Newell Rubbermaid Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing covers the full year, not just Q4; it reports fourth-quarter results separately. The company marketed consumer and commercial products through Home & Family, Office Products, and Tools, Hardware & Commercial Products. The company reorganized into two operating groups effective January 1, 2012, with Baby & Parenting as a stand-alone segment.
Financial performance and position
- Revenue: Net sales were $5.865 billion, up 3.6% from 2010. Core sales rose 1.8%; foreign currency contributed 1.8%.
- Profit and margins: Gross profit was $2.205 billion, with a 37.6% gross margin versus 38.0% in 2010. Operating income was $257.2 million (4.4% margin), versus $623.5 million (11.0%) in 2010. The 2011 result included $382.6 million of noncash impairment charges; excluding those charges, operating income was $639.8 million, or 10.9% of sales. Net income was $125.2 million versus $292.8 million; diluted EPS was $0.42 versus $0.96.
- Cash flow: Operating cash flow was $561.3 million, down from $582.6 million. Capital expenditures were $222.9 million, up from $164.7 million. Cash and cash equivalents increased by $30.6 million to $170.2 million.
- Debt and liquidity: Total debt was $2.177 billion, down from $2.369 billion; net debt was approximately $2.007 billion. Working capital was $487.1 million and the current ratio was 1.29. The company had an $800 million revolving credit facility, undrawn at year-end, and $100 million outstanding under its receivables facility. Debt due within 12 months totaled $367.5 million, including $250 million of notes due March 2012.
- Segments: Sales increased 0.5% in Home & Family, 4.1% in Office Products, and 7.9% in Tools, Hardware & Commercial Products. Segment operating income rose 11.4% in Office Products, declined 0.5% in Home & Family, and declined 5.0% in Tools, Hardware & Commercial Products.
Material changes versus 2010
- Sales growth was driven by emerging markets and currency; core sales in Europe declined 3.4%. Input and sourced-product inflation, partly offset by pricing and productivity, reduced gross margin by 40 basis points.
- The $382.6 million impairment charge principally reflected goodwill write-downs in Baby & Parenting ($305.5 million) and Hardware ($64.7 million), following weaker sales projections. No comparable impairment was recorded in 2010.
- Interest expense fell to $86.2 million from $118.4 million, while debt-extinguishment losses fell to $4.8 million from $218.6 million, which had been associated with 2010 debt restructuring.
- Operating cash flow decreased by $21.3 million, principally reflecting higher customer-program payments. Capital spending increased, with SAP implementation a major component.
- Fourth-quarter 2011 net sales were $1.495 billion and net income was $80.4 million, compared with $1.442 billion and $75.7 million, respectively, in Q4 2010. Q3 2011 included a $177.6 million net loss, largely reflecting impairment charges.
Outlook, management commentary, risks and unusual items
- 2012 outlook: Management expected operating cash flow of $550–$600 million after $110–$120 million of restructuring and restructuring-related cash payments, and capital expenditures of approximately $200–$225 million. It said available cash, operating cash flow, borrowing capacity, and capital-market access were expected to support existing businesses and debt maturities.
- Project Renewal: Expected to generate annual cost savings of $90–$100 million when fully implemented by the end of 2012, with most savings reinvested in growth. Expected pretax restructuring charges were $90–$100 million, including $75–$90 million of cash costs; approximately 500 net positions were expected to be eliminated. The company had incurred about $31 million of charges through year-end 2011.
- European Transformation Plan: Expected total restructuring and related costs of $110–$115 million and annual after-tax savings of $55–$65 million upon completion by the end of 2012. Most expected savings had already been realized and reflected in 2011 results.
- Risks: Key exposures include weak consumer and commercial demand, retailer bargaining power and pricing pressure, commodity and sourced-product inflation, supplier concentration, foreign exchange and international-market risks, pension funding needs, tax uncertainty, product liability, and execution risks from restructuring and the multi-year SAP rollout. Management also warned that further impairment charges could occur if economic or business conditions weaken.
- Contingencies and unusual items: The company sold its hand torch and solder business in July 2011 for $51 million, with $8 million held in escrow; the sale resulted in a $15.2 million after-tax loss. Environmental response costs were estimated at $21.6–$25.6 million, with a $21.9 million reserve. Product liability reserves were $39.7 million. A separate patent dispute was pending, with trial scheduled for March 2012; the company said it was defending the case. The filing also recognized $49 million of tax benefits from resolution or expiration of tax matters.
- Ernst & Young issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Whether core-sales growth and pricing can offset ongoing input-cost inflation, particularly in the segments where operating margins weakened.
- Whether Project Renewal and the European plan achieve their stated savings on schedule and within expected costs, and how much savings are reinvested rather than retained.
- Whether the company can refinance or repay near-term maturities while maintaining liquidity, investment-grade ratings, and covenant compliance.
- Whether Baby & Parenting and Hardware performance supports goodwill valuations after the substantial 2011 impairments, and whether additional impairment tests or charges are needed.
- Whether operating cash flow meets the 2012 outlook after restructuring payments, pension contributions, and planned capital expenditures.
- Developments in the patent litigation, environmental matters, tax contingencies, and the release of the $8 million sale escrow.