Wednesday, March 18, 2009

Georgia Gulf Hangs on By Polyester Thread

The fortunes of Georgia Gulf (GGC-$1.85), a plastics company whose products are used in home-building materials ranging from pipe fittings to vinyl siding, moldings and outdoor vinyl decking, collapsed in the last two years due to ongoing weakness in the North American housing market. Teetering on the edge of bankruptcy, the company won a reprieve today when its senior lenders agreed, among other things, to amend loan covenants until March 2010. Given that the company's end-markets are dependent on the level of demand for residential construction and 'do-it-yourself' home remodeling—where activity remains anemic—is 12-months' relief enough time for management to stop the bleeding?

Credit problems at Georgia Gulf were originally sewn in 2006, when management looked to diversify away from its commodity chemicals business. Eyeing the manufacturing and distribution operations of Toronto-based Royal Group, Georgia Gulf
acquired the maker of vinyl building and construction products at the peak of the construction boom, paying $1.6 billion. Unfortunately, the purchase has not proven accretive to earnings; and, expected cost savings and operational efficiencies previously anticipated have not been realized, according to the 2008 annual filing with the SEC. Instead, as a result of overpaying for Royal Group—and financing more than $800 million of the purchase through debt—total indebtedness climbed five-fold in the last three-years, ending 2008 at $1.4 billion.

The latest credit amendment eases restrictive covenants for 2009, increasing the maximum leverage ratio to 8.75 (from 3.75 times) for the fourth quarter and decreasing the minimum interest coverage ratio (earnings before interest and taxes/interest expense) to 1.15 x (from 3.0 x) for the fourth quarter. At December 31, total debt was 6.4 times available working capital and the interest coverage ratio was 1.2 times interest expense of $133.2 million.

The amendment also establishes a trailing twelve-month minimum consolidated EBTIDA threshold covenant. The minimum compliance EBITDA was set at $167.0 million for the quarter-ended December 31, 2009 (slightly higher than the $165.7 million the company scratched out last year).

In the plus column, more than $1.1 billion of Georgia Gulf's debt does not mature until 2013 and beyond. However, the company is contractually obligated to make payments totaling about $2.0 billion in the next two years ($1.5 billion in raw material purchase agreements).

The company is working to slash overhead costs, from freezing its pension plan and salaries to shortening workweeks and reducing headcount in all divisions. In addition, Chief Executive Officer Paul Carrico told analysts on the
fourth-quarter 2008 earnings call that the company will look to improve its liquidity profile (cash on hand of $90 million) in coming quarters through asset sales, tax refunds, and $142.9 million available under a credit facility.

Assuming continued softness in the North American housing and construction markets (especially in new home construction) combined with estimated cost-savings (totaling more than $55.0 million), Georgia Gulf is forecast to be able to generate enough cash to cover interest costs, fund normal capital expenditures, and pay down debt due in 2009, said Carrico. However, in my opinion, continued overcapacity in commodity chemicals production (chlorovinyl and phenol businesses)—and rising energy and feedstock costs—will adversely impact the company's financial performance in coming quarters, likely forcing management back to the negotiating table with its lenders before March 2010.

Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

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