Spectrum Brands Holdings, Inc. 2019 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended September 30, 2019, including the fourth quarter ended September 30, 2019. Spectrum Brands is a diversified global branded consumer-products company operating through four continuing segments: Hardware & Home Improvement (HHI), Home and Personal Care (HPC), Global Pet Care (GPC), and Home and Garden (H&G). SB/RH Holdings, LLC is a wholly owned subsidiary that contains substantially all of the operating assets and liabilities.
Global Batteries and Lighting (GBL) was sold to Energizer on January 2, 2019, and Global Auto Care (GAC) was sold on January 28, 2019. Both businesses are presented as discontinued operations for all periods.
Key financial metrics
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Net sales | $3,802.1 million | $3,808.7 million | (0.2%) |
| Gross profit | $1,306.9 million | $1,334.3 million | (2.1%) |
| Gross margin | 34.3% | 35.0% | (70 bps) |
| Operating income | $72.2 million | $224.2 million | (67.8%) |
| Operating margin | 1.9% | 5.9% | Down |
| Net loss from continuing operations | $186.7 million | Net income of $427.0 million | Material deterioration |
| Net income attributable to controlling interest | $471.9 million | $768.3 million | (38.6%) |
| Adjusted EBITDA | $567.0 million | $581.3 million | (2.5%) |
| Adjusted EBITDA margin | 14.9% | 15.3% | (40 bps) |
| Cash from continuing operations | $83.5 million | $117.1 million | Down |
| Capital expenditures | $58.4 million | $75.9 million | Down |
| Cash and cash equivalents | $627.1 million | $552.5 million | Up |
| Total debt | $2,351.3 million | $4,651.2 million | Down $2,299.9 million |
Full-year net income was substantially affected by the $659.9 million after-tax contribution from discontinued operations, primarily the GBL sale. Continuing operations remained loss-making because of impairments, restructuring, higher input costs, foreign-exchange losses and tax-related items.
Segment performance and material changes
- HHI: Sales declined 1.6% to $1,355.7 million, while operating income increased 38.1% to $215.0 million. Adjusted EBITDA was $253.7 million, or 18.7% of sales. Efficiency improvements and lower restructuring costs offset lower sales and higher material costs.
- HPC: Sales declined 3.8% to $1,068.1 million. The segment recorded a $127.5 million operating loss, including $116.0 million of goodwill impairment and $18.8 million of intangible-asset impairment. Adjusted EBITDA fell 26.6% to $87.2 million, with margin declining to 8.2%.
- GPC: Sales increased 6.1% to $870.2 million, and operating income increased 88.0% to $65.6 million. Adjusted EBITDA rose 4.4% to $142.6 million. Growth reflected expanded distribution, e-commerce volumes, pricing and recovery from the prior rawhide recall, although manufacturing and distribution costs remained elevated.
- H&G: Sales increased 1.6% to $508.1 million, but operating income declined 3.5% to $85.0 million. Adjusted EBITDA declined 1.9% to $105.5 million as marketing investment, weather-related effects and lower household insect-control volumes pressured margins.
Organic sales increased 1.4% after excluding foreign-currency effects. Reported sales were reduced by a $61.0 million currency impact. Gross margin declined primarily because of tariffs, higher material and input costs and unfavorable product mix, partially offset by pricing actions.
Cash flow, debt and liquidity
- Cash provided by operating activities from continuing operations was $83.5 million; total cash provided by operating activities, including discontinued operations, was only $1.1 million.
- Investing cash flow from continuing operations was $2,802.9 million, primarily reflecting $1,924.1 million of GBL proceeds and $935.4 million of GAC proceeds.
- The Company paid $2,649.9 million of debt during the year, including repayment of the $1,231.7 million USD term loan, the $890.0 million 7.75% notes and $452.6 million of 6.625% notes. It issued $300.0 million of 5.00% senior notes due 2029.
- At September 30, 2019, debt consisted principally of $1,000.0 million of 5.75% notes due 2025, $465.0 million of 4.00% notes due 2026, $300.0 million of 5.00% notes due 2029, $250.0 million of 6.125% notes due 2024 and $117.4 million of remaining 6.625% notes due 2022, plus lease and other obligations.
- Revolver availability was $779.0 million, net of letters of credit and other allocations. Management stated that cash balances and expected operating cash flow should cover operating requirements for at least the next 12 months.
- The Company repurchased $268.5 million of common stock under its $1 billion program and paid $85.5 million of shareholder dividends.
Outlook, unusual items and risks
- The Company initiated a multi-year Global Productivity Improvement Plan expected to run through September 2022. Cumulative costs were $60.9 million at year-end, with approximately $88.9 million of future costs forecast.
- Management provided no quantified revenue, earnings or cash-flow guidance in the filing. It expects additional investment in high-return cost-reduction and restructuring projects.
- The GBL transaction generated a $989.8 million pretax gain. The Company also recognized a $200.0 million payable to Energizer associated with the required Varta consumer-battery divestiture and additional indemnification obligations.
- The Company retained 5.3 million Energizer shares received in the GAC transaction. The investment was valued at $230.8 million at year-end and generated a $12.1 million unrealized loss and $4.8 million of dividend income during the year.
- HPC goodwill was fully impaired, and approximately $240.4 million of intangible assets were identified as potentially at risk of future impairment. GPC goodwill, totaling $430.4 million, had limited excess fair value and was identified as at risk if performance or assumptions deteriorate.
- Key risks include substantial indebtedness and restrictive covenants, dependence on major retailers, tariffs and raw-material costs, foreign-exchange volatility, supply-chain concentration in Asia, seasonality and weather, product liability and recalls, litigation, environmental obligations, cybersecurity, tax-attribute limitations and integration or separation costs related to Energizer.
- Pending shareholder securities litigation was described as without merit by management; the Company stated that current proceedings were not expected to have a material adverse effect, while acknowledging potential legal costs and management distraction.
Most important facts for investors to verify
- Whether continuing operations can generate sustainable positive cash flow after the divestitures and separation from Energizer.
- Progress and realized savings from the Global Productivity Improvement Plan versus the remaining estimated $88.9 million of costs.
- HPC recovery prospects and the risk of additional goodwill or intangible-asset impairments, particularly the GPC goodwill balance.
- Use of divestiture proceeds, remaining debt maturities, interest obligations and compliance with leverage and other debt covenants.
- The ultimate amount and timing of the $200.0 million Varta obligation and other Energizer indemnification liabilities.
- Performance of the Energizer equity investment, including restrictions on sale and its effect on reported earnings.
- Customer concentration, especially exposure to major retailers and the effect of private-label competition and e-commerce trends.
- Utilization of approximately $1.49 billion of federal NOL carryforwards, related ownership-change limitations and the $307.0 million deferred-tax valuation allowance.