Business context and reporting period
Newell Brands Inc. (formerly Newell Rubbermaid Inc.) reported its unaudited second quarter and six months ended June 30, 2016. On April 15, 2016, the company completed its acquisition of Jarden Corporation, adding four business segments and including Jarden’s results only from the acquisition date. Accordingly, reported year-over-year revenue growth is not directly comparable with a full-period combined-company comparison.
Financial performance and position
| Metric | Q2 2016 | Six months 2016 |
|---|---|---|
| Net sales | $3,858.6 million; +147.2% year over year | $5,173.5 million; +83.1% |
| Gross margin | 28.4%, versus 39.8% | 31.0%, versus 39.2% |
| Operating income / margin | $137.7 million / 3.6%, versus $214.7 million / 13.8% | $263.1 million / 5.1%, versus $312.9 million / 11.1% |
| Net income | $135.2 million, versus $148.5 million | $175.7 million, versus $202.6 million |
| Diluted EPS | $0.30, versus $0.55 | $0.49, versus $0.74 |
| Operating cash flow | Not separately reported here | $325.6 million, versus cash used of $51.8 million |
For the first half, capital expenditures were $163.9 million and cash dividends paid were $145.0 million. Cash and cash equivalents were $627.3 million at June 30. Total debt was $13.0 billion, compared with $3.1 billion at December 31, 2015; current debt and short-term debt totaled $943.0 million. Working capital was $2.63 billion and the current ratio was 1.63:1. The company reported $922.3 million of availability under its revolving credit facility, plus $30.0 million under its receivables facility and $285.0 million under Jarden’s securitization facility.
Material changes and unusual items
- Jarden contributed $2.22 billion of reported sales. The acquisition-related inventory fair-value step-up added $333.7 million to cost of products sold in the first half, substantially pressuring gross and operating margins.
- Acquisition and integration costs were $96.2 million in the first half, including $80.5 million in SG&A and $15.5 million in restructuring costs. Higher debt increased first-half net interest expense to $156.1 million from $37.3 million.
- The June sale of the Décor business generated net proceeds of $232.2 million and a pretax gain of $161.0 million, recorded in other income. First-half results also included a $47.1 million loss related to extinguishing debt and terminating the Jarden bridge facility.
- Six-month sales growth also reflected volume, pricing and Elmer’s; foreign currency, divestitures and the deconsolidation of Venezuela were offsets. Management said second-quarter sales were helped by advance sell-in ahead of later advertising support. The reported periods also reflect seasonality and are not necessarily indicative of full-year results.
- Cash flow improved year over year, partly because it included Jarden operations after acquisition and because the prior-year period included a $70.0 million voluntary pension contribution. First-half cash uses included acquisition financing and transaction-related payments.
Outlook, management commentary and risks
Management expects at least $500 million of annualized Jarden cost synergies over four years and up to approximately $500 million of integration and restructuring costs through 2020. The company said it intends to prioritize debt reduction while investing in growth and maintaining its quarterly dividend of $0.19 per share. Management was developing a new strategic framework, expected to be finalized in the second half of 2016. No specific earnings or revenue guidance for the remainder of 2016 is stated in the provided filing text.
Legacy Project Renewal was expected to produce $620–$675 million of annualized savings by the end of 2017; approximately $430 million had been realized by June 30, 2016. The company stated its intention to maintain an investment-grade rating. Ratings were Moody’s Baa3 (stable), S&P BBB- (negative) and Fitch BBB- (stable).
- Acquisition-related leverage, interest expense, refinancing needs, covenant compliance and the ability to realize synergies are significant financial considerations. Management reported compliance with borrowing covenants at quarter-end.
- Environmental remediation exposure at the Lower Passaic River remains uncertain and cannot currently be estimated; the filing notes that an adverse outcome could be material. Environmental remediation reserves overall were $36.8 million.
- Appraisal claims by dissenting Jarden shareholders covered approximately 10.6 million shares; $626.5 million was accrued for estimated merger consideration, while court-determined value could differ. Related litigation remained pending.
- Other disclosed risks include foreign-exchange exposure, retailer concentration (Walmart represented 12.6% of first-half sales), product-liability matters, pension funding, and phased SAP system implementation. Venezuela was deconsolidated and the carrying value of the investment was zero.
Investor facts to verify
- How much of reported growth and future performance reflects Jarden versus organic growth, and what are comparable combined-company trends?
- How quickly will acquisition inventory step-up costs and integration charges subside, and are the targeted synergies being realized net of implementation costs?
- What is the plan and timetable for debt reduction, receivables-facility renewals, and meeting debt maturities while sustaining the dividend?
- What are the eventual cost allocation and potential company exposure in the Lower Passaic River matter and Jarden appraisal proceedings?
- How do working-capital needs, seasonal cash flows and planned investment affect liquidity and full-year cash generation?