Spectrum Brands Holdings, Inc. — Q2 FY2021 Form 10-Q Summary
Business context and reporting period
Spectrum Brands is a diversified branded consumer products company operating in Hardware & Home Improvement (HHI), Home and Personal Care (HPC), Global Pet Care (GPC), and Home and Garden (H&G). The filing covers the three and six months ended April 4, 2021, compared with March 29, 2020. Results are unaudited and presented for Spectrum Brands Holdings, Inc. (SBH) and its wholly owned subsidiary, SB/RH Holdings, LLC.
Key financial metrics
| Metric | Three months ended Apr. 4, 2021 | Prior comparable period | Six months ended Apr. 4, 2021 | Prior comparable period |
|---|---|---|---|---|
| Net sales | $1,149.8 million | $937.8 million | $2,294.7 million | $1,809.3 million |
| Gross profit | $404.0 million | $328.9 million | $826.3 million | $598.0 million |
| Gross margin | 35.1% | 35.1% | 36.0% | 33.1% |
| Operating income | $116.8 million | $67.7 million | $240.3 million | $22.0 million |
| Net income from continuing operations | $36.8 million | $(59.2) million | $110.0 million | $(96.9) million |
| Net income attributable to controlling interest | $36.6 million | $(57.0) million | $108.7 million | $(92.7) million |
| Diluted EPS | $0.85 | $(1.26) | $2.53 | $(2.00) |
| Adjusted EBITDA | $180.9 million | $140.4 million | $384.9 million | $242.5 million |
| Adjusted EBITDA margin | 15.7% | 15.0% | 16.8% | 13.4% |
Six-month operating cash flow from continuing operations was negative $63.9 million, compared with negative $184.6 million in the prior year. Including discontinued operations, total operating cash flow was negative $79.8 million. Investing cash flow was negative $85.1 million, including $129.8 million for acquisitions and $28.1 million of capital expenditures. Financing cash flow was negative $80.1 million.
Cash and cash equivalents were $290.0 million at April 4, 2021, versus $531.6 million at September 30, 2020. Inventories increased to $812.1 million from $557.7 million, while trade receivables increased to $524.9 million from $501.1 million.
Total debt, including current and long-term portions, was approximately $2.57 billion at April 4, 2021, compared with approximately $2.48 billion at September 30, 2020. Revolver availability was $576.6 million, net of letters of credit. Variable-rate debt totaled approximately $402.6 million, or 15.4% of total debt; a 1% increase in market rates was estimated to increase annual interest expense by approximately $4.1 million.
Material changes versus the prior comparable period
- Sales increased 22.6% in the quarter and 26.8% year to date. Organic sales increased 17.8% and 22.6%, respectively, excluding foreign exchange and acquisition effects.
- All four segments reported higher sales. Six-month increases were HHI 27.3%, HPC 21.9%, GPC 28.6%, and H&G 35.7%.
- Gross margin was flat in the quarter but expanded 290 basis points year to date, reflecting volume, productivity, cost improvements, mix, and lower prior-year restructuring and depreciation costs. Inflation and shipping costs partially offset these benefits.
- Operating income improved substantially as the prior-year period included a $25.7 million loss on assets held for sale and a $24.2 million intangible-asset impairment related to the Coevorden divestiture.
- Adjusted EBITDA increased to $180.9 million in the quarter and $384.9 million year to date. Margin improved 70 basis points in the quarter and 340 basis points year to date.
- Interest expense increased by $30.0 million in the quarter and $31.8 million year to date, principally due to refinancing costs, including a $23.4 million make-whole premium and a $7.9 million write-off of unamortized debt costs.
- The company completed the $187.7 million acquisition of Armitage Pet Care in October 2020. Armitage contributed to GPC results, and the acquisition generated $90.7 million of goodwill.
- On March 3, 2021, the company issued $500.0 million of 3.875% senior notes due 2031 and entered into a $400.0 million term loan facility. Proceeds were used partly to redeem $800.0 million of higher-cost notes.
- The company sold its remaining Energizer common stock investment during the quarter and held no Energizer shares at April 4, 2021. The prior-year period included significant unrealized losses on that investment.
Guidance, outlook, commentary, risks, and unusual items
Management did not provide a clear consolidated revenue or earnings guidance figure in the filing. Management expects operating cash flow, existing cash, credit-facility availability, and capital-market access to be sufficient for operating and capital-expenditure requirements for at least the next 12 months, subject to economic and financing conditions.
- COVID-19 demand remained generally strong, and the company reported no material negative impact on liquidity or material impairment as of the filing date. However, demand, supply-chain disruption, customer operations, inflation, and future economic effects remain uncertain.
- The Global Productivity Improvement Program had incurred $136.3 million cumulatively, with approximately $31.6 million of additional costs expected through fiscal 2022.
- Restructuring and related charges were $13.3 million for the first six months, down from $49.4 million in the prior year.
- The company entered into an agreement on April 20, 2021, after the balance-sheet date, to acquire For Life Products, LLC, including the Rejuvenate brand, for approximately $300 million. Closing was expected in the second half of fiscal 2021, subject to customary conditions and antitrust review.
- H&G recorded approximately $6.0 million of legal reserves for significant and unusual non-recurring claims during the six months.
- Environmental remediation liabilities were $11.6 million; product liability and warranty accruals were $4.4 million and $11.4 million, respectively.
- A shareholder litigation settlement previously proposed was not approved by the court in February 2021. The company stated that it intends to defend the matter if a settlement is not reached and approved.
- Management stated that disclosure controls were effective, but a previously identified material weakness involving information-technology general controls in the EMEA region remained under remediation.
- The board approved a new $1.0 billion share-repurchase authorization on May 4, 2021, replacing the prior authorization. No shares were repurchased in the quarter; $42.3 million was spent on repurchases during the six months.
Most important facts for investors to verify
- Whether strong organic sales and adjusted EBITDA growth can persist after favorable comparisons and pandemic-related demand benefits.
- Inventory growth, working-capital consumption, and the timing of conversion to operating cash flow.
- Debt reduction, interest costs, covenant compliance, variable-rate exposure, and liquidity after the refinancing and planned Rejuvenate acquisition.
- The effects of freight, raw-material inflation, tariffs, pricing, and supply-chain constraints on future margins.
- Integration performance and returns from Armitage, as well as the closing, financing, and integration of the approximately $300 million Rejuvenate transaction.
- Remaining restructuring costs, unusual legal reserves, indemnification obligations related to prior divestitures, and potential litigation or environmental exposures.
- Progress in remediating the EMEA information-technology control weakness.