Newell Brands Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Newell sells branded consumer products across five reportable segments. On March 31, it sold Connected Home & Security (CH&S) to Resideo. Q1 results are seasonal and may not indicate full-year performance.
Financial results
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $2.388 billion | $2.288 billion |
| Gross profit / margin | $740 million / 31.0% | $731 million / 31.9% |
| Operating income / margin | $217 million / 9.1% | $192 million / 8.4% |
| Net income | $234 million | $89 million |
| Diluted EPS | $0.55 | $0.21 |
| Operating cash flow | $(272) million | $(25) million |
| Capital expenditures | $70 million | $54 million |
Sales rose 4.4%; operating income increased 13%. Net income included a $130 million pretax gain on the CH&S sale, while lower interest expense and a lower effective tax rate also supported the comparison. Gross margin fell 0.9 percentage point as inflation in commodities, sourced goods, transportation and labor—together a high-single-digit-percentage cost impact—more than offset pricing and productivity benefits. Foreign exchange reduced sales by $41 million.
Segment sales and operating income: Commercial Solutions $510 million and $55 million; Home Appliances $340 million and $(18) million; Home Solutions $500 million and $61 million; Learning and Development $650 million and $130 million; Outdoor and Recreation $388 million and $45 million. Home Appliances operating results weakened to a loss; Learning and Development and Outdoor and Recreation recorded notable operating-income growth.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $344 million, down from $440 million at year-end; inventories were $2.297 billion, up from $1.997 billion.
- Total debt was $4.883 billion, nearly unchanged from $4.886 billion at December 31. Long-term debt was $4.880 billion. The company reported no borrowings on its $1.25 billion revolver or $600 million receivables securitization facility; revolver net availability was approximately $1.23 billion.
- Cash and restricted cash decreased $98 million during the quarter. Investing cash flow included $620 million of proceeds from the CH&S sale; financing included $275 million of share repurchases and $100 million of dividends.
- Operating cash use increased year over year, principally reflecting inventory build and higher annual incentive payments, partly offset by more receivables sold. Management noted that cash generation is typically concentrated in the third and fourth quarters.
- S&P upgraded the debt rating to BBB- from BB+. The upgrade enabled potential access to up to $800 million of commercial paper, subject to revolver availability, and reduced interest expense by about $10 million annualized; certain notes remain subject to a 25-basis-point adjustment tied to Moody’s rating.
Changes, outlook and risks
- Sales growth reflected pricing, customer inventory replenishment and order timing, partly offset by weaker consumption in some U.S. categories and category exits. Management said Q1 benefited from some customer orders shifting forward from Q2 amid supply constraints.
- Management expects significant supply-chain disruption and inflation to persist at least in the near term. Shortages, capacity constraints, port and freight delays, and labor pressures have constrained product availability. Pricing actions, productivity initiatives and overhead controls are mitigation measures; the filing gives no specific full-year financial guidance.
- The CH&S sale generated approximately $593 million before customary adjustments and a $130 million pretax gain. The company repurchased $275 million of shares from Icahn affiliates under a $375 million repurchase authorization, leaving about $100 million of authority at quarter-end.
- A U.K. pension plan buy-in was completed in February; a buy-out is anticipated by end-2022 or early 2023. The associated non-cash settlement charge is expected to be material, but the filing provides no amount.
- Tax exposure: Newell has not recorded an estimated $180–$220 million tax expense relating to its position on U.S. Treasury regulations and believes its position is supportable. The company is monitoring a court decision in another taxpayer’s case; the outcome for Newell remains uncertain.
- Legal and environmental matters include SEC inquiries concerning sales practices, accounting and tax disclosures; securities litigation whose outcome and loss range cannot be estimated; and Lower Passaic River proceedings. A proposed EPA cash-out settlement is not expected to be material if finalized, but losses from related litigation and natural-resource claims cannot be reasonably estimated. Recorded environmental remediation costs were $37 million.
- Other identified risks include demand uncertainty, inflation and supply constraints, consumer-demand shifts, substantial indebtedness, foreign exchange, potential impairment charges, pension funding and tax contingencies. Management reported disclosure controls effective at March 31 and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- How much of reported earnings growth is repeatable after excluding the CH&S gain and considering tax effects?
- Whether pricing and productivity can offset ongoing inflation without further margin deterioration, and whether supply constraints or order timing distort demand.
- Whether inventory levels convert to sales and cash, given the $300 million quarterly inventory increase and elevated operating cash use.
- The amount and timing of the expected pension settlement charge, and the eventual outcome of the tax, SEC, securities and environmental matters.
- How the CH&S divestiture, share repurchases and debt-rating changes affect future cash generation, leverage and liquidity.