Business context and reporting period
Newell Rubbermaid Inc. (the issuer named in the filing; now known as Newell Brands) filed this unaudited Form 10-Q for the quarter ended September 30, 2014. The company sells consumer and commercial products across Writing, Home Solutions, Tools, Commercial Products, and Baby & Parenting. Results are seasonal, and management cautions that nine-month results may not indicate full-year performance.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $1,484.5 million | $1,466.1 million | $4,201.0 million | $4,141.7 million |
| Gross margin | $576.7 million; 38.8% | $552.5 million; 37.7% | $1,629.3 million; 38.8% | $1,583.2 million; 38.2% |
| Operating income | $173.2 million; 11.7% of sales | $178.5 million; 12.2% | $491.2 million; 11.7% | $457.7 million; 11.1% |
| Income from continuing operations | $122.9 million | $122.2 million | $323.7 million | $300.0 million |
| Net income | $122.3 million | $193.3 million | $325.8 million | $357.3 million |
| Diluted EPS | $0.44 | $0.66 | $1.16 | $1.22 |
| Operating cash flow | Not stated for the quarter | Not stated for the quarter | $343.3 million | $301.0 million |
Q3 sales increased 1.3%; core sales increased 2.7%, acquisitions contributed 0.6%, and foreign currency reduced sales 2.0%. Nine-month sales rose 1.4%, with 2.9% core growth, a 0.2% acquisition contribution, and a 1.7% currency headwind. Q3 net income was lower mainly because the prior-year quarter included a gain on the sale of discontinued businesses. Continuing-operations diluted EPS was $0.44 in Q3 versus $0.42; for nine months it was $1.16 versus $1.02.
For the nine months, SG&A was $1,094.9 million, up from $1,027.8 million, reflecting increased advertising, capability investments, and transformation costs. Restructuring costs were $43.2 million versus $97.7 million. The effective tax rate was 19.6% versus 24.0%, including $17.1 million of valuation-allowance benefits and $11.2 million of tax-contingency benefits in 2014.
Liquidity, debt and cash flow
- Cash was $132.6 million at September 30, 2014, down $93.7 million from year-end 2013. Operating cash flow was $343.3 million; investing used $408.4 million, including $312.9 million for Ignite, and financing used $3.0 million.
- Total debt was $2,186.8 million, up $350.4 million from December 31, 2013. Short-term debt was $517.0 million and current long-term debt was $251.1 million, including $250 million of notes due June 2015.
- Working capital was $188.7 million and the current ratio was 1.09:1, compared with $681.1 million and 1.42:1 at year-end. The company attributed the decline partly to the 2015 notes’ current classification and borrowing to fund Ignite.
- The company reported $638.6 million of available capacity under its $800 million revolving facility, with no direct revolver borrowings outstanding. It also had $350 million outstanding under its receivables facility, which expires in September 2015. Management said covenants were met and liquidity was adequate for existing businesses and obligations.
- Net debt to total capitalization increased to 0.50:1 from 0.44:1 at year-end. Cash includes $51 million in Venezuela subject to currency controls.
Material changes and business developments
- Segment sales trends were mixed: nine-month sales grew 4.5% in Writing, 4.6% in Tools, and 7.0% in Commercial Products; they declined 2.6% in Home Solutions and 6.1% in Baby & Parenting. Baby & Parenting operating income fell 64%, including $13.8 million of Graco recall costs.
- On September 4, the company acquired Ignite Holdings, owner of Contigo and Avex, for $312.9 million net of acquired cash. Ignite contributed $9.0 million in sales after acquisition. On October 22, the company acquired bubba brands for $83 million, financed with operating cash and borrowings.
- The company classified Endicia and its Culinary electrics and retail businesses as discontinued operations after initiating sale plans. Their net assets were $61.4 million at September 30. The prior-year comparison also includes gains from the sale of Hardware and Teach businesses.
- Share repurchases totaled $262.6 million for 8.6 million shares in the first nine months; $37.4 million remained available under the program. Dividends paid were $136.1 million. The quarterly dividend had increased 13% to $0.17 per share.
Outlook, management commentary and risks
- For full-year 2014, management expected operating cash flow of $600–$650 million after $100–$120 million of restructuring and related cash payments, and capital expenditures of approximately $150–$175 million.
- Project Renewal was expanded in October. By the end of 2017, the company expects cumulative annualized savings of $470–$525 million, including $200 million of incremental annualized savings from the expansion. Expanded-program costs are estimated at $540–$575 million pretax, with $510–$540 million expected to be cash costs. The first two phases were expected to deliver $270–$325 million of annualized savings by mid-2015.
- Management estimated 2014 sales and operating income would be reduced by approximately $39 million and $26 million, respectively, by using Venezuela’s SICAD I exchange rate rather than the official rate. Nine-month Venezuelan exchange losses were $45.6 million. Further devaluation, restricted cash conversion, and price controls could add pressure; management said the effect of Venezuela’s fair-pricing law remained uncertain.
- The Graco harness-buckle recall covered approximately 4 million toddler seats and was expanded to certain infant seats. The company recorded $13.8 million of costs through September; possible government fines or penalties were not included, although management expected additional recall execution costs not to be significant.
- A U.S. pension lump-sum offer could result in a fourth-quarter non-cash settlement charge; management estimated approximately $50 million at a 50% acceptance rate. Updated mortality assumptions were expected to increase defined-benefit liabilities by approximately $60–$80 million.
- Environmental remediation reserves totaled $23.4 million. The company could not estimate its potential liability for the Lower Passaic River matter; it said an adverse outcome could be material, though it did not believe a material impact was reasonably likely based on currently known facts.
- Other stated risks include economic and retail conditions, foreign currency and international controls, raw-material costs and supply, customer concentration and bargaining power, product liability, execution of restructuring and SAP implementation, pension funding, and possible impairment of goodwill or intangibles. No goodwill or indefinite-lived intangible impairment was recorded in the reported period.
Most important facts for investors to verify
- Whether core-sales growth and margin improvement persist after accounting for currency effects, the Latin America SAP-related sales pull-forward, and planned product or geographic exits.
- Whether Project Renewal achieves its stated savings and whether implementation costs, cash outlays, or operational disruption exceed expectations.
- How the Ignite and bubba acquisitions perform, and the effect of acquisition financing on debt, cash flow, and liquidity.
- Future Venezuela exchange rates, access to cash, import settlement rates, and the impact of price controls on sales and profitability.
- The ultimate cost and any regulatory outcome of the Graco recall, along with the pension settlement charge and environmental contingencies.
- The company’s ability to meet upcoming debt maturities and maintain covenant compliance while funding seasonal working capital, dividends, capital spending, and restructuring.