Spectrum Brands Holdings, Inc. — Fiscal Q1 2023 Form 10-Q Summary
Business context and reporting period
Spectrum Brands is a global branded consumer products company operating through Home and Personal Care (HPC), Global Pet Care (GPC), and Home and Garden (H&G). The fiscal first quarter covered the three months ended January 1, 2023, compared with January 2, 2022. HHI remains classified as held for sale and discontinued operations.
Key financial metrics
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $713.3 million | $757.2 million | Down 5.8% |
| Gross profit | $201.9 million | $219.3 million | Down 7.9% |
| Gross margin | 28.3% | 29.0% | Down 70 bps |
| Operating loss | $20.2 million | $23.8 million | Improved $3.6 million |
| Loss from continuing operations | $40.0 million | $30.2 million | Worsened $9.8 million |
| Net loss attributable to controlling interest | $20.9 million | Net income of $8.2 million | Declined $29.1 million |
| diluted EPS | $(0.51) | $0.20 | Declined $0.71 |
| Adjusted EBITDA | $39.8 million | $49.3 million | Down 19.3% |
| Adjusted EBITDA margin | 5.6% | 6.5% | Down 90 bps |
Segment sales were HPC $364.4 million, GPC $277.5 million, and H&G $71.4 million. Adjusted EBITDA was HPC $13.2 million, GPC $37.2 million, and H&G negative $2.4 million.
Cash flow from operating activities was negative $64.2 million, including negative $57.0 million from continuing operations. Capital expenditures were $13.6 million, including $10.0 million from continuing operations. Ending cash and cash equivalents were $228.0 million for Spectrum Brands Holdings.
Total debt before unamortized discounts and issuance costs was $3.315 billion at January 1, 2023, compared with $3.194 billion at September 30, 2022. Revolver borrowings increased to $830.0 million from $740.0 million, and borrowing availability was $252.5 million after letters of credit. Interest expense increased 53.2% to $33.4 million, reflecting higher variable-rate borrowings, increased rates, and a $2.3 million credit-agreement amendment cost.
The company paid a quarterly dividend of $0.42 per share, or $17.1 million, and made no share repurchases during the quarter. Management stated that the company was in compliance with its debt covenants at January 1, 2023.
Material changes versus the prior comparable period
- Reported sales declined $43.9 million. Organic sales declined $72.1 million, or 9.5%, after a $67.8 million contribution from the Tristar acquisition and a $39.6 million unfavorable currency effect.
- HPC sales declined 4.0% and adjusted EBITDA fell 51.8%, primarily because of lower volumes, high retail inventories, unfavorable mix, higher previously inventoried costs, foreign-exchange pressure, Tristar integration costs, and Russia-related actions.
- GPC sales declined 8.2%, but operating income increased to $22.7 million from $12.3 million. Pricing and operating-cost savings improved the margin, although adjusted EBITDA declined 3.9% because of lower volume.
- H&G sales declined 5.2%, while its adjusted EBITDA loss improved to $2.4 million from $7.3 million due to pricing, operational improvements, and lower integration costs.
- Operating expenses decreased $21.0 million, primarily from lower selling, distribution, transportation, strategic transaction, and restructuring costs. However, higher interest expense more than offset the operating improvement.
- Income from discontinued operations fell to $19.5 million from $38.8 million, mainly reflecting lower HHI volumes. HHI generated $362.9 million of sales and $45.0 million of pretax income in the quarter.
- Operating cash use improved substantially from $271.1 million in the prior-year quarter, primarily because of lower working-capital investment and reduced transaction and restructuring spending, but remained negative due partly to seasonal working-capital needs.
Outlook, commentary, risks, and unusual items
Management did not provide a specific quantitative revenue or earnings forecast in the filing. It expects cash flows from operations, existing cash, anticipated HHI proceeds, and credit-facility availability to be sufficient for operating and capital requirements for at least the next 12 months. Management noted that negative first-quarter operating cash flow is not unusual because of seasonality.
The proposed $4.3 billion HHI sale to ASSA ABLOY remained pending. The Department of Justice filed a complaint to block the transaction, with trial expected in April 2023. The agreement termination date was extended to June 30, 2023, and includes a potential $350 million termination fee if specified antitrust conditions are not satisfied. Completion, regulatory approval, proceeds, deleveraging, and related capital-allocation plans remain uncertain.
The credit agreement temporarily permits a maximum consolidated total net leverage ratio of 7.0 to 1.0, reverting to 6.0 to 1.0 at the earlier of September 29, 2023, or ten business days after the HHI closing or receipt of the termination fee. Rising interest rates, inflation, foreign exchange, supply-chain constraints, labor costs, retail inventory levels, and consumer demand remain significant risks.
Unusual or potentially nonrecurring items included $11.1 million of strategic transaction costs, $9.0 million of restructuring and optimization costs, $5.7 million of Tristar integration costs, $2.9 million of Russia-closing initiatives, $2.4 million of HPC separation costs, $1.5 million of HHI divestiture costs, a $1.5 million gain from remeasurement of contingent consideration, and $0.3 million of HPC product-recall costs. Product-recall liabilities were $8.8 million at quarter-end, partially offset by $7.4 million of related indemnification receivables.
Most important facts for investors to verify
- Whether the DOJ litigation and proposed ASSA ABLOY remedies permit the HHI transaction to close by June 30, 2023, and whether the company receives the expected proceeds or termination fee.
- Whether operating cash flow normalizes after the seasonal first quarter and supports debt service, dividends, capital expenditures, and ongoing initiatives.
- Revolver utilization, variable interest rates, leverage-covenant compliance, and the effect of the temporary 7.0-to-1.0 leverage threshold.
- Whether HPC demand, retail inventory levels, Tristar integration, brand transitions, and Russia-related costs improve sufficiently to restore margins.
- Whether GPC pricing and cost savings are sustainable despite lower volumes and foreign-exchange pressure.
- The extent and duration of inflation, supply-chain disruption, labor shortages, currency volatility, product-recall costs, and other litigation or environmental contingencies.
- The financial implications of any future separation of HPC and the company’s strategy for the retained GPC and H&G businesses.