Today I picked LBY and BLT as possible shorts, based on them being in the housewares sector with international exposure. Then after doing a little more work I thought there was no way they would be shorts based on earnings. Guess what boys and girls, in this case, what goes up must come down. I’m going to provide you with a few excerpts here to peak your interest as I do more work on the names.

LBY’s largest segment is “Glass Operations,” please note where the largest growth was.

Sales in Glass Operations were $753 million, an increase of 3.1%, excluding currency fluctuation.

This was by buoyed by a 24% increase in China sales and a 4.1% increase in the U.S.-Canadian region. Margin improvements for the year as a whole were supported by these sales increases, a better mix in most geographies, lower natural gas cost and lower packaging cost.

So let me move now to the balance sheet highlights and our announcement regarding our debt payment.

As I said before, near-term success is important, but we have a lot of work to do to sustain and further improve this performance to create additional shareholder value and secure our future.

Strengthening our balance sheet and continuing cost reduction remain critical imperatives for the company.

We ended 2012 with total debt of $466.5 million, and a debt net of cash to adjusted EBITDA ratio of 3x.

Today, we announced plan to buy back $45 million of our 6.78% (sic) [6.875%] bonds due in 2020 to eliminate part of our debt.

This action will reduce our outstanding balance on the senior notes to $405 million and at that same 6.875% rate and should move us solidly into our target range of 2.5 to 3x net debt-to-adjusted EBITDA by the end of 2013.

My second initial red flag, when considering LBY, is that paying off debt is great, but when you have less revenue coming in– by China heavily slowing down real estate development, based upon yesterday’s news –why would you not spend the money on R&D, sales, or another endeavor? If you’re going to improve your balance sheet at the detriment of your income statement, is it worth it?

BLT, besides having a stupid ticker, recently took a steep dive on a downgrade. They’ve taken a lot of heat lately over their margins, and have significant exposure in China with their concrete cutting and finishing products and equipment. This is not the only thing, they also have exposure to China in the supply chain of their SpeeCo division, where they have lately had problems.

Most of SpeeCo’s supply chain begins with unaffiliated factories in China. Under normal circumstances, component parts and resale products are shipped to our U.S. assembly and distribution center via ocean transport, which takes several weeks for delivery. During the first nine months of 2012, due to problems with obtaining certain components on a timely basis from certain of these suppliers, we fell behind on deliveries to our customers. In order to minimize service disruption to our customers, we elected to incur higher air and other freight costs to expedite the delivery of products and components from China to our assembly and distribution center in the U.S., where the component parts are assembled and the finished products are shipped to our customers. These higher freight costs were $1.2 million during the third quarter of 2012, and $5.3 million on a year-to-date basis. We do not expect such higher freight costs to be significant after the third quarter of 2012. We also incurred other distribution costs of $1.3 million at SpeeCo in the three months ended September 30, 2012. The FRAG results do not include the direct costs identified with the facility closure and restructuring activities, which are included in the Corporate and Other category.

They manage their risk of foreign currency exchange rate movements, on the revenue taken in by their international factories, by hedging with derivatives. This is common practice, but I am a little worried about the fact that out of the eight countries/regions where they manufacture their goods, four of them are Brazil, China, Europe, and Japan. Those are volatile currencies to hedge against. Lastly, two weeks ago after the stock was downgraded, P2 Capital came in to try and pull an “Icahn” on the company.This gave it some life, but I don’t think it’s sustainable, especially with exposure to China.

Let me know what you think.

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