Griffon Corporation and Subsidiaries
 
Contents
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



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


(Unaudited)


 
December 31,
2019

September 30,
2019
CURRENT ASSETS
 

 
Cash and equivalents
$
64,792


$
72,377

Accounts receivable, net of allowances of $8,877 and $7,881
272,572


264,450

Contract costs and recognized income not yet billed, net of progress payments of $15,458 and $13,861
96,826


105,111

Inventories
467,069


442,121

Prepaid and other current assets
44,374


40,799

Assets of discontinued operations
321


321

Total Current Assets
945,954


925,179

PROPERTY, PLANT AND EQUIPMENT, net
332,148


337,326

OPERATING LEASE RIGHT-OF-USE ASSETS
154,379

 

GOODWILL
446,590


437,067

INTANGIBLE ASSETS, net
357,743


356,639

OTHER ASSETS
18,105


15,840

ASSETS OF DISCONTINUED OPERATIONS
2,883


2,888

Total Assets
$
2,257,802


$
2,074,939







CURRENT LIABILITIES
 


 

Notes payable and current portion of long-term debt
$
9,451


$
10,525

Accounts payable
220,038


250,576

Accrued liabilities
126,943


124,665

Current portion of operating lease liabilities
28,292



Liabilities of discontinued operations
3,787


4,333

Total Current Liabilities
388,511


390,099

LONG-TERM DEBT, net
1,137,134


1,093,749

LONG-TERM OPERATING LEASE LIABILITIES
130,949

 

OTHER LIABILITIES
103,299


109,997

LIABILITIES OF DISCONTINUED OPERATIONS
3,216


3,331

Total Liabilities
1,763,109


1,597,176

COMMITMENTS AND CONTINGENCIES - See Note 21





SHAREHOLDERS’ EQUITY
 


 

Total Shareholders’ Equity
494,693


477,763

Total Liabilities and Shareholders’ Equity
$
2,257,802


$
2,074,939


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


1


GRIFFON CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
For the Three Months Ended December 31, 2019 and 2018
(Unaudited) 
 
COMMON STOCK
 
CAPITAL IN
EXCESS OF
PAR VALUE
 
RETAINED
EARNINGS
 
TREASURY SHARES
 
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME (LOSS)
 
DEFERRED
COMPENSATION
 
 
(in thousands)
SHARES
 
PAR VALUE
 
 
 
SHARES
 
COST
 
 
 
TOTAL
Balance at September 30, 2019
82,775

 
$
20,694

 
$
519,017

 
$
568,516

 
35,969

 
$
(536,308
)
 
$
(65,916
)
 
$
(28,240
)
 
$
477,763

Net income

 

 

 
10,612

 

 

 

 

 
10,612

Dividend

 

 

 
(3,392
)
 

 

 

 

 
(3,392
)
Shares withheld on employee taxes on vested equity awards

 

 

 

 
80

 
(1,758
)
 

 

 
(1,758
)
Amortization of deferred compensation

 

 

 

 

 

 

 
629

 
629

Equity awards granted, net
182

 
45

 
(45
)
 

 

 

 

 

 

ESOP allocation of common stock

 

 
609

 

 

 

 

 

 
609

Stock-based compensation

 

 
3,150

 

 

 

 

 

 
3,150

Stock-based consideration

 

 
239

 

 

 

 

 

 
239

Other comprehensive income, net of tax

 

 

 

 

 

 
6,841

 

 
6,841

Balance at December 31, 2019
82,957

 
$
20,739

 
$
522,970

 
$
575,736

 
36,049

 
$
(538,066
)
 
$
(59,075
)
 
$
(27,611
)
 
$
494,693



 
COMMON STOCK
 
CAPITAL IN
EXCESS OF
PAR VALUE
 
RETAINED
EARNINGS
 
TREASURY SHARES
 
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME (LOSS)
 
DEFERRED
COMPENSATION
 
 
(in thousands)
SHARES
 
PAR VALUE
 
 
 
SHARES
 
COST
 
 
 
TOTAL
Balance at September 30, 2018
81,520

 
$
20,380

 
$
503,396

 
$
550,523

 
35,846

 
$
(534,830
)
 
$
(34,112
)
 
$
(30,966
)
 
$
474,391

Net income

 

 

 
8,753

 

 

 

 

 
8,753

Cumulative catch-up adjustment related to adoption of ASC 606(1)

 

 

 
(5,673
)
 

 

 

 

 
(5,673
)
Dividend

 

 

 
(3,143
)
 

 

 

 

 
(3,143
)
Shares withheld on employee taxes on vested equity awards

 

 

 

 
83

 
(1,058
)
 

 

 
(1,058
)
Amortization of deferred compensation

 

 

 

 

 

 

 
856

 
856

Common stock acquired

 

 

 

 
29

 
(290
)
 

 

 
(290
)
Equity awards granted, net
1,201

 
300

 
(300
)
 

 

 

 

 

 

ESOP allocation of common stock

 

 
(8
)
 

 

 

 

 

 
(8
)
Stock-based compensation

 

 
2,933

 

 

 

 

 

 
2,933

Stock-based consideration

 

 
250

 
$

 

 

 

 

 
$
250

Other comprehensive income, net of tax

 

 

 

 

 

 
(5,450
)
 

 
(5,450
)
Balance at December 31, 2018
82,721

 
$
20,680

 
$
506,271

 
$
550,460

 
35,958

 
$
(536,178
)
 
$
(39,562
)
 
$
(30,110
)
 
$
471,561

(1) See Note 14 - Recent Accounting Pronouncements and Note 3 - Revenue for additional information. 

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


2


GRIFFON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
(Unaudited) 
 
Three Months Ended December 31,

 
2019

2018

Revenue
$
548,438


$
510,522


Cost of goods and services
398,517


367,476


Gross profit
149,921


143,046









Selling, general and administrative expenses
117,798


113,754









Income from operations
32,123


29,292









Other income (expense)
 


 


Interest expense
(16,211
)

(16,529
)

Interest income
261


198


Other, net
778


1,004


Total other expense, net
(15,172
)

(15,327
)








Income before taxes
16,951


13,965


Provision from income taxes
6,339


5,212









Net income
$
10,612

 
$
8,753



 
 
 

Basic earnings per common share
$
0.26

 
$
0.21



 
 
 

Basic weighted-average shares outstanding
41,173

 
40,750



 
 
 

Diluted earnings per common share
$
0.24

 
$
0.21



 
 
 

Diluted weighted-average shares outstanding
43,895

 
41,888



 
 
 

Dividends paid per common share
$
0.0750

 
$
0.0725



 
 
 

Net income
$
10,612

 
$
8,753


Other comprehensive income (loss), net of taxes:
 

 
 


Foreign currency translation adjustments
6,470

 
(5,736
)

Pension and other post retirement plans
672

 
184


Change in cash flow hedges
(301
)
 
102


Total other comprehensive income (loss), net of taxes
6,841

 
(5,450
)

Comprehensive income (loss), net
$
17,453

 
$
3,303


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

3


GRIFFON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
Three Months Ended December 31,
 
2019

2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 


 

Net income
$
10,612


$
8,753

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


 

Depreciation and amortization
15,825


15,085

Stock-based compensation
3,150


2,933

Asset impairment charges - restructuring
4,160



Provision for losses on accounts receivable
35


158

Amortization of debt discounts and issuance costs
1,273


1,229

Deferred income taxes
198


(1,380
)
Gain on sale of assets and investments
(186
)

(91
)
Change in assets and liabilities, net of assets and liabilities acquired:
 


 

Decrease in accounts receivable and contract costs and recognized income not yet billed
2,942


37,181

Increase in inventories
(19,480
)

(33,958
)
Increase in prepaid and other assets
(2,269
)

(444
)
Decrease in accounts payable, accrued liabilities, income taxes payable and net change to leases
(36,445
)

(29,622
)
Other changes, net
2,016


1,197

Net cash provided by (used in) operating activities
(18,169
)

1,041

CASH FLOWS FROM INVESTING ACTIVITIES:
 


 

Acquisition of property, plant and equipment
(13,172
)

(8,397
)
Acquired businesses, net of cash acquired
(10,531
)

(9,219
)
Proceeds from sale of assets
184


51

Net cash used in investing activities
(23,519
)

(17,565
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 


 

Dividends paid
(3,392
)

(3,143
)
Purchase of shares for treasury
(1,758
)

(1,348
)
Proceeds from long-term debt
71,957


38,965

Payments of long-term debt
(32,045
)

(4,322
)
Change in short-term borrowings


38

Financing costs
(21
)

(67
)
Contingent consideration for acquired businesses


(1,686
)
Other, net
(40
)

137

Net cash provided by financing activities
34,701


28,574

CASH FLOWS FROM DISCONTINUED OPERATIONS:
 


 

Net cash used in operating activities
(606
)

(458
)
Net cash used in investing activities



Net cash used in financing activities









Net cash used in discontinued operations
(606
)

(458
)
Effect of exchange rate changes on cash and equivalents
8


402

NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS
(7,585
)

11,994

CASH AND EQUIVALENTS AT BEGINNING OF PERIOD
72,377


69,758

CASH AND EQUIVALENTS AT END OF PERIOD
$
64,792


$
81,752

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

4

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



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

The Company was founded in 1959, is a Delaware corporation headquartered in New York, N.Y. and is listed on the New York Stock Exchange (NYSE:GFF).

Griffon currently conducts its operations through three reportable segments:

Consumer and Professional Products ("CPP") conducts its operations through The AMES Companies, Inc. ("AMES"). Founded in 1774, AMES is the leading North American manufacturer and a global provider of branded consumer and professional tools and products for home storage and organization, landscaping, and enhancing outdoor lifestyles. CPP sells products globally through a portfolio of leading brands including True Temper, AMES, and ClosetMaid.

Home and Building Products ("HBP") conducts its operations through Clopay Corporation ("Clopay"). Founded in 1964, Clopay is the largest manufacturer and marketer of garage doors and rolling steel doors in North America.  Residential and commercial sectional garage doors are sold through professional dealers and leading home center retail chains throughout North America under the brands Clopay, Ideal, and Holmes. Rolling steel door and grille products designed for commercial, industrial, institutional, and retail use are sold under the CornellCookson brand.

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

Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information, and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not include all the information and footnotes required by US GAAP for complete financial statements. As such, they should be read together with Griffon’s Annual Report on Form 10-K for the year ended September 30, 2019, 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, 2019 was derived from the audited financial statements included in Griffon’s Annual Report on Form 10-K for the year ended September 30, 2019.
 
The condensed consolidated financial statements include the accounts of Griffon and all subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. These estimates may be adjusted due

5


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

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

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

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

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

Level 3 inputs are unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
 
The fair values of Griffon’s 2022 senior notes approximated $1,005,200 on December 31, 2019. Fair values were based upon quoted market prices (level 1 inputs).
 
Insurance contracts with values of $3,445 at December 31, 2019 are measured and recorded at fair value based upon quoted prices in active markets for similar assets (level 2 inputs) and are included in Prepaid and other current assets on the Consolidated Balance Sheets.
 
Items Measured at Fair Value on a Recurring Basis

At December 31, 2019, trading securities, measured at fair value based on quoted prices in active markets for similar assets (level 2 inputs), with a fair value of $2,835 ($2,236 cost basis), were included in Prepaid and other current assets on the Consolidated Balance Sheets. Realized and unrealized gains and losses on trading securities are included in Other income in the Consolidated Statements of Operations and Comprehensive Income (Loss).

In the normal course of business, Griffon’s operations are exposed to the effects of changes in foreign currency exchange rates. To manage these risks, Griffon may enter into various derivative contracts such as foreign currency exchange contracts, including forwards and options. As of December 31, 2019, Griffon entered into several such contracts in order to lock into a foreign currency rate for planned settlements of trade and inter-company liabilities payable in US dollars.

At December 31, 2019, Griffon had $20,000 and $750 of Australian dollar and British pound contracts, respectively, at a weighted average rate of $1.43 and $0.76, respectively, which qualified for hedge accounting (level 2 inputs). These hedges were all deemed effective as cash flow hedges with gains and losses related to changes in fair value deferred and recorded in Accumulated other comprehensive income (loss) ("AOCI") and Prepaid and other current assets, or Accrued liabilities, until settlement. Upon settlement, gains and losses are recognized in the Consolidated Statements of Operations and Comprehensive Income (Loss) in Cost of goods and services ("COGS"). AOCI included deferred losses of $202 ($119, net of tax) at December 31, 2019 and a loss

6



of $56 was recorded in COGS during the three months ended December 31, 2019 for all settled contracts. All contracts expire in 15 to 180 days.

At December 31, 2019, Griffon had $4,050 of Canadian dollar contracts at a weighted average rate of $1.30. The contracts, which protect Canadian operations from currency fluctuations for US dollar based purchases, do not qualify for hedge accounting. For the three months ended December 31, 2019, fair value gains of $72 were recorded to Other liabilities and to Other income for the outstanding contracts, based on similar contract values (level 2 inputs). Realized gains of $3 were recorded in Other income during the three months ended December 31, 2019 for all settled contracts. All contracts expire in 30 to 270 days.

NOTE 3 – REVENUE

The Company recognizes revenue when performance obligations identified under the terms of contracts with its customers are satisfied. A performance obligation is a promise in a contract to transfer a distinct good or service, or a bundle of goods or services, to the customer. A contract with a customer is an agreement which both parties have approved, that creates enforceable rights and obligations, has commercial substance and with respect to which payment terms are identified and collectability is probable. Once the Company has entered a contract or purchase order, it is evaluated to identify performance obligations. For each performance obligation, revenue is recognized when control of the promised products is transferred to the customer, or services are satisfied under the contract or purchase order, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those products or services (the transaction price).

A contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when each performance obligation is satisfied. A majority of the Company’s contracts have a single performance obligation which represents, in most cases, the product being sold to the customer. To a lesser extent, some contracts include multiple performance obligations such as a product, the related installation, and extended warranty services. These contracts require judgment in determining the number of performance obligations.

Over 80% of the Company’s performance obligations are recognized at a point in time that relates to the manufacture and sale of a broad range of products and components within the CPP and HBP segments, and revenue is recognized when title, and risk and rewards of ownership, have transferred to the customer. A majority of CPP and HBP segment revenue is short cycle in nature with shipments occurring within one year from order and does not include a material long-term financing component, implicitly or explicitly. Less than 20% of the Company’s performance obligations are recognized over time or under the percentage-of-completion method these relate to prime or subcontractors from contract awards with the U.S. Government, as well as foreign governments and other commercial customers within our DE segment. These contracts are typically long-term in nature, usually greater than one year and do not include a material long-term financing component, either implicitly or explicitly. Revenue and profits from such contracts are recognized under the percentage-of-completion (over time) method of accounting. Revenue and profits on fixed-price contracts that contain engineering as well as production requirements are recorded based on the ratio of total actual incurred costs to date to the total estimated costs for each contract (cost-to-cost method).

Sales recognized over time are generally accounted for using an input measure to determine progress completed at the end of the period. Adjustments to estimates for a contract's estimated costs at completion and estimated profit or loss are often required as experience is gained, more information is obtained (even though the scope of work required under the contract may or may not change) and contract modifications occur. The impact of such adjustments to estimates is made on a cumulative basis in the period when such information has become known. For the three ended December 31, 2019 and 2018, income from operations included net unfavorable catch-up adjustments approximating $3,000 and $2,500, respectively. Gross profit is impacted by a variety of factors, including the mix of products, systems and services, production efficiencies, price competition and general economic conditions. We believe that cumulative costs incurred to date as a percentage of estimated total contract costs at completion is an appropriate measure of progress towards satisfaction of performance obligations, as it most accurately depicts the progress of our work and transfer of control to our customers. For contracts in which anticipated total costs exceed the total expected revenue, an estimated loss is recognized in the period when identifiable. A provision for the entire amount of the estimated loss is recorded on a cumulative basis. The estimated remaining costs to complete loss contracts as of December 31, 2019 and September 30, 2019 were approximately $9,828 and $9,790, respectively, and is recorded as a reduction to gross margin on the Consolidated Statements of Operations and Comprehensive Income (Loss). This loss had an immaterial impact on Griffon's Consolidated Financial Statements.

For a complete explanation of Griffon’s revenue accounting policies, this note should be read in conjunction with Griffon’s Annual Report on Form 10-K for the year ended September 30, 2019. See Note 12 - Business Segments for revenue from contracts with customers disaggregated by end markets, segments and geographic location.

7



Transaction Price Allocated to the Remaining Performance Obligations

On December 31, 2019, we had $370,200 of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 74% of our remaining performance obligations as revenue within one year, with the balance to be completed thereafter.
Backlog represents the dollar value of funded orders for which work has not been performed. Backlog generally increases with bookings, and converts into revenue as we incur costs related to contractual commitments or the shipment of product. Given the nature of our business and a larger dependency on international customers, our bookings, and therefore our backlog, is impacted by the longer maturation cycles resulting in delays in the timing and amounts of such awards, which are subject to numerous factors, including fiscal constraints placed on customer budgets; political uncertainty; the timing of customer negotiations; and the timing of governmental approvals.
Contract Balances

Contract assets were $96,826 as of December 31, 2019 compared to $105,111 as of September 30, 2019. The $8,285 decrease in our contract assets balance was primarily due to the timing of billings and work performed on various radar and surveillance programs. Contract assets primarily relate to the Company's right to consideration for work completed but not billed at the reporting date and are recorded in Contract costs and recognized income not yet billed, net of progress payments in the Consolidated Balance Sheets. Contract assets are transferred to receivables when the right to consideration becomes unconditional. Contract costs and recognized income not yet billed consists of amounts accounted for under the percentage of completion method of accounting, recoverable costs and accrued profit that cannot yet be invoiced under the terms of certain long-term contracts. Amounts will be invoiced when applicable contract terms, such as the achievement of specified milestones or product delivery, are met. At December 31, 2019 and September 30, 2019, approximately $13,900 and $13,100, respectively, of contract costs and recognized income not yet billed were expected to be collected after one year. As of December 31, 2019, Contract costs and recognized income not yet billed included approximately $4,100 of reserves for contract risk. As of September 30, 2019, Contract costs and recognized income not yet billed included no reserves for contract risk.

Contract liabilities were $21,217 as of December 31, 2019 compared to $26,259 as of September 30, 2019. The $5,042 decrease in the contract liabilities balance was due to the recognition of revenue primarily from airborne maritime surveillance radar programs. Contract liabilities relate to advance consideration received from customers for which revenue has not been recognized. The Company often receives cash payments from customers in advance of the Company’s performance resulting in contract liabilities. These contract liabilities are classified as current on the Consolidated Balance Sheets based on the timing of when the Company expects to recognize revenue. Current contract liabilities are recorded in Accounts payable on the Consolidated Balance Sheets. Contract liabilities are reduced when the associated revenue from the contract is recognized.

NOTE 4 – ACQUISITIONS

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

On November 29, 2019, AMES acquired 100% of the outstanding stock of Vatre Group Limited ("Apta"), a leading United Kingdom supplier of innovative garden pottery and associated products sold to leading UK and Ireland garden centers for $10,531 (GBP 8,150). This acquisition broadens AMES' product offerings in the UK market and increases its in-country operational footprint. The purchase price was primarily allocated to goodwill of GBP 6,021, inventory of GBP 2,441, accounts receivable and other assets of GBP 1,432 and accrued liabilities of GBP 1,744.

The Company did not incur any acquisition costs during the three months ended December 31, 2019 and 2018.

8




NOTE 5 – 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 December 31, 2019
 
At September 30, 2019
Raw materials and supplies
$
124,014

 
$
121,791

Work in process
100,607

 
93,830

Finished goods
242,448

 
226,500

Total
$
467,069

 
$
442,121


 
NOTE 6 – PROPERTY, PLANT AND EQUIPMENT

The following table details the components of property, plant and equipment, net:
 
At December 31, 2019
 
At September 30, 2019
Land, building and building improvements
$
143,942

 
$
133,036

Machinery and equipment
576,230

 
580,698

Leasehold improvements
50,603

 
49,808


770,775

 
763,542

Accumulated depreciation and amortization
(438,627
)
 
(426,216
)
Total
$
332,148

 
$
337,326


Depreciation and amortization expense for property, plant and equipment was $13,432 and $12,667 for the quarters ended December 31, 2019 and 2018, respectively. Depreciation included in SG&A expenses was $4,951 and $4,681 for the quarters ended December 31, 2019 and 2018, respectively. Remaining components of depreciation, attributable to manufacturing operations, are included in Cost of goods and services.

Except as described in Note 16, Restructuring Charges, no event or indicator of impairment occurred during the three months ended December 31, 2019 which would require additional impairment testing of property, plant and equipment.
 
NOTE 7 – GOODWILL AND OTHER INTANGIBLES
 
The following table provides changes in the carrying value of goodwill by segment during the three months ended December 31, 2019:

 
At September 30, 2019

Goodwill from acquisitions

Other
adjustments
including currency
translations

At December 31, 2019
Consumer and Professional Products
$
227,269

 
$
7,942

 
$
1,581

 
$
236,792

Home and Building Products
191,253

 

 

 
191,253

Defense Electronics
18,545

 

 

 
18,545

Total
$
437,067

 
$
7,942

 
$
1,581

 
$
446,590



9



The following table provides the gross carrying value and accumulated amortization for each major class of intangible assets:
 
 
At December 31, 2019
 
 
 
At September 30, 2019
 
Gross Carrying Amount
 
Accumulated
Amortization
 
Average
Life
(Years)
 
Gross Carrying Amount
 
Accumulated
Amortization
Customer relationships & other
$
184,980

 
$
60,327

 
23
 
$
183,515

 
$
57,783

Technology and patents
19,317

 
7,640

 
13
 
19,167

 
7,329

Total amortizable intangible assets
204,297

 
67,967

 
 
 
202,682

 
65,112

Trademarks
221,413

 

 
 
 
219,069

 

Total intangible assets
$
425,710

 
$
67,967

 
 
 
$
421,751

 
$
65,112


 
Amortization expense for intangible assets was $2,393 and $2,418 for the quarters ended December 31, 2019 and 2018, respectively. Amortization expense for the remainder of 2020 and the next five fiscal years and thereafter, based on current intangible balances and classifications, is estimated as follows: 2020 - $9,593; 2021 - $9,387; 2022 - $9,387; 2023 - $9,234; 2024 - $9,208; 2025 - $9,208; thereafter $80,313.
 
No event or indicator of impairment occurred during the three months ended December 31, 2019 which would require impairment testing of long-lived intangible assets including goodwill.
 
NOTE 8 – INCOME TAXES

During the quarter ended December 31, 2019, the Company recognized a tax provision of $6,339 on income before taxes of $16,951, compared to a tax provision of $5,212 on income before taxes of $13,965 in the comparable prior year quarter. The current year quarter included restructuring charges of $6,434 ($4,148, net of tax) and net discrete tax and certain other tax provisions, net of $833, that affect comparability. The prior year quarter included net discrete tax and certain other tax provisions of $467 that affect comparability. Excluding these items, the effective tax rates for the quarters ended December 31, 2019 and 2018 were 33.3% and 34.0%, respectively.






10


NOTE 9 – LONG-TERM DEBT
 
 
 
At December 31, 2019
 
At September 30, 2019
  
 
Outstanding Balance

Original Issuer Premium

Capitalized Fees & Expenses
 
Balance Sheet

Coupon Interest Rate

Outstanding Balance

Original Issuer Premium
 
Capitalized Fees & Expenses
 
Balance Sheet

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

 
$
778

 
$
(8,214
)
 
$
992,564

 
5.25
%
 
$
1,000,000

 
$
867

 
$
(9,175
)
 
$
991,692

 
5.25
%
Revolver due 2025
(b)
100,117

 

 
(1,043
)
 
99,074

 
Variable

 
50,000

 

 
(1,243
)
 
48,757

 
Variable

Capital lease - real estate
(d)
3,573

 

 
(48
)
 
3,525

 
5.00
%
 
4,388

 

 
(55
)
 
4,333

 
5.00
%
Non US lines of credit
(e)
9,965

 

 
(42
)
 
9,923

 
Variable

 
17,576

 

 
(45
)
 
17,531

 
Variable

Non US term loans
(e)
37,422

 

 
(181
)
 
37,241

 
Variable

 
36,977

 

 
(188
)
 
36,789

 
Variable

Other long term debt
(f)
4,275

 

 
(17
)
 
4,258

 
Variable

 
5,190

 

 
(18
)
 
5,172

 
Variable

Totals
 
1,155,352

 
778

 
(9,545
)
 
1,146,585

 
 

 
1,114,131

 
867

 
(10,724
)
 
1,104,274

 
 

less: Current portion
 
(9,451
)
 

 

 
(9,451
)
 
 

 
(10,525
)
 

 

 
(10,525
)
 
 

Long-term debt
 
$
1,145,901

 
$
778

 
$
(9,545
)
 
$
1,137,134

 
 

 
$
1,103,606

 
$
867

 
$
(10,724
)
 
$
1,093,749

 
 

 
 
Three Months Ended December 31, 2019
 
Three Months Ended December 31, 2018
 
 
Effective Interest Rate (1)

Cash Interest

Amort. Debt
Discount

Amort. Debt Issuance Costs
& Other Fees

Total Interest Expense

Effective Interest Rate (1)

Cash Interest

Amort. Debt
Premium

Amort.
Debt Issuance Costs
& Other Fees

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

 
$
67

 
$
951

 
$
14,143

 
5.7
%
 
$
13,125

 
$
68

 
$
951

 
$
14,144

Revolver due 2025
(b)
Variable

 
1,382

 

 
232

 
1,614

 
Variable

 
933

 

 
141

 
1,074

ESOP Loans
(c)
n/a

 

 

 

 

 
5.5
%
 
488

 

 
31

 
519

Capital lease - real estate
(d)
5.6
%
 
61

 

 
6

 
67

 
5.6
%
 
115

 

 
6

 
121

Non US lines of credit
(e)
Variable

 
4

 

 
4

 
8

 
Variable

 
7

 

 
4

 
11

Non US term loans
(e)
Variable

 
272

 

 
12

 
284

 
Variable

 
448

 

 
27

 
475

Other long term debt
(f)
Variable

 
160

 

 

 
160

 
Variable

 
182

 

 
3

 
185

Capitalized interest
 
 

 
(65
)
 

 

 
(65
)
 
 

 

 

 

 

Totals
 
 

 
$
14,939

 
$
67

 
$
1,205

 
$
16,211

 
 

 
$
15,298

 
$
68

 
$
1,163