Business context and reporting period
Newell Rubbermaid Inc. (now Newell Brands Inc.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The company markets consumer and commercial products across five segments: Writing, Home Solutions, Tools, Commercial Products, and Baby & Parenting. Results are seasonal; management cautions that first-half performance may not indicate full-year results.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $1,521.0 million | $1,474.7 million | $2,753.2 million | $2,715.5 million |
| Gross margin | $608.4 million; 40.0% | $582.7 million; 39.5% | $1,077.7 million; 39.1% | $1,056.3 million; 38.9% |
| Operating income | $213.4 million; 14.0% | $185.4 million; 12.6% | $318.6 million; 11.6% | $283.2 million; 10.4% |
| Net income | $150.6 million | $109.8 million | $203.5 million | $164.0 million |
| Diluted EPS | $0.54 | $0.37 | $0.72 | $0.56 |
| Operating cash flow | Not separately presented for the quarter | $4.1 million | $(59.8) million |
Reported sales increased 3.1% in Q2 and 1.4% year to date; core sales increased 4.6% and 2.8%, respectively, while foreign currency reduced reported growth. Q2 gross-margin improvement reflected pricing, productivity and mix, partly offset by inflation and currency. Operating income benefited from higher gross margin and lower restructuring costs, partly offset by increased investment in brands and capabilities.
For the six months, SG&A increased to 26.7% of sales from 26.0%, including higher advertising and organizational-change costs. The effective tax rate was 20.1%, versus 23.7%, with the 2014 period including $11.3 million of benefits from tax-contingency resolutions. Discontinued operations contributed $2.3 million of first-half income, compared with a $16.4 million loss in 2013.
Balance sheet, debt and liquidity
At June 30, 2014, cash was $142.7 million, total debt was $2,064.9 million, and equity was $2,103.6 million. Debt increased $228.5 million from year-end 2013, primarily reflecting seasonal working-capital needs. Current liabilities included $389.4 million of short-term debt and $251.3 million of current long-term debt, including $250 million of notes due June 2015. Working capital was $472.2 million and the current ratio was 1.24, down from $681.1 million and 1.42 at year-end, largely because those notes were reclassified as current.
The company reported $764.9 million of available borrowing capacity under its revolving and receivables facilities and was in compliance with debt covenants. Net debt to total capitalization was 0.48, compared with 0.44 at December 31, 2013. First-half investing cash outflow was $63.9 million, including $67.0 million of capital expenditures; financing cash flow was $3.3 million. Cash declined $83.6 million to $142.7 million, including a $27.1 million adverse currency effect. The cash conversion cycle lengthened to 96 days from 94 days a year earlier.
Material changes and segment trends
- Writing sales rose 5.6% year to date, with 8.5% core growth; Tools sales rose 6.1% and Commercial Products sales rose 5.0%. These segments also reported higher first-half operating income.
- Home Solutions sales fell 3.8% and operating income fell 15.0%, reflecting lower volume and input-cost inflation. Baby & Parenting sales fell 5.9% and operating income fell 63.1%, including recall costs, weaker sales and unfavorable mix.
- First-half share repurchases totaled $158.7 million for 5.3 million shares. The quarterly dividend increased 13%, from $0.15 to $0.17 per share.
- Foreign-exchange losses in Venezuela were $38.3 million for the first half, including a $38.7 million charge when the company adopted the SICAD I rate of 10.6 Bolivars per U.S. dollar for remeasurement. This was a major contributor to higher nonoperating expense.
Outlook, management commentary and risks
Management expected 2014 operating cash flow of $600–$650 million after $100–$120 million of restructuring and restructuring-related cash payments, and capital expenditures of $150–$175 million. Project Renewal was expected to be completed by mid-2015, with total costs of $340–$375 million and annualized savings of $270–$325 million; most savings were expected to be reinvested in the business. Management estimated that product-line and geographic exits would reduce 2014 sales by $25 million.
On July 21, 2014, the company agreed to acquire Ignite Holdings for $308 million, subject to customary adjustments and approvals, with closing expected in Q3 2014. The company expected to fund the purchase with operating cash flow and available borrowings. In July, Graco expanded the harness-buckle recall to certain infant car seats; the company had recorded $11.4 million of recall costs through June and said additional execution costs were not expected to be significant, excluding possible fines or penalties.
Key risks include further Venezuelan currency devaluation, limited access to foreign currency, price controls and potential constraints on pricing; product-liability claims and regulatory consequences of the Graco recall; raw-material inflation, competition and foreign-sourcing exposure; restructuring execution and SAP implementation; pension funding; and uncertain environmental remediation exposure. The company estimated environmental response costs of $19.6–$22.2 million and had reserved $20.0 million. Its ultimate share of a potentially large Lower Passaic River cleanup could not be estimated; management said an adverse determination could have a material effect.
Investor verification priorities
- Track whether second-half operating cash flow meets the $600–$650 million outlook, given the weak first-half cash generation and seasonal working-capital demands.
- Verify the Ignite acquisition’s closing, financing, purchase-price adjustments and subsequent contribution to results.
- Monitor Venezuela’s applicable exchange rate, cash repatriation restrictions, price-control effects and any further currency charges.
- Assess recall-related sales, costs, regulatory actions and any fines or penalties beyond the $11.4 million charge recorded through June.
- Compare Project Renewal’s remaining costs, timing and realized savings with management’s targets, and evaluate whether reinvestment supports profitable growth.
- Review near-term debt maturities, borrowing capacity and covenant compliance, along with the company’s capacity to sustain dividends and repurchases.
- Follow developments in the Passaic River environmental matter and whether the company’s potential liability becomes estimable.