Spectrum Brands Holdings, Inc. — Q1 FY2019 Form 10-Q Summary
Business context and reporting period
Combined unaudited filing for Spectrum Brands Holdings, Inc. and SB/RH Holdings, LLC covering the three months ended December 30, 2018, compared with December 31, 2017. Spectrum is a global branded consumer products company operating in Hardware & Home Improvement, Home and Personal Care, Global Pet Supplies, and Home and Garden across approximately 160 countries.
Global Batteries and Lighting (GBL) and Global Auto Care (GAC) were classified as discontinued operations and held for sale. GBL was sold to Energizer on January 2, 2019, and GAC was sold on January 28, 2019. The Company reversed its prior plan to sell Home and Personal Care (HPC), which returned to continuing operations.
Key financial metrics
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Net sales | $874.6 million | $919.6 million | Down 4.9% |
| Organic net sales | $888.2 million | $919.6 million | Down 3.4% |
| Gross profit | $305.3 million | $318.4 million | Down 4.1% |
| Gross margin | 34.9% | 34.6% | Up 30 bps |
| Operating income | $24.8 million | $51.3 million | Down 51.7% |
| Continuing-operations net loss | $29.5 million | $97.2 million income | Declined $126.7 million |
| Net loss attributable to controlling interest | $112.5 million | $507.4 million income | Down $619.9 million |
| Diluted EPS | $(2.11) | $15.55 | Declined $17.66 |
| Adjusted EBITDA | $115.3 million | $132.7 million | Down 13.1% |
Segment sales were HHI $305.1 million, HPC $317.2 million, PET $204.7 million, and H&G $47.6 million. PET was the only segment with reported sales growth. Segment Adjusted EBITDA margins were 18.2% for HHI, 11.0% for HPC, 14.2% for PET, and 6.5% for H&G.
Cash flow from continuing operations was negative $284.0 million for SBH, compared with negative $181.5 million in the prior-year quarter. Total SBH operating cash flow, including discontinued operations, was negative $311.9 million. Capital expenditures were $13.5 million, compared with $20.3 million previously. Cash, cash equivalents, and restricted cash ended at $261.3 million, including $252.4 million of cash and equivalents.
At December 30, 2018, SBH reported total debt before discounts and issuance costs of $4.800 billion, including $2.138 billion classified as current. Revolver borrowings were $114.0 million, with reported borrowing availability of $663.6 million. SB/RH reported $4.353 billion of debt before discounts and issuance costs, including $1.768 billion current. The Company stated that it was in compliance with applicable debt covenants.
Material changes versus the prior comparable period
- Sales declined primarily from lower HHI and HPC sales, unfavorable foreign currency translation, and weaker H&G sales; PET sales increased modestly.
- Operating expenses increased $13.4 million at SBH, principally because HPC returned to held-for-use accounting and incurred $29.0 million of incremental depreciation and amortization, plus $4.7 million of HPC divestiture-related costs.
- Interest expense declined $18.4 million at SBH to $57.0 million, reflecting prior debt repayment and refinancing activity.
- Adjusted EBITDA declined $17.4 million, with lower results in all segments; HHI and PET were affected by lower margins despite HHI sales declines and PET sales growth.
- The prior-year quarter benefited from a $120.5 million income tax benefit and substantial discontinued-operation income related to the former HRG insurance operations. The current quarter included an $82.8 million after-tax loss from discontinued operations, including a $107.2 million pre-tax write-down of GAC assets held for sale.
- HPC was reclassified from held for sale to held for use, increasing comparability-related depreciation and amortization and changing segment presentation.
- The Company adopted ASC 606 using the modified retrospective method, recording a $0.7 million net-of-tax reduction to opening retained earnings. Management does not expect a material ongoing effect on revenue or net income.
Guidance, outlook, commentary, risks, and unusual items
Management stated that existing cash balances and expected operating cash flows should be sufficient to meet operating requirements for at least the next 12 months, while noting that future liquidity depends on operating performance and general economic, competitive, regulatory, and financial conditions. The Company expects capital investments to remain similar to historical levels but did not provide specific earnings or revenue guidance.
Subsequent to quarter-end, the divestitures generated net cash proceeds of $2.872 billion. The Company repaid its term loans in full on January 4, 2019, and redeemed the $890.0 million 7.75% senior notes on January 30, 2019. It recognized subsequent debt-extinguishment charges of $9.0 million and $41.2 million, respectively. Remaining proceeds may be used for additional debt reduction, share repurchases, operations, or acquisitions.
Key risks include substantial indebtedness, variable interest rates, foreign exchange and commodity-price exposure, customer concentration, retail demand and promotional pressure, seasonal sales, product liability and recalls, litigation, regulatory and environmental matters, cybersecurity, execution of restructuring and divestitures, integration and transition-service obligations, and the transition to a new chief executive officer. Three customers represented 30.1% of quarterly net sales and 33.1% of trade receivables at quarter-end.
Project Ignite and other restructuring programs had incurred cumulative costs of $98.5 million through quarter-end, with $2.1 million of additional expected costs. The Company also reported a material weakness in internal control over financial reporting, resulting in ineffective disclosure controls and procedures at quarter-end; remediation activities were undertaken during the quarter.
Important facts for investors to verify
- Post-quarter-end cash proceeds from the GBL and GAC transactions, final purchase-price adjustments, and the resulting debt and leverage balances.
- The Company’s liquidity after repayment of the term loans and 7.75% notes, including remaining cash, revolver availability, and covenant headroom.
- Whether HPC’s return to continuing operations produces sustainable operating improvement after the one-time $29.0 million depreciation and amortization catch-up.
- Drivers of continued sales and Adjusted EBITDA weakness in HHI, HPC, PET, and H&G, including retailer distribution, online-channel performance, product mix, and input costs.
- Resolution and potential cost of the disclosed material weakness in internal controls.
- Final valuation and accounting for the 5.3 million shares of Energizer stock received in the GAC transaction and related restrictions on that investment.
- Exposure to customer concentration, product liability, environmental remediation, warranty claims, pending litigation, and divestiture-related indemnities.