Newell Brands Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. All amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. The quarter’s results are not necessarily indicative of full-year results: the company says sales and operating cash flow are typically seasonally lower in Q1.
Business context and period comparability
Newell Brands is a global consumer-products company. Following the April 2016 Jarden acquisition, it reported results across five segments: Live, Learn, Work, Play and Other. The 2017 quarter includes Jarden, while Q1 2016 does not; accordingly, year-over-year growth comparisons are substantially affected by the acquisition. The company also sold its Tools business in March 2017 and had previously sold its Décor business.
Key financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $3,266.3 | $1,314.9 |
| Gross margin | $1,117.2; 34.2% | $505.6; 38.5% |
| Operating income | $156.0; 4.8% of sales | $125.4; 9.5% of sales |
| Interest expense, net | $122.2 | $29.4 |
| Net income | $638.5 | $40.5 |
| Diluted EPS | $1.31 | $0.15 |
| Operating cash flow | $(289.2) | $(261.4) |
| Capital expenditures | $100.7 | $51.6 |
Sales increased 148.4%, primarily due to Jarden; management estimated the acquisition added approximately 158% to sales growth, partly offset by divestitures. Gross margin declined as unfavorable acquired-business product mix more than offset synergy and productivity benefits. Operating income rose 24.4%, but operating margin fell amid mix effects, increased investment, integration costs and higher acquired-intangible amortization.
Net income was unusually boosted by a $784.0 pretax gain on the Tools business sale, recorded in other income. The sale price was $1.95 billion, subject to working-capital adjustments. Q1 also included $27.8 of debt-extinguishment loss, $18.4 of impairment charges and $13.3 of restructuring costs. The effective tax rate was 19.2%, versus 21.9% a year earlier.
Balance sheet, debt and liquidity
At March 31, 2017, cash and equivalents were $687.5, total debt was $11,184.6 (including $852.5 current), and long-term debt was $10,332.1. Cash increased $100.0 during the quarter, principally reflecting $1,862.9 of divestiture proceeds: investing activities provided $1,205.7, while operating and financing activities used $289.2 and $834.0, respectively. Inventory rose to $2,476.6 from $2,116.0 at year-end.
The company reported no borrowings under its $1.25 billion revolving credit facility and approximately $1.2 billion of net availability. Net availability under its $950 million receivables facility was approximately $317 million. It reported compliance with debt covenants. In March, it repurchased approximately $872 million principal amount of senior notes; in April it redeemed the remaining approximately $187 million of 6.25% notes due 2018. The quarterly dividend was $0.19 per share.
Outlook, management commentary and risks
- No specific full-year revenue, earnings or cash-flow guidance is stated in the provided filing text. Management cautions that Q1 results may not indicate full-year performance and expects most operating cash flow in Q2–Q4.
- The New Growth Game Plan aims to simplify the organization and fund growth investment through approximately $1.3 billion of cost savings from 2016 to 2021: approximately $300 million from Project Renewal and approximately $1 billion from Jarden integration. Project Renewal is expected to conclude by year-end 2017; integration costs may continue through 2021.
- Project Renewal costs are estimated at $690–$725 million pretax. The company expects up to approximately $1.0 billion of Jarden integration and other costs. These are plans and estimates, not guaranteed savings or outcomes.
- Acquisitions included Smith Mountain Industries for approximately $100 million in January. Sistema Plastics was acquired on April 3, 2017 for approximately $460 million; payment was transferred in advance and recorded in other assets at March 31.
- Environmental remediation costs accrued were $42.6 million. The company could not estimate its ultimate exposure for the Lower Passaic River matter; it said an adverse outcome could be material, although it did not currently believe the matter was reasonably likely to materially affect results. A Clean Air Act labeling settlement was being negotiated, with an expected penalty not exceeding $110,000.
- Other risks identified include substantial debt and interest-rate exposure, acquisition integration and divestiture execution, retailer bargaining power, competition, raw-material costs and supply, foreign exchange, product liability, environmental regulation, and potential asset impairment. The filing reported no material change in risk factors from the 2016 Form 10-K.
Most important facts for investors to verify
- Separate acquisition-driven sales growth from underlying organic performance; the year-over-year comparison is not like-for-like.
- Assess earnings excluding the $784.0 Tools-sale gain and other unusual charges, and monitor whether gross and operating margins recover.
- Track seasonal working-capital needs, inventory growth and cash conversion, given negative Q1 operating cash flow.
- Monitor debt reduction, interest expense, refinancing needs and availability under the revolving and receivables facilities.
- Test whether the planned integration and restructuring savings are realized against expected costs and timelines.
- Follow the Jarden appraisal litigation, Lower Passaic River allocation and other contingencies, as ultimate outcomes and exposures remain uncertain.