Spectrum Brands Holdings, Inc. — Q1 FY2022 Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended January 2, 2022, compared with January 3, 2021. Spectrum Brands operates three continuing segments: Home and Personal Care (HPC), Global Pet Care (GPC), and Home and Garden (H&G). Hardware and Home Improvement (HHI) is classified as discontinued operations and held for sale. The filing is a combined report for Spectrum Brands Holdings, Inc. and SB/RH Holdings, LLC; amounts below primarily reflect Spectrum Brands Holdings, Inc.
Key financial metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net sales | $757.2 million | $736.2 million | 2.9% increase |
| Gross profit | $219.3 million | $252.8 million | 13.3% decrease |
| Gross margin | 29.0% | 34.3% | Down 530 bps |
| Operating income (loss) | $(23.8) million | $25.8 million | Declined $49.6 million |
| Continuing operations net income (loss) | $(30.2) million | $15.7 million | Declined $45.9 million |
| Net income attributable to controlling interest | $8.2 million | $72.1 million | Declined 88.6% |
| Diluted EPS | $0.20 | $1.68 | Continuing operations: $(0.73) vs. $0.34 |
| Adjusted EBITDA | $49.3 million | $105.9 million | Down 53.4% |
| Adjusted EBITDA margin | 6.5% | 14.4% | Down 790 bps |
Segment sales were $379.7 million for HPC, $302.2 million for GPC, and $75.3 million for H&G. Segment adjusted EBITDA was $27.4 million, $38.7 million, and $(7.3) million, respectively.
Cash flow, debt, and liquidity
- Cash used in operating activities was $271.1 million, compared with $110.1 million used in the prior-year quarter. Continuing operations used $255.8 million, primarily reflecting weaker operating results and increased working-capital investment, including inventory.
- Cash used in investing activities was $19.0 million, including $14.1 million of capital expenditures.
- Financing activities provided $309.6 million, including $465.0 million of Revolver borrowings, offset by $110.0 million of share repurchases, $17.3 million of dividends, and debt repayments.
- Cash and cash equivalents were $204.9 million at January 2, 2022, versus $187.9 million at September 30, 2021. Cash, cash equivalents, and restricted cash totaled $207.0 million at quarter-end.
- Total debt, before unamortized discount and issuance costs, was approximately $2.99 billion; reported current and long-term debt totaled $2.96 billion. Revolver availability was $116.0 million, net of $19.0 million of letters of credit.
- Management stated that operating cash flow, existing cash, credit-facility availability, and expected capital-market access should satisfy operating and capital requirements for at least the next 12 months. The company was in compliance with its debt covenants at January 2, 2022.
Material changes versus the prior comparable period
- Sales increased modestly, led by GPC growth of 9.7%, while HPC was broadly flat and H&G declined 8.5%. Organic sales increased 1.6% overall, excluding currency and acquisition effects.
- Profitability deteriorated materially as freight, labor, commodity, and other input-cost inflation exceeded pricing actions. Supply-chain constraints, labor turnover, product availability issues, and unfavorable product mix also pressured margins.
- Adjusted EBITDA declined in all three segments. H&G moved from $10.4 million of adjusted EBITDA to a $7.3 million loss.
- Operating expenses increased 7.1%, including $17.4 million of restructuring charges versus $9.0 million and $14.9 million of transaction-related charges versus $19.0 million.
- Prior-year results benefited from a $6.0 million gain on the Energizer investment and $60.5 million of proceeds from its sale; no comparable gain or proceeds occurred in the current quarter.
- Inventories increased to $648.4 million from $562.8 million at September 30, 2021, while trade receivables increased to $298.6 million from $248.4 million.
- The company repurchased $110.0 million of common stock, or approximately 1.1 million shares, and paid a $0.42-per-share dividend.
Outlook, transactions, risks, and unusual items
- HHI is subject to a definitive agreement with ASSA ABLOY for cash proceeds of $4.3 billion, subject to customary adjustments. Regulatory review remained ongoing, and the company did not expect closing before June 2022; closing is not assured. If the transaction has not closed by December 8, 2022 and specified antitrust conditions remain outstanding, ASSA may owe a $350 million termination fee.
- On February 3, 2022, after quarter-end, the company agreed to acquire the Tristar home appliances and cookware business for $325 million in cash at closing, potential earn-outs of up to $125 million, and funding that includes a planned $500 million incremental loan. The transaction was expected to close within 90 days but remained subject to conditions and regulatory approval.
- Management cited continuing COVID-19 uncertainty, inflation, elevated freight and manufacturing costs, labor and supply-chain disruptions, transportation constraints, changing consumer demand, retailer concentration, foreign-exchange and interest-rate exposure, and dependence on access to credit markets.
- The company continued restructuring and productivity initiatives. Estimated future restructuring costs were $15.5 million, including approximately $1.7 million related to the Global Productivity Improvement Program, $3.7 million for the GPC distribution transition, and $10.1 million for the SAP S/4 HANA transformation.
- Two large retail customers each exceeded 10% of consolidated sales and together represented 33.0% of sales. B&D-branded product sales were $129.4 million; the related license agreement was renewed through June 30, 2025.
- HHI discontinued operations generated $38.8 million of after-tax income, down from $57.2 million. HHI sales declined to $374.7 million from $408.7 million, primarily due to lower post-pandemic volumes and inflationary and freight pressures.
- Environmental remediation liabilities were $10.7 million, and product-liability accruals were $3.3 million. Management did not believe pending litigation or contingencies would have a material adverse effect, although outcomes remain subject to uncertainty.
Most important facts for investors to verify
- Whether the HHI divestiture closes on the expected timetable, at the stated proceeds, and with the anticipated debt reduction and strategic benefits.
- Whether pricing actions and productivity programs offset inflation, freight, labor, and supply-chain costs in subsequent quarters.
- Whether the Tristar acquisition closes, the incremental borrowing is completed on acceptable terms, and the transaction produces the expected synergies.
- Operating cash-flow recovery, inventory normalization, Revolver availability, and compliance with debt covenants.
- The sustainability of the $0.42 quarterly dividend and share-repurchase activity given current leverage and negative continuing-operations cash flow.
- Future H&G seasonality and performance, including the impact of the Rejuvenate acquisition and peak-season working-capital requirements.