Newell Brands Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing; quarterly data shows fourth-quarter results separately. Newell Brands markets consumer and commercial products globally. Its primary segments are Food and Appliances, Home and Outdoor Living, and Learning and Development.
Financial performance
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $8.631 billion | $9.552 billion |
| Gross profit / margin | $3.009 billion / 34.9% | $3.263 billion / 34.2% |
| Operating income (loss) | ($7.829 billion) | $385.5 million |
| Income (loss) from continuing operations | ($6.790 billion) | $2.171 billion |
| Net income (loss) | ($6.918 billion) | $2.749 billion |
| Operating cash flow | $680.0 million | $966.2 million |
| Cash and cash equivalents at year-end | $495.7 million | $485.7 million |
| Total debt | $7.015 billion | $10.551 billion |
- FY 2018 net sales fell 9.6%. Management attributed the decline primarily to prior-year divestitures (about 3 percentage points), lower sales across segments (about 5 points), and adoption of the new revenue standard (about 2 points), partly offset by acquisitions (about 1 point). The Topic 606 adoption increased reported sales by $192 million and cost of goods sold by $184.3 million, with little effect on operating results.
- Gross margin improved from 34.2% to 34.9%; pricing, product mix and cost savings were largely offset by product-cost, freight and tariff inflation. Operating results were overwhelmed by $8.322 billion of continuing-operations impairment charges, chiefly goodwill and intangible assets. Discontinued operations recorded a further $1.468 billion impairment.
- Operating cash flow declined year over year. Cash from investing activities was $4.807 billion, including $5.133 billion of divestiture proceeds. Cash used in financing was $5.455 billion, including $2.580 billion of long-term debt payments and $1.507 billion of share repurchases.
- Year-end working capital was $4.419 billion. Liquidity included approximately $1.2 billion of unused availability under the revolving facility and $761 million under the receivables facility. The company reported no covenant default at year-end.
- Fourth-quarter net sales were $2.341 billion versus $2.489 billion in Q4 2017; gross profit was $811.7 million versus $813.8 million. Q4 net income was $208.1 million versus $1.653 billion; the prior-year quarter included substantial tax benefits from U.S. tax reform.
Material changes and business developments
- The Accelerated Transformation Plan reshaped the portfolio and reporting structure. In 2018 Newell sold Goody, Jostens, Pure Fishing, Rawlings/Team Sports and Waddington. Remaining planned divestitures were expected to be completed by the end of 2019.
- Sales declined in all three primary segments: Food and Appliances fell 7.6%, Home and Outdoor Living 5.4%, and Learning and Development 8.8%. Reported segment operating losses in the first two segments chiefly reflect the large impairment charges.
- Management cited appliance competition, weaker outdoor and home-fragrance sales, inventory reductions in office channels, and the bankruptcy/liquidation of a major Baby division customer. Newell wrote off $35.7 million of receivables, primarily associated with that customer.
- Debt fell by approximately $3.5 billion during 2018, including about $2.6 billion of senior-note principal repurchases. The company also repurchased approximately $1.5 billion of shares and paid $434.6 million in dividends.
Outlook, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management’s stated priorities include completing divestitures, reducing debt, investing in growth capabilities, maintaining the dividend and continuing transformation and restructuring efforts.
- Estimated annualized gross tariff exposure was approximately $105 million. The company described mitigation through pricing, productivity and, in some cases, relocation; further tariff increases could raise costs.
- On February 20, 2019, Fitch downgraded the long-term issuer rating from BBB- to BB+ and the short-term rating from F3 to B, citing weaker business expectations and execution risks. This was a post-year-end development.
- Management and the auditor identified a material weakness in controls over accounting for divestitures, including deferred taxes, tax allocation between continuing and discontinued operations, and held-for-sale classification. The company reported that related financial-statement adjustments were corrected; remediation was underway but not yet complete. The auditor’s financial-statement opinion was unqualified, while its opinion on internal controls was adverse.
- Additional risks include substantial indebtedness, retailer concentration and bargaining power, supplier dependencies (including single-source baby products), foreign exchange, inflation, customer losses, litigation and product liability, and possible further impairments. Certain reporting units had limited fair-value cushions after 2018 impairments.
- Environmental remediation reserves were $49.4 million. The company disclosed ongoing Passaic River litigation, with ultimate responsibility and allocation uncertain; it said a material impact was not considered reasonably likely based on then-known facts, while acknowledging adverse outcomes could be material.
- On February 25, 2019, Newell agreed to sell Rexair for $235 million, subject to customary conditions and approvals, with closing expected by the end of Q2 2019.
Investor verification points
- Reconcile the $8.322 billion continuing-operations impairment and $1.468 billion discontinued-operations impairment to segment and held-for-sale disclosures; assess sensitivity of remaining goodwill and brand values to assumptions.
- Track divestiture completion, sale proceeds, retained liabilities and use of proceeds, including the Rexair transaction and the stated debt-reduction objectives.
- Assess underlying sales and margins by segment apart from divestitures, revenue-accounting changes and impairment charges; monitor customer inventory and recovery after the Baby customer liquidation.
- Monitor operating cash generation, debt maturities, liquidity facilities, ratings and the balance between debt repayment, dividends and repurchases.
- Check whether the divestiture-accounting material weakness is remediated and whether subsequent filings report any related control or financial-statement issues.
- Review tariff developments and the status and potential exposure of the Passaic River matter and other disclosed contingencies.