Spectrum Brands Holdings, Inc. — Fiscal 2021 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended September 30, 2021, and includes Spectrum Brands Holdings, Inc. and its wholly owned subsidiary SB/RH Holdings, LLC. Continuing operations comprise Home and Personal Care (HPC), Global Pet Care (GPC), and Home and Garden (H&G). Hardware and Home Improvement (HHI) was classified as held for sale and discontinued operations after the company agreed on September 8, 2021 to sell it to ASSA ABLOY AB.
Key financial metrics
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Net sales | $2,998.1 million | $2,622.1 million | +14.3% |
| Gross profit | $1,034.6 million | $878.1 million | +17.8% |
| Gross margin | 34.5% | 33.5% | +100 bps |
| Operating income | $97.1 million | $8.6 million | Improved |
| Net income from continuing operations | $15.3 million | $(52.4) million | Improved |
| Net income attributable to controlling interest | $189.6 million | $97.8 million | +93.7% |
| Adjusted EBITDA | $391.8 million | $323.9 million | +21.0% |
| Adjusted EBITDA margin | 13.1% | 12.4% | +70 bps |
| Cash flow from continuing operations | $89.2 million | $201.8 million | Down $112.6 million |
| Capital expenditures | $43.6 million | $44.1 million | Down slightly |
Consolidated net income included $174.3 million of after-tax income from discontinued operations, primarily HHI. Basic and diluted earnings per share were $4.44 and $4.39, respectively, compared with $2.19 for both measures in fiscal 2020. The continuing-operations effective tax rate was unusually high at 237.8% because pretax continuing-operations results were near breakeven and were affected by valuation allowance changes, U.K. tax-rate changes, and retroactive GILTI-related tax benefits.
Segment performance
| Segment | FY2021 sales | Sales change | FY2021 Adjusted EBITDA | Margin |
|---|---|---|---|---|
| HPC | $1,260.1 million | +13.8% | $102.6 million | 8.1% |
| GPC | $1,129.9 million | +17.4% | $212.1 million | 18.8% |
| H&G | $608.1 million | +10.2% | $124.0 million | 20.4% |
- HPC benefited from personal-care and small-appliance demand, new products, e-commerce growth, reopening of retail channels, and pricing, but margins were pressured by material, freight, and marketing costs.
- GPC included $99.5 million of acquisition sales from Armitage and achieved organic sales growth of 5.1%. Results benefited from volume, mix, pricing, and productivity, partly offset by distribution-center transition costs and customer penalties.
- H&G included sales from the Rejuvenate acquisition and achieved organic sales growth of 6.0%. Operating income declined because of input-cost inflation, higher marketing and distribution costs, acquisition costs, and legal reserves.
Material changes versus the prior comparable period
- Revenue increased $376.0 million, including $122.7 million from acquisitions and a $49.5 million favorable foreign-exchange impact. Organic sales increased 7.8% overall.
- Gross margin expanded by 100 basis points, but operating expenses rose 7.8%, including higher freight, distribution, marketing, general and administrative, and transaction-related costs.
- Adjusted EBITDA increased, while reported continuing-operations profitability improved from a loss to modest income. Fiscal 2020 included a $76.2 million non-cash gain from extinguishment of Salus CLO debt; fiscal 2021 included refinancing charges and other unusual items.
- The company acquired Armitage Pet Care for approximately $187.7 million and For Life Products/Rejuvenate for $301.5 million. Cash used for acquisitions was $429.9 million.
- The company issued $500.0 million of 3.875% senior notes and entered into a $400.0 million term loan facility. It redeemed $250.0 million of 6.125% notes and $550.0 million of 5.75% notes, recognizing refinancing-related premiums and debt-cost write-offs.
- Inventory increased to $562.8 million from $318.6 million, contributing to lower operating cash flow as the company built inventory to address supply-chain constraints.
- The company repurchased $125.8 million of common stock during the year and paid dividends of $1.68 per share. A new $1.0 billion repurchase authorization was approved in May 2021.
Liquidity, debt, outlook, and risks
- Cash and cash equivalents were $187.9 million at September 30, 2021, compared with $531.6 million a year earlier. Revolver availability was $575.4 million, net of $24.6 million of letters of credit.
- Total debt principal was approximately $2.54 billion before unamortized discount and issuance costs. The company reported no material principal maturities within the following 12 months other than scheduled term-loan amortization, and expected annual interest payments of approximately $117.4 million.
- Management expected operating cash flow, existing cash, anticipated HHI-sale proceeds, credit-facility availability, and capital-markets access to fund operating and capital requirements for at least the next 12 months. The HHI transaction was expected to close by September 30, 2022, subject to regulatory and other conditions; the agreement included a potential $350 million termination fee payable by ASSA in certain antitrust-delay circumstances.
- The filing provides no formal fiscal 2022 revenue or earnings guidance. Management identified continued execution of productivity initiatives, supply-chain normalization, acquisition integration, and the HHI divestiture as important factors.
- COVID-19 had not materially reduced liquidity or demand as of the filing date, but management continued to identify risks from supply disruptions, inventory requirements, transportation costs, inflation, tariffs, labor availability, and changes in consumer behavior.
- Other material risks include substantial leverage and restrictive debt covenants, variable interest rates, foreign-exchange exposure, customer concentration, dependence on third-party suppliers, competition, product liability and regulatory matters, cybersecurity, environmental obligations, and intellectual-property issues.
- The Black & Decker trademark license generated $400.2 million of revenue in fiscal 2021 and was scheduled to expire December 31, 2021. The company was negotiating a replacement agreement, but disclosed no assurance of renewal and described disagreement with the licensor regarding transition and noncompetition provisions.
- Restructuring and related charges were $40.3 million in fiscal 2021. Approximately $27.7 million of additional restructuring costs were expected, including costs related to the Global Productivity Improvement Program, the GPC logistics transition, and the SAP S4 ERP transformation.
Investor verification items
- Verify the timing, final purchase-price adjustments, regulatory approvals, and use of proceeds for the HHI divestiture.
- Assess post-divestiture leverage, debt repayment plans, interest expense, covenant headroom, and the company’s liquidity after HHI proceeds are received.
- Monitor renewal or transition of the Black & Decker license and the potential effect on HPC revenue, margins, and product distribution.
- Evaluate whether inventory normalization and supply-chain improvements convert reported Adjusted EBITDA into sustainable operating cash flow.
- Review acquisition integration performance for Armitage and Rejuvenate, including incremental goodwill and intangible-asset impairment risk.
- Reconcile non-GAAP Adjusted EBITDA to GAAP results and distinguish recurring operating performance from restructuring, transaction, legal, refinancing, and discontinued-operations items.
- Review the company’s tax-attribute utilization assumptions, including $1,389.3 million of U.S. federal NOLs, a $349.4 million valuation allowance, and ongoing tax audits.
- Confirm the status and insurance coverage of shareholder litigation settlements, H&G legal reserves, environmental liabilities, and other commitments.