Newell Rubbermaid Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011. The filing is by Newell Rubbermaid Inc. (the company now known as Newell Brands). The company sells consumer and commercial products across Home & Family, Office Products, and Tools, Hardware & Commercial Products. Management notes that first-quarter sales, operating income, and cash flow are typically seasonally low.
Financial performance
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net sales | $1,302.7 million | $1,306.4 million |
| Gross margin | $490.9 million; 37.7% | $471.7 million; 36.1% |
| Operating income | $130.6 million; 10.0% | $130.1 million; 10.0% |
| Net income | $75.7 million | $58.4 million |
| Diluted EPS | $0.25 | $0.19 |
| Net interest expense | $21.9 million | $32.0 million |
| Operating cash flow | $(108.3) million | $29.4 million |
- Sales declined 0.3%; core sales fell 1.7%, partly offset by a 1.4% favorable foreign-currency effect. Management attributed much of the core-sales comparison to prior-year customer pre-buying ahead of SAP implementation and order timing.
- Gross margin expanded 160 basis points, reflecting productivity, pricing, product mix, and higher overhead absorption, partly offset by input-cost inflation. SG&A rose to 27.2% of sales from 24.9%, including higher strategic spending and $5.3 million of European Transformation Plan-related costs.
- Income-tax expense was $26.7 million, with a 26.1% effective rate versus 40.7%. The lower rate reflected geographic earnings mix and nonrecurring prior-year tax charges.
- By segment, sales were down 4.1% in Home & Family, up 3.8% in Office Products, and up 1.5% in Tools, Hardware & Commercial Products. Operating income declined 17.7% in Home & Family and 4.3% in Tools, Hardware & Commercial Products, while rising 16.1% in Office Products.
Balance sheet, debt, and liquidity
- At March 31, cash and cash equivalents were $139.7 million; total debt was $2,532.4 million, compared with $2,368.9 million at year-end 2010. The company reported $736.1 million of short-term debt and current long-term debt, including commercial paper, receivables-facility borrowings, a term loan due September 2011, and $250 million of notes due March 2012.
- Working capital was $299.2 million, down from $466.1 million at December 31, 2010; the current ratio declined to 1.15 from 1.28. Management attributed the deterioration primarily to higher current and short-term debt.
- Available borrowing capacity was $491 million under the revolving facility and $50 million under the receivables facility. The company reported compliance with its debt covenants at quarter-end. Total debt to total capitalization, as defined by the company, was 0.54:1.
- Operating cash outflow was driven mainly by inventory growth and timing of accrued-liability, customer-program, and tax payments. Investing cash outflow was $61.1 million, including $44.9 million of capital expenditures; financing provided $167.8 million, including $190 million of net short-term borrowings.
Material changes, outlook, and risks
- Interest expense decreased year over year, which management linked to lower borrowing rates and the Capital Structure Optimization Plan. A March exchange of $20 million principal amount of convertible notes generated a $4.8 million debt-extinguishment loss; $0.3 million principal remained outstanding at quarter-end.
- The company completed its accelerated stock buyback in March, with approximately 2.0 million additional shares retired. Management expects the capital-structure actions to reduce annual interest expense by approximately $20–$30 million and expects the interest savings to more than offset net dilution.
- The European Transformation Plan targets European operating margin of at least 10%. Expected total restructuring and related costs are $110–$115 million; annualized after-tax savings upon completion are estimated at $55–$65 million. Substantially all plan costs are expected by year-end 2011, with completion expected in 2012.
- For 2011, management expects operating cash flow above $550 million after $90–$100 million of restructuring-related cash payments, and capital expenditures of approximately $200 million. The company expects liquidity to support operations and debt maturities, including the September 2011 term-loan repayment and March 2012 notes maturity. The quarterly dividend was raised from $0.05 to $0.08 per share effective with the second-quarter 2011 payment.
- Key disclosed risks include economic and retail conditions, raw-material and sourced-product inflation and availability, currency movements, customer concentration and retailer bargaining power, execution of SAP and restructuring initiatives, credit-rating changes, pension funding requirements, and legal, tax, and foreign-operation risks. Legal matters include an appealed patent judgment, environmental fines sought in Brazil of up to approximately $4 million, and an appealed $15.8 million award in the company’s favor that has not been recognized as income pending resolution.
- Venezuelan operations generated less than 1% of sales; $33.7 million of net monetary assets were exposed to exchange-rate changes. The filing estimates that a 5% exchange-rate change would affect pretax income by approximately $1.7 million.
Important facts for investors to verify
- Whether working-capital needs, inventory levels, and accrued-liability timing normalize and operating cash flow meets the full-year outlook.
- Whether the company can refinance or repay near-term maturities while preserving covenant compliance and available liquidity.
- Progress, remaining costs, and realized savings from the European Transformation Plan and SAP rollout.
- Whether segment sales and margins recover, particularly in Home & Family, amid inflation, demand softness, and retailer order timing.
- Developments in the disclosed patent, environmental, and supplier litigation matters, and any effects of Venezuela’s exchange-rate exposure.