Newell 2Q EPS Up, Reaffirms Outlook

Zacks Equity Research

Newell Rubbermaid Inc. (NWL), the producer of Sharpie pens and Rubbermaid containers, reported second-quarter 2012 adjusted earnings per share of 47 cents, up 4.4% from 45 cents in the year-ago quarter and outpacing the Zacks Consensus Estimate of 45 cents.

The earnings growth was driven by positive impact from pricing and productivity and lower structural selling, general and administrative expenses as a percentage of sales, partially offset by higher input cost inflation. On a reported basis, including special items, the company reported earnings of 38 cents per share, down 22.4% from the year-ago quarter.

Top-Line and Margin Details

During the quarter, Newell’s net sales inched down 1.9% to $1,516.2 million, missing the Zacks Consensus Estimate of $1,523 million. However, core sales of the company inched up 0.4%, excluding negative impact of 230 basis points (bps) from foreign currency translation.

The growth in core sales was primarily driven by a sales increase of 4.6% and 7.3% in the company’s Newell Professional and Baby & Parenting Essential categories, respectively.

Newell’s quarterly gross profit fell 0.5% year over year to $581.2 million, whereas gross margin expanded 50 basis points to 38.3% primarily due to higher pricing and productivity. Operating income increased marginally by 0.6% year over year to $207.1 million, while operating margin expanded 40 bps to 13.7%, primarily due to gross margin expansion and lower structural selling, general and administrative expenses.

Segment analysis

Net sales of the company’s Newell Consumer segment declined 3% year over year to $808.4 million while segment’s core sales inched down 0.3% primarily due to weak performance in Decor and soft sales in Fine Writing in Western Europe.

Segmental operating margin came in at $145.6 million compared with $143.5 million in the year-ago quarter. Operating margin expanded by 80 bps to 18%, primarily driven by better pricing and productivity.

During the quarter, sales at Newell Professional segment inched down 2% to $525.4 million. However, the segment’s core sales grew 4.6% primarily driven by solid performance at the company’s Construction Tools & Accessories and Industrial Products & Services global business units.

The segment's operating profit declined to $63.6 million during the quarter compared with $69.6 million registered in the prior-year quarter. As a percentage of sales, it contracted 90 bps to 12.1% due to lower sales volume and higher SG&A expenses.

Driven by strong performance of Graco brand in North America and Aprica brand in Japan, the company’s sales at Baby & Parenting segment improved 4.1% year over year to $182.4 million while core sales grew 7.3% during the reported quarter.

Operating profit jumped 47.7% to $19.2 million from $13.0 million in the previous-year quarter. Operating margin during the quarter expanded 310 bps to 10.5% driven by increased sales volume, better mix and productivity.

Other Financial Details

Newell ended the quarter with cash and cash equivalents of $370.8 million and long-term debt (including the current maturities) of $2,318.7 million. Shareholders’ equity was $1,971.2 million, excluding non-controlling interests of $3.5 million.

During the quarter, the company’s capital expenditure came in at $36.7 million, generating a free cash flow of $66.4 million.

Fiscal 2012 Guidance

Management continues to anticipate core sales growth of 2% to 3% and adjusted earnings in the range of $1.63 to $1.69 per share for fiscal 2012. Moreover, Newell expects an improvement of 20 basis points in operating margin during fiscal 2012.

Moreover, the company expects an incremental annual net income in the range of $55 to $65 million from fiscal 2012 through its European Transformation Plan. Moreover, Newell will be saving costs in between $90 and $100 million through its Project Renewal program in the first half of 2013.

The initiative will be funded by savings through reduced structural selling, general and administrative expenses. The Project Renewal initiative will facilitate the company in reducing the complexity of the organization while increasing investments in most important growth areas within the business.

Further, Newell expects to generate operating cash flow in the range of $550-$600 million in fiscal 2012 with planned capital expenditures in between $200 million and $225 million.

Newell Rubbermaid is one of the leading manufacturers of home and office products in the U.S. The company also possesses a strong portfolio of widely popular brands, such as Sharpie, Paper Mate, Dymo, Expo, Waterman, Parker, Irwin, Lenox, Rubbermaid, Levolor, Graco, Calphalon and Goody. Leveraging its strong brand equity, Newell Rubbermaid expects modest earnings going ahead, provided the market scenario improves.

The company faces intense competition from numerous manufacturers and distributors of consumer and commercial products, such as Jarden Corp. (JAH), Cooper Industries plc (:CBE) and Avery Dennison Corporation (AVY).

Newell Rubbermaid currently has a Zacks #3 Rank, implying a short-term Hold rating on the stock. The company retains a long-term Neutral recommendation.

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