Spectrum Brands Holdings, Inc. — Q1 FY2021 10-Q Summary
Business context and reporting period
Spectrum Brands is a diversified global branded consumer products company operating through Hardware & Home Improvement (HHI), Home and Personal Care (HPC), Global Pet Care (GPC), and Home and Garden (H&G). This combined report covers Spectrum Brands Holdings, Inc. and SB/RH Holdings, LLC for the three months ended January 3, 2021, compared with December 29, 2019. Results are unaudited and presented in millions unless otherwise indicated.
Key financial metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net sales | $1,145.0 | $871.5 | +31.4% |
| Gross profit | $422.3 | $269.1 | +56.9% |
| Gross margin | 36.9% | 30.9% | +600 bps |
| Operating income (loss) | $123.5 | $(45.9) | Improved $169.4 |
| Income from continuing operations | $73.2 | $(37.7) | Improved $110.9 |
| Net income attributable to controlling interest | $72.1 | $(35.8) | Improved $107.9 |
| Diluted EPS | $1.68 | $(0.75) | Improved $2.43 |
| Adjusted EBITDA | $204.1 | $102.2 | +99.7% |
| Adjusted EBITDA margin | 17.8% | 11.7% | +610 bps |
Segment sales increased across all businesses: HHI to $408.7 million, HPC to $378.5 million, GPC to $275.5 million, and H&G to $82.3 million. Reported organic sales increased 27.8% overall after excluding $20.3 million of acquisition sales and the effect of currency changes.
Cash flow remained a use of cash despite the return to profitability. Cash used by operating activities was $110.1 million, including $94.1 million from continuing operations and $16.0 million from discontinued operations. Capital expenditures were $11.8 million. Investing cash flow was $(81.0) million, including $129.8 million paid for acquisitions and $60.5 million of proceeds from selling Energizer shares. Financing cash flow was $(121.8) million, including $54.0 million of debt repayments, $42.3 million of share repurchases, and $17.8 million of dividends.
Cash and cash equivalents were $224.5 million at January 3, 2021, compared with $531.6 million at September 30, 2020. Total debt, including current and long-term portions, was approximately $2.497 billion net of debt issuance costs. The Company reported $584.5 million of revolver borrowing availability, net of letters of credit, and compliance with applicable debt covenants.
Material changes versus the prior comparable period
- Sales growth reflected strong consumer demand, retail inventory rebuilding, e-commerce activity, fulfillment of prior open orders, and favorable volume and mix across all segments.
- Gross margin expanded because of higher volumes, productivity and cost improvements, favorable mix, and the absence of prior-year accelerated depreciation and other charges related to exiting GPC facilities in Latin America.
- Prior-year results included a $32.8 million loss on assets held for sale and a $24.2 million intangible-asset impairment associated with the Coevorden divestiture. Neither charge recurred in Q1 FY2021.
- Restructuring charges declined to $9.2 million from $27.4 million, while transaction-related charges increased to $20.6 million from $4.1 million.
- Other non-operating income declined to $6.2 million from $43.7 million because the prior-year period benefited from a larger unrealized gain on the Energizer investment.
- The Company acquired Armitage Pet Care Ltd. on October 26, 2020 for approximately $187.7 million, including $136.7 million of cash consideration and $51.0 million of debt assumed. The acquisition contributed $20.3 million of reported GPC sales during the quarter.
- The Company repurchased 0.6 million shares for $42.3 million during the quarter and paid a quarterly dividend of $0.42 per share.
Outlook, commentary, risks, contingencies, and unusual items
Management stated that demand remained strong and the Company continued operating as an essential business during the COVID-19 pandemic. However, the duration and severity of the pandemic remain uncertain and could affect demand, manufacturing, supply chains, customer operations, consumer spending, liquidity, and asset values. Management believes existing cash, expected operating cash flow, and available financing will be sufficient for operating requirements for at least the next 12 months, while noting that capital-market access and future liquidity could be affected by COVID-19 and market volatility.
The Global Productivity Improvement Program had incurred cumulative costs of $134.5 million through January 3, 2021, with approximately $31.4 million of additional costs expected through fiscal 2022. The Company recognized approximately $6.0 million of higher H&G legal reserves for significant, unusual, non-recurring claims. It also carried environmental remediation reserves of $11.6 million, product liability reserves of $4.8 million, and warranty accruals of $10.8 million.
Subsequent to January 3, 2021, the Company sold its remaining Energizer investment for $12.6 million. Management reported no COVID-19-related impairment trigger during the quarter, but warned that a prolonged pandemic or adverse changes in assumptions could lead to future goodwill or intangible-asset impairment charges.
The filing identifies risks from leverage and debt restrictions, covenant compliance, customer concentration, commodity and transportation costs, foreign exchange and interest rates, competition, supply-chain disruption, litigation, product liability, cybersecurity, regulatory changes, acquisitions and divestitures, and reliance on third-party suppliers and distributors. Disclosure controls were deemed effective, although previously identified information-technology general-control deficiencies in the EMEA region continued to be remediated.
Most important facts for investors to verify
- Whether strong pandemic-related demand and elevated e-commerce and retail activity persist after comparability benefits from the prior-year charges and disruptions fade.
- The cash conversion impact of elevated inventories, receivables, seasonal production, acquisition spending, dividends, and share repurchases.
- Leverage, refinancing requirements, covenant headroom, and the sustainability of approximately $2.5 billion of net debt.
- The final purchase-price allocation and operating contribution of Armitage, including the $90.7 million of preliminary goodwill.
- The remaining cost and timing of the Global Productivity Improvement Program and other restructuring initiatives.
- Potential exposure from COVID-19, unusual H&G legal claims, environmental matters, product liability, warranty claims, and divestiture-related indemnifications.
- The extent to which adjusted EBITDA excludes recurring or potentially recurring costs, including restructuring, transaction-related charges, stock compensation, and unusual legal items.