Newell Rubbermaid Inc. — Q1 2012 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2012. Newell Rubbermaid markets consumer and commercial products, including Rubbermaid, Sharpie, Graco, Irwin and DYMO. First-quarter sales and operating income are generally seasonally low; the company historically generates more than 60% of annual operating income in the second and third quarters.
Financial results and liquidity
| Metric | Q1 2012 | Q1 2011 or comparison |
|---|---|---|
| Net sales | $1,332.4 million | $1,274.2 million; up 4.6% |
| Core sales growth | 5.2% | Foreign exchange reduced reported growth by 0.6 percentage points |
| Gross margin | $510.6 million; 38.3% | $484.9 million; 38.1% |
| Operating income and margin | $124.2 million; 9.3% | $128.0 million; 10.0% |
| Income from continuing operations | $79.3 million | $73.9 million |
| Net income / diluted EPS | $79.3 million / $0.27 | $75.7 million / $0.25 |
| Operating cash flow | Use of $47.4 million | Use of $108.3 million |
Pricing, product mix and productivity more than offset input and sourced-product inflation, lifting gross margin by 20 basis points. SG&A rose to $373.7 million from $351.1 million, including higher strategic investment and restructuring-related costs. Restructuring costs were $12.7 million versus $5.8 million. Lower interest expense and the absence of the prior-year $4.8 million debt-extinguishment loss helped earnings; the effective tax rate fell to 24% from 26%. Q1 2011 net income included $1.8 million from discontinued operations related to the hand torch and solder business sold in 2011.
Segments: Newell Consumer sales fell 2.6% to $639.6 million and operating income fell 16.9% to $75.5 million, reflecting weakness in Décor and higher strategic spending. Newell Professional sales increased 9.2% to $510.6 million and operating income increased 17.6% to $70.7 million. Baby & Parenting sales increased 21.2% to $182.2 million and operating income rose to $22.4 million from $7.4 million. European customer pre-buys before the April SAP launch boosted reported core sales growth by an estimated 230 basis points company-wide.
Cash, debt and liquidity: Cash was $190.1 million at March 31, up from $170.2 million at December 31, 2011. Total debt was $2.313 billion versus $2.177 billion; short-term debt was $496.9 million and current long-term debt $12.8 million. The company repaid $250 million of notes at maturity, using short-term borrowings. It reported $504.3 million of available borrowing capacity, a 1.33 current ratio, and total debt to total capitalization of 0.52. The cash conversion cycle was 101 days, up from 83 days at year-end, primarily reflecting seasonal inventory build. Capital expenditures were $48.3 million; dividends paid were $24.2 million; share repurchases were $16.4 million.
Material changes, outlook and commentary
- Management forecast 2012 operating cash flow of $550–$600 million after $110–$120 million of restructuring and restructuring-related cash payments, and capital expenditures of approximately $200–$225 million.
- Project Renewal is expected to be completed by year-end 2012, with $90–$100 million in total pretax restructuring charges, $75–$90 million of cash costs, approximately 500 net position reductions and estimated annual cost savings of $90–$100 million. Most savings are intended for reinvestment.
- The European Transformation Plan is expected to be substantially complete by year-end 2012. Management targets a European operating margin of at least 10% and estimates cumulative annual after-tax savings of $55–$65 million. Europe went live on SAP in April 2012; the new structure could affect tax assets, uncertain tax positions and geographic reporting.
- Management said available cash, operating cash flow, capital-market access and credit facilities should support existing businesses and debt maturities. The quarterly dividend was $0.08 per share; the $300 million repurchase authorization runs through August 2014.
- Key risks include economic weakness, retailer bargaining power, competition, raw-material and sourced-product costs, foreign exchange, execution of restructuring and SAP implementation, pension funding, and tax exposures. In Venezuela, $46.1 million of net monetary assets were exposed to currency-rate changes; a 5% exchange-rate change would affect pretax income by approximately $2.3 million.
- Environmental response costs were estimated at $21.6–$25.6 million, with a $22.2 million reserve. The company said ultimate liability in the Lower Passaic River matter cannot be estimated; an adverse outcome could be material. The filing also describes car-seat class actions and a potential fine of up to approximately $4 million relating to a Brazil facility.
Important facts for investors to verify
- How much reported growth after Q1 reflects SAP-related customer pre-buys, and whether the European post-launch sales pattern normalizes.
- Whether Newell Consumer’s sales and margin weakness, particularly in Décor, improves, and whether Professional and Baby & Parenting growth is sustained.
- Whether Project Renewal and the European Transformation Plan deliver stated savings on schedule and within expected cash-cost ranges.
- Whether seasonal working-capital needs, short-term borrowing levels and debt covenants remain manageable as the year progresses.
- Developments in SAP implementation, European tax assessments, Venezuelan currency exposure, pension funding and environmental or product-liability proceedings.