Item 7. Management’s Discussion and Analysis
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”, “Griffon”, "we" or "us") is a diversified management and holding company that conducts business through wholly-owned subsidiaries. Griffon oversees the operations of its subsidiaries, allocates resources among them and manages their capital structures. Griffon provides direction and assistance to its subsidiaries in connection with acquisition and growth opportunities as well as in connection with divestitures. In order to further diversify, Griffon also seeks out, evaluates and, when appropriate, will acquire additional businesses that offer potentially attractive returns on capital.
The Company was founded in 1959, is a Delaware corporation headquartered in New York, N.Y. and is listed on the New York Stock Exchange (NYSE:GFF).
Griffon conducts its operations through two reportable segments:
• Home and Building Products ("HBP") conducts its operations through Clopay Corporation ("Clopay"). Founded in 1964, Clopay is the largest manufacturer and marketer of garage doors and rolling steel doors in North America. Residential and commercial sectional garage doors are sold through professional dealers and leading home center retail chains throughout North America under the brands Clopay, Ideal, and Holmes. Rolling steel door and grille products designed for commercial, industrial, institutional, and retail use are sold under the Cornell and Cookson brands. HBP revenue was 59%, 53% and 46% of Griffon’s consolidated revenue in 2023, 2022 and 2021, respectively.
• Consumer and Professional Products (“CPP”) is a leading global provider of branded consumer and professional tools; residential, industrial and commercial fans; home storage and organization products; and products that enhance indoor and outdoor lifestyles. CPP sells products globally through a portfolio of leading brands including AMES, since 1774, Hunter, since 1886, True Temper, and ClosetMaid. CPP revenue was 41%, 47%, and 54% of Griffon’s consolidated revenue in 2023, 2022 and 2021, respectively.
On August 1, 2023, Griffon amended its credit agreement to increase the total amount available for borrowing under its revolving credit facility from $400,000 to $500,000, extend the maturity date of the revolving credit facility from March 22, 2025 to August 1, 2028 and modify certain other provisions of the facility (the "Credit Agreement"). See Note 12, Long-Term Debt for further details.
On June 27, 2022, we completed the sale of our Defense Electronics ("DE") segment, which consisted of our Telephonics Corporation ("Telephonics") subsidiary, for $330,000 in cash, excluding customary post-closing adjustments. As such, the results of operations of our Telephonics business is classified as a discontinued operation in the Consolidated Statements of Operations for all periods presented and the related assets and liabilities have been classified as assets and liabilities of the discontinued operation in the Consolidated Balance Sheets. Accordingly, all references made to results and information in this Annual Report on Form 10-K are to Griffon's continuing operations, unless noted otherwise.
On May 16, 2022, Griffon announced that its Board of Directors initiated a process to review a comprehensive range of strategic alternatives to maximize shareholder value including a sale, merger, divestiture, recapitalization or other strategic transaction, and on April 20, 2023, Griffon announced that its Board of Directors, after extensive evaluation and deliberation, determined that the ongoing execution of the Company's strategic plan was the best way to maximize value for shareholders and unanimously decided to conclude its review.
On January 24, 2022, Griffon acquired Hunter Fan Company (“Hunter”), a market leader in residential ceiling, commercial, and industrial fans, from MidOcean Partners (“MidOcean”) for a contractual purchase price of $845,000. Hunter, part of our CPP segment, complements and diversifies our portfolio of leading consumer brands and products.
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On December 22, 2020, AMES acquired Quatro Design Pty Ltd (“Quatro”), a leading Australian manufacturer and supplier of
glass fiber reinforced concrete landscaping products for residential, commercial, and public sector projects. Quatro contributed approximately $5,000 in revenue in the first twelve months after the acquisition.
Update of COVID-19 on Our Business
On May 11, 2023, the U.S. Department of Health and Human Services declared the end of the public health emergency for COVID-19; however, the effects of COVID-19 continue to linger throughout the global economy and our business. Though the severity of COVID-19 has subsided, new variants, or the outbreak of a new pathogen, could interrupt business, cause renewed labor and supply chain disruptions, and negatively impact the global and U.S. economy, which could materially and adversely impact our businesses. See information provided in Part 1, Item 1A, “Risk Factors” in this Form 10-K.
CONSOLIDATED RESULTS OF OPERATIONS
2023 Compared to 2022
Revenue for the year ended September 30, 2023 of $2,685,183 decreased 6% compared to $2,848,488 for the year ended September 30, 2022, resulting from decreased revenue of 18% at CPP, partially offset by increased revenue of 5% at HBP. Adjusting for the period Griffon did not own Hunter in the prior year, organic revenue decreased 8% to $2,609,417. Hunter contributed $75,766 of incremental revenue during the year-to-date period.
Gross profit for 2023 was $948,821 compared to $936,886 in 2022. Gross profit as a percent of sales (“gross margin”) for 2023 and 2022 was 35.3% and 32.9%, respectively. In the years ended 2023 and 2022, gross profit included restructuring charges of $82,028 and $7,964, respectively. In the year ended 2022, gross profit also included amortization of $5,401 related to the fair value step-up of acquired inventory sold in connection with the Hunter Fan acquisition. Excluding these charges from both years, gross profit would have been $1,030,849 or 38.4% of revenue, compared to $950,251 or 33.4% in the prior year.
Selling, general and administrative (“SG&A”) expenses in 2023 of $642,734 or 23.9% of revenue, increased 6% from $608,926, or 21.4% of revenue, in 2022. 2023 SG&A expenses included restructuring charges of $10,440, strategic review (retention and other) of $20,225, special dividend ESOP charges of $15,494 and proxy expenses of $2,685. 2022 SG&A expenses included restructuring charges of $8,818, acquisition costs of $9,303, strategic review (retention and other) of $9,683, special dividend ESOP charges of $10,538 and proxy expenses of $6,952. In 2023, proxy expenses of $2,685 related to a settlement entered into with a shareholder that had submitted a slate of director nominees. In 2022, proxy expenses of $6,952 (including legal and advisory fees) were the result of a proxy contest initiated by a shareholder which was completed at the shareholder meeting on February 17, 2022. Excluding these items from both periods, 2023 SG&A expenses would have been $593,890, or 22.1% of revenue compared to $563,632, or 19.8%, with the increase in expenses primarily due to a full year of Hunter Fan expenses as well as increased management incentives, marketing, advertising and administrative expenses.
During the fiscal year ended September 30, 2023, Griffon performed annual and interim impairment testing of its goodwill and indefinite-lived intangible assets. Griffon performed a quantitative assessment of the CPP reporting units and indefinite-lived intangible assets. The assessments did not result in an impairment to goodwill. The impairment tests did result in pre-tax noncash impairment charges totaling $109,200 ($81,313, net of tax) to CPP's gross carrying amount intangible assets. For HBP, Griffon performed qualitative assessments and determined that indicators that fair value was less than the carrying amount were not present.
Interest expense in 2023 of $101,445 increased 20% compared to 2022 interest expense of $84,379, primarily as a result of an increased effective interest rate related to the $800,000 seven year Term Loan B facility entered into in the prior year in connection with the Hunter acquisition, of which Griffon prepaid $25,000 and $300,000 aggregate principal amount in 2023 and 2022, respectively. These amounts were in addition to the required nominal quarterly principal payments of $2,000 per quarter totaling $8,000 and $4,000 in 2023 and 2022, respectively.
Other income (expense) of $2,928 and $6,881 in 2023 and 2022, respectively, includes $302 and $305, respectively, of net currency exchange transaction gains from receivables and payables held in non-functional currencies, $469 and $(225), respectively, of net gains (losses) on investments, and $(866) and $4,256, respectively, of net periodic benefit plan income (expense). Other income (expense) also includes rental income of $212 and $689 in 2023 and 2022, respectively. Additionally, it includes royalty income of $2,104 and $2,250 in 2023 and 2022, respectively.
Griffon reported income before tax from continuing operations for 2023 of $112,682 compared to a loss before tax from continuing operations for 2022 of $270,879. The income tax provision recognized in 2023 and 2022 translated to an effective
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income tax rate of 31.1% and 6.2%, respectively. The 2023 and 2022 tax rates included discrete and certain other tax provisions net, and other items that affect comparability, as listed below. Excluding the discrete and certain other tax provisions, net, and other items that affect comparability, as listed below, the effective income tax rates for 2023 and 2022 were 27.3% and 29.0%, respectively. These rates reflect the impact of tax reserves and changes in earnings mix between U.S. and non-U.S. operations. Income from continuing operations for 2023 was $77,617, or $1.42 per share, compared to loss from continuing operations of $287,715, or $5.57 per share in 2022. The 2023 income from continuing operations included the following:
– Restructuring charges of $92,468 ($68,779, net of tax, or $1.26 per share);
– Gain on sale of buildings $12,655 (9,586, net of tax, or $0.18 per share);
– Debt extinguishment, net $437 ($332, net of tax, or $0.01 per share);
– Strategic review - retention and other of $20,225 ($15,253, net of tax, or $0.28 per share);
– Special dividend ESOP charges of $15,494 ($11,779, net of tax, or $0.22 per share);
– Proxy expenses of $2,685 ($2,059, net of tax, or $0.04 per share);
– Intangible asset impairments of $109,200 ($81,313, net of tax, or $1.49 per share); and
– Discrete and certain other tax provision, net, of $175 or 0.00 per share.
The 2022 loss from continuing operations included the following:
– Restructuring charges of $16,782 ($12,479, net of tax, or $0.23 per share);
– Debt extinguishment, net $4,529 ($3,474, net of tax, or $0.06 per share);
– Acquisition costs of $9,303 ($8,149, net of tax, or $0.15 per share);
– Strategic review - retention and other of $9,683 ($7,280, net of tax, or $0.13 per share);
– Special dividend ESOP charges of $10,538 ($8,083, net of tax, or $0.15 per share);
– Proxy expenses of $6,952 ($5,359, net of tax, or $0.10 per share);
– Fair value step-up of acquired inventory sold of $5,401 ($4,012, net of tax, or $0.07 per share);
– Goodwill and intangible asset impairments of $517,027 ($454,753, net of tax, or $8.43 per share); and
– Discrete and certain other tax provision, net, of $3,913 or $0.07 per share.
Excluding these items from both reporting periods, 2023 income from continuing operations would have been $247,721, or $4.54 per share compared to $219,786, or $4.07 per share, in 2022.
2022 Compared to 2021
Revenue for the year ended September 30, 2022 of $2,848,488 compared to $2,270,626 for the year ended September 30, 2021 increased 25% resulting from increased revenue at HBP and CPP of 45% and 9%, respectively. Hunter (purchased on January 24, 2022) contributed $246,474 of revenue in 2022. The organic revenue increase was 15%.
Gross profit for 2022 was $936,886 compared to $641,113 in 2021. The gross margin for 2022 and 2021 was 32.9% and 28.2%, respectively. In the years ended 2022 and 2021, gross profit included restructuring charges of $7,964 and $7,923, respectively. In the year ended 2022, gross profit also included amortization of $5,401 related to the fair value step-up of acquired inventory sold in connection with the Hunter Fan acquisition. Excluding these charges from both years, gross profit would have been $950,251 or 33.4% of revenue, compared to $649,036 or 28.6% in the prior year.
Selling, general and administrative expenses in 2022 of $608,926 increased 29% from $470,530 in 2021. The 2022 SG&A expenses included restructuring charges of $8,818, acquisition costs of $9,303, strategic review (retention and other) of $9,683, special dividend ESOP charges of $10,538, proxy expenses of $6,952. The 2021 SG&A expenses included restructuring charges of $13,495. Excluding these items from both periods, 2022 SG&A expenses would have been $563,632, or 19.8% of revenue compared to $457,035 or 20.1%, with the increase in expenses primarily due to the inclusion of expenses related to Hunter, which was acquired in January 2022, and increased distribution and shipping costs.
In connection with the preparation of our financial statements for the fiscal year ended September 30, 2022, Griffon performed its annual impairment testing of its goodwill and indefinite lived intangibles. Indicators of impairment were present due to decreases in comparable company market multiples for the CPP reporting units and increased interest rates, and the related impact on weighted average cost of capital rates. Accordingly, a quantitative assessment was performed, which resulted in non-cash, pre-tax impairment charges for goodwill and indefinite lived intangibles of $342,027 and $175,000. respectively, recorded in the fourth fiscal quarter of 2022.
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Interest expense in 2022 of $84,379 increased 34% compared to 2021 of $63,175, primarily as a result of increased debt related to the $800,000 seven year Term Loan B facility entered into in connection with the Hunter acquisition, of which Griffon repaid $300,000 aggregate principal amount in the third quarter of 2022.
Other income (expense) of $6,881 and $2,107 in 2022 and 2021, respectively, includes $305 and ($81), respectively, of net currency exchange transaction gains (losses) from receivables and payables held in non-functional currencies, $(225) and $283, respectively, of net gains (losses) on investments, and $4,256 and $907, respectively, of net periodic benefit plan income. Other income (expense) also includes rental income of $689 in 2022 and $624 in 2021. Additionally, it includes royalty income of $2,250 for the year ended September 30, 2022.
Griffon reported a loss before tax from continuing operations for 2022 of $270,879 compared to income before tax from continuing operations for 2021 of $109,955. The income tax provision in 2022 and 2021 translated to an effective income tax rate of 6.2% and 36.1%, respectively. The 2022 and 2021 tax rates included discrete and certain other tax provisions net, and other items that affect comparability, as listed below. Excluding the discrete and certain other tax provisions, net, and other items that affect comparability, as listed below, the effective income tax rates for 2022 and 2021 were 29.0% and 31.7%, respectively. These rates reflect the impact of tax reserves and changes in earnings mix between U.S. and non-U.S. operations.
Loss from continuing operations for 2022 was $287,715, or $5.57 per share, compared to income from continuing operations of $70,302, or $1.32 per share in 2021. The 2022 loss from continuing operations included the following:
– Restructuring charges of $16,782 ($12,479, net of tax, or $0.23 per share);
– Debt extinguishment, net $4,529 ($3,474, net of tax, or $0.06 per share);
– Acquisition costs of $9,303 ($8,149, net of tax, or $0.15 per share);
– Strategic review - retention and other of $9,683 ($7,280, net of tax, or $0.13 per share);
– Special dividend ESOP charges of $10,538 ($8,083, net of tax, or $0.15 per share);
– Proxy expenses of $6,952 ($5,359, net of tax, or $0.10 per share);
– Fair value step-up of acquired inventory sold of $5,401 ($4,012, net of tax, or $0.07 per share);
– Goodwill and intangible asset impairments of $517,027 ($454,753, net of tax, or $8.43 per share); and
– Discrete and certain other tax provision, net, of $3,913 or 0.07 per share.
The 2021 income from continuing operations included the following:
– Restructuring charges of $21,418 ($16,131, net of tax, or $0.30 per share); and
– Discrete and certain other tax provision, net, of $3,245 or $0.06 per share.
Excluding these items from both reporting periods, 2022 income from continuing operations would have been $219,786, or $4.07 per share compared to $89,678, or $1.68 per share, in 2021.
Griffon evaluates performance based on adjusted income from continuing operations and the related adjusted earnings per common share, which excludes non-cash impairment charges, restructuring charges, debt extinguishment, acquisition related expenses and discrete and certain other tax items, as well other items that may affect comparability, as applicable. Griffon believes this information is useful to investors for the same reason. The following table provides a reconciliation of income (loss) from continuing operations to adjusted income from continuing operations and earnings (loss) per share from continuing operations to adjusted earnings per share from continuing operations:
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GRIFFON CORPORATION AND SUBSIDIARIES
RECONCILIATION OF INCOME (LOSS) FROM CONTINUING OPERATIONS
TO ADJUSTED INCOME FROM CONTINUING OPERATIONS
(Unaudited)
For the Years Ended September 30,
2023 2022 2021
Income (loss) from continuing operations $ 77,617 $ (287,715) $ 70,302
Adjusting items:
Restructuring charges (1)
92,468 16,782 21,418
Gain on sale of buildings (12,655) — —
Debt extinguishment, net 437 4,529 —
Acquisition costs — 9,303 —
Strategic review - retention and other 20,225 9,683 —
Special dividend ESOP charges 15,494 10,538 —
Proxy expenses 2,685 6,952 —
Fair value step-up of acquired inventory sold — 5,401 —
Goodwill and intangible asset impairments 109,200 517,027 —
Tax impact of above items (2)
(57,925) (76,627) (5,287)
Discrete and other certain tax provision 175 3,913 3,245
Adjusted income from continuing operations $ 247,721 $ 219,786 $ 89,678
Earnings (loss) per common share from continuing operations $ 1.42 $ (5.57) $ 1.32
Adjusting items, net of tax:
Anti-dilutive share impact (3)
— 0.24 —
Restructuring charges (1)
1.26 0.23 0.30
Gain on sale of buildings (0.18) — —
Debt extinguishment, net 0.01 0.06 —
Acquisition costs — 0.15 —
Strategic review - retention and other 0.28 0.13 —
Special dividend ESOP charges 0.22 0.15 —
Proxy expenses 0.04 0.10 —
Fair value step-up of acquired inventory sold — 0.07 —
Goodwill and intangible asset impairments 1.49 8.43 —
Discrete and other certain tax (benefit) provision — 0.07 0.06
Adjusted earnings per share from continuing operations $ 4.54 4.07 $ 1.68
Weighted-average shares outstanding (in thousands) 52,111 51,672 53,369
Diluted weighted average shares outstanding (in thousands) (3)
54,612 53,966 53,369
Note: Due to rounding, the sum of earnings per common share and adjusting items, net of tax, may not equal adjusted earnings per common share.
(1) For the year ended September 30, 2023, restructuring charges relate to the CPP global sourcing expansion of which $82,028 is included in Cost of goods and services and $10,440 is included in SG&A.
(2) Tax impact for the above reconciling adjustments from GAAP to non-GAAP Income from continuing operations and the related EPS is determined by comparing the Company's tax provision, including the reconciling adjustments, to the tax provision excluding such adjustments.
(3) In fiscal 2022, loss from continuing operations is calculated using basic shares on the face of the income statement. Per share impact of using diluted shares represents the impact of converting from the basic shares used in calculating earnings per share from the loss from continuing operations to the diluted shares used in calculating earnings per share from the adjusted income from continuing operations.
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REPORTABLE SEGMENTS
Griffon evaluates performance and allocates resources based on each segment's adjusted EBITDA, a non-GAAP measure, defined as income before taxes from continuing operations, excluding interest income and expense, depreciation and amortization, unallocated amounts (mainly corporate overhead), strategic review charges, non-cash impairment charges, restructuring charges, and acquisition related expenses, as well as other items that may affect comparability, as applicable. Griffon believes this information is useful to investors for the same reason.
See the table provided in Note 19 - Business Segments for a reconciliation of adjusted EBITDA to income before taxes from continuing operations.
Home and Building Products
For the Years Ended September 30,
2023 2022 2021
Residential repair and remodel $ 757,088 $ 736,525 $ 516,995
Residential new construction 131,305 140,291 116,528
Residential 888,393 876,816 633,523
Commercial 700,112 630,066 407,585
Total Revenue $ 1,588,505 $ 1,506,882 $ 1,041,108
Adjusted EBITDA $ 510,876 32.2 % $ 412,738 27.4 % $ 181,015 17.4 %
Depreciation and amortization $ 15,066 $ 16,539 $ 17,370
2023 Compared to 2022
HBP revenue in 2023 increased $81,623, or 5%, compared to 2022, due to favorable commercial and residential pricing and mix of 8%, partially offset by a decline in volume of 3%. The volume decrease was primarily driven by residential, partially offset by increased commercial.
HBP Adjusted EBITDA in 2023 increased 24% to $510,876 compared to $412,738 in 2022. Adjusted EBITDA benefited from the increased revenue noted above and reduced material costs, partially offset by increased labor, transportation, advertising and marketing costs.
Segment depreciation and amortization decreased $1,473 from the comparable prior year period primarily due to fully depreciated assets.
2022 Compared to 2021
HBP revenue in 2022 increased $465,774, or 45%, compared to 2021, primarily due to favorable pricing and mix of 47% driven by both residential and commercial. Total volume decreased 2%, primarily due to labor and supply chain disruptions impacting residential deliveries, partially offset by increased commercial volume.
HBP Adjusted EBITDA in 2022 increased 128% to $412,738 compared to $181,015 in 2021. EBITDA benefited from the increased revenue noted above, partially offset by increased material, labor and transportation costs.
Segment depreciation and amortization decreased $831 in 2022 compared to 2021 primarily due to fully depreciated assets.
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Consumer and Professional Products
For the Years Ended September 30,
2023 2022 2021
United States $ 716,098 $ 858,956 $ 766,150
Europe 51,041 106,471 123,607
Canada 75,477 92,930 85,676
Australia 231,764 258,945 244,674
All other countries 22,298 24,304 9,411
Total Revenue $ 1,096,678 $ 1,341,606 $ 1,229,518
Adjusted EBITDA $ 50,343 4.6 % $ 99,308 7.4 % $ 115,673 9.4 %
Depreciation and amortization $ 49,811 $ 47,562 $ 34,433
2023 Compared to 2022
CPP revenue in 2023 decreased $244,928, or 18%, compared to 2022, primarily resulting from a 25% decrease in volume across all channels and geographies driven by reduced customer demand, elevated customer inventory levels, customer supplier diversification in the U.S., and an unfavorable foreign exchange impact of 2%. The volume decline was partially offset by $75,766 of Hunter revenue, or 6%, for the portion of the comparable year-to-date period in which Hunter was not owned by Griffon in the prior year, as well as price and mix of 3%. Hunter contributed $282,723 during 2023 compared to $246,474 in 2022.
CPP adjusted EBITDA in 2023 decreased 49% to $50,343 compared to $99,308 in 2022, primarily due to the unfavorable impact of the reduced volume noted above and its related impact on manufacturing and overhead absorption, partially offset by reduced material costs, discretionary spending and $7,679 of Hunter EBITDA for the portion of the comparable year-to-date period in which Hunter was not owned by Griffon in the prior year. EBITDA reflected an unfavorable foreign exchange impact of 2%. Hunter contributed $56,949 during 2023 compared to $43,579 in 2022.
Segment depreciation and amortization increased $2,249 compared to the prior year period, primarily due to depreciation and amortization on assets placed in service, including a full period of Hunter assets, partially offset by fully depreciated assets and the write-down of certain fixed assets at several manufacturing facilities in connection with CPP's restructuring activities.
On January 24, 2022, Griffon completed the acquisition of Hunter Fan Company (“Hunter”), a market leader in residential ceiling, commercial, and industrial fans for a contractual purchase price of $845,000. Hunter adds to Griffon's CPP segment, complementing and diversifying our portfolio of leading consumer brands and products.
2022 Compared to 2021
CPP revenue in 2022 increased $112,088, or 9%, compared to 2021, primarily resulting from a 20% or $246,474 contribution from the Hunter acquisition, and price and mix of 11%. These benefits were partially offset by a 20% reduction in volume primarily from reduced consumer demand and rebalancing of customer inventory levels in North America and the United Kingdom (U.K.), in part offset by Australia. Foreign exchange was an unfavorable impact of 2%.
CPP Adjusted EBITDA in 2022 decreased 14% to $99,308 compared to $115,673 in 2021. Excluding the Hunter contribution of $43,579, EBITDA of $55,729 decreased 52% primarily due to the unfavorable impact of the reduced volume noted above and the related impact on manufacturing absorption, and increased material, labor and transportation costs, partially offset by the benefits of price and mix. The year ended September 30, 2022 included increased demurrage and detention costs, primarily related to COVID-19 and global supply chain disruptions, of approximately $15,172 ($9,512 related to Hunter).
Segment depreciation and amortization increased $13,129 in 2022 compared to 2021 primarily due to depreciation for new assets placed in service and the Hunter assets acquired.
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On December 22, 2020, AMES acquired Quatro Design Pty Ltd (“Quatro”), a leading Australian manufacturer and supplier of glass fiber reinforced concrete landscaping products for residential, commercial, and public sector projects, for approximately AU$3,500.
CPP Global Sourcing Strategy Expansion and Restructuring Charges
On May 3, 2023, in response to changing market conditions, Griffon announced that its CPP segment will expand its global sourcing strategy to include long handled tools, material handling, and wood storage and organization product lines.
By transitioning these product lines to an asset-light structure, CPP’s operations will be better positioned to serve customers with a more flexible and cost-effective sourcing model that leverages supplier relationships around the world, while improving its competitive positioning in a post-pandemic marketplace. These actions will be essential to CPP achieving 15% EBITDA margins, while enhancing free cash flow through improved working capital and significantly lower capital expenditures.
The global sourcing strategy expansion is expected to be complete by the end of calendar 2024. Over that period, CPP expects to reduce its facility footprint by approximately 1.2 million square feet, or approximately 15%, and its headcount by approximately 600. The affected U.S. locations will include Camp Hill and Harrisburg, Pennsylvania; Grantsville, Maryland; Fairfield, Iowa; and four wood mills.
Implementation of this strategy over the duration of the project will result in charges of $120,000 to $130,000, including $50,000 to $55,000 of cash charges for employee retention and severance, operational transition, and facility and lease exit costs, and $70,000 to $75,000 of non-cash charges primarily related to asset write-downs. Capital investment in the range of $3,000 to $5,000 will also be required. These costs exclude cash proceeds from the sale of real estate and equipment, which are expected to largely offset the cash charges, and also exclude inefficiencies due to duplicative labor costs and absorption impacts during transition.
During the year ended September 30, 2023, CPP incurred pre-tax restructuring and related exit costs approximating $92,468. Cash charges totaled $33,536 and non-cash, asset-related charges totaled $58,932; the cash charges included $16,772 for one-time termination benefits and other personnel-related costs and $16,764 for facility exit and other related costs. Non-cash charges included a $21,832 impairment charge related to certain fixed assets at several manufacturing locations and $37,100 to adjust inventory to net realizable value.
Cash Charges Non-Cash Charges
Personnel related costs Facilities, exit costs and other Facilities, inventory and other Total Capital Investments
Anticipated Charges (1)
$ 19,500 $ 35,500 $ 75,000 $ 130,000 $ 5,000
Total 2023 restructuring charges (16,772) (16,764) (58,932) (92,468) —
Estimate to Complete $ 2,728 $ 18,736 $ 16,068 $ 37,532 $ 5,000
________________________
(1)The above table represents the upper range of anticipated charges during the duration of the project.
To date, the global sourcing expansion project remains on schedule and within budget. By the end of calendar 2023, operations at two manufacturing facilities and four wood mills, representing over one million square feet of space, will cease. The remaining affected AMES locations will be transitioned during calendar year 2024.
In November 2019, Griffon announced the development of a next-generation business platform for CPP to enhance the growth, efficiency, and competitiveness of its U.S. operations, and on November 12, 2020, Griffon announced that CPP was broadening this strategic initiative to include additional North American facilities, the AMES United Kingdom (U.K.) and Australia businesses, and a manufacturing facility in China. On April 28, 2022, Griffon announced a reduced scope and accelerated timeline for the initiative, which was completed in fiscal 2022. The cost to implement this new business platform included one-time charges of approximately $51,869 and capital investments of approximately $13,000, net of future proceeds from the sale of exited facilities. This initiative resulted in cash savings of approximately $25,000.
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Unallocated Amounts
For 2023, unallocated amounts, excluding depreciation, consisted primarily of corporate overhead costs, totaled $55,887 compared to $53,888 in 2022, with the increase primarily due to stock compensation expense.
For 2022, unallocated amounts, excluding depreciation, consisted primarily of corporate overhead costs, totaled $53,888 compared to $50,278 in 2021, with the increase primarily due to compensation and incentive costs.
Depreciation and Amortization
Depreciation and amortization of $65,445 in 2023 compared to $64,658 in 2022; the increase was primarily due to depreciation for new assets placed in service and a full year of depreciation and amortization related to the Hunter Fan acquisition.
Depreciation and amortization of $64,658 in 2022 compared to $52,302 in 2021; the increase was primarily due to depreciation for new assets placed in service and the Hunter assets acquired.
Comprehensive Income (Loss)
During 2023, total other comprehensive income (loss), net of taxes, of $12,728 included a gain of $8,447 from foreign currency translation adjustments primarily due to the strengthening of the Euro and British Pound, all in comparison to the U.S. Dollar; a $6,634 gain from pension and other post-retirement benefits, primarily associated with an increase in the assumed discount rate compared to 2022; and a $2,353 loss on cash flow hedges.
During 2022, total other comprehensive income (loss), net of taxes, of $(36,761) included a loss of $37,920 from foreign currency translation adjustments primarily due to the weakening of the Euro, British Pound, and Australian and Canadian Dollars, all in comparison to the U.S. Dollar; a $1,503 gain from pension and other post-retirement benefits, primarily associated with an increase in the assumed discount rate compared to 2021; and a $344 loss on cash flow hedges.
DISCONTINUED OPERATIONS
Defense Electronics
On September 27, 2021, Griffon announced it was exploring strategic alternatives for its Defense Electronics segment, which consisted of Telephonics Corporation ("Telephonics"), and on June 27, 2022, Griffon completed the sale of Telephonics for $330,000, excluding customary post-closing adjustments, primarily related to working capital. As a result, Griffon classified the results of operations of the Telephonics business as a discontinued operation in the Consolidated Statements of Operations for all periods presented and classified the related assets and liabilities associated with the discontinued operation as held for sale in the consolidated balance sheets. Accordingly, all references made to results and information in this Annual Report on Form 10-K are to Griffon's continuing operations unless noted otherwise.
At September 30, 2023 and 2022, Griffon's discontinued assets and liabilities included the Company's obligation of $4,596 and $8,846, respectively, in connection with the sale of Telephonics related to certain customary post-closing adjustments, primarily working capital and retention bonuses. At September 30, 2023 and 2022, Griffon’s liabilities for Installations Services and other discontinued operations primarily related to insurance claims, income taxes, product liability, warranty and environmental reserves, and totaled $7,202 and $8,072, respectively. See Note 8, Discontinued Operations.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Management assesses Griffon’s liquidity in terms of its ability to generate cash to fund its operating, investing and financing activities. Significant factors affecting liquidity include cash flows from operating activities, capital expenditures, acquisitions, dispositions, bank lines of credit and the ability to attract long-term capital under satisfactory terms. Griffon 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.
As of September 30, 2023, the amount of cash, cash equivalents and marketable securities held by non-U.S. subsidiaries was $45,500. Our intent is to permanently reinvest these funds, except in limited circumstances, outside the U.S., and we do not currently anticipate that we will need funds generated from foreign operations to fund our domestic operations. The Company
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may repatriate cash from its non-U.S. subsidiaries if the Company determines that it is beneficial to the company and tax efficient. The Company has accrued a deferred tax liability for withholding taxes on previously taxed earnings and profit (PTEP) which are not considered permanently reinvested. In the event we determine that additional funds from non-U.S. operations are needed to fund operations in the U.S., we will be required to accrue and pay U.S. taxes to repatriate these additional funds.
Griffon's primary sources of liquidity are cash flows generated from operations, cash on hand and our August 2028 five-year secured $500,000 revolving credit facility ("Revolver"). During the fiscal year ended September 30, 2023, the Company generated $431,765 of net cash from continuing operating activities and, as of September 30, 2023, the Company had $436,593 available, subject to certain loan covenants, for borrowing under the Revolver. The Company had cash and cash equivalents of $102,889 at September 30, 2023.
The table below provides a summary of the Consolidated Statements of Cash Flows for the periods indicated.
Cash Flows from Continuing Operations Years Ended September 30,
(in thousands) 2023 2022
Net Cash Flows Provided By (Used In):
Operating activities $ 431,765 $ 59,240
Investing activities (45,211) (583,227)
Financing activities (400,162) 393,345
Cash provided by operating activities from continuing operations for 2023 was $431,765 compared to $59,240 in 2022, an increase of $372,525. The increase was due to increased cash generated from operations at HBP and a decrease in working capital across all businesses, primarily inventory and accounts receivable.
Cash flows from investing activities from continuing operations is primarily comprised of capital expenditures and business acquisitions as well as proceeds from the sale of businesses, investments and property, plant and equipment. During 2023, Griffon used $45,211 in investing activities from continuing operations compared to $583,227 in 2022. During 2023, cash flows used in investing activities from continuing operations primarily consisted of a working capital adjustment payment of $2,568 related to the sale of Telephonics and capital expenditures of $63,604 that included the purchase of two buildings for approximately $29,207, partially offset by proceeds totaling $20,961 from the sale of two buildings. During 2022, cash flows used in investing activities from continuing operations primarily consisted of a $851,464 payment to acquire Hunter on January 24, 2022 and capital expenditures of $42,488, partially offset by proceeds from the sale of Telephonics on June 27, 2022 totaling $295,712 and proceeds from the sale of investments totaling $14,923.
Cash used in financing activities from continuing operations was $400,162 in 2023 compared to cash provided by financing activities of $393,345 in 2022. During 2023, cash flows used in financing activities from continuing operations primarily consisted of net repayments of long-term debt of $99,223, primarily related to the Revolver, the payoff of AMES UK loans and a prepayment of $25,000 aggregate principal amount of the Term Loan B; the purchase of treasury shares in connection with the board authorized share repurchase program and to satisfy withholding taxes on vesting of restricted stock totaling $163,970; and the payment of dividends of $133,814. During 2022, cash flows provided by financing activities from continuing operations primarily consisted of the payment of dividends of $126,677, purchase of treasury shares to satisfy withholding taxes on vesting of restricted stock of $10,886 and net proceeds from long-term debt of $547,715. During 2022, Griffon prepaid $300,000 aggregate principal amount of the Term Loan B, which permanently reduced the outstanding balance. In connection with the prepayment of the Term Loan B Griffon recognized a $6,296 charge related to the write-off of capitalized debt issuance costs. In addition, during 2022, Griffon purchased $25,225 of 2028 Senior Notes in the open market at a weighted average discount of 91.82% of par, or $23,161. In connection with these purchases, Griffon recognized a $1,767 net gain on the early extinguishment of debt. At September 30, 2023, there were $50,445 in outstanding borrowings under the Credit Agreement, compared to $97,328 in outstanding borrowings at the same date in 2022.
During 2023, the Board of Directors approved two quarterly cash dividends each for $0.10 per share, and two quarterly cash dividends of $0.125 per share, totaling $0.45. Additionally, on April 19, 2023, the Board of Directors declared a special cash dividend of $2.00 per share, paid on May 19, 2023, to shareholders of record as of the close of business on May 9, 2023. 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 14, 2023, the Board of Directors declared a cash dividend of $0.15 per share, payable on December 14, 2023, to shareholders of record as of the close of business on November 28, 2023.
During 2023, 365,823 shares, with a market value of $12,882, or $35.21 per share were withheld to settle employee taxes due upon the vesting of restricted stock and were added to treasury stock. During 2023, an additional 3,066 shares, with a market
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value of $108, or $35.31 per share, were withheld from common stock issued upon the vesting of restricted stock units to settle employee taxes due upon vesting.
On April 19, 2023, the Company's Board of Directors approved a $200,000 increase to Griffon's share repurchase program to $257,955 from the prior unused board authorizations from August 3, 2016 and August 1, 2018 of $57,955. Under the authorized share repurchase program, the Company may, from time to time, purchase shares of its common stock in the open market, including pursuant to a 10b5-1 plan, pursuant to an accelerated share repurchase program or issuer tender offer, or in privately negotiated transactions. During 2023, Griffon purchased 4,142,794 shares of common stock under these repurchase programs, for a total of $150,772, or $36.39 per share, excluding excise taxes. As of September 30, 2023, $107,183 remains under these Board authorized repurchase programs. In connection with the share repurchases, excise taxes totaling $1,301 was accrued as of September 30, 2023.
Subsequent to September 30, 2023 and through November 14, 2023, Griffon purchased 1,127,062 shares of its common stock for a total of $44,980, or $39.91 per share under Board authorized share repurchase programs. On November 15, 2023, Griffon announced a $200,000 increase to its share repurchase program which on November 15, 2023 had $262,203 available given effect to all repurchases through November 14, 2023.
During 2023, cash used in discontinued operations from operating activities of $2,994 primarily related to the settling of certain liabilities, primarily stay bonuses, associated with the disposition of Telephonics, and environmental and other costs related to other discontinued businesses. During 2022, cash provided by discontinued operations from operating activities of $10,198 primarily related to Telephonics operations and the payment of income taxes, stay bonuses and transaction related expenses, as well as payments associated with the settling of certain environmental and other liabilities related to other discontinued businesses. During 2022, cash used by discontinued operations from investing activities of $2,627 primarily related to Telephonics capital expenditures.
Debt
At September 30, 2023 and 2022, Griffon had debt, net of cash and equivalents, as follows:
Cash and Equivalents and Debt At September 30, At September 30,
(in thousands) 2023 2022
Cash and equivalents $ 102,889 $ 120,184
Notes payables and current portion of long-term debt $ 9,625 $ 12,653
Long-term debt, net of current maturities 1,459,904 1,560,998
Debt discount and issuance costs 20,283 21,909
Total debt 1,489,812 1,595,560
Debt, net of cash and equivalents $ 1,386,923 $ 1,475,376
During 2020, Griffon issued, at par $1,000,000 of 5.75% Senior Notes due 2028 (the "2028 Senior Notes"). Proceeds from the 2028 Senior Notes were used to redeem $1,000,000 of 5.25% Senior Notes due 2022. In connection with the issuance and exchange of the 2028 Senior Notes, Griffon capitalized $16,448 of underwriting fees and other expenses incurred, which is being amortized over the term of such notes.
During 2022, Griffon purchased $25,225 of 2028 Senior Notes in the open market at a weighted average discount of 91.82% of par, or $23,161. In connection with these purchases, Griffon recognized a $1,767 net gain on the early extinguishment of debt comprised of $2,064 of face value in excess of purchase price, offset by $297 related to the write-off of underwriting fees and other expenses. As of September 30, 2023, outstanding Senior Notes due totaled $974,775; interest is payable semi-annually on March 1 and September 1.
The 2028 Senior Notes are senior unsecured obligations of Griffon guaranteed by certain domestic subsidiaries, and subject to certain covenants, limitations and restrictions. The 2028 Senior Notes were registered under the Securities Act of 1933, as amended (the "Securities Act") via an exchange offer. The fair value of the 2028 Senior Notes approximated $882,171 on September 30, 2023 based upon quoted market prices (level 1 inputs). At September 30, 2023, $8,920 of underwriting fees and other expenses incurred remained to be amortized.
On August 1, 2023, Griffon amended and restated its revolving credit agreement (as amended, "Credit Agreement"). The amendment increased the maximum borrowing availability on its revolving credit facility from $400,000 to $500,000 (the "Revolver") and extended the maturity date of the Revolver from March 22, 2025 to August 1, 2028. In the event the 2028
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Senior Notes are not repaid, refinanced, or replaced prior to December 1, 2027, the Revolver will mature on December 1, 2027. The amendment also modified certain other provisions of the Credit Agreement, including increasing the letter of credit sub-facility from $100,000 to $125,000 and increasing the customary accordion feature from a minimum of $375,000 to a minimum of $500,000. Additionally, the Revolver includes a multi-currency sub-facility of $200,000.
Borrowings under the Revolver may be repaid and re-borrowed at any time. Interest is payable on borrowings at either a Secured Overnight Financing Rate ("SOFR"), Sterling Overnight Index Average ("SONIA") or base rate benchmark rate, plus an applicable margin, which adjusts based on financial performance. Griffon's SOFR loans accrue interest at Term SOFR plus a credit adjustment spread and a margin of 2.00% (7.42% at September 30, 2023), SONIA loans accrue interest at SONIA Base Rate plus a credit adjustment spread and a margin of 2.00% (7.22% at September 30, 2023) and base rate loans accrue interest at prime rate plus a margin of 1.00% (9.50% at September 30, 2023).
At September 30, 2023, under the Credit Agreement, there were $50,445 in outstanding borrowings; outstanding standby letters of credit were $12,962; and $436,593 was available, subject to certain loan covenants, for borrowing at that date.
On January 24, 2022, Griffon amended and restated its Credit Agreement to provide for a new $800,000 Term Loan B facility, due January 24, 2029, in addition to the Revolver, and replaced LIBOR with SOFR. The Term Loan B accrues interest at the Term SOFR rate plus a credit adjustment spread with a floor of 0.50%, and a spread of 2.25% (7.79% as of September 30, 2023). The Original Issue Discount for the Term Loan B was 99.75%. In connection with this amendment, Griffon capitalized $15,466 of underwriting fees and other expenses incurred, which are being amortized over the term of the loan.
The Term Loan B facility requires nominal quarterly principal payments of $2,000, potential additional annual principal payments based on a percentage of excess cash flow and secured leverage thresholds starting with the fiscal year ended September 30, 2023; and a final balloon payment due at maturity. At September 30, 2023, Griffon's secured leverage remained below the threshold set forth in the Credit Agreement that would, if exceeded, require Griffon to make an additional payment, and therefore no additional annual principal payment was required. Term Loan B borrowings may generally be repaid without penalty but may not be re-borrowed. During 2023 and 2022, Griffon prepaid $25,000 and $300,000, respectively, of the aggregate principal amount of the Term Loan B, which permanently reduced the outstanding balance, and recognized a $437 and $6,296 charge on the prepayment of debt in 2023 and 2022, respectively. The charges were comprised of write-offs of underwriting fees and other expenses of $386 and $5,575 for 2023 and 2022, respectively, and the original issue discount of $51 and $721 for 2023 and 2022, respectively. The Term Loan B facility is subject to the same affirmative and negative covenants that apply to the Revolver, but is not subject to any financial maintenance covenants. Term Loan B borrowings are secured by the same collateral as the Revolver. The fair value of the Term Loan B facility approximated $461,843 on September 30, 2023 based upon quoted market prices (level 1 inputs). At September 30, 2023, $7,039 of underwriting fees and other expenses incurred remained to be amortized. At September 30, 2023, $463,000 of the Term Loan B was outstanding.
The Revolver 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. Both the Revolver and Term Loan B 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 Griffon’s material, first-tier foreign subsidiaries.
On September 28, 2023, the Company closed on the exercise of its lease purchase option, as permitted under the lease agreement, to acquire ownership of the manufacturing facility located in Ocala, Florida for a cash purchase price of $23,207. The Ocala lease had a maturity date in 2025 and bore interest at a fixed rate of approximately 5.6%. As a result of exercising the purchase option, the Company no longer has any future lease obligations related to this real estate. During 2022, the financing lease on the Troy, Ohio location expired. The Troy lease bore interest at a rate of approximately 5.0%, was secured by a mortgage on the real estate, which was guaranteed by Griffon, and had a one dollar buyout at the end of the lease. Griffon exercised the one dollar buyout option in November 2021. Refer to Note 22- Leases for further details.
In November 2012, Garant G.P. (“Garant”), a Griffon wholly owned subsidiary, entered into a CAD 15,000 ($11,117 as of September 30, 2023) revolving credit facility. Effective in December 2022, the facility was amended to replace LIBOR (USD) with the Canadian Dollar Offer Rate ("CDOR"). The facility accrues interest at CDOR or the Bankers Acceptance Rate (CDN) plus 1.3% per annum (6.69% using CDOR and 6.43% using Bankers Acceptance Rate CDN as of September 30, 2023). The revolving facility matures in December 2023, but is renewable upon mutual agreement with the lender. Garant is required to maintain a certain minimum equity. At September 30, 2023, there were no outstanding borrowings under the revolving credit facility with CAD 15,000 ($11,117 as of September 30, 2023) available.
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During 2022, Griffon Australia Holdings Pty Ltd and its Australian subsidiaries (collectively, "Griffon Australia") amended its AUD 18,375 term loan, AUD 20,000 revolver and AUD 15,000 receivable purchase facility agreement that was entered into in July 2016 and further amended in fiscal 2020. Griffon Australia paid off the term loan in the amount of AUD 9,625 and canceled the AUD 20,000 revolver. In March 2023 the existing receivable purchase facility was renewed and increased from AUD 15,000 to AUD 30,000 ($19,188 as of September 30, 2023). The receivable purchase facility matures in March 2024, but is renewable upon mutual agreement with the lender. The receivable purchase facility accrues interest at BBSY (Bank Bill Swap Rate) plus 1.25% per annum (5.33% at September 30, 2023). At September 30, 2023, there was no balance outstanding under the receivable purchase facility with AUD 30,000 ($19,188 as of September 30, 2023) available. The receivable purchase facility is secured by substantially all of the assets of Griffon Australia and its subsidiaries. Griffon Australia is required to maintain a certain minimum equity level.
In July 2018, the AMES Companies UK Ltd and its subsidiaries (collectively, "Ames UK") entered into a GBP 14,000 term loan, GBP 4,000 mortgage loan and GBP 5,000 revolver, which matured in July 2023. Prior to maturity, on June 30, 2023, AMES UK repaid and cancelled the GBP 14,000 term loan and GBP 4,000 mortgage loan. The payoff amounts were GBP 7,525 ($9,543) and GBP 2,451 ($3,108), respectively. Upon maturity in July 2023, the GBP 5,000 revolver had no balance and was not renewed.
Other debt primarily consists of a loan with the Pennsylvania Industrial Development Authority, with the balance consisting of finance leases.
At September 30, 2023, Griffon and its subsidiaries were in compliance with the terms and covenants of its credit and loan agreements. Net Debt to EBITDA (Leverage), as calculated in accordance with the definition in the Credit Agreement, was 2.6x at September 30, 2023.
Capital Resource Requirements
On May 3, 2023, in response to changing market conditions, Griffon announced that its CPP segment will expand its global sourcing strategy to include long handled tools, material handling, and wood storage and organization product lines. By transitioning these product lines to an asset-light structure, CPP’s operations will be better positioned to serve customers with a more flexible and cost-effective sourcing model that leverages supplier relationships around the world, while improving its competitive positioning in a post-pandemic marketplace. These actions will be essential to CPP achieving 15% EBITDA margins, while enhancing free cash flow through improved working capital and significantly lower capital expenditures. For additional information, see the CPP segment discussion.
Griffon's debt requirements include principal on our outstanding debt, most notably our Senior Notes totaling $974,775 payable in 2028 and related annual interest payments of approximately $56,050, a Term Loan B facility maturing in 2029 with an outstanding balance of $463,000 on September 30, 2023, and the Revolver, which matures in 2028 and has an outstanding balance of $50,445. The Term Loan B accrues interest at the Term SOFR rate plus a credit adjustment spread with a floor of 0.50%, and a spread of 2.25% (7.79% as of September 30, 2023). Additionally, the Term Loan B facility requires quarterly payments of $2,000 and a balloon payment due at maturity. For the Revolver, interest is payable on borrowings at either a SOFR, SONIA or base rate benchmark rate, plus an applicable margin, which adjusts based on financial performance. Griffon's SOFR loans accrue interest at Term SOFR plus a credit adjustment spread and a margin of 2.00% (7.42% at September 30, 2023), SONIA loans accrue interest at SONIA Base Rate plus a credit adjustment spread and a margin of 2.00% (7.22% at September 30, 2023), and base rate loans accrue interest at prime rate plus a margin of 1.00% (9.50% at September 30, 2023).
Griffon's purchase obligations, which are generally for the purchase of goods and services in the ordinary course of business over the next twelve months is approximately $160,539. Griffon uses blanket purchase orders to communicate expected requirements to certain vendors. Purchase obligations reflect those purchase orders in which the commitment is considered to be firm.
Griffon rents real property and equipment under operating leases expiring at various dates. Operating lease obligations over the next twelve months is approximately $41,955. Refer to Note 22 - Leases.
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 2023, Home Depot represented 12% of Griffon’s consolidated revenue, 9% of HBP's revenue and 15% of CPP's revenue.
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No other customer exceeded 10% or more 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.
SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
Griffon’s Senior Notes are fully and unconditionally guaranteed, jointly and severally by Clopay Corporation, The AMES Companies, Inc., Clopay AMES Holding Corp., ClosetMaid LLC, AMES Hunter Holdings Corporation, Hunter Fan Company, CornellCookson, LLC and Cornell Real Estate Holdings, LLC, all of which are indirectly 100% owned by Griffon. In accordance with Rule 3-10 of Regulation S-X promulgated under the Securities Act, presented below are summarized financial information of the Parent (Griffon) subsidiaries and the Guarantor subsidiaries as of September 30, 2023 and September 30, 2022 and for the years ended September 30, 2023 and 2022. All intercompany balances and transactions between subsidiaries under Parent and subsidiaries under the Guarantor have been eliminated. The information presented below excludes eliminations necessary to arrive at the information on a consolidated basis. The summarized information excludes financial information of the Non-Guarantors, including earnings from and investments in these entities. The financial information may not necessarily be indicative of the results of operations or financial position of the guarantor companies or non-guarantor companies had they operated as independent entities. The guarantor companies and the non-guarantor companies include the consolidated financial results of their wholly-owned subsidiaries accounted for under the equity method.
The indentures relating to the Senior Notes (the “Indentures”) contain terms providing that, under certain limited circumstances, a guarantor will be released from its obligations to guarantee the Senior Notes. These circumstances include (i) a sale of at least a majority of the stock, or all or substantially all the assets, of the subsidiary guarantor as permitted by the Indentures; (ii) a public equity offering of a subsidiary guarantor that qualifies as a “Minority Business” as defined in the Indentures (generally, a business the EBITDA of which constitutes less than 50% of the segment adjusted EBITDA of the Company for the most recently ended four fiscal quarters), and that meets certain other specified conditions as set forth in the Indentures; (iii) the designation of a guarantor as an “unrestricted subsidiary” as defined in the Indentures, in compliance with the terms of the Indentures; (iv) Griffon exercising its right to defease the Senior Notes, or to otherwise discharge its obligations under the Indentures, in each case in accordance with the terms of the Indentures; and (v) upon obtaining the requisite consent of the holders of the Senior Notes.
Summarized Statements of Operations and Comprehensive Income (Loss)
For the Year Ended For the Year Ended
September 30, 2023 September 30, 2022
Parent Company Guarantor Companies Parent Company Guarantor Companies
Net sales $ — $ 2,190,636 $ — $ 2,301,215
Gross profit $ — $ 800,477 $ — $ 752,982
Income (loss) from operations $ (42,948) $ 228,346 $ (43,492) $ (127,982)
Equity in earnings of Guarantor subsidiaries $ 149,981 $ — $ (184,618) $ —
Net income (loss) $ (85,770) $ 149,981 $ (74,423) $ (184,618)
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Summarized Balance Sheet Information
For the Year Ended For the Year Ended
September 30, 2023 September 30, 2022
Parent Company Guarantor Companies Parent Company Guarantor Companies
Current assets $ 51,701 $ 707,929 $ 49,238 $ 915,329
Non-current assets 13,954 1,317,575 15,571 1,393,864
Total assets $ 65,655 $ 2,025,504 $ 64,809 $ 2,309,193
Current liabilities $ 76,460 $ 226,532 $ 78,635 $ 275,165
Long-term debt 1,459,952 — 1,538,235 12,886
Other liabilities (9,994) 271,985 4,331 322,224
Total liabilities $ 1,526,418 $ 498,517 $ 1,621,201 $ 610,275
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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 most significant areas involving management estimates are described below.
Goodwill, Long-Lived Intangible and Tangible Assets, and Impairment
As of September 30, 2023, the balance of goodwill on our balance sheet is $327,864 and indefinite-lived intangibles representing our trademarks is $293,447. We test goodwill and indefinite-lived intangibles for impairment at least annually in the fourth quarter, and more frequently whenever events or circumstances change that would more likely than not reduce the fair value below the carrying amount. Such events or changes in circumstance include significant deterioration in overall economic conditions, changes in the business climate in which our reporting units operate, a decline in our market capitalization, operating performance indicators, when some portion of a reporting unit is disposed of or classified as held for sale, or when a change in the composition of reporting units occurs for other reasons, such as a change in operating segments. To test goodwill and indefinite-lived intangible assets for impairment, we may perform both a qualitative assessment and quantitative assessment. If we elect to perform a qualitative assessment, we consider operating results as well as circumstances impacting the operations or cash flows of the reporting unit or indefinite-lived intangible assets, including macroeconomic conditions, industry and market conditions and reporting unit events and circumstances. For the quantitative test, the assessment is based on both an income-based and market-based valuation approach. If it is determined that an impairment exists, we recognize an impairment loss for the amount by which the carrying amount of the reporting unit or indefinite-lived intangible asset exceeds its estimated fair value.
Under the income-based approach, we determine the fair value of a reporting unit by using discounted cash flows that require significant judgement and assumptions, such as our best estimate of future revenue, operating costs, cash flows, expected long-term cash flow growth rates (terminal value growth rates), and risk adjusted discount rates. Under the market-based approach, we determine the fair value of a reporting unit by applying those multiples exhibited by comparable publicly traded companies and those multiples paid in acquisitions of peer company transactions to the financial results of the reporting units. We then compare the fair value estimates resulting from the income and market-based valuations to the sum of Griffon’s market capitalization and net debt position to assess the reasonableness of the implied control premium. We determine the fair value of indefinite-lived intangible assets by using the relief from royalty method, which estimates the value of a trademark by discounting to present value the hypothetical royalty payments that are saved by owning the asset rather than licensing it.
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During the fiscal year ended September 30, 2023, the Company performed a qualitative assessment of the HBP reporting unit goodwill and determined that indicators that the fair value was less than the carrying amount were not present. With respect to CPP's reporting units goodwill, the Company performed a quantitative assessment using both an income-based and market-based approach, which did not result in an impairment. Additionally, the Company compared the estimated fair values of the CPP indefinite-lived intangibles to their carrying amounts, which resulted in pre-tax noncash impairment charges of $109,200 to the gross carrying amount of our trademarks, of which $9,200 was recognized in the fourth quarter and $100,000 was recognized in the second quarter. Indicators of impairment were not present for the HBP indefinite-lived intangibles during 2023. A 100-basis point increase in the discount rate would have resulted in an additional impairment charge to our indefinite-lived intangible assets of $4,600 and a goodwill impairment of $19,400.
For the fiscal year ended September 30, 2022, we performed a qualitative assessment of the HBP reporting unit and determined that indicators that the fair value was less than the carrying amount were not present. However, indicators of impairment were present for our CPP reporting units driven by a decrease in comparable company market multiples and an increase in interest rates and the related impact on weighted average cost of capital rates. As such, in connection with the preparation of our financial statements for the fiscal year ended September 30, 2022, we performed a quantitative assessment of the CPP reporting units using both an income-based and market-based approach. The impairment tests resulted in a pre-tax, non-cash goodwill impairment charge of $342,027. Further, we compared the estimated fair values of the CPP indefinite lived intangibles to their carrying amounts which resulted in a pre-tax, non-cash impairment charge of $175,000. Indicators of impairment were not present for the HBP indefinite-lived intangibles during 2022.
Long-lived 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. We assess the recoverability of the carrying amount of our long-lived assets, including amortizable intangible assets, whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. We evaluate the recoverability of such assets based on the expectations of undiscounted cash flows attributable to the asset group. If the sum of the expected future undiscounted cash flows are less than the carrying amount of the asset group, a loss would be recognized for the difference between the fair value and the carrying amount. As of September 30, 2023 and 2022, we tested long-lived intangible and tangible assets for impairment by comparing estimated future undiscounted cash flows of each CPP asset group to the carrying amount of the asset group and determined that an impairment did not exist. No event or indicator of impairment existed for the HBP assets groups as of September 30, 2023.
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.
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 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
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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 may require the use of cash in the period of resolution. The liability for unrecognized tax benefits is generally presented as non-current. 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.