Newell Brands Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Newell is a global consumer products company, reporting in Live, Learn, Work, Play and Other segments. Comparability is affected by the Jarden acquisition, completed April 15, 2016, and subsequent divestitures; prior segment results were reclassified to the 2017 structure.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $4,054.6m | $3,858.6m | $7,320.9m | $5,173.5m |
| Gross margin | 36.4% | 28.4% | 35.4% | 31.0% |
| Operating income | $423.1m | $137.7m | $579.1m | $263.1m |
| Operating margin | 10.4% | 3.6% | 7.9% | 5.1% |
| Net income | $223.0m | $135.2m | $861.5m | $175.7m |
| Diluted EPS | $0.46 | $0.30 | $1.78 | $0.49 |
- Q2 sales rose 5.1%; management attributed growth to Jarden and underlying business growth, partly offset by divestitures. First-half sales rose 41.5%, primarily reflecting Jarden; underlying growth was approximately 2%, while divestitures reduced sales.
- Margin gains chiefly reflect prior-year Jarden inventory step-up charges and synergies/productivity, partly offset by acquisition-related mix, higher brand and e-commerce investment, and increased intangible amortization.
- First-half net income includes a $771m pretax gain on the sale of the Tools business, recorded in other income. Other income, net, was $750.7m for the half; therefore reported earnings growth is not solely indicative of recurring operating performance. The first half also included $84.6m of impairment charges and $43.8m of restructuring costs.
- Net interest expense was $114.6m in Q2 versus $126.7m; for the first half it was $236.8m versus $156.1m, reflecting higher average debt. First-half effective tax rate was 18.8%, versus 20.6%.
- Operating cash flow was negative $241.0m for the first half, versus positive $335.9m. Management cited seasonal working-capital needs, including a $498.8m inventory cash use, higher cash interest, and integration costs. The company notes that most operating cash flow is typically generated in the third and fourth quarters.
- Cash was $780.2m at June 30, including approximately $700m held by non-U.S. subsidiaries. Total debt was $11.394bn, down from $11.893bn at year-end; net debt was approximately $10.614bn. Current assets were $7.131bn and current liabilities $4.791bn. Revolver availability was approximately $1.2bn and receivables-facility availability approximately $217m; the company reported compliance with debt covenants.
- Six-month diluted weighted-average shares were 485.8m versus 360.1m, largely reflecting the Jarden transaction. Dividends were $0.23 per share in Q2, compared with $0.19.
Material changes, outlook and risks
- Q2 sales increased across Live, Learn, Work and Play; Other declined substantially following divestitures. Management cited strength in Baby Gear, Writing, Safety and Security, Waddington, Coleman and Team Sports, alongside softness in Fresh Preserving and Cookware, retail inventory reductions in some categories, fishing declines, and a key retail customer bankruptcy.
- Acquisitions included Smith Mountain for approximately $100m and Sistema Plastics for approximately $472m. The Tools business sold for $1.95bn in March, generating the $771m pretax gain. Winter Sports was sold July 14 for approximately $240m; a $59.1m impairment was recorded in Q2 based on expected proceeds. Other divestiture-related impairments were $14.9m.
- Management’s New Growth Game Plan targets approximately $1.3bn in cost savings from 2016–2021, including approximately $300m from Project Renewal and approximately $1bn from Jarden integration synergies. Project Renewal was expected to be completed by the end of 2017; integration and other costs could reach approximately $1bn through 2021. No specific earnings or revenue guidance is provided in the filing.
- Seasonality and working-capital timing make Q2 results not necessarily indicative of full-year results. Key stated risks include integration and synergy execution, substantial indebtedness and interest-rate exposure, retail customer concentration and bargaining power, competition, input costs, foreign exchange, product liability/recalls, and environmental and regulatory matters.
- Environmental remediation reserves were $49.7m. The company could not estimate its ultimate liability for the Lower Passaic River matter; it said an adverse outcome could be material, while noting allocation among potentially responsible parties remains unresolved. A Clean Air Act labeling settlement was under negotiation, with an expected penalty not exceeding $110,000. Certain Jarden appraisal claims were settled in July, with 6.6m shares issued and approximately $162m paid.
- Disclosure controls were reported effective, with no material change in internal control over financial reporting. The filing reports no material change in risk factors from the 2016 Form 10-K.
Investor verification priorities
- Separate recurring operating trends from the Tools sale gain, impairment charges, restructuring costs and acquisition-related accounting effects.
- Assess the sustainability of margin gains and underlying organic sales growth, excluding acquisition and divestiture effects.
- Track seasonal cash conversion, inventory and receivables levels, and the effect of offshore cash on accessible liquidity.
- Monitor debt maturities, borrowing-facility availability, interest costs and progress on integration savings versus the associated costs.
- Review the eventual costs and allocation of environmental remediation, remaining Jarden appraisal claims, and execution of planned divestitures and integration initiatives.