Business context and reporting period
Newell Brands Inc. is a global consumer and commercial products company, reporting four segments: Appliances and Cookware; Food and Commercial; Home and Outdoor Living; and Learning and Development. This unaudited Form 10-Q covers the three months ended March 31, 2020, compared with the same 2019 period. The quarter was materially affected by the emerging COVID-19 pandemic. The company had completed its Accelerated Transformation Plan and sale of its Playing Cards business by December 31, 2019; 2019 discontinued-operations results therefore differ in scope.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net sales | $1.886 billion | $2.042 billion; down 7.6% |
| Gross profit / margin | $617 million / 32.7% | $655 million / 32.1% |
| Operating income (loss) | $(1.408) billion; margin (74.7)% | $12 million; margin 0.6% |
| Net loss | $(1.279) billion; diluted loss per share $(3.02) | $(151) million; diluted loss per share $(0.36), including discontinued operations |
| Interest expense, net | $63 million | $80 million |
| Operating cash flow | $23 million | $(200) million |
| Capital expenditures | $58 million | $58 million |
The operating loss included $1.469 billion of non-cash goodwill and intangible-asset impairments, versus $63 million in Q1 2019. The impairment charge comprised $1.257 billion for indefinite-lived trade names and $212 million for Appliances and Cookware goodwill. Gross margin improved primarily on productivity and net pricing, partly offset by mix, input-cost inflation and tariffs. Foreign exchange reduced sales by $33 million and gross profit by $11 million.
Segment sales and operating income (loss): Appliances and Cookware $291 million and $(308) million; Food and Commercial $520 million and $84 million; Home and Outdoor Living $547 million and $(1.121) billion; Learning and Development $528 million and $5 million. Impairments substantially affected the segment operating results. Food and Commercial sales rose 3.2%, while sales declined in the other three segments.
At March 31, cash and cash equivalents were $476 million, total debt was $6.014 billion ($639 million current and $5.375 billion long-term), and total stockholders’ equity was $3.479 billion. Cash increased from $349 million at year-end 2019; cash, cash equivalents and restricted cash totaled $487 million. The company reported $23 million of operating cash flow, supported in part by working-capital actions and receivables sales; it sold an additional $100 million of receivables under its amended factoring agreement. The $600 million receivables securitization facility was drawn to its maximum net availability (approximately $290 million outstanding). The $1.25 billion revolver had no borrowings at quarter-end and approximately $1.2 billion net availability; after quarter-end, the company borrowed $125 million and repaid $40 million of commercial paper.
Material changes, outlook and key risks
- COVID-19: The company reported temporary disruption at approximately 20 of 135 manufacturing and distribution facilities, closures of secondary retail customers and North American Yankee Candle stores, and shifts in consumer demand. Food and Commercial benefited from higher demand for certain food, washroom and cleaning products; other categories weakened. Management expected Q2 results to worsen sequentially and warned effects could persist beyond Q2. It said the pandemic’s ultimate duration and financial impact could not be predicted.
- Actions and liquidity: Cost and cash measures included a hiring freeze, furloughs effective April 1 for field-based and most North American corporate retail employees, reduced discretionary spending and advertising, and prioritized capital expenditures. The company suspended planned open-market share repurchases and debt retirement before maturity, while stating it believed available cash, operating cash flow and borrowing capacity provided adequate liquidity. It was compliant with debt covenants at the time of filing, but warned prolonged disruption could affect covenant compliance and future borrowing capacity.
- Credit and tariffs: Moody’s downgraded the company to Ba1 in March and S&P had downgraded it to BB+ in November 2019; commercial-paper borrowing access was eliminated. Fitch downgraded it to BB on April 15, 2020. Downgrades by Moody’s and S&P triggered a total 50-basis-point increase on approximately $4.5 billion of senior notes, expected to add about $17 million to 2020 interest expense and $23 million annually. Management estimated 2020 gross tariff impact of approximately $75 million, including approximately $20 million in Q1, before mitigation.
- Impairment risk: Management’s impairment estimates depend on uncertain pandemic duration, demand, recovery and other assumptions. Further deterioration could trigger additional material goodwill or intangible impairments. Nine indefinite-lived trade names had fair values within 10% of carrying values; sensitivity tests showed potential incremental impairment under specified adverse assumptions.
- Contingencies: The company received an SEC subpoena on January 31, 2020, primarily concerning sales practices and accounting matters from January 1, 2016 onward, and said it could not predict the investigation’s timing or outcome. It also disclosed ongoing litigation, including a Delaware appeal in the Jarden appraisal matter, a Waddington buyer lawsuit, and environmental matters. Environmental remediation reserves were $43 million; the company said the ultimate Lower Passaic River liability remained uncertain and could be material in adverse circumstances.
- Tax exposure: The company did not recognize the effect of challenged temporary tax regulations; if its position is not sustained, it estimated tax expense of $180–$220 million, plus possible interest and penalties.
- Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at March 31, 2020 because material weaknesses remained in controls over divestiture accounting and certain income-tax accounting. Remediation was underway but not yet complete.
The filing gives no specific numerical sales or earnings guidance. Management described its longer-term priorities as core-sales growth, improved margins, faster cash conversion and stronger organizational capability. Q1 dividends declared were $0.23 per share.
Important facts for investors to verify
- Whether COVID-19 closures, consumer-demand changes and supply-chain constraints worsened or eased after March 31, particularly in Q2.
- Cash generation, receivables factoring and facility availability, including borrowing-base and covenant headroom and the post-quarter revolver draw.
- Debt maturities, rating developments, financing costs and the company’s progress against its debt-reduction objectives.
- Whether impairment assumptions remain supportable and whether additional goodwill or trade-name charges are required.
- Developments in the SEC investigation, tax-regulation challenge and disclosed litigation or environmental matters.
- Whether management’s remediation of the disclosed material weaknesses is completed and tested as effective.