Salton battles liquidity questions; says will make April payment, works on refinancing

By Paul Deckelman

New York, Feb. 8 - Salton Inc., the maker of the popular home hotdog and hamburger grills endorsed by former world boxing champion George Foreman, was taking some heavy punches from analysts Wednesday as they demanded to know on the company's earnings conference call whether the Lake Forest, Ill.-based small appliance maker would be able to generate sufficient liquidity to stay afloat while it attempts to refinance $125 million of 10¾% senior subordinated notes coming due on Dec. 15.

Company executives in turn denied that Salton was on the ropes, saying they expected an upturn in cash coming in during the current third quarter, reiterating that they were working on strategies to refinance the 10¾% bonds, and confidently assuring the investment community that Salton would certainly be in a position to make the scheduled April 15 coupon payment on another series of bonds, its 12¼% senior subordinated notes due 2008.

They also pointed to continued efforts to reduce the company's expenses by eliminating unneeded warehouse facilities and cutting headcount, as well as noting the company's expansion internationally.

In the fiscal second quarter ended Jan. 1, Salton reported net earnings of $2.75 million (18 cents per diluted share), well down from $12.34 million (81 cents per share) a year earlier. In the six-month period ended Jan. 1, the company lost $430,000 (four cents per share) versus year-earlier earnings of $13 million (86 cents per share).

$5 million availability

The company's chief financial officer, David Mulder, raised a red flag with several of the analysts on the call when he said that, as of Jan. 1, Salton had borrowed $181.3 million under its senior secured revolving credit facility and had just $3.6 million available under this facility for future borrowings. The situation was a little better as of last Friday - though not that much - with $5 million of availability under this credit agreement.

One analyst put it very bluntly, saying the low availability figure - particularly as the company heads into its historically weak sales period of the year - was "more dire than I even expected, at least at the liquidity level."

He demanded to know how the company was going to build up "the momentum" it needed to be in a position to refinance the bonds coming due in December.

Another analyst projected that even if the company - which had been EBITDA negative for most of last year - managed to stay EBITDA positive this year and finish the fiscal year with $60 million of EBITDA, by his calculations, after capital expenditures, interest costs and the like, Salton would still not have the kind of cash it would need to refinance those December bonds.

No specifics on refinancing

Company officials declined to get to specific about how the bonds would be refinanced.

Salton's president and chief operating officer, William Rue, said that the company "continue[s] to work actively with our investment bankers" - the restructuring specialists Houlihan Lokey Howard & Zukin - "to develop a plan or actions that achieves this and results in as little dilution of our shareholders as possible."

Rue said that such plans "may include asset sales, joint ventures, new lines of credit and discussions with new investors who could help refinance the bonds."

He said that no decisions had yet been made and that Salton would continue to evaluate "a host of alternatives. This remains a high priority with Salton."

Rue, Mulder and chief executive officer Leonhard Dreimann spoke in general terms rather than specifics about these possibilities.

Rue said that a joint venture could be "almost anything with respect to anyone that would like to partner with us in a various market."

Everything for sale

On what assets the company might choose to unload in such a scenario, Rue replied that he wouldn't describe what those assets are, "but I will say that as a public company, everything we have is for sale, every day."

Mulder quipped that to avoid him and Rue getting a deluge of phone calls after the conference call from analysts or the media, "we have no fire sales under way at all."

Analysts raised the question about Salton possibly selling or borrowing against its 52% stake in Amalgamated Appliances, or AMAP, which sells Salton appliances and related products internationally.

While Dreimann pointed out that AMAP is [majority] owned by Salton's international holding company - meaning there are restrictions on upstreaming asset sale proceeds back to the U.S. parent - Mulder allowed that should the company go that route, "there would be ways of moving that cash around, in excess of $100 million. It is owned by our European entity with the holding company in Hong Kong. There are ways that that could be done. It's not an easy transfer - but there are ways that certainly could be done."

Right now, however, there seems to be no inclination on Salton's part to sell AMAP, which Dreimann called "a valuable investment" for the company.

Revolver deadline

Mulder said that the company's revolving credit facility requires that financing to take out the Dec. 15 bonds be lined up - or at least, that reserves be in place - three months before the bonds mature, or by mid-September, and while there is no timetable for a formal announcement, "I would certainly think we would be beating that date," he predicted.

Of more immediate impact is the $9.1 million coupon payment due on April 15 on the $150 million of 12¼% notes. An analyst questioned whether Salton would be able to make that payment, given the fact that the company only has $5 million of credit facility availability.

Mulder acknowledged that "right now, our availability is a little bit tight," but added that "we anticipate it will certainly rise through the end of the quarter. Certainly we feel confident that we can make our April 15 bond payment."

The CFO explained that "historically, in the U.S., our availability generally does rise in the quarter that we're in, for as the cash does come in from receivables we get the differential between the availability we can borrow on those receivables; the cash obviously adds something to it. So it generally does rise during this quarter. But historically it definitely does rise during this quarter."

While some of the analysts expressed concern about the company having pretty much maxed out its credit facility availability heading into what is traditionally a slow quarter, Dreimann said that "we are heading into a period where the company traditionally is not a user of cash because of the lower needs for inventory and receivables financing during this period, and does not require the same form of liquidity that's needed if we are generating high volume sales."

He appeared to shrug off the objections of one analyst who said that "you've had Houlihan Lokey [working for you for] over six months. It seems the numbers aren't tempting them to come up with a plan." The analyst said this raised the question of "survivability."

Dreimann said that the $5 million of current borrowing availability was by no means the least the company has ever had - it has been lower at times, and Salton has survived. He also noted that the $5 million figure refers to the company's domestic operations.

Availability outside the U.S.

Overseas, the situation is quite different. Mulder said that Salton "also has availability from credit facilities outside the U.S.," including in Britain, where the company expects to fatten its cash cushion by $15 million via a sale/leaseback transaction for a warehouse property it is selling there.

"We are also exploring the possibility of increasing our borrowing capabilities in Europe through an expanded credit facility."

Right now, he said, "on a global basis, outside the U.S., we are almost virtually unlevered, and with the sale of the [U.K. warehouse facility] and the cash from that, that will take our leverage down extremely low. Our receivables and inventory abroad, all that is very leveragable."

Rue estimated the U.K. credit line at some £30 million, and said that it was "predominantly free."

The executives acknowledged, however, that for the most part, proceeds from the company's international borrowings could not be upstreamed to the U.S. parent.

As of Jan. 1, the company had $37.4 million of cash on its balance sheet on a consolidated basis, although most of that was with Amalgamated Appliances, and only "a very small amount of that is actually in the U.S. right now," Mulder said.

Interest costs during the quarter increased by $3.5 million from a year earlier on higher borrowing costs and overall levels of indebtedness. The company's average indebtedness increased to $512.8 million from $427.7 million a year earlier.

Despite the limited domestic borrowing availability and lagging domestic sales - down $49 million in the second quarter from year-earlier levels, Mulder said that "we believe we have sufficient working capital to allow the company to meet our obligations."

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