Newell Brands Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Newell Brands is a global consumer-goods company operating across Commercial Solutions, Home Appliances, Home Solutions, Learning and Development, and Outdoor and Recreation. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $2.787B | $2.699B | $7.784B | $6.696B |
| Gross profit / margin | $848M / 30.4% | $914M / 33.9% | $2.461B / 31.6% | $2.195B / 32.8% |
| Operating income (loss) / margin | $281M / 10.1% | $363M / 13.4% | $778M / 10.0% | ($882M) / (13.2%) |
| Net income (loss) | $190M | $304M | $476M | ($897M) |
| Diluted EPS | $0.44 | $0.71 | $1.11 | ($2.12) |
| Operating cash flow | Not provided separately | Not provided separately | $490M | $820M |
- Q3: Sales increased 3.3%, but gross profit fell 7.2% and operating income declined 22.6%. Higher input costs and operating expenses outweighed sales growth.
- Nine months: Sales rose 16.2%; operating income improved from a loss to profit, largely because the 2020 comparison included $1.471B of goodwill and intangible-asset impairment charges. Net income also benefited from the absence of those prior-year charges.
- Cash flow and working capital: Nine-month operating cash flow fell $330M year over year to $490M, with inventory growth a major use of cash. Inventory was $2.098B at September 30, up from $1.638B at December 31, 2020. Capital expenditures were $181M and cash dividends were $296M.
- Liquidity and debt: Cash and equivalents were $494M, down from $981M at year-end 2020; total debt was $5.137B, including $4.884B long-term debt. No borrowings were outstanding under the $1.25B revolver or $600M receivables securitization facility; reported net availability under the revolver was approximately $1.23B. The company reported compliance with debt covenants.
Material changes and segment results
- Q3 sales growth was led by Learning and Development (+19.4%) and Home Appliances (+3.0%); Commercial Solutions declined 9.2%, Home Solutions declined 4.0%, and Outdoor and Recreation rose 2.1%.
- Learning and Development had the strongest Q3 results: sales of $869M and operating income of $195M, up from $728M and $158M, respectively. Commercial Solutions operating income fell to $18M from $84M; Home Solutions fell to $75M from $123M. Home Appliances operating income was $19M in both periods; Outdoor and Recreation declined to $27M from $39M.
- Management attributed pressure on gross margin to inflation in commodities, sourced goods, transportation and labor, with a negative high-single-digit-percentage impact on 2021 product costs. Pricing and productivity actions partly offset costs, but pricing recovery lagged inflation.
- Effective January 2021, cookware product lines moved from Home Appliances to Home Solutions, and the former Appliances and Cookware segment was renamed Home Appliances. Prior-period segment data was recast.
Outlook, risks and unusual items
- The filing provides no specific full-year revenue, earnings or EPS guidance. Management expected supply, labor and logistics constraints, inflation, and uncertainty in post-pandemic consumer demand to continue through the remainder of 2021. It described seasonality and noted that results through September may not indicate full-year performance.
- Project Ovid, announced in Q3, is a multi-year U.S. supply-chain and go-to-market transformation intended to integrate 23 business-unit supply chains, improve customer service and inventory workflows, and increase operational efficiency.
- COVID-19 remains a source of uncertainty, including potential variants, restrictions, workforce availability, supply continuity and shifts in demand. Management cautioned that actual results could differ from estimates and that further impairment charges may be possible.
- Substantial indebtedness and below-investment-grade ratings (S&P BB+, Moody’s Ba1, Fitch BB) may constrain funding or raise borrowing costs. The company redeemed its 3.75% notes due 2021 in September and announced after quarter-end that it would redeem $250M of 4.00% notes due 2022 on November 22, 2021, subject to a make-whole premium and accrued interest.
- Tax contingency: The company is challenging U.S. Treasury regulations affecting a prior tax position. If its position is not sustained, it estimates a potential tax expense of approximately $180M–$220M, plus possible interest and penalties. The company also received an SEC subpoena concerning disclosure of this potential impact.
- Investigations and litigation: The company is cooperating with an SEC investigation concerning sales practices and accounting matters dating from 2016 and cannot predict its outcome. A securities class action and derivative litigation remain pending; the company cannot reasonably estimate possible losses in the securities case.
- Environmental exposure: Recorded environmental remediation costs were $38M. The company’s share of Lower Passaic River remediation costs is not known; an October 2021 EPA interim decision selected a remedy estimated at $441M for a river section. The company stated the matter could ultimately have a material impact, though it did not consider that reasonably likely based on currently known facts.
- Q3 and nine-month 2021 tax results included discrete tax benefits, including $37M related to Luxembourg operations; nine-month results also included $13M related to U.K. operations and $9M from expiration of a French statute of limitations.
Most important facts for investors to verify
- Whether pricing and productivity initiatives can offset persistent input-cost inflation and restore gross margins.
- Whether supply-chain constraints ease and whether elevated inventory converts into sales and operating cash flow.
- Debt maturities, borrowing costs, covenant headroom, and the effect of the announced 2022 note redemption on liquidity.
- The status and potential financial consequences of the SEC matters, tax-regulation dispute, securities litigation and Lower Passaic River remediation.
- Execution costs, milestones and realized savings from Project Ovid, and any subsequent formal earnings guidance.