Newell Brands Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited results; amounts are in millions of dollars except per-share data. Newell sells consumer and commercial products through five reportable segments: Appliances and Cookware, Commercial Solutions, Home Solutions, Learning and Development, and Outdoor and Recreation.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $2,111 | $2,480 | $3,997 | $4,522 |
| Gross profit | $664 | $865 | $1,281 | $1,520 |
| Gross margin | 31.5% | 34.9% | 32.0% | 33.6% |
| Operating income (loss) | $163 | $231 | $(1,245) | $243 |
| Operating margin | 7.7% | 9.3% | (31.1)% | 5.4% |
| Net income (loss) | $78 | $90 | $(1,201) | $(61) |
| Diluted EPS | $0.18 | $0.21 | $(2.83) | $(0.14) |
| Interest expense, net | $71 | $78 | $134 | $158 |
- Q2 net sales declined 14.9% year over year; gross profit fell 23.2%. Lower volume, temporary facility closures, product mix, input-cost and tariff inflation, and COVID-related employee and safety costs pressured gross margin. Productivity partly offset these effects.
- Six-month operating loss included $1.469 billion of non-cash goodwill and intangible-asset impairments, primarily recorded in Q1 after COVID-19 triggered impairment testing. This included $212 million of goodwill impairment and $1.257 billion of indefinite-lived trade-name impairments. No additional impairment was recorded in Q2.
- For Q2, Learning and Development sales fell 25.7% and operating income fell to $126 million from $217 million. Outdoor and Recreation sales fell 20.3% and operating income to $25 million from $40 million. Home Solutions sales declined 4.6%, but operating income rose to $29 million from $4 million, helped by cost controls and strong food-category demand. Commercial Solutions sales fell 9.0% and operating income to $40 million from $53 million. Appliances and Cookware sales were nearly flat; operating income was $10 million versus $6 million.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $132 million, versus a $9 million use in 2019. Investing cash flow was a use of $88 million, including $94 million of capital expenditures; the prior-year period included $740 million of divestiture proceeds. Financing cash flow was $239 million provided, including $493 million net proceeds from debt issuance and $197 million of dividends paid.
- Cash and cash equivalents were $619 million at June 30, 2020, versus $349 million at December 31, 2019. Cash, cash equivalents and restricted cash totaled $634 million at period-end. Current assets were $4.286 billion and current liabilities $2.917 billion.
- Total debt was $6.183 billion, including $402 million of short-term debt and current maturities; long-term debt was $5.781 billion. Debt increased from $5.723 billion at year-end 2019. The company issued $500 million of 4.875% notes due 2025, receiving about $493 million net, and intends to use part of the proceeds to repay or redeem 2020 notes.
- The $1.25 billion revolving credit facility and $600 million receivables securitization facility had no borrowings outstanding at June 30. Net availability under the revolver was about $1.2 billion. The company reported compliance with debt covenants at quarter-end and at filing.
- Credit downgrades eliminated access to commercial paper on terms the company considered acceptable. Certain notes totaling about $4.5 billion incurred a combined 50-basis-point rate increase, expected to add approximately $17 million of 2020 interest expense and $23 million annually. The company reported cash of $619 million, including $368 million held by non-U.S. subsidiaries.
Outlook, risks and unusual items
- Management reported improving sales trends and was optimistic about sequential financial improvement over the rest of 2020, subject to improved conditions. It did not provide quantified full-year guidance and said COVID-19’s duration and cumulative impact were not predictable. Management expects most facilities to operate at or near capacity after substantially all temporary closures had reopened by Q2 end, while logistics disruptions continued.
- COVID-19 effects varied by category: food, cleaning and some appliance products benefited from demand shifts, while school and office closures, specialty retail weakness, and disruptions weighed on other businesses. Management flagged potential continuing headwinds for Learning and Development, including possible school reopening delays, and for Yankee Candle stores where closures persisted.
- The company initiated a 2020 restructuring program, recording $8 million of Q2 charges and estimating approximately $10 million in total 2020 charges. It also used hiring freezes, furloughs, tighter discretionary spending, reduced advertising and working-capital measures.
- Tariffs had an estimated gross 2020 impact of approximately $90 million; the gross impact was $15 million in Q2 and $35 million for the six months. Management said mitigation included pricing, productivity and relocation, but could not assure full offset.
- A tax position concerning temporary U.S. Treasury regulations remains uncertain. If the company’s position is not sustained, it estimates $180–$220 million of income tax expense, potentially plus interest and penalties.
- Legal and regulatory matters include an SEC subpoena primarily concerning sales practices and accounting matters dating from 2016; the company said it could not predict the investigation’s timing or outcome. Other disclosed matters include securities and derivative litigation, a Waddington buyer lawsuit, environmental claims including the Lower Passaic River matter, and the Gizmo children’s cup recall. Environmental remediation reserves were $43 million; recall charges incurred to date were $22 million, including $2 million in the first half of 2020.
- Disclosure controls were deemed ineffective at June 30 due to a continuing material weakness in accounting controls over certain income-tax matters, including state taxes and uncertain tax positions. Management said a previously reported weakness related to divestiture accounting had been remediated; remediation of the tax weakness was ongoing.
Most important facts for investors to verify
- Whether COVID-related demand, store and school reopening patterns, and supply-chain recovery support management’s expectation of sequential improvement.
- Whether lower sales, tariffs, input costs, and customer mix continue to pressure margins, and whether planned cost savings deliver lasting benefits.
- Debt maturities, interest costs after rating downgrades, covenant headroom, and ongoing access to liquidity if operating conditions worsen.
- Whether further impairment testing results in additional charges, given sensitivity of asset valuations to forecasts and pandemic duration.
- Outcome and potential financial exposure from the tax-regulation position, SEC investigation, litigation, environmental matters, and product recall.
- Progress in remediating the remaining income-tax control weakness and evidence that controls operate effectively over a sufficient period.