Newell Rubbermaid Inc. — Q3 2015 Form 10-Q
Business context and period. This unaudited filing covers the quarter and nine months ended September 30, 2015. Newell Rubbermaid sold consumer and commercial products across five segments: Writing, Home Solutions, Tools, Commercial Products, and Baby & Parenting. The company was executing its Growth Game Plan and Project Renewal. Results are seasonal; management cautioned that nine-month results may not indicate full-year performance.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $1,530.0m | $1,484.5m | $4,354.9m | $4,201.0m |
| Gross margin | $598.9m; 39.1% | $576.7m; 38.8% | $1,707.4m; 39.2% | $1,629.3m; 38.8% |
| Operating income | $186.6m; 12.2% | $173.2m; 11.7% | $499.5m; 11.5% | $491.2m; 11.7% |
| Income from continuing operations | $134.0m | $122.9m | $339.0m | $323.7m |
| Net income | $134.2m | $122.3m | $336.8m | $325.8m |
| Diluted EPS | $0.50 | $0.44 | $1.25 | $1.16 |
- Reported sales rose 3.1% in Q3 and 3.7% year to date. Core sales, excluding foreign exchange, acquisitions, and divestitures, grew 5.9% and 5.2%, respectively. Currency reduced reported sales by 6.2% in Q3 and 5.9% year to date; acquisitions added 4.6% and 5.2%, respectively.
- Year-to-date gross margin improved 40 basis points, but operating margin fell 20 basis points as higher restructuring and transformation costs offset margin gains and overhead savings. Q3 operating margin increased 50 basis points.
- Year-to-date effective tax rate was 21.2%, versus 19.6% in 2014; the prior period included $28.3m of specified tax benefits. Diluted EPS from continuing operations was $1.25 for the nine months, versus $1.16.
- By segment, year-to-date reported sales increased 13.0% in Home Solutions and 12.1% in Baby & Parenting, partly reflecting acquisitions. Writing rose 0.5%; Tools declined 6.8% and Commercial Products declined 3.4%, with foreign exchange and the medical-cart divestiture affecting reported results. Core sales grew in all five segments.
Cash flow, debt, and liquidity
- Operating cash flow for the first nine months was $288.1m, down from $343.3m. Management attributed much of the decline to a $70.0m voluntary U.S. pension contribution and higher inventory investment. Capital expenditures were $154.7m, compared with $101.0m.
- Cash increased $66.8m to $266.2m. Investing activities used $139.7m and financing activities used $69.6m. The company paid $155.4m in dividends and repurchased $166.3m of shares during the period.
- Total debt was $2,734.4m at September 30, up $252.5m from year-end 2014; cash was $266.2m. Short-term debt was $631.4m, including $236.9m of commercial paper and $375.0m drawn on the receivables facility. Net debt to total capitalization rose to 0.58 from 0.55.
- Working capital was $445.2m and the current ratio was 1.21:1, down from $535.9m and 1.28:1 at year-end. The company reported $563.1m available under its $800m revolver and $25.0m available under its $400m receivables facility, and said it was in compliance with debt covenants. It considered available liquidity and expected operating cash flows adequate for existing needs.
Material changes, outlook, and risks
- Project Renewal: The expanded program is expected to be completed by the end of 2017. Total pretax costs are estimated at $690m–$725m, including $645m–$675m cash costs; expected annualized savings are $620m–$675m. The company reported $325m of annualized savings realized through September 30 and $421m of restructuring and other project-related costs incurred to date. It expects about $150m of additional costs from the 2015 expansion, with approximately $150m of incremental annualized savings; much of the savings are intended for reinvestment.
- Venezuela: The company remeasured Venezuelan operations at 13.5 bolivars per U.S. dollar and recorded $9.2m of foreign-exchange losses year to date. Venezuelan operations had $82.8m of bolivar-denominated net monetary assets, including $78.2m of cash subject to exchange controls. The company warned that insufficient access to U.S. dollars could force use of the SIMADI rate (199 bolivars per dollar); applying that rate at September 30 could have caused charges of up to $105m, including asset impairments. Further currency controls, price restrictions, or inability to make key operating decisions could materially affect results or lead to deconsolidation. In October, Venezuela reduced the maximum profit margin on imported goods to 20%.
- Portfolio actions and subsequent events: The company sold substantially all Rubbermaid medical-cart assets in August. Endicia was under agreement for an estimated $215m sale, with closing expected in November. In October, it announced plans to divest the Levolor and Kirsch window-coverings business. It also acquired Elmer’s Products for $600m on October 22, financed with $600m of senior notes; the acquisition was not reflected in September 30 debt. Elmer’s 2015 sales were projected at approximately $240m.
- Other unusual items: A Graco car-seat buckle recall resulted in a $10m NHTSA consent-order cost recorded in Q1 2015; $3m was paid and $7m is to be spent over five years. A pension lump-sum offer could result in a non-cash Q4 settlement charge; management estimated about $35m at a 50% acceptance rate, with the final amount not yet determinable.
- Contingencies and sensitivities: Environmental remediation reserves totaled $23.6m against estimated aggregate costs of $22.8m–$28.4m. The company could not estimate its ultimate liability for the Lower Passaic River matter; it said an adverse outcome could be material, while currently not believing material impact was reasonably likely. Product-liability reserves were $37.2m. Annual impairment testing found no material goodwill or indefinite-lived intangible impairment, but estimates remain sensitive to business performance and valuation assumptions.
- Management cited foreign-exchange movements, consumer and industrial conditions, retailer bargaining power, input costs, product recalls, pension funding, execution of restructuring, and risks in foreign operations among factors that could affect results. The company reported effective disclosure controls as of quarter-end.
Investor verification priorities
- Check whether core-sales growth converts into sustainable reported growth as currency, acquisitions, and planned divestitures change.
- Track Project Renewal’s realized savings against its remaining costs and whether planned reinvestment supports growth and margins.
- Assess Venezuela’s currency access, trapped cash, price controls, and the potential financial effects of a move to SIMADI or deconsolidation.
- Review liquidity and debt after the Elmer’s acquisition, including short-term borrowing needs, covenant headroom, and cash conversion.
- Follow the Endicia and Décor divestitures, the pension settlement charge, and the unresolved environmental and product-liability exposures.