Newell Brands Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Amounts are in U.S. dollars; financial figures are in millions unless noted. The company reported four segments: Food and Appliances, Home and Outdoor Living, Learning and Development, and Other.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $2,277.2 | $2,466.6 | $6,290.3 | $7,062.8 |
| Gross profit | $817.0 | $864.9 | $2,197.1 | $2,449.2 |
| Gross margin | 35.9% | 35.1% | 34.9% | 34.7% |
| Operating income (loss) | $(7,903.8) | $141.1 | $(7,846.3) | $243.8 |
| Net income (loss) | $(7,311.0) | $234.4 | $(7,126.0) | $1,095.9 |
| Basic and diluted EPS | $(15.52) | $0.48 | $(14.81) | $2.25 |
- Sales declined 7.7% in Q3 and 10.9% for the nine-month period. Management attributed the nine-month decrease primarily to divestitures, lower sales across segments and the revenue-standard adoption, partly offset by acquisitions.
- Q3 gross margin improved 0.8 percentage points; nine-month margin improved 0.2 points. Pricing, product mix, productivity, synergies and cost savings helped offset input-cost, freight and tariff inflation.
- Q3 continuing-operations impairment charges were $8.1 billion, primarily goodwill and intangible assets. Nine-month charges were $8.2 billion. These non-cash charges drove the reported operating loss. Discontinued operations also recorded impairment charges of $628.8 million in Q3 and $1.1 billion for the nine months.
- Q3 net interest expense was $105.6 million; nine-month expense was $342.2 million. Weighted-average interest rates were approximately 4.2% in both periods, versus 4.0% and 4.1%, respectively, in 2017.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $181.6 million, compared with cash use of $23.8 million in 2017; continuing operations provided $170.3 million. Investing activities provided $2.56 billion, including $2.77 billion of divestiture proceeds. Financing activities used $1.77 billion.
- Cash and cash equivalents were $1.44 billion at September 30, 2018, including approximately $493 million held by non-U.S. subsidiaries. Total debt was $9.61 billion, down from $10.55 billion at December 31, 2017; long-term debt was $9.30 billion.
- Available capacity was approximately $1.2 billion under the $1.25 billion revolving credit facility and $853 million under the receivables facility. No revolver borrowings or commercial paper were outstanding, and the company reported compliance with debt covenants.
- The company repurchased 19.3 million shares for approximately $511 million in the first nine months and paid $332.3 million in dividends. Approximately $3.1 billion remained authorized under the repurchase program at quarter-end.
Material changes, outlook and risks
- Portfolio transformation: The Accelerated Transformation Plan targets a more focused consumer-products portfolio. Goody, Rawlings and Waddington were sold in 2018. Management expected remaining divestitures to be completed by the end of Q2 2019. Subsequent to quarter-end, the company announced agreements to sell Jostens and Pure Fishing for approximately $1.3 billion each, subject to customary conditions; proceeds were expected to support deleveraging and share repurchases.
- Operating conditions: Management cited continuing competitive challenges in U.S. appliances, weakness in outdoor and home-fragrance categories, lost distribution, unfavorable weather, contraction in office-supply channels, and a major Baby division customer’s bankruptcy and liquidation. Sales comparisons also reflect divestitures and adoption of Topic 606, which affected reported revenue presentation; prior periods were not restated.
- Tariffs: Estimated annualized gross tariff exposure was approximately $110–$115 million. The company said it was pursuing pricing, productivity and, in some cases, relocation to mitigate the impact, and warned that broader tariffs could have a significant effect.
- Impairment uncertainty: The third-quarter impairment testing reflected lower forecasts and a decline in market capitalization. Management noted that further deterioration in results, market capitalization or economic conditions could lead to additional material impairment charges.
- Internal controls: Management concluded disclosure controls were ineffective due to a material weakness in controls over deferred taxes included in held-for-sale asset carrying values. The deficiency caused adjustments to the quarter’s financial statements; remediation was still being developed.
- Other exposures: The filing discusses securities and derivative litigation, appraisal claims related to the Jarden acquisition, product-related matters and environmental proceedings. Environmental remediation reserves were $42.3 million; the company said ultimate Passaic River liability was uncertain and could be material under adverse outcomes.
- Guidance: The filing provides no clear quantified earnings or revenue guidance. Management’s stated outlook focuses on portfolio transformation, cost savings, maintaining dividends, debt repayment and share repurchases; results may be affected by seasonality and execution risks.
Key facts for investors to verify
- Whether the $8.1 billion continuing-operations impairment and held-for-sale impairments fully reflect current business valuations, and whether further charges are likely.
- Progress, closing conditions and realized proceeds for announced and remaining divestitures, and how proceeds are divided between debt reduction and share repurchases.
- Underlying sales and segment trends excluding divestitures, currency effects and Topic 606 presentation changes.
- Tariff mitigation effectiveness relative to the stated $110–$115 million annualized gross exposure.
- Remediation of the material weakness and whether future filings report effective controls.
- Debt reduction, liquidity and capital-return plans in light of substantial indebtedness and ongoing transformation costs.