Newell Brands Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Amounts are in millions of U.S. dollars, except per-share data and percentages. Newell Brands sells consumer products across five segments. It sold its Connected Home & Security business on March 31, 2022; its results were included through that date.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $2,534 | $2,709 | $4,922 | $4,997 |
| Gross profit / margin | $825 / 32.6% | $882 / 32.6% | $1,565 / 31.8% | $1,613 / 32.3% |
| Operating income / margin | $317 / 12.5% | $305 / 11.3% | $534 / 10.8% | $497 / 9.9% |
| Net income | $204 | $197 | $438 | $286 |
| Diluted EPS | $0.49 | $0.46 | $1.04 | $0.67 |
| Net interest expense | $55 | $65 | $114 | $132 |
- Q2 sales fell 6.5%; management cited the CH&S divestiture, softer U.S. demand in certain categories, category exits and unfavorable foreign exchange. Currency reduced Q2 sales by $80, or 3%.
- Q2 gross margin was unchanged year over year: favorable pricing and productivity were offset by inflation. For the first half, gross margin declined 0.5 percentage point. Input-cost inflation had a negative high-single-digit-percentage impact on cost of products sold.
- First-half net income included a $133 pretax gain on the CH&S sale, recorded in other income. The sale also contributed to the lower reported effective tax rate. Thus, the increase in first-half net income was not solely from underlying operating improvement.
- By segment, Q2 Learning and Development sales rose 2.5% and operating income rose to $247; Home Solutions operating income fell to $5 from $53; Home Appliances sales declined 12.2%; Outdoor and Recreation sales declined 5.7%. For the first half, Learning and Development and Outdoor and Recreation operating income improved, while Home Appliances recorded a $3 operating loss.
Cash flow, debt and liquidity
- First-half operating cash flow was negative $450, versus positive $76 in 2021. The company attributed the decrease principally to inventory build, timing of customer collections and vendor payments, and higher annual incentive compensation. Inventory was $2,522 at June 30, up from $1,997 at year-end.
- Investing cash flow was positive $499, including $620 proceeds from the CH&S sale; capital expenditures were $140. Financing cash flow was negative $185 and included $325 of share repurchases and $195 of dividends.
- Cash and cash equivalents were $323 at June 30, down from $440 at December 31, 2021. Total debt was $5,254, compared with $4,886 at year-end; $1,461 was classified as short-term debt and current maturities. The filing reports $112 commercial paper and $260 drawn under the receivables securitization facility.
- The company reported about $1.1 billion of net availability under its $1.25 billion revolving credit facility, with no revolver borrowings, and said it was in compliance with debt covenants. It also had approximately $545 of factored receivables at quarter-end.
Outlook, management commentary and risks
- The filing provides no quantified full-year guidance. Management cautioned that first-half results and cash flows may not indicate full-year results, citing seasonality; it generally expects most operating cash flow in the third and fourth quarters.
- Supply, labor and logistics constraints and significant input-cost inflation were expected to persist at least in the near term. Management cited selective pricing, productivity and overhead controls as mitigations. Project Ovid, a multi-year supply-chain and go-to-market initiative, is intended to improve service and operational efficiency.
- Management cited continued uncertainty around COVID-19-related disruption, consumer demand, inflation, supply chains, and the indirect effects of the Russia-Ukraine conflict. Foreign exchange also reduced first-half sales by $121.
- Tax exposure: the company has not recognized the potential effect of disputed U.S. Treasury regulations on certain 2018 tax benefits. If its position is not sustained, it estimates income tax expense of approximately $180–$220, plus possible interest and penalties.
- Contingencies include ongoing SEC inquiries relating to sales practices and accounting matters and disclosure of the tax regulations; securities and derivative litigation; and environmental matters. The company estimated environmental remediation costs of $36. For the Lower Passaic River matter, it said a proposed EPA settlement allocation was not expected to be material if finalized, but could not estimate losses from related litigation and natural-resource-damage assessment.
- The company expects a noncash pension settlement charge of approximately £50–£70 million when it completes a U.K. pension-plan buy-out, anticipated by year-end 2022 or early 2023.
Important facts for investors to verify
- Whether pricing and productivity can offset persistent inflation without further weakening demand or margins.
- Whether inventory converts to sales and operating cash flow improves as seasonal patterns and Project Ovid take effect.
- Debt maturities, refinancing needs and liquidity, particularly given the short-term debt classification and substantial indebtedness.
- The CH&S sale’s effect on ongoing revenue and earnings, and the degree to which reported earnings depend on divestiture gains and tax items.
- Developments in the disputed tax position, SEC inquiries, litigation and environmental matters, including potential losses not currently estimable.