Spectrum Brands Holdings, Inc. — Q1 Fiscal 2020 Form 10-Q
Reporting period: Three months ended December 29, 2019, compared with December 30, 2018. Results cover four continuing-operation segments: Hardware & Home Improvement (HHI), Home and Personal Care (HPC), Global Pet Care (GPC), and Home and Garden (H&G). The filing also reports SB/RH Holdings, LLC, a wholly owned subsidiary.
Financial overview
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $871.5 million | $880.3 million | (1.0%) |
| Gross profit | $269.1 million | $305.7 million | (12.0%) |
| Gross margin | 30.9% | 34.7% | (380 bps) |
| Operating income (loss) | $(45.9) million | $25.2 million | $(71.1) million |
| Net loss from continuing operations | $(37.7) million | $(29.1) million | $(8.6) million |
| Net loss attributable to controlling interest | $(35.8) million | $(112.5) million | Improved by $76.7 million |
| Diluted loss per share | $(0.75) | $(2.11) | Improved by $1.36 |
| Adjusted EBITDA | $102.2 million | $115.3 million | $(13.1) million |
| Adjusted EBITDA margin | 11.7% | 13.1% | (140 bps) |
Reported results include significant unusual items, including a $32.8 million loss on assets held for sale, a $24.2 million intangible-asset impairment, $27.4 million of restructuring and related charges, and a $38.5 million unrealized gain on the Energizer investment.
Segment performance
| Segment | Sales | Sales change | Adjusted EBITDA | Margin |
|---|---|---|---|---|
| HHI | $297.7 million | (2.4%) | $42.8 million | 14.4% |
| HPC | $322.1 million | 1.5% | $36.4 million | 11.3% |
| GPC | $205.8 million | 0.5% | $31.5 million | 15.3% |
| H&G | $45.9 million | (13.9%) | $(3.3) million | (7.2%) |
Organic sales declined 0.3% overall. HHI was pressured by lower builder-channel volumes and tariffs. HPC benefited from promotional holiday volumes, particularly in EMEA. GPC benefited from companion-animal products and productivity, while H&G was affected by lower volumes, retail inventory levels, higher input costs, and increased marketing spending.
Cash flow, liquidity, and debt
- SBH cash used in operating activities was $196.7 million, compared with $283.6 million in the prior-year quarter. Cash used in investing activities was $18.7 million, including $18.7 million of capital expenditures.
- SBH cash used in financing activities was $273.0 million, primarily reflecting $127.5 million of debt repayments, $90.6 million of treasury-stock purchases, a $125.0 million accelerated share repurchase payment, and $19.9 million of dividends, partially offset by $103.0 million of revolver borrowings.
- Cash and cash equivalents declined to $142.2 million from $627.1 million at September 30, 2019. SB/RH cash was $137.5 million.
- SBH total debt was approximately $2.37 billion before unamortized debt costs; long-term debt, net of current portion, was $2.324 billion. The company had $678.4 million of revolver availability, net of letters of credit.
- The company stated that it was in compliance with applicable debt covenants and believed existing cash and expected operating cash flows would fund requirements for at least the next 12 months.
- Interest expense declined to $34.8 million from $57.0 million, primarily due to lower debt and average interest rates.
Material changes and unusual items
- The company adopted ASC 842 lease accounting on October 1, 2019, recognizing $107.5 million of additional right-of-use assets and $113.0 million of additional lease liabilities, with no material equity impact.
- The company agreed to sell its Coevorden, Netherlands dog-and-cat-food production and distribution operations for €30 million, subject to adjustments. The transaction is expected to close in the second quarter of fiscal 2020 and resulted in a $32.8 million held-for-sale loss.
- The Coevorden transaction also led to $24.2 million of intangible-asset impairments in the retained commercial DCF business. Remaining GPC goodwill of $421.5 million was described as at risk of impairment if operating performance or assumptions deteriorate.
- The Global Productivity Improvement Plan incurred cumulative costs of $80.5 million through December 29, 2019, with approximately $57.4 million of additional costs forecast through fiscal 2022.
- The company completed the tender and call of its 6.625% senior unsecured notes, with $117.4 million of principal outstanding, and recorded a $2.6 million loss on extinguishment.
- Following quarter-end, the company settled its $197.0 million indemnification payable to Energizer related to the Varta transaction.
- The company repurchased approximately 3.2 million shares for $196.9 million during the quarter, including a $125.0 million accelerated share repurchase. The ASR final settlement was expected no later than May 6, 2020.
Outlook, commentary, and risks
Management emphasized productivity initiatives, cost savings, pricing, operational simplification, and the transition to a post-divestiture operating structure. No specific revenue, earnings, or cash-flow guidance is provided in the filing text.
- Key operating pressures include tariffs, commodity and input-cost inflation, foreign-exchange volatility, promotional activity, retail customer concentration, seasonal demand, and weaker builder-channel or retail volumes.
- Liquidity depends on operating cash generation, access to revolver capacity, working-capital requirements, and continued compliance with debt covenants.
- The company remains exposed to impairment risk involving GPC goodwill and DCF-related trade names and intangible assets.
- Material contingencies include litigation, environmental remediation, product liability, product warranties, indemnification obligations to Energizer, and commitments associated with restructuring and divestitures.
- The company reported that pending litigation was not expected to have a material adverse effect, but stated that actual results may differ materially from forward-looking expectations due to indebtedness, market conditions, customers, competition, regulation, cybersecurity, acquisitions or divestitures, and other listed risks.
Most important facts for investors to verify
- Whether gross-margin pressure from tariffs, input costs, foreign-exchange effects, and restructuring improves in subsequent quarters.
- The timing and final proceeds from the Coevorden divestiture and any additional impairment of GPC goodwill or DCF-related intangible assets.
- Post-quarter-end cash after the $197.0 million Energizer settlement and the company’s ongoing revolver borrowings and debt-service needs.
- The final share count and effective price under the $125.0 million ASR, as well as the pace and remaining authorization of future repurchases.
- Whether the Global Productivity Improvement Plan delivers expected savings relative to the remaining $57.4 million of projected costs.
- The sustainability of adjusted EBITDA, which declined year over year and excludes substantial restructuring, impairment, held-for-sale, stock compensation, and investment-market adjustments.