Spectrum Brands Holdings, Inc. Form 10-Q Summary
Business context and reporting period
The combined filing covers Spectrum Brands Holdings, Inc. (formerly HRG Group, Inc.) and SB/RH Holdings, LLC. SBH reported the three and nine months ended June 30, 2018; SB/RH reported the corresponding periods ended July 1, 2018. Spectrum is a global branded consumer-products company operating in hardware and home improvement, pet supplies, home and garden, and global auto care across approximately 160 countries.
The Spectrum Merger closed on July 13, 2018, after the reporting period. HRG changed its name to Spectrum Brands Holdings, Inc., adopted the ticker SPB, and became the parent of Spectrum. The Global Batteries and Appliances business was classified as held for sale and discontinued operations. Former HRG insurance operations were sold in November 2017 and are also presented as discontinued operations.
Key financial metrics
| SBH consolidated metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue | $945.5 million | $863.0 million | $2,358.1 million | $2,222.7 million |
| Gross profit | $354.6 million | $320.3 million | $863.7 million | $867.1 million |
| Gross margin | 37.5% | 37.1% | 36.6% | 39.0% |
| Operating income | $126.3 million | $100.7 million | $180.8 million | $237.2 million |
| Operating margin | 13.4% | 11.7% | 7.7% | 10.7% |
| Net income from continuing operations | $402.9 million | $3.8 million | $443.7 million | $(46.0) million |
| Net income attributable to controlling interest | $377.3 million | $2.1 million | $847.7 million | $132.2 million |
| Diluted EPS | $11.51 | $0.06 | $25.93 | $4.10 |
| Adjusted EBITDA | $206.4 million | $199.3 million | $427.7 million | $464.7 million |
SBH’s nine-month net income benefited materially from discontinued operations, including the insurance disposition and a $445.9 million reclassification of accumulated other comprehensive income. Q3 and nine-month continuing-operations results also benefited from significant tax items, including a $335.0 million release of U.S. federal valuation allowance and other provisional Tax Cuts and Jobs Act adjustments.
- SBH cash and cash equivalents were $814.6 million at June 30, 2018, compared with $270.1 million at September 30, 2017.
- SBH net cash used by continuing operating activities was $148.7 million for the nine months, compared with $69.0 million used in the prior-year period.
- SBH received $1.5468 billion from the sale of the insurance operations and used significant proceeds to repay debt.
- Capital expenditures were $49.2 million for the nine months, compared with $51.1 million in the prior-year period.
- SBH long-term debt, net of current portion, was $5.1894 billion; SB/RH long-term debt was $4.2535 billion.
- The Spectrum revolver had $800.0 million of capacity and $234.5 million of borrowing availability at June 30, 2018, after borrowings, letters of credit and other allocations.
- Management stated that the company was in compliance with applicable debt covenants and expected existing cash and operating cash flows to fund requirements for at least the next 12 months.
Material changes versus the prior comparable period
- Q3 revenue increased 9.6%; nine-month revenue increased 6.1%. Reported growth included acquisitions and favorable foreign-currency effects, while organic sales declined 7.3% in Q3 and 2.1% for the nine months.
- Q3 gross profit increased $34.3 million, but nine-month gross profit declined $3.4 million. Nine-month gross margin fell 240 basis points because of restructuring inefficiencies, higher raw-material costs, product mix and pet-recall-related production costs.
- Q3 operating income increased 25.4%, while nine-month operating income declined 23.8%, primarily because of higher restructuring costs and weaker year-to-date segment profitability.
- Interest expense declined 16.6% in Q3 and 11.1% for the nine months following refinancing and debt repayment activity.
- Q3 adjusted EBITDA increased to $206.4 million from $199.3 million, but nine-month adjusted EBITDA declined to $427.7 million from $464.7 million.
- Hardware and Home Improvement revenue increased 14.7% in Q3 and 9.7% for the nine months, but nine-month operating margin declined to 10.1% from 14.8% because of distribution-center consolidation, material costs and unfavorable mix.
- Global Pet Supplies revenue increased 2.5% in Q3 and 5.6% for the nine months, aided by acquisitions, while organic revenue declined in both periods. Q3 adjusted EBITDA declined 3.3% because of product mix.
- Home and Garden revenue increased 5.6% in Q3 but declined 1.0% for the nine months; nine-month adjusted EBITDA declined 13.0% because of lower volumes, unfavorable mix and higher input costs.
- Global Auto Care revenue increased 12.5% in Q3 and 5.3% for the nine months, but nine-month adjusted EBITDA declined 26.9% because of restructuring inefficiencies, product mix, product-development and marketing costs, and higher input costs.
Guidance, outlook, risks and unusual items
- No formal earnings or revenue guidance is provided in the filing. Management expected the GBL sale to Energizer for approximately $2.0 billion, subject to customary adjustments and closing conditions, to be completed before December 31, 2018. The U.S. antitrust waiting period had expired, but international regulatory approvals remained outstanding.
- The company was actively marketing the Home and Personal Care business and expected a separate transaction before December 31, 2018. Completion, proceeds and timing remained uncertain.
- Restructuring charges were $69.0 million for the nine months, with $16.4 million of future costs expected. Initiatives primarily involved HHI distribution-center consolidation, GAC rationalization and PET rightsizing.
- The pet safety recall generated $5.1 million of expense in Q3 and $16.3 million for the nine months. Management stated that estimates remained provisional and could change as customer claims were substantiated.
- The company recorded provisional Tax Cuts and Jobs Act effects, including a $71.0 million repatriation-tax expense and substantial deferred-tax valuation-allowance releases. Final amounts could differ materially during the permitted measurement period.
- Key risks include substantial leverage, variable interest rates, commodity and foreign-exchange volatility, retailer concentration, seasonal demand, restructuring execution, product liability and recall exposure, litigation, cybersecurity, tax-attribute limitations, and the ability to complete the GBL and HPC divestitures.
- Three customers represented 40% of Q3 net sales and 29% of trade receivables at June 30, 2018, creating meaningful customer-concentration risk.
- Environmental remediation, product liability and warranty accruals were $4.2 million, $4.8 million and $7.3 million, respectively, at June 30, 2018.
Most important facts for an investor to verify
- Whether the Energizer GBL transaction and any HPC transaction closed on expected terms, including proceeds, regulatory conditions and debt repayment.
- The post-merger capital structure, including the effect of the July 13, 2018 Spectrum Merger, the additional 20.6 million shares issued, and the new $1.0 billion share-repurchase authorization.
- Underlying operating performance excluding tax benefits, discontinued operations, acquisitions, restructuring, recall costs and merger expenses.
- Progress in restoring HHI, H&G and GAC margins and completing the remaining restructuring initiatives.
- Final Tax Cuts and Jobs Act accounting, utilization of U.S. net operating losses and potential future cash-tax payments.
- Liquidity, revolver availability, debt maturities, covenant compliance and the extent to which divestiture proceeds are required to reduce leverage.
- The sustainability of cash flow, given that continuing operations used $148.7 million of SBH operating cash during the first nine months.