Newell Brands Inc. — Q1 2019 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2019, Newell Brands reported continuing operations across Food and Appliances, Home and Outdoor Living, and Learning and Development. The company was executing its Accelerated Transformation Plan, including divestitures of non-core and industrial businesses. Results are seasonal: first-quarter sales, operating income, and cash flow are generally lower, so the quarter may not indicate full-year performance.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Continuing-operations net sales | $1,712.1 million | $1,811.5 million |
| Gross profit / margin | $543.8 million / 31.8% | $605.3 million / 33.4% |
| Operating income (loss) / margin | $15.0 million / 0.9% | $(26.4) million / (1.5)% |
| Loss from continuing operations | $(71.8) million; $(0.17) per share | $(54.7) million; $(0.11) per share |
| Discontinued-operations income (loss), net of tax | $(79.4) million | $108.0 million |
| Net income (loss) | $(151.2) million; $(0.36) per share | $53.3 million; $0.11 per share |
| Cash from (used in) operating activities | $(200.4) million | $(401.7) million |
- SG&A was $517.9 million, down 17.3%; lower overhead, foreign exchange, and cost savings contributed to the decrease. Cost of products sold fell 3.1%, less than sales, and gross margin declined amid lower sales, input-cost inflation, and tariffs.
- Q1 2019 discontinued operations included a $174.7 million impairment charge, principally from write-downs of held-for-sale businesses. Continuing operations included $80.2 million of net interest expense and $23.3 million of other expense.
- At March 31, cash was $364.1 million, total debt $7,268.2 million, and total liabilities $13,123.0 million. Cash declined $131.6 million during the quarter. Total debt included $573.6 million of short-term and current debt and $6,694.6 million of long-term debt.
- Liquidity included approximately $1.0 billion of net availability under the $1.25 billion revolving facility and $500 million under the $950 million receivables facility. Commercial paper outstanding was $258.9 million; no revolving-facility borrowings were outstanding. The company reported compliance with debt covenants.
- Inventories rose to $1,799.0 million from $1,583.1 million at year-end. The balance sheet included $3,456.1 million of current assets held for sale and $747.1 million of current liabilities held for sale.
Material changes versus the prior comparable period
- Sales decreased 5.5%, with management citing declines across segments and approximately 3% unfavorable foreign-currency effects. Gross margin fell 1.6 percentage points, while operating results improved from a loss to income, primarily due to lower overhead and savings initiatives.
- Segment sales declined in Food and Appliances (5.6%), Home and Outdoor Living (6.4%), and Learning and Development (4.2%). Learning and Development operating income increased to $88.5 million; Home and Outdoor Living moved to a $1.5 million operating loss.
- Continuing-operations operating cash use improved by $225.3 million year over year, partly from working-capital changes. The company still used cash in the quarter, consistent with its disclosed seasonal pattern.
- Weighted-average diluted shares fell to 423.0 million from 486.0 million. The company repaid approximately $268 million of senior notes due in March 2019; short-term borrowing increased during the quarter.
- Adoption of the new lease standard added operating lease assets and liabilities to the balance sheet. The company recognized approximately $629 million of operating lease right-of-use assets and $687 million of related liabilities at adoption.
Outlook, management commentary, risks, and unusual items
- No specific numerical revenue, earnings, or cash-flow guidance is provided in the filing text. Management expected to complete remaining divestitures by the end of 2019 and stated that cash, future operating cash flows, divestiture proceeds, and borrowing capacity were expected to support the company’s needs.
- On May 1, 2019, after quarter-end, the company completed sales of Process Solutions and Rexair for approximately $500 million and $235 million, respectively. It said some proceeds were used to repay short-term debt, including approximately $269 million outstanding under the receivables facility at March 31.
- Management estimated annualized gross tariff exposure of approximately $86 million, while noting mitigation efforts through pricing, productivity, and possible relocation. Further tariff increases or expansion to more product categories could materially affect costs.
- The company recorded an $11.7 million other-than-temporary impairment of its FireAngel investment and $5.4 million of unrealized losses on a newly acquired publicly traded equity investment. A $9.3 million net benefit related to the CEO’s retirement-award treatment was recorded in Q1.
- Management disclosed a material weakness in internal control over financial reporting related to accounting for divestitures, including held-for-sale balances, deferred taxes, impairment inputs, and expected form of sale. Disclosure controls were deemed ineffective as of March 31, 2019; remediation work had begun but was not yet complete.
- The company revised 2018 financial statement amounts after identifying errors in the fair-value and expected-sale assumptions for a held-for-sale business. It said the effects were not material to the previously issued statements; the revision included an additional $12.0 million impairment and approximately $12.6 million of income tax expense.
- Environmental remediation reserves were $47.3 million. The company described substantial uncertainty in the Lower Passaic River matter, including allocation of cleanup costs, and said an adverse outcome could be material. Other disclosed matters include securities litigation, Jarden appraisal claims, and a Virginia air-permit lawsuit; outcomes and potential losses are uncertain.
Most important facts for investors to verify
- Progress and realized proceeds from remaining divestitures, and the use of proceeds to reduce debt.
- Whether sales and gross margins stabilize, particularly in Home and Outdoor Living and baby gear, and whether cost savings offset inflation and tariffs.
- Debt levels, near-term maturities, facility availability, and cash generation as seasonal working-capital needs change.
- Completion and effectiveness of remediation for the disclosed material weakness, including the accuracy of held-for-sale valuations and tax accounting.
- Potential exposure from litigation and environmental matters, especially the Lower Passaic River, along with any changes in recorded reserves.