Newell Brands Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; filed November 4, 2019. Amounts below are in U.S. dollars unless stated otherwise. Prior periods were reclassified for the company’s changed segment structure and discontinued-operations presentation.
Business context
Newell Brands sells consumer products through four segments: Appliances and Cookware, Food and Commercial, Home and Outdoor Living, and Learning and Development. Under its Accelerated Transformation Plan, the company sold several businesses and continued to pursue portfolio changes. In July 2019, it decided to retain most of the Rubbermaid Commercial Products-related Commercial Business, citing brand strength, growth prospects and cash generation; it is now reported in Food and Commercial.
Financial results and liquidity
- Q3 revenue: $2.451 billion, down 3.8% from $2.549 billion. Gross profit was $810.7 million, and gross margin fell to 33.1% from 35.9%, reflecting lower sales, input-cost inflation and tariffs, partly offset by pricing and productivity savings.
- Q3 earnings: Operating loss was $634.8 million and net loss was $625.8 million; diluted loss per share was $1.48. Results included $834.9 million of impairment and other asset charges, including $824 million of indefinite-lived intangible impairment, and a $29 million debt-extinguishment loss. The prior-year quarter included $8.134 billion of impairment charges, making the year-over-year loss comparison heavily affected by noncash impairments.
- Nine-month revenue: $6.739 billion, down 4.6%. Gross margin was 33.5%, versus 34.8%. Operating loss was $345.7 million; net loss was $687.2 million, or $1.62 per diluted share.
- Cash flow, nine months: Operating cash flow was $424.1 million for the total company, including $403.1 million from continuing operations. Investing activities provided $581.0 million, largely reflecting $753.4 million of divestiture proceeds; financing activities used $1.024 billion. Capital expenditures were $171.7 million total ($151 million from continuing operations, per MD&A).
- Balance sheet at September 30: Cash was $465.4 million, total debt $6.326 billion, and stockholders’ equity $4.169 billion. Debt declined from $7.015 billion at year-end 2018. Current assets were $5.468 billion and current liabilities $3.684 billion; current assets include $966.7 million held for sale.
- Liquidity and debt: Commercial paper outstanding was $324.9 million; net availability under the $1.25 billion revolving facility was approximately $900 million. The company reported covenant compliance. Cash included approximately $444 million held by non-U.S. subsidiaries.
- Segments: Nine-month sales declined in all four segments. Learning and Development reported $487.6 million of operating income; Food and Commercial reported $152.8 million. Appliances and Cookware and Home and Outdoor Living recorded operating losses of $592.9 million and $163.0 million, respectively; impairment charges materially affect these figures.
Material changes versus the prior comparable period
- Q3 and nine-month sales fell, with management citing declines across segments, unfavorable currency effects and category-specific weakness. Appliances and Cookware faced market-share losses; Food and Commercial had lower retailer volumes and softness in food storage; Home and Outdoor Living faced lost retail distribution, weather and recall-related effects; Baby and Parenting was affected by a major customer’s liquidation.
- The Commercial Business returned to continuing operations in Q3. The company recorded a cumulative $39.7 million depreciation and amortization adjustment related to the decision to retain it.
- The company recorded $824 million of Q3 intangible impairment, primarily $606.9 million in Appliances and Cookware and $217.1 million in Home and Outdoor Living. No goodwill impairment was recorded in the 2019 test. By contrast, 2018 impairment charges were substantially larger.
- In August, the company repurchased approximately $700 million principal amount of senior notes for approximately $728 million, recording a $29 million extinguishment loss. It repaid $706.4 million of long-term debt during the nine-month period.
Outlook, management commentary and risks
- Tariffs: Management estimated 2019 gross exposure from existing China tariffs at $78 million and said mitigation included pricing, productivity and relocation. Expected 2020 gross impact from existing and potential tariffs was $115 million to $180 million, primarily in Appliances and Cookware and Outdoor and Recreation; mitigation may not fully offset it. Additional tariffs were then expected to take effect December 15, 2019.
- Credit rating: S&P downgraded the company to BB+ on November 1, 2019; Moody’s retained its investment-grade rating. The downgrade was expected to raise annual interest expense by about $11 million on approximately $4.5 billion of notes and could constrain or increase the cost of commercial-paper access. The company reported no expected short-term liquidity change.
- Portfolio outlook: In October, management decided to retain Mapa/Spontex and Quickie rather than continue their sale process. The company anticipated a fourth-quarter 2019 charge of about $16 million for depreciation and amortization that would have been recognized earlier. It expected to complete the U.S. Playing Cards divestiture in Q4 for approximately $220 million, subject to conditions and approvals.
- Tax contingency: The company did not apply disputed temporary U.S. tax regulations and believed its position met the recognition threshold, while acknowledging uncertainty. An adverse outcome could result in $180 million to $220 million of tax expense, plus possible interest and penalties.
- Impairment sensitivity: Management cited tariffs, competitive product launches and changes in product mix as drivers of impairment. It warned that further material impairment could occur if forecast cash flows, sales or operating-income growth are not achieved.
- Controls: Disclosure controls and internal control over financial reporting were not effective at quarter-end because of a continuing material weakness in controls over divestiture accounting, held-for-sale valuations and related tax classification. Remediation measures were underway but were not yet considered complete.
- Other contingencies and unusual items: The Gizmo children’s cup recall was estimated to cost $10 million to $15 million; $13 million of revenue had been reduced in Q2 for retailer return authorizations. Environmental remediation reserves were $44.2 million; the company said ultimate Lower Passaic River liability remained uncertain. It paid approximately $177 million in October on a Jarden appraisal judgment; former dissenting shareholders filed an appeal in November.
The filing provided no specific consolidated earnings or revenue guidance. Management noted that operating cash flow is seasonal and typically concentrated in the third and fourth quarters.
Most important facts for investors to verify
- Whether underlying sales and gross margins stabilize, particularly in Appliances and Cookware and Food and Commercial, apart from impairment-related effects.
- Actual tariff costs and the effectiveness of mitigation against the stated 2020 gross exposure range of $115 million to $180 million.
- Cash generation, working-capital trends, debt repayments, refinancing costs and liquidity following the S&P downgrade and the planned note redemption.
- Whether the retained Commercial, Mapa/Spontex and Quickie businesses deliver the cash flow and operating performance management expects, and the final treatment of related charges.
- Resolution of the tax-regulation dispute, Jarden appraisal appeal, recall costs and environmental matters.
- Evidence that the material weakness in financial reporting controls has been fully remediated and tested.