Newell Brands Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unless noted, amounts are U.S. dollars. The company’s Accelerated Transformation Plan led it to classify several businesses as discontinued operations; reported sales and operating results below are for continuing operations, while net income includes discontinued operations.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $2,203.1 million | $2,527.4 million | $4,015.9 million | $4,618.0 million |
| Gross profit | $775.1 million | $877.2 million | $1,380.7 million | $1,585.4 million |
| Gross margin | 35.2% | 34.7% | 34.4% | 34.3% |
| Operating income | $84.2 million | $92.3 million | $58.1 million | $103.8 million |
| Operating margin | 3.8% | 3.7% | 1.4% | 2.3% |
| Income (loss) from continuing operations | ($76.1) million | $16.6 million | ($130.5) million | $562.0 million |
| Net income | $131.7 million | $223.0 million | $185.0 million | $861.5 million |
| Diluted EPS | $0.27 | $0.46 | $0.38 | $1.77 |
- Cash flow: Six-month operating cash flow was a use of $390.5 million, versus a use of $206.8 million a year earlier. Investing activities provided $2,460.4 million, principally reflecting divestiture proceeds; financing activities used $262.9 million. Cash rose by $1,793.7 million to $2,279.4 million.
- Debt and liquidity: Total debt was $10,502.9 million at June 30, 2018, versus $10,551.0 million at year-end 2017. Cash less total debt was approximately $8.2 billion of net debt. The company reported approximately $932 million available under its revolving credit facility and $833 million under its receivables purchase agreement; it was not in default of debt covenants.
- Other: Q2 dividend was $0.23 per share; first-half dividends were $0.46 per share. Cash and cash equivalents included approximately $410 million held by non-U.S. subsidiaries.
Material changes and drivers
- Q2 sales fell 12.8% and first-half sales fell 13.0%. Management attributed the declines to weakness across segments, prior divestitures, and the adoption of the new revenue standard. First-half sales also reflected approximately 1% favorable foreign currency and approximately 1% contribution from acquisitions.
- Q2 gross margin improved to 35.2% from 34.7%, supported by synergies, cost savings and pricing, partly offset by unfavorable mix and product and freight inflation. First-half margin was nearly flat at 34.4% versus 34.3%.
- Operating income declined 8.8% in Q2 and 44.0% for the first half. Lower sales, inflation and higher restructuring costs weighed on results; savings, lower integration costs and lower impairment charges provided offsets. Q2 continuing-operations interest expense rose to $120.5 million from $114.5 million; the first-half amount was $236.6 million in both years.
- All three main segments reported lower sales in Q2: Food and Appliances down 11.9%, Home and Outdoor Living down 6.7%, and Learning and Development down 15.3%. Management cited category weakness, lost distribution, unfavorable spring weather, customer inventory reductions and a major Baby division customer’s bankruptcy and liquidation. The company wrote off $28.7 million of receivables in the first half, primarily tied to that customer.
- Comparisons of net income are affected by large portfolio-sale gains. First-half 2017 continuing results included a $784 million pretax gain on the Tools divestiture. First-half 2018 discontinued operations included a $598 million pretax gain on Waddington, a $136 million pretax loss on Rawlings, and a $454 million impairment charge related to Process Solutions.
Outlook, risks and unusual items
- The Accelerated Transformation Plan aims to focus the portfolio on consumer brands and return capital to shareholders while improving operations and reducing debt. Rawlings and Waddington were sold in Q2. The company expected to complete remaining divestitures by the end of Q2 2019 and stated that the broader portfolio transformation was expected to be completed by the end of 2019.
- The board increased the share repurchase authorization to approximately $3.6 billion through the end of 2019. No shares were repurchased under the program during the first half; Q2 share purchases disclosed in the filing related to employee tax withholding.
- No formal earnings or revenue guidance is stated in the supplied filing text. Management said available cash, expected operating cash flows, capital-market access and borrowing capacity should adequately support needs. The company notes that operating cash flow is typically strongest in the second through fourth quarters and that first-half results may not indicate full-year results.
- New U.S. tariffs and announced retaliatory tariffs could raise costs in 2018; the company said the impact could be significant in a reporting period but could not yet be quantified. Other risks include sales weakness, competition and retailer bargaining power, inflation, execution of planned divestitures and restructuring, foreign exchange, indebtedness and possible asset impairments.
- Environmental remediation reserves were $41.9 million. In the Lower Passaic River matter, potential liability and cost allocation remain uncertain; the company said an adverse outcome could be material. Securities class actions filed in 2018 seek unspecified damages. Jarden appraisal claims remained outstanding, with approximately $171 million accrued for unpaid consideration.
- Topic 606 adoption did not materially affect opening retained earnings; it reduced reported Q2 sales by $51.0 million and first-half sales by $94.4 million compared with the filing’s “excluding adjustments” presentation, with little effect on operating income. The 2017 comparison was not restated for the new standard.
Important facts for investors to verify
- Whether continuing-business sales and margins stabilize, particularly in the three main segments, and how much reported sales trends reflect business disposals versus underlying demand.
- Timing, proceeds and any further impairment charges from the remaining planned divestitures, and the effect of those sales on debt reduction and the continuing portfolio.
- Cash conversion and working-capital trends: first-half operating cash use increased, while the cash balance was boosted substantially by divestiture proceeds.
- Potential impact of tariffs, customer distress, environmental claims and Jarden appraisal litigation, including exposures beyond recorded reserves.
- How management balances the expanded repurchase authorization, dividends, restructuring costs and debt reduction amid substantial indebtedness.