Jarden is a leading provider of diversified niche consumer products, small appliances, household products, fishing and outdoor products, and sports equipment. Jarden's diversified sales mix includes ski, camping, fishing and other outdoor products, in its largest segment, Outdoor Solutions (about 41% of 2011 sales). The company's large portfolio of outdoor products includes well-recognized brands such as Coleman, K2, Rawlings, and Trilene.
Through its Consumer Solutions segment (28% of 2011 sales) the company manufactures or sources, markets, and distributes a variety of housewares and small appliance products, under brands such as FoodSaver, Crock-Pot, Mr. Coffee, Sunbeam and Oster. Within the housewares industry, we believe retailers are concentrated, competition is intense and fragmented, and companies generally can increase prices only by adding new features to existing products. However, growth through acquisitions in the Outdoor Solutions segment as well as growth into other product areas has reduced Jarden's exposure to the housewares segment.
Jarden's two other business segments, Branded Consumables and Process Solutions, constitute about 26% and 5% of 2011 sales, respectively. Acquisitions have contributed significantly to Jarden's increased scale and diversity in recent years.
The company has generally reported good operating results, despite a challenging economic environment. For the first six months of 2012 Jarden's reported revenues increased only slightly year over year, to $3.17 billion, or up about 3.3% excluding the impact of acquisitions and foreign exchange translations. For the 12 months ended June 30, 2012, reported revenues increased about 4% from the prior-year period, while adjusted EBITDA margins increased slightly to about 12.7%, from 12.5%, largely reflecting cost savings programs, higher pricing, and a moderation in input cost inflation.
In March 2012 the company repurchased $435 million of common stock through a modified Dutch auction, funded through a combination of cash and $300 million in new term loans. Jarden's credit metrics have weakened modestly following the incremental debt from this share repurchase program. For the 12 months ended June 30, 2012, we estimate that the ratio of lease- and pension-adjusted total debt to EBITDA was about 4.4x and funds from operations (FFO) to debt was about 15%, compared to 4.2x and 16.3%, respectively for the prior-year period.
We believe Jarden's operating performance and credit measures will improve over the next year. Our forecast assumptions include:
-- Sales will increase at a low-single-digit rate over the next year, benefiting from modest volume growth and improved price realization from higher prices and new products.
-- We expect adjusted EBITDA margins will expand modestly, reflecting contributions from new products, pricing gains, and a moderation of input cost inflation.
-- We see capital expenditures of about $130 million for 2012, up from $127 million in 2011. We expect minimal share repurchase activity for the rest of 2012.
Based on our forecast, we estimate that by the end of 2012 adjusted leverage will be about 4.2x and FFO to total debt will be above 15%. These credit protection measures are in line with the indicative ratios for an "aggressive" financial risk profile, which include leverage of 4x-5x and FFO to debt of 12%-20%.
We believe Jarden's liquidity is strong, and we expect sources of cash are likely to exceed cash uses for the next 12 to 24 months. Our view of the company's liquidity profile incorporates the following expectations and assumptions:
-- We expect liquidity sources (including cash, discretionary cash flow, and availability under its $250 million revolving credit facility) will exceed uses by more than 1.5x for the next 12 months.
-- We estimate that net sources would continue to be positive even with a 30% decline in EBITDA from current levels.
-- With its cash balance and availability under its revolving credit facility, we believe the company would be able to absorb, without need for refinancing, high-impact, low-probability events.
-- In our view, the company has well-established relationships with its banks.
As of June 30, 2012, Jarden reported about $590 million in cash on its balance sheet (reflecting a fully drawn $400 million accounts receivable securitization facility) and had about $209 million of availability on its $250 million revolving credit facility. Maintenance financial covenants consist of a minimum interest coverage test and a maximum total leverage test. As of June 30, 2012, we believe the company was in compliance with and had adequate cushion under its financial covenants.
We expect Jarden to maintain adequate cash balances and availability on its credit facility to fund seasonal working capital needs and its debt service requirements. We expect the company to generate more than $300 million of free cash flow after capital expenditures, which we believe will be about $130 million for 2012. We believe there is potential for additional tuck-in acquisitions to be an additional use of cash.
Jarden's senior secured credit facility is rated 'BB+', two notches above the corporate credit rating, and has a recovery rating of '1', indicating expectations of very high (90% to 100%) recovery in the event of a payment default. The rating on the company's 8% senior unsecured notes due 2016 and 6.125% senior unsecured notes due 2022 is 'BB-', the same as the corporate credit rating, with a recovery rating of '3', indicating expectations of meaningful (50% to 70%) recovery in the event of a payment default. The ratings on the company's 7.5% subordinated notes due 2017 and 2020 are 'B', two notches below the corporate credit rating, with a recovery rating of '6', indicating expectations of negligible (0% to 10%) recovery in the event of a payment default. (For the complete recovery analysis, see Standard & Poor's recovery report on Jarden published May 29, 2012, on RatingsDirect).
Our rating outlook on Jarden is stable, reflecting our expectation for stable operating performance and gradual improvement in credit measures. We expect Jarden to sustain leverage of about 4.5x over the intermediate term.
We could consider lowering the ratings if the company adopts a more aggressive financial policy or if the company encounters significant operating issues, financial performance falls below our expectations, liquidity becomes constrained or credit protection measures meaningfully weaken, or leverage increases well above 5x. We estimate that if sales declined by more than 7% and margins dropped by more than 100 basis points over the next year, perhaps as a result of a sharp drop in consumer spending combined with increased input costs, leverage would be above 5x.
Although unlikely in the near term, we could consider raising the rating if the company can improve operating performance and credit measures, including achieving and sustaining adjusted debt to EBITDA below 3.5x.
Related Criteria And Research
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Key Credit Factors: Business And Financial Risks In The Branded Consumer Products Industry, Sept. 10, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008