GFF

Business Context and Reporting Period

Company: Griffon Corporation
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2009 (Second Quarter of Fiscal 2009)
Business Overview: Griffon operates three primary segments: Electronic Information and Communication Systems, Garage Doors, and Specialty Plastic Films. The Company exited its Installation Services segment in the prior fiscal year, reporting those results as discontinued operations.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 7.5% year-over-year for the quarter and 2.5% for the six-month period, driven primarily by the Garage Doors and Specialty Plastic Films segments due to weak housing markets and lower resin volumes.
• Profitability Improvement: Despite lower sales, the loss from continuing operations narrowed significantly compared to the prior year. The six-month period turned profitable ($3.4M net income) compared to a $22.7M loss in the prior year, largely due to the absence of significant restructuring charges and the exit of the loss-making Installation Services segment.
• Debt Reduction: The Company repurchased $35.5 million face value of its 4% convertible notes in October 2008 for $28.4 million, recording a $6.7 million pre-tax gain. Total long-term debt decreased by approximately $38 million compared to the prior fiscal year-end.
• Segment Performance:
  • Electronic Information: Core business sales grew 14%, offset by the winding down of prior-year contracts.
  • Garage Doors: Reported an operating loss of $11.8M for the quarter, impacted by reduced volume and high steel costs.
  • Specialty Plastic Films: Operating income improved 51% year-over-year due to lower resin costs, despite a 12.6% sales decline.

Outlook, Risks, and Management Commentary

• Outlook: Management expects the Garage Doors segment to remain challenged by the housing market downturn. The Electronic Information segment anticipates a run rate of approximately $100 million per year from new MH-60 program contracts. Specialty Plastic Films expects challenges with volume but optimism regarding cost reduction programs.
• Liquidity: The Company maintains strong liquidity with $274.3 million in cash and $80.6 million in available borrowing capacity under revolving credit facilities. Management believes cash flows and existing credit lines are adequate for working capital and debt repayment.
• Risks:
  • Customer Concentration: Procter & Gamble accounted for 50% of Specialty Plastic Films sales. The Home Depot and Menards are significant Garage Doors customers.
  • Commodity Prices: Volatility in steel and resin prices impacts margins, though the Company has passed some costs to customers.
  • Convertible Notes: The Company has $94.5 million of convertible notes outstanding. Noteholders may require repurchase in 2010 if the stock price is below the conversion price.
• Unusual Items: The $6.7 million gain from debt extinguishment in the first quarter of fiscal 2009 was a non-cash item that significantly impacted net income. A similar gain of approximately $0.7 million is expected in the third quarter from a subsequent note repurchase in April 2009.

Investor Verification Checklist

• Convertible Note Repurchases: Verify the timing and accounting treatment of the April 2009 note repurchase and the expected $0.7 million gain in Q3.
• Garage Doors Segment Loss: Monitor the trajectory of the Garage Doors operating loss and the effectiveness of cost-cutting initiatives against the shrinking housing market.
• Customer Concentration: Assess the risk exposure related to Procter & Gamble (50% of Specialty Plastic Films sales) and potential order fluctuations.
• Debt Covenants: Confirm continued compliance with the Clopay and Telephonics credit facility covenants, particularly regarding dividend restrictions and availability ratios.
• Discontinued Operations: Verify the finalization of the Installation Services exit and the estimated $3-4 million in remaining cash outflows for disposal liabilities.