Spectrum Brands Holdings, Inc. — Q2 FY2022 Form 10-Q Summary
Reporting period: Quarterly and year-to-date periods ended April 3, 2022, compared with April 4, 2021. The filing covers Spectrum Brands Holdings, Inc. and SB/RH Holdings, LLC. The company operates through Home and Personal Care (HPC), Global Pet Care (GPC), and Home and Garden (H&G).
Financial performance and liquidity
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Net sales | $807.8 million | $760.3 million | $1,565.0 million | $1,496.5 million |
| Gross profit | $255.6 million | $261.0 million | $474.9 million | $513.8 million |
| Gross margin | 31.6% | 34.3% | 30.3% | 34.3% |
| Operating income (loss) | $(8.1) million | $45.3 million | $(32.0) million | $71.2 million |
| Net income from continuing operations | $(25.1) million | $(4.6) million | $(55.3) million | $11.1 million |
| Net income attributable to controlling interest | $15.9 million | $36.6 million | $24.1 million | $108.7 million |
| Diluted EPS | $0.39 | $0.86 | $0.59 | $2.53 |
| Adjusted EBITDA | $79.0 million | $107.5 million | $128.3 million | $213.3 million |
| Adjusted EBITDA margin | 9.8% | 14.1% | 8.2% | 14.3% |
Reported net income included $41.1 million of after-tax income from discontinued operations in the quarter and $79.9 million year to date, primarily related to the HHI business. Continuing operations remained loss-making.
- Segment sales: Q2 HPC $316.1 million, GPC $295.1 million, and H&G $196.6 million. Year-to-date sales were $695.8 million, $597.3 million, and $271.9 million, respectively.
- Segment profitability: Q2 adjusted EBITDA was $10.6 million for HPC, $40.6 million for GPC, and $37.7 million for H&G. Year-to-date adjusted EBITDA was $38.0 million, $79.3 million, and $30.4 million, respectively.
- Cash flow: Continuing operations used $212.2 million of operating cash flow and $338.6 million of investing cash flow during the first six months. Financing activities provided $568.9 million. Total cash, cash equivalents, and restricted cash ended at $195.8 million, compared with $292.2 million a year earlier.
- Working capital: Inventories increased to $800.6 million from $562.8 million at September 30, 2021, while trade receivables increased to $349.5 million from $248.4 million.
- Debt: Total debt before discounts and issuance costs was approximately $3.29 billion at April 3, 2022, including $775.0 million drawn under the revolver. Net long-term debt was $3.236 billion. Variable-rate debt totaled $1.171 billion, or 35.6% of total debt; management estimated that a 1 percentage-point rate increase would raise annual interest expense by approximately $10 million.
- Liquidity: Revolver availability was $308.4 million after outstanding letters of credit. Management stated that existing cash, expected operating cash flow, credit availability, and capital-market access should cover operating and capital expenditure requirements for at least the next 12 months. The company reported compliance with applicable debt covenants.
- Capital returns: The company paid $34.4 million of dividends during the first six months, or $0.42 per share per quarter, and repurchased $134.0 million of stock at an average price of $97.34 per share.
Material changes versus the prior comparable period
- Sales increased 6.2% in Q2 and 4.6% year to date, but gross margin declined 270 basis points in Q2 and 400 basis points year to date.
- Operating expenses increased 22.3% in Q2 and 14.5% year to date, driven by higher selling, distribution, transportation, labor, restructuring, and transaction-related costs.
- Adjusted EBITDA declined 26.0% in Q2 and 39.9% year to date. Margin pressure reflected freight and input-cost inflation, supply-chain disruption, labor inefficiencies, distribution-transition costs, and continued investment in marketing and product development.
- HPC sales benefited from $35.8 million of Tristar acquisition sales in Q2, but organic sales declined 2.1%; HPC adjusted EBITDA margin fell to 3.4% from 8.5%.
- GPC organic sales increased 2.4% in Q2 and 4.8% year to date, but adjusted EBITDA margin declined to 13.8% from 18.9% in Q2, partly because of distribution-transition costs and supply constraints.
- H&G Q2 organic sales increased 8.6% and adjusted EBITDA increased 8.3%, although the year-to-date adjusted EBITDA margin declined to 11.2% from 18.0%.
- Interest expense decreased substantially from the prior year because the prior-year period included refinancing premiums and debt-issuance write-offs.
Guidance, outlook, unusual items, and risks
- On February 18, 2022, the company acquired the Tristar Business for a stated purchase price of $325.0 million, with potential earn-outs of up to $125.0 million. The preliminary purchase price allocation included $103.7 million of goodwill and $95.0 million of intangible assets.
- The company agreed to sell HHI to ASSA ABLOY for cash proceeds of $4.3 billion, subject to customary adjustments and closing conditions. HHI remains classified as held for sale and discontinued operations. The filing contains differing timing language: one disclosure stated an expectation of closing before September 2022, while the MD&A stated that closing was not expected before September 2022. Regulatory review remains ongoing, and completion is not assured. If the transaction is not completed by December 8, 2022, ASSA may owe a $350 million termination fee if specified conditions are met.
- Restructuring and related charges were $16.4 million in Q2 and $33.8 million year to date, compared with $4.3 million and $13.3 million, respectively, in the prior-year periods. The company expected approximately $0.9 million of additional Global Productivity Improvement Program costs and $5.3 million of additional GPC distribution-transition costs.
- Management expects continued inflation in manufacturing, labor, energy, commodities, and logistics, as well as ongoing supply-chain and transportation constraints. Pricing actions may not fully offset these pressures.
- COVID-19 effects, the Russia-Ukraine conflict, sanctions, labor shortages, third-party logistics execution, retailer concentration, commodity prices, interest rates, foreign exchange, and customer demand remain material risks.
- Two large retail customers each represented more than 10% of consolidated sales and together represented 33.3% of Q2 sales and 33.1% of year-to-date sales.
- The company reported no material impairment of goodwill or intangible assets and no material adverse effect from pending litigation. Environmental remediation liabilities were $10.5 million, and product liability reserves were $3.3 million at April 3, 2022.
Most important facts for investors to verify
- Whether and when the HHI divestiture closes, including regulatory approvals, purchase-price adjustments, use of proceeds, leverage reduction, and any termination-fee outcome.
- Whether pricing actions can offset inflation, freight, labor, commodity, and supply-chain costs sufficiently to restore gross and adjusted EBITDA margins.
- Progress integrating Tristar, achievement of expected synergies, and potential earn-out obligations.
- Inventory levels, receivables growth, working-capital cash usage, and the company’s ability to convert earnings into operating cash flow.
- Revolver utilization, variable-rate exposure, covenant compliance, refinancing requirements, and the effect of higher interest rates.
- GPC distribution-center transition costs and execution, including customer penalties or lost sales.
- Reliance on major retailers and the Black & Decker license, which runs through June 30, 2025, including its royalty and minimum-payment requirements.
- The filing’s inconsistent statements regarding the expected timing of the HHI closing.