Business context and reporting period
Newell Brands Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. The consumer-products company reported three continuing operating segments: Food and Appliances, Home and Outdoor Living, and Learning and Development. Results reflect its Accelerated Transformation Plan, including multiple business divestitures classified as discontinued operations.
Financial performance and condition
Amounts are in millions of U.S. dollars, except per-share data.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales, continuing operations | $2,116.5 | $2,201.6 | $3,828.6 | $4,013.1 |
| Gross profit | $746.6 | $774.8 | $1,290.4 | $1,380.1 |
| Operating income | $178.1 | $83.9 | $193.1 | $57.5 |
| Income (loss) from continuing operations | $83.0 | $(76.4) | $11.2 | $(131.1) |
| Net income (loss), including discontinued operations | $89.8 | $131.7 | $(61.4) | $185.0 |
| Diluted EPS, continuing operations | $0.20 | $(0.16) | $0.03 | $(0.27) |
- Gross margin was 35.3% in Q2 versus 35.2% a year earlier; for the first half it was 33.7% versus 34.4%. Operating margin improved to 8.4% from 3.8% in Q2 and to 5.0% from 1.4% for the first half.
- Operating cash flow for the six months was a $9.1 million use of cash, compared with a $390.5 million use in 2018. Continuing-operations operating cash flow was a $33.5 million use; discontinued operations provided $24.4 million.
- Investing activities provided $622.4 million, including $739.8 million of divestiture proceeds. Financing activities used $486.0 million, including $268.2 million of payments on current long-term debt and $195.3 million of dividends. Cash increased $128.8 million to $624.5 million.
- At June 30, total debt was $6,751.2 million, including $6,707.8 million long-term debt. Cash was $624.5 million. The company had no revolver or receivables-facility borrowings outstanding and reported approximately $1.2 billion available under its $1.25 billion revolving facility. It stated it was in compliance with debt covenants.
- Current assets were $7,061.7 million and current liabilities $3,135.8 million. The balance sheet included $2,545.7 million of current assets held for sale and $538.0 million of current liabilities held for sale.
Material changes versus the prior comparable period
- Q2 continuing-operations sales declined 3.9%; first-half sales declined 4.6%. The company attributed declines to segment softness and approximately 2% unfavorable foreign currency effects.
- In Q2, Food and Appliances sales fell 9.3% and Home and Outdoor Living sales fell 4.9%; Learning and Development sales grew 1.2%. First-half sales declined across all three segments.
- Operating income rose despite lower sales, supported by reduced SG&A, restructuring and impairment charges. Q2 SG&A decreased $54.7 million; first-half SG&A decreased $163.1 million. Lower impairment and transformation-related costs also aided comparisons.
- Interest expense fell to $78.2 million in Q2 from $120.5 million and to $158.4 million for the first half from $236.6 million, primarily due to lower debt levels. Other expense was $23.5 million for the first half, versus $14.6 million of other income in 2018.
- Discontinued-operations results were volatile: Q2 income was $6.8 million versus $208.1 million, while the first-half loss was $72.6 million versus income of $316.1 million. Prior-year results included major divestiture gains, while 2019 included impairment charges on businesses held for sale.
Outlook, management commentary, risks and unusual items
- The company expected to complete remaining planned divestitures by year-end 2019. After quarter-end, it decided to retain most of the Rubbermaid Business rather than sell it. That business generated $243 million of Q2 revenue and $49.1 million of Q2 operating income, previously presented in discontinued operations. The company expected a roughly $40 million Q3 charge for depreciation and amortization that would have been recorded if the assets had remained held and used.
- The company continued to explore a sale of the Quickie cleaning-tools business; a sale could result in an additional charge of $70 million to $110 million. The U.S. Playing Cards sale, for approximately $220 million subject to customary adjustments and approvals, was expected to close in the second half of 2019.
- Management cited seasonality: operating cash flow is generally strongest in the third and fourth quarters. It said cash, future operating cash flows, divestiture proceeds, capital-market access and available facilities were expected to support liquidity needs. No specific earnings or sales guidance is provided in the supplied filing text.
- Tariffs on Chinese goods created estimated annualized gross exposure of approximately $92 million. Management said 2019 mitigation actions had substantially reduced exposure; further tariff expansion could materially affect results.
- A product safety issue in Home and Outdoor Living led to stopped sales and a retailer return authorization. The company recorded a $13 million revenue reduction and estimated total costs of $10 million to $15 million. No consumer-return accrual had been recorded pending regulatory determination of any field action.
- The company did not record an estimated $180 million to $220 million potential tax expense related to its challenge to temporary U.S. tax regulations. It believes its position is supportable, but an adverse outcome could also involve interest and penalties.
- Following a July 2019 court order on remaining Jarden appraisal claims, the company faced an award of approximately $140 million plus accrued interest. Interest accrued through June 30 was approximately $35 million; claimants filed for reargument after quarter-end. The filing reports approximately $174 million accrued unpaid consideration related to these claims.
- Environmental remediation reserves were $46.1 million. The company said the Lower Passaic River matter’s ultimate allocation and exposure were unknown; it did not consider a material impact reasonably likely based on known facts, while acknowledging adverse determinations could be material.
- Disclosure controls were deemed ineffective at June 30 because of a continuing material weakness in controls over divestiture accounting, including held-for-sale valuations, deferred taxes and classification. The company was developing and implementing remediation controls. It also disclosed revisions to previously issued 2018 financial statements, which management concluded were not material to those statements.
- Other notable items include $11.7 million of first-quarter impairment on the FireAngel investment and the retirement of CEO Michael Polk at quarter-end, with an interim CEO in place.
Important facts for investors to verify
- Whether sales trends, gross-margin pressure from input costs and tariffs, and segment-level performance improve in subsequent quarters.
- Completion, proceeds and accounting impacts of planned divestitures, and the effects of bringing the retained Rubbermaid Business back into continuing operations.
- Cash conversion and working-capital trends, including inventory growth and the use of receivables sales to support operating cash flow.
- Debt reduction progress, upcoming maturities, and the company’s capacity to fund dividends, restructuring and other cash commitments.
- Regulatory outcomes and ultimate costs for the product safety matter, the tax-regulation challenge, Jarden appraisal litigation and environmental proceedings.
- Progress and testing of remediation for the material weakness in internal control over financial reporting.