What changed in this filing

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Item 1A. Risk Factors

2020-11-13 compared with 2019-11-22 · 134 added, 84 removed, 216 unchanged (50% of the section changed)

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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;

impact of natural disasters and pandemics, and their effect on global markets;

possible future terrorist threats and their effect on the worldwide economy;

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Griffon has identified the following specific risks and uncertainties that it believes have the potential to materially affect its business and financial condition.

Risks Related to Our Business

The COVID-19 outbreak could adversely impact our results of operations.

The future impact of the COVID-19 outbreak and the spread of the pathogen on a global basis could adversely affect our businesses in a number of respects, although the extent, nature and timing of such impact cannot be predicted as of the date of this filing.

The COVID-19 outbreak has led countries around the world, as well as most states in the U.S., to implement restrictions from time-to-time relating to the operation of almost all types of businesses.

Within the U.S., the standards vary from state to state, but typically require all but “critical”, “essential” or “life-sustaining” businesses to close all offices and facilities.

We believe, based on the various standards published to date, that our businesses meet the requisite standard in all U.S states.

We also believe that our businesses meet the applicable standards to remain open in Canada, the United Kingdom, Ireland and Australia.

As of the date

of this filing, all of our manufacturing and distribution facilities in the U.S., Canada, the United Kingdom, Ireland, Australia and China are operating, although some of them are operating at reduced capacity as a result of our implementation of procedures designed to prevent the spread of the virus, such as social distancing and staggered shifts.

However, government actions taken based on the changing nature of the outbreak in the U.S.

or in other countries in which we do business, as well as the changing of standards regarding what type of facilities are permitted to remain open and evolving interpretations of existing standards, could result in additional closures of Griffon facilities.

To date, our supply chain has not experienced significant disruptions, and at this time we do not anticipate any such significant disruptions in the near term.

However, our suppliers could be required by government authorities to temporarily cease operations in accordance with the various restrictions discussed above;

might be limited in their production capacity due to complying with restrictions relating to the operation of businesses during the COVID-19 pandemic;

or could suffer their own supply chain disruptions, impacting their ability to continue to supply us with the quantity of materials required by us.

If as a result of the COVID-19 outbreak, including a potential resurgence of the virus in the fall and winter months, governments take additional protective actions, or extend the time period for existing protective actions, it may have a material adverse impact on Griffon’s businesses and operating results.

This could include additional closures of our facilities of an unknown duration, or the closure of the facilities of our customers, suppliers, or other vendors in our supply chain.

Any disruption of our supply chain or the businesses of our customers could adversely impact our businesses and results of operations.

The COVID-19 outbreak has recently worsened in many U.S.

states, and as a result, certain states have put in place new restrictions regarding the operation of many types of businesses or have tightened up restrictions already in place.

Many medical experts believe that during the winter, as the weather gets colder and more people spend time with others indoors, the COVID-19 infection rate will worsen.

In addition, the widespread public health crisis caused by the COVID-19 outbreak has adversely impacted the economies and financial markets worldwide, resulting in an economic downturn that has adversely impacted many businesses, including ours.

The extent and duration of the impact on the global economy and financial markets from the COVID-19 outbreak is difficult to predict, and the extent to which the COVID-19 outbreak will negatively affect us and the duration of any potential business disruption is uncertain.

The impact to our results will depend to a large extent on future developments and new information that may emerge regarding the duration and severity of the COVID-19 outbreak and the actions taken by authorities and other entities to contain the COVID-19 outbreak or treat its impact, and the impact of such actions, all of which are beyond our control.

These potential impacts, while uncertain, could adversely affect our operating results.

To the extent the COVID-19 outbreak adversely affects our businesses, operations, financial condition and operating results, it may also have the effect of heightening many of the other risks factors such as those relating to our high level of indebtedness, our need to generate sufficient cash flows to service our indebtedness, and our ability to comply with the covenants contained in the agreements that govern our indebtedness, as described in more detail below.

Current worldwide economic uncertainty and market volatility could adversely affect Griffon’s businesses.

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Purchases of many CPP and HBP 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 or obtain additional credit on favorable terms for investments in current businesses or for acquisitions, or may render financing unavailable.

Disruptions in the credit markets have increased the spread between the yields realized on risk-free and higher risk securities, resulting in illiquidity in parts of the credit markets .

These conditions could make it more difficult to obtain additional credit on favorable terms for investments in current businesses or for acquisitions, or could render financing unavailable;

in addition, while we do not have any near term debt maturities, if these conditions persist, we may have difficulty refinancing our debt when it comes due.

Griffon is also exposed to certain fundamental economic risks including a decrease in the demand for the products and services it offers or a higher likelihood of default on its receivables.

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In addition, the intense competition in the retail and e-commerce sectors, combined with the overall increasingly competitive economic environment, may result in a number of customers experiencing financial difficulty, or failing in the future.

The loss of, or a failure by, one of CPP or HBP customers could adversely impact our sales and operating cash flows.

The loss of, or a failure by, one of CPP’s or HBP’s significant customers could adversely impact our sales and operating cash flows.

To address all of these challenges, CPP and HBP must be able to respond to these competitive pressures, and the failure to respond effectively could result in a loss of sales, reduced profitability and a limited ability to recover cost increases through price increases.

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Home Depot accounted for approximately 17% of consolidated revenue, 27% of CPP's revenue and 12% HBP's revenue for the year ended September 30, 2020 .

Government and its agencies and subcontractors, including Lockheed Martin and Boeing, is a significant customer of Telephonics, and together accounts for approximately 10% of consolidated revenue and 63% of Defense Electronics segment revenue (Lockheed Martin and Boeing each individually represent less than 10% of consolidated revenue inclusive of such sales to the U.S.

Government and its agencies and subcontractors, including Lockheed Martin and Boeing, is a significant customer of DE, and together accounts for approximately 10% of consolidated revenue and 69% of DE segment revenue (Lockheed Martin and Boeing each individually represent less than 10% of consolidated revenue inclusive of such sales to the U.S.

Future operating results will continue to substantially depend on the success of Griffon’s largest customers, as well as Griffon’s relationships with them.

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Reliance on third party suppliers and manufacturers may reduce control over the timing of deliveries and quality of both CPP and HBP products.

Reduced product quality or failure to deliver products timely may jeopardize relationships with certain of CPP and HBP key customers.

Reduced product quality or failure to deliver products timely may jeopardize relationships with certain of CPP's and HBP's key customers.

In addition, reliance on third party suppliers or manufacturers may result in the failure to meet CPP and HBP customer demands.

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CPP is subject to risks from sourcing from international locations, especially China

CPP' business is global, with products and raw materials sourced from, manufactured in and sold in multiple countries around the world.

CPP's business is global, with products and raw materials sourced from, manufactured in and sold in multiple countries around the world.

There are risks associated with conducting a business that may be impacted by political and other developments associated with international trade.

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at various times since March 2018, represents a continuing risk to CPP revenue and operating performance.

Following the initial announcement in March 2018 of a 25% tariff on steel imports and a 10% tariff on aluminum imports, the Trump Administration imposed additional and/or increased tariffs on a wide variety of consumer and industrial items imported from China throughout the remainder of 2018 and 2019 to date.

Some of these tariffs were subsequently reduced and/or delayed as the Trump Administration continues to pursue trade negotiations with China.

The materials subject to these tariffs include various steel and aluminum finished goods, as well as a variety of resins, fabrics and wood products.

The United States entered into what is described as “Phase 1” trade agreement with China on January 15, 2020, which reduces some existing tariffs that had been imposed and defers proposed increases of the tariff rate on an additional $250 billion of Chinese goods from 25% to 30% that had been planned for October 15, 2019, and proposed 15% tariffs on an additional $160 billion of a wide range of goods and materials imported from China to be effective December 15, 2019.

Under the Phase 1 agreement, existing 25% tariffs previously imposed on $250 billion of Chinese goods will remain in place, while a 15% tariff on another $120 billion of Chinese goods has been reduced to 7.5%.

In response, China has imposed tariffs on certain U.S.

products, some of which are being reduced as part of the Phase 1 agreement.

China may take additional actions if additional U.S.

tariffs are reduced or imposed.

On May 8, 2020, the two countries reaffirmed their Phase 1 trade agreement notwithstanding the COVID-19 pandemic.

In view of potential discussions between the Chinese and U.S.

governments on a second phase agreement, for which discussions only among trade negotiators are currently scheduled, the ultimate level of tariffs, the ultimate scope of them, and whether or how the proposed additional tariffs will impact our business is uncertain.

The imposition of additional tariffs by the U.S.

government on various steel and aluminum finished goods, as well as a variety of resins, fabrics and wood products could materially affect our operations.

As a result of these tariffs and the fluid nature of ongoing trade negotiations, we intend to continue to manage our China supply base, which may include raising prices on certain goods.

This may in turn result in reduced sales or the loss of customers and could impact our operating performance.

CPP and HBP operations are also subject to the effects of international trade agreements and regulations such as the North American Free Trade Agreement, and the activities and regulations of the World Trade Organization.

Although these trade agreements generally have positive effects on trade liberalization, sourcing flexibility and cost of goods by reducing or eliminating the duties and/or quotas assessed on products manufactured in a particular country, trade agreements can also adversely affect CPP and HBP businesses.

The continuing political and economic conflicts between U.S.

and China have resulted in and may continue to cause retaliatory policies from both countries, including a recent executive order issued by the U.S.

President eliminating the preferential trade status of Hong Kong in response to China’s action to impose new security measures and regulation on Hong Kong.

We cannot predict what new and additional retaliatory policies and regulations may be implemented by the Chinese government in response to U.S.

actions, and such policies and regulations may adversely affect our business operations in China.

CPP and HBP operations are also subject to the effects of international trade agreements and regulations such as the United States-Mexico-Canada Agreement, and the activities and regulations of the World Trade Organization.

Although these trade agreements generally have positive effects on trade liberalization, sourcing flexibility and cost of goods by reducing or eliminating the duties

and/or quotas assessed on products manufactured in a particular country, trade agreements can also adversely affect CPP and HBP businesses.

For example, trade agreements can result in setting quotas on products that may be imported from a particular country into key markets including the U.S., Canada, Australia and the United Kingdom, or may make it easier for other companies to compete by eliminating restrictions on products from countries where CPP and HBP competitors source products.

The ability of CPP and HBP to import products in a timely and cost-effective manner may also be affected by conditions at ports or issues that otherwise affect transportation and warehousing providers, such as port and shipping capacity, labor disputes, severe weather or increased homeland security requirements in the U.S.

and other countries.

and other countries, as well as the potential for increased costs due to currency exchange fluctuations.

These issues could delay importation of products or require CPP and HBP to locate alternative ports or warehousing providers to avoid disruption to customers.

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Griffon’s businesses are subject to seasonal variations and the impact of uncertain weather patterns.

Historically, overall Griffon revenue and earnings are lower in the first and second quarters ending December 31 and March 31, respectively and higher in the third and fourth quarters ending June 30 and September 30, respectively.

Griffon's revenue and earnings are generally lowest in our first and fourth quarters ending December 31, and September 30, respectively, and highest in the second and third quarters ending March 31, and June 30, respectively, primarily due to the seasonality of the AMES business.

In 2019 , 56% of AMES' sales occurred during the second and third quarters.

In 2020 , 53% of AMES' sales occurred during the second and third quarters compared to 56% and 57% in 2019 and 2018, respectively.

In 2020, as a result of the COVID-19 pandemic, sales orders shifted somewhat into the third and fourth quarters resulting in revenue increasing in these two quarters to 55% of 2020 sales.

Clopay’s business is driven by residential renovation and construction, which occurs more during warm weather, than during the winter months, and so revenues and earnings of Clopay are generally lower in the second quarter.

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As a result, AMES' results of operations, financial results and cash flows could be adversely impacted.

Each of Griffon's businesses faces risks related to the disruption of its primary manufacturing facilities.

The manufacturing facilities for each of Griffon's businesses are concentrated in just a few locations, and in the case of CPP, some of these locations are abroad in low-cost locations.

Any of Griffon's manufacturing facilities are subject to disruption for a variety of reasons, such as natural or man-made disasters, terrorist activities, disruptions of information technology resources, and utility interruptions.

Such disruptions may cause delays in shipping products, which could result in the loss of business or customer trust, adversely affecting Griffon’s businesses and operating results.

Manufacturing capacity constraints or increased manufacturing costs may have a material adverse effect on Griffon's business, results of operations, financial condition and cash flows.

Griffon’s current manufacturing resources may be inadequate to meet significantly increased demand for some of its products.

Griffon’s ability to increase its manufacturing capacity depends on many factors, including the availability of capital, steadily increasing consumer demand, equipment delivery, construction lead-times, installation, qualification, and permitting and other regulatory requirements.

Increasing capacity through the use of third-party manufacturers may depend on Griffon’s ability to develop and maintain such relationships and the ability of such third parties to devote additional capacity to fill its orders.

A lack of sufficient manufacturing capacity to meet demand could cause customer service levels to decrease, which may negatively affect customer demand for Griffon's products and customer relations generally, which in turn could have a material adverse effect on Griffon's business, results of operations, financial condition and cash flows.

In addition, operating facilities at or near capacity may also increase production and distribution costs and negatively impact relations with employees or contractors, which could result in disruptions to operations.

In addition, manufacturing costs may increase significantly and Griffon may not be able to successfully recover these cost increases with increased pricing to its customers.

If CPP and HBP do not continue to develop and maintain leading brands or realize the anticipated benefits of advertising and promotion spend, its operating results may suffer.

The ability of CPP and HBP to compete successfully depends in part on the company’s ability to develop and maintain leading brands so that retail and other customers will need its products to meet consumer demand.

Leading brands allow both CPP and HBP to realize economies of scale in its operations.

The development and maintenance of such brands require significant investment in brand-building and marketing initiatives.

While CPP and HBP plan to continue to increase its expenditures for advertising and promotion and other brand-building and marketing initiatives over the long term, the initiatives may not deliver the anticipated results and the results of such initiatives may not cover the costs of the increased investment.

Unionized employees could strike or participate in a work stoppage.

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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 as a result 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.

Telephonics’ business depends heavily upon government contracts and, therefore, the defense budget.

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The failure or inability of the prime contractor to perform its contract under circumstances in which 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;

Failure to observe and comply with government 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;

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The government’s right, in certain circumstances, to freely use technology developed under these contracts.

All of Telephonics’ U.S.

Telephonics’ U.S.

Government end-user contracts contain a termination for convenience clause, regardless if Telephonics is the prime contractor or the subcontractor.

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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.

The programs in which Telephonics participate may extend for several years, and may be funded on an incremental basis.

Decreases in the U.S.

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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.

Ability of government to fund and conduct its operations

Telephonics’ business could be adversely affected by a government shutdown

The impact of a government shutdown for any duration could have a material adverse effect on Telephonics’ revenues, profits and cash flows.

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Griffon's business could be negatively affected by cyber or other security threats or other disruptions.

Overall, Griffon and its operating companies are subjected to cyber and other security threats common to U.S.

Griffon and its operating companies are subjected to cyber and other security threats common to U.S.

defense contractor, Telephonics, in particular, may be the target of cyber security threats to its information technology infrastructure and unauthorized attempts to gain access to sensitive or highly confidential information that could compromise U.S.

The types of threats could vary from attacks common to most industries to more advanced and persistent, highly organized adversaries who target Telephonics because of national security information in its possession.

types of threats could vary from attacks common to most industries to more advanced and persistent, highly organized adversaries who target Telephonics because of national security information in its possession.

Individuals and groups of hackers and sophisticated organizations, including organizations sponsored by foreign countries, may use a wide variety of methods, such as deploying malicious software or exploiting vulnerabilities in hardware, software, or other infrastructure in order to gain access to our networks or using social engineering techniques to induce our employees to disclose passwords or other sensitive information or take other actions to gain access to our data.

Inadequate account security practices may also result in unauthorized access to confidential data.

For example, system administrators may fail to timely remove employee account access when no longer appropriate.

Employees or third parties may also intentionally compromise our systems, security or confidential information.

If Telephonics is unable to protect sensitive information, its customers or governmental authorities could question the adequacy of its security processes and procedures and its compliance with evolving government cyber security requirements for government contractors.

Due to the evolving nature of these security threats, the impact of any future incident cannot be predicted.

Due to the evolving nature of these security threats, and the increasing difficulty of detecting and defending against them, the risk and 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 Griffon's internal operations, future financial results and reputation, as well as result in the loss of competitive advantages derived from research and development efforts and other intellectual property.

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.

Griffon closed the acquisitions of La Hacienda, Tuscan Path, ClosetMaid and Harper Brush in the months of July through November 2017, Kelkay in February 2018, CornellCookson in June 2018 and Apta in November 2019.

This integration risk may be exacerbated when numerous acquisitions are consummated in a short time period.

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;

Difficulty in obtaining financing on acceptable terms, or at all.

An unsuccessful implementation of Griffon’s acquisition growth strategy, including the failure to properly integrate acquisitions, could have an adverse impact on Griffon’s results of operations, cash flows and financial condition.

We may also incur debt or assume contingent liabilities in connection with acquisitions, which could impose restrictions on our business operations and harm our operating results.

Risks Related to Our Indebtedness

While Griffon’s senior notes, which have limited covenants, are not due until 2028, and while its $400 million revolving line of credit, which is largely undrawn and has greater covenant requirements, does not mature until 2025, there are potential impacts from Griffon’s use of debt to finance certain of its activities, especially acquisitions and expansions, as set forth below.

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, to a lesser extent, 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, which is largely undrawn, 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 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 the 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.

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 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 secure on favorable terms, if at all;

Its level of indebtedness may make Griffon more vulnerable to economic or industry downturns.

Risk Related to Our Common Stock

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, 3,000,000 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 at any time.

In addition, Griffon is authorized to issue, without stockholder approval, up to 85,000,000 shares of common stock, of which 56,129,784 shares, net of treasury shares, were outstanding as of September 30, 2020 .

Additionally, Griffon is authorized to issue, without stockholder approval, securities convertible into either shares of common stock or preferred stock.

General Risk Factors

Each of Griffon's businesses faces risks related to the disruption of its primary manufacturing facilities.

The manufacturing facilities for each of Griffon's businesses are concentrated in just a few locations, and in the case of CPP, some of these locations are abroad in low-cost locations.

Any of Griffon's manufacturing facilities are subject to disruption for a variety of reasons, such as natural or man-made disasters, pandemics, terrorist activities, disruptions of information technology resources, and utility interruptions.