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100
Jericho Quadrangle
Jericho,
NY 11753-2794
(516) 938-5544 ●
(516) 938-5644
March 18,
2009
Ms.
Terence O’Brien, Accounting Branch Chief
U.S.
Securities and Exchange Commission
Mail Stop
7010
Washington,
D.C. 20549-7010
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Re:
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Griffon
Corporation (File No. 001-06620)
Form
10-K for the Fiscal Year Ended September 30, 2008 (Filed December 15,
2008)
Definitive
Proxy Statement (Filed December 29,
2008)
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Dear Ms.
O’Brien:
Griffon
Corporation (“Griffon” or the “Company”) has received your correspondence dated
March 4, 2009 and is responding to your comments herein. We are supplementally
providing information in response to your comments. We understand that you may
have additional comments upon your review of our responses.
Form 10-K for the Fiscal
Year Ended September 30, 2008
Risk
Factors
If we were to lose any of
our largest customers, our results of operations could be significantly harmed,
page 11
1. Please
file copies of any contracts between the company and its largest customers that
are identified in this section, such as Proctor and Gamble (21% of total 2008
sales from continuing operations). Otherwise, we should be advised
supplementally why the contracts are not required to be filed pursuant to Item
601(b)(10)(ii)(B).
Response:
Based on the following information, we do not believe that any of our contracts
are required to be filed pursuant to Item 601(b)(10)(ii)(B). None of our
contracts with our largest customers individually exceeds 10% of our fiscal 2008
consolidated sales. Specifically, our sales to Proctor & Gamble are made
pursuant to multiple contracts, no one of which we believe to be material. While
the relationships with our largest customers are important to our business, and,
as we state in our risk factors, the loss of any one of our largest customer
relationships could significantly harm our business, there is no one contract
with any one customer on which our business is substantially dependent. Further,
we do not believe that we are required to file any contract that we have with
Proctor & Gamble, or any other customer contract, because such contracts are
such as ordinarily accompany our business and were all made in the ordinary
course of business.
Ms.
Terence O’Brien
U.S.
Securities and Exchange Commission
March 18,
2009
Page 2
of 9
Part III
2. We note
that your proxy statement does not include disclosure of information required by
Item 404 of Regulation S-K (Transactions with related person, promoters, and
certain control persons), which is incorporated by reference into Part III of
Form 10-K. Please confirm supplementally that there is no information that you
are required to disclose under Item 404(a), or tell us where the disclosure
appears. Please also provide supplementally, with a view toward future
disclosure, the information regarding your policies and procedures for the
review, approval or ratification of related party transactions, as required by
Item 404(b).
Response:
Please be advised that there is no information that we are required to disclose
under Item 404(a) because there were no related party transactions in fiscal
2008. Please also be advised supplementally that it is our policy to have our
Audit Committee review and approve any related party transactions, which we
intend to disclose in future filings.
Liquidity and Capital
Resources, page 26
3. You state
operating cash flows from continuing operations were principally the result of
decreased accounts receivable and increased accounts payable, partially offset
by increased inventories and increased prepaid expenses and other current
assets. In future filings, revise your discussion, to address the reasons for
the changes in operating assets and liabilities, specifically the increase in
accounts payable and inventory and the decrease in accounts receivable. Please
disclose your DSO for each period and explain any variances, to the extent this
disclosure would enhance an investors understanding of your cash flow position
and the company's ability to adjust its future cash flows to meet needs and
opportunities, both expected and unexpected. Your DSO analysis should discuss
any collectability or billing problems with any major customers or classes of
customers or any significant changes in credit terms, collection efforts, credit
utilization and/or delinquency policies. Refer to FRR 501.03 and SEC Release
33-8350.
Response:
Please be advised that we intend to expand our disclosure in future filings to
provide additional information with respect to changes in working capital
components that materially affect cash flows from continuing operations. As we
discussed with members of the staff, under most circumstances we believe that an
analysis of our DSOs would not provide meaningful assistance to the reader in
understanding our business. A substantial portion of our revenues are derived
from our defense electronics business, where payments are received in accordance
with the terms of development and production subcontracts to which we are a
party. Indeed, certain of the payments received in this business segment are
progress payments. The customers for our plastics business are generally
substantial industrial companies whose payments have been steady, reliable and
made in accordance with the terms governing such sales. Our sales in this
segment are made to satisfy orders that we receive in advance of production,
where payment terms are established in advance of production and sale. Thus far,
there have been no material impacts on payment for sales in our Garage Doors
segment. We will continue to watch these issues and make appropriate disclosure
should circumstances change where the timing or collectability of receivables
have a material impact on our liquidity, cash flows or results of
operations.
Ms.
Terence O’Brien
U.S.
Securities and Exchange Commission
March 18,
2009
Page 3
of 9
4. Your customer
concentration disclosures on pages 6 and 11 disclose that a significant amount
of sales were made to Proctor & Gamble, The Home Depot and Menards, Inc.
during the year ending September 30, 2008. Please provide a discussion within
the liquidity section, in future filings, to discuss the effects of your
customer concentrations on your liquidity and operations, specifically whether
the loss of all or portion of the sales volume from a significant customer would
have an adverse effect to liquidity or operations. Refer to Financial Reporting
Codification 501.03.a.
Response:
Please be advised that at September 30, 2008, we did not believe that our
customer concentrations could have a material adverse effect on the liquidity of
the Company given our cash position and the terms of our credit facilities which
do not materially constrain availability of borrowings as a result of customer
concentrations. However, in future filings, we intend to state in this section
as we do in “Risk Factors” that the loss of all or a portion of the sales volume
from a significant customer would have an adverse affect on our liquidity or
operations.
5. We note
the disclosure regarding your covenants on page 27 and in Note 3 to the
financial statements. In future filings, please expand this discussion to
disclose the required ratios and amounts as well as the actual ratios as of each
reporting date. This will allow readers to understand how much cushion there is
between the required ratios and the actual ratios. Please show the specific
computations used to arrive at the actual ratios with corresponding
reconciliations to US GAAP amounts, if necessary. See Sections I.D and IV.C
of the SEC Interpretive Release No. 33-8350 and Question 10 of our FAQ
Regarding the Use of Non-GAAP Financial Measures dated June 13, 2003. Provide a
clear discussion of the ramifications of a covenant violation and a discussion
of the financing options being considered in sufficient detail to allow an
investor to see through the eyes of those who manage the business.
Response:
Please be advised that, pursuant to Section IV.C
of the SEC Interpretive Release No. 33-8350, we believe that a discussion
and analysis of material covenants related to our outstanding debt is not
required. As we have disclosed in the Liquidity section on page 27, our
wholly-owned subsidiaries, Clopay and Telephonics, each have credit facilities.
At September 30, 2008, we were not, nor were we reasonably likely to be, in
breach of covenants under our respective credit facilities. The Clopay facility
provides for credit availability primarily based on working capital assets and
imposes only one ratio compliance requirement, which becomes operative only in
the event that utilization of that facility were to reach a defined level
significantly beyond the September 30, 2008 level. The Telephonics facility is a
“cash flow based” credit agreement and compliance with required ratios at
September 30, 2008 were well within the parameters set forth in that agreement.
Copies of the respective credit agreements have been previously filed with
Commission. Further, the covenants within such credit facilities do not
materially affect our ability to undertake additional debt or equity financing
for Griffon as such credit facilities are at the subsidiary level and are not
guaranteed by Griffon. In assessing materiality at September 30, 2008, please
note that we reported cash and cash equivalents significantly in excess of our
total debt.
Contractual Obligations,
page 29
6. If
material, to the extent you are required or planning to fund your pension plans
in the future, please present funding contributions to your plans for at least
the following year and, if known, for subsequent years. Include a footnote to
the table that (1) discusses the basis for inclusion or exclusion of these
obligations and (2) explicitly state the periods for which no amounts have been
included in the table.
Ms. Terence O’Brien
U.S.
Securities and Exchange Commission
March 18,
2009
Page 4
of 9
Response:
We note that one of our defined benefit pension plans has been frozen for
several years, with a grandfathered group accruing benefits until 2010, and the
other relates to three participants, two of whom are already retired and the
size of whose payments have therefore been fixed. As stated in Note 5 to Notes
to Consolidated Financial Statements, we expect to contribute approximately
$4,600,000 to the defined benefit plans in fiscal 2009 and the expected benefit
payments under the defined benefit plans at September 30, 2008 were $4,757,000
in 2009, $4,759,000 in 2010, $4,813,000 in 2011, $4,888,000 in 2012, $5,094,000
in 2013 and $25,726,000 in the aggregate in the years 2014 to 2018. We intend to
include similar disclosure in the Contractual Obligations table, as applicable,
in future filings. We intend to provide a footnote to the table addressing the
inclusion or exclusion of such obligations and explicitly state the periods for
which no amounts have been included in the table.
Critical Accounting
Policies, page 29
7. Please
expand your critical accounting estimates section to include a discussion of the
material assumptions you made in arriving at each critical estimate and to
advise an investor of the financial statement impact if actual results differ.
You should also consider commenting on your historical experience between
estimates made and actual results. It appears more detailed disclosures related
to each of these estimates are warranted in future filings.
● Please
tell us and disclose in your critical accounting policy section for property,
plant and equipment, whether you performed a SFAS 144 impairment test on your
long-lived assets, specifically those assets included in the Garage Door
segment. Considering the materiality of your long-lived assets, the impact of
the current economic environment, the recent SFAS 142 analysis that resulted in
goodwill impairment and the losses in your garage door segment, it is unclear
why an impairment test under SFAS 144 would not be necessary. If you have
performed a test, please disclose the results, including the amount of headroom
between the carrying value of the assets and their recoverable amount. If not,
please tell us your consideration of paragraph 8 of SFAS 144 as it relates to
these assets and explain how you determined intangible assets and other
long-lived assets are recoverable in the current market
environment.
Response:
Please be advised that we intend to expand disclosure in future filings of our
SFAS 144 impairment testing policy and analysis on our long-lived assets. Please
be advised supplementally that we evaluate property, plant and equipment for
impairment when there are indicators of potential impairment. As such, we
evaluated our long-lived assets of our Garage Doors segment for the reasons that
you have enumerated above. We compared the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the Garage Doors
asset group to the carrying amount of the asset group. The cash flows were based
on our best estimate of future cash flows derived from the most recent business
projections. Although our SFAS 142 analysis resulted in goodwill impairment
within the Garage Doors segment, our SFAS 144 analysis indicated that our
long-lived assets, principally property, plant and equipment, in the aggregate
were not impaired. The headroom between the carrying value of the assets and
their recoverable amounts were approximately $12 million.
Ms. Terence O’Brien
U.S.
Securities and Exchange Commission
March 18,
2009
Page 5
of 9
● Please
disclose the assumptions surrounding the recoverability of your deferred tax
assets.
Response:
Please be advised that we intend to expand our disclosure in future filings to
disclose the assumptions surrounding the recoverability of our deferred tax
assets. Please be advised supplementally that, as stated in Note 1 to the Notes
to Consolidated Financial Statements, in assessing the realizability of the
deferred tax assets, we consider whether it is more likely than not that some
portion or all of the deferred tax assets will be realized. Ultimately, the
realization of the deferred tax assets is dependent upon the generation of
sufficient future taxable income during those periods in which temporary
differences become deductible and/or net operating loss and tax credit
carryforwards can be utilized. We consider the level of historical taxable
income, scheduled reversal of taxable temporary differences, tax planning
strategies and projected future taxable income. Based on these considerations,
we believe it is more likely than not that the Company will realize the benefit
of its deferred tax assets, net of the valuation allowance established. Please
note that we have been historically profitable and the fiscal 2008 loss was
principally as a result of disposing of a segment, impacted further by the
write-off of goodwill.
● In
your revenue recognition policy, discuss your return policy and policy for other
sales incentives. Your disclosure should also include the amount recorded each
period for these incentives, expected return rates and how these expected rates
have compared to historical rates.
Response:
Please be advised that we have not enumerated our return policy or other sales
incentive policies as historically the amounts recorded with respect to such
policies have been immaterial to our consolidated financial statements. This is
due to the fact that a significant part of our revenues are derived from
products being produced under existing long-term programs, sold to meet the
manufacturing requirements of our customers or to fulfill orders that our
retailers and dealers have received from consumers. To the extent such amounts
become material, we would expand our disclosure in future filings.
● With
regard to your defined benefit plans, please ensure that your policy discussion
includes a sensitivity analysis of the effect of changes in your material
assumptions, such as your discount rates, future compensation levels, expected
return on plan assets, and mortality rates.
Response:
As noted above, we have two defined benefit plans, one of which consists of
three employees, two of whom have already retired and are being paid a fixed
benefit calculated on their respective life expectancies, and the other of which
has been frozen for several years, with a grandfathered group accruing benefits
until 2010. Accordingly, as of September 30, 2008, the size of the payments
required under the plans were largely fixed, with the principal uncertainty
being primarily related to the life expectancy of the participants who are
currently receiving benefits. As such, this substantially reduces the risk
within the material assumptions to which the sensitivity analysis is applicable.
Please be advised that we intend to continue our review of material assumptions
and, to the extent necessary, revise our disclosure in future filings to discuss
the effect of such changes on our defined benefit pension plans.
● Your
goodwill and intangible asset policy should quantify the projected cash flows
used in your analysis, the growth rate used in projecting cash flows, quantify
the discount rate, include terminal value assumptions, and discuss how you
assessed your reporting units under paragraph 30 and 31 of SFAS
142.
Ms. Terence O’Brien
U.S.
Securities and Exchange Commission
March 18,
2009
Page 6
of 9
Response:
We direct your attention to your first comment under the heading “Critical
Accounting Policies” and our response. As noted in our response, in the last
fiscal year, after analysis, we recognized impairment in the goodwill that we
carried in our Garage Doors segment. As we indicated in that response, in the
future we will expand our discussion with respect to assumptions used in our
impairment testing, including our assessment of our reporting
units.
● Provide
a robust discussion of your inventory accounting policies, valuation methods,
and underlying assumptions. Also provide a quantification of the amount of
inventory attributable to each segment, as well as a discussion of how certain
variations in raw material prices have impacted your valuation if at
all.
Response:
Please be advised that our businesses do not require us or our customers to
maintain inventories that are susceptible to becoming obsolete or dated. Our
defense electronics business primarily manufactures and sells products in
connection with programs authorized and approved by the United States
Government. Our plastic products segment primarily produces fabricated materials
used by our customers in the production of their products and these materials
are produced against orders placed by those customers to meet their
manufacturing needs. We produce and frequently install garage doors in response
to orders that our retailers and dealers have received from consumers.
Accordingly, we do not believe that material exposure exists for
obsolete/slow-moving inventory or inventory returns. Purchase price and
manufacturing variances are recorded when material and costing standards are
reviewed periodically further reducing material exposure in our inventory
valuation. Our inventory is valued on a FIFO basis and turns multiple times a
year. Therefore, we have not further enumerated our inventory accounting
policies, valuation methods and underlying assumptions as our historical
experience regarding inventory reserves, adjustments to raw materials valuations
and related inventory adjustments have been immaterial. To the extent such
estimates or adjustments become material, we would expand our disclosure in
future filings. Further, in future filings we intend to provide a quantification
of the amount of inventory attributable to each segment.
Definitive Proxy
Statement
Stock Ownership, page
11
8. Include a
footnote to identify the person(s) who exercise sole or shared voting and/or
investment power over the shares shown in the table for GAMCO Asset Management
Inc. and its affiliates.
Response:
Please be advised that we intend to include a footnote identifying the person(s)
who exercise sole or shared voting and/or investment power over the shares shown
in the beneficial ownership table for GAMCO Asset Management Inc. and its
affiliates, if applicable, in the proxy statement for the Company’s annual
stockholder meeting in respect of fiscal 2009 and thereafter. Please be advised
supplementally that, in respect to the proxy statement for fiscal 2008, Mr.
Mario Gabelli is deemed to have beneficial ownership of the securities owned by
GAMCO Asset Management Inc. and its affiliates as reported on Schedule
13D.
Base Salary, page
15
Ms. Terence O’Brien
U.S.
Securities and Exchange Commission
March 18,
2009
Page 7
of 9
9. We note
that you evaluate the compensation of senior management versus the comparators
in each element of compensation and on an overall basis. Please tell us, with a
view toward future disclosure, what amount or percentile of compensation paid by
the comparator companies you use as a benchmark against which you base
compensation for the named executive officers. Please also address where the
actual compensation for each named executive officer falls in relation to the
benchmarked information. To the extent actual compensation paid is different
from a targeted benchmark, please explain why the committee determined to pay
that amount of compensation.
Response:
Please be advised that we have not specifically benchmarked compensation against
the comparator companies. We have a small group of highly-skilled executive
officers for which compensation levels are determined by the Compensation
Committee on an individual basis from time to time. Our Compensation Committee
uses its business judgment in determining, on a subjective basis using objective
criteria and data, a compensation package for each particular
officer. In doing so, the Compensation Committee considers a variety
of factors in making such determination, including comparative data, whether the
officer is being recruited to join the Company (as in the case of Mr. Kramer) or
whether the officer is being asked to take on new responsibilities at the
Company (as in the case of Messrs. Smith and Alesia). We do not benchmark to a
specific or targeted amount or percentile of compensation against the comparator
companies.
10. Disclosure
in this section states that the Compensation Committee evaluates compensation
“versus selected comparators” in each element of compensation and on an overall
basis. If the committee does not use all of the comparators that you have named
on page 15 for each element of each named executive officer's compensation,
please make this clear and explain why the committee omitted some of the
comparators and the impact that any omission had on the compensation
paid.
Response:
Please be advised that we use all of the comparator companies indicated on page
15, but use them as stated in the answer to comment 9 above. We do not use only
some of the comparator companies in analyzing comparative compensation
data.
Cash Incentive Bonuses, page
15
11. Where
bonuses are provided for in employment agreements, such as the agreement with
Mr. Kramer, you should still provide disclosure that explains how the committee
or board determined to provide for the bonus in the amount awarded. Please tell
us supplementally, with a view toward disclosure in future filings, how the
committee or board determined to provide for the guaranteed bonus of $581,250 in
Mr. Kramer's employment agreement.
Response:
Please be advised supplementally that the Compensation Committee determined to
provide for the guaranteed bonus of $581,250 to Mr. Kramer as an inducement to
join the Company. The amount was arrived at after negotiation with Mr. Kramer,
and was calculated based upon 150% of the salary earned by Mr. Kramer during the
six months in which Mr. Kramer worked for us in fiscal 2008. In order to
successfully recruit Mr. Kramer to the Company, the Compensation Committee
determined that it was necessary and appropriate to set the bonus at the target
bonus for such period, which is 150% of salary. The Compensation Committee also
considered at the same time the tax ramifications of such payment for the
Company, in particular Section 162(m) of the Internal Revenue Code and limited
the guaranteed bonus to $581,250 so that when added to Mr. Kramer’s aggregate
base salary for the six-month period ending September 30, 2008 ($388,000), the
total would not exceed $1,000,000 in non-performance-based
compensation.
Ms. Terence O’Brien
U.S.
Securities and Exchange Commission
March 18,
2009
Page 8
of 9
12. We note
your statement that you have not awarded any bonuses under the Performance Bonus
Plan. Please clarify whether this is because no targets have been established
for the named executive officers under this plan, or because the officers did
not meet the targets.
Response:
Please be advised supplementally that, through fiscal 2008, there were no
participants in the Performance Bonus Plan and, thus, no performance targets
were set. As disclosed in the proxy statement, performance goals have been
established for Mr. Kramer for fiscal 2009.
Equity — Based Compensation,
page 16
13. Please
clarify how the committee determines the amount of the equity based compensation
that is awarded to named executive officers. We note your disclosure that the
committee considers the level of the officer's responsibility and that previous
grants of stock and options are reviewed in determining the size of an
executive's award for any particular year. However; this
disclosure should provide a more thorough and informative analysis of the
committee's decision to provide the awards in the amounts indicated in the
compensation tables. Please provide us supplementally with sample disclosure
that you would propose to include in future filings to address this
comment.
Response:
Please be advised supplementally that we do not use any formulaic approach to
determine the amount of equity-based compensation to be awarded to named
executive officers. Rather, the Compensation Committee uses its business
judgment considering the particular circumstances to determine the appropriate
level of such compensation. Please be further advised supplementally that we
intend to include the following sample disclosure in future filings, as
applicable, relating to the Compensation Committee’s determination of the amount
of equity-based compensation that is awarded to named executive officers. This
proposed sample disclosure will be followed by a thorough and informative
analysis of the Compensation Committee’s decision to provide the equity awards
set forth in the proxy statement’s tabular compensation disclosure. This
analysis will be provided for each named executive officer receiving an equity
award for that year.
“In determining the amount of
equity-based compensation to be awarded to our named executive officers, the
Compensation Committee takes into consideration, among other things, the level
of the officer’s responsibility, performance of the officer, other compensation
elements and the amount of previous grants of stock and options. The goal of the
committee is to retain and motivate the named executive officer to perform at
the level the Company requires. In addition, with respect to recruiting an
executive to join the Company, the amount of equity consideration may be
negotiated and reflect the amount necessary to hire the desired
person.”
14. Please
explain supplementally why you believe that awarding equity grants on a
quarterly basis “provides more consistency to the granting of awards” and how
consistency serves your compensation goals. Provide sample disclosure that you
would propose to include in future filings to address this comment.
Ms. Terence O’Brien
U.S.
Securities and Exchange Commission
March 18,
2009
Page 9
of 9
Response:
Please be advised supplementally that we have determined that the disclosure
regarding the grant of equity awards on a quarterly basis may not be necessary
in future filings. We were attempting only to disclose that equity awards are
generally made at regularly-scheduled meetings and we have concluded that this
disclosure is not that relevant or helpful.
*****
In
addition, pursuant to your request, please be advised that the Company
acknowledges that:
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it
is responsible for the adequacy and accuracy of the disclosure in their
filings;
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staff
comments or changes to disclosure in response to staff comments do not
foreclose the Commission from taking any action with respect to the
filing; and
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it
may not assert staff comments as a defense in any proceeding initiated by
the Commission or any person under the federal securities laws of the
United States.
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Thank you
for your comments. We trust that these responses are sufficient for your
purposes. However, if you have further comments, please feel free to contact
me.
Sincerely,
/s/ Patrick L.
Alesia
Patrick
L. Alesia
Chief
Financial Officer