Overview 

Griffon Corp 4% converts 2023 @ 85 (15% YTP) (put to Griffon July 18, 2010).  Griffon is a mini-conglomerate with a collection of profitable businesses and more cash than debt thanks to a rights offering conducted this past summer.  Griffon has been repurchasing the converts in the open market and they are almost certainly money good.  A buyer at these prices can earn 15% a year for the next 1 ½ years until the put date, with an option on a higher IRR if the convert market continues to stabilize and these trade up sooner than the put date. 

Capital Structure

-         60m shares outstanding

-         GFF: $8.35 – equity capitalization $500 million

-         Debt: $200m total debt includes $100m convert and $100m bank debt and cap leases

-         Cash: $285m

-         Net Cash: $85m

Griffon had been under pressure for years to sell various divisions in order to maximize shareholder value.  The former CEO, Harvey Blau, was reluctant to break up the company and he was ultimately replaced this past year by a new CEO, Ron Kramer.  With the collapse of the capital markets and the subsequent decline in asset values, the opportunity to sell the company in pieces was closed.  Instead, the company announced a substantial equity raise via a $246m rights offering backstopped by Goldman Sachs.  While the company was relatively tight-lipped about the purpose of the offering, it seemed at the time that they were perhaps looking ahead a couple of years at the put date on the convert and wanted to avoid a difficult refinancing.  The official line is that they were raising money for “general corporate purposes” and with Goldman as their new largest shareholder would be open to creating a new business line via acquisition.   However, management has recently reiterated that cash is king and they are focused on managing the convert issue, meaning that they are unlikely to use their existing cash hoard to make a significant purchase. 

While the rights offering was dilutive (and upsetting) to existing shareholders, it should be highly reassuring to the convertible bond holders.   This issue, like many other converts, has been sold indiscriminately by funds forced to liquidate their convert positions.  Griffon management has been eager to take advantage of the bond discount; on the fourth quarter (Sept 30 FY) conference call, the company announced that it had repurchased $35.5m bonds at 80 in the open market and would consider additional bond repurchases. 

Business Segments
 

In aggregate, the collection of businesses at Griffon continues to hold up reasonably well.  Griffon generated $24m of EBITDA in Q4 and $68m EBITDA on the year.  This past fiscal year, the company generated $85m in CFOP against $53m in CAPX and Kramer has suggested that CAPX will be lowered to between $30m and $40m in 2009.

The most valuable segment at Griffon is their “Telephonics” business -- a defense electronics subcontractor.  It generated $39.5m in 2008 segment EBITDA (before allocated G&A) and is enjoying rapid organic growth.  The segment appears to have declined from the previous year, but that is because of the conclusion of a very large short-term contract to supply anti-IED devices to the military in Iraq.  The core of the business consists of a host of radar, surveillance and communications systems that equip a range of airplanes and helicopters.  Excluding the impact of the anti-IED contract, the core business grew 31% in Q4. 

The second most important segment is the “plastic film business” which primarily consists of manufacturing diaper backs.  This segment generated $43.3m in EBITDA (before allocated G&A) up 13% from the previous year.  The diaper back business is a relatively steady if unspectacular one; there is large customer concentration, but only one real competitor (Tredegar) and they have multi-year contracts with lagged commodity pass-through provisions. 

The third segment is the Clopay brand “Garage Door” segment; it generated segment EBITDA of $10.1m this past year, down approximately 50% from the previous year.  This business is obviously getting crushed in the current environment, but management has begun to reduce fixed costs and will benefit from the rapid decline in steel input costs.  It operated at an EBIT loss in the most recent quarter and it’s tough to expect anything other than losses at the current production rate for the next couple of years. 

Griffon previously had a fourth operating segment “Installation Services” which contracted to install garage doors, kitchen cabinets, etc.  This was never a good business and lost a horrific amount of money over the past two years until they closed it down this past summer.  There are relatively minor additional cash costs (less than $10m) required to fully shut this segment. 

Conclusion