Spectrum Brands (SPB, Financial), a global branded consumer products company, held a conference call with investors on Thursday morning to discuss Q3 2011 results. The company is broken down into three business segments: Global Batteries and Appliances (well known brands include Rayovac and Remington, the second being the company’s fastest growing business), Global Pet Supplies, and Home and Garden (well known brands include Cutter and Hot Shot). Here are some of the highlights from the Q&A and major developments that are occurring at Spectrum Brands:
For our third quarter 2011, consolidated GAAP net sales increased 23% to $805 million, largely driven by the acquisition of kitchen appliances company Russell Hobbs in 2010; on a comparable basis (excluding Russell Hobbs), sales were up 1.72% and 1.62% in the third quarter and through the first nine months of the year, respectively (in-line with projections for FY2011 increases of 1.5-2.5%).
For the third quarter of fiscal 2011, the company reported net income of $28.6 million or $0.56 per diluted share, compared with a net loss of $86.5 million or $2.53 per diluted share in the year-ago quarter. By management’s non-GAAP metrics (which they believe represents on-going business results), EPS in the quarter was $0.66, representing an increase of 35% compared with earnings per share of $0.49 last year.
The Global Batteries and Appliances segment reported net income of $39.9 million, up more than 23% from a year earlier ($32.4 million), largely driven by Russell Hobbs. The Global Pet Supplies business segment reported net income of $15.1 million, a decrease of 12% compared to the third quarter of 2010 ($17.2 million). In the Home and Garden business segment, reported net income came in at $42.2 million, an increase of 4.7% from last year ($40.3M).
The balance sheet is loaded with debt (more than $1.7 billion as of July 3, 2011, compared to a cash balance of just $88 million), but management is looking to change that. Here is what CEO David Lumley had to say about the company’s financial situation: “Our priority is rapid balance sheet de-leveraging. A little more than 2 years ago, our leverage ratio was about 5x. We expect to be at or below 3.5x by the end of fiscal 2011, and as low as 3x by the end of fiscal 2012.” Despite what management believes, I question how rapidly SPB will be able to extinguish this debt and the correspondingly large interest expenses (more than $40 million in the Q): the current debt load is more than 11x management’s projection of 2011 FCF ($155-$165 million).
Spectrum is still working through liabilities from prior years, most noticeably two acquisitions (an insect repellant and a pet supplies company) in 2005 which added more than $2 billion in debt to the balance sheet; ultimately, they were forced to file for Chapter 11 protection in February 2009, and negotiated with bondholders to eliminate more than $840 million in debt in exchange for stock and senior subordinated notes.
Overall, Spectrum is still working through the effects from filing Chapter 11, as seen in the long term debt account and the increase in shares outstanding. While management might be able to pull it off, I personally am not interested in SPB at this price (roughly 10x this year’s estimated FCF) due to my aversion to large debt loads. In this environment, and with a lot of competition to grab share amongst some of the most well established companies in the business (for example, P&G and Energizer Holdings in batteries), I personally would not feel comfortable working through the remainder of SPB’s Chapter 11 hangover. The market, on the other hand, has responded positively, moving the stock more than 17% higher in the last two days of the week (compared to 5% on the DJIA).
For our third quarter 2011, consolidated GAAP net sales increased 23% to $805 million, largely driven by the acquisition of kitchen appliances company Russell Hobbs in 2010; on a comparable basis (excluding Russell Hobbs), sales were up 1.72% and 1.62% in the third quarter and through the first nine months of the year, respectively (in-line with projections for FY2011 increases of 1.5-2.5%).
For the third quarter of fiscal 2011, the company reported net income of $28.6 million or $0.56 per diluted share, compared with a net loss of $86.5 million or $2.53 per diluted share in the year-ago quarter. By management’s non-GAAP metrics (which they believe represents on-going business results), EPS in the quarter was $0.66, representing an increase of 35% compared with earnings per share of $0.49 last year.
The Global Batteries and Appliances segment reported net income of $39.9 million, up more than 23% from a year earlier ($32.4 million), largely driven by Russell Hobbs. The Global Pet Supplies business segment reported net income of $15.1 million, a decrease of 12% compared to the third quarter of 2010 ($17.2 million). In the Home and Garden business segment, reported net income came in at $42.2 million, an increase of 4.7% from last year ($40.3M).
The balance sheet is loaded with debt (more than $1.7 billion as of July 3, 2011, compared to a cash balance of just $88 million), but management is looking to change that. Here is what CEO David Lumley had to say about the company’s financial situation: “Our priority is rapid balance sheet de-leveraging. A little more than 2 years ago, our leverage ratio was about 5x. We expect to be at or below 3.5x by the end of fiscal 2011, and as low as 3x by the end of fiscal 2012.” Despite what management believes, I question how rapidly SPB will be able to extinguish this debt and the correspondingly large interest expenses (more than $40 million in the Q): the current debt load is more than 11x management’s projection of 2011 FCF ($155-$165 million).
Spectrum is still working through liabilities from prior years, most noticeably two acquisitions (an insect repellant and a pet supplies company) in 2005 which added more than $2 billion in debt to the balance sheet; ultimately, they were forced to file for Chapter 11 protection in February 2009, and negotiated with bondholders to eliminate more than $840 million in debt in exchange for stock and senior subordinated notes.
Overall, Spectrum is still working through the effects from filing Chapter 11, as seen in the long term debt account and the increase in shares outstanding. While management might be able to pull it off, I personally am not interested in SPB at this price (roughly 10x this year’s estimated FCF) due to my aversion to large debt loads. In this environment, and with a lot of competition to grab share amongst some of the most well established companies in the business (for example, P&G and Energizer Holdings in batteries), I personally would not feel comfortable working through the remainder of SPB’s Chapter 11 hangover. The market, on the other hand, has responded positively, moving the stock more than 17% higher in the last two days of the week (compared to 5% on the DJIA).
