Newell Rubbermaid Inc. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. The filing reports Newell Rubbermaid Inc. (now identified in the request as Newell Brands). The company sells consumer and commercial products through Home & Family, Office Products, and Tools, Hardware & Commercial Products. Results are seasonal; management cautions that first-half results may not indicate full-year performance.
Financial results and position
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net sales | $1,496.2 million | $1,504.3 million | $2,802.6 million | $2,708.2 million |
| Gross margin | $587.3 million; 39.3% | $558.3 million; 37.1% | $1,059.0 million; 37.8% | $981.1 million; 36.2% |
| Operating income | $203.5 million; 13.6% | $199.5 million; 13.3% | $333.6 million; 11.9% | $280.3 million; 10.4% |
| Net income | $130.4 million | $105.7 million | $188.8 million | $139.4 million |
| Diluted EPS | $0.41 | $0.37 | $0.61 | $0.49 |
| Operating cash flow | Not separately presented for the quarter | $183.4 million | $88.0 million |
- Q2 sales declined 0.5%; core sales rose 1.5%, while product-line exits reduced sales 1.9%. First-half sales rose 3.5%, including 4.1% core growth, 1.0% favorable currency, and a 1.6% reduction from product-line exits.
- Management attributed improved gross margins mainly to productivity and favorable product mix, partly offset by input-cost inflation. SG&A rose to 24.2% of sales in Q2 from 21.9%; first-half SG&A rose to 24.6% from 23.7%, reflecting brand-building, marketing, sales-force, and SAP investments.
- Q2 net income included an $8.2 million tax-reserve reversal benefit and a $5.6 million foreign-exchange gain associated with Venezuela’s exchange-rate transition. Interest expense was $33.2 million in Q2 and $65.2 million for the first half.
- Total debt was $2.443 billion at June 30, versus $2.509 billion at year-end 2009; cash was $259.8 million. Working capital was $636.6 million and the current ratio was 1.36, compared with $422.6 million and 1.24 at December 31. Management attributed the working-capital increase mainly to seasonal receivables and inventory.
- Cash used in investing was $64.1 million, including $69.3 million of capital expenditures. Financing used $137.1 million, including $108.4 million of debt payments and $28.0 million of dividends.
Material changes and segment performance
- Quarterly segment sales: Home & Family fell 4.1% to $592.0 million; Office Products fell 2.7% to $483.5 million; Tools, Hardware & Commercial Products rose 7.8% to $420.7 million.
- First-half segment sales: Home & Family fell 2.2% to $1,148.9 million; Office Products rose 2.5% to $835.1 million; Tools, Hardware & Commercial Products rose 14.0% to $818.6 million. The latter benefited from stronger industrial and commercial demand and customer restocking.
- Q2 operating income improved 2.0%; first-half operating income improved 19.0%. Lower restructuring charges helped: $21.2 million in Q2 versus $29.5 million, and $37.2 million in the first half versus $60.0 million.
- Q2 core sales were affected by customer purchases brought forward ahead of April SAP launches in North America; management estimated a 200–300 basis-point consolidated impact. The launches were reported as successful and did not adversely affect internal control over financial reporting.
Outlook, plans, risks, and contingencies
- For 2010, management expected operating cash flow above $500 million after approximately $70–$100 million of restructuring cash payments, and capital expenditures of approximately $160–$170 million.
- The European Transformation Plan, announced in June, is expected to be completed in 2012. Management estimated total restructuring and implementation costs of $90–$100 million, annual net-of-tax savings of $50–$60 million upon completion, and approximately $15 million of related SG&A expense in 2010.
- Project Acceleration was expected to finish by year-end 2010, with lifetime restructuring costs of $475–$500 million and 2010 costs of $60–$80 million. Management reported more than $180 million in annualized savings realized and expected cumulative annualized savings above $200 million upon completion. Product-line exits were expected to reduce 2010 sales by 1%–2% versus 2009.
- On August 2, after quarter-end, the company announced a capital-structure plan: issue $550 million of 4.70% notes due 2020, use proceeds and other funding for a $500 million accelerated share buyback and a tender offer for up to $300 million of 10.60% notes due 2019, and potentially exchange the 2014 convertible notes for cash and stock. Management estimated charges of up to $200 million in 2010. The exchange offer was subject to market conditions and had not yet been completed.
- The $290.2 million carrying value of convertible notes was classified as current because holders could elect conversion during the quarter ending September 30, 2010. The term loan also required a $100 million principal payment in September 2010. The $200 million receivables facility was due to expire September 14, 2010 unless extended.
- Venezuela was treated as highly inflationary from January 2010; the company began applying the SITME exchange rate of 5.3 bolivars per U.S. dollar in May. Management estimated currency translation would reduce 2010 consolidated sales by about 1% and operating income by about 3% versus 2009. Venezuelan operations generated less than 1% of consolidated sales in the first half.
- Risks include economic and demand conditions, retailer bargaining power, input costs and supply availability, foreign exchange, execution of restructuring and SAP implementation, refinancing and credit ratings, pension funding, and tax exposures. The company reported compliance with debt covenants at June 30; failure to comply could restrict borrowing or accelerate repayment.
- Contingencies include an appealed patent judgment involving Endicia, Brazilian environmental fines sought of up to approximately $4 million, and an IRS dispute for 2005–2006. A jury awarded the company $13 million in a supplier dispute, but no gain was recorded pending resolution of contingencies; the supplier intended to appeal.
Key facts for investors to verify
- Whether the announced capital-structure transactions closed as planned, their final share and debt effects, and the realized costs and earnings impact.
- Progress on debt repayment and refinancing, the September 2010 term-loan payment, and renewal or replacement of the receivables facility.
- Whether cash-flow, capital-expenditure, restructuring-cost, and savings expectations were achieved, particularly as restructuring programs conclude.
- Underlying demand and segment trends apart from SAP-related purchase timing, product exits, currency effects, and customer restocking.
- Developments in the IRS examination, litigation, environmental fines, and Venezuela exchange controls and translation effects.