Newell Rubbermaid Inc. (now identified in the request as Newell Brands) — Q2 2011 Form 10-Q
Business context and reporting period
Quarterly period ended June 30, 2011; filed August 5, 2011. Newell Rubbermaid reported three segments: Home & Family, Office Products, and Tools, Hardware & Commercial Products. Results are unaudited. The company notes that sales and cash flows are seasonal, so first-half results may not indicate full-year performance.
Financial results and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $1,572.8 million | $1,496.2 million | $2,875.5 million | $2,802.6 million |
| Gross margin | $589.9 million; 37.5% | $587.3 million; 39.3% | $1,080.8 million; 37.6% | $1,059.0 million; 37.8% |
| Operating income | $197.9 million; 12.6% margin | $203.5 million; 13.6% margin | $328.5 million; 11.4% margin | $333.6 million; 11.9% margin |
| Net income | $146.7 million | $130.4 million | $222.4 million | $188.8 million |
| Diluted EPS | $0.49 | $0.41 | $0.75 | $0.61 |
- Q2 reported sales rose 5.1%; core sales increased 1.9% and foreign currency contributed 3.2%. First-half reported sales rose 2.6%, with core sales up 0.2% and currency contributing 2.4%.
- Q2 gross margin declined 175 basis points per management, primarily because pricing lagged input and sourced-product inflation and prior-year overhead absorption was favorable. First-half margin decreased 20 basis points.
- First-half cash used in operating activities was $15.5 million, versus $183.4 million provided in the prior-year period. Higher inventory and customer-program payments were cited. Capital expenditures were $96.1 million; investing cash use was $116.0 million.
- Cash was $143.6 million at June 30. Total debt was $2,528.2 million, versus $2,368.9 million at December 31, 2010; debt classified as short-term or current totaled $722.7 million. Working capital was $409.2 million and the current ratio was 1.19:1. Revolver availability was $553.1 million; the $200 million receivables facility was fully drawn.
- Cash conversion cycle increased to 92 days from 84 days at June 30, 2010, reflecting higher receivables and inventory. Total debt to total capitalization, as defined by the company, was 0.52:1.
Material changes versus comparable periods
- Despite higher sales and net income, operating income and operating margin declined year over year in both Q2 and the first half. Higher input costs and SG&A spending offset sales growth and lower restructuring charges.
- Segment sales in Q2 rose 1.6% in Home & Family, 3.4% in Office Products, and 12.1% in Tools, Hardware & Commercial Products. First-half segment sales changed by -1.2%, +3.6%, and +6.9%, respectively. Home & Family operating income fell 16.1% in the first half; Office Products operating income rose 3.1%; Tools, Hardware & Commercial Products operating income fell 4.2%.
- Interest expense fell to $43.2 million for the first half from $65.2 million, attributed to lower borrowing costs and capital-structure actions. First-half net income included a $4.8 million loss on extinguishment of convertible debt.
- Operating cash flow shifted from positive to negative, while short-term borrowings increased. Cash dividends paid were $38.1 million, up from $28.0 million; the quarterly dividend was raised from $0.05 to $0.08 per share in June 2011.
Outlook, management commentary, risks and unusual items
- Management forecast 2011 operating cash flow of $520–$560 million after $90–$100 million of restructuring and related cash payments, and capital expenditures of approximately $200 million. The company expected liquidity sources to cover business needs and debt maturities.
- Management identified Baby & Parenting stabilization, consumer response to Rubbermaid Consumer price increases, and back-to-school sell-through as key second-half sales factors. Core sales growth was targeted to increase in the second half.
- The European Transformation Plan is expected to cost $110–$115 million in total, including $40–$45 million of restructuring charges and $70–$75 million of related SG&A costs. Completion is expected in 2012; annualized after-tax savings of $55–$65 million are expected upon completion. Approximately $7 million of restructuring and $30 million of related charges had been incurred through June 30, 2011.
- A $20.8 million tax benefit from expiration of worldwide statutes of limitation reduced the effective tax rate to 15.2% in Q2 and 19.2% for the first half. The benefit is an unusual item, not a recurring operating contribution.
- On July 1, 2011, after quarter-end, the company sold its hand torch and solder business to Worthington for preliminary cash consideration of $51 million, including $8 million in escrow, subject to adjustment. The transaction settled related litigation; management said it intended to use substantially all proceeds to repay debt. The business had approximately $100 million of 2010 sales.
- Near-term maturities include $150 million under the term loan in September 2011, the receivables facility’s September 2011 expiration unless extended, and $250 million of notes due March 2012. The company reported compliance with debt covenants at June 30; a covenant breach could restrict borrowing and accelerate repayment.
- Risks include input-cost inflation, retailer bargaining power, economic conditions, foreign exchange, execution of SAP and restructuring programs, pension funding, and tax exposures. Environmental response-cost estimates were $19.8–$32.3 million against a $22.0 million reserve. Potential Sao Paulo environmental fines were up to approximately $4.0 million. Product-liability reserves were $42.7 million. Management believed resolution of disclosed proceedings would not materially affect the consolidated financial statements, while noting outcomes are uncertain.
Important facts for investors to verify
- Whether operating cash flow recovers in the second half as forecast, given first-half cash use and the 92-day cash conversion cycle.
- Whether pricing and productivity offset input-cost inflation sufficiently to stabilize gross and operating margins.
- How the September 2011 term-loan repayment and receivables-facility renewal or replacement affect liquidity and short-term debt.
- Whether the European Transformation Plan remains within its $110–$115 million cost range and achieves the stated savings and margin objectives.
- Final sale proceeds and adjustments for the hand torch and solder divestiture, including escrow release and debt repayment.