Business context and reporting period
Newell Brands Inc. is a global consumer-products company with five reportable segments: Home Appliances, Commercial Solutions, Home Solutions, Learning and Development, and Outdoor and Recreation. This unaudited Form 10-Q covers the three months ended March 31, 2021, compared with the same period in 2020. Results reflect pandemic-related demand shifts and the prior-year impairment charges; first-quarter performance is also typically seasonally lower and may not indicate full-year results.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $2.288 billion | $1.886 billion |
| Gross profit / margin | $731 million / 31.9% | $617 million / 32.7% |
| Operating income (loss) / margin | $192 million / 8.4% | $(1.408) billion / (74.7)% |
| Net income (loss) | $89 million | $(1.279) billion |
| Diluted EPS | $0.21 | $(3.02) |
| Operating cash flow | $(25) million | $23 million |
| Capital expenditures | $54 million | $58 million |
Net sales rose 21.3%, with growth in all segments and major geographic regions; foreign exchange contributed $32 million, or 2%. Gross margin declined 0.8 percentage points, as resin, freight, logistics and labor inflation outweighed some productivity and pricing benefits. Operating income improved substantially, principally because Q1 2020 included $1.469 billion of non-cash goodwill and intangible-asset impairment charges.
At March 31, 2021, cash and cash equivalents were $682 million; total debt was $5.492 billion, including $357 million classified as short-term/current and $5.135 billion long-term. The company had no borrowings under its $1.25 billion revolver or $600 million receivables securitization facility; revolver availability was approximately $1.23 billion. It paid $100 million in cash dividends. Cash and restricted cash declined by $332 million during the quarter. Management attributes operating cash use in part to inventory building and annual incentive payments, partly offset by vendor payment terms and receivables factoring.
Material changes and segment results
Sales growth was strongest in Home Appliances (+37.9%) and Home Solutions (+33.7%); Commercial Solutions rose 14.0%, Learning and Development 16.9%, and Outdoor and Recreation 9.4%. Each segment reported higher operating income than a year earlier, with the comparison heavily affected by prior-year impairment charges. Segment sales benefited from demand for stay-at-home, food-preservation, baby-care, cleaning, writing and home-fragrance products, among others.
Management reported persistent supply and labor shortages, capacity constraints, transportation and logistics challenges, and higher-than-expected input and freight inflation. The company revised segment reporting: cookware product lines moved to Home Solutions, the former Appliances and Cookware segment was renamed Home Appliances, and prior-period segment information was recast. Segment operating income now includes restructuring charges.
Outlook, risks, contingencies and unusual items
No numerical full-year guidance is provided in the supplied filing text. Management says the pandemic’s effects remain difficult to predict and depend on its duration and severity, new variants, economic conditions and vaccine deployment. It expects disruptions and inflationary pressures to persist until public-health and economic conditions improve. Management also notes that first-quarter sales and cash flow are normally seasonally lower and that much of the company’s operating cash flow is typically generated in the third and fourth quarters.
- The 2020 restructuring program, initiated largely in response to COVID-19, generated $5 million of Q1 2021 charges and $24 million cumulatively; estimated total charges for launched projects are approximately $30 million to $35 million, with cash payments expected within one year of charges incurred.
- Debt ratings were previously downgraded by S&P, Moody’s and Fitch. The company says it can no longer access commercial paper on terms it considers acceptable; approximately $4.2 billion of senior notes carry a total 50-basis-point interest-rate adjustment related to the S&P and Moody’s downgrades. The company reported compliance with debt covenants at quarter-end.
- A continuing material weakness in income-tax controls means disclosure controls and procedures were not effective as of March 31, 2021. Remediation steps are underway but are not considered complete until controls operate effectively for a sufficient period and are tested.
- The company is challenging the validity of certain U.S. tax regulations affecting a 2018 tax benefit. If its position is not sustained, it estimates an income-tax expense of approximately $180 million to $220 million, potentially plus interest and penalties.
- The company disclosed an ongoing SEC investigation relating primarily to sales practices and accounting matters beginning in 2016; it cannot predict the timing or outcome. Other securities, commercial and environmental proceedings remain pending. Environmental remediation reserves totaled $41 million; the company says the ultimate liability in the Lower Passaic River matter is uncertain and could be material under adverse determinations.
- Management identifies potential further impairment charges and changes to reserves or valuations if pandemic-related assumptions or other estimates prove inaccurate.
Important facts for investors to verify
- Whether sales growth and demand remain durable as pandemic-related comparisons and consumer behavior normalize.
- Whether pricing and productivity can offset resin, labor, freight and other cost inflation, and whether gross margins recover.
- How inventory investment, receivables factoring and seasonal cash generation affect operating cash flow and liquidity through the rest of 2021.
- Debt reduction, refinancing costs, rating developments, covenant headroom and continued access to committed borrowing facilities.
- Progress and testing of the income-tax control remediation plan, and the outcome and potential financial impact of the disputed tax regulations.
- Developments in the SEC investigation, litigation and environmental matters, including any changes to recorded reserves or disclosed exposure.