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Griffon Corp – ‘10-K’ for 9/30/15

On:  Thursday, 11/12/15, at 5:25pm ET   ·   For:  9/30/15   ·   Accession #:  50725-15-80   ·   File #:  1-06620

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  As Of                Filer                Filing    For·On·As Docs:Size

11/12/15  Griffon Corp                      10-K        9/30/15  124:22M

Annual Report   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                       HTML   1.48M 
 2: EX-10.42    Material Contract                                   HTML     36K 
 3: EX-23       Consent of Experts or Counsel                       HTML     34K 
 4: EX-31.1     Certification per Sarbanes-Oxley Act (Section 302)  HTML     41K 
 5: EX-31.2     Certification per Sarbanes-Oxley Act (Section 302)  HTML     41K 
 6: EX-32       Certification per Sarbanes-Oxley Act (Section 906)  HTML     38K 
16: EXCEL       XBRL IDEA Workbook -- Financial Report (.xlsx)      XLSX    187K 
81: R1          Document And Entity Information                     HTML     61K 
60: R2          Consolidated Balance Sheets                         HTML    130K 
76: R3          Consolidated Balance Sheets (Parentheticals)        HTML     60K 
85: R4          Consolidated Statements of Operations and           HTML    146K 
                          Comprehensive Income (Loss)                            
112: R5          Consolidated Statements of Cash Flows               HTML    151K  
63: R6          Consolidated Statements of Shareholders' Equity     HTML    103K 
75: R7          Description of Business and Summary of Significant  HTML    111K 
                          Accounting Policies                                    
54: R8          Acquisitions                                        HTML     71K 
44: R9          Inventories                                         HTML     45K 
114: R10         Property, Plant and Equipment                       HTML     48K  
87: R11         Goodwill and Other Intangibles                      HTML     88K 
86: R12         Discontinued Operations                             HTML     59K 
94: R13         Accrued Liabilities                                 HTML     52K 
95: R14         Restructuring and Other Related Charges             HTML     80K 
91: R15         Warranty Liability                                  HTML     46K 
96: R16         Notes Payable, Capitalized Leases and Long-Term     HTML    329K 
                          Debt                                                   
77: R17         Employee Benefit Plans                              HTML    311K 
82: R18         Income Taxes                                        HTML    153K 
89: R19         Stockholders' Equity and Equity Compensation        HTML    104K 
123: R20         Commitments and Contingent Liabilities              HTML     51K  
105: R21         Earnings (Loss) Per Share                           HTML     53K  
69: R22         Related Parties                                     HTML     41K 
88: R23         Quarterly Financial Information (Unaudited)         HTML     88K 
72: R24         Reportable Segments                                 HTML    209K 
34: R25         Other Income (Expense)                              HTML     38K 
106: R26         Other Comprehensive Income (Loss)                   HTML    111K  
119: R27         Consolidating Guarantor and Non-Guarantor           HTML    754K  
                          Financial Information                                  
48: R28         Subsequent Events                                   HTML     37K 
47: R29         Schedule Ii Valuation and Qualifying Accounts       HTML    143K 
52: R30         Description of Business and Summary of Significant  HTML    159K 
                          Accounting Policies (Policies)                         
53: R31         Acquisitions (Tables)                               HTML     65K 
55: R32         Inventories (Tables)                                HTML     44K 
22: R33         Property, Plant and Equipment (Tables)              HTML     47K 
103: R34         Goodwill and Other Intangibles (Tables)             HTML     83K  
67: R35         Discontinued Operations (Tables)                    HTML     56K 
70: R36         Accrued Liabilities (Tables)                        HTML     51K 
39: R37         Restructuring and Other Related Charges (Tables)    HTML     74K 
122: R38         Warranty Liability (Tables)                         HTML     45K  
13: R39         Notes Payable, Capitalized Leases and Long-Term     HTML    357K 
                          Debt (Tables)                                          
57: R40         Employee Benefit Plans (Tables)                     HTML    303K 
110: R41         Income Taxes (Tables)                               HTML    153K  
36: R42         Stockholders' Equity and Equity Compensation        HTML     88K 
                          (Tables)                                               
46: R43         Earnings (Loss) Per Share (Tables)                  HTML     50K 
51: R44         Quarterly Financial Information (Unaudited)         HTML     82K 
                          (Tables)                                               
61: R45         Reportable Segments (Tables)                        HTML    203K 
21: R46         Other Comprehensive Income (Loss) (Tables)          HTML    112K 
43: R47         Consolidating Guarantor and Non-Guarantor           HTML    659K 
                          Financial Information (Tables)                         
15: R48         Description of Business and Summary of Significant  HTML    197K 
                          Accounting Policies (Details)                          
108: R49         Acquisitions (Details)                              HTML     53K  
35: R50         Acquisitions (Details) - Summary of Fair Values of  HTML     70K 
                          Assets Acquired                                        
104: R51         Acquisitions (Details) - Summary of Goodwill and    HTML     70K  
                          Intangible Asset Classifications                       
40: R52         INVENTORIES (Details) - Summary of Inventories      HTML     43K 
                          stated at lower cost                                   
58: R53         PROPERTY, PLANT AND EQUIPMENT (Details) - Summary   HTML     50K 
                          of property plant and equipment                        
14: R54         GOODWILL AND OTHER INTANGIBLES (Details) - Summary  HTML     51K 
                          of changes in carrying value of goodwill               
18: R55         GOODWILL AND OTHER INTANGIBLES (Details) - Summary  HTML     51K 
                          of gross carrying value and accumulated                
                          amortization of intangible assets                      
50: R56         Goodwill and Other Intangibles (Details)            HTML     52K 
26: R57         Discontinued Operations (Details)                   HTML     44K 
115: R58         Discontinued Operations (Details) - Summary of      HTML     55K  
                          discontinued operations                                
65: R59         ACCRUED LIABILITIES (Details) - Schedule of         HTML     59K 
                          accrued liabilities                                    
92: R60         Restructuring and Other Related Charges (Details)   HTML     65K 
42: R61         Restructuring and Other Related Charges (Details)   HTML     47K 
                          - Summary of the restructuring and other               
                          related charges                                        
45: R62         Restructuring and Other Related Charges (Details)   HTML     52K 
                          - Summary of accrued liability for the                 
                          restructuring and related charges                      
101: R63         Warranty Liability (Details)                        HTML     42K  
97: R64         Warranty Liability (Details) - Summary of changes   HTML     42K 
                          in warrant liability included in Accrued               
                          liabilities                                            
68: R65         NOTES PAYABLE, CAPITALIZED LEASES AND LONG-TERM     HTML     47K 
                          DEBT (Details) - Summary of net minimum                
                          payments on capitalized leases                         
99: R66         Notes Payable, Capitalized Leases and Long-Term     HTML    463K 
                          Debt (Details)                                         
41: R67         Notes Payable, Capitalized Leases and Long-Term     HTML    161K 
                          Debt (Details) - Summary of Long-Term                  
                          Debt                                                   
73: R68         Notes Payable, Capitalized Leases and Long-Term     HTML    116K 
                          Debt (Details) - Summary of Interest                   
                          Expense Incurred                                       
118: R69         Employee Benefit Plans (Details)                    HTML     91K  
17: R70         Employee Benefit Plans (Details) - Schedule of net  HTML     63K 
                          periodic costs                                         
33: R71         Employee Benefit Plans (Details) -                  HTML     47K 
                          Weighted-average assumptions used in                   
                          determining the net periodic benefit                   
                          costs                                                  
59: R72         Employee Benefit Plans (Details) - Plan assets and  HTML    143K 
                          benefit obligation of the defined                      
                          benefit plans                                          
24: R73         Employee Benefit Plans (Details) - Schedule of      HTML     44K 
                          weighted average assumptions used in                   
                          determining benefit obligations                        
121: R74         Employee Benefit Plans (Details) - Actual and       HTML     48K  
                          weighted-average assets allocation for                 
                          qualified benefit plans                                
37: R75         Employee Benefit Plans (Details) - Estimated        HTML     54K 
                          future benefit payments to retirees                    
28: R76         Employee Benefit Plans (Details) - Pension and      HTML     94K 
                          post-retirement plan assets by asset                   
                          category                                               
32: R77         Employee Benefit Plans (Details) - ESOP Shares      HTML     41K 
19: R78         INCOME TAXES (Details) - Components of Income       HTML     42K 
                          before taxes and discontinued operations               
23: R79         INCOME TAXES (Details) - Provision (benefit) for    HTML     55K 
                          income taxes on income from continuing                 
                          operations                                             
83: R80         Income Taxes (Details)                              HTML     61K 
30: R81         Income Taxes (Details) - Schedule of effective      HTML     68K 
                          income tax rate reconciliation                         
116: R82         Income Taxes (Details) - Schedule of deferred tax   HTML     89K  
                          assets and liabilities                                 
56: R83         Income Taxes (Details) - Components of net          HTML     47K 
                          deferred tax asset (liability), by                     
                          balance sheet account                                  
90: R84         Income Taxes (Details) - Schedule of unrecognized   HTML     49K 
                          tax benefits                                           
98: R85         Stockholders' Equity and Equity Compensation        HTML    163K 
                          (Details)                                              
29: R86         Stockholders' Equity and Equity Compensation        HTML     42K 
                          (Details) - Summary of stock-based                     
                          compensation expense (Details)                         
31: R87         Stockholders' Equity and Equity Compensation        HTML     58K 
                          (Details) - Summary of stock option                    
                          activity                                               
113: R88         Stockholders' Equity and Equity Compensation        HTML     61K  
                          (Details) - Stock options activity range               
                          of exercise prices                                     
25: R89         Stockholders' Equity and Equity Compensation        HTML     60K 
                          (Details) - Summary of restricted stock                
                          activity                                               
84: R90         Commitments and Contingent Liabilities (Details)    HTML     62K 
80: R91         EARNINGS (LOSS) PER SHARE (Details) - Basic and     HTML     54K 
                          diluted EPS from continuing operations                 
102: R92         Related Parties (Details)                           HTML     53K  
79: R93         Quarterly Financial Information (Unaudited)         HTML     45K 
                          (Details)                                              
64: R94         Quarterly Financial Information (UNAUDITED)         HTML     54K 
                          (Details) - Schedule of quarterly                      
                          financial information                                  
107: R95         REPORTABLE SEGMENTS (Details) - Schedule of         HTML    110K  
                          Summary of Reconciliation of Segment                   
                          Profit Before Taxes and Operations                     
62: R96         REPORTABLE SEGMENTS (Details) - Schedule of         HTML     54K 
                          summary of segment assets                              
38: R97         REPORTABLE SEGMENTS (Details) - Schedule of         HTML     65K 
                          Segment Information by Geographic Region               
71: R98         Reportable Segments (Details)                       HTML     43K 
66: R99         Other Income (Expense) (Details)                    HTML     40K 
49: R100        OTHER COMPREHENSIVE INCOME (LOSS) (Details) -       HTML     77K 
                          Summary of Other Comprehensive Income                  
124: R101        OTHER COMPREHENSIVE INCOME (LOSS) (Details) -       HTML     48K  
                          Accumulated Other Comprehensive Income                 
100: R102        Other Comprehensive Income (Loss) (Details) -       HTML     47K  
                          Total Comprehensive Income (Loss)                      
78: R103        Other Comprehensive Income (LOSS) (Details) -       HTML     67K 
                          Summary of Amounts Reclassified from                   
                          Accumulated Other Comprehensive Income                 
20: R104        Consolidating Guarantor and Non-Guarantor           HTML     48K 
                          Financial Information (Details)                        
109: R105        Consolidating Guarantor and Non-Guarantor           HTML    163K  
                          Financial Information (Details) -                      
                          Summary of consolidated balance sheets                 
117: R106        Consolidating Guarantor and Non-Guarantor           HTML    179K  
                          Financial Information (Details) -                      
                          Summary of consolidated statement of                   
                          operations and comprehensive income                    
111: R107        Consolidating Guarantor and Non-Guarantor           HTML    198K  
                          Financial Information (Details) -                      
                          Summary of consolidated cash flows                     
74: R108        Subsequent Events (Details)                         HTML     37K 
27: R109        SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS       HTML     63K 
                          (Details) - Schedule of Valuation and                  
                          Qualifying Accounts                                    
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10-K   —   Annual Report


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  10-K  

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

x
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the year ended September 30, 2015

OR

o
 
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 1-06620

GRIFFON CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
 
11-1893410
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
712 Fifth Avenue, 18th Floor, New York, New York
 
(Address of Principal Executive Offices)
 
(Zip Code)
 
 
 
Registrant’s telephone number, including area code:              (212) 957-5000

Securities registered pursuant to Section 12(b) of the Act:

 
Title of each class
 
Name of each exchange on
which registered
 
 
Common Stock, $0.25 par value
 
New York Stock Exchange
 

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o
No x

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 x No o




Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 
Large accelerated filer  o
Accelerated filer                  x
 
Non-accelerated filer    o
(Do not check if a smaller reporting company)
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No S

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of the close of business March 31, 2015, the registrant’s most recently completed second quarter, was approximately $685,000,000. The registrant’s closing price as reported by the New York Stock Exchange-Composite Transactions for March 31, 2015 was $17.43. The number of the registrant’s outstanding shares was 48,159,173 as of October 31, 2015.

DOCUMENTS INCORPORATED BY REFERENCE:

Part III — (Items 10, 11, 12, 13 and 14). Registrant’s definitive proxy statement to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934.




Special Notes Regarding Forward-Looking Statements
 
This Annual Report on Form 10-K, especially “Management’s Discussion and Analysis”, contains certain “forward-looking statements” within the meaning of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Such statements relate to, among other things, income (loss), earnings, cash flows, revenue, changes in operations, operating improvements, industries in which Griffon Corporation (the “Company” or “Griffon”) operates and the United States and global economies. Statements in this Form 10-K 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 Griffon's Telephonics Corporation supplies products, including as a result of continuing budgetary cuts resulting from sequestration and other government actions; the ability of the federal government to fund and conduct its operations; increases in the cost of raw materials such as resin, wood and steel; changes in customer demand or loss of a material customer at one of Griffon’s operating companies; the potential impact of seasonal variations and uncertain weather patterns on certain of Griffon’s businesses; political events that could impact the worldwide economy; a downgrade in Griffon’s credit ratings; changes in international economic conditions including interest rate and currency exchange fluctuations; the reliance by certain of Griffon’s businesses on particular third party suppliers and manufacturers to meet customer demands; the relative mix of products and services offered by Griffon’s businesses, which impacts margins and operating efficiencies; short-term capacity constraints or prolonged excess capacity; unforeseen developments in contingencies, such as litigation and environmental matters; unfavorable results of government agency contract audits of Telephonics Corporation; Griffon’s ability to adequately protect and maintain the validity of patent and other intellectual property rights; the cyclical nature of the businesses of certain of Griffon’s operating companies; and possible terrorist threats and actions and their impact on the global economy. 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.


1


(Unless otherwise indicated, any reference to years or year-end refers to the fiscal year ending September 30 and US dollars and non-US currencies are in thousands, except per share data)

PART I
Item 1. Business

The Company
 
Griffon Corporation (the “Company” or “Griffon”) is a diversified management and holding company conducting business through wholly-owned subsidiaries. Griffon oversees the operations of its subsidiaries, allocates resources among them and manages their capital structures. Griffon provides direction and assistance to its subsidiaries in connection with acquisition and growth opportunities as well as in connection with divestitures. In order to further diversify, Griffon also seeks out, evaluates and, when appropriate, will acquire additional businesses that offer potentially attractive returns on capital.
 
Headquartered in New York, N.Y., the Company was founded in 1959 and is incorporated in Delaware. Griffon is listed on the New York Stock Exchange and trades under the symbol GFF.
 
Griffon currently conducts its operations through three reportable segments:

Home & Building Products ("HBP") consists of two companies, The AMES Companies, Inc. (“AMES”) and Clopay Building Products Company, Inc. (“CBP”). HBP accounted for 52%, 49% and 46% of Griffon’s consolidated revenue in 2015, 2014 and 2013, respectively:

AMES is a global provider of non-powered landscaping products for homeowners and professionals. AMES’ revenue was 27%, 25% and 23% of Griffon’s consolidated revenue in 2015, 2014 and 2013, respectively.

CBP is a leading manufacturer and marketer of residential, commercial and industrial garage doors to professional dealers and major home center retail chains. CBP’s revenue was 26%, 24% and 23% of Griffon’s consolidated revenue in 2015, 2014 and 2013.

Telephonics Corporation ("Telephonics") designs, develops and manufactures high-technology integrated information, communication and sensor system solutions for military and commercial markets worldwide. Telephonics’ revenue was 21% of Griffon’s consolidated revenue in both 2015 and 2014, and 24% in 2013.

Clopay Plastic Products Company, Inc. ("PPC") 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.  PPC revenue was 26% of Griffon’s consolidated revenue in 2015, and 30% in both 2014 and 2013.

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

As a result of the decline in the U.S. housing market and the subsequent global financial crisis, Griffon has undergone a strategic transformation. In May 2008, we announced the divestiture of our Installation Services business, which was consummated by September 2008. In September 2008, Griffon strengthened its balance sheet by raising $248,600 in equity through a common stock rights offering and a related investment by GS Direct L.L.C., an affiliate of The Goldman Sachs Group, Inc. Since that time, Griffon has continued to refine and enhance the strategic direction and operating performance of its companies, while strengthening its balance sheet. During this period, Griffon has grown revenue and earnings through organic growth, cost containment and acquisitions, while returning capital to its shareholders through dividends and stock buybacks.

On September 30, 2010, Griffon purchased AMES for $542,000 in cash. Subsequently, Griffon acquired three businesses complementary to AMES: the pots and planters business of Southern Sales & Marketing ("Southern Patio"), Northcote Pottery™ ("Northcote") and the Australian Garden and Tools division of Illinois Tool Works, Inc. ("Cyclone").

On October 17, 2011, AMES acquired Southern Patio for approximately $23,000. Southern Patio, is a leading designer, manufacturer and marketer of landscape accessories. Southern Patio had revenue exceeding $40,000 in 2011.

In January 2013, AMES announced its intention to close certain U.S. manufacturing facilities and consolidate affected operations primarily into its Camp Hill and Carlisle, PA locations. These actions, which were completed at the end of the first quarter of 2015,

2


improve manufacturing and distribution efficiencies, allow for in-sourcing of certain production previously performed by third party suppliers, and improve material flow and absorption of fixed costs. Management continues to estimate that AMES' initiative will result in annual cash savings exceeding $10,000, based on current operating levels. Realization of expected savings began in the 2015 second quarter.

On December 31, 2013, AMES acquired Northcote, founded in 1897 and a leading brand in the Australian outdoor planter and decor market, for approximately $22,000. In the first year after the acquisition, Northcote was expected to generate approximately $28,000 of annualized revenue.
 
On May 21, 2014, AMES acquired Cyclone for approximately $40,000. Cyclone offers a full range of quality garden and hand tool products sold under various leading brand names including Cyclone®, Nylex® and Trojan®, designed to meet the requirements of both the Do-it-Yourself and professional trade segments. In the first year after acquisition, Cyclone was expected to generate approximately $65,000 of annualized revenue. The Northcote and Cyclone acquisitions complement Southern Patio and add to AMES' existing lawn and garden operations in Australia.

From August 2011 through September 30, 2015, Griffon has repurchased 16,751,221 shares of its common stock, for a total of $203,132 or $12.13 per share. This includes the repurchase of 12,306,777 shares on the open market, as well as the December 10, 2013 repurchase of 4,444,444 shares from GS Direct for $50,000. In each of August 2011, May 2014, March 2015 and July 2015, Griffon's Board of Directors authorized the repurchase of up to $50,000 of Griffon's outstanding common stock. Under these authorizations, the Company may purchase shares in the open market, including pursuant to a 10b5-1 plan, or in privately negotiated transactions. At September 30, 2015, $57,926 remains under current Board repurchase authorizations.

Since September 2008, Griffon's Employee Stock Ownership Plan ("ESOP") purchased 4,013,459 shares of Griffon's common stock, for a total of $44,973 or $11.21 per share. At September 30, 2015, the ESOP holds allocated and unallocated shares totaling 5,517,607, or 11% of Griffon's outstanding shares, with a related loan balance of $36,520, net of issuance costs.

On November 17, 2011, the Company began declaring quarterly dividends. During 2015, 2014 and 2013, the Company declared and paid dividends per share of $0.16, $0.12 and $0.10, respectively, for a total of $19,752 dividends paid during the period.

During 2014, Griffon issued $600,000 of 5.25% Senior Notes due 2022, the proceeds of which were used to redeem $550,000 of 7.125% senior notes due 2018.

On March 13, 2015, Griffon amended its Revolving Credit Facility to increase the credit facility from $225,000 to $250,000, extend its maturity date from March 28, 2019 to March 13, 2020 and modify certain other provisions of the facility.

Griffon has outstanding $100,000 principal amount of 4% Convertible Subordinated Notes due 2017, with a current conversion rate of 69.3811 shares of Griffon’s common stock per $1 principal amount of notes, which corresponds to a conversion price of $14.41 per share.

On October 15, 2015, CBP announced plans to significantly expand it manufacturing facility in Troy, Ohio. The expansion reflects increased customer demand for its core products, and our success in bringing new technologies to market. The project includes improvements to its existing one million square foot building, as well as adding 200,000 square feet and new manufacturing equipment. The project is expected to be completed in 2016.
 
Griffon makes available, free of charge through its website at www.griffoncorp.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as soon as reasonably practicable after such materials are filed with or furnished to the Securities and Exchange Commission (the “SEC”).
 
For information regarding revenue, profit and total assets of each segment, see the Reportable Segments footnote in the Notes to Consolidated Financial Statements.

3


Reportable Segments:
 
Home & Building Products
 
Home & Building Products consists of two companies, AMES and CBP, described below.
 
AMES
 
AMES, founded in 1774, is the leading United States ("U.S.") and a global provider of non-powered landscaping products that make work easier for homeowners and professionals. AMES employs approximately 1,800 employees.
 
Brands
 
AMES' brands are among the most recognized across primary product categories in the North American and Australian non-powered landscaping product markets. Our brand portfolio includes AMES®, True Temper®, Garant®, UnionTools®, Hound Dog®, Westmix™, Cyclone®, Southern Patio®, Northcote Pottery™, Kelso™, Darby and Dynamic Design™, as well as contractor-oriented brands including Razor-Back® Professional Tools and Jackson® Professional Tools. This strong portfolio of brands enables AMES to build and maintain long-standing relationships with leading retailers and distributors. In addition, given the breadth of its brand portfolio and product category depth, AMES is able to offer specific, differentiated branding strategies for key retail customers. These strategies have focused on enhancement of brand value, with the goal of de-commoditizing AMES products through the introduction of identity and functionality elements that will make each top brand unique, attractive and visually recognizable by the consumer. The visual brand transformation of the AMES® and Razor-Back® brands, as well as phase one for the True Temper® line, were completed in 2015. The balance of the True Temper line will roll-out through 2016. In addition to the brands listed, AMES also sells private label branded products further enabling channel management and customer differentiation.

Products
 
AMES is a global provider of non-powered landscaping products that make work easier for homeowners and professionals. AMES manufactures and markets one of the broadest product portfolios in the non-powered landscaping product industry. This portfolio is anchored by four core product categories: long handle tools, wheelbarrows, snow tools, and decorative plastic and ceramic planters. As a result of brand portfolio recognition, high product quality, industry leading service and strong customer relationships, AMES has earned market-leading positions in its four core product categories. The following is a brief description of AMES' primary product lines:
 
Long Handle Tools: An extensive line of engineered tools including shovels, spades, scoops, rakes, hoes, cultivators, weeders, post hole diggers, scrapers, edgers and forks, marketed under leading brand names including AMES®, True Temper®, UnionTools®, Garant®, Cyclone® and Kelso™, as well as contractor-oriented brands including Razor-Back® and Jackson®.

Wheelbarrows:  AMES designs, develops and manufactures a full line of wheelbarrows and lawn carts, primarily under the AMES®, True Temper®, Jackson® Professional Tools, UnionTools®, Garant® and Westmix™ brand names. The products range in size, material (poly and steel), tray form, tire type, handle length and color based on the needs of homeowners, landscapers and contractors.

Snow Tools:  A complete line of snow tools is marketed under the True Temper®, Garant® and Union Tools® brand names. The snow tool line includes shovels, pushers, roof rakes, sled sleigh shovels, scoops and ice scrapers.

Planters and Lawn Accessories:  AMES is a designer, manufacturer and distributor of indoor and outdoor planters and accessories, sold under the Southern Patio®, Northcote Pottery™ and Dynamic Design™ brand names, as well as various private label brands. The range of planter sizes (from 6 to 32 inches) is available in various designs, colors and materials. On October 17, 2011, Griffon acquired the Southern Patio® pots and planters business. Southern Patio® is a leading designer and marketer of decorative landscape products. Southern Patio® and Dynamic Design have been integrated to leverage Southern Patio®’s capabilities, enhance AMES' product offering in the U.S. pots and planters category and enable AMES to improve its innovation and speed to market in this category.

Striking Tools:  Axes, picks, mattocks, mauls, wood splitters, sledgehammers, pry bars and repair handles make up the striking tools product line. These products are marketed under the True Temper®, Cyclone®, Garant®, Jackson® Professional Tools and Razor-Back® Professional Tools brand names.

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Hand Tools:  Hammers, screwdrivers, pliers, adjustable wrenches, handsaws, tape measures, levels, clamps, and other traditional non-powered hand tools make up this product line. These products are marketed under the Trojan®, Cyclone® and Supercraft® brand names. In addition, gardening hand tools, such as trowels, cultivators, weeders and other specialty garden hand tools, are marketed under the AMES® brand name.

Pruning:  The pruning line is made up of pruners, loppers, shears and other tools sold primarily under the True Temper®, Cyclone® and Garant® brand names.

Garden Hose and Storage:  AMES offers a wide range of manufactured and sourced garden hoses and hose reels under the AMES®, NeverLeak®, Nylex® and Jackson® Professional Tools brand names.

Customers
 
AMES sells products throughout North America, Australia and Europe through (1) retail centers, including home centers and mass merchandisers, such as The Home Depot, Inc. (“Home Depot”), Lowe’s Companies Inc. (“Lowe’s”), Wal-Mart Stores Inc. ("Walmart"), Canadian Tire Corporation, Limited, Costco Wholesale Corporation, Rona Inc., Bunnings Warehouse ("Bunnings") and Woodies; (2) wholesale chains, including hardware stores and garden centers, such as Ace, Do-It-Best and True Value Company and (3) industrial distributors, such as W.W. Grainger, Inc. and ORS Nasco.
 
Home Depot, Lowe's and Bunnings are significant customers of AMES. The loss of any of these customers would have a material adverse effect on the AMES business and on Griffon.
 
Product Development
 
AMES product development efforts focus on both new products and product line extensions. Products are developed through in-house industrial design and engineering staffs to introduce new products and product line extensions timely and cost effectively.
 
Sales and Marketing
 
AMES' sales organization is structured by distribution channel in the U.S., and by country internationally. In the U.S., a dedicated team of sales professionals is provided for each of the large retail customers. Offices are maintained adjacent to each of the three largest customers’ headquarters, supported by dedicated in-house sales analysts. In addition, sales professionals are assigned to domestic, wholesale and industrial distribution channels. Sales teams located in Canada, Australia and Ireland handle sales in each of their respective regions. In Australia, a dedicated team of sales professionals is provided for the largest retail customer.
 
Raw Materials and Suppliers
 
AMES' primary raw material inputs include resin (primarily polypropylene and high density polyethylene), wood (mainly ash, hickory and poplar logs) and steel (hot rolled and cold rolled). In addition, some key materials and components are purchased, such as heavy forged components and wheelbarrow tires; most final assembly is completed internally in order to ensure consistent quality. All raw materials are generally available from a number of sources.

Competition
 
The non-powered landscaping product industry is highly competitive and fragmented. Most competitors consist of small, privately-held companies focusing on a single product category. Some competitors, such as Fiskars Corporation and Truper Herramientas S.A. de C.U., compete in various tool categories. Suncast Corporation competes in the hose reel and accessory market, and Swan Hose competes in the garden hose market. In addition, there is competition from imported or sourced products from China, India and other low-cost producing countries, particularly in long handled tools, wheelbarrows, planters, striking tools and pruning tools.
 
The principal factors by which AMES differentiates itself and provides the best value to customers are innovation, service, quality, and product performance. AMES' size, depth and breadth of product offering, category knowledge, research and development (“R&D”) investment and service are competitive advantages. Offshore manufacturers lack sufficient product innovation, capacity, proximity to market and distribution capabilities to service large retailers to compete in highly seasonal, weather related product categories.


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Manufacturing & Distribution
 
AMES has two distribution facilities in the U.S., a 1.2 million square foot facility in Carlisle, Pennsylvania and a 400,000 square foot facility in Reno, Nevada. Finished goods are transported to these facilities by both an internal fleet, as well as over the road trucking and rail. Additionally, light assembly is performed at the Carlisle and Reno locations. Distribution centers are also maintained in Canada, Australia and Ireland. AMES has a combination of internal and external, and domestic and foreign manufacturing sources from which it sources products for sale in the markets it serves.
 
In January 2013, AMES undertook to close certain of its U.S. manufacturing facilities and consolidate affected operations primarily into its Camp Hill and Carlisle, PA locations. The actions, completed at the end of the 2015 first quarter, improved manufacturing and distribution efficiencies, allow for in-sourcing of certain production previously performed by third party suppliers, and improved material flow and absorption of fixed costs. Management continues to estimate that AMES' initiative will result in annual cash savings exceeding $10,000, based on current operating levels. Realization of expected savings began in the 2015 second quarter.

Since January 2013, AMES incurred pre-tax restructuring and related exit costs approximating $7,941, comprised of cash charges of $4,016 and non-cash, asset-related charges of $3,925; the cash charges included $2,622 for one-time termination benefits and other personnel-related costs and $1,394 for facility exit costs. AMES had $19,964 in capital expenditures since January 2013.

Clopay Building Products
 
CBP, in business since 1964, has grown, organically and through tuck-in acquisitions, to become the largest manufacturer and marketer of residential garage doors, and among the largest manufacturers of commercial sectional doors, in the U.S., and manufactures a complete line of entry door systems uniquely designed to complement its popular residential garage door styles. The majority of CBP’s sales are for home remodeling and renovation, with the balance for the new residential housing and commercial building markets. Sales into the home remodeling market are driven by the aging of the housing stock, existing home sales activity, and the trends of improving both home appearance and energy efficiency. CBP employs approximately 1,400 employees.
 
According to the U.S. census, calendar year 2015 new construction single-family home starts will increase by 15%. The repair and remodel market rose 1% for the trailing twelve months ending March 2015, with modest growth expectations for the balance of the calendar year. The commercial segment saw spending fall 5% for the year (according to estimates from McGraw Hill Construction Dodge). According to industry sources, the residential and commercial sectional garage door market for calendar year 2014 was estimated to be $1,850,000, an increase of $100,000 over the prior year.

Brands
 
CBP brings over 50 years of experience and innovation to the garage door industry. Our strong family of brands includes Clopay®, America’s Favorite Garage Doors®, Holmes Garage Door Company® and IDEAL Door®. Clopay is the only residential garage door brand to hold the Good Housekeeping Seal of Approval.
 
Products and Service
 
CBP manufactures a broad line of residential sectional garage doors with a variety of options, at varying prices. CBP offers garage doors made primarily from steel, plastic composite and wood, and also sells related products, such as garage door openers manufactured by third parties.
 
CBP also markets commercial sectional doors, which are similar to residential garage doors, but are designed to meet the more demanding performance specifications of a commercial application.
 
CBP has a complete line of entry door systems uniquely designed to complement its popular residential garage door styles.
 
Customers
 
CBP is the principal supplier of residential garage doors throughout North America to Home Depot and Menards. The loss of either of these customers would have a material adverse effect on CBP’s and Griffon’s business. CBP distributes its garage doors directly to customers from its manufacturing facilities and through its distribution centers located throughout the U.S. and Canada. These distribution centers allow CBP to maintain an inventory of garage doors near installing dealers and provide quick-ship service to retail and professional dealer customers.


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Product Development
 
CBP product development efforts focus on both new products and improvements to existing products. Products are developed through in-house design and engineering staffs.
 
CBP operates a technical development center where its research engineers design, develop and implement new products and technologies and perform durability and performance testing of new and existing products, materials and finishes. CBP continually improves its garage door offerings through these development efforts, focusing on characteristics such as strength, design and energy efficiency. Also at this facility, the process engineering team works to develop new manufacturing processes and production techniques aimed at improving manufacturing efficiencies and ensuring quality-made products.
 
Sales and Marketing
 
The CBP sales and marketing organization supports our customers, consults on new product development and aggressively markets garage door solutions, with a primary focus on the North American market. CBP maintains a strong promotional presence, in both traditional and digital media. CBP developed a web application that guides consumers through an easy to use visualization and pricing program, allowing them to select the optimal door for their home. CBP recently updated its website to ensure mobile optimization.

Raw Materials and Suppliers
 
The principal raw material used in CBP’s manufacturing is galvanized steel. CBP also utilizes certain hardware components, as well as wood and insulated foam. All raw materials are generally available from a number of sources.
 
Competition
 
The garage door industry is characterized by several large national manufacturers and many smaller, regional and local manufacturers. CBP competes on the basis of service, quality, price, brand awareness and product design.
 
CBP’s brand names are widely recognized in the building products industry. CBP believes that it has earned a reputation among installing dealers, retailers and wholesalers for producing a broad range of innovative, high-quality doors with industry leading lead times. CBP’s market position and brand recognition are key marketing tools for expanding its customer base, leveraging its distribution network and increasing its market share.
 
Distribution
 
CBP distributes its products through a wide range of distribution channels, including installing dealers, retailers and wholesalers. CBP owns and operates a national network of 50 distribution centers. Additionally, products are sold to approximately 2,000 independent professional installing dealers and to major home center retail chains. CBP maintains strong relationships with its installing dealers and believes it is the largest supplier of residential garage doors to the retail and professional installing channels in North America.
 
Manufacturing
 
CBP currently has manufacturing facilities in Troy, Ohio and Russia, Ohio and recently announced plans to expand the Troy, Ohio facility. The expansion, which is expected to be completed in 2016, reflects increased customer demand for its core products, and CBP's success in bringing new technologies to market.
 
During 2013, CBP completed the closing of the Auburn, Washington facility and the consolidation of that facility into its Russia, Ohio facility.
 
Telephonics Corporation
 
Telephonics, founded in 1933, specializes in advanced electronic information and communication systems for defense, aerospace, civil, industrial, and commercial applications for the U.S. and international markets. Telephonics designs, develops, manufactures, sells, and provides logistical support and sustainment services for aircraft intercommunication systems, radar, air traffic management, identification friend or foe equipment (“IFF”), integrated border and perimeter security systems and custom, mixed-signal, application-specific, integrated circuits. Telephonics is also a provider of advanced systems engineering services supporting air and missile defense programs, as well as other threat and situational analysis requirements. Telephonics is a leading supplier

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of airborne maritime surveillance radar and aircraft intercommunication management systems, the segment’s two largest product lines. In addition to its traditional defense products used predominantly by the U.S. Government and its agencies, Telephonics has adapted its core technologies to products used in international markets in an effort to further increase its presence in both non-defense government and commercial markets. In 2015, approximately 66% of the segment’s sales were to the U.S. Government and agencies thereof, as a prime or subcontractor, 31% to international customers and 3% to U.S. commercial customers. Telephonics employs approximately 1,100 people.

Griffon believes that Telephonics’ advanced systems and sub-systems are well-positioned to address the needs of an integrated and modernized battlefield with emphasis on providing situational awareness to warfighters through the retrieval and dissemination of timely data for use by highly mobile ground, air and sea-going forces. Telephonics anticipates that the need for such systems will increase in connection with the active role that the military is playing in the war on terrorism, both at home and abroad. In recent years, Telephonics has increasingly focused its technologies and core competencies in the growing border and perimeter security, Intelligence, Surveillance and Reconnaissance (“ISR”) and Unmanned Aerial Vehicle (“UAV”) markets.

Telephonics operates in an increasingly complex industry that is faced with continued economic and budgetary pressure on U.S. Department of Defense procurement initiatives. Despite these challenges, Telephonics remains focused on delivering high-quality mission capable products and services at competitive prices to its customers. Telephonics continues to expand its product portfolio with innovative and cutting-edge technology concentrating on core and adjacent markets that will support its growth initiatives both domestically and internationally.
 
On April 22, 2013, the Joint Venture (“JV”) between Telephonics and Mahindra & Mahindra Ltd was incorporated. The JV will provide the Indian defense and civil sectors with radar and surveillance systems, IFF devices and communication systems. In addition, the JV intends to provide systems for Air Traffic Management services, border and perimeter security and other emerging surveillance requirements.

Programs and Products
 
Based on long-established relationships supported by existing contractual arrangements, Telephonics is a first-tier supplier to prime contractors in the defense industry such as Lockheed Martin Corporation ("Lockheed Martin"), The Boeing Company ("Boeing"), Northrop Grumman Corporation ("Northrup Grumman"), MacDonald Dettwiler and Associates Ltd., Airbus Military, Airbus Helicopters, Agusta Westland, SAAB, and Sikorsky Aircraft ("Sikorsky"), and is at times a prime contractor to the U.S. Department of Defense. The significance of each of these customers to Telephonics’ revenue fluctuates on an annual basis, based on the timing and funding of the Original Equipment Manufacturers (“OEM”) contract award, and the technological scope of the work required. The significant contraction and consolidation in the U.S. and international defense industry provides opportunities for established first-tier suppliers to capitalize on existing relationships with major prime contractors and to play a larger role in defense systems development and procurement for the foreseeable future.
 
Telephonics continues to direct resources towards border surveillance and critical infrastructure security initiatives. These opportunities represent strategic advances for Telephonics by enabling it to expand its core technical expertise into the nascent and growing border and perimeter security markets, both in the U.S. and abroad. With many of these programs, system specifications and operational and test requirements are challenging, exacerbated by demanding delivery schedules. Telephonics believes that the technological capabilities that these systems encompass will also be able to serve and protect the most complex borders.
 
In 2013, Telephonics was awarded a contract by Northrop Grumman as the radar supplier for the U.S. Navy’s Fire Scout MQ-8B program, which is a vertical take-off and landing UAV platform. This firmly positions Telephonics, with both its radar and communications products, as a strong competitor in this growing UAV/ISR market segment, as well as the next generation Fire Scout MQ-8C competition.

In 2015, Telephonics continued to focus its resources in commercial markets, and was successful in receiving a contract award from the Metropolitan Transportation Authority via the Long Island Railroad, as well as continued performance under existing contracts and additional awards from the Federal Aviation Administration. We believe these recent customer relationships will position Telephonics to continue growing in these adjacent commercial markets through leveraging its core technology and production capabilities.

Backlog

The funded backlog for Telephonics approximated $442,000 at September 30, 2015, compared to $494,000 at September 30, 2014. Approximately 73% of the current backlog is expected to be filled during 2016.


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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. The decrease in backlog was primarily attributed to the unpredictability in timing of various international contract awards associated with radar and surveillance opportunities that were not received by the end of the reporting period. 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 unpredictable 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.
Customers
 
The U.S. Government, through prime contractors like Lockheed Martin, Sikorsky, Northrop Grumman and Boeing, is a significant customer of Telephonics. The loss of the U.S. Government or any of its prime contractors as a customer could have a material adverse effect on Telephonics’ business. Notwithstanding the significance of Lockheed Martin, Sikorsky, Northrop Grumman and Boeing, Telephonics sells to a diverse group of other domestic and international defense industry contractors, as well as others who use Telephonics products for commercial use.
 
Telephonics participates in a range of long-term defense and non-military government programs, both in the U.S. and internationally. Telephonics has developed a base of installed products that generate significant recurring revenue from product enhancements and retrofits, as well as providing spare parts and customer support. Due to the inherent complexity of these electronic systems, Telephonics believes that its incumbent status on major platforms provides a competitive advantage in the selection process for platform upgrades and enhancements. Furthermore, Telephonics believes that its ability to leverage and apply its advanced technology to new platforms provides a competitive advantage when bidding for new business.
 
Research and Development ("R&D")
 
In an effort to maintain customer satisfaction and loyalty, Telephonics works closely with prime customers to ensure that there is a future market for its products by investing R&D funds in desired enhancements. Telephonics continually updates its core technologies through internally funded R&D while coordinating with customers at the earliest stages of new program development in an effort to provide solutions well in advance of its competitors. Internally funded R&D costs include basic and applied research initiatives, development activities, and other conceptual formulation studies. Telephonics is a technological leader in its core markets and pursues new growth opportunities by leveraging its systems design and engineering capabilities, and incumbent position, on key platforms.
 
In addition to products for defense programs, Telephonics' technology is also used in commercial applications such as airborne weather, search and rescue radar, and air traffic management systems. Telephonics’ reputation for innovative product design and engineering capabilities, especially in the areas of voice and data communications, radio frequency design, digital signal processing, networking systems, inverse synthetic aperture radar and analog, digital and mixed-signal integrated circuits, will continue to enhance its ability to secure, retain and expand its participation in defense programs and commercial opportunities.
 
Telephonics often designs its products to exceed customers’ minimum specifications, providing its customers with greater performance, flexibility, and value. Telephonics believes that early participation and communication with its customers in the requirements definition stages of new program development increases the likelihood that its products will be selected and integrated as part of a total system solution.

Sales and Marketing
 
Telephonics has technical business development personnel who act as the focal point for its marketing activities and sales representatives who introduce its products and systems to customers worldwide.
 
Competition
 
Telephonics competes with major manufacturers of electronic information and communication systems, as well as several smaller manufacturers of similar products. Telephonics endeavors to design high quality and reliable products with greater performance and flexibility than its competitors while competing on the basis of technology, innovative solutions, and price.
 

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Manufacturing Facilities
 
Telephonics’ facilities are located in the U.S., primarily in New York. Telephonics also maintains a Technical Support Services Center in Elizabeth City, North Carolina, which supports aircraft integration and upgrade activities in addition to providing support services to customers.
 
Clopay Plastic Products
 
PPC, which began as a paper products company in the 1930s and expanded with plastic products in the 1950s, develops and produces specialty plastic films and laminates for a variety of hygienic, health care and industrial uses in the U.S. and certain international markets. Products include thin gauge embossed and printed films, elastomeric films, laminates of film and non-woven fabrics, and perforated films and non-wovens. These products are used as moisture barriers in disposable infant diapers, adult incontinence products and feminine hygiene products, protective barriers in single-use surgical and industrial gowns, drapes and equipment covers, fluid transfer/distribution layers in absorbent products, components to enhance comfort and fit in infant diaper and adult incontinence products, packaging for hygienic products, house wrap and other products. PPC products are sold through a direct sales force, primarily to multinational consumer and medical products companies. PPC employs approximately 1,500 employees.
 
The markets in which PPC participates have been affected by several key trends over the past five years. These trends include increased use of disposable products in developing countries and favorable demographics, including increasing immigration in major global economies. Other trends representing significant opportunities include the continued demand for innovative products such as cloth-like, breathable, laminated and printed products, and large consumer products companies’ needs for global supply partners. Notwithstanding positive trends affecting the industry, product design changes by the customer can change the products manufactured by PPC and associated demand.
 
PPC believes that its business development activities targeting major multinational and regional producers of hygiene, healthcare and related products and its investments in its technology development capability and capacity increases, will lead to additional sales of new and related products.
 
Products
 
PPC specialty plastic film is a thin-gauge film engineered to provide certain performance characteristics and manufactured from polymer resins. A laminate is the combination of a plastic film and a woven or non-woven fabric. These products are produced using both cast and blown extrusion and various laminating processes. High speed, multi-color custom printing of films, customized embossing patterns, and proprietary perforation technology further differentiate our products. Specialty plastic film products typically provide a unique combination of performance characteristics, such as breathability, barrier properties, fluid flow management, elastic properties, processability and aesthetic appeal that meet specific, proprietary customer needs.

Customers
 
PPC largest customer is The Procter & Gamble Company (“P&G”), which has accounted for approximately half of its revenue over the last five years. The loss of this customer would have a material adverse effect on the PPC business and Griffon. Notwithstanding the significance of P&G, PPC sells to a diverse group of other leading consumer, health care and industrial companies.
 
Product Development
 
PPC is an industry leader in the research, design and development of specialty plastic film and laminate products. PPC operates a technical center where polymer chemists, scientists and engineers work independently, and in partnership with customers to develop new technologies, products, processes and product applications.
 
PPC R&D efforts have resulted in many inventions covering embossing patterns, improved processing methods, product formulations, product applications and other proprietary technology. Products developed include microporous breathable films and cost-effective printed films and laminates. Microporous breathability provides for moisture vapor transmission and airflow while maintaining barrier properties resulting in improved comfort and skin care. Elastic laminates provide the user with improved comfort and fit. Printed films and laminates provide consumer preferred aesthetics, such as softness and visual appeal. Perforated films and non-wovens provide engineered fluid transfer with unique softness and aesthetics. PPC holds a number of patents for its specialty film and laminate products and related manufacturing processes. While patents play a significant role, PPC believes

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that its proprietary know-how and the knowledge, ability and experience of its employees are more significant to its long-term success.
 
Sales and Marketing
 
PPC sells its products primarily in North America, Europe, and South and Central America with additional sales in Asia Pacific and Africa. PPC primarily utilizes an internal direct sales force, with senior management actively participating in developing and maintaining close contacts with customers.
 
PPC seeks to expand its market presence by providing innovative products and services to major international consumer products companies. Specifically, PPC believes that it can continue to increase its North American sales and expand internationally through ongoing product development and enhancement, and by marketing its technologically-advanced films, laminates and printed films for use in all of its markets. Operations in Germany and Brazil, and most recently in Asia, provide a strong platform for additional sales growth in international markets.
 
Raw Materials and Suppliers
 
Plastic resins, such as polyethylene and polypropylene, and non-woven fabrics are the basic raw materials used in the manufacture of substantially all PPC products. The price of resin has fluctuated dramatically over the past five years primarily due to volatility in oil and natural gas prices, foreign exchange and producer capacity. PPC customer contracts generally provide for adjusting selling prices based on underlying resin costs on a delayed basis. Resins are purchased in pellet form from several suppliers. Sources for raw materials are believed to be adequate for current and anticipated needs.

Competition
 
PPC has a number of competitors, some of whom are larger, in the specialty plastic films and laminates market. PPC competes on quality, service and price using its technical expertise, product development capabilities and broad international footprint to enhance its market position, build and maintain long-term customer relationships and meet changing customer needs.
 
Manufacturing
 
Specialty plastic film and laminate products are manufactured using high-speed equipment designed to meet stringent tolerances. The manufacturing process consists of melting a mixture of polymer resins and additives, and forcing this mixture through a combination of die and rollers to produce thin films. Laminates of films and non-wovens are manufactured by a variety of techniques to meet customer needs. In addition, films and laminates can be printed.
 
PPC U.S. manufacturing facilities are in Augusta, Kentucky and Nashville, Tennessee from which it sells plastic films and laminates throughout the U.S. and various parts of the world.
 
PPC has two manufacturing facilities in Germany from which it sells plastic films throughout Europe, the Middle East and Africa. PPC also has operations in Brazil and China, which manufacture plastic hygienic and specialty films. PPC international operations provide a platform to broaden participation in Europe, the Middle East, South America and Asia and strengthen PPC position as a global supplier.
 
Griffon Corporation
 
Employees
 
Griffon and its subsidiaries employ approximately 6,000 people located primarily throughout the U.S., Canada, Europe, Brazil, Australia and China. Approximately 200 of these employees are covered by collective bargaining agreements in the U.S., primarily with an affiliate of the American Federation of Labor and Congress of Industrial Organizations; United Brotherhood of Carpenters and Joiners of America; International Brotherhood of Teamsters and the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy Allied Industrial and Service Workers International Union. Additionally, approximately 200 employees in Canada are represented by the Trade Union Advisory Committee. Griffon believes its relationships with its employees are satisfactory.
 
Regulation
 
Griffon’s operations are subject to various environmental, health, and employee safety laws and regulations. Griffon believes that it is in material compliance with these laws and regulations. Historically, compliance with environmental laws has not materially

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affected, and is not expected to materially affect, Griffon’s capital expenditures, earnings or competitive position in the future. Nevertheless, Griffon cannot guarantee that, in the future, it will not incur additional costs for compliance or that such costs will not be material.
 
Telephonics, which sells directly and indirectly to the U.S. government, is subject to certain regulations, laws and standards set by the U.S. government. Additionally, Telephonics is subject to routine audits and investigations by U.S. Government Agencies such as the Defense Contract Audit Agency, the Defense Security Service, with respect to its classified contracts, and other Inspectors General. These agencies review a contractor’s performance under its contracts, cost structure and compliance with applicable laws, regulations and standards, including those relating to facility and personnel security clearances. These agencies also review the adequacy of, and a contractor’s compliance with, its internal control systems and policies, including the contractor’s management, purchasing, property, estimating, compensation, and accounting and information systems.

Customers
 
A small number of customers account for, and are expected to continue to account for, a substantial portion of Griffon’s consolidated revenue. In 2015:
a.
The U.S. Government and its agencies, through prime and subcontractor relationships, represented 14% of Griffon’s consolidated revenue and 66% of Telephonics' revenue.
b.
P&G represented 14% of Griffon’s consolidated revenue and 51% of PPC revenue.
c.
Home Depot represented 12% of Griffon’s consolidated revenue and 23% 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 relationships with them. Orders from these customers are subject to change and may fluctuate materially. The loss of all or a portion of volume from any one of these customers could have a material adverse impact on Griffon’s financial results, liquidity and operations.
 
Seasonality
 
Historically, Griffon’s revenue and income were lowest in our first and fourth quarters ending December 31, and September 30, respectively, and highest in our second and third quarters ending March 31, and June 30, respectively, primarily due to the seasonality of AMES' business. With the 2014 acquisition of Northcote and Cyclone®, both in Australia, AMES' revenue is less susceptible to seasonality. In 2015, 56% of AMES' sales occurred during the second and third quarters compared to 58% in 2014 and 63% in 2013. CBP’s business is driven by residential renovation and construction during warm weather, which is generally at reduced levels during the winter months, generally in our second quarter. Griffon's revenue is expected to be lowest in the first quarter and highest in the third quarter.
 
Demand for lawn and garden products is influenced by weather, particularly weekend weather during peak gardening season. AMES' sales volume can be adversely affected by certain weather patterns such as unseasonably cool or warm temperatures, hurricanes, water shortages or floods. In addition, lack of snow or lower than average snowfall during the winter season may result in reduced sales of certain AMES products, such as snow shovels and other snow tools. As a result, AMES' results of operations, financial results and cash flows could be adversely impacted.
 
Financial Information About Geographic Areas
 
Segment and operating results are included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
For geographic financial information, see the Reportable Segment footnote in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data.
 
Griffon’s non-U.S. businesses are primarily in Germany, Canada, Brazil, Australia and China.
 
Research and Development
 
Griffon’s businesses are encouraged to improve existing products as well as develop new products to satisfy customer needs; expand revenue opportunities; maintain or extend competitive advantages; increase market share and reduce production costs.

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R&D costs, not recoverable under contractual arrangements, are charged to expense as incurred. R&D costs for Griffon were $25,600 in 2015, $23,400 in 2014 and $22,400 in 2013.

Intellectual Property
 
Griffon follows a practice of actively protecting and enforcing its proprietary rights in the U.S. and throughout the world where Griffon’s products are sold.
 
Trademarks are of significant importance to Griffon’s HBP business. With 50 years of experience and innovation in the garage door industry, and with Clopay being the only residential garage door brand to hold the Good Housekeeping Seal of Approval, CBP has a significant level of goodwill in its strong family of brands, including: Clopay®, America’s Favorite Garage Doors®; Holmes Garage Door Company® and IDEAL Door®. Principal global and regional trademarks used by AMES include AMES®, True Temper®, Garant®, UnionTools®, Hound Dog®, Westmix™, Cyclone®, Southern Patio®, Northcote Pottery™, Kelso™, Dynamic Design™, Razor-Back® Professional Tools and Jackson® Professional Tools. The HBP business has 760 registered trademarks and approximately 105 pending trademark applications around the world. PPC uses the Clopay® trademark in addition to its 8 other brand names, and holds 75 registered trademarks and 10 pending trademark applications around the world. Griffon’s rights in these trademarks endure for as long as they are used and registered.
 
Patents are significant to PPC. Technology evolves rapidly in the plastics business, and PPC customers are constantly striving to offer products with innovative features at a competitive price to the end consumer. As a result, PPC constantly seeks to offer new and innovative products to its customers. PPC has 21 issued patents and 16 pending patent applications in the U.S., and 163 corresponding foreign patents and patent applications, primarily covering breathable and elastic polymer films and laminates for use in personal hygiene applications, as well as innovative technologies that are extensions of our core capabilities. Patents are also important to our HBP business. CBP holds 20 issued patents and has 1 patent application pending in the U.S., as well as 12 corresponding foreign patents, primarily related to garage door system components. AMES protects its designs and product innovation through the use of patents, and currently has 256 issued patents and 61 pending patent applications in the U.S., as well as 188 and 31 corresponding foreign patents and patent applications, respectively. Design patents are generally valid for fourteen years, and utility patents are generally valid for twenty years, from the date of filing. Our patents are in various stages of their terms of validity.
 
In the government and defense business, formal intellectual property rights are of limited value. Therefore, our Telephonics business tends to hold most of its important intellectual property as trade secrets, which it protects through the use of contract terms and carefully restricting access to its technology.


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Executive Officers of the Registrant
 
The following is a current list of Griffon’s executive officers:
 
Name
 
Age
 
Positions Held and Prior Business Experience
 
57
 
Chief Executive Officer since April 2008, Director since 1993, Vice Chairman of the Board since November 2003, and President from February 2009 to December 2012. From 2002 through March 2008, President and a Director of Wynn Resorts, Ltd., a developer, owner and operator of destination casino resorts.  From 1999 to 2001, Managing Director at Dresdner Kleinwort Wasserstein, an investment banking firm, and its predecessor Wasserstein Perella & Co. Formerly on the board of directors of Leap Wireless International, Inc. (NASDAQ: LEAP). Mr. Kramer is the son-in-law of Harvey R. Blau, Griffon’s Chairman of the Board.
 
 
 
 
 
Robert F. Mehmel
 
53
 
President and Chief Operating Officer since December 2012. From August 2008 to October 2012, President and Chief Operating Officer of DRS Technologies (“DRS”), a supplier of integrated products, services and support to military forces, intelligence agencies and prime contractors worldwide. From May 2006 to August 2008, Executive Vice President and Chief Operating Officer of DRS and from January 2001 to May 2006, Executive Vice President, Business Operations and Strategy, of DRS.
 
 
 
 
 
 
46
 
Senior Vice President and Chief Financial Officer since August 2015. From November 2012 to July 2015, Vice President and Controller of Griffon. From July 2009 to July 2015, Griffon's Chief Account Officer. From May 2005 to June 2009, Assistant Controller of Dover Corporation, a diversified global manufacturer (NYSE: DOV). Prior to this time, held various finance and accounting roles with Hearst Argyle Television (Formerly NYSE: HTV), John Wiley and Sons, Inc. (NYSE: JW.A) and Arthur Andersen, LLP.
 
 
 
 
 
Seth L. Kaplan
 
46
 
Senior Vice President, General Counsel and Secretary since May 2010.  From July 2008 to May 2010, Assistant General Counsel and Assistant Secretary at Hexcel Corporation, a manufacturer of advanced composite materials for space and defense, commercial aerospace and wind energy applications.  From 2000 to July 2008, Senior Corporate Counsel and Assistant Secretary at Hexcel.  From 1994 to 2000, associate at the law firm Winthrop, Stimson, Putnam & Roberts (now Pillsbury Winthrop Shaw Pittman LLP).

Item 1A. Risk Factors
 
Griffon’s business, financial condition, operating results and cash flows can be impacted by a number of factors which could cause Griffon’s actual results to vary materially from recent or anticipated future results. The risk factors discussed in this section should be carefully considered with all of the information in this Annual Report on Form 10-K. These risk factors should not be considered the only risk factors facing Griffon. Additional risks and uncertainties not presently known or that are currently deemed immaterial may also materially impact Griffon’s business, financial condition, operating results and cash flows in the future.
 
In general, Griffon is subject to the same general risks and uncertainties that impact other diverse manufacturing companies including, but not limited to, general economic, industry and/or market conditions and growth rates; impact of natural disasters and their effect on global markets; continued events in the Middle East and Asia and possible future terrorist threats and their effect on the worldwide economy; and changes in laws or accounting rules. Griffon has identified the following specific risks and uncertainties that it believes have the potential to materially affect its business and financial condition.
 
Current worldwide economic uncertainty and market volatility could adversely affect Griffon’s businesses.
 
The current worldwide economic uncertainty and market volatility could continue to have an adverse effect on Griffon during 2016, particularly in HBP, which is substantially linked to the U.S. housing market and the U.S. economy in general. Purchases of AMES' products are discretionary for consumers who are generally more willing to purchase products during periods in which favorable macroeconomic conditions prevail. Additionally, the current condition of the credit markets could impact Griffon’s ability to refinance expiring debt, obtain additional credit for investments in current businesses or for acquisitions, with favorable terms, or may render financing unavailable. Griffon is also exposed to basic economic risks including a decrease in the demand for the products and services it offers or a higher likelihood of default on its receivables.
 
Adverse trends in the housing sector and in general economic conditions will directly impact Griffon’s business.
 
HBP’s business is influenced by market conditions for new home construction and renovation of existing homes. For the year ended September 30, 2015, approximately 52% of Griffon’s consolidated revenue was derived from the HBP segment, which is heavily dependent on new home construction and renovation of existing homes. The strength of the U.S. economy, the age of

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existing home stock, job growth, interest rates, consumer confidence and the availability of consumer credit, as well as demographic factors such as migration into the U.S. and migration of the population within the U.S., also have an effect on HBP. In that respect, the significant downturn in the housing market has had an adverse effect on the operating results of HBP and this effect is likely to continue in 2016, particularly with respect to CBP.
 
Griffon operates in highly competitive industries and may be unable to compete effectively.
 
Griffon’s operating companies face intense competition in each of the markets served. There are a number of competitors, some of which are larger and have greater resources than Griffon’s operating companies. Griffon competes primarily on the basis of competitive prices, technical expertise, product differentiation, and quality of products and services. There can be no assurance that Griffon will not encounter increased competition in the future, which could have a material adverse effect on Griffon’s financial results.

The loss of large customers can harm financial results.
 
A small number of customers account for, and are expected to continue to account for, a substantial portion of Griffon's consolidated revenue. Approximately 14% of consolidated revenue and 51% of the PPC segment revenue for the year ended September 30, 2015 was generated from P&G. Home Depot, Lowe’s, Menards and Bunnings are significant customers of HBP with Home Depot accounting for approximately 12% of consolidated revenue and 23% of HBP's revenue for the year ended September 30, 2015. The U.S. Government and its agencies and subcontractors, including Lockheed Martin and Boeing, is a significant customer of Telephonics, and accounts for approximately 14% of consolidated revenue and 66% of Telephonics segment revenue, inclusive of sales made through Lockheed Martin and Boeing where Telephonics serves as a subcontractor; Lockheed Martin and Boeing each represent less than 10% of consolidated revenue inclusive of such sales to the U.S. Government. Future operating results will continue to substantially depend on the success of Griffon’s largest customers, as well as Griffon’s relationship with them. Orders from these customers are subject to fluctuation and may be reduced materially due to changes in customer needs or other factors. Any reduction or delay in sales of products to one or more of these customers could significantly reduce Griffon’s revenue. Griffon’s operating results will also depend on successfully developing relationships with additional key customers. Griffon cannot assure that its largest customers will be retained or that additional key customers will be recruited. Also, HBP and PPC extend credit to their customers, which expose them to credit risk. HBP’s largest customer accounted for approximately 19% and 10% of HBP’s and Griffon’s net accounts receivable as of September 30, 2015, respectively. PPC largest customer accounted for approximately 34% and 8% of PPC and Griffon’s net accounts receivable as of September 30, 2015, respectively. If either of these customers were to become insolvent or otherwise unable to pay its debts, the financial condition, results of operations and cash flows of the respective segments and Griffon could be adversely affected.
 
Reliance on third party suppliers and manufacturers may impair AMES' ability to meet its customer demands.
 
AMES relies on a limited number of domestic and foreign companies to supply components and manufacture certain of its products. The percentage of AMES products sourced, based on revenue, approximated 41% in 2015. Reliance on third party suppliers and manufacturers may reduce control over the timing of deliveries and quality of AMES' products. Reduced product quality or failure to deliver products timely may jeopardize relationships with certain of AMES' key customers. In addition, reliance on third party suppliers or manufacturers may result in the failure to meet AMES' customer demands. Continued turbulence in the worldwide economy may affect the liquidity and financial condition of AMES' suppliers. Should any of these parties fail to manufacture sufficient supply, go out of business or discontinue a particular component, alternative suppliers may not be found in a timely manner, if at all. Such events could impact AMES' ability to fill orders, which could have a material adverse effect on customer relationships.
 
If Griffon is unable to obtain raw materials for products at favorable prices it could adversely impact operating performance.
 
HBP’s and PPC suppliers primarily provide resin, wood and steel. Assurance cannot be provided that these segments will not experience shortages of raw materials or components for products or be forced to seek alternative sources of supply. If temporary shortages due to disruptions in supply caused by weather, transportation, production delays or other factors require raw materials to be secured from sources other than current suppliers, the terms may not be as favorable as current terms or certain materials may not be available at all. In recent years, HBP and PPC have experienced price increases in steel and plastic resins.
 
While most key raw materials used in Griffon’s businesses are generally available from numerous sources, raw materials are subject to price fluctuations. Because raw materials in the aggregate constitute a significant component of the cost of goods sold, price fluctuations could have a material adverse effect on Griffon’s results of operations. Griffon’s ability to pass raw material price increases to customers is limited due to supply arrangements and competitive pricing pressure, and there is generally a time lag between increased raw material costs and implementation of corresponding price increases for Griffon’s products. In particular,

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sharp increases in raw material prices are more difficult to pass through to customers and may negatively affect short-term financial performance.

AMES is subject to risks associated with sourcing from Asia.
 
A substantial amount of AMES finished goods sourcing is done through supply agreements with China based vendors. China does not have a well-developed, consolidated body of laws governing agreements with international customers. Enforcement of existing laws or contracts based on existing law may be uncertain and sporadic, and it may be difficult to obtain swift and equitable enforcement or to obtain enforcement of a judgment by a court of another jurisdiction. The relative inexperience of China’s judiciary on matters of international trade in many cases creates additional uncertainty as to the outcome of any litigation. In addition, interpretation of statutes and regulations may be subject to government policies reflecting domestic political changes. Products entering from China may be subject to import quotas, import duties and other restrictions. Any inability to import these products into the U.S. and any tariffs that may be levied with respect to these products may have a material adverse result on AMES' business and results of operations, financial position and cash flows.
 
Griffon’s businesses are subject to seasonal variations and the impact of uncertain weather patterns.
 
Historically, Griffon’s revenue and income are lowest in our first and fourth quarters ending December 31, and September 30, respectively, and highest in our second and third quarters ending March 31, and June 30, respectively, primarily due to the seasonality of AMES' business. With the 2014 acquisition of Northcote and Cyclone, both in Australia, AMES' revenue is less susceptible to seasonality. In 2015, 56% of AMES' sales occurred during the second and third quarters compared to 58% in 2014 and 63% in 2013. CBP’s business is driven by residential renovation and construction during warm weather, which is generally at reduced levels during the winter months, generally in our second quarter. Griffon's revenue is expected to be lowest in the first quarter and highest in the third quarter.
 
Demand for lawn and garden products is influenced by weather, particularly weekend weather during the peak gardening season. AMES sales volumes could be adversely affected by certain weather patterns such as unseasonably cool or warm temperatures, hurricanes, water shortages or floods. In addition, lack of snow or lower than average snowfall during the winter season may result in reduced sales of certain AMES products, such as snow shovels and other snow tools. As a result, AMES' results of operations, financial results and cash flows could be adversely impacted.
 
Further consolidation in the retail industry may adversely affect profitability.
 
Home centers and mass merchandisers have consolidated and increased in scale. If this trend continues, customers will likely seek more favorable pricing and other terms for their purchases of products, which will limit Griffon’s ability to pass through raw material or other cost increases, or to raise prices for any reason. Sales on terms less favorable than current terms could have a material adverse effect on profitability.
 
Unionized employees could strike or participate in a work stoppage.
 
Griffon employs approximately 6,000 people on a full-time basis, approximately 8% of whom are covered by collective bargaining or similar labor agreements (all within Telephonics and AMES). If unionized employees engage in a strike or other work stoppage, or if Griffon is unable to negotiate acceptable extensions of agreements with labor unions, a significant disruption of operations and increased operating costs could occur. In addition, any renegotiation or renewal of labor agreements could result in higher wages or benefits paid to unionized employees, which could increase operating costs and could have a material adverse effect on profitability.
 
Griffon may be required to record impairment charges for goodwill and indefinite-lived intangible assets.

Griffon is required to assess goodwill and indefinite-lived intangible assets annually for impairment or on an interim basis if changes in circumstances or the occurrence of events suggest impairment exists. If impairment testing indicates that the carrying value of reporting units or indefinite-lived intangible assets exceeds the respective fair value, an impairment charge would be recognized. If goodwill or indefinite-lived intangible assets were to become impaired, the results of operations could be materially and adversely affected.
 
Trends in the baby diaper market will directly impact Griffon’s business.
 
Recent trends have been for baby diaper manufacturers to request thinner plastic films for use in their products which reduces the amount of product sold and PPC revenue; this trend has generally resulted in PPC incurring costs to redesign and reengineer

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products to accommodate required specification changes. Such decreases, or the inability to meet changing customer specifications, could result in a material decline in PPC revenue and profits.
 
Telephonics’ business depends heavily upon government contracts and, therefore, the defense budget.
 
Telephonics sells products to the U.S. government and its agencies both directly and indirectly as a first-tier supplier to prime contractors in the defense industry such as Lockheed Martin, Boeing, Sikorsky and Northrop Grumman. In the year ended September 30, 2015, U.S. government contracts and subcontracts accounted for approximately 14% of Griffon’s consolidated revenue. Contracts involving the U.S. government may include various risks, including:
 
Termination for default or for convenience by the government;
Reduction or modification in the event of changes in the government’s requirements or budgetary constraints;
Increased or unexpected costs, causing losses or reduced profits under contracts where Telephonics’ prices are fixed, or determinations that certain costs are not allowable under particular government contracts;
The failure or inability of the prime contractor to perform its contract in circumstances where Telephonics is a subcontractor;
Failure to observe and comply with government business practice and procurement regulations such that Telephonics could be suspended or barred from bidding on or receiving awards of new government contracts;
The failure of the government to exercise options for additional work provided for in contracts; and
The government’s right, in certain circumstances, to freely use technology developed under these contracts.

All of Telephonics’ U.S. Government end-user contracts contain a termination for convenience clause, regardless if Telephonics is the prime contractor or the subcontractor. This clause generally entitles Telephonics, upon a termination for convenience, to receive the purchase price for delivered items, reimbursement of allowable work-in-process costs, and an allowance for profit. Allowable costs would include the costs to terminate existing agreements with suppliers.
 
The programs in which Telephonics participates may extend for several years, and may be funded on an incremental basis. Decreases in the U.S. defense budget, in particular with respect to programs to which Telephonics supplies materials, could have a material adverse impact on Telephonics' financial conditions, results of operations and cash flows. The U.S. government may not continue to fund programs to which Telephonics’ development projects apply. Even if funding is continued, Telephonics may fail to compete successfully to obtain funding pursuant to such programs. Reductions to funding on existing programs or delays in the funding of new opportunities could affect the timing of revenue recognition, and impact Telephonics' and Griffon's results of operations.

The Budget Control Act called for additional substantial, mandatory defense spending reductions, known as “sequestration.” There continues to be much uncertainty regarding how sequestration will be implemented. There are many variables in how the law could be applied that make it difficult to determine the specific impacts; however, we expect that sequestration will result in lower revenues, profits and cash flows for Telephonics.
 
Ability of government to fund and conduct its operations
 
The impact of a government shutdown for any duration could have a material adverse effect on Telephonics’ revenues, profits and cash flows. Telephonics relies on government personnel to conduct routine business processes related to the inspection and delivery of products for various programs, to approve and pay certain billings and invoices, to process export licenses and for other administrative services that, if disrupted, could have an immediate impact on Telephonics’ business.
 
Telephonics’ business could be adversely affected by a negative audit by the U.S. Government
 
As a government contractor, and a subcontractor to government contractors, Telephonics is subject to audits and investigations by U.S. Government Agencies such as the Defense Contract Audit Agency, the Defense Security Service, with respect to its classified contracts, other Inspectors General and the Department of Justice. These agencies review a contractor’s performance under its contracts, its cost structure and compliance with applicable laws and standards as well as compliance with applicable regulations, including those relating to facility and personnel security clearances. These agencies also review the adequacy of, and a contractor’s compliance with, its internal control systems and policies, including the contractor’s management, purchasing, property, estimating, compensation, and accounting and information systems. Any costs found to be misclassified or improperly allocated to a specific contract will not be reimbursed, or must be refunded if already billed and collected. Griffon could incur significant expenses in complying with audits and subpoenas issued by the government in aid of inquiries and investigations. If an audit or an investigation uncovers improper or illegal activities, Telephonics may be subject to civil and criminal penalties and/or administrative sanctions, which could include contract termination, forfeiture of profit, suspension of payments, fines, including treble damages, and suspension or prohibition from doing business with the U.S. Government. In addition, if allegations of impropriety are made, Telephonics and Griffon could suffer serious harm to their reputation.

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Many of our contracts contain performance obligations that require innovative design capabilities, are technologically complex, or are dependent upon factors not wholly within our control. Failure to meet these obligations could adversely affect customer relations, future business opportunities, and our overall profitability.
 
Telephonics designs, develops and manufactures advanced and innovative surveillance and communication products for a broad range of applications for use in varying environments. As with many of our programs, system specifications, operational requirements and test requirements are challenging, exacerbated by the need for quick delivery schedules. Technical problems encountered and delays in the development or delivery of such products, as well as the inherent discretion involved in government approval related to compliance with applicable specifications of products supplied under government contracts, could prevent us from meeting contractual obligations, which could subject us to termination for default. Under a termination for default, the company is entitled to negotiate payment for undelivered work if the Government requests the transfer of title and delivery of partially completed supplies and materials. Conversely, if the Government does not make this request, there is no obligation to reimburse the company for its costs incurred. We may also be subject to the repayment of advance and progress payments, if any. Additionally, the company may be liable to the Government for any of its excess costs incurred in acquiring supplies and services similar to those terminated for default, and for other damages. Should any of the foregoing events occur, it could result in a material adverse effect on our financial position.

Our business could be negatively affected by cyber or other security threats or other disruptions.

As a U.S. defense contractor, Telephonics may be the target of cyber security threats to its information technology infrastructure and unauthorized attempts to gain access to sensitive information. The types of threats could vary from attacks common to most industries to more advanced and persistent, highly organized adversaries who target us because of national security information in our possession. If we are unable to protect sensitive information, our customers or governmental authorities could question the adequacy of our security processes and procedures and our compliance with evolving government cyber security requirements for government contractors. Due to the evolving nature of these security threats, however, the impact of any future incident cannot be predicted.

The costs related to cyber or other security threats or disruptions could be significant. Security events such as these could adversely affect our internal operations, our future financial results, our reputation, as well as result in the loss of competitive advantages derived from our research and development efforts and other intellectual property.

If our subcontractors or suppliers fail to perform their obligations, our performance and our ability to win future business could be harmed.

We rely on other companies to provide materials, major components and products to fulfill our contractual obligations. Such arrangements may involve subcontracts, teaming arrangements, or supply agreements with other companies. There is a risk that we may have disputes regarding the quality and timeliness of work performed. In addition, changes in the economic environment, including defense budgets and constraints on available financing, may adversely affect the financial stability of our supply chain and their ability to meet their performance requirements or to provide needed supplies on a timely basis. A disruption or failure of any supplier could have an adverse effect on the business resulting in an impact to profitability, possible termination of a contract, imposition of fines or penalties, and harm to our reputation impacting our ability to secure future business.

Griffon’s companies must continually improve existing products, design and sell new products and invest in research and development in order to compete effectively.
 
The markets for PPC and Telephonics are characterized by rapid technological change, evolving industry standards and continuous improvements in products. Due to constant changes in these markets, future success depends on their ability to develop new technologies, products, processes and product applications.
 
Product and technological developments are accomplished both through internally-funded R&D projects, as well as through strategic partnerships with customers. Because it is not generally possible to predict the amount of time required and costs involved in achieving certain R&D objectives, actual development costs may exceed budgeted amounts and estimated product development schedules may be extended. Griffon’s financial condition and results of operations may be materially and adversely affected if:
 
Product improvements are not completed on a timely basis;
New products are not introduced on a timely basis or do not achieve sufficient market penetration;

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There are budget overruns or delays in R&D efforts; or
New products experience reliability or quality problems, or otherwise do not meet customer preferences or requirements.

Griffon may be unable to implement its acquisition growth strategy, which may result in added expenses without a commensurate increase in revenue and income and divert management’s attention.
 
Making strategic acquisitions is a significant part of Griffon’s growth plans. The ability to successfully complete acquisitions depends on identifying and acquiring, on acceptable terms, companies that either complement or enhance currently held businesses or expand Griffon into new profitable businesses, and, for certain acquisitions, obtaining financing on acceptable terms. Additionally, Griffon must properly integrate acquired businesses in order to maximize profitability. The competition for acquisition candidates is intense and Griffon cannot assure that it will successfully identify acquisition candidates and complete acquisitions at reasonable purchase prices, in a timely manner, or at all. Further, there is a risk that acquisitions will not be properly integrated into Griffon’s existing structure. In implementing an acquisition growth strategy, the following may be encountered:
 
Costs associated with incomplete or poorly implemented acquisitions;
Expenses, delays and difficulties of integrating acquired companies into Griffon’s existing organization;
Dilution of the interest of existing stockholders;
Diversion of management’s attention; or
Difficulty in obtaining financing on acceptable terms, or at all.

An unsuccessful implementation of Griffon’s acquisition growth strategy could have an adverse impact on Griffon’s results of operations, cash flows and financial condition.
 
The loss of certain key officers or employees could adversely affect Griffon’s business.
 
The success of Griffon is materially dependent upon the continued services of certain key officers and employees. The loss of such key personnel could have a material adverse effect on Griffon’s operating results or financial condition.
 
Griffon is exposed to a variety of risks relating to non-U.S. sales and operations, including non-U.S. economic and political conditions and fluctuations in exchange rates.

Griffon and its companies conduct operations in Germany, Canada, Brazil, Australia and China, and sell their products in many countries around the world. Sales of products through non-U.S. subsidiaries accounted for approximately 21% of consolidated revenue for the year ended September 30, 2015. These sales could be adversely affected by changes in political and economic conditions, trade protection measures, the ability of the Company to enter into industrial cooperation agreements (off-set agreements), differing intellectual property rights laws and changes in regulatory requirements that restrict the sales of products or increase costs in such locations. Enforcement of existing laws in such jurisdictions can be uncertain, and the lack of a sophisticated body of laws can create various uncertainties, including with respect to customer and supplier contracts. Currency fluctuations between the U.S. dollar and the currencies in the non-U.S. regions in which Griffon does business may also have an impact on future reported financial results.

Our international sales and operations are subject to applicable laws relating to trade, export controls and foreign corrupt practices, the violation of which could adversely affect our operations. We are subject to various anti-corruption laws that prohibit improper payments or offers of payments to foreign governments and their officials for the purpose of obtaining or retaining business. In addition, we are subject to export controls, laws and regulations applicable to us, including the Arms Export Control Act, the International Traffic in Arms Regulation and the Export Administration Regulations, and economic sanctions laws and embargoes imposed by various governments or organizations, including the U.S. and the European Union or member countries. Violations of anti-corruption, export controls, or sanctions laws may result in severe criminal or civil sanctions and penalties, including debarments from export privileges, loss of authorizations needed to conduct our international business, or harm our ability to enter into contracts with the U.S. Government, and we may be subject to other liabilities, which could have a material adverse effect on our business, results of operations and financial condition.

Griffon may not be able to protect its proprietary rights.
 
Griffon relies on a combination of patent, copyright and trademark laws, trade secrets, confidentiality and non-disclosure agreements and other contractual provisions to protect proprietary rights. Such measures do not provide absolute protection and Griffon cannot give assurance that measures for protecting these proprietary rights are and will be adequate, or that competitors will not independently develop similar technologies.
 

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Griffon may inadvertently infringe on, or may be accused of infringing on, proprietary rights held by another party.
 
Griffon is regularly improving its technology and employing existing technologies in new ways. Though Griffon takes reasonable precautions to ensure it does not infringe on the rights of others, it is possible that Griffon may inadvertently infringe on, or may be accused of infringing on, proprietary rights held by others. If Griffon is found to have infringed on the propriety rights held by others, any related litigation or settlement relating to such infringement may have a material effect on Griffon’s business, results of operations and financial condition.
 
Griffon is exposed to product liability and warranty claims.
 
Griffon is subject to product liability and warranty claims in the ordinary course of business, including with respect to former businesses now included within discontinued operations. These claims relate to the conformity of its products with required specifications, and to alleged or actual defects in Griffon’s products (or in end-products in which Griffon’s products were a component part) that cause damage to property or persons. There can be no assurance that the frequency and severity of product liability claims brought against Griffon will not increase, which claims can be brought either by an injured customer of an end product manufacturer who used one of the products as a component or by a direct purchaser. There is also no assurance that the number and value of warranty claims will not increase as compared to historical claim rates, or that our warranty reserve at any particular time is sufficient. No assurance can be given that indemnification from customers or coverage under insurance policies will be adequate to cover future product liability claims against Griffon; for example, product liability insurance typically does not cover claims for punitive damages. Warranty claims are typically not covered by insurance at all. Product liability insurance can be expensive, difficult to maintain and may be unobtainable in the future on acceptable terms. The amount and scope of any insurance coverage may be inadequate if a product liability claim is successfully asserted. Furthermore, if any significant claims are made, the business and the related financial condition of Griffon may be adversely affected by negative publicity.
 
Griffon has been, and may in the future be, subject to claims and liabilities under environmental laws and regulations.

Griffon’s operations and assets are subject to environmental laws and regulations pertaining to the discharge of materials into the environment, the handling and disposal of wastes, including solid and hazardous wastes, or otherwise relating to health, safety and protection of the environment, in various jurisdictions in which it operates. Griffon does not expect to make any expenditure with respect to ongoing compliance with or remediation under these environmental laws and regulations that would have a material adverse effect on its business, operating results or financial condition. However, the applicable requirements under environmental laws and regulations may change at any time.
 
Griffon can incur environmental costs related to sites that are no longer owned or operated, as well as third-party sites to which hazardous materials are sent. It cannot be assured that material expenditures or liabilities will not be incurred in connection with such claims. See the Commitment and Contingencies footnote in the Notes to Consolidated Financial Statements for further information on environmental contingencies. Based on facts presently known, the outcome of current environmental matters are not expected to have a material adverse effect on Griffon’s results of operations and financial condition. However, presently unknown environmental conditions, changes in environmental laws and regulations or other unanticipated events may give rise to claims that may involve material expenditures or liabilities.
 
Changes in income tax laws and regulations or exposure to additional income tax liabilities could adversely affect profitability.
 
Griffon is subject to Federal, state and local income taxes in the U.S. and in various taxing jurisdictions outside the U.S. Tax provisions and liabilities are subject to the allocation of income among various U.S. and international tax jurisdictions. Griffon’s effective tax rate could be adversely affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in any valuation allowance for deferred tax assets or the amendment or enactment of tax laws. The amount of income taxes paid is subject to audits by U.S. Federal, state and local tax authorities, as well as tax authorities in the taxing jurisdictions outside the U.S. If such audits result in assessments different from recorded income tax liabilities, Griffon’s future financial results may include unfavorable adjustments to its income tax provision.
 
Compliance with restrictions and covenants in Griffon’s debt agreements may limit its ability to take corporate actions.
 
The credit agreement entered into by, and the terms of the senior notes issued by, Griffon each contain covenants that restrict the ability of Griffon and its subsidiaries to, among other things, incur additional debt, pay dividends, incur liens and make investments, acquisitions, dispositions, restricted payments and capital expenditures. Under the credit agreement, Griffon is also required to comply with specific financial ratios and tests. Griffon may not be able to comply in the future with these covenants or restrictions as a result of events beyond its control, such as prevailing economic, financial and industry conditions or a change in control of Griffon. If Griffon defaults in maintaining compliance with the covenants and restrictions in its credit agreement or the senior

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notes, its lenders could declare all of the principal and interest amounts outstanding due and payable and, in the case of the credit agreement, terminate their commitments to extend credit to Griffon in the future. If Griffon or its subsidiaries are unable to secure credit in the future, its business could be harmed.
 
Reported earnings per share may be more volatile because of the conversion contingency provision of the notes.
 
The outstanding convertible notes are convertible when a “market price” condition is satisfied and also upon the occurrence of other circumstances as more fully described in the Notes Payable, Capitalized Leases and Long-Term Debt footnote in the Notes to Consolidated Financial Statements. Upon conversion, at Griffon’s discretion, note holders will receive $1 in cash for each $1 principal amount of notes presented for conversion or an equivalent value in Griffon’s common stock, and Griffon common stock for the value above the principal amount of the notes. The potential shares of Griffon common stock issuable for value above the principal value of the notes are considered in the calculation of diluted earnings per share and volatility in Griffon’s stock price could cause these notes to be dilutive in one quarter and not in a subsequent quarter, increasing the volatility of fully diluted earnings per share.

Griffon may be unable to raise additional financing if needed
 
Griffon may need to raise additional financing in the future in order to implement its business plan, refinance debt, or to acquire new or complimentary businesses or assets. Any required additional financing may be unavailable, or only available at unfavorable terms, due to uncertainties in the credit markets. If Griffon raises additional funds by issuing equity securities, current holders of its common stock may experience significant ownership interest dilution and the holders of the new securities may have rights senior to the rights associated with current outstanding common stock.
 
Griffon’s indebtedness and interest expense could limit cash flow and adversely affect operations and Griffon’s ability to make full payment on outstanding debt.
 
Griffon’s indebtedness poses potential risks such as:
 
A substantial portion of cash flows from operations could be used to pay principal and interest on debt, thereby reducing the funds available for working capital, capital expenditures, acquisitions, product development and other general corporate purposes;
Insufficient cash flows from operations may force Griffon to sell assets, or seek additional capital, which Griffon may not be able to accomplish on favorable terms, if at all; and
The level of indebtedness may make Griffon more vulnerable to economic or industry downturns.

Griffon has the ability to issue additional equity securities, which would lead to dilution of issued and outstanding common stock.
 
The issuance of additional equity securities or securities convertible into equity securities would result in dilution to existing stockholders’ equity interests. Griffon is authorized to issue, without stockholder vote or approval, 4,200,000 shares of preferred stock in one or more series, and has the ability to fix the rights, preferences, privileges and restrictions of any such series. Any such series of preferred stock could contain dividend rights, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences or other rights superior to the rights of holders of Griffon’s common stock. While there is no present intention of issuing any such preferred stock, Griffon reserves the right to do so in the future. In addition, Griffon is authorized to issue, without stockholder approval, up to 85,000,000 shares of common stock, of which 48,343,192 shares, net of treasury shares, were outstanding as of September 30, 2015. Additionally, Griffon is authorized to issue, without stockholder approval, securities convertible into either shares of common stock or preferred stock.
 
Item 1B. Unresolved Staff Comments
 
None.



21


Item 2.    Properties

Griffon occupies approximately 7,700,000 square feet of general office, factory and warehouse space throughout the U.S., Germany, Canada, Brazil, Australia, and China. For a description of the encumbrances on certain of these properties, see the Notes Payable, Capitalized Leases and Long-Term Debt footnote in the Notes to Consolidated Financial Statements. The following table sets forth certain information related to Griffon’s major facilities:
Location
 
Business Segment
 
Primary Use
 
Approx.
Square
Footage
 
Owned/
Leased
 
Lease
End Year
New York, NY
 
Corporate
 
Headquarters
 
10,000

 
Leased
 
2025
Jericho, NY
 
Corporate
 
Office
 
6,900

 
Leased
 
2017
Farmingdale, NY
 
Telephonics
 
Manufacturing/R&D
 
180,000

 
Owned
 
 
Huntington, NY
 
Telephonics
 
Manufacturing
 
90,000

 
Owned
 
 
Huntington, NY
 
Telephonics
 
Manufacturing
 
100,000

 
Leased
 
2016
Columbia, MD
 
Telephonics
 
Engineering
 
25,000

 
Leased
 
2016
Elizabeth City, NC
 
Telephonics
 
Repair and Service
 
22,000

 
Leased
 
2039
Mason, OH
 
Home & Building Products/ Clopay Plastic Products
 
Office/R&D
 
131,000

 
Owned
 
 
Aschersleben, Germany
 
Clopay Plastic Products
 
Manufacturing
 
289,000

 
Owned
 
 
Dombuhl, Germany
 
Clopay Plastic Products
 
Manufacturing
 
124,000

 
Owned
 
 
Augusta, KY
 
Clopay Plastic Products
 
Manufacturing
 
354,000

 
Owned
 
 
Nashville, TN
 
Clopay Plastic Products
 
Manufacturing
 
210,000

 
Owned
 
 
Nashville, TN
 
Clopay Plastic Products
 
Manufacturing
 
190,000

 
Leased
 
2019
Jundiai, Brazil
 
Clopay Plastic Products
 
Manufacturing
 
114,000

 
Owned
 
 
Hangzhou, China
 
Clopay Plastic Products
 
Manufacturing
 
66,000

 
Leased
 
2024
Troy, OH
 
Home & Building Products
 
Office, Manufacturing
 
985,000

 
Leased
 
2021
Russia, OH
 
Home & Building Products
 
Manufacturing
 
350,000

 
Owned
 
 
Carlisle, PA
 
Home & Building Products
 
Manufacturing, Distribution
 
1,227,000

 
Leased
 
2020
Reno, NV
 
Home & Building Products
 
Manufacturing, Distribution
 
400,000

 
Leased
 
2017
Camp Hill, PA
 
Home & Building Products
 
Office, Manufacturing
 
380,000

 
Owned
 

Harrisburg, PA
 
Home & Building Products
 
Manufacturing
 
264,000

 
Owned
 
 
St. Francois, Quebec
 
Home & Building Products
 
Manufacturing, Distribution
 
353,000

 
Owned
 
 
Falls City, NE
 
Home & Building Products
 
Manufacturing
 
82,000

 
Owned
 

Cork, Ireland
 
Home & Building Products
 
Manufacturing, Distribution
 
74,000

 
Owned
 
 
Victoria, Australia
 
Home & Building Products
 
Manufacturing, Distribution
 
32,000

 
Leased
 
2017
Victoria, Australia
 
Home & Building Products
 
Manufacturing
 
29,000

 
Leased
 
2017
Victoria, Australia
 
Home & Building Products
 
Distribution
 
57,000

 
Leased
 
2016
New South Wales, Australia
 
Home & Building Products
 
Distribution
 
32,000

 
Leased
 
2017
New South Wales, Australia
 
Home & Building Products
 
Manufacturing
 
72,000

 
Leased
 
2016
Western, Australia
 
Home & Building Products
 
Manufacturing
 
58,000

 
Leased
 
2020

Griffon also leases approximately 1,000,000 square feet of space for the CBP distribution centers in numerous facilities throughout the U.S. and in Canada. In addition, AMES owns approximately 200,000 square feet of space for wood mills in the U.S. and leases approximately 260,000 square feet of additional distribution facility space throughout Australia.

All facilities are generally well maintained and suitable for the operations conducted.



22


Item 3.    Legal Proceedings

Griffon is involved in litigation, investigations and claims arising out of the normal conduct of business, including those relating to commercial transactions, product liability and warranty claims, environmental, employment, and health and safety matters.  Griffon estimates and accrues liabilities resulting from such matters based on a variety of factors, including the stage of the proceeding; potential settlement value; assessments by internal and external counsel; and assessments by environmental engineers and consultants of potential environmental liabilities and remediation costs.  Such estimates are not discounted to reflect the time value of money due to the uncertainty in estimating the timing of the expenditures, which may extend over several years.

While it is impossible to ascertain the ultimate legal and financial liability with respect to certain contingent liabilities and claims, Griffon believes, based upon examination of currently available information, experience to date, and advice from legal counsel, that the individual and aggregate liabilities resulting from the ultimate resolution of these contingent matters, after taking into consideration our existing insurance coverage and amounts already provided for, will not have a material adverse impact on consolidated results of operations, financial position or cash flows.

Item 4.    Reserved


23


PART II


Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Griffon’s Common Stock is listed for trading on the New York Stock Exchange under the symbol “GFF”. The following table shows, for the periods indicated, the quarterly range in the high and low sales prices for Griffon’s Common Stock and the amount of dividends paid during the last two years:
 
Fiscal 2015
 
Fiscal 2014
 
 
 
Market Prices
 
Dividends
 
Market Prices
 
Dividends
 
High
 
Low
 
Per Share
 
High
 
Low
 
Per Share
Quarter ended December 31,
$
13.75

 
$
10.54

 
$
0.04

 
$
13.64

 
$
11.87

 
$
0.03

Quarter ended March 31,
17.65

 
12.72

 
0.04

 
14.34

 
11.73

 
0.03

Quarter ended June 30,
17.87

 
15.43

 
0.04

 
12.55

 
10.45

 
0.03

Quarter ended September 30,
17.85

 
15.45

 
0.04

 
12.77

 
10.43

 
0.03

 
 

 
 

 
$
0.16

 
 

 
 

 
$
0.12


Dividends

On November 17, 2011, the Company began declaring quarterly cash dividends. During 2015, 2014 and 2013, the Company declared and paid dividends totaling $0.16 per share, $0.12 per share and $0.10 per share, respectively. The Company currently intends to pay dividends each quarter; however, payment of dividends is determined by the Board of Directors at its discretion based on various factors, and no assurance can be provided as to the payment of future dividends.

On November 12, 2015, the Company declared a $0.05 per share dividend payable on December 23, 2015 to shareholders of record as of December 3, 2015.

Holders

As of October 31, 2015, there were approximately 8,900 record holders of Griffon’s Common Stock.

Securities Authorized for Issuance Under Equity Compensation Plans

Information regarding securities authorized for issuance under Griffon’s equity compensation plans is contained in Part III, Item 12 of this Form 10-K.


24


Issuer Purchase of Equity Securities

The table below presents shares of Griffon Stock which were acquired by Griffon during the fourth quarter of 2015:

ISSUER PURCHASES OF EQUITY SECURITIES
 
Period
(a) Total Number
of Shares (or
Units) Purchased
 
 
(b) Average
Price Paid Per
Share (or Unit)
 
(c) Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs
(1)
 
(d) Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units) That
May Yet Be Purchased
Under the Plans or
Programs
 
July 1 - 31, 2015
600,185

(1)
 
$
16.05

 
600,185

 
 

 
August 1 - 31, 2015
229,763

(2)
 
16.37

 
227,170

 
 

 
September 1 - 30, 2015
654,214

(3)
 
16.69

 
644,105

 
 

 
Total
1,484,162

 
 
$
16.25

 
1,471,460

 
$
57,926

(1)
 
1.
Shares were purchased by the Company in open market purchases pursuant to share repurchases authorized by the Company’s Board of Directors. On each of May 1, 2014, March 20, 2015 and July 30, 2015, the Company’s Board of Directors authorized the repurchase of up to $50,000 of Griffon common stock; as of September 30, 2015, $57,926 remained available for purchase under these authorizations.
2.
Includes (a) 227,170 shares purchased by the Company in open market purchases pursuant to stock repurchases authorized by the Company’s Board of Directors and (b) 2,593 shares acquired by the Company from holders of restricted stock upon vesting of the restricted stock to satisfy tax withholding obligations of the holders.
3.
Includes (a) 644,105 shares purchased by the Company in open market purchases pursuant to stock repurchases authorized by the Company’s Board of Directors and (b) 10,109 shares acquired by the Company from the holders of restricted stock upon vesting of the restricted stock to satisfy tax withholding obligations of the holders.


25



Performance Graph
 
The performance graph does not constitute soliciting material, is not deemed filed with the SEC and is not incorporated by reference in any of Griffon’s filings under the Securities Act of 1933 or the Exchange Act of 1934, whether made before or after the date of this Annual Report on Form 10-K and irrespective of any general incorporation language in any such filings, except to the extent Griffon specifically incorporates this performance graph by reference therein.

The following graph sets forth the cumulative total return to Griffon’s stockholders during the five years ended September 30, 2015, as well as an overall stock market (S&P Small Cap 600 Index) and Griffon’s peer group index (Dow Jones U.S. Diversified Industrials Index). Assumes $100 was invested on September 30, 2010, including the reinvestment of dividends, in each category.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Griffon Corporation, the S&P Smallcap 600 Index
and the Dow Jones US Diversified Industrials Index

* $100 invested on 9/30/10 in stock or index, including reinvestment of dividends.



26


Item 6.    Selected Financial Data
 
For the Years Ended September 30,
(in thousands, except per share amounts)
2015
 
2014
 
2013
 
2012
 
2011
Revenue
$
2,016,032

 
$
1,991,811

 
$
1,871,327

 
$
1,861,145

 
$
1,830,802

 
 
 
 
 
 
 
 
 
 
Income (loss) before taxes and discontinued operations
$
53,636

 
$
(5,716
)
 
$
14,333

 
$
21,941

 
$
(14,349
)
Provision (benefit) for income taxes
19,347

 
(5,539
)
 
7,543

 
4,930

 
(6,918
)
Income (loss) from continuing operations
34,289

 
(177
)
 
6,790

 
17,011

 
(7,431
)
Income (loss) from discontinued operations

 

 
(3,023
)
 

 

Net Income (loss)
$
34,289

 
$
(177
)
 
$
3,767

 
$
17,011

 
$
(7,431
)
 
 
 
 
 
 
 
 
 
 
Basic earnings (loss) per share:
 

 
 

 
 

 
 

 
 

Continuing operations
$
0.77

 
$
0.00

 
$
0.12

 
$
0.30

 
$
(0.13
)
Discontinued operations

 

 
(0.06
)
 

 
0.00

Net income (loss)
$
0.77

 
$
0.00

 
$
0.07

 
$
0.30

 
$
(0.13
)
Weighted average shares outstanding
44,608

 
49,367

 
54,428

 
55,914

 
58,919

 
 
 
 
 
 
 
 
 
 
Diluted earnings (loss) per share:
 

 
 

 
 

 
 

 
 

Continuing operations
$
0.73

 
$
0.00

 
$
0.12

 
$
0.30

 
$
(0.13
)
Discontinued operations

 

 
(0.05
)
 

 
0.00

Net income (loss)
$
0.73

 
$
0.00

 
$
0.07

 
$
0.30

 
$
(0.13
)
Weighted average shares outstanding
46,939

 
49,367

 
56,563

 
57,329

 
58,919

 
 
 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.16

 
$
0.12

 
$
0.10

 
$
0.08

 
$

 
 
 
 
 
 
 
 
 
 
Capital expenditures
$
73,620

 
$
77,094

 
$
64,441

 
$
68,851

 
$
87,617

Depreciation and amortization
$
69,800

 
$
67,396

 
$
70,748

 
$
66,264

 
$
60,712

Total assets
$
1,731,433

 
$
1,808,826

 
$
1,777,608

 
$
1,802,921

 
$
1,861,983

 
 
 
 
 
 
 
 
 
 
Current portion of debt
$
16,593

 
$
7,886

 
$
10,768

 
$
17,703

 
$
25,164

Long term portion of debt, net
826,976

 
791,301

 
666,904

 
668,288

 
671,649

Total debt, net
$
843,569

 
$
799,187

 
$
677,672

 
$
685,991

 
$
696,813

Notes:
Results of operations from acquired businesses are included from the date of acquisition forward.  The fair value of assets and liabilities, inclusive of changes resulting from operating the businesses, are included in the first period ended after the date of each acquisition, and all periods thereafter.

2015 includes discrete tax benefits, net, of $62 or $0.00 per share.

2014 includes $6,136 of restructuring charges ($3,804, net of tax, or $0.07 per share), $3,161 of acquisition costs ($1,960, net of tax, or $0.04 per share), $38,890 loss on debt extinguishment ($24,964, net of tax, or $0.49 per share) and discrete tax benefits, net, of $4,674 or $0.09 per share.

2013 includes $13,262 of restructuring charges ($8,266, net of tax, or $0.15 per share), a loss on pension settlement of $2,142 ($1,392, net of tax, or $0.02 per share) and discrete tax benefits, net, of $325 or $0.01 per share.

2012 includes $4,689 of restructuring charges ($3,048, net of tax, or $0.05 per share), $477 of acquisition related costs ($310, net of tax, or $0.01 per share) and discrete tax benefits, net, of $5,110, or $0.09 per share.

2011 includes $26,164 ($16,813, net of tax, or $0.29 per share) of loss on debt extinguishment; $15,152 ($9,849, net of tax, or $0.17 per share) of increased cost of goods sold related to the sale of inventory recorded at fair value in connection with acquisition accounting for AMES; $7,543 ($4,903, net of tax, or $0.08 per share) of restructuring charges; and $4,570, or $0.08 per share of discrete tax benefits, net.


Due to rounding, the sum of earnings per share of Continuing operations and Discontinued operations may not equal earnings per share or Net income.



27



Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Unless otherwise indicated, all references to years or year-end refers to the fiscal year ending September 30 and dollars are in thousands, except per share data)

OVERVIEW

The Company

Griffon Corporation (the “Company” or “Griffon”) is a diversified management and holding company conducting 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.

Griffon currently conducts its operations through three reportable segments:

Home & Building Products ("HBP") consists of two companies, The AMES Companies, Inc. (“AMES”) and Clopay Building Products Company, Inc. (“CBP”). HBP accounted for 52%, 49% and 46% of Griffon’s consolidated revenue in 2015, 2014 and 2013, respectively:

AMES is a global provider of non-powered landscaping products for homeowners and professionals. AMES’ revenue was 27%, 25% and 23% of Griffon’s consolidated revenue in 2015, 2014 and 2013, respectively.

CBP is a leading manufacturer and marketer of residential, commercial and industrial garage doors to professional dealers and major home center retail chains. CBP’s revenue was 26%, 24% and 23% of Griffon’s consolidated revenue in 2015, 2014 and 2013.

Telephonics Corporation ("Telephonics") designs, develops and manufactures high-technology integrated information, communication and sensor system solutions for military and commercial markets worldwide. Telephonics’ revenue was 21% of Griffon’s consolidated revenue in both 2015 and 2014, and 24% in 2013.

Clopay Plastic Products Company, Inc. ("PPC") 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.  PPC revenue was 26% of Griffon’s consolidated revenue in 2015, and 30% in both 2014 and 2013.

On May 21, 2014, AMES acquired the Australian Garden and Tools division of Illinois Tool Works, Inc. (“Cyclone”) for approximately $40,000. Cyclone offers a full range of quality garden and hand tool products sold under various leading brand names including Cyclone®, Nylex® and Trojan®, designed to meet the requirements of both the Do-it-Yourself and professional trade segments. Cyclone adds to AMES' existing lawn and garden operations in Australia.

On December 31, 2013, AMES acquired Northcote Pottery (“Northcote”), founded in 1897 and a leading brand in the Australian outdoor planter and decor market, for approximately $22,000. Northcote complements Southern Patio®, acquired in 2011, and adds to AMES’ existing lawn and garden operations in Australia.

CONSOLIDATED RESULTS OF OPERATIONS

2015 Compared to 2014

Revenue for the year ended September 30, 2015 was $2,016,032, compared to $1,991,811 in the prior year. Excluding the unfavorable impact of foreign currency, revenue increased 5% driven by HBP and Telephonics. Gross profit for 2015 was $475,778 compared to $459,399 in 2014, with gross margin as a percent of sales (“gross margin”) of 23.6% and 23.1%, respectively.

Selling, general and administrative (“SG&A”) expenses of $374,761 remained consistent with the prior year amount of $375,099. SG&A for 2015, as a percent of revenue, decreased to 18.6% from 18.8% in 2014, reflecting the inclusion of the full year SG&A from the Northcote and Cyclone acquisitions, offset by the benefit of foreign currency translation. In 2014, SG&A included $3,161 of acquisition related expenses.


28


Interest expense in 2015 totaled $48,173, a 1% decrease from the prior year.

Other income of $491 in 2015 and $3,154 in 2014 consists primarily of currency exchange transaction gains and losses from receivables and payables held in non-functional currencies, and net gains on investments.

Griffon reported pretax income of $53,636 for the year ended September 30, 2015 compared to a pretax loss of $5,716 for the prior year. In 2015, the Company recognized a tax provision of 36.1% compared to a tax benefit of 96.9% in 2014.  The 2015 and 2014 rates reflect net discrete benefits of $62 and $4,674, respectively, resulting from release of previously established reserves for uncertain tax positions, release of various valuation allowances, filing of tax returns and impact of law changes in various jurisdictions. Excluding discrete tax items, the 2015 rate would have been a provision of 36.2%, and the 2014 rate would have been a benefit of 15.1%. The effective rates reflect the impact of permanent differences not deductible in determining taxable income, mainly tax reserves, changes in earnings mix between domestic and non-domestic operations and in 2014 limited deductibility of restricted stock, all of which were material to the 2014 rate relative to the level of pretax result.

Net income from continuing operations was $34,289, or $0.73 per share, for 2015 compared to a loss of $177, or $0.00 per share in the prior year. The current year results included discrete tax benefits, net, of $62 or $0.00 per share.

The prior year results included:

Loss from debt extinguishment of $38,890 ($24,964, net of tax or $0.49 per share);

Restructuring charges of $6,136 ($3,804, net of tax, or $0.07 per share);

Acquisition costs of $3,161 ($1,960, net of tax, or $0.04 per share); and

Discrete tax benefits, net, of $4,674 or $0.09 per share.

Excluding these items from both reporting periods, 2015 Net income from continuing operations would have been $34,227, or $0.73 per share compared to $25,877, or $0.51 per share, in 2014. Excluding both the discrete tax benefit and the impact of foreign currency, current year adjusted net income would have been $37,751 or $0.80 per share.

2014 Compared to 2013

Revenue for the year ended September 30, 2014 was $1,991,811, compared to $1,871,327 in the prior year, with the increase driven by HBP and PPC. Gross profit for 2014 was $459,399 compared to $417,585 in 2013, with gross margin as a percent of sales (“gross margin”) of 23.1% and 22.3%, respectively.

SG&A expenses in 2014 increased $34,630 to $375,099 in 2014 from $340,469 in 2013 in support of the increased level of sales and due to the inclusion of Northcote and Cyclone expenses from their respective acquisition dates. SG&A for 2014, as a percent of revenue, increased to 18.8% from 18.2% in 2013. SG&A included $3,161 of acquisition related expenses in 2014, and a $2,142 pension settlement loss resulting from the lump-sum buyout of certain participant’s balances in the Company’s defined benefit plan in 2013.

Interest expense in 2014 totaled $48,447, a decrease of $4,073 compared to the prior year, primarily driven by lower average borrowing rates as a result of the refinancing of the 7.125% senior notes, partially offset by increased debt levels.

Other income of $3,154 in 2014 and $2,646 in 2013 consists primarily of currency exchange transaction gains and losses from receivables and payables held in non-functional currencies, and net gains on investments.

Griffon reported a pretax loss for the year ended September 30, 2014 compared to pretax income for the prior year. In 2014, the Company recognized a tax benefit from continuing operations of 96.9% compared to a provision of 52.6% in 2013.  The 2014 and 2013 rates reflected net discrete benefits of $4,674 and $325, respectively, resulting from release of previously established reserves for uncertain tax positions on conclusion of tax audits, the filing of tax returns in various jurisdictions and tax basis review and adjustment for the impact of tax law changes enacted; the 2013 discrete amount also reflected net benefits resulting from various tax planning initiatives in prior years and the retroactive extension of the federal R&D credit signed into law January 2, 2013. Excluding discrete tax items, the 2014 rate would have been a benefit of 15.1%, and the 2013 rate would have been a provision of 54.9%. In both years, the effective rates 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.

29



Net loss from continuing operations was $177, or $0.00 per share, for 2014 compared to income of $6,790, or $0.12 cents per share in the prior year. The current year results included:

Loss from debt extinguishment of $38,890 ($24,964, net of tax or $0.49 per share);

Restructuring charges of $6,136 ($3,804, net of tax, or $0.07 per share);

Acquisition costs of $3,161 ($1,960, net of tax, or $0.04 per share); and

Discrete tax benefits, net, of $4,674 or $0.09 per share

The prior year results included:

Restructuring charges of $13,262 ($8,266, net of tax, or $0.15 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 $325 or $0.01 per share.

Excluding these items from both reporting periods, 2014 Net income from continuing operations would have been $25,877 thousand, or $0.51 per share compared to $16,123, or $0.29 per share, in 2013.

Griffon evaluates performance based on Earnings (loss) per share from continuing operations and Net income (loss) from continuing operations excluding, as applicable, restructuring charges, gains (losses) from pension settlement and debt extinguishment, acquisition-related expenses, including the impact of the fair value of inventory acquired as part of a business combination, and discrete tax items (a non-GAAP measure). Griffon believes this information is useful to investors for the same reason. The following table provides a reconciliation of Earnings (loss) per share from continuing operations and Net income (loss) from continuing operations to Adjusted earnings (loss) per share from continuing operations and Adjusted net income from continuing operations:

30


 
GRIFFON CORPORATION AND SUBSIDIARIES
RECONCILIATION OF INCOME (LOSS) FROM CONTINUING OPERATIONS
TO ADJUSTED INCOME FROM CONTINUING OPERATIONS
(Unaudited) 
 
For the Years Ended September 30,
 
2015
 
2014
 
2013
Income (loss) from continuing operations
$
34,289

 
$
(177
)
 
$
6,790

Adjusting items, net of tax:
 

 
 

 
 

Loss from debt extinguishment

 
24,964

 

Restructuring

 
3,804

 
8,266

Acquisition costs

 
1,960

 

Loss on pension settlement

 

 
1,392

Discrete tax benefits
(62
)
 
(4,674
)
 
(325
)
Adjusted income from continuing operations
$
34,227

 
$
25,877

 
$
16,123

Earnings (loss) per common share from continuing operations
$
0.73

 
$
0.00

 
$
0.12

Adjusting items, net of tax:
 

 
 

 
 

Loss from debt extinguishment

 
0.49

 

Restructuring

 
0.07

 
0.15

Acquisition costs

 
0.04

 

Loss on pension settlement

 

 
0.02

Discrete tax provisions (benefits)
0.00

 
(0.09
)
 
(0.01
)
Adjusted earnings per share from continuing operations
$
0.73

 
$
0.51

 
$
0.29


REPORTABLE SEGMENTS

The following table provides a reconciliation of Segment operating profit to Income (loss) before taxes and discontinued operations:
 
For the Years Ended September 30,
INCOME (LOSS) BEFORE TAXES
2015
 
2014
 
2013
Segment operating profit:
 
 
 
 
 
Home & Building Products
$
58,883

 
$
40,538

 
$
26,130

Telephonics
43,006

 
45,293

 
55,076

PPC
33,137

 
28,881

 
16,589

Total segment operating profit
135,026

 
114,712

 
97,795

Net interest expense
(47,872
)
 
(48,144
)
 
(52,167
)
Unallocated amounts
(33,518
)
 
(33,394
)
 
(29,153
)
Loss from debt extinguishment

 
(38,890
)
 

Loss on pension settlement

 

 
(2,142
)
Income (loss) before taxes from continuing operations
$
53,636

 
$
(5,716
)
 
$
14,333


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 including the impact of the fair value of inventory acquired as part of a business combination, and gains (losses) from pension settlement and debt extinguishment, as applicable (“Segment adjusted EBITDA”, a non-GAAP measure). Griffon believes this information is useful to investors for the same reason.

31



The following table provides a reconciliation of Segment adjusted EBITDA to Income (loss) before taxes and discontinued operations:
 
For the Years Ended September 30,
 
2015
 
2014
 
2013
Segment adjusted EBITDA:
 

 
 

 
 

Home & Building Products
$
94,226

 
$
77,171

 
$
70,064

Telephonics
53,028

 
57,525

 
63,199

PPC
57,103

 
56,291

 
48,100

Total Segment adjusted EBITDA
204,357

 
190,987

 
181,363

Net interest expense
(47,872
)
 
(48,144
)
 
(52,167
)
Segment depreciation and amortization
(69,331
)
 
(66,978
)
 
(70,306
)
Unallocated amounts
(33,518
)
 
(33,394
)
 
(29,153
)
Loss from debt extinguishment

 
(38,890
)
 

Restructuring charges

 
(6,136
)
 
(13,262
)
Acquisition costs

 
(3,161
)
 

Loss on pension settlement

 

 
(2,142
)
Income (loss) before taxes
$
53,636

 
$
(5,716
)
 
$
14,333


Home & Building Products
 
Years Ended September 30,
 
2015
 
2014
 
2013
Revenue:
 
 
 
 
 
 
 
 
 
 
 
AMES
$
535,881

 
 
 
$
503,687

 
 
 
$
419,549

 
 
CBP
516,320

 
 
 
475,756

 
 
 
435,416

 
 
Home & Building Products
$
1,052,201

 
 
 
$
979,443

 
 
 
$
854,965

 
 
Segment operating profit
$
58,883

 
5.6
%
 
$
40,538

 
4.1
%
 
$
26,130

 
3.1
%
Depreciation and amortization
35,343

 
 
 
31,580

 
 
 
36,195

 
 
Restructuring charges

 
 
 
1,892

 
 
 
7,739

 
 
Acquisition costs

 
 
 
3,161

 
 
 

 
 
Segment adjusted EBITDA
$
94,226

 
9.0
%
 
$
77,171

 
7.9
%
 
$
70,064

 
8.2
%
 

2015 Compared to 2014

Segment revenue increased $72,758, or 7%, compared to the prior year reflecting a 5% contribution from the Cyclone (acquired in May 2014) and Northcote (acquired in December 2013) acquisitions and an unfavorable foreign currency impact of 3%. AMES revenue increased 6%, mainly driven by the inclusion of AMES acquisition results contributing 10%, and improved North American pots and planter and Canadian wheelbarrow sales; foreign currency was 4% unfavorable. CBP revenue increased 9% from the prior year, primarily due to improved volume of 5% and favorable mix of 5%; foreign currency was 1% unfavorable.

Segment operating profit in 2015 was $58,883 compared to $40,538 in 2014, an increase of $18,345, or 45%. The prior year included $1,892 of restructuring charges and $3,161 of acquisition costs; excluding such costs, prior year Segment operating profit was $45,591, resulting in a 29% increase. The current year included an unfavorable impact from foreign currency of $6,000 or 15%, which was more than offset by the full year contribution from AMES acquisitions of 15%, favorable product mix, improved CBP volume, and savings from the AMES plant consolidation initiative completed at the end of the 2015 first quarter. Segment depreciation and amortization increased $3,763 from the prior year.

On May 21, 2014, AMES acquired Cyclone for approximately $40,000. Cyclone offers a full range of quality garden and hand tool products sold under various leading brand names including Cyclone®, Nylex® and Trojan®, designed to meet the requirements of both the Do-it-Yourself and professional trade segments. In the first year after acquisition, Cyclone was expected to generate approximately $65,000 in annualized revenue. SG&A expenses included $2,363 of related acquisition costs in 2014.

32



On December 31, 2013, AMES acquired Northcote, founded in 1897 and a leading brand in the Australian outdoor planter and decor market, for approximately $22,000. In the first year after the acquisition, Northcote was expected to generate approximately $28,000 of annualized revenue. SG&A expenses included $798 of related acquisition costs in 2014.

On October 15, 2015, CBP announced plans to expand its manufacturing facility in Troy, Ohio. The expansion reflects increased customer demand for its core products, and our success in bringing new technologies to market. The project includes improvements to its existing one million square foot building, as well as adding 200,000 square feet and new manufacturing equipment. The project is expected to be completed in 2016.

2014 Compared to 2013

Segment revenue for the year ended September 30, 2014 increased $124,478, or 15%, compared to the prior year. AMES revenue increased 20%, mainly driven by the inclusion of Northcote and Cyclone results of 10% from their acquisition dates, improved U.S. pots and planter sales, and increased snow tool sales. CBP revenue increased 9% due to increased volume of 7% and favorable product mix of 2%. Segment revenue reflected the unfavorable impact of foreign currency translation of a weaker Canadian dollar of 1%.

Segment operating profit in 2014 was $40,538 compared to $26,130 in 2013. 2014 and 2013 included $1,892 and $7,739, respectively, of restructuring charges primarily related to the previously announced manufacturing and operations consolidation initiative at AMES, and 2014 included $3,161 of acquisition costs related to the Northcote and Cyclone transactions. Excluding restructuring charges and acquisition costs, 2014 Segment operating profit totaled $45,591, an increase of $11,722 or 35% over the prior year comparable amount of $33,869, with the improvement due to increased volume and favorable product mix at CBP, and the contributions from Northcote and Cyclone of 16%, partially offset by increased AMES' distribution and freight costs. AMES also experienced manufacturing inefficiencies in connection with its plant consolidation initiative prior to its completion. Segment operating profit included the unfavorable impact of foreign currency translation of a weaker Canadian dollar of 4%. The prior year benefited from $1,000 in Byrd Amendment receipts (anti-dumping compensation from the government); 2014 Byrd Amendment receipts were not significant. Segment depreciation and amortization decreased $4,615 from the prior year.

Restructuring and Acquisition Expenses

In 2014 and 2013, HBP recognized $1,892 and $7,739, respectively, of restructuring and other related exit costs primarily related to one-time termination benefits, facility and other personnel costs, and asset impairment charges. In 2014, HBP had $3,161 of acquisition and integration costs related to Northcote and Cyclone. Over a three-year period from 2012, HBP headcount was reduced by 206 as a result of these actions.

In January 2013, AMES undertook to close certain of its U.S. manufacturing facilities and consolidate affected operations primarily into its Camp Hill and Carlisle, PA locations. The actions, completed at the end of the 2015 first quarter, improved manufacturing and distribution efficiencies, allow for in-sourcing of certain production previously performed by third party suppliers, and improved material flow and absorption of fixed costs. Management continues to estimate that AMES' initiative will result in annual cash savings exceeding $10,000, based on current operating levels. Realization of expected cash savings began in the 2015 second quarter.

AMES incurred pre-tax restructuring and related exit costs approximating $7,941, comprised of cash charges of $4,016 and non-cash, asset-related charges of $3,925; the cash charges included $2,622 for one-time termination benefits and other personnel-related costs and $1,394 for facility exit costs. AMES had $19,964 in capital expenditures.

During 2013, CBP completed the consolidation of its Auburn, Washington facility into its Russia, Ohio facility.


33


Telephonics
 
Years Ended September 30,
 
2015
 
2014
 
2013
Revenue
$
431,090

 
 
 
$
419,005

 
 
 
$
453,351

 
 
Segment operating profit
$
43,006

 
10.0
%
 
$
45,293

 
10.8
%
 
$
55,076

 
12.1
%
Depreciation and amortization
10,022

 
 
 
7,988

 
 
 
7,373

 
 
Restructuring charges

 
 
 
4,244

 
 
 
750

 
 
Segment adjusted EBITDA
$
53,028

 
12.3
%
 
$
57,525

 
13.7
%
 
$
63,199

 
13.9
%

2015 Compared to 2014
 
Revenue in 2015 increased $12,085, or 3%, compared to the prior year period primarily driven by Multi-Mode ASW and Identification Friend and Foe ("IFF") product lines, partially offset by decreased sales of airborne intercommunication products associated with the C-17 program.
Segment operating profit decreased $2,287 or 5%, and operating margin decreased 80 basis points compared to the prior year period. The prior year included $4,244 of restructuring costs; excluding such costs, prior year Segment operation profit was $49,537, resulting in a 13% decrease. The decrease was due to an increase in depreciation and amortization of $2,034 and unfavorable program mix from decreased revenue on airborne intercommunications product, partially offset by reduced operating expenses.

During 2015 Telephonics was awarded several new contracts and incremental funding on existing contracts approximating $379,800. Contract backlog was $442,000 at September 30, 2015 with 73% expected to be fulfilled in the next 12 months; backlog was $494,000 at September 30, 2014. 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. The decrease in backlog was primarily due to the timing of various international contract awards associated with radar and surveillance opportunities that were not received by the end of the reporting period.

2014 Compared to 2013

Revenue in 2014 decreased $34,346, or 8%, compared to the prior year. 2013 included $33,257 of electronic warfare program ("ICREW") revenue in which Telephonics served as a contract manufacturer; there was no such revenue in 2014. Excluding the ICREW program, 2014 revenue was in line with the prior year.

Segment operating profit in 2014 decreased $9,783 or 18%, compared to the prior year. Excluding restructuring charges, Segment operating profit decreased $6,289 or 11%, compared to 2013 primarily due to reduced gross profit driven by the absence of ICREW revenue, increased operating costs and the effects of product mix. Segment depreciation and amortization increased $615 from the prior year.

Restructuring

During 2014, Telephonics recognized $4,244 in restructuring costs in connection with the closure of its Swedish facility and restructuring of operations, a voluntary early retirement plan and a reduction in force aimed at improving efficiency by combining functions and responsibilities, resulting in the elimination of 80 positions. In 2013, Telephonics recognized $750 of restructuring charges in connection with voluntary early retirement plan offerings and other costs related to changes in organizational structure and facilities; such charges were primarily personnel-related, reducing headcount by 185 employees since 2012.


34


Plastic Products Company
 
Years Ended September 30,
 
2015
 
2014
 
2013
Revenue
$
532,741

 
 
 
$
593,363

 
 
 
$
563,011

 
 
Segment operating profit
$
33,137

 
6.2
%
 
$
28,881

 
4.9
%
 
$
16,589

 
2.9
%
Depreciation and amortization
23,966

 
 
 
27,410

 
 
 
26,738

 
 
Restructuring charges

 
 
 

 
 
 
4,773

 
 
Segment adjusted EBITDA
$
57,103

 
10.7
%
 
$
56,291

 
9.5
%
 
$
48,100

 
8.5
%

2015 Compared to 2014

Revenue in 2015 decreased $60,622 or 10%, in comparison to 2014, primarily due to the unfavorable impact of foreign currency of $46,051 or 8% and reduced volume of 2%, primarily due to product rationalization. Resin pricing had no material impact on revenue in the current year. PPC adjusts selling prices based on underlying resin costs on a delayed basis.

Segment operating profit increased $4,256 or 15%, compared to the prior year, primarily driven by a $4,600 change in the impact of resin pricing pass through, partially offset by reduced volume. The favorable impact of foreign currency was $1,000 or 3%. Segment depreciation and amortization decreased $3,444 from the prior year.

2014 Compared to 2013

Revenue in 2014 increased $30,352, or 5%, in comparison to the prior year. The increase reflected favorable mix of 2%, the benefit of increased volume of 1% and the pass through of increased resin costs in customer selling prices of 2%. The impact of foreign exchange translation was not significant to the year.

Segment operating profit in 2014 increased $12,292 compared to the prior year; the prior year included restructuring charges of $4,773. Excluding such charges, Segment operating profit increased $7,519 or 35% primarily due to continued efficiency improvements, increased volume, favorable product mix and a $1,100 change in the impact of resin pricing pass through.

Restructuring

In February 2013, PPC undertook a restructuring project, primarily in Europe, to exit low margin business and to eliminate 80 positions, resulting in restructuring charges of $4,773, primarily related to one-time termination benefits and other personnel costs. This project was completed in 2013.

Unallocated Amounts

For 2015, unallocated amounts, which consist primarily of corporate overhead costs, totaled $33,518 compared to $33,394 in 2014.

For 2014, unallocated amounts totaled $33,394 compared to $29,153 in 2013, with the increase primarily due to compensation and incentive costs.

Loss on Pension Settlement

In 2013, SG&A includes 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 buyout, funded by the pension plan, reduced the Company’s net pension liability by $3,472.

Segment Depreciation and Amortization

Segment depreciation and amortization of $69,331 increased $2,353 compared to 2014, primarily due to capital spending.

Segment depreciation and amortization of $66,978 decreased $3,328 in 2014 compared to 2013, primarily due to assets fully amortizing, partially offset by the onset of depreciation for new assets placed in service.


35


Comprehensive Income (Loss)

During 2015, total other comprehensive loss, net of taxes, of $61,124 consisted of a $56,358 loss on Foreign currency translation adjustments primarily due to the weakening of the Euro, Canadian, Brazilian and Australian currencies, all in comparison to the U.S. Dollar, a $4,326 loss from Pension and other post retirement benefits, primarily due to lower assumed discount rates compared to the prior year, a $430 gain on cash flow hedges and $870 settlement of available-for-sale securities.
During 2014, total other comprehensive loss, net of taxes, of $27,918, consisted of a $23,933 loss on Foreign currency translation adjustments primarily due to the weakening of the Euro, Canadian and Australian currencies, all in comparison to the U.S. Dollar, a $5,107 loss from Pension and other post retirement benefits, primarily due to lower assumed discount rates compared to the prior year, a $252 gain on cash flow hedges and $870 gain on available-for-sale securities.

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

Griffon substantially concluded remaining disposal activities in 2009. There was no reported revenue in 2015, 2014 and 2013. Future net cash outflows to satisfy liabilities related to disposal activities accrued as of September 30, 2015 are estimated to be $5,608.

In 2013, the Company recorded a $4,651 charge to discontinued operations increasing environmental and casualty insurance reserves. A portion of this charge relates to ongoing and potential future homeowner association claims related to the former Installation Services business; claims experience has been greater than anticipated when reserves were initially established in 2008. The adjustment to environmental reserves relates to changes in status of and approach to cleanup requirements for businesses that were discontinued several years ago.

At September 30, 2015, Griffon’s assets and liabilities for discontinued operations primarily related to income taxes and product liability, warranty and environmental reserves.

LIQUIDITY AND CAPITAL RESOURCES

Management assesses Griffon’s liquidity in terms of its ability to generate cash to fund its operating, investing and financing activities. Significant factors affecting liquidity are: cash flows from operating activities, capital expenditures, acquisitions, dispositions, bank lines of credit and the ability to attract long-term capital under satisfactory terms. Griffon believes it has sufficient liquidity available to invest in 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 Consolidated Statements of Cash Flows:
Cash Flows from Continuing Operations
Years Ended September 30,
(in thousands)
2015
 
2014
Net Cash Flows Provided By (Used In):
 

 
 

Operating activities
$
76,137

 
$
93,301

Investing activities
(66,620
)
 
(147,250
)
Financing activities
(44,851
)
 
(27,930
)

Cash flows generated by operating activities for 2015 decreased $17,164, to $76,137 compared to $93,301 in 2014, with the decrease driven by increased working capital, partially offset by operating results and the inclusion of the full year results from the 2014 AMES acquisitions. When compared with the prior year period, the increase in working capital consisted of increased settlement of accounts payable and certain current liabilities partially offset by increased collections of accounts receivable.




36


During 2015, Griffon used cash in investing activities of $66,620 compared to $147,250 in 2014; the prior year included approximately $62,000 related to AMES acquisitions. The current year includes proceeds received of $8,891 from the sale of available securities. In 2015, capital expenditures, net, totaled $73,286 compared to $76,542 in 2014.

Cash used by financing activities in 2015 totaled $44,851 compared to $27,930 in the prior year. The current year included $82,343 for the repurchase of common stock and $7,654 for the payment of dividends, partially offset by net proceeds from debt of $45,391. In 2014, financing activity usage primarily consisted of $79,614 for the repurchase of common stock, $20,000 for the purchase of ESOP shares, $11,298 paid for financing costs and $6,273 for the payment of dividends, partially offset by net proceeds from debt of $88,100.

During 2015, the Board of Directors approved four quarterly cash dividends each for $0.04 per share. On November 12, 2015, the Board of Directors declared a cash dividend of $0.05 per share, payable on December 23, 2015 to shareholders of record as of the close of business on December 3, 2015.

In each of May 2014, March 2015 and July 2015, Griffon's Board of Directors authorized the repurchase of up to $50,000 of Griffon's outstanding common stock. Under these programs, the Company may purchase shares in the open market, including pursuant to a 10b5-1 plan, or in a privately negotiated transactions. During 2015, Griffon purchased an aggregate of 5,311,915 shares of common stock under both the May 2014 and March 2015 programs, for a total of $80,934 or $15.24 per share. At September 30, 2015, an aggregate of $57,926 remains under the March 2015 and July 2015 Board authorized repurchase programs.

In addition to the repurchases under Board authorized programs, during 2015, 89,488 shares, with a market value of $1,409, or $15.74 per share, were withheld to settle employee taxes due upon the vesting of restricted stock.

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. PPC customers are generally substantial industrial companies whose payments have been steady, reliable and made in accordance with the terms governing such sales. PPC sales satisfy orders that are received in advance of production; payment terms are established in advance. With respect to HBP, uncollected receivables have been immaterial in amount.

A small number of customers account for, and are expected to continue to account for, a substantial portion of Griffon’s consolidated revenue. In 2015:

a.
The U.S. Government and its agencies, through prime and subcontractor relationships, represented 14% of Griffon’s consolidated revenue and 66% of Telephonics' revenue.
b.
P&G represented 14% of Griffon’s consolidated revenue and 51% of PPC revenue.
c.
Home Depot represented 12% of Griffon’s consolidated revenue and 23% 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 relationships with them. Orders from these customers are subject to change and may fluctuate materially. The loss of all or a portion of volume from any one of these customers could have a material adverse impact on Griffon’s liquidity and operations.

At September 30, 2015, Griffon had debt, net of cash and equivalents, as follows:
Cash and Equivalents and Debt
At September 30,
 
At September 30,
(in thousands)
2015
 
2014
Cash and equivalents
$
52,001

 
$
92,405

Notes payables and current portion of long-term debt
16,593

 
7,886

Long-term debt, net of current maturities
826,976

 
791,301

Debt discount and issuance costs
17,630

 
23,384

Total debt
861,199

 
822,571

Debt, net of cash and equivalents
$
809,198

 
$
730,166

 
On February 27, 2014, in an unregistered offering through a private placement under Rule 144A, Griffon issued, at par, $600,000 of 5.25% Senior Notes due 2022 (“Senior Notes”); interest is payable semi-annually on March 1 and September 1. Proceeds from

37


the Senior Notes were used to redeem $550,000 of 7.125% senior notes due 2018, to pay a call and tender offer premium of $31,530 and to make interest payments of $16,716, with the balance used to pay a portion of the related transaction fees and expenses. In connection with the issuance of the Senior Notes, all obligations under the $550,000 of 7.125% senior notes due in 2018 were discharged.

The Senior Notes are senior unsecured obligations of Griffon guaranteed by certain domestic subsidiaries, and subject to certain covenants, limitations and restrictions. On June 18, 2014, Griffon exchanged all of the Senior Notes for substantially identical Senior Notes registered under the Securities Act of 1933 via an exchange offer. The fair value of the Senior Notes approximated $570,000 on September 30, 2015 based upon quoted market prices (level 1 inputs).

In connection with these transactions, Griffon capitalized $10,313 of underwriting fees and other expenses incurred related to the issuance and exchange of the Senior Notes, which will amortize over the term of such notes. Griffon recognized a loss on the early extinguishment of debt on the 7.125% senior notes aggregating $38,890, comprised of the $31,530 tender offer premium, the write-off of $6,574 of remaining deferred financing fees and $786 of prepaid interest on defeased notes.

On March 13, 2015, Griffon amended its Revolving Credit Facility (“Credit Agreement”) to increase the credit facility from $225,000 to $250,000, extend its maturity from March 28, 2019 to March 13, 2020, and modify certain other provisions of the facility. The facility includes a letter of credit sub-facility with a limit of $50,000 (decreased from $60,000), and a multi-currency sub-facility of $50,000. Borrowings under the Credit Agreement may be repaid and re-borrowed at any time, subject to final maturity of the facility, or the occurrence or event of default under the Credit Agreement. Interest is payable on borrowings at either a LIBOR or base rate benchmark rate, in each case without a floor, plus an applicable margin, which adjusts based on financial performance. Current margins are 1.00% for base rate loans and 2.00% for LIBOR loans. The Credit Agreement has certain financial maintenance tests including a maximum total leverage ratio, a maximum senior secured leverage ratio and a minimum interest coverage ratio, as well as customary affirmative and negative covenants and events of default. The negative covenants place limits on Griffon's ability to, among other things, incur indebtedness, incur liens and make restricted payments and investments. The Credit Agreement also has a minimum liquidity covenant that requires cash and available borrowings under the Credit Agreement in the aggregate to equal or exceed $100 million during the six month period prior to maturity of the 2017 Notes (which mature on January 15, 2017); such covenant will no longer apply after payment in full of the 2017 Notes. Borrowings under the Credit Agreement are guaranteed by Griffon’s material domestic subsidiaries and are secured, on a first priority basis, by substantially all domestic assets of the Company and the guarantors and a pledge of not greater than 65% of the equity interest in each of Griffon’s material, first-tier foreign subsidiaries (except that a lien on the assets of Griffon material domestic subsidiaries securing a limited amount of the debt under the credit agreement relating to Griffon's Employee Stock Ownership Plan ranks pari passu with the lien granted on such assets under the Credit Agreement). At September 30, 2015, outstanding borrowings and standby letters of credit were $35,000 and $16,938, respectively, under the Credit Agreement; $198,062 was available 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 69.3811 shares of Griffon’s common stock per $1 principal amount of notes, corresponding to a conversion price of $14.41 per share. Prior to July 15, 2016, if for at least 20 trading days out of the last 30 trading days during any fiscal quarter the closing price of Griffon's common stock is 130% or greater than the conversion price on each such trading day, then at any time during the immediately subsequent fiscal quarter any holder has the option to convert such holder's notes (and the Company is required to notify the trustee under the notes, and the holders of the notes, that this condition to conversion has been met). At any time on or after July 15, 2016, any holder has the option to convert such holder's notes into shares of Griffon common stock. Griffon has the intent and ability to settle the principal component of any conversion of notes in cash. 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 September 30, 2015, aggregate dividends since the last conversion price adjustment of $0.08 per share would have resulted in an adjustment to the conversion ratio of approximately 0.48%. At both September 30, 2015 and 2014, 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 $118,875 on September 30, 2015 based upon quoted market prices (level 1 inputs). These notes are classified as long term debt as Griffon has the intent and ability to refinance the principal amount of the notes, including with borrowings under the Credit Agreement.

In September 2015, Griffon entered into a $32,280 mortgage loan secured by four properties occupied by Griffon's subsidiaries, refinancing two existing real estate mortgages and providing new mortgages on two existing real estate properties. The loans mature in September 2025, are collateralized by the specific properties financed and are guaranteed by Griffon. The loans bear interest at a rate of LIBOR plus 1.50%. As of September 30, 2015, $31,810 was outstanding, net of issuance costs.


38


In December 2013, Griffon’s Employee Stock Ownership Plan (“ESOP”) entered into an agreement that refinanced the two existing ESOP loans into one new Term Loan in the amount of $21,098 (the "Agreement"). The Agreement also provided for a Line Note with $10,000 available to purchase shares of Griffon common stock in the open market. In July 2014, Griffon's ESOP entered into an amendment of the existing Agreement which provided an additional $10,000 Line Note available to purchase shares in the open market. During 2014, the Line Notes were combined with the Term Loan to form one new Term Loan. The Term Loan bears interest at LIBOR plus 2.38% or the lender’s prime rate, at Griffon’s option.  The Term Loan requires quarterly principal payments of $551, with a balloon payment of approximately $30,137 due at maturity on December 31, 2018. During 2014, 1,591,117 shares of Griffon common stock, for a total of $20,000 or $12.57 per share, were purchased with proceeds from the Line Notes. As of September 30, 2015, $36,520, net of issuance costs, was outstanding under the Term Loan. The Term Loan is secured by shares purchased with the proceeds of the loan and with a lien on a specific amount of Griffon assets (which lien ranks pari passu with the lien granted on such assets under the Credit Agreement), and is guaranteed by Griffon.

In October 2006, CBP entered into a capital lease totaling $14,290 for real estate in Troy, Ohio. The lease matures in 2022, bears interest at a fixed rate of 5.0%, is secured by a mortgage on the real estate and is guaranteed by Griffon. At September 30, 2015, $7,368 was outstanding, net of issuance costs.
 
In September 2015, Clopay Europe GMBH (“Clopay Europe”) entered into a EUR 5,000 ($5,599 as of September 30, 2015) revolving credit facility and a EUR 15,000 ($16,795 as of September 30, 2015) term loan. The term loan is payable in twelve quarterly installments of EUR 1,250, bears interest at a fixed rate of 2.5% and matures in September 2018. The revolving facility matures in November 2016, but is renewable upon mutual agreement with the bank. The revolving credit facility accrues interest at EURIBOR plus 1.75% per annum (1.75% at September 30, 2015). The revolver and the term loan are both secured by substantially all of the assets of Clopay Europe and its subsidiaries. Griffon guarantees the revolving facility and term loan. The term loan had an outstanding balance of EUR 15 million ($16,795) and the revolver had no borrowings outstanding at September 30, 2015. Clopay Europe is required to maintain a certain minimum equity to assets ratio and is subject to a maximum debt leverage ratio (defined as the ratio of total debt to EBITDA).
 
Clopay do Brasil maintains lines of credit of R$12,800 ($3,222 as of September 30, 2015). Interest on borrowings accrues at a rate of Brazilian CDI plus 6.0% (20.13% at September 30, 2015). As of September 30, 2015, there was approximately R$7,652 ($1,926 as of September 30, 2015) borrowed under the lines. PPC guarantees the loan and lines.

In November 2012, Garant G.P. (“Garant”) entered into a CAD 15,000 revolving credit facility. The facility accrues interest at LIBOR (USD) or the Bankers Acceptance Rate (CDN) plus 1.3% per annum (1.63% LIBOR USD and 2.03% Bankers Acceptance Rate CDN as of September 30, 2015). The revolving facility matures in October 2016. Garant is required to maintain a certain minimum equity. As of September 30, 2015, there were CAD 7,481 ($5,606 as of September 30, 2015) borrowed under the revolving credit facility with CAD 6,307 ($4,726 as of September 30, 2015) available for borrowing.

In December 2013 and May 2014, Northcote Holdings Pty Ltd entered into two unsecured term loans in the outstanding amounts of AUD 12,500 and AUD 20,000. The AUD 12,500 term loan requires quarterly interest payments with principal due upon maturity in December 2016. The AUD 20,000 term loan requires quarterly principal payments of AUD 625, with a balloon payment due upon maturity in May 2017. The loans accrue interest at Bank Bill Swap Bid Rate “BBSY” plus 2.8% per annum (4.98% at September 30, 2015 for each loan). As of September 30, 2015, Griffon had an outstanding combined balance of AUD 31,874,000 ($22,347 as of September 30, 2015) on the term loans, net of issuance costs.
Subsidiaries of Northcote Holdings Pty Ltd also maintain two lines of credit of AUD 3,000 and AUD 5,000 ($2,103 and $3,506, respectively, as of September 30, 2015), which accrue interest at BBSY plus 2.25% per annum (4.43% at September 30, 2015 ) and 2.50% per annum (4.68% at September 30, 2015), respectively. As of September 30, 2015, there was AUD 2,000 ($1,402 as of September 30, 2015) in outstanding borrowings under the lines. Griffon Corporation guarantees the term loans and the AUD 3,000 line of credit; the assets of a subsidiary of Northcote Holdings Pty Ltd secures the AUD 5,000 line of credit.
At September 30, 2015, Griffon and its subsidiaries were in compliance with the terms and covenants of its credit and loan agreements.
In each of August 2011, May 2014, March 2015 and July 2015, Griffon's Board of Directors authorized the repurchase of up to $50,000 of Griffon's outstanding common stock. Under these programs, the Company may purchase shares in the open market, including pursuant to a 10b5-1 plan, or in privately negotiated transactions. During 2015, Griffon purchased an aggregate of 5,311,915 shares of common stock under both the May 2014 and March 2015 programs, for a total of $80,934 or $15.24 per share. From August 2011 through September 30, 2015, Griffon repurchased 16,751,221 shares of its common stock, for a total of $203,132 or $12.13 per share (which repurchases included exhausting the remaining availability under a Board authorized repurchase program in existence prior to 2011). This included the repurchase of 12,306,777 shares on the open market, as well as the December

39


10, 2013 repurchase of 4,444,444 shares from GS Direct for $50,000, or $11.25 per share. At September 30, 2015, $57,926 in the aggregate remains under the March 2015 and July 2015 Board authorized repurchase programs.

On December 10, 2013, Griffon repurchased 4,444,444 shares of its common stock for $50,000 from GS Direct. The repurchase was effected in a private transaction at a per share price of $11.25, an approximate 9.2% discount to the stock’s closing price on November 12, 2013, the day before announcement of the transaction. The transaction was exclusive of the Company’s August 2011 $50,000 authorized share repurchase program. After closing the transaction, GS Direct continued to hold approximately 5.56 million shares (approximately 10% of the shares outstanding at such time) of Griffon’s common stock. Subject to certain exceptions, if GS Direct intends to sell its remaining shares of Griffon common stock at any time prior to December 31, 2016, it will first negotiate in good faith to sell such shares to the Company.

On November 17, 2011, the Company began declaring quarterly cash dividends. During 2015, 2014 and 2013, the Company declared and paid dividends totaling $0.16 per share, $0.12 per share and $0.10 per share, respectively. The Company currently intends to pay dividends each quarter; however, payment of dividends is determined by the Board of Directors at its discretion based on various factors, and no assurance can be provided as to the payment of future dividends.

On November 12, 2015, the Board of Directors declared a cash dividend of $0.05 per share, payable on December 23, 2015 to shareholders of record as of the close of business on December 3, 2015.

During the year ended September 30, 2015, Griffon used cash for discontinued operations of $918,000, primarily related to settling certain Installation Services liabilities.

Contractual Obligations

At September 30, 2015, payments to be made pursuant to significant contractual obligations are as follows:
 
 Payments Due by Period
(in thousands)
 Total
 
Less Than 1 Year
 
1-3 Years
 
3-5 Years
 
More than 5
Years
 
 Other
Long-term debt (a)
$
861,199

 
$
16,593

 
$
149,169

 
$
72,345

 
$
623,092

 
$

Interest expense
224,163

 
40,485

 
71,196

 
66,417

 
46,065

 

Rental commitments
307,207

 
186,214

 
87,085

 
24,614

 
9,294

 

Purchase obligations (b)
234,691

 
230,419

 
4,270

 
2

 

 

Capital expenditures
19,995

 
19,995

 

 

 

 

Supplemental & post-retirement benefits (c)
32,688

 
4,056

 
7,714

 
6,926

 
13,992

 

Uncertain tax positions (d)
4,753

 

 

 

 

 
4,753

Total obligations
$
1,684,696

 
$
497,762

 
$
319,434

 
$
170,304

 
$
692,443

 
$
4,753

______________

(a)
Included in long-term debt are capital leases of: $1,575 (less than 1 year), $2,955(1-3 years), $2,696 (3-5 years) and $1,568 (more than 5 years).
(b)
Purchase obligations are generally for the purchase of goods and services in the ordinary course of business. Griffon uses blanket purchase orders to communicate expected requirements to certain vendors. Purchase obligations reflect those purchase orders where the commitment is considered to be firm. Purchase obligations that extend beyond 2015 are principally related to long-term contracts received from customers of Telephonics.
(c)
Griffon funds required payouts under its non-qualified supplemental defined benefit plan from its general assets and the expected payments are included in each period, as applicable.
(d)
Due to the uncertainty of the potential settlement of future uncertain tax positions, management is unable to estimate the timing of related payments, if any, that will be made subsequent to 2015. These amounts do not include any potential indirect benefits resulting from deductions or credits for payments made to other jurisdictions.

40



Off-Balance Sheet Arrangements

Except for operating leases and purchase obligations as disclosed herein, Griffon is not a party to any off-balance sheet arrangements.

Off-Set Agreements

Telephonics may enter into industrial cooperation agreements, sometimes referred to as offset agreements, as a condition to obtaining orders for its products and services from customers in foreign countries. These agreements promote investment in the country, and may be satisfied through activities that do not require Griffon to use its cash, including transferring technology, providing manufacturing and other consulting support. These agreements may also be satisfied through the use of cash for such activities as purchasing supplies from in-country vendors, setting up support centers, research and development investments, acquisitions, and building or leasing facilities for in-country operations, if applicable. The amount of the offset requirement is determined by contract value awarded and negotiated percentages with customers. At September 30, 2015, Telephonics had outstanding offset agreements approximating $81,000, primarily related to its Radar Systems division, some of which extend through 2028. Offset programs usually extend over several years and in some cases provide for penalties in the event Telephonics fails to perform in accordance with contract requirements. Historically, Telephonics has not been required to pay any such penalties and as of September 30, 2015, no such penalties are estimable or probable.

ACCOUNTING POLICIES AND PRONOUNCEMENTS

Critical Accounting Policies

The preparation of Griffon’s consolidated financial statements in conformity with accounting principles generally accepted in the U.S. 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.

An estimate is considered to be critical if it is subjective and if changes in the estimate using different assumptions would result in a material impact on Griffon’s financial position or results of operations. The following have been identified as the most critical accounting policies and estimates:

Revenue Recognition

Revenue is recognized when the following circumstances are satisfied: a) persuasive evidence of an arrangement exists, b) delivery has occurred, title has transferred or services are rendered, c) price is fixed and determinable and d) collectability is reasonably assured. Goods are sold on terms that transfer title and risk of loss at a specified location. Revenue recognition from product sales occurs when all factors are met, including transfer of title and risk of loss, which occurs either upon shipment or upon receipt by customers at the location specified in the terms of sale. Other than standard product warranty provisions, sales arrangements provide for no other significant post-shipment obligations. From time to time and for certain customers, rebates and other sales incentives, promotional allowances or discounts are offered, typically related to customer purchase volumes, all of which are fixed or determinable and are classified as a reduction of revenue and recorded at the time of sale. Griffon provides for sales returns allowances based upon historical returns experience.

Telephonics earns a substantial portion of its revenue as either a prime or subcontractor from contract awards with the U.S. Government, as well as non-U.S. governments and other commercial customers. These formal contracts are typically long-term in nature, usually greater than one year. Revenue and profits from these long-term fixed price contracts are recognized under the percentage-of-completion 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). Using the cost-to-cost method, revenue is recorded at amounts equal to the ratio of actual cumulative costs incurred divided by total estimated costs at completion, multiplied by the total estimated contract revenue, less the cumulative revenue recognized in prior periods. The profit recorded on a contract using this method is equal to the current estimated total profit margin multiplied by the cumulative revenue recognized, less the amount of cumulative profit previously recorded for the contract in prior periods. As this method relies on the substantial use of estimates, these projections may be revised throughout the life of a contract. Components of this formula and ratio that may be estimated include gross profit margin and total costs at

41


completion. The cost performance and estimates to complete on long-term contracts are reviewed, at a minimum, on a quarterly basis, as well as when information becomes available that would necessitate a review of the current estimate. Adjustments to estimates for a contracts estimated costs at completion and estimated profit or loss often are required as experience is gained, and as more information is obtained, even though the scope of work required under the contract may or may not change, or if contract modifications occur. The impact of such adjustments or changes to estimates is made on a cumulative basis in the period when such information has become known. In 2015, 2014 and 2013, income from operations included net favorable/(unfavorable) catch-up adjustments approximating $(400), $(400) and $3,400, respectively. Gross profit is affected by a variety of factors, including the mix of products, systems and services, production efficiencies, price competition and general economic conditions.

Revenue and profits on cost-reimbursable type contracts are recognized as allowable costs are incurred on the contract at an amount equal to the allowable costs plus the estimated profit on those costs. The estimated profit on a cost-reimbursable contract may be fixed or variable based on the contractual fee arrangement. Incentive and award fees on these contracts are recorded as revenue when the criteria under which they are earned are reasonably assured of being met and can be estimated.

For contracts whose anticipated total costs exceed 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 September 30, 2015 was $10,600 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 to Griffon's Consolidated Financial Statements.

Amounts representing contract change orders or claims are included in revenue only when they can be reliably estimated and their realization is probable, and are determined on a percentage-of-completion basis measured by the cost-to-cost method.

From time to time, Telephonics may combine contracts if they are negotiated together, have specific requirements to combine, or are otherwise closely related. Contracts are segmented based on customer requirements.

Inventories

Inventories, stated at the lower of cost (first-in, first-out or average) or market, include material, labor and manufacturing overhead costs.

Griffon’s businesses typically do not require inventory that is susceptible to becoming obsolete or dated. In general, Telephonics sells products in connection with programs authorized and approved under contracts awarded by the U.S. Government or agencies thereof, and in accordance with customer specifications. PPC primarily produces fabricated materials used by customers in the production of their products and these materials are produced against orders from those customers. HBP produces doors and non-powered lawn and garden tools in response to orders from customers of retailers and dealers or based on expected orders, as applicable.

Warranty Accruals

Direct customer and end-user warranties are provided on certain products. These warranties cover manufacturing defects that would prevent the product from performing in line with its intended and marketed use. The terms of such warranties vary by product line and generally provide for the repair or replacement of the defective product. Warranty claims data is collected and analyzed with a focus on the historical amount of claims, the products involved, the amount of time between the warranty claims and the products’ respective sales and the amount of current sales. Based on such analysis, warranty accruals are recorded as an increase to cost of sales and regularly reviewed for adequacy.

Stock-based Compensation

Griffon has issued stock-based compensation to certain employees, officers and directors in the form of restricted stock and restricted stock units.

Compensation expense for restricted stock and restricted stock units is recognized ratably over the required service period based on the fair value of the grant, calculated as the number of shares or units granted multiplied by the stock price on the date of grant, and for performance shares or units, the likelihood of achieving the performance criteria.


42


Allowances for Discount, Doubtful Account and Returns

Trade receivables are recorded at their stated amount, less allowances for discounts, doubtful accounts and returns. The allowances represent estimated uncollectible receivables associated with potential customer defaults on contractual obligations (usually due to customers’ potential insolvency), discounts related to early payment of accounts receivables by customers and estimates for returns. The allowance for doubtful accounts includes amounts for certain customers where a risk of default has been specifically identified, as well as an amount for customer defaults, based on a formula, when it is determined the risk of some default is probable and estimable, but cannot yet be associated with specific customers. Allowance for discounts and returns are recorded as a reduction of revenue and the provision related to the allowance for doubtful accounts is recorded in SG&A expenses.

Acquisitions

Acquired businesses are accounted for using the acquisition method of accounting which requires, among other things, that most assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date and that the fair value of acquired in-process research and development be recorded on the balance sheet. Related transaction costs are expensed as incurred. Any excess of the purchase price over the assigned values of the net assets acquired is recorded as goodwill.

Goodwill, Long-Lived Intangible and Tangible Assets, and Impairment

Griffon has significant intangible and tangible long-lived assets on its balance sheet that includes goodwill and other intangible assets related to acquisitions. Goodwill represents the excess of the cost of net assets acquired in business combinations over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. As required under GAAP, goodwill and indefinite-lived intangibles are reviewed for impairment annually, for Griffon as of September 30, or more frequently whenever events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount, using discounted future cash flows for each reporting unit. The testing of goodwill and indefinite-lived intangibles for impairment involves significant use of judgment and assumptions in the determination of a reporting unit’s fair market value. Based upon the results of the annual impairment review, it was determined that the fair value of each reporting unit substantially exceeded the carrying value of the assets, and no impairment existed as of September 30, 2015.

Long-lived amortizable intangible assets, such as customer relationships and software, and tangible assets, primarily Property, plant and equipment, are amortized over their expected useful lives, which involve significant assumptions and estimates. Long-lived intangible and tangible assets are tested for impairment by comparing estimated future undiscounted cash flows to the carrying value of the asset when an impairment indicator, such as change in business, customer loss or obsolete technology, exists.

Fair value estimates are based on assumptions believed to be reasonable at the time, but such assumptions are subject to inherent uncertainty. Actual results may differ materially from those estimates. Any changes in key assumptions or management judgment with respect to a reporting unit or its prospects, which may result from a decline in Griffon’s stock price, a change in market conditions, market trends, interest rates or other factors outside of Griffon’s control, or significant underperformance relative to historical or projected future operating results, could result in a significantly different estimate of the fair value of Griffon’s reporting units, which could result in an impairment charge in the future.

Restructuring Reserves

From time to time, Griffon will establish restructuring reserves at an operation. These reserves, for both termination and other exit costs, require the use of estimates. Though Griffon believes the estimates made are reasonable, they could differ materially from the actual costs.

Income Taxes

Griffon’s effective tax rate is based on income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which Griffon operates. For interim financial reporting, the annual tax rate is estimated based on projected taxable income for the full year, and a quarterly income tax provision is recorded in accordance with the anticipated annual rate. As the year progresses, the annual tax rate is refined as new information becomes available, including year-to-date financial results. This process often results in changes to the effective tax rate throughout the year. Significant judgment is required in determining the effective tax rate and in evaluating tax positions.

Deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets represent items to be used as a tax deduction or credit in future tax returns for which a tax benefit has been recorded in the income statement. The Company assesses whether a valuation allowance should

43


be established against its deferred tax assets based on consideration of all available evidence, both positive and negative, using a more likely than not standard. This assessment considers, among other matters, the nature, frequency and severity of recent losses; a forecast of future profitability; the duration of statutory carryback and carryforward periods; the Company's experience with tax attributes expiring unused; and tax planning alternatives. The likelihood that the deferred tax asset balance will be recovered from future taxable income is assessed at least quarterly, and the valuation allowance, if any, is adjusted accordingly.

Tax benefits are recognized for an uncertain tax position when, in management’s judgment, it is more likely than not that the position will be sustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, the tax benefit is measured as the largest amount that is judged to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. The liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, case law developments and new or emerging legislation. Such adjustments are recognized in the period in which they are identified. The effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by management. A number of years may elapse before a particular matter for which Griffon has recorded a liability related to an unrecognized tax benefit is audited and finally resolved. The number of years with open tax audits varies by jurisdiction. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, Griffon believes its liability for unrecognized tax benefits is adequate. Favorable resolution of an unrecognized tax benefit could be recognized as a reduction in Griffon’s tax provision and effective tax rate in the period of resolution. Unfavorable settlement of an unrecognized tax benefit could increase the tax provision and effective tax rate and may require the use of cash in the period of resolution. The liability for unrecognized tax benefits is generally presented as noncurrent. However, if it is anticipated that a cash settlement will occur within one year, that portion of the liability is presented as current. Interest and penalties recognized on the liability for unrecognized tax benefits is recorded as income tax expense.

Pension Benefits

Griffon sponsors defined and supplemental benefit pension plans for certain active and retired employees. Annual amounts relating to these plans are recorded based on actuarial projections, which include various actuarial assumptions, including discount rates, assumed rates of return, compensation increases and turnover rates. The actuarial assumptions used to determine pension liabilities, assets and expense are reviewed annually and modified based on current economic conditions and trends. The expected return on plan assets is determined based on the nature of the plans’ investments and expectations for long-term rates of return. The discount rate used to measure obligations is based on a corporate bond spot-rate yield curve that matches projected future benefit payments, with the appropriate spot rate applicable to the timing of the projected future benefit payments. Assumptions used in determining Griffon’s obligations under the defined benefit pension plans are believed to be reasonable, based on experience and advice from independent actuaries; however, differences in actual experience or changes in the assumptions may materially affect Griffon’s financial position or results of operations.

All of the defined benefit plans are frozen and have ceased accruing benefits.

Newly issued but not yet effective accounting pronouncements

In May 2014, the FASB issued guidance on revenue from contracts with customers. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved, in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers. This guidance permits the use of either the retrospective or cumulative effect transition method and is effective for the Company beginning in 2019; early adoption is permitted beginning in 2018. We have not yet selected a transition method and are currently evaluating the impact of the guidance on the Company's financial condition, results of operations and related disclosures.

In August 2014, the FASB issued guidance on management's responsibility in evaluating whether there is substantial doubt about a company's ability to continue as a going concern and related footnote disclosures. Management will be required to evaluate, at each reporting period, whether there are conditions or events that raise substantial doubt about a company's ability to continue as a going concern within one year from the date the financial statements are issued. This guidance is effective prospectively for annual and interim reporting periods beginning in 2017; implementation of this guidance is not expected to have a material effect on the Company’s financial condition or results of operations.



44





Recently issued effective accounting pronouncements

In July 2013, the FASB issued new accounting guidance requiring an unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss or tax credit carryforward, except for instances when the carryforward is not available to settle any additional income taxes and an entity does not intend to use the deferred tax benefit for these purposes. In these circumstances, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This guidance was effective for fiscal years beginning after December 15, 2013, and accordingly, the Company adopted this guidance effective October 1, 2014. Adoption of this standard did not have a significant impact on the Company's consolidated financial statements.

In April 2014, the FASB issued guidance changing the requirements for reporting discontinued operations where the disposal of a component of an entity or group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results when either classified as held for sale, or disposed of by sale or otherwise disposed. The amendment also requires enhanced disclosures about the discontinued operation and disclosure information for other significant dispositions. This guidance was effective for the Company beginning in 2015. Adoption of this standard did not have a significant impact on the Company's consolidated financial statements.

In April 2015, the FASB issued guidance on simplifying the presentation of debt issuance costs. This guidance required debt issuance costs on the balance sheet to be presented as a direct deduction from the carrying amount of a related debt liability, similar to debt discounts. The Company early adopted this guidance in March 2015 and applied it retrospectively for all periods presented in the financial statements. Adoption of this standard did not have a significant impact on the Company's consolidated financial statements.

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.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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- and EURIBOR- based variable interest rate. Due to the current and expected level of borrowings under these facilities, a 100 basis point change in LIBOR or EURIBOR 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 Germany, Canada, Brazil, Australia, and China; 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.



45


Item 8.    Financial Statements and Supplementary Data

The financial statements of Griffon and its subsidiaries and the report thereon of Grant Thornton LLP are included herein:

Report of Independent Registered Public Accounting Firm.  
Consolidated Balance Sheets at September 30, 2015 and 2014.  
Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended September 30, 2015, 2014 and 2013.  
Consolidated Statements of Cash Flows for the years ended September 30, 2015, 2014 and 2013.  
Consolidated Statements of Shareholders’ Equity for the years ended September 30, 2015, 2014 and 2013.  
Notes to Consolidated Financial Statements.  
Schedule II – Valuation and Qualifying Account.  


46


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
Board of Directors and Shareholders
Griffon Corporation

We have audited the accompanying consolidated balance sheets of Griffon Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of September 30, 2015 and 2014, and the related consolidated statements of operations and comprehensive income(loss), shareholders’ equity, and cash flows for each of the three years in the period ended September 30, 2015. We also have audited the Company’s internal control over financial reporting as of September 30, 2015, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our audits of the basic financial statements included the financial statement schedule listed in the index appearing under Item 15(a)(2). The Company’s management is responsible for these financial statements, financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements, financial statement schedule and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Griffon Corporation and subsidiaries as of September 30, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2015 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. In addition, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2015, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.

/s/ GRANT THORNTON LLP

New York, New York

November 12, 2015


47


GRIFFON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)



 
 
CURRENT ASSETS
 

 
 

Cash and equivalents
$
52,001

 
$
92,405

Accounts receivable, net of allowances of $5,342 and $7,336
218,755

 
258,436

Contract costs and recognized income not yet billed, net of progress payments of $16,467 and $16,985
103,895

 
109,930

Inventories, net
325,809

 
290,135

Prepaid and other current assets
55,086

 
62,569

Assets of discontinued operations
1,316

 
1,624

Total Current Assets
756,862

 
815,099

PROPERTY, PLANT AND EQUIPMENT, net
379,972

 
370,565

GOODWILL
356,241

 
374,111

INTANGIBLE ASSETS, net
213,837

 
233,623

OTHER ASSETS
22,346

 
13,302

ASSETS OF DISCONTINUED OPERATIONS
2,175

 
2,126

Total Assets
$
1,731,433

 
$
1,808,826

CURRENT LIABILITIES
 

 
 

Notes payable and current portion of long-term debt
$
16,593

 
$
7,886

Accounts payable
199,811

 
218,703

Accrued liabilities
104,997

 
103,557

Liabilities of discontinued operations
2,229

 
3,282

Total Current Liabilities
323,630

 
333,428

LONG-TERM DEBT, net
826,976

 
791,301

OTHER LIABILITIES
146,923

 
148,240

LIABILITIES OF DISCONTINUED OPERATIONS
3,379

 
3,830

Total Liabilities
1,300,908

 
1,276,799

COMMITMENTS AND CONTINGENCIES - See Note 14


 


SHAREHOLDERS’ EQUITY
 

 
 

Preferred stock, par value $0.25 per share, authorized 3,000 shares, no shares issued

 

Common stock, par value $0.25 per share, authorized 85,000 shares, issued 79,080 shares and 78,484 shares
19,770

 
19,621

Capital in excess of par value
518,485

 
506,090

Retained earnings
454,548

 
427,913

Treasury shares, at cost, 30,737 common shares and 25,335 common shares
(436,559
)
 
(354,216
)
Accumulated other comprehensive loss
(91,188
)
 
(30,064
)
Deferred compensation
(34,531
)
 
(37,317
)
Total Shareholders’ Equity
430,525

 
532,027

Total Liabilities and Shareholders’ Equity
$
1,731,433

 
$
1,808,826

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


48


GRIFFON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)


 
Years Ended September 30,
 
2015
 
2014
 
2013
Revenue
$
2,016,032

 
$
1,991,811

 
$
1,871,327

Cost of goods and services
1,540,254

 
1,532,412

 
1,453,742

Gross profit
475,778

 
459,399

 
417,585

Selling, general and administrative expenses
374,761

 
375,099

 
340,469

Restructuring and other related charges

 
6,136

 
13,262

Total operating expenses
374,761

 
381,235

 
353,731

Income from operations
101,017

 
78,164

 
63,854

Other income (expense)
 

 
 

 
 

Interest expense
(48,173
)
 
(48,447
)
 
(52,520
)
Interest income
301

 
303

 
353

Loss from debt extinguishment

 
(38,890
)
 

Other, net
491

 
3,154

 
2,646

Total other income (expense)
(47,381
)
 
(83,880
)
 
(49,521
)
Income (loss) before taxes
53,636

 
(5,716
)
 
14,333

Provision (benefit) for income taxes
19,347

 
(5,539
)
 
7,543

Income (loss) from continuing operations
$
34,289

 
$
(177
)
 
$
6,790

Discontinued operations:
 

 
 

 
 

Loss from operations of discontinued businesses

 

 
(4,651
)
Benefit from income taxes

 

 
1,628

Loss from discontinued operations

 

 
(3,023
)
Net income (loss)
$
34,289

 
$
(177
)
 
$
3,767

 
 
 
 
 
 
Income (loss) from continuing operations
$
0.77

 
$

 
$
0.12

Loss from discontinued operations

 

 
(0.06
)
Basic earnings per common share
$
0.77

 
$

 
$
0.07

 
 
 
 
 
 
Weighted-average shares outstanding
44,608

 
49,367

 
54,428

 
 
 
 
 
 
Income from continuing operations
$
0.73

 
$

 
$
0.12

Loss from discontinued operations

 

 
(0.05
)
Diluted earnings per common share
$
0.73

 
$

 
$
0.07

 
 
 
 
 
 
Weighted-average shares outstanding
46,939

 
49,367

 
56,563

 
 
 
 
 
 
Net income (loss)
$
34,289

 
$
(177
)
 
$
3,767

 
 
 
 
 
 
Other comprehensive income (loss), net of taxes:
 

 
 

 
 

Foreign currency translation adjustments
(56,358
)
 
(23,933
)
 
(3,090
)
Pension and other post retirement plans
(4,326
)
 
(3,914
)
 
19,310

Change in available-for-sale securities
(870
)
 
870

 

Gain on cash flow hedge
430

 
252

 

Total other comprehensive income (loss), net of taxes
(61,124
)
 
(26,725
)
 
16,220

Comprehensive income (loss)
$
(26,835
)
 
$
(26,902
)
 
$
19,987

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

49


GRIFFON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)


 
Years Ended September 30,
 
2015
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 

 
 

 
 

Net income (loss)
$
34,289

 
$
(177
)
 
$
3,767

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

 
 

 
 

Loss from discontinued operations

 

 
3,023

Depreciation and amortization
69,800

 
67,396

 
70,748

Stock-based compensation
11,110

 
11,473

 
12,495

Asset impairment charges - restructuring

 
191

 
4,316

Provision for losses on accounts receivable
84

 
359

 
1,813

Amortization of deferred financing costs and debt discounts
6,982

 
6,427

 
6,232

Loss from debt extinguishment

 
38,890

 

Deferred income tax (benefit)
2,132

 
(5,131
)
 
5,075

(Gain) loss on sale/disposal of assets and investments
(342
)
 
244

 
(498
)
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
32,150

 
6,009

 
(58,038
)
(Increase) decrease in inventories
(48,356
)
 
(50,461
)
 
26,887

(Increase) decrease in prepaid and other assets
(5,022
)
 
(4,278
)
 
6,678

Increase (decrease) in accounts payable, accrued liabilities and income taxes payable
(27,250
)
 
21,304

 
652

Other changes, net
560

 
1,055

 
2,533

Net cash provided by operating activities
76,137

 
93,301

 
85,683

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

 
 

Acquisition of property, plant and equipment
(73,620
)
 
(77,094
)
 
(64,441
)
Acquired business, net of cash acquired
(2,225
)
 
(62,306
)
 

Investment sales (purchases)
8,891

 
(8,402
)
 

Proceeds from sale of property, plant and equipment
334

 
552

 
1,573

Net cash used in investing activities
(66,620
)
 
(147,250
)
 
(62,868
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

 
 

Proceeds from issuance of common stock
371

 
584

 

Dividends paid
(7,654
)
 
(6,273
)
 
(5,825
)
Purchase of shares for treasury
(82,343
)
 
(79,614
)
 
(32,521
)
Proceeds from long-term debt
233,491

 
691,943

 
303

Payments of long-term debt
(187,735
)
 
(603,094
)
 
(16,867
)
Change in short-term borrowings
(365
)
 
(749
)
 
2,950

Financing costs
(1,308
)
 
(11,298
)
 
(833
)
Purchase of ESOP shares

 
(20,000
)
 

Tax effect from exercise/vesting of equity awards, net
345

 
273

 
150

Other, net
347

 
298

 
394

Net cash used in financing activities
(44,851
)
 
(27,930
)
 
(52,249
)
CASH FLOWS FROM DISCONTINUED OPERATIONS:
 

 
 

 
 

Net cash used in operating activities
(918
)
 
(1,528
)
 
(2,090
)
Net cash used in discontinued operations
(918
)
 
(1,528
)
 
(2,090
)

50


GRIFFON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)


Effect of exchange rate changes on cash and equivalents
(4,152
)
 
(2,318
)
 

NET DECREASE IN CASH AND EQUIVALENTS
(40,404
)
 
(85,725
)
 
(31,524
)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD
92,405

 
178,130

 
209,654

CASH AND EQUIVALENTS AT END OF PERIOD
$
52,001

 
$
92,405

 
$
178,130

Supplemental Disclosure of Cash Flow Information:
 

 
 

 
 

Cash paid for interest
$
41,580

 
$
60,246

 
$
47,243

Cash paid for taxes
16,446

 
9,626

 
15,665

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



51


GRIFFON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)


 
COMMON STOCK
 
CAPITAL IN
EXCESS OF
PAR VALUE
 
RETAINED
EARNINGS
 
TREASURY SHARES
 
ACCUMULATED OTHER
COMPREHENSIVE
INCOME (LOSS)
 
DEFERRED
COMPENSATION
 
Total
(in thousands)
SHARES
 
PAR VALUE
 
 
 
SHARES
 
COST
 
 
 
Balance at 9/30/2012
76,509

 
$
19,127

 
$
482,009

 
$
436,421

 
15,621

 
$
(242,081
)
 
$
(19,559
)
 
$
(21,765
)
 
$
654,152

Net income

 

 

 
3,767

 

 

 

 

 
3,767

Dividends

 

 

 
(5,825
)
 

 

 

 

 
(5,825
)
Tax effect from exercise/vesting of equity awards, net

 

 
150

 

 

 

 

 

 
150

Amortization of deferred compensation

 

 

 

 

 

 

 
1,991

 
1,991

Common stock acquired

 

 

 

 
2,906

 
(32,521
)
 

 

 
(32,521
)
Equity awards granted, net
1,107

 
277

 
(472
)
 

 

 

 

 

 
(195
)
ESOP allocation of common stock

 

 
230

 

 

 

 

 

 
230

Stock-based compensation

 

 
12,495

 

 

 

 

 

 
12,495

Other comprehensive income, net of tax

 

 

 

 

 

 
16,220

 

 
16,220

Balance at 9/30/2013
77,616

 
$
19,404

 
$
494,412

 
$
434,363

 
18,527

 
$
(274,602
)
 
$
(3,339
)
 
$
(19,774
)
 
$
650,464

Net loss

 

 

 
(177
)
 

 

 

 

 
(177
)
Dividends

 

 

 
(6,273
)
 

 

 

 

 
(6,273
)
Tax effect from exercise/vesting of equity awards, net

 

 
273

 

 

 

 

 

 
273

Amortization of deferred compensation

 

 

 

 

 

 

 
2,457

 
2,457

Common stock issued
44

 
11

 
573

 

 

 

 

 

 
584

Common stock acquired

 

 

 

 
6,808

 
(79,614
)
 

 

 
(79,614
)
Equity awards granted, net
824

 
206

 
(358
)
 

 

 

 

 

 
(152
)
ESOP purchase of common stock

 

 

 

 

 

 

 
(20,000
)
 
(20,000
)
ESOP allocation of common stock

 

 
(283
)
 

 

 

 

 

 
(283
)
Stock-based compensation

 

 
11,473

 

 

 

 

 

 
11,473

Other comprehensive loss, net of tax

 

 

 

 

 

 
(26,725
)
 

 
(26,725
)
Balance at 9/30/2014
78,484

 
$
19,621

 
$
506,090

 
$
427,913

 
25,335

 
$
(354,216
)
 
$
(30,064
)
 
$
(37,317
)
 
$
532,027

Net income









34,289














34,289

Dividends









(7,654
)













(7,654
)
Tax effect from exercise/vesting of equity awards, net






345

















345

Amortization of deferred compensation





















2,786


2,786

Common stock issued
69


17


354

















371

Common stock acquired












5,402


(82,343
)







(82,343
)
Equity awards granted, net
527


132


(384
)
















(252
)
ESOP allocation of common stock






970

















970

Stock-based compensation






11,110

















11,110

Other comprehensive loss, net of tax


















(61,124
)




(61,124
)
Balance at 9/30/2015
79,080


$
19,770


$
518,485


$
454,548


30,737


$
(436,559
)

$
(91,188
)

$
(34,531
)

$
430,525

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

52



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


NOTE 1 — DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of business

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

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

Griffon currently conducts its operations through three reportable segments:

Home & Building Products (“HBP”) consists of two companies, The AMES Companies, Inc. (“AMES”) and Clopay Building Products (“CBP”):

AMES is a global provider of non-powered landscaping products for homeowners and professionals.

CBP is a leading manufacturer and marketer of residential, commercial and industrial garage doors to professional dealers and major home center retail chains.

Telephonics Corporation (“Telephonics”) designs, develops and manufactures high-technology integrated information, communication and sensor system solutions for military and commercial markets worldwide.

Clopay Plastic Products Company (“PPC”) 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. 

Consolidation

The consolidated financial statements include the accounts of Griffon and all subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. The results of operations of acquired businesses are included from the dates of acquisitions.

Earnings (Loss) per share

Due to rounding, the sum of earnings per share of Continuing operations and Discontinued operations may not equal earnings per share of Net income.

Discontinued operations – Installation Services

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

At September 30, 2015, Griffon’s assets and liabilities for discontinued operations primarily related to income taxes and product liability, warranty and environmental reserves.


53


GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(US dollars and non US currencies in thousands, except per share data)


Reclassifications

Certain amounts in prior years have been reclassified to conform to the current year presentation.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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, 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.

Cash and equivalents

Griffon considers all highly liquid investments purchased with an initial maturity of three months or less to be cash equivalents. Cash equivalents primarily consist of overnight commercial paper, highly-rated liquid money market funds backed by U.S. Treasury securities and U.S. Agency securities, as well as insured bank deposits. Griffon had cash in non-U.S. bank accounts of approximately $31,700 and $34,500 at September 30, 2015 and 2014, respectively. Substantially all U.S. cash and equivalents are in excess of FDIC insured limits. Griffon regularly evaluates the financial stability of all institutions and funds that hold its cash and equivalents.

Fair value of financial instruments

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 value hierarchy, as outlined in the applicable accounting guidance, establishes a fair value hierarchy that requires 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 and 2017 4% convertible notes approximated $570,000 and $118,875, respectively, on September 30, 2015. Fair values were based upon quoted market prices (level 1 inputs).

Insurance contracts with a value of $2,942 at September 30, 2015 are measured and recorded at fair value based upon quoted prices in active markets for similar assets (level 2 inputs) and are included in Other current assets on the consolidated balance sheet.


54


GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(US dollars and non US currencies in thousands, except per share data)


Items Measured at Fair Value on a Recurring Basis

At September 30, 2015, trading securities, measured at fair value based on quoted prices in active markets for similar assets (level 2 inputs), with a fair value of $1,374 ($1,000 cost basis) were included in Prepaid and other current assets on the Consolidated Balance Sheets. During the current year, the Company settled all outstanding available-for-sale securities with proceeds totaling $8,891 and recognized a gain of $489 in Other income, and accordingly, a gain of $870, net of tax, on available-for-sale securities was reclassified out of Accumulated other comprehensive income (loss) ("AOCI"). At September 30, 2014, available-for-sale securities, measured at fair value based on quoted prices in active markets for the underlying assets (level 1 inputs), and trading securities, measured at fair value based on quoted prices in active markets for similar assets (level 2 inputs), with values of $9,770 ($8,400 cost basis) and $1,274 ($1,000 cost basis), respectively, are included in Prepaid and other current assets on the Consolidated Balance Sheets. Unrealized gains and losses, net of deferred taxes, on available-for-sale securities are included in our Consolidated Balance Sheets as a component of AOCI. Realized and unrealized gains and losses on trading securities and realized gains and losses on available-for-sale 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 effect 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. During 2015 and 2014, 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 USD.

At September 30, 2015 and 2014, Griffon had $25,531 and $4,975 of Australian dollar contracts at a weighted average rate of $1.43 and $1.14, which qualified for hedge accounting. At inception, these hedges were all 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, or Accrued liabilities, until settlement. Upon settlement, gains and losses were recognized in the Consolidated Statements of Operations and Comprehensive Income (Loss) in Cost of goods and services. AOCI included deferred gains of $1,049 ($682, net of tax) and $386 ($252, net of tax) at September 30, 2015 and 2014, respectively. A gain of $1,223 was recorded in COGS during the year ended September 30, 2015 for settled contracts and no contracts settled during the year ended September 30, 2014.

At September 30, 2015, Griffon had $6,500 of Canadian dollar contracts at a weighted average rate of $1.33. As of September 30, 2014, Griffon had $3,197 of Australian dollar contracts at a weighted average rate of $1.14. These contracts, which protect both Canadian and Australian operations from currency fluctuations for U.S. dollar based purchases, do not qualify for hedge accounting and a fair value loss of $274 and gain of $141 were recorded in Other assets and to Other income for the outstanding contracts, based on similar contract values (level 2 inputs), for the years ended September 30, 2015 and 2014, respectively.  All contracts expire in 30 to 360 days.

Pension plan assets with a fair value of $144,625 at September 30, 2015, are measured and recorded at fair value based upon quoted prices in active markets for identical assets (level 1 inputs) and quoted market prices for similar assets (level 2 inputs).

Non-U.S. currency translation

Assets and liabilities of non-U.S. subsidiaries, where the functional currency is not the U.S. dollar, have been translated at year-end exchange rates and profit and loss accounts have been translated using weighted average exchange rates. Adjustments resulting from currency translation have been recorded in the equity section of the balance sheet in AOCI as cumulative translation adjustments. Cumulative translation adjustments were a loss of $60,178 and $3,820 at September 30, 2015 and 2014, respectively. Assets and liabilities of an entity that are denominated in currencies other than that entity’s functional currency are remeasured into the functional currency using period end exchange rates, or historical rates where applicable to certain balances. Gains and losses arising on remeasurements are recorded within the Consolidated Statement of Operations and Comprehensive Income (Loss) as a component of Other income (expense).

Revenue recognition

Revenue is recognized when the following circumstances are satisfied: a) persuasive evidence of an arrangement exists, b) delivery has occurred, title has transferred or services are rendered, c) price is fixed and determinable and d) collectability is reasonably assured. Goods are sold on terms that transfer title and risk of loss at a specified location. Revenue recognition from product sales

55


GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(US dollars and non US currencies in thousands, except per share data)


occurs when all factors are met, including transfer of title and risk of loss, which occurs either upon shipment or upon receipt by customers at the location specified in the terms of sale. Other than standard product warranty provisions, sales arrangements provide for no other significant post-shipment obligations. From time to time and for certain customers, rebates and other sales incentives, promotional allowances or discounts are offered, typically related to customer purchase volumes, all of which are fixed or determinable and are classified as a reduction of revenue and recorded at the time of sale. Griffon provides for sales returns allowances based upon historical returns experience.

Telephonics earns a substantial portion of its revenue as either a prime or subcontractor from contract awards with the U.S. Government, as well as non-U.S. governments and other commercial customers. These formal contracts are typically long-term in nature, usually greater than one year. Revenue and profits from these long-term fixed price contracts are recognized under the percentage-of-completion 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). Using the cost-to-cost method, revenue is recorded at amounts equal to the ratio of actual cumulative costs incurred divided by total estimated costs at completion, multiplied by the total estimated contract revenue, less the cumulative revenue recognized in prior periods. The profit recorded on a contract using this method is equal to the current estimated total profit margin multiplied by the cumulative revenue recognized, less the amount of cumulative profit previously recorded for the contract in prior periods. As this method relies on the substantial use of estimates, these projections may be revised throughout the life of a contract. Components of this formula and ratio that may be estimated include gross profit margin and total costs at completion. The cost performance and estimates to complete on long-term contracts are reviewed, at a minimum, on a quarterly basis, as well as when information becomes available that would necessitate a review of the current estimate. Adjustments to estimates for a contract’s estimated costs at completion and estimated profit or loss often are required as experience is gained, and as more information is obtained, even though the scope of work required under the contract may or may not change, or if contract modifications occur. The impact of such adjustments or changes to estimates is made on a cumulative basis in the period when such information has become known. In 2015, 2014 and 2013, income from operations included net favorable/(unfavorable) catch-up adjustments approximating $(400), $(400) and $3,400, respectively. Gross profit is affected by a variety of factors, including the mix of products, systems and services, production efficiencies, price competition and general economic conditions.

Revenue and profits on cost-reimbursable type contracts are recognized as allowable costs, and are incurred on the contract at an amount equal to the allowable costs plus the estimated profit on those costs. The estimated profit on a cost-reimbursable contract may be fixed or variable based on the contractual fee arrangement. Incentive and award fees on these contracts are recorded as revenue when the criteria under which they are earned are reasonably assured of being met and can be estimated.

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 September 30, 2015 was $10,600 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.

Amounts representing contract change orders or claims are included in revenue only when they can be reliably estimated and their realization is probable, and are determined on a percentage-of-completion basis measured by the cost-to-cost method.

From time to time, Telephonics may combine contracts if they are negotiated together, have specific requirements to combine, or are otherwise closely related. Contracts are segmented based on customer requirements.

Accounts receivable, allowance for doubtful accounts and concentrations of credit risk

Accounts receivable is composed principally of trade accounts receivable that arise from the sale of goods or services on account, and is stated at historical cost. A substantial portion of Griffon’s trade receivables are from customers of HBP, of which the largest customer is Home Depot, whose financial condition is dependent on the construction and related retail sectors of the economy. In addition, a significant portion of Griffon’s trade receivables are from one PPC customer, P&G, whose financial condition is dependent on the consumer products and related sectors of the economy. As a percentage of consolidated accounts receivable, U.S. Government related programs were 13%, P&G was 8% and Home Depot was 10%. Griffon performs continuing evaluations of the financial condition of its customers, and although Griffon generally does not require collateral, letters of credit may be required from customers in certain circumstances.


56


GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(US dollars and non US currencies in thousands, except per share data)


Trade receivables are recorded at the stated amount, less allowance for doubtful accounts and, when appropriate, for customer program reserves and cash discounts. The allowance represents estimated uncollectible receivables associated with potential customer defaults on contractual obligations (usually due to customers’ potential insolvency). The allowance for doubtful accounts includes amounts for certain customers where a risk of default has been specifically identified, as well as an amount for customer defaults based on a formula when it is determined the risk of some default is probable and estimable, but cannot yet be associated with specific customers. The provision related to the allowance for doubtful accounts is recorded in Selling, general and administrative ("SG&A") expenses. The Company writes-off accounts receivable when they are deemed to be uncollectible.

Customer program reserves and cash discounts are netted against accounts receivable when it is customer practice to reduce invoices for these amounts. The amounts netted against accounts receivable in 2015 and 2014 were $7,507 and $9,295, respectively.

All accounts receivable amounts are expected to be collected in less than one year.

The Company does not currently have customers or contracts that prescribe specific retainage provisions.

Contract costs and recognized income not yet billed

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 September 30, 2015 and 2014, approximately $16,500 and $8,400, respectively, of contract costs and recognized income not yet billed were expected to be collected after one year. As of September 30, 2015 and 2014, the unbilled receivable balance included $2,800 and $2,200, respectively, of reserves for contract risk.

Inventories

Inventories, stated at the lower of cost (first-in, first-out or average) or market, include material, labor and manufacturing overhead costs.

Griffon’s businesses typically do not require inventory that is susceptible to becoming obsolete or dated. In general, Telephonics sells products in connection with programs authorized and approved under contracts awarded by the U.S. Government or agencies thereof and in accordance with customer specifications. PPC primarily produces fabricated materials used by customers in the production of their products and these materials are produced against orders from those customers. HBP produces doors and non-powered lawn and garden tools in response to orders from customers of retailers and dealers or based on expected orders, as applicable.

Property, plant and equipment

Property, plant and equipment includes the historical cost of land, buildings, equipment and significant improvements to existing plant and equipment or, in the case of acquisitions, a fair market value appraisal of such assets completed at the time of acquisition. Expenditures for maintenance, repairs and minor renewals are expensed as incurred. When property or equipment is sold or otherwise disposed of, the related cost and accumulated depreciation is removed from the respective accounts and the gain or loss is recognized. No event or indicator of impairment occurred during the three years ended September 30, 2015, which would require additional impairment testing of property, plant and equipment.

Depreciation expense, which includes amortization of assets under capital leases, was $62,144, $59,488 and $62,911 for the years ended September 30, 2015, 2014 and 2013, respectively, and was calculated on a straight-line basis over the estimated useful lives of the assets. Depreciation included in SG&A expenses was $13,009, $10,815 and $12,733 for the years ended September 30, 2015, 2014 and 2013. The remaining components of depreciation, attributable to manufacturing operations, are included in Cost of goods and services. Estimated useful lives for property, plant and equipment are as follows: buildings and building improvements, 25 to 40 years; machinery and equipment, 2 to 15 years and leasehold improvements, over the term of the lease or life of the improvement, whichever is shorter.


57


GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(US dollars and non US currencies in thousands, except per share data)


Capitalized interest costs included in Property, plant and equipment were $4,165, $4,529 and $4,030 for the years ended September 30, 2015, 2014 and 2013, respectively. The original cost of fully-depreciated property, plant and equipment remaining in use at September 30, 2015 was approximately $18,146.

Goodwill and indefinite-lived intangibles

Goodwill is the excess of the acquisition cost of a business over the fair value of the identifiable net assets acquired. Goodwill is not amortized, but is subject to an annual impairment test unless during an interim period, impairment indicators such as a significant change in the business climate exist.

Griffon performed its annual impairment testing of goodwill as of September 30, 2015. The performance of the test involves a two-step process. The first step involves comparing the fair value of Griffon’s reporting units with the reporting unit’s carrying amount, including goodwill. Griffon generally determines the fair value of its reporting units using the income approach methodology of valuation that includes the present value of expected future cash flows. This method uses market assumptions specific to Griffon’s reporting units. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, Griffon performs the second step of the goodwill impairment test to determine the amount of impairment loss. The second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill.

Griffon defines its reporting units as its three reportable segments: HBP, Telephonics and PPC. HBP consists of two components, AMES and CBP, which due to their similar economic characteristics, are aggregated into one reporting unit for goodwill testing.

Griffon used 5 year projections and a 3.0% terminal value to which discount rates between 9% and 10% were applied to calculate each unit’s fair value. To substantiate fair values derived from the income approach methodology of valuation, the implied fair value was reconciled to Griffon’s market capitalization, the results of which supported the implied fair values. Any changes in key assumptions or management judgment with respect to a reporting unit or its prospects, which may result from a decline in Griffon’s stock price, a change in market conditions, market trends, interest rates or other factors outside Griffon’s control, or significant underperformance relative to historical or project future operating results, could result in a significantly different estimate of the fair value of the reporting units, which could result in a future impairment charge (level 3 inputs).

Based upon the results of the annual impairment review, it was determined that the fair value of each reporting unit substantially exceeded the carrying value of the assets, as performed under step one, and no impairment existed.

Similar to goodwill, Griffon tests indefinite-lived intangible assets at least annually and when indicators of impairment exist. Griffon uses a discounted cash flow method to calculate and compare the fair value of the intangible to its book value. This method uses market assumptions specific to Griffon’s reporting units, which are reasonable and supportable. If the fair value is less than the book value of the indefinite-lived intangibles, an impairment charge would be recognized.

There was no impairment related to any goodwill or indefinite-lived intangible at September 30, 2015, 2014 or 2013.

Definite-lived long-lived assets

Amortizable intangible assets are carried at cost less accumulated amortization. For financial reporting purposes, definite-lived intangible assets are amortized on a straight-line basis over their useful lives, generally eight to twenty-five years. Long-lived assets and certain identifiable intangible assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition.

There were no indicators of impairment during the three years ending September 30, 2015.
 
Income taxes
 
Income taxes are accounted for under the liability method. Deferred taxes reflect the tax consequences on future years of differences between the tax basis of assets and liabilities and their financial reporting amounts. The carrying value of Griffon’s deferred tax assets is dependent upon Griffon’s ability to generate sufficient future taxable income in certain tax jurisdictions. Should Griffon

58


GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(US dollars and non US currencies in thousands, except per share data)


determine that it is more likely than not that some portion of the deferred tax assets will not be realized, a valuation allowance against the deferred tax assets would be established in the period such determination was made.
 
Griffon provides for uncertain tax positions and any related interest and penalties based upon Management’s assessment of whether a tax benefit is more likely than not of being sustained upon examination by tax authorities. At September 30, 2015 Griffon believes that it has appropriately accounted for all unrecognized tax benefits. As of September 30, 2015, 2014 and 2013, Griffon has recorded unrecognized tax benefits in the amount of $7,851, $7,906 and $10,520, respectively. Accrued interest and penalties related to income tax matters are recorded in the provision for income taxes.
 
Research and development costs, shipping and handling costs and advertising costs
 
Research and development costs not recoverable under contractual arrangements are charged to SG&A expense as incurred and amounted to $25,600, $23,400 and $22,400 in 2015, 2014 and 2013, respectively.
 
SG&A expenses include shipping and handling costs of $40,800 in 2015, $42,400 in 2014 and $39,600 in 2013 and advertising costs, which are expensed as incurred, of $24,000 in 2015, $24,000 in 2014 and $23,000 in 2013.
 
Risk, retention and insurance

Griffon’s property and casualty insurance programs contain various deductibles that, based on Griffon’s experience, are reasonable and customary for a company of its size and risk profile. Griffon generally maintains deductibles for claims and liabilities related primarily to workers’ compensation, general, product and automobile liability as well as property damage and business interruption losses resulting from certain events. Griffon does not consider any of the deductibles to represent a material risk to Griffon. Griffon accrues for claim exposures that are probable of occurrence and can be reasonably estimated. Insurance is maintained to transfer risk beyond the level of self-retention and provides protection on both an individual claim and annual aggregate basis.

Pension benefits

Griffon sponsors defined and supplemental benefit pension plans for certain retired employees. Annual amounts relating to these plans are recorded based on actuarial projections, which include various actuarial assumptions, including discount rates, assumed rates of return, compensation increases and turnover rates. Actuarial assumptions used to determine pension liabilities, assets and expense are reviewed annually and modified based on current economic conditions and trends. The expected return on plan assets is determined based on the nature of the plan's investments and expectations for long-term rates of return. The discount rate used to measure obligations is based on a corporate bond spot-rate yield curve that matches projected future benefit payments, with the appropriate spot rate applicable to the timing of the projected future benefit payments. Assumptions used in determining Griffon’s obligations under the defined benefit pension plans are believed to be reasonable, based on experience and advice from independent actuaries; however, differences in actual experience or changes in assumptions may materially impact Griffon’s financial position or results of operations.

All of the defined benefit plans are frozen and have ceased accruing benefits.

Newly issued but not yet effective accounting pronouncements

In May 2014, the FASB issued guidance on revenue from contracts with customers. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved, in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers. This guidance permits the use of either the retrospective or cumulative effect transition method and is effective for the Company beginning in 2019; early adoption is permitted beginning in 2018. We have not yet selected a transition method and are currently evaluating the impact of the guidance on the Company's financial condition, results of operations and related disclosures.


59


GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(US dollars and non US currencies in thousands, except per share data)


In August 2014, the FASB issued guidance on management's responsibility in evaluating whether there is substantial doubt about a company's ability to continue as a going concern and related footnote disclosures. Management will be required to evaluate, at each reporting period, whether there are conditions or events that raise substantial doubt about a company's ability to continue as a going concern within one year from the date the financial statements are issued. This guidance is effective prospectively for annual and interim reporting period beginning in 2017; implementation of this guidance is not expected to have a material effect on the Company’s financial condition or results of operations.

Recently issued effective accounting pronouncements

In July 2013, the FASB issued new accounting guidance requiring an unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss or tax credit carryforward, except for instances when the carryforward is not available to settle any additional income taxes and an entity does not intend to use the deferred tax benefit for these purposes. In these circumstances, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This guidance was effective for fiscal for fiscal years beginning after December 15, 2013, and accordingly, the Company adopted this guidance effective October 1, 2014. Adoption of this standard did not have a significant impact on the Company's consolidated financial statements.

In April 2014, the FASB issued guidance changing the requirements for reporting discontinued operations where a disposal of a component of an entity or group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results when either classified as held for sale, or disposed of by sale or otherwise disposed. The amendment also requires enhanced disclosures about the discontinued operation and disclosure information for other significant dispositions. This guidance was effective for the Company beginning in 2015. Adoption of this standard did not have a significant impact on the Company's consolidated financial statements.

In April 2015, the FASB issued guidance on simplifying the presentation of debt issuance costs. This guidance required debt issuance costs on the balance sheet to be presented as a direct deduction from the carrying amount of a related debt liability, similar to debt discounts. The Company early adopted this guidance in March 2015 and applied it retrospectively for all periods presented in the financial statements. Adoption of this standard did not have a significant impact on the Company's consolidated financial statements.
 
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 2 — 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 good 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. 

On April 16, 2015, AMES acquired the assets of an operational wood mill in Champion, PA from the Babcock Lumber Company for $2,225. The purchase price was preliminarily allocated to property, plant and equipment. The wood mill secures wood supplies, lowers overall production costs and mitigates risk associated with manufacturing handles for wheelbarrows and long-handled tools.

On May 21, 2014, AMES acquired the Australian Garden and Tools business of Illinois Tool Works, Inc. (“Cyclone”) for approximately $40,000. Cyclone, which was integrated with AMES, offers a full range of quality garden and hand tool products sold under various leading brand names including Cyclone®, Nylex® and Trojan®, designed to meet the requirements of both the Do-it-Yourself and professional trade segments. SG&A expenses included $2,363 of related acquisition costs in 2014.

On December 31, 2013, AMES acquired Northcote Pottery™ (“Northcote”), founded in 1897 and a leading brand in the Australian outdoor planter and decor market, for approximately $22,000. Northcote complements Southern Patio®, acquired in 2011, and adds to AMES’ existing lawn and garden operations in Australia. SG&A expenses included $798 of related acquisition costs in 2014.

60


GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(US dollars and non US currencies in thousands, except per share data)



The accounts of the acquired companies, after adjustment to reflect fair market values (level 3 inputs), have been included in the consolidated financial statements from the date of acquisition; in each instance, acquired inventory was not significant.
 
Cyclone
Northcote
Total
Current Assets and Other, net of cash acquired
$
21,116

$
7,398

$
28,514

PP&E
488

1,385

1,873

Goodwill
13,587

11,254

24,841

Amortizable intangible assets
11,608

6,098

17,706

Indefinite life intangible assets
3,548

3,121

6,669

Total assets acquired
$
50,347

$
29,256

$
79,603

Total liabilities assumed
(10,822
)
(7,475
)
$
(18,297
)
Net assets acquired
$
39,525

$
21,781

$
61,306

The amounts assigned to major intangible asset classifications, none of which are tax deductible, are as follows:
 
Cyclone
Northcote
Total
Amortization
Period (Years)
Goodwill
$
13,587

$
11,254

$
24,841

N/A
Trade names
3,548

3,121

6,669

Indefinite
Customer relationships
11,608

6,098

17,706

25
 
$
28,743

$
20,473

$
49,216

 
 
NOTE 3 — INVENTORIES
 
The following table details the components of inventory:
 
 
Raw materials and supplies
$
91,973

 
$
75,560

Work in process
70,811

 
67,866

Finished goods
163,025

 
146,709

Total
$
325,809

 
$
290,135

 
NOTE 4 — PROPERTY, PLANT AND EQUIPMENT
 
The following table details the components of property, plant and equipment, net:
 
 
Land, building and building improvements
$
131,546

 
$
127,714

Machinery and equipment
747,194

 
720,417

Leasehold improvements
47,465

 
42,852

 
926,205

 
890,983

Accumulated depreciation and amortization
(546,233
)
 
(520,418
)
Total
$
379,972

 
$
370,565




61


GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(US dollars and non US currencies in thousands, except per share data)


NOTE 5 — GOODWILL AND OTHER INTANGIBLES
 
The following table provides changes in carrying value of goodwill by segment through the year ended September 30, 2015:
 
 
Goodwill from 2014 acquisitions
 
Other adjustments including currency translations
 
 
Other adjustments including currency translations
 
Home & Building Products
$
266,531

 
$
24,841

 
$
(711
)
 
$
290,661

 
$
(4,836
)
 
$
285,825

Telephonics
18,545

 

 

 
18,545

 

 
18,545

PPC
69,383

 

 
(4,478
)
 
64,905

 
(13,034
)
 
51,871

Total
$
354,459

 
$
24,841

 
$
(5,189
)
 
$
374,111

 
$
(17,870
)
 
$
356,241

 
The following table provides the gross carrying value and accumulated amortization for each major class of intangible asset:
 
 
 
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
Average
Life
(Years)
 
Gross Carrying
Amount
 
Accumulated Amortization
Customer relationships
$
168,560

 
$
39,755

 
25
 
$
180,282

 
$
35,280

Unpatented technology
6,107

 
3,525

 
12.5
 
6,500

 
3,313

Total amortizable intangible assets
174,667

 
43,280

 
 
 
186,782

 
38,593

Trademarks
82,450

 

 
 
 
85,434

 

Total intangible assets
$
257,117

 
$
43,280

 
 
 
$
272,216

 
$
38,593

 
Amortization expense for intangible assets subject to amortization was $7,656, $7,908 and $7,837 for the years ended September 30, 2015, 2014 and 2013, respectively. Amortization expense for each of the next five years and thereafter, based on current intangible balances and classifications, is estimated as follows: 2016 - $7,602; 2017 - $7,541; 2018 - $7,390; 2019 - $7,272 and 2020 - $6,793; thereafter - $94,789.

No event or indicator or impairment occurred during the current year, which would require impairment testing of long-lived intangible assets including goodwill.

NOTE 6 — DISCONTINUED OPERATIONS
 
In 2008, as a result of the downturn in the residential housing market, Griffon exited substantially all operating activities of its Installation Services segment which sold, installed and serviced garage doors and openers, fireplaces, floor coverings, cabinetry
and a range of related building products, primarily for the new residential housing market. In 2008, Griffon sold eleven units, closed one unit and merged two units into CBP. Griffon substantially concluded its remaining disposal activities in 2009.

Installation Services operating results have been reported as discontinued operations in the Consolidated Statements of Operations and Comprehensive Income (Loss) for all periods presented; Installation Services is excluded from segment reporting. There was no reported revenue in 2015, 2014 and 2013.
 
In 2013, the Company recorded a $4,651 charge to discontinued operations increasing environmental and casualty insurance reserves. A portion of this charge relates to ongoing and potential future homeowner association claims related to the Installation Services business; claims experience has been greater than anticipated when reserves were initially established in 2008. The adjustment to environmental reserves relates to changes in status of and approach to cleanup requirements for businesses that were discontinued several years ago.
 
At September 30, 2015, Griffon’s assets and liabilities for discontinued operations primarily related to income taxes and product liability, warranty and environmental reserves.
 
The following amounts related primarily to the Installation Services segment have been segregated from Griffon’s continuing operations and are reported as assets and liabilities of discontinued operations in the consolidated balance sheets:

62


GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(US dollars and non US currencies in thousands, except per share data)



 
 
Assets of discontinued operations:
 

 
 

Prepaid and other current assets
$
1,316

 
$
1,624

Other long-term assets
2,175

 
2,126

Total assets of discontinued operations
$
3,491

 
$
3,750

 
 
 
 
Liabilities of discontinued operations:
 

 
 

Accrued liabilities, current
$
2,229

 
$
3,282

Other long-term liabilities
3,379

 
3,830

Total liabilities of discontinued operations
$
5,608

 
$
7,112


NOTE 7 — ACCRUED LIABILITIES

The following table details the components of accrued liabilities:
 
 
Compensation
$
53,805

 
$
57,860

Interest
3,395

 
3,400

Warranties and rebates
6,501

 
6,950

Insurance
12,401

 
9,010

Rent, utilities and freight
2,094

 
1,653

Income and other taxes
12,105

 
6,446

Marketing and advertising
1,809

 
1,650

Restructuring
481

 
5,228

Other
12,406

 
11,360

Total
$
104,997

 
$
103,557


NOTE 8 – RESTRUCTURING AND OTHER RELATED CHARGES

During 2014, Telephonics recognized $4,244 in restructuring costs in connection with the closure of its Swedish facility and restructuring of operations, a voluntary early retirement plan and a reduction in force aimed at improving efficiency by combining functions and responsibilities, resulting in the elimination of 80 positions.

In January 2013, AMES undertook to close certain of its U.S. manufacturing facilities and consolidate affected operations primarily into its Camp Hill and Carlisle, PA locations. The actions, completed at the end of the 2015 first quarter, improved manufacturing and distribution efficiencies, allow for in-sourcing of certain production currently performed by third party suppliers, and improved material flow and absorption of fixed costs.

Since January 2013, AMES incurred pre-tax restructuring and related exit costs approximating $7,941, comprised of cash charges of $4,016 and non-cash, asset-related charges of $3,925; the cash charges included $2,622 for one-time termination benefits and other personnel-related costs and $1,394 for facility exit costs. AMES had $19,964 of capital expenditures since January 2013.

In 2014 and 2013, HBP recognized $1,892 and $7,739, respectively, of restructuring and other related exit costs. In 2014 and 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 AMES' plant consolidation initiative and, in 2013, CBP's consolidation of its Auburn, Washington facility into its Russia, Ohio facility. Over a three year period from 2012, HBP headcount was reduced by 206 as a result of these actions.

During 2013, PPC Europe undertook to exit low margin businesses and eliminate approximately 80 positions, resulting in a restructuring cash charge of $4,773. These actions were essentially complete at September 30, 2013.


63


GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(US dollars and non US currencies in thousands, except per share data)


During 2013, Telephonics recognized $750 of restructuring charges in connection with voluntary early retirement plan offerings and other costs related to changes in organizational structure and facilities; such charges were primarily personnel-related, reducing headcount by 185 employees since 2012.

A summary of the restructuring and other related charges included in the line item “Restructuring and other related charges” in the Consolidated Statements of Operations recognized for 2013 and 2014 were as follows:
 
Workforce
Reduction
 
Facilities &
Exit Costs
 
Other Related
Costs
 
Non-cash
Facility and
Other
 
Total
Amounts incurred in the year ended:
 
 
 
 
 
 
 
 
 
$
5,649

 
$
1,668

 
$
1,629

 
$
4,316

 
$
13,262

5,382

 
548

 
206

 

 
6,136


In 2015, no restructuring and other related charges were incurred.

The activity in the restructuring accrual recorded in Accrued liabilities consisted of the following:
 
Workforce
Reduction
 
Facilities &
Exit Costs
 
Other Related
Costs
 
Total
Accrued liability at September 30, 2013
$
3,057

 
$
393

 
$
407

 
$
3,857

Charges
5,382

 
548

 
206

 
6,136

Payments
(3,211
)
 
(941
)
 
(613
)
 
(4,765
)
Accrued liability at September 30, 2014
$
5,228

 
$

 
$

 
$
5,228

Payments
(4,747
)
 

 

 
(4,747
)
Accrued liability at September 30, 2015
$
481

 
$

 
$

 
$
481

 
NOTE 9 – 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. AMES 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:
 
Years Ended September 30,
 
2015
 
2014
Balance, beginning of period
$
4,934

 
$
6,649

Warranties issued and changes in estimated pre-existing warranties
5,790

 
2,379

Actual warranty costs incurred
(5,968
)
 
(4,094
)
Balance, end of period
$
4,756

 
$
4,934

 


64


GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(US dollars and non US currencies in thousands, except per share data)


NOTE 10 — NOTES PAYABLE, CAPITALIZED LEASES AND LONG-TERM DEBT

The present value of the net minimum payments on capitalized leases as of September 30, 2015 was follows:

 
Total minimum lease payments
$
10,970

Less amount representing interest payments
(2,176
)
Present value of net minimum lease payments
8,794

Current portion
(1,575
)
Capitalized lease obligation, less current portion
$
7,219


Minimum payments under capital leases for the next five years are as follows: $2,399 in 2016, $2,067 in 2017, $1,891 in 2018, $1,501 in 2019, $1,495 in 2020 and $1,617 thereafter.

Included in the consolidated balance sheet at September 30, 2015 under Property, plant and equipment, are costs and accumulated depreciation subject to capitalized leases of $17,314 and $8,520, respectively, and included in Other assets are deferred interest charges of $156. Included in the consolidated balance sheet at September 30, 2014, under Property, plant and equipment are costs and accumulated depreciation subject to capitalized leases of $16,446 and $6,755, respectively, and included in Other assets are deferred interest charges of $181. Amortization expense was $1,905, $1,579, and $1,605 in 2015, 2014 and 2013, respectively.

In October 2006, a subsidiary of Griffon entered into a capital lease totaling $14,290 for real estate it occupies in Troy, Ohio. Approximately $10,000 was used to acquire the building and the remaining amount was used for improvements. The lease matures in 2022, bears interest at a fixed rate of 5.0%, is secured by a mortgage on the real estate and is guaranteed by Griffon.

Debt at September 30, 2015 and 2014 consisted of the following:
 
 
 
 
 
 
Outstanding
Balance
 
Original
Issuer
Discount
 
Capitalized Fees & Expenses
 
Balance
Sheet
 
Coupon
Interest Rate
Senior note due 2022
(a)
 
$
600,000

 
$

 
$
(8,264
)
 
$
591,736

 
5.25
%
Revolver due 2020
(b)
 
35,000

 

 
(2,049
)
 
32,951

 
n/a

Convert. debt due 2017
(c)
 
100,000

 
(5,594
)
 
(571
)
 
93,835

 
4.00
%
Real estate mortgages
(d)
 
32,280

 

 
(470
)
 
31,810

 
n/a

ESOP Loans
(e)
 
36,744

 

 
(224
)
 
36,520

 
n/a

Capital lease - real estate
(f)
 
7,524

 

 
(156
)
 
7,368

 
5.00
%
Non U.S. lines of credit
(g)
 
8,934

 


 
(3
)
 
8,931

 
n/a

Non U.S. term loans
(g)
 
39,142

 

 
(299
)
 
38,843

 
n/a

Other long term debt
(h)
 
1,575

 

 

 
1,575

 
n/a

Totals
 
 
861,199

 
(5,594
)
 
(12,036
)
 
843,569

 
 

less: Current portion
 
 
(16,593
)
 

 

 
(16,593
)
 
 

Long-term debt
 
 
$
844,606

 
$
(5,594
)
 
$
(12,036
)
 
$
826,976

 
 

 

65


GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(US dollars and non US currencies in thousands, except per share data)


 
 
 
 
 
 
Outstanding
Balance
 
Original
Issuer
Discount
 
Capitalized
Fees &
Expenses
 
Balance
Sheet
 
Coupon
Interest Rate
Senior notes due 2022
(a)
 
$
600,000

 
$

 
$
(9,553
)
 
$
590,447

 
5.25
%
Revolver due 2020
(b)
 
25,000

 

 
(2,009
)
 
22,991

 
n/a

Convert. debt due 2017
(c)
 
100,000

 
(9,584
)
 
(1,034
)
 
89,382

 
4.00
%
Real estate mortgages
(d)
 
16,388

 

 
(576
)
 
15,812

 
n/a

ESOP Loans
(e)
 
38,946

 

 
(262
)
 
38,684

 
n/a

Capital lease - real estate
(f)
 
8,551

 

 
(181
)
 
8,370

 
5.00
%
Non U.S. lines of credit
(g)
 
3,306

 

 

 
3,306

 
n/a

Non U.S. term loans
(g)
 
28,470

 

 
(161
)
 
28,309

 
n/a

Other long term debt
(h)
 
1,910

 

 
(24
)
 
1,886

 
 

Totals
 
 
822,571

 
(9,584
)
 
(13,800
)
 
799,187

 
 

less: Current portion
 
 
(7,886
)
 

 

 
(7,886
)
 
 

Long-term debt
 
 
$
814,685

 
$
(9,584
)
 
$
(13,800
)
 
$
791,301

 
 


Interest expense consists of the following for the years ended September 30, 2015, 2014 and 2013.
 
 
 
 
 
 
Effective
Interest Rate
 
Cash Interest
 
Amort. Debt
Discount
 
Amort.
Deferred Cost
& Other Fees
 
Total Interest
Expense
Senior notes due 2022
(a)
 
5.46
%
 
31,500

 

 
1,289

 
32,789

Revolver due 2018
(b)
 
n/a

 
2,301

 

 
520

 
2,821

Convert. debt due 2017
(c)
 
9.1
%
 
4,000

 
3,989

 
444

 
8,433

Real estate mortgages
(d)
 
3.8
%
 
468

 

 
576

 
1,044

ESOP Loans
(e)
 
2.9
%
 
1,025

 

 
69

 
1,094

Capital lease - real estate
(f)
 
5.3
%
 
405

 

 
25

 
430

Non U.S. lines of credit
(g)
 
n/a

 
661

 

 

 
661

Non U.S. term loans
(g)
 
n/a

 
1,335

 

 
57

 
1,392

Other long term debt
(h)
 
n/a

 
166

 


 
13

 
179

Capitalized interest
 
 
 

 
(670
)
 


 


 
(670
)
Totals
 
 
 

 
$
41,191

 
$
3,989

 
$
2,993

 
$
48,173

 

66


GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(US dollars and non US currencies in thousands, except per share data)


 
 
 
 
 
 
Effective
Interest Rate
 
Cash Interest
 
Amort. Debt
Discount
 
Amort.
Deferred Cost
& Other Fees
 
Total Interest
Expense
Senior notes due 2018
(a)
 
7.4
%
 
$
15,930

 
$

 
$
667

 
$
16,597

Senior notes due 2022
(a)
 
5.25
%
 
18,550

 

 
759

 
19,309

Revolver due 2018
(b)
 
n/a

 
1,094

 

 
570

 
1,664

Convert. debt due 2017
(c)
 
9.1
%
 
4,000

 
3,662

 
443

 
8,105

Real estate mortgages
(d)
 
3.9
%
 
500

 

 
144

 
644

ESOP Loans
(e)
 
2.8
%
 
747

 

 
54

 
801

Capital lease - real estate
(f)
 
5.3
%
 
456

 

 
25

 
481

Non U.S. lines of credit
(g)
 
n/a

 
919

 

 
27

 
946

Non U.S. term loan
(g)
 
n/a

 
847

 

 
36

 
883

Other long term debt
(h)
 
 

 
70

 

 
40

 
110

Capitalized interest
 
 
 

 
(1,093
)
 

 

 
(1,093
)
Totals
 
 
 

 
42,020

 
3,662

 
2,765

 
48,447


 
 
 
 
 
 
Effective
Interest Rate
 
Cash Interest
 
Amort. Debt
Discount
 
Amort.
Deferred Cost
& Other Fees
 
Total Interest
Expense
Senior notes due 2018
(a)
 
7.4
%
 
$
39,188

 
$

 
$
1,626

 
$
40,814

Revolver due 2016
(b)
 
n/a

 
785

 

 
582

 
1,367

Convert. debt due 2017
(c)
 
9.1
%
 
4,000

 
3,361

 
443

 
7,804

Real estate mortgages
(d)
 
4.9
%
 
538

 

 
86

 
624

ESOP Loans
(e)
 
2.9
%
 
628

 

 
8

 
636

Capital lease - real estate
(f)
 
5.3
%
 
504

 

 
25

 
529

Non U.S. lines of credit
(g)
 
n/a

 
520

 

 

 
520

Non U.S. term loans
(g)
 
n/a

 
216

 

 
14

 
230

Other long term debt
(h)
 
 

 
553

 

 

 
553

Term loan due 2013
 
 
3.9
%
 
271

 

 
87

 
358

Revolver due 2013
 
 
0.5
%
 
68

 

 

 
68

Capitalized interest
 
 
 

 
(983
)
 

 

 
(983
)
Totals
 
 
 

 
$
46,288

 
$
3,361

 
$
2,871

 
$
52,520

 
Minimum payments under debt agreements for the next five years are as follows: $7,886 in 2016, $33,332 in 2017, $4,531 in 2018, $104,442 in 2019, $57,402 in 2020 and $614,978 thereafter.
 
(a)
On February 27, 2014, in an unregistered offering through a private placement under Rule 144A, Griffon issued, at par, $600,000 of 5.25% Senior Notes due in 2022 (“Senior Notes”); interest is payable semi-annually on March 1 and September 1. Proceeds from the Senior Notes were used to redeem $550,000 of 7.125% senior notes due 2018, to pay a call and tender offer premium of $31,530 and to make interest payments of $16,716, with the balance used to pay a portion of the related transaction fees and expenses. In connection with the issuance of the Senior Notes, all obligations under the $550,000 of 7.125% senior notes due in 2018 were discharged.


67


GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(US dollars and non US currencies in thousands, except per share data)


The Senior Notes are senior unsecured obligations of Griffon guaranteed by certain domestic subsidiaries, and subject to certain covenants, limitations and restrictions. On June 18, 2014, Griffon exchanged all of the Senior Notes for substantially identical Senior Notes registered under the Securities Act of 1933 via an exchange offer. The fair value of Senior Notes approximated $570,000 on September 30, 2014 based upon quoted market prices (level 1 inputs).

In connection with these transactions, Griffon capitalized $10,313 of underwriting fees and other expenses incurred related to the issuance and exchange of the Senior Notes, which will amortize over the term of such notes. Griffon recognized a loss on the early extinguishment of debt on the 7.125% senior notes aggregating $38,890, comprised of the $31,530 tender offer premium, the write-off of $6,574 of remaining deferred financing fees and $786 of prepaid interest on defeased notes.
 
(b)
On March 13, 2015, Griffon amended its Revolving Credit Facility (“Credit Agreement”) to increase the credit facility from$225,000 to $250,000, extend its maturity from March 28, 2019 to March 13, 2020, and modify certain other provisions of the facility. The facility includes a letter sub-facility with a limit of $50,000 (decreased from $60,000), and a multi-currency sub-facility of $50,000. The Credit Agreement provides for same day borrowings of base rate loans in lieu of a swing line sub-facility. Borrowings under the Credit Agreement may be repaid and re-borrowed at any time, subject to final maturity of the facility, or the occurrence or event of default under the Credit Agreement. Interest is payable on borrowings at either a LIBOR or base rate benchmark rate, in each case without a floor, plus an applicable margin, which adjusts based on financial performance. Current margins are 1.00% for base rate loans and 2.00% for LIBOR loans. The Credit Agreement has certain financial maintenance tests including a maximum total leverage ratio, a maximum senior secured leverage ratio and a minimum interest coverage ratio, as well as customary affirmative and negative covenants and events of default. The negative covenants place limits on Griffon's ability to, among other things, incur indebtedness, incur liens, and make restricted payments and investments. The Credit Agreement also has a minimum liquidity covenant that requires cash and available borrowings under the Credit Agreement in the aggregate to equal or exceed $100 million during the six month period prior to maturity of the 2017 Notes (which mature on January 15, 2017); such covenant will no longer apply after payment in full of the 2017 Notes. Borrowings under the Credit Agreement are guaranteed by Griffon’s material domestic subsidiaries and are secured, on a first priority basis, by substantially all domestic assets of the Company and the guarantors and a pledge of not greater than 65% of the equity interest in each of Griffon’s material, first-tier foreign subsidiaries (except that a lien on the assets of Griffon’s material domestic subsidiaries securing a limited amount of the debt under the credit agreement relating to Griffon's Employee Stock Ownership Plan ranks pari passu with the lien granted on such assets under the Credit Agreement; see footnote (d) below). At September 30, 2015, outstanding borrowings and standby letters of credit were $35,000 and $16,938, respectively, under the Credit Agreement; $198,062 was available for borrowing at that date.

(c)
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 69.3811 shares of Griffon’s common stock per $1 principal amount of notes, corresponding to a conversion price of $14.41 per share. Prior to July 15, 2016, if for at least 20 trading days out of the last 30 trading days during any fiscal quarter the closing price of Griffon's common stock is 130% or greater than the conversion price on each such trading day, then at any time during the immediately subsequent fiscal quarter any holder has the option to convert such holder's notes (and the Company is required to notify the trustee under the notes, and the holders of the notes, that this condition to conversion has been met). At any time on or after July 15, 2016, any holder has the option to convert such holder's notes into shares of Griffon common stock. Griffon has the intent and ability to settle the principal component of any conversion of notes in cash. 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 September 30, 2015, aggregate dividends since the last conversion price adjustment of $0.08 per share would have resulted in an adjustment to the conversion ratio of approximately 0.48%. At both September 30, 2015 and 2014, 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 $118,875 on September 30, 2015 based upon quoted market prices (level 1 inputs). These notes are classified as long term debt as Griffon has the intent and ability to refinance the principal amount of the notes, including with borrowings under the Credit Agreement.

(d)
In September 2015, Griffon entered into a $32,280 mortgage loan secured by four properties occupied by Griffon's subsidiaries, refinancing two existing real estate mortgages and providing new mortgages on two existing real estate properties. The loans mature in September 2025, are collateralized by the specific properties financed and are guaranteed by Griffon. The loans bear interest at a rate of LIBOR plus 1.50%.
 

68


GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(US dollars and non US currencies in thousands, except per share data)


(e)
In December 2013, Griffon’s Employee Stock Ownership Plan (“ESOP”) entered into an agreement that refinanced the two existing ESOP loans into one new Term Loan in the amount of $21,098 (the "Agreement"). The Agreement also provided for a Line Note with $10,000 available to purchase shares of Griffon common stock in the open market. In July 2014, Griffon's ESOP entered into an amendment of the existing Agreement which provided an additional $10,000 Line Note available to purchase shares in the open market. During 2014, the Line Notes were combined with the Term Loan to form one new Term Loan. The Term Loan bears interest at LIBOR plus 2.38% or the lender’s prime rate, at Griffon’s option. The Term Loan requires quarterly principal payments of $551, with a balloon payment of approximately $30,137 due at maturity on December 31, 2018. During 2014, 1,591,117 shares of Griffon common stock, for a total of $20,000, or $12.57 per share, were purchased with proceeds from the Line Notes. The Term Loan is secured by shares purchased with the proceeds of the loan and with a lien on a specific amount of Griffon assets (which lien ranks pari passu with the lien granted on such assets under the Credit Agreement) and is guaranteed by Griffon.

(f)
In October 2006, CBP entered into a capital lease totaling $14,290 for real estate in Troy, Ohio. The lease matures in 2022, bears interest at a fixed rate of 5.0%, is secured by a mortgage on the real estate and is guaranteed by Griffon.

(g)
In September 2015, Clopay Europe GMBH (“Clopay Europe”) entered into a EUR 5,000 ($5,599 as of September 30, 2015) revolving credit facility and a EUR 15,000 ($16,795 as of September 30, 2015) term loan. The term loan is payable in twelve quarterly installments of EUR 1,250, bears interest at a fixed rate of 2.5% and matures in September 2018. The revolving facility matures in November 2016, but is renewable upon mutual agreement with the bank. The revolving credit facility accrues interest at EURIBOR plus 1.75% per annum (1.75% at September 30, 2015). The revolver and the term loan are both secured by substantially all of the assets of Clopay Europe and its subsidiaries. Griffon guarantees the revolving facility and term loan. The term loan had an outstanding balance of EUR 15 million and the revolver had no borrowings outstanding at September 30, 2015. Clopay Europe is required to maintain a certain minimum equity to assets ratio and is subject to a maximum debt leverage ratio (defined as the ratio of total debt to EBITDA).
 
Clopay do Brasil maintains lines of credit of approximately R$12,800 ($3,222 as of September 30, 2015). Interest on borrowings accrues at a rate of Brazilian CDI plus 6.0% (20.13% at September 30, 2015). As of September 30, 2015, there was approximately R$7,652 ($1,926 as of September 30, 2015) borrowed under the lines borrowed under the lines. PPC guarantees the loan and lines.

In November 2012, Garant G.P. (“Garant”) entered into a CAD 15,000 revolving credit facility. The facility accrues interest at LIBOR (USD) or the Bankers Acceptance Rate (CDN) plus 1.3% per annum (1.63% LIBOR USD and 2.03% Bankers Acceptance Rate CDN as of September 30, 2015). The revolving facility matures in October 2016. Garant is required to maintain a certain minimum equity. As of September 30, 2015, there were CAD 7,481($5,606 as of September 30, 2015) borrowed under the revolving credit facility with CAD 6,307 ($4,726 as of September 30, 2015) available for borrowing.

In December 2013 and May 2014, Northcote Holdings Pty Ltd entered into two unsecured term loans in the outstanding amounts of AUD 12,500 and AUD 20,000. The AUD 12,500 term loan requires quarterly interest payments with principal due upon maturity in December 2016. The AUD 20,000 term loan requires quarterly principal payments of AUD 625, with a balloon payment due upon maturity in May 2017. The loans accrue interest at Bank Bill Swap Bid Rate “BBSY” plus 2.8% per annum (4.98% at September 30, 2015 for each loan). As of September 30, 2015, Griffon had an outstanding combined balance of AUD 31,874 ($22,347 as of September 30, 2015) on the term loans, net of issuance costs.
Subsidiaries of Northcote Holdings Pty Ltd also maintain two lines of credit of AUD 3,000 and AUD 5,000 ($2,103 and $3,506, respectively, as of September 30, 2015), which accrue interest at BBSY plus 2.25% per annum (4.43% at September 30, 2015 ) and 2.50% per annum (4.68% at September 30, 2015), respectively. As of September 30, 2015, there was AUD 2,000 ($1,402 as of September 30, 2015) in outstanding borrowings under the lines. Griffon Corporation guarantees the term loans and the AUD 3,000 line of credit; the assets of a subsidiary of Northcote Holdings Pty Ltd secures the AUD 5,000 line of credit.
(h) Other long-term debt primarily consists of capital leases.
At September 30, 2015, Griffon and its subsidiaries were in compliance with the terms and covenants of its credit and loan agreements.


69


GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(US dollars and non US currencies in thousands, except per share data)


NOTE 11 – EMPLOYEE BENEFIT PLANS
 
Griffon offers defined contribution plans to most of its U.S. employees. In addition to employee contributions to the plans, Griffon makes contributions based upon various percentages of compensation and/or employee contributions, which were $7,988 in 2015, $8,207 in 2014 and $6,950 in 2013.

The Company also provides healthcare and life insurance benefits for certain groups of retirees through several plans. For certain employees, the benefits are at fixed amounts per retiree and are partially contributory by the retiree. The post-retirement benefit obligation was $2,035 and $1,990 as of September 30, 2015 and 2014. The accumulated other comprehensive income (loss) for these plans was $(97) and ($38) as of September 30, 2015 and 2014, respectively, and the 2015 and 2014 benefit expense was $58 and $59, respectively. It is the Company’s practice to fund these benefits as incurred.
 
Griffon also has qualified and non-qualified defined benefit plans covering certain employees with benefits based on years of service and employee compensation. Over time, these amounts will be recognized as part of net periodic pension costs in the Consolidated Statements of Operations and Comprehensive Income (Loss).
 
Griffon is responsible for overseeing the management of the investments of the qualified defined benefit plan and uses the services of an investment manager to manage these assets based on agreed upon risk profiles. The primary objective of the qualified defined benefit plan is to secure participant retirement benefits. As such, the key objective in this plan’s financial management is to promote stability and, to the extent appropriate, growth in the funded status. Financial objectives are established in conjunction with a review of current and projected plan financial requirements. The fair values of a majority of the plan assets were determined by the plans’ trustee using quoted market prices for identical instruments (level 1 inputs) as of September 30, 2015 and 2014. The fair value of various other investments was determined by the plan’s trustee using direct observable market corroborated inputs, including quoted market prices for similar assets (level 2 inputs). There were no pension assets measured using level 3 inputs.

Effective January 1, 2012, the Clopay Pension Plan merged with the Ames True Temper Inc. Pension Plan. The merged qualified defined benefit plan was named the Clopay Ames Pension Plan (the “Clopay AMES Plan”).

The Clopay portion of the Clopay AMES Plan has been frozen to new entrants since December 2000. Certain employees who were part of the plan prior to December 2000 continued to accrue a service benefit through December 2010, at which time all plan participants stopped accruing service benefits.

The AMES portion of the Clopay AMES Plan has been frozen to all new entrants since November 2009 and stopped accruing benefits in December 2009.

The AMES supplemental executive retirement plan was frozen to new entrants and participants in the plan stopped accruing benefits in 2008.

In 2014, the company contributed €1,300 (U.S. $1,776), which equaled the net balance sheet liability, in settlement of all remaining obligations for a non-U.S. pension liability. There were no gains or losses recorded for this settlement.

In 2013, SG&A expenses included a $2,142 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 at September 30, 2013 by $3,472 and increased Accumulated Other Comprehensive Income (Loss) by $3,649 at that date.

Griffon uses judgment to establish the assumptions used in determining the future liability of the plan, as well as the investment returns on the plan assets. The expected return on assets assumption used for pension expense was developed through analysis of historical market returns, current market conditions and past experience of plan investments. The long-term rate of return assumption represents the expected average rate of earnings on the funds invested, or to be invested, to provide for the benefits included in the benefit obligations. The assumption is based on several factors including historical market index returns, the anticipated long-term asset allocation of plan assets and the historical return. The discount rate assumption is determined by developing a yield curve based on high quality bonds with maturities matching the plans’ expected benefit payment stream. The plans’ expected cash flows are then discounted by the resulting year-by-year spot rates. A 10% change in the discount rate, average wage increase or return on assets would not have a material effect on the financial statements of Griffon.


70


GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(US dollars and non US currencies in thousands, except per share data)


Net periodic costs (benefits) were as follows:
 
Defined Benefits for the Years Ended 
September 30,
 
Supplemental Benefits for the Years 
 
2015
 
2014
 
2013
 
2015
 
2014
 
2013
Net periodic (benefits) costs:
 

 
 

 
 

 
 

 
 

 
 

Service cost
$

 
$
22

 
$
165

 
$

 
$

 
$
35

Interest cost
7,526

 
8,205

 
7,977

 
1,302

 
1,497

 
1,344

Expected return on plan assets
(11,728
)
 
(11,309
)
 
(11,869
)
 

 

 

Recognition of settlement

 

 
2,142

 

 

 

Amortization of:
 

 
 

 
 

 
 

 
 

 
 

Prior service costs
1

 
1

 
6

 
16

 
14

 
14

Actuarial loss
1,008

 
885

 
1,795

 
1,157

 
1,034

 
1,288

Total net periodic (benefits) costs
$
(3,193
)
 
$
(2,196
)
 
$
216

 
$
2,475

 
$
2,545

 
$
2,681

 
The tax benefits in 2015, 2014 and 2013 for the amortization of pension costs in Other comprehensive income (loss) were $764, $677 and $1,086, respectively.
 
The estimated net actuarial loss and prior service cost that will be amortized from AOCI into Net periodic pension cost during 2016 is $2,746 and $20, respectively.
 
The weighted-average assumptions used in determining the net periodic (benefits) costs were as follows:
 
Defined Benefits for the Years Ended 
September 30,
 
Supplemental Benefits for the Years 
 
2015
 
2014
 
2013
 
2015
 
2014
 
2013
Discount rate
3.98
%
 
4.49
%
 
3.67
%
 
3.50
%
 
4.09
%
 
3.40
%
Average wage increase
%
 
0.15
%
 
0.11
%
 
%
 
%
 
4.87
%
Expected return on assets
8.00
%
 
8.00
%
 
7.80
%
 

 

 



71


GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(US dollars and non US currencies in thousands, except per share data)


Plan assets and benefit obligation of the defined and supplemental benefit plans were as follows:
 
Defined Benefits at
September 30,
 
Supplemental Benefits at
 
2015
 
2014
 
2015
 
2014
Change in benefit obligation:
 

 
 

 
 

 
 

Benefit obligation at beginning of fiscal year
$
194,327

 
$
195,961

 
$
38,207

 
$
38,674

Benefits earned during the year

 
22

 

 

Interest cost
7,526

 
8,205

 
1,302

 
1,497

Plan participant contributions

 
3

 

 

Benefits paid
(10,300
)
 
(10,359
)
 
(4,082
)
 
(4,083
)
Benefits paid - settlement

 

 

 

Plan settlement

 
(9,780
)
 

 

Effect of foreign currency

 
37

 

 

Actuarial (gain) loss
(6,707
)
 
10,238

 
1,878

 
2,119

Actuarial gain - settlement

 

 

 

Benefit obligation at end of fiscal year
184,846

 
194,327

 
37,305

 
38,207

Change in plan assets:
 

 
 

 
 

 
 

Fair value of plan assets at beginning of fiscal year
154,966

 
153,731

 

 

Actual return on plan assets
(1,711
)
 
12,830

 

 

Plan participant contributions

 
3

 

 

Company contributions
1,670

 
7,433

 
4,082

 
4,083

Effect of foreign currency

 
26

 

 

Benefits paid
(10,300
)
 
(10,359
)
 
(4,082
)
 
(4,083
)
Benefits paid - settlement

 

 

 

Plan settlement

 
(8,698
)
 
 
 
 
Fair value of plan assets at end of fiscal year
144,625

 
154,966

 

 

Projected benefit obligation in excess of plan assets
$
(40,221
)
 
$
(39,361
)
 
$
(37,305
)
 
$
(38,207
)
Amounts recognized in the statement of financial position consist of:
 

 
 

 
 

 
 

Accrued liabilities
$

 
$

 
$
(4,056
)
 
$
(4,058
)
Other liabilities (long-term)
(40,221
)
 
(39,361
)
 
(33,249
)
 
(34,149
)
Total Liabilities
(40,221
)
 
(39,361
)
 
(37,305
)
 
(38,207
)
Net actuarial losses
29,158

 
23,433

 
21,139

 
20,420

Prior service cost
2

 
2

 
71

 
85

Deferred taxes
(10,206
)
 
(8,202
)
 
(7,423
)
 
(7,177
)
Total Accumulated other comprehensive loss, net of tax
18,954

 
15,233

 
13,787

 
13,328

Net amount recognized at September 30,
$
(21,267
)
 
$
(24,128
)
 
$
(23,518
)
 
$
(24,879
)
Accumulated benefit obligations
$
184,846

 
$
194,327

 
$
37,305

 
$
38,207

Information for plans with accumulated benefit obligations in excess of plan assets:
 

 
 

 
 

 
 

ABO
$
184,846

 
$
194,327

 
$
37,305

 
$
38,207

PBO
184,846

 
194,327

 
37,305

 
38,207

Fair value of plan assets
144,625

 
154,966

 

 

 

72


GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(US dollars and non US currencies in thousands, except per share data)


The weighted-average assumptions used in determining the benefit obligations were as follows:
 
Defined Benefits at 
September 30,
 
Supplemental Benefits at 
 
2015
 
2014
 
2015
 
2014
Weighted average discount rate
3.94
%
 
3.98
%
 
3.52
%
 
3.60
%
Weighted average wage increase
%
 
%
 
%
 
%
 
The actual and weighted-average asset allocation for qualified benefit plans were as follows:
 
 
 
 
2015
 
2014
 
Target
Equity securities
52.7
%
 
56.4
%
 
63.0
%
Fixed income
41.0
%
 
38.1
%
 
37.0
%
Other
6.3
%
 
5.5
%
 
%
Total
100.0
%
 
100.0
%
 
100.0
%

Estimated future benefit payments to retirees, which reflect expected future service, are as follows:
For the years ending September 30,
Defined
Benefits
 
Supplemental Benefits
2016
$
10,618

 
$
4,056

2017
10,665

 
3,997

2018
10,717

 
3,717

2019
10,804

 
3,550

2020
10,948

 
3,376

2021 through 2025
55,693

 
13,992


During 2016, Griffon expects to contribute $4,056 in payments related to Supplemental Benefits that will be funded from the general assets of Griffon. Griffon does not expect to make any contributions to the Defined Benefit plan in 2016.

The Clopay AMES Plan is covered by the Pension Protection Act of 2006. The Adjusted Funding Target Attainment Percent for the plan as of January 1, 2015 was 102.3%. Since the plan was in excess of the 80% funding threshold there were no plan restrictions. The expected level of 2016 catch up contributions is $0.

The following is a description of the valuation methodologies used for plan assets measured at fair value:

Short-term investment funds – The fair value is determined using the Net Asset Value (“NAV”) provided by the administrator of the fund. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of shares outstanding. The NAV is a quoted price in a market that is not active and is primarily classified as Level 2. These investments can be liquidated on demand.

Government and agency securities – When quoted market prices are available in an active market, the investments are classified as Level 1. When quoted market prices are not available in an active market, the investments are classified as Level 2.

Equity securities – The fair values reflect the closing price reported on a major market where the individual mutual fund securities are traded in equity securities. These investments are classified within Level 1 of the valuation hierarchy.

Debt securities – The fair values are based on a compilation of primarily observable market information or a broker quote in a non-active market where the individual mutual fund securities are invested in debt securities. These investments are primarily classified within Level 2 of the valuation hierarchy.


73


GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(US dollars and non US currencies in thousands, except per share data)


Commingled funds – The fair values are determined using NAV provided by the administrator of the fund. The NAV is based on the value of the underlying assets owned by the trust/entity, minus its liabilities, and then divided by the number of shares outstanding. These investments are generally classified within Level 2 of the valuation hierarchy and can be liquidated on demand.

Interest in limited partnerships and hedge funds - One limited partnership investment is a private equity fund and the fair value is determined by the fund managers based on the estimated value of the various holdings of the fund portfolio. These investments are classified within Level 2 of the valuation hierarchy.

The following table presents the fair values of Griffon’s pension and post-retirement plan assets by asset category:
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Cash and equivalents
$
1,370

 
$

 
$

 
$
1,370

Short-term investment funds

 

 

 

Government agency securities

 

 

 

Debt instruments
14,291

 

 

 
14,291

Equity securities
44,742

 

 

 
44,742

Commingled funds

 
78,490

 

 
78,490

Limited partnerships and hedge fund investments

 
5,732

 

 
5,732

Total
$
60,403

 
$
84,222

 
$

 
$
144,625

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Cash and equivalents
$
2,912

 
$

 
$

 
$
2,912

Short-term investment funds

 

 

 

Government agency securities

 

 

 

Debt instruments
29,447

 

 

 
29,447

Equity securities
45,870

 

 

 
45,870

Commingled funds

 
72,722

 

 
72,722

Insurance contracts


 


 


 


Limited partnerships and hedge fund investments

 
4,015

 

 
4,015

Total
$
78,229

 
$
76,737

 
$

 
$
154,966


Griffon has an ESOP that covers substantially all domestic employees. All U.S. employees of Griffon, who are not members of a collective bargaining unit, automatically become eligible to participate in the plan on the October 1st following completion of one year of service. Securities are allocated to participants’ individual accounts based on the proportion of each participant’s aggregate compensation (not to exceed $265 for the plan year ended September 30, 2015), to the total of all participants’ compensation. Shares of the ESOP which have been allocated to employee accounts are charged to expense based on the fair value of the shares transferred and are treated as outstanding in determining earnings per share. Dividends paid on shares held by the ESOP are used to offset debt service on ESOP Loans. Dividends paid on shares held in participant accounts are utilized to allocate shares from the aggregate number of shares to be released, equal in value to those dividends, based on the closing price of Griffon common stock on the dividend payment date. Compensation expense under the ESOP was $3,400 in 2015, $2,447 in 2014 and $2,015 in 2013. The cost of the shares held by the ESOP and not yet allocated to employees is reported as a reduction of Shareholders’ Equity.

74


GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(US dollars and non US currencies in thousands, except per share data)


The fair value of the unallocated ESOP shares as of September 30, 2015 and 2014 based on the closing stock price of Griffon’s stock was $47,907 and $37,372, respectively. The ESOP shares were as follows:
 
 
2015
 
2014
Allocated shares
2,479,776

 
2,406,941

Unallocated shares
3,037,831

 
3,281,095

 
5,517,607

 
5,688,036

 
NOTE 12 – INCOME TAXES

Income taxes have been based on the following components of Income before taxes and discontinued operations:
 
For the Years Ended September 30,
 
2015
 
2014
 
2013
Domestic
$
54,515

 
$
(14,682
)
 
$
16,083

Non-U.S.
(879
)
 
8,966

 
(1,750
)
 
$
53,636

 
$
(5,716
)
 
$
14,333


Provision (benefit) for income taxes on income from continuing operations was comprised of the following:
 
For the Years Ended September 30,
 
2015
 
2014
 
2013
Current
$
17,215

 
$
(408
)
 
$
2,468

Deferred
2,132

 
(5,131
)
 
5,075

Total
$
19,347

 
$
(5,539
)
 
$
7,543

U.S. Federal
$
16,937

 
$
(6,486
)
 
$
5,807

State and local
3,215

 
(291
)
 
2,915

Non-U.S.
(805
)
 
1,238

 
(1,179
)
Total provision
$
19,347

 
$
(5,539
)
 
$
7,543


Griffon’s Income tax provision (benefit) included benefits of ($517) in 2015, ($4,429) in 2014, and ($3,209) in 2013 reflecting the reversal of previously recorded tax liabilities primarily due to the resolution of various tax audits and the closing of certain statutes for prior years’ tax returns.


75


GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(US dollars and non US currencies in thousands, except per share data)


Differences between the effective income tax rate applied to Income from continuing operations and U.S. Federal income statutory rate were as follows:
 
For the Years Ended September 30,
 
2015
 
2014
 
2013
U.S. Federal income tax provision (benefit) rate
35.0
 %
 
(35.0
)%
 
35.0
 %
State and local taxes, net of Federal benefit
4.9
 %
 
17.5
 %
 
2.8
 %
Non-U.S. taxes
(4.0
)%
 
(35.8
)%
 
5.3
 %
Change in tax contingency reserves
0.3
 %
 
(36.0
)%
 
(10.9
)%
Repatriation of foreign earnings
0.9
 %
 
4.7
 %
 
(8.3
)%
U.S. Valuation allowance
(1.1
)%
 
4.5
 %
 
10.1
 %
Non-deductible/non-taxable items, net
(0.7
)%
 
(3.4
)%
 
11.6
 %
Research credits
(0.5
)%
 
(3.9
)%
 
(7.4
)%
Deferred tax impact of state rate change
 %
 
(4.5
)%
 
15.0
 %
Other<