Business context and reporting period
Newell Rubbermaid Inc. (the company identified in the filing; now associated with the Newell Brands name) filed this Form 10-K for the fiscal year ended December 31, 2013. It markets consumer and commercial products across Writing, Home Solutions, Tools, Commercial Products, and Baby & Parenting. During 2013, it sold its Hardware and Teach businesses; their results are presented as discontinued operations.
Financial performance and position
| Metric | 2013 | 2012 |
|---|---|---|
| Net sales | $5,692.5 million | $5,579.9 million |
| Core sales growth | 3.2% | 2.9% |
| Gross margin | $2,178.2 million; 38.3% | $2,136.1 million; 38.3% |
| Operating income | $621.0 million; 10.9% margin | $640.0 million; 11.5% margin |
| Income from continuing operations | $420.1 million | $392.0 million |
| Net income | $474.6 million | $401.3 million |
| Diluted EPS | $1.63 | $1.37 |
| Cash from operating activities | $605.2 million | $618.5 million |
Reported sales rose 2.0%, with currency reducing growth by 1.2 percentage points. Gross margin was flat as a percentage of sales: productivity was offset by input-cost inflation and unfavorable mix. Operating income fell 3.0%, principally reflecting higher restructuring costs. Net income benefited from $54.5 million of discontinued-operations income, including a $58.9 million net gain on disposal; continuing-operations income increased 7.2%.
In the fourth quarter, unaudited net sales were $1,489.8 million versus $1,447.2 million a year earlier; gross margin was $557.0 million versus $536.4 million; income from continuing operations was $117.4 million versus $101.2 million; and net income was $117.3 million versus $101.9 million. Diluted EPS was $0.41 versus $0.35.
At year-end, cash and cash equivalents were $226.3 million, working capital was $681.1 million, and the current ratio was 1.42. Total debt was $1,836.4 million, down from $1,918.4 million; net debt to total capitalization was 0.44:1. The company reported nearly $1.0 billion of borrowing capacity across its revolving and receivables facilities, while $87.9 million of cash was subject to Venezuelan exchange controls. Total assets were $6,069.7 million and stockholders’ equity was $2,075.0 million.
Material changes and segment results
- Core sales increased in all five segments. Baby & Parenting grew 10.2% on a core basis, Home Solutions 2.9%, Tools 3.4%, Commercial Products 3.9%, and Writing 0.1%.
- Segment operating income increased in Writing, Home Solutions, and Baby & Parenting, but declined in Tools and Commercial Products. Tools operating income fell 37.8% and Commercial Products fell 11.2%, largely amid higher selling, marketing, and promotional investment.
- Regional core sales grew 26.6% in Latin America and 3.0% in North America, but declined 3.3% in Europe, Middle East and Africa and 2.4% in Asia Pacific.
- Cash from operations decreased $13.3 million year over year, with higher pension contributions, inventory investment, restructuring payments, and incentive compensation partly offset by improved profitability and collections.
- The company paid $174.1 million in dividends and spent $119.5 million on its ongoing share-repurchase program. It also paid $350 million under an accelerated share buyback and initially received approximately 9.4 million shares; final settlement was expected by April 2014.
Outlook, management commentary, risks, and unusual items
Management expected 2014 operating cash flow of $600 million to $650 million after $100 million to $120 million of restructuring and restructuring-related cash payments, and capital expenditures of approximately $150 million to $175 million. These are cash-flow and investment expectations, not sales or earnings guidance. The company expected to remain in the Strategic Phase of its Growth Game Plan.
Project Renewal was expected to be completed by mid-2015, with total costs of $340 million to $375 million, including $300 million to $340 million in cash costs, and annualized savings of $270 million to $325 million. Through 2013, reported cumulative costs were $217 million, annualized savings approximately $200 million, and headcount reductions approximately 1,800 against a planned 2,250. Management said most savings would be reinvested in brand building and selling capabilities.
- Venezuela: The February 2013 currency devaluation generated an $11.1 million charge. The company had $87.3 million of Bolivar-denominated net monetary assets at year-end; further devaluation could affect earnings, sales, and operating income.
- Product safety: In February 2014, the company announced a voluntary recall of harness buckles on certain Graco convertible and harnessed booster seats. An expansion to infant car seats could adversely affect results.
- Supply and costs: Management expected continued raw-material inflation in 2014. The Baby & Parenting segment depends on a single supplier for products representing a majority of segment sales, and that supplier owns intellectual property for many of those products.
- Other significant exposures include retailer bargaining power and customer concentration (Wal-Mart represented approximately 11% of 2013 sales), the Office Depot–OfficeMax merger, foreign exchange, pension funding, tax contingencies, restructuring execution, and environmental matters.
- Environmental response costs were estimated at $20.4 million to $23.0 million, with a $21.0 million reserve. The company could not estimate its ultimate liability for the Lower Passaic River matter; it said adverse outcomes could be material.
- Restructuring costs were $111.1 million in 2013 versus $52.9 million in 2012. The 2013 effective tax rate was 22.5% versus 29.3%, affected by earnings mix and discrete tax benefits.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective.
Important facts for investors to verify
- Separate recurring performance from discontinued-operation gains: confirm the ongoing earnings contribution and the accounting for the Hardware and Teach divestitures.
- Track Project Renewal’s remaining costs, cash payments, realized savings, reinvestment, and progress toward mid-2015 completion.
- Assess the drivers of weaker operating income and margin, especially in Tools and Commercial Products, and whether brand investment translates into profitable growth.
- Monitor cash generation, working capital, pension contributions, debt maturities, borrowing capacity, and final settlement of the accelerated share buyback.
- Follow the Graco recall, Venezuela exposure, single-source supply dependency, tax uncertainties, and environmental contingencies, including any material changes after the filing date.