Spectrum Brands Holdings, Inc. — Fiscal 2020 Second-Quarter Form 10-Q
Reporting period: Three and six months ended March 29, 2020, compared with March 31, 2019. The filing is a combined report for Spectrum Brands Holdings, Inc. and SB/RH Holdings, LLC. Spectrum operates through Hardware & Home Improvement, Home and Personal Care, Global Pet Care, and Home and Garden segments.
Financial performance and position
| Metric | Three months ended March 29, 2020 | Three months ended March 31, 2019 | Six months ended March 29, 2020 | Six months ended March 31, 2019 |
|---|---|---|---|---|
| Net sales | $937.8 million | $906.7 million | $1,809.3 million | $1,787.0 million |
| Gross profit | $328.9 million | $305.5 million | $598.0 million | $611.3 million |
| Gross margin | 35.1% | 33.7% | 33.1% | 34.2% |
| Operating income | $67.7 million | $41.6 million | $22.0 million | $67.0 million |
| Net loss from continuing operations | $(59.2) million | $(54.0) million | $(96.9) million | $(83.0) million |
| Net loss attributable to controlling interest | $(57.0) million | Net income of $728.6 million | $(92.7) million | Net income of $616.2 million |
| Adjusted EBITDA | $140.4 million | $115.6 million | $242.5 million | $230.8 million |
| Adjusted EBITDA margin | 15.0% | 12.7% | 13.4% | 12.9% |
Three-month sales increased 3.4%, while six-month sales increased 1.2%. Organic sales increased 4.1% and 2.0%, respectively, excluding currency and acquisition effects. The three-month operating margin improved to 7.2% from 4.6%; the six-month margin declined to 1.2% from 3.8%.
- Segment sales: Second-quarter HHI declined 0.6%, HPC increased 5.0%, GPC increased 10.2%, and H&G was essentially flat. Six-month sales declined 1.5% in HHI and 3.8% in H&G, while HPC increased 3.0% and GPC increased 5.5%.
- Cash flow: Six-month net cash used by operating activities was $184.6 million for SBH, compared with $533.7 million in the prior year, including $184.6 million used by continuing operations. Capital expenditures were $31.7 million.
- Liquidity: Cash and cash equivalents were $457.8 million at March 29, 2020, compared with $627.1 million at September 30, 2019. The company reported $460.7 million of cash, cash equivalents, and restricted cash at period end.
- Debt: Total SBH debt was $3.042 billion, including $780.0 million drawn under the revolver. Long-term debt, net of current portion, was $2.999 billion. Revolver availability was only $1.4 million after letters of credit at March 29, 2020; capacity was subsequently increased by $90 million to $890 million.
- Capital allocation: The company paid $39.1 million in dividends and repurchased $364.5 million of common stock during the six months, including a $125 million accelerated share repurchase. The quarterly dividend was $0.42 per share.
Material changes versus the prior comparable period
- Interest expense declined by $58.7 million in the quarter and $80.8 million in the six-month period, primarily due to lower debt and average interest rates.
- Other non-operating expense increased substantially because of losses on the Energizer investment: $106.8 million in the quarter and $68.3 million year to date.
- Prior-year results included substantial discontinued-operation income from the GBL and GAC divestitures: $783.6 million in the quarter and $700.4 million year to date. Current-period discontinued-operation income was only $1.4 million and $4.3 million, respectively.
- Six-month results included a $25.7 million loss on the sale of the Coevorden dog and cat food facility and distribution center and a $24.2 million intangible-asset impairment charge.
- The company adopted the new lease accounting standard on October 1, 2019, recognizing $107.5 million of additional right-of-use assets and $113.0 million of additional lease liabilities.
- On March 10, 2020, the company acquired Omega Sea for approximately $17.0 million, recording $8.6 million of goodwill and a $4.4 million indefinite-lived trade-name asset.
Guidance, outlook, commentary, and risks
- On April 30, 2020, the company withdrew its fiscal 2020 and first-quarter guidance because of limited visibility, demand volatility, and supply-chain uncertainty. It expects to provide an annual outlook when business conditions normalize.
- Management stated that COVID-19 negatively affected sales by an estimated $7.5 million and operating income and adjusted EBITDA by approximately $3.6 million through the reporting period. The company remained classified as an essential business, but experienced facility restrictions in China, the Philippines, Mexico, and at a St. Louis facility.
- Management reported that demand remained generally strong, particularly in online, home appliance, personal care, and pet-care channels, but warned that the duration and severity of COVID-19 could materially affect demand, manufacturing, supply chains, customer operations, capital markets, liquidity, and asset values.
- The company expects existing cash and operating cash flows to satisfy operating requirements for at least the next 12 months, but acknowledged that access to capital markets is not assured. It is managing non-critical capital spending and operating expenses and seeking to preserve cash.
- S&P downgraded the company’s corporate credit rating to B from B+ on March 26, 2020, with a negative outlook. The downgrade did not trigger default or acceleration under current borrowings, but could increase future financing costs.
- GPC goodwill of $429.4 million was identified as at risk of impairment; a prolonged pandemic could cause additional goodwill or intangible-asset impairment. The company also reported $89.4 million of anticipated future costs under its Global Productivity Improvement Plan through fiscal 2022.
- Recorded contingencies included $1.1 million for shareholder-litigation settlement costs, $11.5 million for environmental remediation, $6.0 million for product liability, and $7.0 million for product warranties. Management does not currently expect pending matters to have a material adverse effect.
Facts investors should verify
- Revolver liquidity after the subsequent $90 million capacity increase and the company’s ability to refinance or reduce approximately $3.0 billion of long-term debt.
- The timing and magnitude of COVID-19-related demand, production, supply-chain, and customer-credit impacts after March 29, 2020.
- Whether the GPC goodwill and remaining DCF-related intangible assets require additional impairment charges.
- The sustainability of reported Adjusted EBITDA improvement, particularly after excluding restructuring, investment-market losses, impairment, divestiture, and other adjustments.
- The effect of the withdrawn fiscal 2020 guidance, continued share repurchases, dividends, and restructuring expenditures on liquidity.
- Future obligations and indemnifications related to Energizer, including the $197.0 million Varta-related payment made during the quarter and remaining recorded indemnification liabilities.