In part one of the analysis, we reviewed the Kaz acquisition and set some targets for the financial performance of that business unit.
HELE has also been in the news for some other recent decisions by management - insider stock option conversion and a new proposed compensation plan for the founder and CEO, Gerald Rubin.
Mr Rubin, it may surpise, does not have a very large stake in the company. According to the most recent filings, he owned about 2.4mn shares, less than 10% of the total. At current market prices, his stake is worth about $60mn. This is not a bad thing, except that it means his annual compensation, which can run to above $10mn matters a great deal in comparison to changes in the market capitalization of the firm.
What is particularly interesting is that he, and a few other senior executives, chose to exercise their options back in early July, when the stock was trading at an all-time high of near $36. The stock has subsequently declined by over $10 per share, partly on market fears, but also perhaps because there is a perception that insiders, six months into their largest acquisition, believe the company may struggle going forward. This is particularly true when one considers the fact that Mr Rubin cashed in all of his outstanding options, 1.325mn shares worth - two years before expiration!
How do I arrive at this conclusion? By checking the latest 10-Q which notes on page 22 that there were 2mn options outstanding and exercisable as of May 31, 2011, with an average life of 2.11 years. Mr Rubin's 1.375mn represent over 65% of the 2mn total shares, enough that his expiration cannot diverge significantly from the overall average.
Given the opportunities the Kaz acquisition presents, not to mention the ongoing and rising cash flows from the legacy business, one would assume that Mr Rubin would want to hold out for future appreciation with at least some of his options. Why not leave some skin in the game, unless you believed the stock price had peaked?
Incidentally, Mr Rubin submitted most of these shares in settlement for taxes and the purchase price of the stock. The company retired the tendered shares, so net share issuance only rose by about 300k - or 1%.
In fairness to Mr Rubin, the exercise may have been related to the intent to change the management contract. Mr Rubin had been barred from participating in options under the existing stock programs, becuase of his high number of outstanding options. Cashing them in may have been part of an arrangement between himself and the board to obtain a new incentive agreement. I say this, because in early September, the Board announced a new agreement with Mr Rubin, one which has not been ratified by shareholders. In this agreement, Mr Rubin will no longer participate with a share of Net Income, but rather based on "Adjusted EBITDA". What this does is separate Mr Rubin's pay from the effects of asset impairments, such as writedowns in estimates of the value of intangible assets and goodwill. (It applies to writedowns of other physical assets as well, but over 50% of HELE assets are of the intangible variety).
From my perspective, what this does is insulate management from the impacts of it's own decisions. Mr Rubin has led the company for four decades. He has made the decisions to purchase these assets - subtantially all of the intangible assets are the result of a strategy Mr Rubin has pursued. It makes no sense to release him from the consquences should history show him to have overpaid.
These two decisions, more than anything else, indicate that Mr Rubin believes the company's prospects are less rosy than they appeared in the months after the acquisition.
Incidentally, I encourage you to vote AGAINST this proposal, as I shall.
In purchasing Kaz, HELE decided to grow the top line fast, and enter new categories. The company has incredible cost management and has consistently managed to grow the business. Indeed, the OXO brand alone might be worth more than the market cap of HELE. But the acquisition is risky and it looks as though management is looking for ways to insulate itself from the consequences of those decisions.
Thursday will be most interesting.
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