Newell Brands Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016; filed November 8, 2016. Newell acquired Jarden on April 15, 2016, so 2016 results include Jarden only from the acquisition date, while 2015 reported results do not. Reported growth rates are therefore not like-for-like.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $3,954.6 million | $1,530.0 million | $9,128.1 million | $4,354.9 million |
| Gross margin | 32.2% | 39.1% | 31.5% | 39.2% |
| Operating income / margin | $323.9 million / 8.2% | $186.6 million / 12.2% | $587.0 million / 6.4% | $499.5 million / 11.5% |
| Net income | $186.5 million | $134.2 million | $362.2 million | $336.8 million |
| Diluted EPS | $0.38 | $0.50 | $0.91 | $1.24 |
| Operating cash flow | Not separately stated for the quarter | $837.0 million | $288.1 million |
Q3 sales rose 158.5% and nine-month sales rose 109.6%, principally reflecting Jarden; Jarden contributed $2.4 billion of Q3 sales and $4.7 billion of nine-month sales. Gross margin and operating margin contracted materially, mainly because of Jarden inventory fair-value step-up charges ($145.8 million in Q3; $479.5 million year to date), acquisition mix, foreign exchange and integration costs. SG&A was $937.9 million in Q3 and $2,247.4 million year to date. Nine-month net income also included a $159.5 million pretax gain on the Décor sale and $47.1 million of debt/credit-facility extinguishment costs.
Balance sheet, debt and liquidity
At September 30, cash was $670.0 million; total debt was $12.75 billion, including $704.5 million classified as short-term/current. Total assets were $34.42 billion. Working capital was $3.81 billion and the current ratio was 1.94:1. Net debt to total capitalization was 0.51:1, versus 0.60:1 at December 31, 2015. The company reported approximately $1.0 billion of capacity under its revolving facility, in addition to availability under receivables facilities that were replaced after quarter-end.
Nine-month cash from operations was $837.0 million; investing cash use was $8.67 billion, primarily reflecting the Jarden acquisition; financing provided $8.24 billion. Capital expenditures were $287.5 million and dividends paid were $236.9 million. The quarterly dividend was $0.19 per share.
Material changes and management outlook
- Jarden’s acquisition consideration was approximately $15.3 billion, and the company assumed or incurred substantial financing obligations. Management said it would prioritize debt reduction while investing in growth and maintaining the dividend.
- Management expects at least $500 million of annualized Jarden-related cost synergies over four years and approximately $500 million of restructuring and integration costs through 2020.
- Project Renewal is expected to generate $620–$675 million of annualized savings by the end of 2017; approximately $464 million had been realized by September 30, 2016. Expected cumulative costs are $690–$725 million.
- In October, the company announced planned divestitures and agreed to sell the Tools business for an estimated $1.95 billion, subject to adjustments and approvals, with closing expected in 2017. Management anticipated an approximately $1.0 billion pretax gain. The filing also anticipated a $130–$150 million deferred tax charge in Q4 related to the planned Tools sale, plus tax on the eventual sale gain.
- Management announced a restructuring of 32 business units into 16 Global Divisions, effective January 1, 2017, and described investment in brand, design, innovation and e-commerce capabilities.
- Following quarter-end, the company replaced its receivables programs with a new $950 million, three-year securitization facility.
Risks, contingencies and unusual items
- Debt increased substantially after the Jarden acquisition, raising interest expense and potentially limiting flexibility or affecting ratings, borrowing costs and covenant headroom. Ratings included BBB- from S&P with a negative outlook; the company reported covenant compliance at quarter-end.
- Integration execution, realizing projected synergies, portfolio divestitures, foreign exchange, customer concentration, raw-material costs, product liability, pension funding, tax matters and potential impairment of goodwill or intangibles are identified risks. Goodwill and other intangible assets were substantial following the acquisition.
- Jarden appraisal claims covered approximately 10.6 million shares; $626.5 million was accrued for estimated consideration, while the court-determined value could differ. Related litigation remained pending.
- Environmental remediation reserves were $42.9 million. The company could not estimate its ultimate liability for the Lower Passaic River matter; it said a material impact was not currently considered reasonably likely, but adverse outcomes could be material. Product-liability reserves were $91.0 million.
- The company reported effective tax rates of 6.8% for Q3 and 14.1% year to date, affected by acquisition and geographic earnings mix and discrete tax items, including a $33.8 million benefit related to resolution of tax contingencies.
Key facts investors should verify
- How much reported sales and earnings growth reflects Jarden versus organic performance, and how results compare on a pro forma basis.
- The timing, cash costs and realization of Jarden synergies and Project Renewal savings, including whether margin recovery offsets integration and inventory step-up effects.
- Debt repayment progress, interest expense, credit ratings, covenant capacity and liquidity after replacement of the receivables facilities.
- Completion terms, proceeds, tax consequences and operating impact of the planned Tools and other divestitures.
- Final outcomes of Jarden appraisal claims and material environmental, product-liability and tax contingencies.