Business context and reporting period
Newell Brands Inc. (formerly Newell Rubbermaid Inc.) filed this Form 10-K for the fiscal year ended December 31, 2016. The company markets consumer and commercial products globally. On April 15, 2016, it completed the Jarden acquisition, substantially expanding the business; Jarden’s results are included only from that date, so year-over-year comparisons are not like-for-like.
The filing also reports fourth-quarter 2016 results: net sales of $4.14 billion, continuing-operations income of $165.9 million, net income of $165.6 million, and diluted EPS of $0.34.
Key financial metrics
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net sales | $13.264 billion | $5.916 billion |
| Gross profit / margin | $4.399 billion / 33.2% | $2.305 billion / 39.0% |
| Operating income / margin | $1.100 billion / 8.3% | $601.4 million / 10.2% |
| Income from continuing operations | $528.5 million | $259.3 million |
| Net income | $527.8 million | $350.0 million |
| Diluted EPS | $1.25 | $1.29 |
| Cash provided by operating activities | $1.829 billion | $565.8 million |
| Capital expenditures | $441.4 million | $211.4 million |
| Cash and cash equivalents at year-end | $587.5 million | $274.8 million |
| Total debt at year-end | $11.893 billion | $3.058 billion |
Year-end working capital was $3.2 billion and the current ratio was 1.74:1. The company reported $1.21 billion of availability under its $1.25 billion revolving facility and $756 million under its $950 million receivables facility. Net debt to total capitalization was 0.50:1.
Material changes versus the prior comparable period
- Reported sales rose 124.2%; Jarden contributed $7.297 billion, or most of the increase. Management also cited volume, pricing and Elmer’s, while foreign exchange and divestitures were adverse.
- Gross margin declined 580 basis points and operating margin declined 190 basis points. The largest identified factor was a $479.5 million Jarden inventory fair-value step-up charge; acquisition and integration SG&A costs were $261.3 million.
- Interest expense rose to $404.5 million from $79.9 million, reflecting substantially higher acquisition-related borrowings. The company also recorded a $47.6 million debt-extinguishment loss.
- Income from continuing operations increased, but net income comparisons also reflect unusual prior-year discontinued-operations income, including the Endicia sale gain. 2016 included a $160.2 million pretax gain on the sale of the Décor business.
- Operating cash flow increased substantially, primarily reflecting Jarden’s contribution. The cash conversion cycle lengthened to 93 days from 80 days, with inventory days rising to 85 from 71.
Outlook, management commentary, risks and unusual items
- Strategy and targets: The New Growth Game Plan reorganizes the company around global divisions and aims to focus resources on growth categories and brand investment. Management expects at least $500 million of annualized Jarden cost synergies over four years, with approximately $500 million of restructuring and integration costs over the same period. Project Renewal is expected to generate $620–$675 million of annualized savings by the end of 2017; approximately $510 million had been realized by year-end 2016. These are management targets, not guaranteed results.
- Portfolio actions: The company agreed to sell the Tools business for approximately $1.95 billion, subject to adjustments and regulatory approval, and anticipated a pretax gain of about $0.9 billion. Other announced divestitures included Winter Sports, heaters/fans/humidifiers, consumer storage totes, Lehigh/firebuilding and Teutonia stroller operations. These businesses remained in continuing operations until sold.
- Capital priorities: Management stated it intends to maintain investment-grade credit ratings, prioritize debt reduction, invest in growth platforms and maintain the dividend. It believed cash, operating cash flow, capital-market access and borrowing facilities would be adequate for cash needs over the next 12 months.
- Risks: High post-acquisition leverage and interest expense, execution and integration risks, delivery of planned synergies, impairment risk on substantial goodwill and intangibles, foreign exchange and input-cost pressures, dependence on large retailers and suppliers, and competitive pricing pressure are key exposures. Walmart represented approximately 13.5% of 2016 sales.
- Contingencies and unusual items: The 2016 effective tax rate was 35.1%, including a $164.2 million deferred tax charge related to the pending Tools sale. Appraisal litigation involving 10.6 million Jarden shares remained pending; the company accrued estimated merger consideration of $626.5 million. The company recorded $41.9 million of environmental reserves, but said its ultimate Lower Passaic River liability could not be estimated. Product liability reserves were $81.7 million.
- Controls: Management and PwC concluded internal control over financial reporting was effective, but both excluded Jarden from their assessment and audit. Jarden represented approximately 55% of 2016 sales and 15% of year-end assets.
Important facts for investors to verify
- Whether the announced divestitures closed on expected terms and how proceeds were applied to debt reduction.
- Actual timing, costs and realization of Jarden synergies and Project Renewal savings, compared with management’s targets.
- Debt maturities, interest costs, covenant headroom and progress toward the stated investment-grade and deleveraging priorities.
- Underlying sales and margin trends excluding Jarden’s partial-year contribution, acquisition accounting effects and gains or other unusual items.
- Resolution and potential cash impact of Jarden shareholder appraisal claims and environmental matters, particularly the Lower Passaic River proceeding.
- Integration of Jarden’s financial controls, given its exclusion from the 2016 internal-control assessment.