Spectrum Brands Holdings, Inc. quarterly report, Q3 FY2020

Spectrum Brands Holdings, Inc. 10-Q Summary

Business context and reporting period

Spectrum Brands Holdings, Inc. and subsidiary SB/RH Holdings, LLC reported unaudited results for the three and nine months ended June 28, 2020, compared with June 30, 2019. The company operates four segments: Hardware & Home Improvement (HHI), Home and Personal Care (HPC), Global Pet Care (GPC), and Home and Garden (H&G).

Management stated that the company remained classified as an essential business during the COVID-19 pandemic. Temporary production restrictions affected facilities in China, the Philippines, Mexico, and St. Louis, but most facilities were operating or ramping toward normal capacity by quarter-end.

Key financial metrics

SBH metric	Q3 FY2020	Q3 FY2019	9M FY2020	9M FY2019
Net sales	$984.3 million	$1,022.2 million	$2,793.6 million	$2,809.2 million
Gross profit	$348.9 million	$361.0 million	$946.9 million	$972.4 million
Gross margin	35.4%	35.3%	33.9%	34.6%
Operating income	$94.6 million	$92.8 million	$116.6 million	$159.9 million
Net income from continuing operations	$137.6 million	$(24.7) million	$40.8 million	$(107.6) million
Net income attributable to controlling interest	$145.1 million	$(25.9) million	$52.4 million	$590.3 million
Diluted EPS	$3.36	$(0.53)	$1.16	$11.50
Adjusted EBITDA	$164.4 million	$172.9 million	$407.0 million	$403.7 million
Adjusted EBITDA margin	16.7%	16.9%	14.6%	14.4%

Q3 reported earnings benefited materially from a $76.2 million non-cash gain on extinguishment of Salus CLO debt and a $60.1 million gain on the Energizer investment. Q3 discontinued operations also included an $8.8 million tax benefit. These items limit comparability with operating performance.

Segment performance

HHI: Q3 sales declined 20.6% to $281.6 million and adjusted EBITDA declined 35.6% to $43.6 million, primarily from COVID-19-related supply constraints, lower security volumes, and fixed-cost deleverage. Adjusted EBITDA margin declined to 15.5% from 19.1%.
HPC: Q3 sales increased 3.0% to $250.6 million and adjusted EBITDA increased 37.4% to $25.0 million. Demand for hair care, personal grooming, and kitchen appliances, particularly through e-commerce, supported results.
GPC: Q3 sales increased 8.9% to $241.5 million and adjusted EBITDA increased 29.7% to $50.6 million, driven by companion-animal and aquatics demand. Nine-month operating income was reduced by the Coevorden disposal loss and intangible-asset impairments.
H&G: Q3 sales increased 4.0% to $210.6 million and adjusted EBITDA increased 4.1% to $55.5 million, supported by seasonal demand, favorable weather, online retail, and home-center volumes.

Cash flow, liquidity, debt, and capital allocation

SBH cash provided by operating activities from continuing operations was $35.4 million in the first nine months, compared with $186.1 million used in the prior-year period.
Capital expenditures were $44.5 million, versus $40.3 million in the prior-year period.
Cash and cash equivalents were $465.9 million at June 28, 2020, compared with $627.1 million at September 30, 2019.
Total SBH debt was approximately $2.72 billion before debt issuance costs, including $528.0 million drawn under the revolver. Revolver availability was $341.3 million after letters of credit.
On June 30, 2020, the company refinanced its credit facility, extending maturity to June 30, 2025 and reducing total revolver capacity from $890 million to $600 million. It also issued $300 million of 5.50% senior notes due July 2030, using the proceeds to repay revolver borrowings.
The company paid $57.2 million of dividends and repurchased $364.8 million of common stock during the nine months. Treasury repurchases were temporarily suspended during the COVID-19 period.
Management stated that existing cash and expected operating cash flow should meet operating requirements for at least the next 12 months, subject to economic and pandemic-related uncertainty.

Material changes versus the prior comparable period

Reported nine-month sales declined 0.6%, while organic sales increased 0.2%. Q3 organic sales declined 2.9%, principally because of HHI weakness.
Q3 continuing-operations net income improved from a $24.7 million loss to $137.6 million of income, primarily due to gains on the Energizer investment and Salus debt extinguishment.
Nine-month continuing-operations net income improved from a $107.6 million loss to $40.8 million of income, but total net income fell sharply because the prior year included substantial gains from the GBL and GAC divestitures.
The company incurred $61.6 million of restructuring and related charges during the nine months, compared with $42.2 million. Cumulative Global Productivity Improvement Plan costs were $113.9 million, with approximately $74.8 million of additional costs forecast through fiscal 2022.
The Coevorden operations divestiture generated $30.1 million of proceeds and a $26.8 million loss on assets held for sale. The company also recognized $24.2 million of intangible-asset impairment, comprising $16.6 million related to indefinite-lived tradenames and $7.6 million related to definite-lived assets.
The company acquired Omega Sea for approximately $16.9 million, adding the Omega aquatics business to GPC.
The company adopted lease accounting standard ASC 842 on October 1, 2019, recognizing $107.5 million of additional right-of-use assets and $113.0 million of additional lease liabilities.

Guidance, outlook, commentary, and risks

On April 30, 2020, the company withdrew its fiscal 2020 and first-quarter guidance because of limited visibility into COVID-19-related demand volatility and supply-chain disruptions. It stated that it expects to provide an annual outlook when business conditions become more normal.

COVID-19 may affect demand, manufacturing capacity, suppliers, retailers, logistics, consumer spending, capital markets, and asset valuations. Management had not identified a material liquidity impact or significant customer-credit deterioration as of the filing date.
GPC goodwill of $430.1 million was described as “at risk” of impairment if operating performance, long-term outlook, discount rates, or pandemic assumptions deteriorate. Additional goodwill or intangible impairments remain possible.
Four customers accounted for 46.4% of Q3 sales and 44.4% of nine-month sales, creating customer-concentration risk.
The company reported $50.3 million of indemnification liabilities associated with the GBL divestiture, including $34.0 million payable to Energizer at June 28, 2020.
The company disclosed environmental remediation liabilities of $11.7 million, product-liability liabilities of $6.1 million, and warranty accruals of $6.8 million.
A $22.6 million out-of-period tax error related to discontinued operations was identified and corrected in the September 30, 2019 balance sheet; management concluded it was not material to the consolidated financial statements.
The company stated that disclosure controls were effective, with control updates continuing for the adoption of the lease standard.

Important facts for investors to verify

Reconcile reported earnings and adjusted EBITDA to underlying operating performance, excluding the Energizer investment gain, Salus debt-extinguishment gain, discontinued-operation tax benefits, restructuring, impairments, and divestiture-related items.
Confirm the effect of the June 30, 2020 refinancing on interest expense, revolver availability, covenant compliance, maturities, and liquidity.
Monitor HHI recovery, COVID-19 supply constraints, customer concentration, tariffs, and e-commerce demand trends.
Assess the likelihood and potential magnitude of additional GPC goodwill or DCF-related intangible impairments.
Track restructuring spending, the remaining $74.8 million forecast cost, and whether projected productivity benefits offset those expenditures.
Review the withdrawn guidance and determine when management restores a fiscal 2020 outlook.
Verify the tax impact of the July 2020 GILTI regulations, which management stated could materially affect fiscal 2020 tax expense.