Newell Rubbermaid Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; filed November 6, 2012. The company markets consumer and commercial products under brands including Rubbermaid, Sharpie, Graco, Irwin and Calphalon. Amounts below are in U.S. dollars; financial figures are in millions except per-share data.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $1,535.3 | $1,549.9 | $4,383.9 | $4,369.4 |
| Gross margin | $582.3; 37.9% | $579.3; 37.4% | $1,674.1; 38.2% | $1,648.6; 37.7% |
| Operating income (loss) | $188.4; 12.3% | $(192.2); (12.4)% | $498.1; 11.4% | $131.7; 3.0% |
| Net income (loss) | $108.3 | $(177.6) | $299.4 | $44.8 |
| Diluted EPS | $0.37 | $(0.61) | $1.02 | $0.15 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $357.2 | $279.8 |
Q3 reported sales fell 0.9%, while core sales grew 1.5%; foreign currency reduced sales by 2.4%. For the first nine months, sales increased 0.3%, reflecting 2.2% core growth offset by a 1.9% foreign-currency headwind. Pricing and productivity more than offset input-cost inflation, adding 50 basis points to gross margin in both comparison periods.
Q3 operating results compare against a $382.6 million non-cash impairment charge in 2011. Excluding that charge, Q3 2011 operating margin was 12.3%, approximately equal to Q3 2012. For nine months, 2012 operating income was below the 2011 figure excluding impairment ($514.3 million); higher SG&A and restructuring costs more than offset gross-margin improvement. Q3 net income also included a $1.7 million discontinued-operations gain related to escrow proceeds from a business sale.
Segments and material changes
- Newell Consumer: Q3 sales decreased 2.1% and operating income rose 7.1% to $137.9 million. Nine-month sales decreased 2.6% and operating income was $359.0 million. Weakness included Décor and Culinary; writing products benefited from back-to-school demand.
- Newell Professional: Q3 sales decreased 1.1% and operating income fell 16.4% to $70.6 million, with selling and marketing investment weighing on margin. Nine-month sales rose 1.7%, while operating income fell 4.3% to $204.9 million.
- Baby & Parenting: Q3 sales rose 5.2% and operating income increased 3.4% to $18.3 million. Nine-month sales rose 9.6% and operating income increased 57.2% to $59.9 million, supported by product mix, productivity and expense leverage.
International weakness was concentrated in Europe, Middle East and Africa, where nine-month core sales declined 4.7% amid macroeconomic pressures and lower merchandising ahead of the European SAP implementation. Latin America and Asia Pacific posted strong core growth. Sales to Walmart represented approximately 10.9% of nine-month consolidated sales.
Cash, debt and liquidity
- Cash was $250.1 million at September 30, 2012, versus $170.2 million at year-end 2011. Nine-month operating cash flow was $357.2 million; investing cash use was $139.0 million and financing cash use was $141.7 million.
- Total debt was $2,164.1 million, compared with $2,176.8 million at year-end. Current and short-term debt totaled $798.0 million, including $500 million of notes due April 2013, $200 million under the receivables facility and $86.7 million of commercial paper.
- Available capacity under the $800 million revolving facility was $713.3 million. The company reported compliance with debt covenants. Working capital was $278.1 million, down from $487.1 million; the current ratio declined to 1.13 from 1.29, primarily reflecting debt classified as current.
- In June, the company issued $500 million of senior notes—$250 million at 2.0% due 2015 and $250 million at 4.0% due 2022—and used proceeds in part to redeem $436.7 million of junior convertible debentures. It also repaid $250 million of notes at maturity.
- Nine-month capital expenditures were $130.2 million; dividends paid were $82.4 million; and $67.2 million was spent repurchasing and retiring 3.8 million shares. Net debt to total capitalization was 0.48 at quarter-end, versus 0.52 at year-end.
Outlook, management commentary and risks
- For full-year 2012, management expected 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 was expanded in October 2012, after quarter-end. Cumulative pretax costs are now expected at $340–$375 million, including $300–$340 million cash costs; completion is expected by mid-2015. Management projected annualized savings of $270–$325 million when fully implemented, with $90–$100 million expected by the first half of 2013. Most savings are intended for reinvestment.
- The expanded restructuring is expected to reduce the global workforce by slightly more than 10%. The company planned to begin reporting under a new six-segment structure in Q4 2012.
- The quarterly dividend increased from $0.08 to $0.10 per share in June 2012; in October the board approved a further increase to $0.15, payable in December.
- Management cited uncertainty in U.S. and Western European economic conditions, fiscal policy and political developments, currency fluctuations, raw-material and sourced-product costs, retailer bargaining power, execution of restructuring and SAP implementation, pension funding needs, and tax exposures. A 10% change in Venezuela’s applicable exchange rate was estimated to cause a one-time pretax impact of approximately $6 million and an ongoing annual sales and operating-income impact of approximately $5 million and $2 million, respectively.
- Annual goodwill and indefinite-lived-intangible impairment tests in 2012 found no impairment. The Technology reporting unit had limited valuation headroom under a sensitivity scenario; management said execution shortfalls or deterioration in its markets could lead to future impairment charges.
- Environmental response costs were estimated at $21.5–$25.6 million, with a $21.7 million reserve. The company stated that ultimate liability in the Lower Passaic River matter could not be estimated; adverse outcomes could be material. It also faced three class actions alleging a car-seat model did not meet safety standards and potential fines of up to approximately $4 million in Brazil.
Most important facts for investors to verify
- Whether core sales, especially in Baby & Parenting and emerging markets, continue to offset foreign-exchange and European weakness.
- Whether Project Renewal delivers its projected savings, at the stated cost and schedule, without impairing sales or execution.
- How the company plans to refinance or repay the $500 million notes due April 2013 and manage other short-term borrowings.
- Whether cash-flow guidance and planned capital spending remain achievable as seasonal working-capital needs evolve.
- Developments in Technology goodwill valuation, environmental matters, car-seat litigation, pension funding and tax exposures.