GFF

Business Context and Reporting Period

Company: Griffon Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended June 30, 2008
Business Overview: Griffon operates three primary segments: Electronic Information and Communication Systems, Garage Doors, and Specialty Plastic Films. The company is in the process of exiting its Installation Services segment, which is reported as discontinued operations.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales from continuing operations decreased 4.4% in the quarter and 11.3% year-to-date compared to 2007. The Electronic Information segment saw a 26.8% quarterly drop due to the completion of major contracts with Syracuse Research Corporation (SRC). The Garage Doors segment declined 7.6% due to the housing market downturn.
• Discontinued Operations Impact: The company recorded a significant loss from discontinued operations of $19.2 million for the quarter and $39.3 million for the nine months. This includes a $23.3 million loss on disposal and an $11.4 million impairment charge related to the exit of the Installation Services segment.
• Profitability: While continuing operations generated a profit of $9.4 million for the quarter (up from $6.1 million in 2007), the net result was a loss due to discontinued operations. Specialty Plastic Films was the only segment to show operating profit growth, increasing 92.7% in the quarter.
• Tax Benefit: The effective tax rate for the quarter was a 48.0% benefit, driven largely by a $5.8 million reversal of uncertain tax position reserves (FIN 48), compared to a tax provision in the prior year.

Guidance, Outlook, and Risks

• Segment Outlook: Management anticipates continued pressure on the Garage Doors segment due to the weak housing market and consumer credit conditions. The Electronic Information segment expects growth in new programs to offset the loss of SRC contracts.
• Discontinued Operations Exit: The company plans to exit substantially all Installation Services activities in 2008. Two remaining units (Phoenix and Las Vegas) are under agreement to be sold in the fourth quarter. Additional disposal costs of up to $17 million are estimated for the remainder of the fiscal year.
• Liquidity and Capital: In August 2008, the Board authorized a rights offering of up to 20 million shares at $8.50 per share, expected to raise $170–$255 million. The company also secured two new $100 million revolving credit facilities in March and June 2008 to refinance existing debt.
• Risks: Key risks include the duration and severity of the housing market downturn, the ability to successfully exit the Installation Services segment within the estimated cost range, and the success of the rights offering.

Investor Verification Checklist

• Discontinued Operations Costs: Verify the final disposal costs for the Installation Services segment against the estimated $17 million remaining exposure.
• Garage Doors Segment: Monitor the impact of the housing market on repair and renovate business volumes, which management notes is difficult to gauge.
• Rights Offering: Confirm the subscription rate and total capital raised from the August 2008 rights offering.
• Debt Covenants: Review compliance with financial covenants in the new $100 million credit facilities for Clopay and Telephonics subsidiaries.
• Tax Reserves: Assess the sustainability of the tax benefit derived from the $5.8 million reserve reversal and the potential impact of the $1.0 million of unrecognized tax benefits that may be recognized in the next 12 months.