Spectrum Brands Holdings, Inc. — Fiscal 2021 Q3 Form 10-Q Summary
Business context and reporting period
Spectrum Brands is a diversified branded consumer products company operating through Hardware & Home Improvement, Home and Personal Care, Global Pet Care, and Home and Garden. This combined filing covers Spectrum Brands Holdings, Inc. and SB/RH Holdings, LLC for the three- and nine-month periods ended July 4, 2021, compared with June 28, 2020. Amounts are in millions unless otherwise stated.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $1,162.8 | $984.3 | $3,457.5 | $2,793.6 |
| Gross profit | $407.4 | $348.9 | $1,233.7 | $946.9 |
| Gross margin | 35.0% | 35.4% | 35.7% | 33.9% |
| Operating income | $98.0 | $94.6 | $338.3 | $116.6 |
| Income from continuing operations | $35.9 | $137.6 | $145.9 | $40.8 |
| Net income attributable to controlling interest | $30.7 | $145.1 | $139.4 | $52.4 |
| Diluted EPS | $0.72 | $3.36 | $3.25 | $1.16 |
| Adjusted EBITDA | $167.4 | $164.4 | $552.4 | $407.0 |
| Adjusted EBITDA margin | 14.4% | 16.7% | 16.0% | 14.6% |
Q3 sales increased 18.1%, while nine-month sales increased 23.8%. Nine-month growth was broad-based: HHI sales rose 34.0%, HPC 18.1%, GPC 20.8%, and H&G 17.1%. Reported nine-month organic sales increased 18.9%; acquisitions contributed $81.4 million and currency contributed $55.0 million.
Q3 adjusted EBITDA increased modestly despite margin compression. HHI adjusted EBITDA rose 56.0%, while HPC, GPC, and H&G declined 52.8%, 2.8%, and 3.8%, respectively. Management attributed the margin pressure primarily to freight, raw-material and other input-cost inflation, distribution costs, marketing investment, and a GPC distribution-center transition.
Cash flow, debt and liquidity
- Net cash provided by operating activities was $8.9 million for the nine months, including $24.8 million from continuing operations and a $15.9 million outflow from discontinued operations, versus $35.4 million in the prior-year period.
- Investing cash flow was negative $400.1 million, primarily reflecting $429.5 million of acquisitions, partly offset by $73.1 million of proceeds from selling the remaining Energizer investment. Capital expenditures were $43.3 million.
- Financing cash flow was negative $15.2 million. The company issued $997.0 million of debt, repaid $885.3 million, repurchased $52.5 million of stock, and paid $53.6 million of shareholder dividends.
- Cash and cash equivalents were $130.2 million at July 4, 2021, down from $531.6 million at September 30, 2020. Inventory increased to $908.3 million from $557.7 million.
- Total debt was approximately $2.7 billion, including $2.65 billion of long-term debt net of current maturities. Borrowing availability under the revolver was $478.0 million, net of letters of credit.
- Variable-rate debt was approximately $499.1 million, or 18.4% of total debt. A 1% increase in market rates would increase annual interest expense by approximately $5.1 million.
- Management expects operating cash flow, existing cash, revolver availability, and capital-market access to fund operating and capital requirements for at least the next 12 months. The company reported compliance with applicable debt covenants at July 4, 2021.
Material changes versus the prior comparable period
- On May 28, 2021, the company acquired For Life Products, owner of the Rejuvenate brand, for approximately $301.5 million. The acquisition added $147.0 million of goodwill and $128.7 million of intangible assets.
- The October 2020 Armitage Pet Care acquisition contributed to GPC results and added $90.7 million of goodwill and $88.6 million of intangible assets.
- On March 3, 2021, the company issued $500.0 million of 3.875% notes due 2031 and entered into a $400.0 million term loan due 2028. Proceeds were used partly to redeem $800.0 million of higher-coupon notes. Refinancing costs included a $23.4 million make-whole premium and a $7.9 million debt-cost write-off.
- Q3 continuing-operations income declined substantially because the prior-year quarter included a $61.3 million gain from the Energizer investment and a $76.2 million gain from extinguishing Salus CLO debt. The company had sold its remaining Energizer shares by January 2021.
- Nine-month results benefited from the absence of prior-year Coevorden-related charges, including a $26.8 million loss on assets held for sale and a $24.2 million intangible-asset impairment.
- The company repurchased $52.5 million of shares during the nine months and initiated a new $1.0 billion authorization in May 2021, with $989.8 million remaining at July 4, 2021.
Guidance, outlook, risks and unusual items
The filing does not provide a clear numerical fiscal 2021 revenue, earnings, or cash-flow guidance range. Management expects continued operating cash generation and access to credit markets, but notes that future results depend on economic conditions, capital-market access, customer demand, and the duration and severity of COVID-19 effects.
- COVID-19 may affect demand, manufacturing, suppliers, logistics, customer operations, consumer behavior, and asset valuations. No material liquidity impact or COVID-related impairment was identified through the reporting date.
- Inflation in freight, raw materials, labor and other inputs, together with supply-chain and distribution disruptions, is a significant near-term operating risk.
- GPC experienced lower-than-anticipated fulfillment during a transition to a new U.S. third-party logistics provider.
- The Global Productivity Improvement Program had incurred $141.1 million cumulatively, with approximately $27.3 million of additional costs forecast through fiscal 2022.
- Discontinued-operations losses principally reflect tax and legal indemnification matters related to the 2019 GBL and GAC divestitures. Indemnification payables totaled $36.8 million at July 4, 2021.
- The company recognized approximately $3.2 million of legal reserves for unusual, non-recurring H&G claims during the nine months.
- Environmental remediation liabilities were $11.2 million, product-liability reserves were $4.1 million, and warranty accruals were $11.6 million at July 4, 2021.
- A previously identified material weakness related to information-technology general controls in the EMEA region remained under remediation. Management nevertheless concluded that disclosure controls and procedures were effective.
Most important facts for investors to verify
- Whether elevated inventory, working-capital usage, and low operating cash flow normalize in subsequent quarters.
- The pace and success of integrating Rejuvenate and Armitage, including realization of expected synergies and finalization of purchase-accounting estimates.
- The sustainability of adjusted EBITDA margins amid inflation, freight costs, marketing spending, and distribution constraints.
- Debt covenant compliance, variable-rate exposure, refinancing requirements, and revolver availability.
- Progress and remaining cost of the Global Productivity Improvement Program.
- Resolution and potential cost of shareholder litigation, divestiture indemnifications, environmental matters, product claims, and the unusual H&G legal claims.
- Remediation of the EMEA IT general-control material weakness and any related reporting implications.
- Future share repurchases and dividends relative to acquisition spending, debt reduction, and liquidity needs.