Newell Rubbermaid Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. The filing describes a global consumer and commercial products company with five reporting segments. Management cautions that first-quarter results are seasonally weak and are not necessarily indicative of full-year performance; historically, about 60% of annual operating income is earned in Q2 and Q3, and more than 90% of operating cash flow in the second half.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $1,264.0 million | $1,214.3 million |
| Gross margin | $487.5 million; 38.6% | $457.0 million; 37.6% |
| Operating income | $98.2 million; 7.8% margin | $104.7 million; 8.6% margin |
| Income from continuing operations | $56.9 million | $51.8 million |
| Net income | $54.1 million; diluted EPS $0.20 | $52.9 million; diluted EPS $0.19 |
| Net cash used in operating activities | $154.3 million | $92.1 million |
| Capital expenditures | $50.9 million | $31.9 million |
- Reported sales rose 4.1%. Core sales increased 4.7%; acquisitions added 5.5%, planned divestitures reduced sales 0.6%, and foreign exchange reduced sales 5.5%.
- Gross margin improved 100 basis points, reflecting productivity, lower input costs, pricing, favorable mix and the prior-year Graco recall comparison. The recall comparison accounted for about 70 basis points of the improvement.
- Operating income fell 6.2%, mainly as restructuring costs increased to $27.3 million from $12.0 million. SG&A rose $21.7 million to $362.0 million, including higher advertising and acquisition-related costs.
- Net nonoperating expenses declined to $19.3 million from $54.4 million, primarily because Q1 2014 included a $38.7 million Venezuelan foreign-exchange loss. Interest expense rose to $19.2 million from $14.4 million as borrowings increased following 2014 acquisitions.
- Income tax expense was $22.0 million versus a $1.5 million benefit. The respective effective rates were 27.9% and negative 3.0%; prior-year results included discrete tax benefits and tax effects related to the Venezuelan currency loss.
Segments and material changes
- Writing: Sales $341.8 million, down 1.8% reported; core sales +9.0%. Operating income rose to $82.4 million from $76.1 million.
- Home Solutions: Sales $364.5 million, up 15.2%, including acquisition contribution; core sales +0.9%. Operating income increased to $38.5 million from $26.8 million.
- Tools: Sales $180.4 million, down 3.9% reported; core sales +3.2%. Operating income was $22.2 million versus $21.4 million.
- Commercial Products: Sales $185.2 million, up 1.4%; core sales +9.0%, partly offset by the planned medical-cart divestiture and currency. Operating income increased to $17.0 million from $13.8 million.
- Baby & Parenting: Sales $192.1 million, up 7.1%, including Baby Jogger acquisition contribution; core sales +0.8%. Operating income fell to $0.5 million from $5.4 million, with increased advertising, currency effects and $10.2 million of Graco recall-related costs weighing on results.
- Q1 2015 comprehensive loss was $39.1 million, versus comprehensive income of $62.4 million in Q1 2014, mainly reflecting $105.5 million of foreign-currency translation losses.
Cash, debt and liquidity
- At March 31, cash was $215.4 million; total debt was $2,834.5 million, including $733.9 million of short-term debt and $2,094.1 million of long-term debt. Debt increased $352.6 million from year-end 2014.
- Working capital was $378.8 million, down from $535.9 million at December 31, 2014; the current ratio fell to 1.19 from 1.28. Net debt to total capitalization rose to 0.61 from 0.55.
- The company reported $422.9 million of available borrowing capacity under its revolving credit and receivables facilities. It had $477.1 million of commercial paper and $250.0 million drawn under the receivables facility; the latter facility expires in September 2015. The company reported compliance with debt covenants.
- Operating cash outflow increased year over year, largely reflecting a voluntary $70.0 million contribution to the U.S. pension plan, seasonal working-capital needs and payments for customer programs and performance compensation. Financing provided $218.2 million, including $343.4 million of net short-term borrowings.
- Q1 uses included $73.6 million of share repurchases and $53.2 million of dividends. The quarterly dividend increased 12% to $0.19 per share. The repurchase authorization had $362.8 million remaining through 2017.
Outlook, management commentary and risks
- Management continued its Growth Game Plan and Project Renewal restructuring. The April 2015 expansion is expected to add approximately $150 million in annualized savings by the end of 2017 and incur $150 million of additional costs, including approximately $135 million cash costs. Total Project Renewal costs are now estimated at $690–$725 million, with cumulative annualized savings of $620–$675 million expected by the end of 2017. Management intends to reinvest a large portion of incremental savings in brand-building and selling capabilities. These are forward-looking estimates, not guaranteed results.
- No formal consolidated revenue or EPS guidance is stated in the supplied filing text. Management reported Q1 core sales growth of 4.7%, with strength in Latin America and North America and declines in EMEA and slight declines in Asia Pacific. It noted that Q1 growth was favorably affected by some advance customer sell-in ahead of later advertising and merchandising support.
- Venezuela: The company remeasured at the SICAD rate of 12 bolivars per U.S. dollar and recorded no Venezuelan remeasurement gain or loss in Q1. Venezuelan operations held $57.8 million in net monetary assets, including $52.9 million of cash subject to exchange controls. Management estimated that using the SIMADI rate of 193 could trigger charges of up to $86 million, plus adverse effects on subsequent sales and operating income. Restricted access to foreign currency, price controls and further devaluation could materially harm results.
- Restructuring and product matters: Graco agreed to spend $7 million over five years on child-safety enhancements and pay NHTSA $3 million in Q2 2015; the company recorded $10 million of related costs in Q1. The recall involved harness buckles on certain car seats; the filing reported no injuries associated with the recalled buckles.
- Divestitures: Endicia sale was agreed at an estimated $215 million, subject to customary adjustments and conditions, with closing expected by year-end 2015. Culinary electrics and retail operations ceased during Q1. In May 2015, the company announced its intention to divest the Rubbermaid medical-cart business, which remained in continuing operations pending sale.
- Contingencies: Environmental remediation reserves were $23.8 million against estimated costs of $22.3–$27.6 million. Potential responsibility for the Lower Passaic River cleanup remains uncertain; the company could not estimate its ultimate liability, and an adverse outcome could be material. Product-liability reserves were $32.9 million at March 31.
- Other risks include currency and commodity movements, customer and retail concentration, demand and regional economic weakness, acquisition and divestiture execution, pension funding, product liability and recalls, restructuring execution, and SAP implementation. Wal-Mart accounted for approximately 9.6% of Q1 sales.
Most important facts for investors to verify
- Whether core sales momentum persists after considering advance sell-in, foreign exchange and acquisition contributions, and the strength of results by region and segment.
- Whether Project Renewal delivers its projected savings on schedule and within the revised cost and cash-cost ranges.
- Liquidity and refinancing needs around the September 2015 receivables-facility expiry, commercial-paper balances and seasonal working-capital outflows.
- Whether Venezuela can continue accessing SICAD currency, and the potential financial effects of SIMADI use, devaluation or price restrictions.
- Progress and final proceeds for the Endicia and medical-cart divestitures, along with any related costs or changes in reported operations.
- Developments in the Lower Passaic River environmental matter, Graco recall-related obligations and other legal or product contingencies.