Spectrum Brands Holdings, Inc. — Fiscal 2018 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended September 30, 2018, with fourth-quarter results included. Spectrum Brands Holdings, Inc. (formerly HRG Group, Inc.) completed the Spectrum Merger on July 13, 2018, changed its name and NYSE ticker to SPB, and became the sole owner of Spectrum’s consumer-products business. Continuing operations comprise Hardware & Home Improvement (HHI), Global Pet Supplies (PET), Home & Garden (H&G), and Global Auto Care (GAC), serving approximately 160 countries.
Global Batteries and Appliances (GBA) was classified as held for sale and discontinued operations for all periods presented. Former HRG insurance operations were also classified as discontinued operations following their November 2017 sale.
Financial results and key metrics
| SBH consolidated metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Net sales | $3,145.9 million | $3,009.5 million | 4.5% |
| Gross profit | $1,153.6 million | $1,177.1 million | (2.0%) |
| Gross margin | 36.7% | 39.1% | (240) bps |
| Operating income | $102.0 million | $283.0 million | (64.0%) |
| Continuing-operations net income | $304.4 million | $(69.2) million | Improved |
| Income from discontinued operations | $567.6 million | $342.4 million | 65.8% |
| Net income | $872.0 million | $273.2 million | 219.2% |
| Net income attributable to controlling interest | $768.3 million | $106.0 million | 624.8% |
| Adjusted EBITDA | $561.9 million | $639.2 million | (12.1%) |
| Cash flow from continuing operations | $73.9 million | $155.1 million | (52.4%) |
| Capital expenditures | $64.7 million | $77.8 million | (16.8%) |
Fiscal 2018 continuing-operations results included a $92.5 million GAC goodwill impairment, a $20.3 million PET indefinite-lived intangible impairment, $92.8 million of restructuring and related charges, $45.9 million of Spectrum Merger transaction costs, and $18.9 million of PET safety-recall costs. The reported continuing-operations tax benefit of $460.7 million was materially affected by Tax Reform Act accounting and releases of valuation allowances.
Segment performance
| Segment | 2018 sales | Sales change | 2018 operating income | 2018 Adjusted EBITDA |
|---|---|---|---|---|
| HHI | $1,377.7 million | 8.0% | $155.6 million | $254.7 million |
| PET | $820.5 million | 3.4% | $34.9 million | $136.7 million |
| H&G | $482.2 million | (2.3%) | $88.0 million | $107.5 million |
| GAC | $465.5 million | 4.2% | $(28.7) million | $99.3 million |
HHI growth was led by security and locksets. PET’s reported sales benefited from the PetMatrix and GloFish acquisitions, while organic sales declined 6.6% because of recall-related distribution losses, weaker demand, and European distribution-center disruption. H&G was pressured by unfavorable weather, lower volumes, product mix, and higher input and distribution costs. GAC sales increased, but profitability deteriorated because of restructuring inefficiencies, higher refrigerant and other material costs, unfavorable mix, and the goodwill impairment.
Fourth-quarter results
For the quarter ended September 30, 2018, SBH reported revenue of $787.8 million, gross profit of $289.9 million, a continuing-operations net loss of $151.7 million, discontinued-operations income of $35.5 million, and net loss of $116.2 million. Basic and diluted earnings per share were both $(2.31).
The company identified a cumulative $27.0 million after-tax out-of-period error involving depreciation and amortization recorded on GBA assets after classification as held for sale. It also identified a $19.6 million deferred-tax error relating to an earlier quarter. Management stated that the errors were not material to the consolidated financial statements and revised interim-period information.
Balance sheet, debt, liquidity, and cash flow
- Cash and cash equivalents were $552.5 million at September 30, 2018, compared with $270.1 million a year earlier.
- Total debt was $4.67 billion, including $4.65 billion of long-term debt. SB/RH reported total debt of $4.25 billion, including a $520.0 million intercompany note with its parent.
- The $800.0 million revolving credit facility had $777.3 million of borrowing availability, net of letters of credit and a foreign-subsidiary allocation.
- Debt repayments totaled $1.07 billion, including repayment of HRG’s $864.4 million 7.875% senior secured notes, $92.0 million of HGI Energy notes, and $50.0 million of the HGI Funding loan.
- Annual interest obligations were estimated at approximately $270.4 million, excluding changes in variable rates and foreign currency.
- SBH generated $73.9 million of cash from continuing operations and used $64.7 million for capital expenditures. Total cash from operating activities, including discontinued operations, was $343.1 million.
- Management stated that existing cash and expected operating cash flows should be sufficient to meet operating requirements for at least the next 12 months.
Material changes, outlook, and unusual items
- The Spectrum Merger eliminated Spectrum’s noncontrolling interest and changed the company’s reporting structure, capital structure, management, ticker, and historical per-share presentation through a reverse stock split.
- SBH received $1.55 billion from the sale of its former HRG insurance operations. Proceeds were partly used to repay debt.
- Spectrum agreed to sell its Global Batteries and Lighting business to Energizer for $2.0 billion, subject to customary adjustments and regulatory approvals. A November 2018 amendment contemplated a potential purchase-price reduction of up to $200 million related to a European Commission remedy.
- In November 2018, the company agreed to sell GAC to Energizer for $1.25 billion, consisting of $937.5 million in cash and $312.5 million in Energizer equity. GAC was expected to be reported as discontinued operations thereafter, with a subsequent impairment assessment.
- The company stopped marketing the Home and Personal Care portion of GBA after year-end and expected to return it to continuing operations beginning in fiscal 2019, with comparable periods to be adjusted.
- Restructuring programs generated $92.8 million of fiscal 2018 charges. The HHI distribution-center consolidation was expected to require approximately $3.7 million of additional costs after year-end.
- Management disclosed a material weakness in internal control over financial reporting related to risk assessment and accounting controls for unusual transactions, including discontinued operations, held-for-sale assets, and merger-related tax effects. KPMG issued an adverse opinion on internal control effectiveness. Remediation was expected during fiscal 2019.
- Key ongoing risks include substantial leverage and restrictive covenants, variable interest rates, retailer concentration, commodity and tariff exposure, foreign exchange volatility, product liability and recalls, regulatory requirements, cybersecurity, weather sensitivity, and execution of divestitures and restructuring.
Most important facts for investors to verify
- Completion timing, final proceeds, purchase-price adjustments, and regulatory conditions for the GBL and GAC divestitures.
- Whether GAC’s subsequent held-for-sale impairment and discontinued-operations presentation materially change reported historical results.
- Progress in remediating the material weakness and whether additional interim or annual financial-statement corrections are required.
- Actual cash generation after separating discontinued operations and the company’s use of divestiture proceeds between debt reduction, repurchases, dividends, and other purposes.
- Compliance with debt covenants, refinancing requirements, variable-rate exposure, and the concentration of maturities in 2022.
- The sustainability of operating performance excluding tax benefits, divestiture gains, impairments, recall costs, merger costs, and restructuring charges.
- Utilization limits and realizability of the company’s substantial U.S. net operating losses and other tax attributes.