Newell Rubbermaid Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; filed August 7, 2015. The company marketed consumer and commercial products through five segments: Writing, Home Solutions, Tools, Commercial Products, and Baby & Parenting.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $1,560.9m | $1,502.2m | $2,824.9m | $2,716.5m |
| Gross margin | $621.0m; 39.8% | $595.6m; 39.6% | $1,108.5m; 39.2% | $1,052.6m; 38.7% |
| Operating income | $214.7m; 13.8% | $213.3m; 14.2% | $312.9m; 11.1% | $318.0m; 11.7% |
| Net income | $148.5m | $150.6m | $202.6m | $203.5m |
| Diluted EPS | $0.55 | $0.54 | $0.74 | $0.72 |
- Q2 reported sales increased 3.9%; core sales, excluding currency, acquisitions and planned divestitures, grew 5.1%. For the first half, reported sales rose 4.0% and core sales grew 4.9%.
- Q2 gross margin improved 20 basis points, but operating margin declined 40 basis points. For the first half, gross margin improved 50 basis points while operating margin fell 60 basis points.
- First-half operating cash flow was negative $51.8m, versus positive $4.1m a year earlier. Investing used $77.0m; financing provided $162.6m. Cash increased $39.3m to $238.7m.
- Cash used in operations reflected, among other items, a $70m voluntary U.S. pension contribution and seasonal working-capital needs; inventory increased $245.9m in operating cash-flow movements.
- At June 30, total debt was $2,863.5m, up $381.6m from year-end; short-term debt was $776.6m and long-term debt $2,080.9m. Net debt to total capitalization rose to 0.60 from 0.55.
- Working capital was $446.5m and the current ratio 1.19:1, compared with $535.9m and 1.28:1 at December 31, 2014. Cash included $61.9m subject to Venezuelan currency controls. The company reported $380.2m available under its $800m revolving facility.
Changes and segment performance
- Q2 sales growth included 5.1% core growth, a 5.6% contribution from acquisitions, a 0.8% reduction from planned medical-cart divestiture, and a 6.0% adverse currency impact. First-half figures were 4.9%, 5.6%, negative 0.8%, and negative 5.7%, respectively.
- Acquisitions completed in 2014—Ignite and bubba in Home Solutions, and Baby Jogger in Baby & Parenting—boosted reported sales. Home Solutions and Baby & Parenting Q2 sales grew 14.4% and 14.7%; Tools and Commercial Products sales declined 7.7% and 5.8%, largely reflecting currency and, for Commercial Products, the planned medical-cart divestiture.
- Home Solutions and Baby & Parenting Q2 operating income increased 41.1% and 36.9%; Tools and Commercial Products declined 21.7% and 20.2%. Writing operating income increased 2.6%.
- Management attributed gross-margin improvement to productivity, pricing, lower input costs and favorable mix, partly offset by currency and acquisition mix. SG&A rose with increased advertising, acquired-business expenses, Graco recall costs and Project Renewal activity.
Outlook, management commentary and risks
- No specific consolidated revenue, earnings or EPS guidance for 2015 is stated in the filing. Management cautioned that first-half results may not indicate full-year performance: historically, about 60% of annual operating income is earned in Q2 and Q3, and more than 90% of operating cash flow is generated in the second half.
- Project Renewal is expected to deliver annualized savings of $620m–$675m by the end of 2017; approximately $311m of annualized savings had been realized by June 30. Total program costs are estimated at $690m–$725m, including $645m–$675m in cash costs. The April 2015 expansion adds approximately $150m in expected costs and is expected to produce about $150m in annualized incremental savings. A large portion of savings is intended for reinvestment.
- Venezuela is a significant uncertainty. The company remeasured using the SICAD rate of 12.8 bolivars per U.S. dollar and recorded a $4.7m Q2 foreign-exchange loss. It disclosed potential charges of up to $97m if it adopted the SIMADI rate, and a possible impairment of up to $102.2m if it had to deconsolidate Venezuelan operations. Restricted currency access, price controls and further devaluation could adversely affect results.
- The Graco car-seat harness-buckle recall continued to affect costs. A March 2015 NHTSA consent order required $7m over five years for child-safety efforts and a $3m payment, paid in Q2; the company recorded the $10m cost in Q1. Product liability reserves were $33.1m at June 30.
- Environmental reserves were $23.6m. For the Lower Passaic River site, cleanup alternatives range widely and the company said its ultimate responsibility could not yet be estimated; an adverse determination could be material.
- Endicia was under an agreement to be sold for an estimated $215m, subject to customary conditions. The company ceased its Culinary electrics and retail operations during Q1. It announced plans to divest its Rubbermaid medical-cart business; substantially all assets were sold in August 2015, after quarter-end.
- After quarter-end, the receivables facility was extended to September 2016 and its capacity increased to $400m. The company said it was compliant with debt covenants at June 30 and believed available liquidity would support existing business needs.
Key facts investors should verify
- Whether second-half seasonal cash generation offsets first-half operating cash use and the inventory build.
- Whether Project Renewal savings are achieved on schedule and within the disclosed cost range, including the balance between savings and reinvestment.
- Venezuela’s access to U.S. dollars, applicable exchange rate, price-control developments, and any related impairment or deconsolidation exposure.
- Debt reduction, short-term borrowing needs, liquidity availability and covenant headroom as working capital normalizes.
- Performance excluding acquisitions, currency and planned divestitures, particularly in Tools, Commercial Products and Baby & Parenting.
- Resolution and remaining costs of the Graco recall, Endicia sale conditions, and environmental contingencies.