Newell Brands Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Unaudited results; amounts below are in millions of dollars except per-share data. Newell Brands is a global consumer-products company reporting five segments: Live, Learn, Work, Play and Other.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Net sales | $3,017.4 | $3,266.3 | Down 7.6% |
| Gross profit / margin | $1,005.4 / 33.3% | $1,117.2 / 34.2% | Margin down 0.9 percentage points |
| Operating income / margin | $117.1 / 3.9% | $154.0 / 4.7% | Down 24.0%; margin down 0.8 points |
| Net income | $53.3 | $638.5 | Prior-year result included a $784 million pretax gain on the Tools business sale |
| Diluted EPS | $0.11 | $1.31 | Prior-year comparison also reflects the sale gain and different tax items |
| Operating cash flow | $(401.7) | $(263.6) | Cash use increased by $138.1 |
| Capital expenditures | $95.1 | $100.7 | Lower year over year |
| Cash and cash equivalents | $459.0 | $485.7 at Dec. 31, 2017 | Quarter-end balance; about $351 million held by non-U.S. subsidiaries |
| Total debt | $11,156.1 | $10,552.4 at Dec. 31, 2017 | Includes $700.5 million of commercial paper |
Interest expense was $116.1 million, versus $122.2 million a year earlier. The reported income-tax benefit was $51.3 million, compared with $151.6 million of tax expense in Q1 2017. The 2018 reported effective rate was negative 2,565%, driven principally by recognition of previously unrealizable French deferred tax benefits, low pretax income and the lower U.S. corporate tax rate.
Material changes and business drivers
- Management attributed the sales decline primarily to 2017 divestitures, which reduced sales by approximately 6%, and an approximately 3% decline in remaining businesses, partly offset by favorable currency and acquisitions. Management cited weakness in Writing and Baby and the adoption of the new revenue standard.
- Gross margin declined amid unfavorable product mix, particularly lower Writing sales, and cost-of-goods and freight inflation; synergies, cost savings and positive pricing partly offset the pressure.
- Sales fell 13.0% in Learn and 50.2% in Other, the latter mainly reflecting divestitures. Live sales were roughly flat; Work grew 4.4%; Play declined 1.8%. Live operating income fell to $8.6 million from $58.3 million, with customer bankruptcy-related bad debt, freight and sourced-product inflation among the cited factors.
- A major Baby customer filed for liquidation; Newell wrote off $24.0 million, primarily related to that customer. Management also cited the bankruptcy’s effect on Live results.
- Q1 2017 comparisons included the $784 million pretax Tools-sale gain and $27.8 million debt-extinguishment loss. Q1 2018 had no reported impairment charge, compared with $18.4 million in Q1 2017.
- New revenue guidance (Topic 606) was adopted January 1, 2018 using the modified retrospective method. It did not materially affect opening retained earnings; the company said it did not expect a material ongoing net-income impact. Q1 2018 sales were $46.2 million lower under the new presentation than they would have been excluding the adoption adjustments.
Liquidity, debt and capital resources
- Current assets were $8,471.3 million and current liabilities $4,917.9 million at March 31. Assets held for sale were $2,654.1 million and liabilities held for sale $209.3 million.
- Net cash used in investing was $105.3 million; financing provided $474.7 million, including a $602.8 million net increase in short-term debt. Cash declined $26.7 million during the quarter.
- The $1.25 billion revolving facility had no borrowings outstanding and approximately $516 million available; approximately $702 million of commercial paper was outstanding. The $950 million receivables facility had approximately $465 million of net availability. The company reported compliance with debt covenants.
- Management said cash, future operating cash flow, capital-market access and facility availability should be adequate for expected needs. It noted that operating cash flow is typically concentrated in the third and fourth quarters and that Q1 is seasonally weaker.
- The quarterly dividend was $0.23 per share, up from $0.19. No shares were repurchased under the repurchase program during the quarter; approximately $1.1 billion remained authorized. Shares acquired during the quarter were for employee tax withholding.
Outlook, strategy, risks and unusual items
- The 2018 Accelerated Transformation Plan targets a portfolio focused on seven core consumer divisions, operational improvement, capital returns and balance-sheet deleveraging. The company said it expected to complete the portfolio transformation by the end of 2019. It was exploring sales of industrial, commercial and non-core consumer businesses; Team Sports/Rawlings, Waddington and Goody were classified as held for sale at quarter-end.
- On May 4, 2018, after quarter-end, the company announced an agreement to sell Waddington for approximately $2.3 billion, subject to adjustments and approvals. It said proceeds were expected to support deleveraging and share repurchases. The filing’s stated expected completion timing (“third quarter of 2017”) conflicts with the May 2018 announcement; the correct timing is unclear from the filing text.
- Newell expected approximately $1.0 billion of Jarden integration and other costs through 2021; cumulative Jarden Integration restructuring costs were approximately $168 million at March 31, 2018. The broader cost-savings commitment cited was approximately $1.3 billion from Project Renewal and Jarden synergies.
- Environmental remediation estimates totaled $46.2 million. For the Lower Passaic River matter, EPA’s selected remedy estimate was $1.4 billion, but allocation among potentially responsible parties remained unresolved. The company said its liability was uncertain and that an adverse outcome could be material.
- Jarden appraisal claims remained outstanding for approximately 2.9 million former shares; the company accrued approximately $171 million of unpaid consideration. Other risks highlighted include substantial indebtedness, interest and currency movements, commodity and freight inflation, retailer bargaining power, divestiture execution, product liability, tax uncertainty and potential impairments.
- Management reported disclosure controls as effective and no material change in internal control over financial reporting during the quarter. The filing reported no material change in risk factors from the 2017 Form 10-K.
Investor verification points
- Reconcile reported sales and margins with the effects of divestitures, the new revenue-recognition presentation, currency, acquisitions and underlying volume/mix.
- Track the Baby customer exposure and whether further losses or customer-related impacts emerge.
- Verify the Waddington sale’s final price, closing date, regulatory status and use of proceeds; the filing’s stated completion year appears inconsistent.
- Monitor debt, commercial-paper use, facility availability, refinancing needs and progress toward deleveraging.
- Assess execution and costs of the transformation and Jarden integration, and whether expected savings and portfolio sales are achieved.
- Follow the Passaic River allocation process and Jarden appraisal litigation for changes to potential liabilities.