Newell Rubbermaid Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. The registrant’s name at the time of filing was Newell Rubbermaid Inc. (the company is identified in the request as Newell Brands). Results are unaudited. The company notes that Q1 is seasonally weaker and may not indicate full-year results.
Financial performance
- Revenue: Net sales were $1.232 billion, down 0.7% year over year. Core sales increased 0.7%, while foreign currency reduced reported sales by 1.4%.
- Profit and margins: Gross margin was $469.3 million, or 38.1% of sales, versus 38.2%. Operating income rose 7.6% to $105.2 million; operating margin increased to 8.5% from 7.9%, primarily because restructuring costs were lower. Continuing-operations income was $52.1 million versus $63.8 million. Net income was $52.9 million versus $54.2 million. Diluted EPS was $0.18 from continuing operations and $0.19 overall; prior-year diluted EPS was $0.22 and $0.19, respectively.
- Cash flow: Operating cash use was $92.1 million, improving from $123.1 million used in Q1 2013. Investing cash use was $32.2 million, including $31.9 million of capital expenditures. Financing provided $73.9 million. Cash declined $89.5 million to $136.8 million, including a $39.1 million unfavorable currency effect.
- Debt and liquidity: Total debt was $1.986 billion, up from $1.836 billion at year-end 2013; cash was $136.8 million. Net debt to total capitalization increased to 0.47 from 0.44. Working capital was $678.5 million and the current ratio was 1.44. The company reported $835.3 million of available borrowing capacity and compliance with debt covenants.
- Capital returns: The quarterly dividend was $0.15 per share during Q1; the company announced an increase to $0.17 effective with the dividend expected in June 2014. It repurchased $44.4 million of shares under its program during Q1.
Changes and business drivers
- Writing sales rose 6.1% and operating income rose 22.0%, supported by core growth, pricing, productivity and mix. Home Solutions sales fell 5.2%, reflecting weak North American demand, severe weather and reduced merchandising on certain products.
- Tools sales were down 0.4%, with operating income up 14.4%. Commercial Products sales were down 0.3% and operating income fell 36.1%, reflecting inflation, mix and increased selling investment. Baby & Parenting sales fell 5.4% and operating income fell 77.4%, including recall costs and weaker sales.
- SG&A increased to $352.1 million from $341.4 million, reflecting higher brand advertising and selling-capability investment. Restructuring costs declined to $12.0 million from $34.4 million.
- Other expense increased to $40.0 million from $13.0 million, principally reflecting a $38.7 million Venezuela foreign-exchange charge. The company adopted the SICAD I exchange rate of 10.7 Bolivars per U.S. dollar for remeasurement, versus the prior 6.3 rate. Q1 2013 included an $11.1 million Venezuela charge.
Outlook, risks and unusual items
- Outlook: For 2014, management expected operating cash flow of $600–$650 million after $100–$120 million of restructuring and restructuring-related cash payments, and capital expenditures of approximately $150–$175 million. The filing estimates Venezuela’s SICAD I rate would reduce 2014 reported sales by about $32 million and operating income by about $21 million. European product and geographic exits were expected to reduce 2014 sales by $25 million versus 2013.
- Project Renewal: Expected completion by mid-2015, with total pretax costs of $340–$375 million and annualized savings of $270–$325 million; most savings are intended for reinvestment. Through March 31, 2014, the company had incurred approximately $196 million in restructuring charges and $43 million in restructuring-related charges.
- Product recall: Graco recalled harness buckles on approximately 4 million toddler car seats. The company recorded an $11 million Q1 charge and was discussing a potential infant-seat buckle recall with NHTSA; the ultimate scope and costs remained uncertain.
- Venezuela: Approximately $54.6 million of cash was subject to currency controls. Further devaluation, restricted repatriation, inflation and a new law setting a maximum profit margin of 30% could affect results; management said the law’s impact was unclear.
- Environmental and other contingencies: Environmental remediation reserves totaled $20.0 million. Potential liability in the Lower Passaic River matter could not be estimated; management did not believe it was then reasonably likely to materially affect results, while noting adverse determinations could be material. Product-liability reserves were $34.6 million.
- The company cited risks including economic and retail conditions, currencies, input costs, competition, recalls and litigation, pension funding, international operations, SAP implementation and its ability to execute restructuring. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the infant-seat buckle discussions with NHTSA result in a broader recall and costs beyond the $11 million accrued.
- Actual Venezuela exchange-rate access, cash repatriation, pricing restrictions and the resulting sales, margin and cash effects.
- Progress and realized savings from Project Renewal against its cost, timing and annualized-savings estimates.
- Full-year operating cash flow and restructuring cash payments, considering seasonal working-capital needs and the Q1 cash outflow.
- Debt, borrowing capacity and covenant headroom as seasonal borrowing and capital returns continue; and developments in the Passaic River environmental matter.