Newell Rubbermaid Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. The filing is under the name Newell Rubbermaid Inc., the company’s name at the time. Comparisons are with Q1 2012 unless noted.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $1,240.8 million | $1,250.5 million | Down 0.8%; core sales up 0.2%, or 2.5% excluding prior-year European SAP pre-buys |
| Gross margin | $473.6 million; 38.2% | $488.0 million; 39.0% | Down 80 basis points |
| Operating income | $97.8 million; 7.9% | $123.2 million; 9.9% | Down 20.6% |
| Income from continuing operations | $63.8 million | $78.3 million | Down 18.5% |
| Net income | $54.2 million; diluted EPS $0.19 | $79.3 million; diluted EPS $0.27 | Down 31.7% |
| Operating cash flow | $(123.1) million | $(47.4) million | Cash use increased |
Gross-margin pressure reflected inflation and increased customer programming, along with favorable prior-year comparisons from European SAP-related pre-buys. SG&A was $341.4 million, down from $352.7 million, but restructuring costs rose to $34.4 million from $12.1 million. Interest expense fell to $14.6 million from $20.2 million; other expense included an $11.1 million Venezuelan foreign-exchange loss. The effective tax rate was 9.1% versus 24.2%, including $13.1 million of discrete tax benefits. Q1 2013 results also included a $9.6 million after-tax loss from discontinued operations.
Segments and material changes
- Writing: Sales fell 9.3% to $340.6 million; operating income declined 4.8% to $63.2 million. Core sales were down 8.5%, partly reflecting prior-year SAP pre-buys, office-channel weakness and softer Fine Writing.
- Home Solutions: Sales rose 3.7% to $338.9 million and operating income rose 10.4% to $34.1 million, led by Rubbermaid Consumer.
- Tools: Sales declined 1.0% to $188.6 million; operating income fell 34.8% to $18.7 million amid input-cost pressure and higher brand-building and selling investment.
- Commercial Products: Sales increased 4.4% to $183.1 million and operating income increased 16.1% to $21.6 million, supported by North American demand.
- Baby & Parenting: Sales increased 4.1% to $189.6 million and operating income increased 6.7% to $23.9 million, with growth in North America and Asia Pacific.
- The company committed to divest its Hardware and Teach businesses and classified them as discontinued operations. Those businesses generated $69.2 million of Q1 sales and a pretax loss of $11.7 million, including $12.4 million of impairment charges. Dymo Office and Endicia were moved into Writing; comparative segment figures were recast.
Financial position and liquidity
- At March 31, cash was $174.2 million, total debt $2,112.6 million and stockholders’ equity $1,988.6 million. Debt increased $194.2 million from year-end, principally due to short-term borrowing for working capital and payments of customer-program and incentive-compensation liabilities.
- Short-term debt was $411.8 million, comprising $202.0 million of commercial paper and $200.0 million under the receivables facility. The company had $598.0 million available under its $800 million revolving facility; no amounts were drawn on that facility. It reported compliance with borrowing covenants.
- Working capital was $682.0 million; the current ratio was 1.41:1. Net debt to total capitalization was 0.49:1, versus 0.46:1 at December 31, 2012.
- Operating cash use reflected a voluntary $100 million U.S. pension contribution and higher annual incentive payouts, partly offset by improved receivables and inventory. Investing cash use was $33.9 million, including $33.6 million of capital expenditures. Financing provided $148.1 million, including $200.7 million of net short-term borrowings; the company paid $44.5 million in dividends and repurchased $33.8 million of shares.
- The cash conversion cycle was 98 days, up from 83 days at year-end and down from 101 days a year earlier, with seasonal inventory build contributing to the quarter-end level.
Outlook, management commentary and risks
- For 2013, management expected operating cash flow of $575–$625 million after $70–$90 million of restructuring and restructuring-related cash payments and a $100 million U.S. pension contribution; planned capital expenditures were $175–$200 million. The filing gave no specific full-year sales or EPS guidance.
- Project Renewal was expected to cost $340–$375 million in total, including $300–$340 million in cash costs, and generate $270–$325 million of annualized savings. Completion was expected by mid-2015; management said most savings would be reinvested in growth. Approximately 2,250 employees were expected to be affected.
- Management described 2013 as a transition toward a strategic growth phase. It cited planned investment in innovation, brands, selling capabilities and geographic expansion, alongside organizational simplification and supply-chain changes.
- Venezuela’s February devaluation produced an $11.1 million Q1 loss. Management estimated the devaluation would reduce 2013 reported sales by $9 million and operating income by $5 million; further exchange-rate changes could cause additional effects.
- Risks highlighted include weak regional demand, currency movements, retailer bargaining power, raw-material and sourced-product costs and availability, execution of restructuring and SAP implementation, pension funding needs, credit-rating changes, and litigation and environmental exposures. Environmental reserves were $21.6 million against estimated response costs of $21.3–$25.3 million; the ultimate exposure from the Lower Passaic River matter could not be estimated and could be material in an adverse outcome.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track whether underlying sales growth persists after adjusting for SAP pre-buys, currency and discontinued businesses, especially in Writing and international markets.
- Assess whether gross-margin pressure and Tools’ operating-income decline reverse, and whether Project Renewal savings offset restructuring costs and reinvestment.
- Monitor operating cash conversion, seasonal inventory and receivables, short-term borrowing, and the September 2013 expiration of the $200 million receivables facility.
- Confirm the timing, proceeds and final accounting for the Hardware and Teach divestitures and related impairment or exit costs.
- Review the sustainability of the unusually low quarterly tax rate and the effects of Venezuelan currency exposure, pension obligations, and unresolved environmental and product-liability matters.