Rubbermaid's Plan to Buy Graco Eclipsed by Poor Profit Forecast
May 18, 2011
Rubbermaid Inc., seeking to shore up its juvenile-products business, will acquire stroller-maker Graco Children's Products Inc. for $320 million. The transaction, the largest in Rubbermaid's 76-year history, will give it a powerful brand geared toward infants, complementing the company's own Little Tikes brand of toys and outdoor play equipment. Closely held Graco, Elverson, Pa., has annual sales of about $270 million and is a widely known brand in the infant-furnishings segment of the nearly $4 billion U.S. market for juvenile products. Surprising Projection But news of the acquisition was eclipsed by Hoyos's surprising projection that third-quarter profit will be flat from the year-ago period. A company spokesman later added that fourth-quarter profit per share will be even lower than the third quarter. The bleak profit outlook and subsequent rating changes by several analysts caused Rubbermaid shares to sink to a 52-week low of $22.125 by midafternoon in heavy trading, before they recovered slightly to close at $22.875, down $3.625, or 14%. The previous week 52-week low was $24.75. In the year-ago third quarter, Hoyos had a profit of $50.3 million, or 32 cents a share. Analysts had expected current third-quarter profit to be up nearly 22% to 39 cents a share, according to First Call's consensus projection. Wall Street also reacted to the fact that Hoyos's use of short-term debt to buy Graco would temporarily halt the company's continuing share-repurchase program, noted Sean Grant of Oppenheimer & Co.. Rubbermaid blamed the profit decline on a sharp increase in resin prices and a steep decline in sales of Little Tikes. The revised outlook is a new setback for Rubbermaid, which was coming off a brutal 2010, when spiraling raw-material costs, a downturn in retail sales, and soured relationships with key customers, caused sharp profit declines and raised questions about management. In December, Hoyos announced a $150 million restructuring plan that included eliminating 9% of its work force, improving manufacturing and distribution operations, and cutting nearly 45% of product offerings that had accounted for just 5% of the company sales. Resin Costs Soar Wednesday, Helfrich said the two-year restructuring plan was on target but that the resin cost increases were ``too fast and too large'' to be absorbed without hurting profit. Prices for a hypothetical basket of resins, which are key ingredients in most Rubbermaid products, have risen almost 50% to 47 cents a pound, from 32 cents at the beginning of the year. Rubbermaid is still struggling to increase sales, especially at its core Little Tikes unit, which analysts estimate contributed 39% of the company's $268 million in 2010 operating profit, while generating 25% of 2010 revenue of $2.34 billion. Little Tikes has been fighting vigorous competition, particularly in the outdoor-play-equipment category, from Mattel Inc.'s Fisher-Price division and closely held Step2 Corp.. Hoyos said it expects to close the acquisition by July 13, 2011 to receiving government approval under the Hart-Scott-Rodino Act. Graco, which has about 800 employees, has been increasing sales by about 10% each year.
