NEWELL BRANDS INC. quarterly report, Q2 FY2013

Business context and reporting period

Newell Rubbermaid Inc. (now identified in the request as Newell Brands) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2013. The company markets consumer and commercial products through five segments: Writing, Home Solutions, Tools, Commercial Products, and Baby & Parenting. Results are seasonal; management cautions that first-half results may not indicate full-year performance.

Financial results and liquidity

Q2 sales and continuing-operations income improved year over year, but reported net income was slightly lower because discontinued operations recorded a loss. First-half operating income and net income declined, with higher restructuring charges and discontinued-operation losses weighing on results. First-half gross margin was unchanged: productivity gains offset input-cost inflation and pricing, including merchandising investments. First-half tax rate was 23.7%, versus 28.9%, including $13.1 million of discrete tax benefits.

At June 30, cash was $154.1 million; total debt was $2,082.2 million, including $412.4 million of short-term debt. Net debt to total capitalization was 0.49, compared with 0.46 at year-end 2012. Working capital was $758.8 million and the current ratio was 1.41. The company reported $600.1 million of available capacity under its $800 million revolving facility; it was in compliance with debt covenants. The 364-day, $200 million receivables facility was due to expire in September 2013.

Material changes and management commentary

• By segment, first-half sales grew in Home Solutions (2.8%), Commercial Products (5.8%), and Baby & Parenting (5.8%); declined in Writing (2.0%) and Tools (1.6%). Tools operating income fell 37.5%, while operating income increased in the other four segments.
• First-half sales benefited from 2.5% core growth, offset in part by a 1.0% adverse currency impact. Growth in North and Latin America was partly offset by declines in EMEA and Asia Pacific. Management cited strong Baby & Parenting and Commercial Products demand, while Tools faced sluggish industrial markets and Writing faced channel and China distribution challenges.
• Project Renewal restructuring costs were $66.4 million in the first half, versus $22.1 million a year earlier. The program is expected to cost $340–$375 million in total, including $300–$340 million cash costs, and be completed by mid-2015. Management targets $270–$325 million of annualized savings; more than $100 million had been realized by June 30. Approximately 2,250 employees are expected to be affected.
• The company committed to divest its Hardware and Teach businesses and classified them as discontinued operations. First-half discontinued operations recorded $16.4 million of after-tax losses, including $22.7 million of pretax impairment and working-capital write-down charges. The Teach sale closed July 12, 2013; a definitive agreement to sell Hardware was signed August 8.
• Cash used in operations reflected a $100 million voluntary U.S. pension contribution, inventory builds ahead of product launches, and higher incentive compensation payments. First-half cash dividends were $88.1 million; share repurchases were $72.4 million for 2.9 million shares.

Outlook, risks, and contingencies

For 2013, management expected operating cash flow of $575–$625 million after $90–$110 million of restructuring and restructuring-related cash payments and the $100 million pension contribution; planned capital expenditures were $150–$175 million. Management believed cash, future operating cash flow, capital-market access, and borrowing facilities would support business needs and debt maturities. No full-year revenue or earnings guidance is stated in the supplied filing text.

Venezuela’s currency devaluation generated an $11.1 million first-half foreign-exchange loss. Management estimated the devaluation would reduce 2013 reported sales by $9 million and operating income by $5 million; a 10% exchange-rate change was estimated to affect pretax earnings by about $6 million and annual sales and operating income by about $6 million and $3 million, respectively.

Key risks include economic and retail demand, currency movements, raw-material and sourced-product costs, customer concentration and retailer bargaining power, execution of restructuring and SAP implementation, and pension funding requirements. The company reported a $22.2 million environmental reserve within an estimated response-cost range of $21.1–$24.0 million. It could not estimate its ultimate liability for the Lower Passaic River matter; management said an adverse determination could have a material impact. Other disclosed matters include car-seat class actions, a Brazil environmental fine claim of up to approximately $4 million, and product-liability reserves of $35 million.

Important facts for investors to verify

• Whether core-sales growth persists after accounting for currency effects and the prior-year European SAP timing shift.
• Actual cash conversion and working-capital trends: operating cash flow was negative in the first half, and the cash conversion cycle rose to 94 days from 83 at year-end.
• Project Renewal’s realized savings, remaining cash costs, timing, and execution risks relative to management’s targets.
• Renewal or replacement of the receivables facility expiring in September 2013, and the company’s short-term funding and covenant capacity.
• Completion terms and financial effects of the Teach and Hardware divestitures, plus any further discontinued-operation charges.
• Developments in Venezuela’s exchange rate and the Passaic River and other legal or environmental contingencies.