NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded the long-term Issuer Default Rating (IDR) for Newell Rubbermaid, Inc. (Newell) to 'BBB+' and affirmed the short-term IDR and commercial paper rating at 'F2'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.
The company substantially met Fitch's expectations for an upgrade, which were based on a continuation of positive business trends, stable or increasing FCF levels and leverage sustained near 2x.
Newell's operating environment from a macro-economic perspective remains fair to modestly positive, particularly due to the company's still large reliance on the U.S. market. Organic/core sales growth has been consistent in the low single digit range over the past three years, and the company has had sequential improvement in both operating and EBITDA margins by approximately 125 basis points.
Fitch expects Newell's leverage to fall to 2.3x or less in the near term from 2.54x, a level that Fitch considers temporary due to three debt funded but accretive acquisitions that closed in the fourth quarter. FCF of $290 million paralleled the previous three-year average of $287 million. Fitch anticipates FCF (cash flow from operations less capital expenditures less dividends) to improve meaningfully as incremental revenues contributed by acquisitions and organic/core sales growth more than offset the potential pressure from currencies.
--Newell maintains SG&A/Sales in the 25% range, and gross margins remain near current levels.
--Mid-single digit organic growth and contributions from late 2014 acquisitions are expected to fully offset currency pressure and lead to meaningful improvement in FCF to the $350 million level by 2016 compared to an average of $287 million over the past four years.
--Fitch sees Newell operating with leverage near 2X on a sustained basis. The company has increased its share repurchase program. However, given strong FCF, the company is expected to balance the mix of internal cash generation and additional debt to maintain its leverage target.
--Newell's portfolio has a large cyclical component but macroeconomic factors in its key U.S. market (approximately 70% of revenue) are expected to remain stable to positive. While there is some macroeconomic slowdown in a few of its emerging markets, the company still has a solid weighting towards the U.S. market whose fundamentals have been improving.
KEY RATING DRIVERS
Improved Business Profile
Since the last recession, Newell has divested or exited more than $1 billion (15% of 2009 revenues) in product lines or businesses sensitive to commodities such as resin, generated low margins or minimal growth prospects, or provided little brand differentiation. Of the amount divested, approximately $500 million was in resin intensive product lines, which will reduce the company's exposure to volatile commodity costs. Two of Newell's recent bolt-on acquisitions in the on-the-go hydration bottles category that would have added roughly $130 million to 2014's revenues on a pro forma basis have a higher resin component. However, at less than 3% of 2014 revenues, their contribution to the overall portfolio is modest.
Concurrently, the company has undertaken several restructuring actions to reduce fixed overhead and increase the variable portion of its cost structure. Newell's organizational flexibility has increased with EBITDA margins expanded to over 17%, up sharply from the 12% seen in the cyclical trough experienced in 2008. Since the portfolio is modestly less cyclical due to some of the business line exits, Fitch expects less pronounced variability in margins and cash flows during cyclical peaks and troughs going forward. Further, accretive acquisitions should provide a modest boost to margins in 2015.
Benefits from Economic Cycle
Fitch estimates that the portion of Newell's product lines facing cyclical end-users or markets such as the Tools segment, or higher end products in other segments such as Calphalon cookware in Home Solutions, has declined modestly in the past two years to approximately 60% with recent dispositions. Nonetheless, the portfolio should benefit from relative economic stability in the United States. The domestic market represented approximately 70% of the company's $5.7 billion in revenues last year. Fitch expects positive GDP growth in the U.S. during 2015 and growth in construction to benefit Newell's tools and commercial products segments (approximately 30% of revenues) going forward. This provides support for low-single digit organic growth rates despite the pressure in the office supply superstore market, which is one of the end markets for Newell's writing segment.
Strong FCF Despite Cyclicality
Importantly, despite the fact that Newell has been restructuring for much of the past decade that included several economic downturns, it has generated positive free cash flow in every year since 1996. Newell's FCF ranged from $250 million to $293 million annually over the past four years despite significant cash restructuring and pension payments. Fitch expects FCF to improve to the $350 million range by 2016.
Strong Credit Protection, Leverage Temporarily High
The company has lowered its costs, simplified its capital structure and reduced debt such that credit protection measures have improved markedly since 2008. However, at year end, Newell's leverage of 2.5x is temporarily higher than the 1.9x to 2.2x seen in the recent past with three fourth quarter acquisitions totaling $602 million. Much of the funding for the acquisitions, which are in the beverage container space and baby and parenting space, was with debt. Nonetheless, as the acquisitions are accretive, Fitch expects leverage to trend downward to 2.3x or less by the end of 2015.
Ample Liquidity, Moderate Maturities
Liquidity is ample. The company had almost $200 million of cash, much of which is offshore, and more than $1.1 billion in credit facilities. The $1.1 billion is comprised of an $800 million revolving credit facility due December 2019 and a $350 million receivable securitization facility maturing September 2015. There is no long-term debt maturity in the next two years and $400 million due annually from 2017 through 2019. To maintain its existing capital structure and liquidity, Newell is likely to refinance upcoming debt maturities and renew and extend its $350 securitization facility.
What could trigger a positive rating action:
--Given Newell's targeted leverage of 2.0x-2.2x and its product mix that is susceptible to macroeconomic shifts, Fitch does not expect ratings upside in the intermediate term.
Future developments that may, individually or collectively, lead to a negative rating action include:
--Top line deceleration or margin deterioration, or a deep and lengthy downturn of one or more major markets that causes FCF to decelerate meaningfully and leads to sustaining leverage above 2.5x. Newell's profitability and cash flows have historically bounced back to normal levels within 12 - 18 months after the end of previous economic downturns;
--Intention of sustaining leverage well above 2.5x caused by a change in management's financial strategy or a sizeable debt-financed acquisition.
Fitch has taken the following rating actions on Newell:
--Long-term Issuer Default Rating (IDR) upgraded to 'BBB+' from 'BBB';
--$800 million revolving credit facility upgraded to 'BBB+' from 'BBB';
--Senior unsecured notes upgraded to 'BBB+' from 'BBB'.
--Short-term IDR affirmed at 'F2';
--Commercial paper affirmed at 'F2'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014);
--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers' (Nov. 19, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers