Spectrum Brands Holdings, Inc. — Fiscal 2023 Second Quarter 10-Q Summary
Business context and reporting period
Spectrum Brands is a global branded consumer products company operating through Home and Personal Care (HPC), Global Pet Care (GPC), and Home and Garden (H&G). The report covers the three and six months ended April 2, 2023, compared with April 3, 2022. Results exclude Hardware and Home Improvement (HHI) from continuing operations because HHI remains classified as held for sale and discontinued operations.
Key financial metrics
| Metric | Three months ended April 2, 2023 | Three months ended April 3, 2022 | Six months ended April 2, 2023 | Six months ended April 3, 2022 |
|---|---|---|---|---|
| Net sales | $729.2 million | $807.8 million | $1,442.5 million | $1,565.0 million |
| Gross profit / margin | $214.5 million / 29.4% | $255.6 million / 31.6% | $416.4 million / 28.9% | $474.9 million / 30.3% |
| Operating loss | $(77.0) million | $(8.1) million | $(97.2) million | $(32.0) million |
| Net loss from continuing operations | $(75.0) million | $(25.1) million | $(115.0) million | $(55.3) million |
| Net loss attributable to controlling interest | $(53.7) million | Net income of $15.9 million | $(74.6) million | Net income of $24.1 million |
| Diluted EPS | $(1.31) | $0.39 | $(1.82) | $0.59 |
| Adjusted EBITDA | $51.0 million | $79.0 million | $90.8 million | $128.3 million |
| Adjusted EBITDA margin | 7.0% | 9.8% | 6.3% | 8.2% |
Interest expense increased to $31.6 million in the quarter and $65.0 million year to date, versus $24.7 million and $46.4 million, respectively, primarily because of higher variable borrowing rates and borrowings. The company paid a quarterly dividend of $0.42 per share.
Segment performance and material changes
- HPC: Second-quarter sales declined 11.7% to $279.2 million; organic sales declined 14.9%. Six-month sales declined 7.5% to $643.6 million. Adjusted EBITDA fell to $(1.9) million from $10.6 million in the quarter and to $11.3 million from $38.0 million year to date. Results reflected lower kitchen-appliance demand, retailer inventory management, competitive pressure, unfavorable foreign exchange, and higher-cost inventory.
- GPC: Second-quarter sales increased 0.5% to $296.7 million, with organic sales up 3.1%. Six-month sales declined 3.9% to $574.3 million, with organic sales down 0.3%. Adjusted EBITDA increased to $46.3 million from $40.6 million in the quarter and to $83.5 million from $79.3 million year to date, supported by pricing, lower distribution costs, improved fulfillment, and cost reductions.
- H&G: Second-quarter sales declined 22.0% to $153.3 million; six-month sales declined 17.4% to $224.6 million. Adjusted EBITDA declined 59.9% to $15.1 million in the quarter and 57.9% to $12.8 million year to date. Lower retail inventory, adverse weather, slower spring demand, and higher-cost inventory affected results.
- Gross margin declined 220 basis points in the quarter and 140 basis points year to date, primarily due to lower volume, product mix, and higher inventoried costs, partly offset by pricing.
- Operating expenses included a $67.0 million intangible-asset impairment: $48.0 million related to the Rejuvenate tradename and $19.0 million related to PowerXL. The impairment reflected lower projected revenues, weaker demand, increased competition, and changes in strategic distribution and product innovation assumptions.
- Restructuring charges were $4.8 million in the quarter and $6.8 million year to date, compared with $16.4 million and $33.8 million in the comparable periods.
Cash flow, debt, and liquidity
- Six-month operating cash flow from continuing operations was $148.6 million, compared with cash used of $212.2 million in the prior year. Improvement primarily reflected lower inventory purchases and working-capital needs. Total operating cash flow, including discontinued operations, was $177.6 million.
- Capital expenditures were $25.9 million from continuing operations and $33.8 million including discontinued operations. Investing cash outflow was substantially lower than the prior year because the prior-year period included the $314.3 million Tristar acquisition.
- Cash and cash equivalents were $327.8 million at April 2, 2023, compared with $243.7 million at September 30, 2022.
- Total external debt was approximately $3.22 billion before discounts and issuance costs, including $725.0 million outstanding on the revolver. The revolver has $1.1 billion of total capacity, with $362.1 million of borrowing availability net of letters of credit.
- The company amended its credit agreement to temporarily permit a consolidated total net leverage ratio of up to 7.0x, reverting to 6.0x at the earlier of September 29, 2023, or ten business days after the HHI closing or receipt of the termination fee. Management stated that the company was in compliance with its debt covenants at April 2, 2023.
- Management expects operating cash flow, existing cash, anticipated HHI proceeds, and revolver availability to fund operating and capital requirements for at least the next 12 months, although this expectation depends on operating performance, market access, and completion of the HHI transaction.
Guidance, outlook, risks, and unusual items
- The filing does not provide a clear quantitative revenue, earnings, or adjusted EBITDA outlook.
- The HHI divestiture is subject to customary closing conditions and remaining regulatory approval from the Mexican competition authority. Following a DOJ settlement announced May 5, 2023, Spectrum and ASSA continued to expect closing on or before June 30, 2023. The transaction is expected to generate cash proceeds of approximately $4.3 billion before customary adjustments; closing remains a material contingency.
- HHI generated $383.3 million of sales and $59.5 million of pretax income in the quarter, compared with $420.8 million and $71.0 million, respectively, in the prior-year quarter. Six-month pretax income declined to $104.4 million from $130.9 million.
- Management cited inflation, labor costs, transportation and commodity costs, supply-chain constraints, retailer inventory reductions, foreign exchange, interest rates, weather, consumer demand, competition, and the Russia-Ukraine conflict as key operating risks.
- The HPC business remains dependent on the Black & Decker license, which runs through June 30, 2025, including a sell-off period. B&D products represented 11.7% of quarterly consolidated sales and 11.9% of six-month sales.
- Two large retail customers represented 33.5% of quarterly sales and 34.8% of six-month sales. One customer represented 19.7% of trade receivables at April 2, 2023.
- The company continues to carry liabilities related to product recalls, product liability, environmental remediation, and indemnification obligations. It reported $8.4 million of recall liabilities and $8.2 million of related indemnification receivables at April 2, 2023.
Most important facts for investors to verify
- Whether the HHI divestiture closed by the expected June 30, 2023 date, the final proceeds and adjustments, and the resulting debt reduction.
- Compliance with the temporary 7.0x leverage covenant and the required return to a 6.0x threshold.
- Whether HPC and H&G sales and margins stabilize after retailer inventory reductions and demand weakness.
- The sustainability of GPC’s improved profitability and the extent to which cost savings offset inflation, foreign exchange, and volume pressure.
- The valuation and future performance of the Rejuvenate and PowerXL brands following the $67.0 million impairment.
- Cash conversion, inventory levels, revolver usage, interest costs, and the company’s ability to maintain dividends while funding restructuring and separation initiatives.