Business context and reporting period
Newell Brands Inc. (formerly Newell Rubbermaid Inc.) reported its unaudited first quarter ended March 31, 2016; amounts are in U.S. dollars. The quarter’s results exclude Jarden Corporation, which became a wholly owned subsidiary on April 15, 2016. Jarden’s acquisition is a major subsequent event and materially changes the company’s scale and debt profile. First-quarter results are seasonally weaker and may not indicate full-year performance.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $1,314.9 million | $1,264.0 million |
| Gross margin | $505.6 million; 38.5% | $487.5 million; 38.6% |
| Operating income | $125.4 million; 9.5% margin | $98.2 million; 7.8% margin |
| Income from continuing operations | $40.3 million | $56.9 million |
| Net income | $40.5 million; diluted EPS $0.15 | $54.1 million; diluted EPS $0.20 |
| Cash used in operating activities | $270.9 million | $154.3 million |
| Cash used in investing activities | $70.0 million | $49.1 million |
| Cash and cash equivalents at quarter-end | $8,180.9 million | $215.4 million |
| Total debt at quarter-end | $11,375.3 million | $3,057.9 million |
Gross margin declined 10 basis points, while operating margin improved 170 basis points, reflecting lower restructuring costs and SG&A as a percentage of sales. Interest expense was $29.4 million versus $19.2 million; net nonoperating expenses included a $45.9 million write-off of fees on the terminated Jarden bridge facility. The effective tax rate was 21.9%, compared with 27.9%.
Reported sales rose 4.0%; core sales, a company-defined non-GAAP measure excluding currency, acquisitions and divestitures, increased 5.6%. Sales growth reflected $44.9 million from acquisitions, including Elmer’s, and was partly offset by foreign currency, divestitures and Venezuela’s deconsolidation. Segment sales were: Writing $378.8 million, Home Solutions $372.1 million, Tools $179.7 million, Commercial Products $174.5 million, and Baby & Parenting $209.8 million.
Material changes versus the prior period
- Net income fell to $40.5 million from $54.1 million, despite higher sales and operating income, primarily reflecting increased interest expense and the $45.9 million facility-termination charge.
- Operating cash outflow widened to $270.9 million from $154.3 million. Management attributed the increase mainly to a $58.0 million tax payment related to the 2015 Endicia divestiture, $91.2 million paid to settle interest-rate hedges, and higher incentive compensation; the prior-year period included a $70.0 million pension contribution.
- Debt increased by $8.3 billion, primarily following the March issuance of $8.0 billion of senior notes to finance the Jarden transaction. The quarter-end cash balance includes the $7.9 billion net note proceeds and is not representative of recurring operating cash generation.
- Baby & Parenting operating income improved to $23.1 million from $0.5 million, partly because the prior-year quarter included $10.2 million of Graco recall costs. Commercial Products operating income increased to $22.4 million from $17.0 million; Tools declined to $18.7 million from $22.2 million.
- Venezuela was deconsolidated effective December 31, 2015. Its Q1 2015 results had included $21.9 million in sales and $7.5 million in operating income.
Outlook, commentary, risks and unusual items
- Management described 2016 as the start of the Growth Game Plan’s Acceleration Phase, with increased investment behind higher-growth businesses, innovation, advertising and international expansion. No specific full-year revenue or earnings guidance is provided in the filing text.
- Following Jarden’s acquisition, management expects at least $500 million in annualized cost synergies over four years and approximately $500 million of restructuring and integration costs over the same period. Management intends to prioritize debt reduction while maintaining the dividend and its investment-grade credit rating.
- Project Renewal is expected to generate $650–$675 million of annualized savings by the end of 2017, with cumulative pretax costs of $690–$725 million. Through March 31, 2016, the company reported approximately $395 million of annualized savings and $495 million of restructuring and other project-related costs.
- Jarden’s acquisition consideration was estimated at approximately $15.3 billion, assuming conversion of all its convertible notes. The company reported post-closing indebtedness of approximately $13.9 billion on the same conversion assumption. Jarden’s purchase accounting was incomplete at the filing date.
- Key risks include higher leverage, interest costs, potential credit-rating pressure, integration and synergy execution, currency and macroeconomic exposure, customer concentration (Walmart represented 12.7% of Q1 sales), product liability and environmental matters. Moody’s rated senior debt Baa3 with a stable outlook; S&P rated it BBB- with a negative outlook; Fitch rated it BBB- with a stable outlook.
- Environmental exposure includes a $24.9 million reserve for remediation matters. The company cannot estimate its ultimate liability for the Lower Passaic River cleanup; EPA’s selected remedy for the lower 8.3 miles is estimated at $1.38 billion, but allocation among potentially responsible parties is unclear. A separate Clean Air Act labeling matter was under settlement discussion, with an expected penalty not exceeding $110,000.
- The filing describes Jarden-related shareholder litigation and appraisal demands involving approximately 11.5 million shares. It also reports the Levolor and Kirsch divestiture agreement at an estimated $270 million, subject to adjustments and closing conditions.
- The company reported compliance with debt covenants and effective disclosure controls at March 31, 2016. Seasonal working-capital needs, elevated inventory and customer-program payments contributed to first-quarter cash usage; management historically generates more than 95% of operating cash flow in the second half.
Important facts for investors to verify
- Post-acquisition debt, interest expense, maturities and cash-flow capacity, including the effects of Jarden debt and convertible-note conversions.
- Actual realization, timing and costs of the Jarden synergy plan and Project Renewal savings.
- Whether reported core-sales growth converts into sustained reported growth and margin improvement after currency, divestitures and acquisition effects.
- Operating cash generation and working-capital trends through the seasonally stronger quarters; distinguish operating cash from acquisition-financing proceeds.
- Progress and final sale proceeds for the Levolor/Kirsch business, and developments in environmental, litigation and product-related contingencies.