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Newell Rubbermaid Inc. (NWL - Analyst Report) – the producer of Sharpie pens and Rubbermaid containers – reported third-quarter 2012 adjusted earnings per share of 47 cents, beating the Zacks Consensus Estimate of 44 cents and year-ago quarter’s earnings of 45 cents.

The earnings growth was a result of positive impact from pricing and productivity and lower structural selling as well as general and administrative expenses as a percentage of sales. On a reported basis, including special items, the company reported earnings of 37 cents per share compared to a loss of 61 cents in the year-ago quarter.

Top-Line and Margin Details

During the quarter, Newell’s net sales inched down 0.9% to $1.535 billion, missing the Zacks Consensus Estimate of $1.540 million. However, core sales of the company inched up 1.5%, excluding negative impact from foreign currency translation.

The growth in core sales was primarily driven by core sales increases of 2.5% and 7.8% in the company’s Newell Professional and Baby & Parenting Essential categories, respectively.

Newell’s quarterly gross profit marginally grew 0.5% year over year to $0.582 billion, while gross margin expanded 50 basis points to 37.9% primarily due to higher pricing and productivity, partially offset by higher input cost inflation.

Operating income decreased marginally by 0.5% year over year to $0.210 billion, while operating margin remains flat year over year at 13.7%, as the benefit from gross margin expansion were fully offset by higher overall selling, general and administrative expenses (SG&A).

Segment Analysis

Net sales of the company’s Newell Consumer segment dipped 2.1% year over year to $0.815 billion while segment’s core sales slipped 0.4% primarily due to weak performance in Decor and soft sales in Culinary business partially offset by robust performance in Writing and Creative Expression global business.

Segmental operating margin came in at $0.141 billion compared with $0.129 billion in the year-ago quarter. Operating margin expanded by 180 bps to 17.3%, primarily driven by improved gross margin and lower SG&A expenses.

During the quarter, sales at Newell Professional segment inched down 1.1% to $0.535 billion. However, the segment’s core sales grew 2.5% primarily driven by solid performance at the company’s Commercial Products global business in North America and Latin America, which were partially offset by weak performances in Europe, Australia and New Zealand.

The segment's operating profit declined to $70.6 million during the quarter compared with $84.5 million registered in the prior-year quarter. As a percentage of sales, it contracted 240 bps to 13.2% due to higher input costs along with increased investments in selling and marketing.

Driven by strong performance of Graco brand in North America and Aprica brand in Japan, the company’s sales at Baby & Parenting segment improved 5.2% year over year to $0.185 billion, while core sales climbed 7.8% during the reported quarter.

Operating profit increased to $18.3 million from $17.7 million in the previous-year quarter. Operating margin during the quarter contracted 10 bps to 9.9%.

Other Financial Details

Newell ended the quarter with cash and cash equivalents of $0.250 billion and long-term debt of $1.366 billion. Shareholders’ equity was $1,971.2 million, excluding non-controlling interests of $2.063 billion.

During the quarter, the company’s capital expenditure came in at $45.2 million, generating a cash flow of $301.5 million from operating activities.

Fiscal 2012 Guidance

Management continues to anticipate core sales growth of 2%–3% and adjusted earnings in the range of $1.63–$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–$65 million from fiscal 2012 through its European Transformation Plan. Moreover, Newell will be saving costs in between $90 million 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 still 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.

Expansion of Project Renewal Program

Concurrent with its third-quarter results, Newell has announced to expand its Project Renewal Restructuring Program. The company has outlined five new work stream in connection with the expansion.

A)      In order to simplify its organizational structure, the company has decided to report its financial results under six new segments beginning fourth-quarter 2012. The company has eliminated its Consumer and Professional segments while retained Baby & Parenting. The six new reporting segments are – Tools, Commercial Products, Writing, Home Solutions, Baby & Parenting, and Specialty.

B)      To reduce costs Newell will enlarge its scope of SAP.

C)      To simplify decision making, transaction process and information management, the company, along with aligning other resources, will apply SAP.

D)     The company will enhance its efficiencies in customer services and sourcing functions.

E)      Newell will optimize manufacturing and distribution facilities.

The company expects the implementation of the expansion program would cost in between $340 million and $370 million. On the other hand, with the completion of the program, Newell will be saving additional $180–$225 million annually from the end of the second quarter of fiscal 2015. Moreover, the company will be able to reduce its global work force by 10% and above in the next two and a half years.

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 - Snapshot Report), Cooper Industries plc and Avery Dennison Corporation (AVY - Analyst Report).

Newell Rubbermaid currently has a Zacks #2 Rank, implying a short-term Buy rating. However, we maintain a long-term Neutral recommendation on the stock.

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