Spectrum Brands still aims at 3.4x debt ratio, touts recent Q2 bond deal eliminating PIK notes

By Paul Deckelman

New York, May 9 - Spectrum Brands Holdings Inc. made what its chief executive officer called "significant progress in improving and refining our capital structure" during the 2012 fiscal second quarter ended last month, including its March junk bond deal that resulted in the elimination of the consumer products company's high-coupon payment-in-kind notes.

"We strengthened our balance sheet, lowered our cost of capital and increased our flexibility to create greater shareholder value" with the replacement of the $245 million of outstanding 12% senior subordinated PIK notes due 2019 with new 6¾% senior notes due 2020, CEO David R. Lumley declared during the Madison, Wis.-based company's conference call on Wednesday following the release of its results for the fiscal second quarter ended April 1.

Lumley also told analysts on the call: "We want to emphasize that de-leveraging and strengthening our balance sheet remains a top strategic and value-creation priority for our company. We plan to use our strong free cash flow of an expected $200 million to continue to pay down debt in fiscal 2012, with payments occurring in the latter part of the fiscal year, consistent with the peak period of our cash flow generation."

Target back to 3.4x

"As a result, we continue to expect to achieve a total leverage ratio of 3.4 times or less by the end of fiscal 2012," the CEO said.

The company actually ended the 2011 fiscal year last Sept. 30 with that 3.4 times ratio of debt to trailing 12-month EBITDA, on its way to bringing the debt measure down to a previously announced target level of about 3 times, which would be just one third of the swollen 9 times level seen at the end of 2007. That level was prior to a reorganization that shed hundreds of millions of dollars of debt.

Spectrum executive vice president and chief financial officer Anthony L. Genito said the leverage level at the end of the second quarter had risen to about 4 times EBITDA, reflecting a bond deal the company completed during its fiscal first quarter to finance an acquisition, as well as an increase in debt when it did its latest junk deal to take out the PIKs.

Spectrum, which makes and markets such varied consumer products as Rayovac flashlight batteries, George Foreman cooking grills, Remington shavers, as well as a variety of pet products, garden supplies and insecticides, did a $200 million add-on to its existing $750 million of 9 ½% notes due 2018, pricing the tranche at 108.5 on Nov. 2, 2011 to yield 7.29%.

Genito said that proceeds from the deal went toward the acquisition of two new product lines: FURminator, a pet grooming product, and Black Flag, a well-known line of home and garden insecticides.

Then on March 15, it priced the $300 million issue of 6¾% notes, after the quickly shopped deal was upsized from an originally announced $275 million. Those notes came to market at par.

Proceeds were used to finance the previously announced tender for the PIK notes. As of the close of that tender offer on March 28, holders had tendered holders had tendered $231.509 million of the motes, or about 94.48%, with all but a handful tendered by the March 14 early tender deadline for total consideration of $1,100 per $1,000 principal amount.

Genito told an analyst during the question-and-answer portion of the call following his and Lumley's formal presentations that the company originally planned to sell $275 million of the new bonds, which would cover the face amount of the PIKs being taken out plus about another $27 million of tender premiums and other expenses connected with that transaction. But the company then decided to upsize by another $25 million while still getting "a very competitive rate" at 6¾%.

The extra cash in the till, he said, "gives us a lot more flexibility, obviously, and as a CFO, I just love flexibility when it comes to cash."

Debt levels slightly higher

Genito said that as of the end of the second quarter, Spectrum's total gross debt was $1.878 billion. That was up from $1.78 billion at the end of the 2012 fiscal first quarter on Jan. 1, $1.551 billion at the end of fiscal 2011 and $1.825 billion at the end of the year-ago fiscal second quarter.

He said debt in the latest period consisted of a senior secured term loan of $523 million, senior secured notes of $950 million, senior unsecured notes of $300 million, a $50 million draw on its working capital asset-blacked loan facility and other debt, which was primarily foreign debt, and capital leases of $55 million. In addition, it had about $28 million of letters of credit outstanding.

The CFO said that the company ended the quarter with "a solid liquidity position." It still had most of the $300 million total ABL facility undrawn. The $50 million draw, he said, was "consistent with our seasonal peak level at that time of the year."

The company had $11 million drawn against the facility in the first quarter, had no draws at the end of fiscal 2011 and $118 million drawn in the fiscal 2011 second quarter.

It ended the latest second quarter with a cash balance of about $52 million, versus $74 million in the first quarter, $142 million at the end of fiscal 2011 and $73 million a year ago.

Genito echoed Lumley's projection that "given the strong cash flow potential of our businesses, our goal is to generate at least $200 million, or approximately $4 per share, of free cash flow for fiscal 2012."

He said that would be used to pay down debt, mostly in the latter part of the fiscal year, when cash-flow generation is strongest, and bring the leverage ratio back down to 3.4 times or less by the end of the current fiscal year on Sept. 30.

He also said that as result of the replacement of the 12% PIK notes, "we expect to save approximately $10 million annually in lower interest costs, while improving the company's strategic and financial flexibility for creating shareholder value."

The CFO estimated that cash interest for the full 2012 fiscal year is now expected to approximate $150 million.

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