Business context and reporting period
Newell Brands Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. The global consumer-products company reports five segments: Commercial Solutions, Home Appliances, Home Solutions, Learning and Development, and Outdoor and Recreation. Comparisons are against 2020, when COVID-19 disruptions and substantial impairment charges affected results.
Key financial metrics
| Metric | Q2 2021 | Six months 2021 |
|---|---|---|
| Net sales | $2.709 billion; up 28.3% | $4.997 billion; up 25.0% |
| Gross profit / margin | $882 million / 32.6% (31.5% prior year) | $1.613 billion / 32.3% (32.0% prior year) |
| Operating income (loss) / margin | $305 million / 11.3% (vs. $163 million / 7.7%) | $497 million / 9.9% (vs. loss of $1.245 billion / (31.1%)) |
| Net income (loss) | $197 million; diluted EPS $0.46 | $286 million; diluted EPS $0.67 |
| Operating cash flow | Not separately presented for the quarter | $76 million (vs. $132 million) |
| Cash and debt at June 30 | Cash and equivalents: $637 million; total debt: $5.495 billion, including $610 million current debt |
Q2 sales increased in all segments and major geographic regions; foreign exchange contributed $69 million, or 3%, to sales growth. Six-month foreign-exchange benefit was $101 million, or 3%. Gross-margin gains reflected volume leverage, productivity, mix and pricing, partly offset by input-cost inflation. Six-month operating cash flow was pressured by inventory investment and incentive compensation payments.
Six-month segment sales and operating income were: Commercial Solutions $964 million and $93 million; Home Appliances $754 million and $16 million; Home Solutions $1.029 billion and $114 million; Learning and Development $1.461 billion and $327 million; Outdoor and Recreation $789 million and $63 million.
Material changes versus prior comparable periods
- Q2 net income rose to $197 million from $78 million. For the first half, results swung to $286 million net income from a $1.201 billion loss.
- The first-half 2020 comparison included $1.469 billion in goodwill and intangible-asset impairments, plus other asset impairments. No impairment charges were recorded in the first half of 2021; therefore, the large operating-income improvement is not solely reflective of underlying operating growth.
- Total debt declined to $5.495 billion from $5.607 billion at year-end 2020. Cash declined to $637 million from $981 million. The company redeemed $94 million of notes due in 2021 and repurchased $5 million of 2023 notes.
- Inventories increased to $2.016 billion from $1.638 billion at year-end. The company reported $450 million of factored receivables, up about $100 million from year-end.
- Segment reporting was revised: cookware product lines moved into Home Solutions and the former Appliances and Cookware segment was renamed Home Appliances. Prior-period segment results were recast.
Outlook, management commentary, risks and unusual items
- No numerical full-year revenue or earnings guidance is provided in the supplied filing text. Management expects elevated supply-chain and logistical challenges, labor and capacity shortages, and significant inflation to persist in the near term. Input-cost inflation was expected to have a negative high-single-digit-percentage impact on 2021 cost of products sold; pricing, productivity and cost containment are mitigation measures.
- Management cautioned that second-half comparisons would include lapping stronger 2020 performance and that demand patterns remain uncertain as pandemic conditions evolve. The company typically generates most operating cash flow in the third and fourth quarters.
- COVID-19, new variants, consumer-demand shifts, supply constraints, inflation, retailer concentration, substantial indebtedness, ratings and covenant risks, foreign exchange, potential impairment, and legal and regulatory matters are identified risks. The company reported covenant compliance and no borrowings under its $1.25 billion revolver or $600 million receivables securitization facility at June 30.
- The company’s position challenging U.S. tax regulations could, if unsuccessful, require $180–$220 million of income-tax expense, plus possible interest and penalties. The SEC requested documents concerning disclosure of the potential impact of those regulations; the filing also describes an existing SEC inquiry into sales practices and accounting matters.
- Environmental remediation reserves were $40 million. Liability in the Lower Passaic River matter remains uncertain; the company stated an adverse outcome could be material. Other disclosed litigation includes securities derivative and class actions and disputes related to divested businesses.
- Management reported that a previously identified material weakness in income-tax controls had been remediated as of June 30, 2021; disclosure controls were deemed effective. The company declared dividends of $0.23 per share for the quarter.
Important facts for investors to verify
- Whether sales and margin momentum persists after comparisons against the pandemic-affected 2020 periods, and how much pricing offsets inflation and higher logistics costs.
- Whether inventory growth converts to sales and cash, and whether operating cash flow improves in the seasonally stronger second half.
- Debt maturities, refinancing costs, credit ratings, covenant headroom and the company’s reliance on receivables factoring.
- Developments in the SEC inquiries and the tax-regulation challenge, including any potential tax expense, interest or penalties.
- Potential environmental and other litigation exposure, particularly the Lower Passaic River matter, and the assumptions supporting impairment valuations.