Newell Brands Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Amounts are in millions of dollars, except per-share data. Financial statements are unaudited. Newell Brands is a global consumer products company reporting across Live, Learn, Work, Play and Other.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $3,678.2 | $3,954.6 | $10,999.1 | $9,128.1 |
| Gross margin | $1,267.7; 34.5% | $1,274.8; 32.2% | $3,860.2; 35.1% | $2,876.1; 31.5% |
| Operating income | $323.4; 8.8% of sales | $323.9; 8.2% | $902.5; 8.2% | $587.0; 6.4% |
| Net income | $234.4 | $186.5 | $1,095.9 | $362.2 |
| Diluted EPS | $0.48 | $0.38 | $2.25 | $0.91 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $(58.0) | $848.7 |
- Quarterly performance: Sales declined 7.0%, primarily reflecting divestitures. Gross margin rate improved, while operating income was essentially flat. Net income included a $68.8 tax benefit; pretax income fell to $165.6 from $200.1.
- Nine-month earnings: Sales increased 20.5%, primarily from the Jarden acquisition and other acquisitions, partly offset by divestitures. Operating income rose 53.7%. Other income of $709.1 included a $771.0 pretax gain on the Tools business sale, as well as losses and other items; the reported net-income increase therefore includes significant unusual gains and tax effects.
- Cash and working capital: Cash was $792.3 at September 30, including approximately $731 held by non-U.S. subsidiaries. Operating cash flow was negative, with inventory growth using $707.0 of cash. Inventory increased to $2,861.5 from $2,116.0 at year-end 2016.
- Debt and liquidity: Total debt was $11,475.4, including $1,291.0 classified as current; long-term debt was $10,184.4. The $1.25 billion revolving facility had no borrowings and approximately $1.2 billion net availability. The $950 million receivables facility had approximately $177 million net availability. The company reported compliance with debt covenants.
- Other metrics: Interest expense was $116.2 in Q3 and $353.0 year to date. Dividends were $0.23 per share in Q3 and $0.65 year to date.
Material changes versus comparable periods
- Q3 sales decreased by $276.4; management attributed the reduction mainly to the Tools, Décor, Lehigh, firebuilding and Winter Sports divestitures. On a nine-month basis, sales rose by $1,871.0, with acquisition contributions outweighing divestitures.
- Gross margin rate and operating margin improved year over year, reflecting the absence of substantial 2016 Jarden inventory step-up charges and benefits from synergies and productivity. These benefits were partly offset by product mix, investment and integration costs.
- Nine-month operating cash flow fell by $906.7 year over year. Management cited the unusually high 2016 comparison, higher cash interest, taxes and integration costs, and unfavorable working-capital movements, including seasonal inventory builds.
- Total debt declined from $11,892.8 at December 31, 2016, while current debt increased from $601.9. The company repurchased or redeemed debt during 2017 and recorded $32.3 of debt-extinguishment losses year to date.
- Q3 segment results varied: Live, Work and Play operating income improved; Learn operating income declined to $67.7 from $124.3, and Other sales fell 62.4%, mainly due to divestitures.
Outlook, management commentary and risks
- Management expects Hurricane Harvey-related resin supply constraints to disrupt some U.S. resin-based manufacturing through Q4 2017, with resin inflation building through the rest of 2017 and into 2018. No formal quantified earnings or revenue guidance is provided in the supplied filing text.
- The New Growth Game Plan targets approximately $1.3 billion of cost savings from 2016 through 2021: approximately $300 million from Project Renewal and approximately $1 billion from Jarden integration. The company expects up to approximately $1 billion of Jarden integration and other costs through 2021.
- The company completed acquisitions of Smith Mountain, Sistema Plastics and Chesapeake Bay Candle in 2017. It sold the Tools business for $1.95 billion, recognizing a $771.0 pretax gain, and sold Winter Sports for approximately $240 million while recording a $48.0 pretax sale loss and $59.1 impairment charge.
- Goodwill and indefinite-lived intangibles are substantial. Annual testing identified no impairment for indefinite-lived intangibles, but certain trade names had limited valuation headroom; management warns that weaker results or changed assumptions could lead to future material impairment charges.
- Environmental remediation reserves were $49.5. The company says its ultimate liability for the Lower Passaic River matter cannot currently be estimated; although management did not believe it was reasonably likely to have a material impact based on known facts, an adverse outcome could be material.
- Other disclosed risks include substantial indebtedness and interest rates, retailer bargaining power, raw-material availability and pricing, integration and synergy execution, product liability and recalls, foreign currency exposure, and consumer and commercial market conditions. A baby-products retail customer bankruptcy affected Q3 Live results.
- The company reinstated its share repurchase program in September. On November 2, 2017, the board authorized repurchases of up to $1.0 billion through 2020; no shares were repurchased under the program during the nine months ended September 30.
Important facts for investors to verify
- How much of reported nine-month earnings reflects recurring operations versus the Tools sale gain, other divestiture items and tax benefits.
- Whether operating cash flow recovers after the seasonal inventory build, and whether inventory levels and working capital convert to cash.
- Debt maturities, current-debt refinancing needs, borrowing availability, and the effect of debt service on dividends and the expanded repurchase authorization.
- Progress toward the $1.3 billion savings target, integration costs, and whether synergies offset increased investment and operating pressures.
- The duration and financial impact of resin supply disruptions and inflation, and any related product availability or margin effects.
- Developments in Lower Passaic River remediation and Jarden appraisal proceedings; the filing reports approximately $171 million accrued for remaining Jarden consideration and ongoing appraisal claims.
- Whether revenue growth and cash-flow projections support the carrying values of goodwill and intangible assets, particularly the trade names with limited valuation headroom.