Newell Brands Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Newell sells consumer and commercial products across five reportable segments. Results reflect significant, uneven effects from COVID-19, including demand shifts, temporary facility and store closures, and supply and logistics disruption.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $2.699B | $2.569B | $6.696B | $7.091B |
| Gross profit | $914M | $847M | $2.195B | $2.367B |
| Gross margin | 33.9% | 33.0% | 32.8% | 33.4% |
| Operating income (loss) | $363M | $(857)M | $(882)M | $(614)M |
| Net income (loss) | $304M | $(626)M | $(897)M | $(687)M |
| Diluted EPS | $0.71 | $(1.48) | $(2.12) | $(1.62) |
| Operating cash flow | Not separately provided for the quarter | $820M | $424M |
- Q3 sales rose 5.1% and gross margin improved 0.9 percentage points. Higher volume and productivity supported gross profit; mix, input-cost inflation, tariffs, and pandemic-related expenses partly offset gains.
- Q3 operating results improved sharply versus 2019, principally because the prior-year quarter included $1.071B of impairment charges and $40M of catch-up depreciation and amortization. Q3 2020 included just $2M of impairment.
- Nine-month sales fell 5.6%, gross margin declined 0.6 percentage points, and operating loss widened. The 2020 period included $1.471B of goodwill and intangible impairment charges, versus $1.145B in 2019.
- Nine-month operating cash flow increased $396M year over year. Management attributed the improvement primarily to working-capital actions, including customer collections, inventory management, and extended vendor payment terms. Investing cash flow was $(138)M, including $158M of capital expenditures; financing cash flow was $(174)M.
Balance sheet, debt, and liquidity
- At September 30, cash and cash equivalents were $858M, total debt was $5.891B, and long-term debt was $5.794B. Total debt was $5.723B at year-end 2019. Current assets were $4.704B and current liabilities $3.108B.
- The company reported no borrowings under its $1.25B revolving credit facility or $600M accounts-receivable securitization facility; net revolver availability was approximately $1.2B. Securitization availability varies with eligible receivables.
- Cash included approximately $499M held by non-U.S. subsidiaries. The company said cash, operating cash flow, and borrowing capacity provided adequate liquidity, while warning that prolonged or worsening COVID-19 conditions could affect liquidity and covenant compliance.
- Credit downgrades eliminated access to commercial paper on terms the company considered acceptable. Moody’s and S&P downgrades raised rates on certain notes by a total of 50 basis points; management estimated added interest expense of $17M in 2020 and $23M annually thereafter. The company reported compliance with debt covenants at quarter-end.
- Nine-month cash dividends were $294M; the quarterly dividend was $0.23 per share.
Business trends and material changes
- Q3 sales increased in Appliances and Cookware (+11%), Commercial Solutions (+13%), Home Solutions (+19%), and Outdoor and Recreation (+8%). Learning and Development sales declined 12%.
- Learning and Development’s nine-month sales fell 16%, with delayed school and office reopening weighing on writing products. Outdoor and Recreation’s nine-month sales fell 9%, despite improved outdoor-product trends in Q3.
- Most manufacturing and distribution facilities had reopened and were operating at or near capacity by quarter-end. Management nevertheless cited intermittent supply and labor shortages, capacity constraints, and transportation challenges.
- The company divested a Learning and Development foam-board product line in August 2020 and recorded an $8M pretax loss. Segment reporting was realigned during 2020; prior periods were recast.
Outlook, risks, and unusual items
- Management reported positive sequential momentum and Q3 year-over-year sales growth, and remained optimistic about improvement in second-half 2020 results. It gave no specific numerical guidance and said the pandemic’s duration and severity made its financial effects difficult to predict.
- COVID-19 contributed to approximately $1.5B of non-cash impairment charges in the first quarter, including $212M of goodwill and $1.259B of indefinite-lived intangible impairments. Further impairments remain possible; management noted some reporting units and trade names have fair values at or near carrying values.
- A 2020 restructuring program was expected to incur total charges of approximately $20M–$25M through 2020 and into 2021; cash payments were expected within one year of charges incurred.
- Tariffs were estimated to have an approximately $80M gross impact in 2020; the gross impact was $25M in Q3 and $60M for the first nine months. Management said it had mitigated much of the exposure but could not assure further mitigation.
- The company has not recognized a potential $180M–$220M tax expense related to its position challenging certain Treasury regulations; it may also face interest and penalties if its position is not sustained. Q3 tax results included discrete benefits of $87M from tax planning and $53M from a valuation-allowance reduction.
- Disclosure controls were deemed ineffective because a material weakness in income-tax controls remained. The company said it had remediated a separate weakness relating to divestiture accounting but had not yet completed testing to remediate the tax weakness.
- The SEC issued a subpoena concerning sales practices and certain accounting matters. The company said it could not predict the investigation’s timing or outcome. Other disclosed matters include securities litigation, environmental proceedings, and a $43M environmental remediation reserve.
- After quarter-end, the company agreed to transfer approximately $155M–$160M of pension obligations to an insurer and expected a fourth-quarter pretax settlement loss of approximately $45M–$50M.
Key facts for investors to verify
- Whether Q3 demand growth and margin improvement persist, particularly across the four growing segments, and whether Learning and Development stabilizes.
- How much reported operating cash flow depends on working-capital timing and receivables factoring; factored receivables were approximately $350M at quarter-end, up about $150M from December 2019.
- Debt maturity, refinancing costs, rating and covenant headroom, and continued availability of revolver and receivables-facility liquidity.
- Potential additional impairment charges, including the sensitivity of goodwill and trade-name valuations to revised forecasts.
- Outcomes of the tax-regulation dispute, SEC investigation, legal and environmental matters, and completion of remediation of the material weakness in tax controls.
- Actual restructuring charges and pension settlement loss compared with management’s estimates.