Newell Brands Inc. — Q3 2023 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2023. Newell Brands sells consumer products globally. From January 2023, it reports three operating segments: Home and Commercial Solutions, Learning and Development, and Outdoor and Recreation; prior-period segment results were reclassified. The 2022 comparative period also includes the Connected Home & Security business through its March 31, 2022 sale.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $2.048bn | $2.252bn | $6.057bn | $7.174bn |
| Gross profit / margin | $621m / 30.3% | $658m / 29.2% | $1.732bn / 28.6% | $2.234bn / 31.1% |
| Operating income (loss) | ($159m) | $40m | ($75m) | $585m |
| Net income (loss) | ($218m) | $19m | ($302m) | $446m |
| Diluted EPS | ($0.53) | $0.05 | ($0.73) | $1.07 |
| Interest expense, net | $69m | $57m | $213m | $171m |
- Q3 sales declined 9% year over year; nine-month sales fell 16%. Management cited softer demand, retailer inventory rebalancing, order timing shifts, distribution losses and category exits. Pricing partly offset the declines.
- Q3 gross margin improved 1.1 percentage points, reflecting pricing and productivity, despite lower sales, inflation and restructuring-related costs. Nine-month margin contracted 2.5 points.
- Operating results included non-cash impairment charges of $263m in Q3 and $274m for the first nine months. Nine-month restructuring and related costs were $131m, versus $29m in the prior-year period.
- Q3 included a $61m pretax pension settlement loss; the nine-month charge was $66m. The nine-month 2022 comparison included a $136m pretax gain on the CH&S divestiture.
Segment results
- Home and Commercial Solutions: Q3 sales $1.123bn, down 7%; operating income $64m versus a $75m loss, with the comparison benefiting from prior-year impairments. Nine-month sales fell 17% to $3.152bn and operating income declined to $6m from $88m.
- Learning and Development: Q3 sales $694m, down 8%; operating loss $127m, including $241m of Baby goodwill impairment. Nine-month sales declined 9% to $2.071bn and operating income was $133m versus $505m.
- Outdoor and Recreation: Q3 sales $231m, down 20%; operating loss $42m, including a $22m tradename impairment. Nine-month sales fell 24% to $834m and operating loss was $38m versus $100m of income.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $679m, compared with cash used of $567m in 2022. Management attributed the improvement mainly to working-capital reductions and lower incentive-compensation payments, partly offset by lower operating income and higher restructuring payments.
- Capital expenditures were $209m. Investing activities used $147m; financing activities used $405m, including $244m of net short-term debt payments and $155m of dividends. Cash, cash equivalents and restricted cash ended at $422m, including $26m restricted cash.
- At September 30, cash and cash equivalents were $396m; total debt was $5.113bn, including $375m drawn on the revolving credit facility. Net debt on these reported amounts was approximately $4.717bn. The $1.5bn revolver had approximately $1.1bn net availability; the company reported compliance with all debt covenants.
- Debt ratings were downgraded by Moody’s and S&P. Associated rate adjustments on approximately $3.1bn of notes are expected to add about $23m to annual interest expense in aggregate; the filing estimates about $10m of added expense in 2023. S&P’s March downgrade also eliminated access to commercial paper on terms the company considered acceptable or favorable.
- After quarter-end, the company entered a three-year receivables facility providing liquidity of up to $225m seasonally and $275m at other times, expiring in October 2026.
Outlook, management commentary and risks
- The filing provides no specific numerical sales, earnings or cash-flow guidance. Management expected inflation, softening global demand, retailer inventory rebalancing and rising interest rates to continue negatively affecting results, cash flows and financial condition during 2023. It noted that seasonal patterns mean year-to-date results may not indicate full-year results.
- Project Phoenix: expected to be substantially implemented by year-end 2023, with estimated restructuring and related charges of $100m–$130m, mostly cash. The company had recorded $63m of restructuring charges through September.
- Network Optimization Project: expected to be substantially implemented by year-end 2024, with estimated restructuring and related charges of $37m–$49m and related capital expenditures of $30m–$40m.
- Management cited pricing, productivity, overhead controls, advertising optimization and working-capital actions as mitigations. It also warned that further demand or forecast deterioration could trigger additional goodwill or intangible impairments. A hypothetical 10% reduction in Baby reporting-unit forecasted earnings would have added about $115m to its impairment; the Baby goodwill remaining at September 30 was $415m.
- Environmental remediation reserves were $36m. The company said its expected allocation in the Lower Passaic River settlement was not expected to be material, but could not estimate possible losses from related litigation and natural-resource claims; adverse outcomes could be material.
- The company settled an SEC investigation on September 29, 2023, agreeing to a roughly $13m civil penalty without admitting or denying the findings; it stated the penalty was not material to its financial statements. Certain tax returns remain under examination.
- Management reported disclosure controls effective at September 30, 2023, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether demand, retailer inventory levels, distribution and category exits stabilize, particularly in Baby and Outdoor and Recreation.
- Progress and realized savings from Project Phoenix, Network Optimization and Project Ovid, against their expected charges and capital requirements.
- Liquidity, covenant headroom, refinancing needs and the effects of rating downgrades on borrowing costs and access to funding.
- Potential further impairment exposure, especially the Baby reporting unit and the Home and Commercial Solutions tradename identified as carrying $553m.
- Cash conversion and working-capital sustainability, including the company’s use of receivables sales and supplier finance arrangements.
- Developments in environmental matters, tax examinations and other legal or contingent exposures.