Newell Rubbermaid Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; comparisons are with the same 2011 periods unless noted. Amounts are in millions of dollars, except per-share data. The company markets consumer and commercial products under brands including Rubbermaid, Sharpie, Graco and Irwin. Effective January 1, 2012, it reorganized into Newell Consumer, Newell Professional and Baby & Parenting reporting segments.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net sales | $1,516.2 | $1,545.3 | $2,848.6 | $2,819.5 |
| Gross margin | $581.2; 38.3% | $584.4; 37.8% | $1,091.8; 38.3% | $1,069.3; 37.9% |
| Operating income | $185.5; 12.2% | $195.9; 12.7% | $309.7; 10.9% | $323.9; 11.5% |
| Net income | $111.8 | $146.7 | $191.1 | $222.4 |
| Diluted EPS | $0.38 | $0.49 | $0.65 | $0.75 |
| Operating cash flow | Not separately stated | Not separately stated | $55.7 | $(15.5) |
- Q2 reported sales fell 1.9%; core sales rose 0.4%, while foreign exchange reduced sales by 2.3%. First-half reported sales rose 1.0%; core sales grew 2.5%, partly offset by a 1.5% foreign-exchange headwind.
- Gross margin improved 50 basis points in Q2 and 40 basis points in the first half, as pricing and productivity more than offset input and sourced-product inflation. Operating margin declined as restructuring costs, strategic spending and weaker SG&A leverage offset gross-margin gains.
- Q2 and first-half net income were lower, reflecting weaker operating income and higher income taxes. The effective tax rate was 32.0% in Q2 and 28.9% for the first half, versus 15.0% and 19.0%, respectively, in 2011. The 2012 periods included $11.1 million of tax expense for contingencies and non-cash European Transformation Plan charges; the 2011 first half benefited from a $20.8 million release of tax reserves.
- First-half operating cash flow improved by $71.2 million year over year, primarily due to lower incentive-compensation and customer-program payments and improved management of non-operating working capital; pension contributions partly offset the improvement. Investing cash use was $82.3 million, including $85.0 million of capital expenditures; financing provided $227.8 million.
Segments and material changes
- Newell Consumer: First-half sales fell 2.8% to $1,448.0 million and operating income fell 5.6% to $221.1 million. Weakness in Décor and Europe offset growth in Writing & Creative Expression.
- Newell Professional: First-half sales rose 3.2% to $1,036.0 million and operating income rose 3.5% to $134.3 million. Core sales growth was broad, led by Industrial Products & Services.
- Baby & Parenting: First-half sales rose 12.0% to $364.6 million and operating income more than doubled to $41.6 million, with stronger North American retail sales and continued Asia Pacific growth.
- Western European macroeconomic weakness and customer pre-buys ahead of the April SAP launch affected reported quarterly performance. Management estimated that those pre-buys reduced Q2 core sales by about 190 basis points overall. Foreign currency was an additional headwind.
Liquidity, debt and capital allocation
- Cash was $370.8 million at June 30, 2012, up from $170.2 million at year-end 2011. Working capital was $210.4 million and the current ratio was 1.09:1, down from $487.1 million and 1.29:1, mainly because of debt classified as current.
- Total debt was $2,494.2 million, versus $2,176.8 million at December 31, 2011. Current portion of long-term debt was $946.3 million and short-term debt was $175.5 million. Total debt to total capitalization, net of cash as defined by the company, was 0.52:1.
- In June, the company issued $500 million of senior notes: $250 million at 2.0% due 2015 and $250 million at 4.0% due 2022, generating $495.1 million net proceeds. It redeemed $436.7 million of 5.25% junior convertible subordinated debentures on July 16, 2012; the associated preferred securities were also redeemed for $421.2 million. The balance sheet also included $500 million of 5.5% notes due April 2013.
- Available borrowing capacity was reported as $826.5 million under the revolving and receivables facilities; the company was compliant with its debt covenants. The $200 million receivables facility was due to expire in September 2012 unless extended.
- The company paid $53.3 million in dividends and repurchased and retired 2.3 million shares for $41.3 million in the first half. The quarterly dividend increased 25%, from $0.08 to $0.10 per share.
Outlook, management commentary and risks
- For full-year 2012, 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.
- Project Renewal was expected to be completed by year-end 2012, with $90–$100 million of pretax restructuring charges, $75–$90 million of cash costs and approximately $90–$100 million in annualized savings when fully implemented. The company expected to reinvest most savings in growth.
- The European Transformation Plan was also expected to be substantially completed by year-end. Its stated goal is to raise European operating margin to at least 10%; cumulative annual after-tax savings were projected at $55–$65 million. SAP went live in Europe in April, and management noted the new operating model changes geographic reporting comparability.
- Management cited uncertainty around back-to-school execution, recovery in the Décor business, European conditions and a stronger U.S. dollar. Other disclosed risks include retailer bargaining power, input costs and supply, innovation and brand execution, SAP implementation, pension funding, credit ratings, and tax exposures.
- Contingencies include product-liability reserves of $41.8 million and environmental reserves of $21.8 million. The company disclosed ongoing car-seat class actions and environmental matters, including Lower Passaic River proceedings for which ultimate liability could not be estimated; it stated an adverse outcome could be material. Venezuela had $53.0 million of net monetary assets exposed to exchange-rate changes, though local operations generated 1% or less of consolidated sales in the period.
Key facts for investors to verify
- Whether management achieves the full-year cash-flow and capital-expenditure outlook, particularly given the seasonal working-capital cycle; the filing notes that historically more than 65% of annual operating cash flow is generated in the second half.
- Progress and realized savings from Project Renewal and the European Transformation Plan, including remaining charges, cash costs and execution after the European SAP launch.
- Debt repayment and refinancing needs, especially the $500 million April 2013 maturity, commercial paper, and the status or renewal of the receivables facility.
- Whether core sales stabilize in Décor and Europe, and whether Baby & Parenting and Newell Professional growth can offset weakness elsewhere and currency effects.
- Changes in tax contingencies, environmental exposure and product-liability matters, and any impact on results or cash requirements.