Newell Brands(US:NWL)2020-10-30 20:01PART I. FINANCIAL INFORMATION Financial Statements The company reported net sales of $2.7 billion for Q3 2020, a 5.1% increase year-over-year, and a net income of $304 million, a significant turnaround from a net loss of $626 million in Q3 2019. For the nine months ended September 30, 2020, net sales decreased 5.6% to $6.7 billion, and the net loss widened to $897 million, primarily due to a $1.5 billion impairment charge related to the COVID-19 pandemic's impact. The balance sheet shows total assets decreased to $14.7 billion from $15.6 billion at year-end 2019, while cash and cash equivalents more than doubled to $858 million. Operating cash flow for the nine-month period significantly improved to $820 million from $424 million in the prior year Condensed Consolidated Statements of Operations Q3 and Nine Months 2020 vs 2019 Operating Results (in millions) | Metric | Q3 2020 | Q3 2019 | YoY Change | Nine Months 2020 | Nine Months 2019 | YoY Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net Sales | $2,699 | $2,569 | +5.1% | $6,696 | $7,091 | -5.6% | | Gross Profit | $914 | $847 | +7.9% | $2,195 | $2,367 | -7.3% | | Operating Income (Loss) | $363 | $(857) | N/A | $(882) | $(614) | -43.6% | | Net Income (Loss) | $304 | $(626) | N/A | $(897) | $(687) | -30.6% | | Diluted EPS from Continuing Ops | $0.71 | $(1.51) | N/A | $(2.12) | $(1.40) | -51.4% | Condensed Consolidated Balance Sheets Balance Sheet Summary (in millions) | Account | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $858 | $349 | | Total current assets | $4,704 | $4,110 | | Goodwill | $3,523 | $3,709 | | Other intangible assets, net | $3,567 | $4,916 | | Total Assets | $14,720 | $15,642 | | Total current liabilities | $3,108 | $2,978 | | Long-term debt | $5,794 | $5,391 | | Total Liabilities | $10,970 | $10,646 | | Total Stockholders' Equity | $3,750 | $4,996 | Condensed Consolidated Statements of Cash Flows Cash Flow Summary for Nine Months Ended Sep 30 (in millions) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $820 | $424 | | Net cash provided by (used in) investing activities | $(138) | $581 | | Net cash used in financing activities | $(174) | $(1,024) | | Increase (decrease) in cash | $494 | $(30) | Notes to Condensed Consolidated Financial Statements - Due to the COVID-19 pandemic, the company concluded a triggering event occurred in Q1 2020, leading to impairment tests for goodwill and intangible assets. This resulted in an aggregate non-cash impairment charge of approximately $1.5 billion in Q1 202017 - The company initiated a new restructuring program in Q2 2020 in response to the COVID-19 pandemic, designed to reduce overhead costs. The estimated aggregate charges are $20 million to $25 million42 - In May 2020, the company issued $500 million of 4.875% senior notes due 2025. Debt rating downgrades by S&P and Moody's resulted in a 50 basis point interest rate increase on approximately $4.5 billion of existing senior notes7072 - The company received a subpoena from the SEC on January 31, 2020, relating to its sales practices and certain accounting matters from January 1, 2016, onwards126 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's turnaround strategy and the significant impact of the COVID-19 pandemic, which caused disruptions but also led to a 5.1% net sales increase in Q3 2020 as demand shifted. For the first nine months, sales were down 5.6%. The report details segment performance, highlighting strong Q3 growth in Appliances & Cookware, Commercial Solutions, Home Solutions, and Outdoor & Recreation, while Learning & Development declined due to delayed school openings. The company took actions to improve liquidity, including issuing $500 million in new debt and managing working capital, resulting in a significant increase in operating cash flow. Management also addresses the impact of tariffs, a dispute with the U.S. Treasury over tax regulations, and critical accounting estimates related to goodwill and intangible asset impairments Recent Developments - The COVID-19 pandemic caused significant business disruptions, including temporary facility closures and shifts in consumer demand. However, the company saw positive momentum in Q3 2020 with 5% year-over-year sales growth158159163 - The company estimates the gross impact of U.S. tariffs on Chinese goods to be approximately $80 million in 2020, primarily affecting the Appliances and Cookware, Commercial Solutions, and Outdoor and Recreation segments167 - The company is challenging U.S. Treasury regulations related to the 2017 Tax Reform. If its position is not sustained, it could face an additional income tax expense of approximately $180 million to $220 million related to a 2018 tax benefit168 Results of Operations Q3 2020 vs Q3 2019 Consolidated Operating Results (in millions) | Metric | Q3 2020 | Q3 2019 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net sales | $2,699 | $2,569 | $130 | 5.1% | | Gross profit | $914 | $847 | $67 | 7.9% | | Operating income (loss) | $363 | $(857) | $1,220 | NM | - The significant improvement in Q3 2020 operating income was primarily due to the absence of the $1.07 billion impairment charge recorded in Q3 2019173 Nine Months 2020 vs 2019 Consolidated Operating Results (in millions) | Metric | 9M 2020 | 9M 2019 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net sales | $6,696 | $7,091 | $(395) | (5.6)% | | Gross profit | $2,195 | $2,367 | $(172) | (7.3)% | | Operating loss | $(882) | $(614) | $(268) | (43.6)% | - The increased operating loss for the first nine months of 2020 was driven by non-cash impairment charges of $1.5 billion, compared to $1.1 billion in the same period of 2019195 Business Segment Operating Results Q3 2020 Net Sales Growth by Segment | Segment | Q3 2020 Net Sales (M) | YoY Change | | :--- | :--- | :--- | | Appliances and Cookware | $479 | +11.4% | | Commercial Solutions | $535 | +12.6% | | Home Solutions | $574 | +18.6% | | Learning and Development | $728 | -11.7% | | Outdoor and Recreation | $383 | +7.6% | - The Learning and Development segment's sales decline was primarily due to the impact of delayed and limited re-opening of schools and offices as a result of the COVID-19 pandemic188 Liquidity and Capital Resources - The company strengthened its financial position by issuing $500 million in senior notes, enhancing working capital management, and prioritizing expenditures. As of September 30, 2020, cash and cash equivalents were $858 million213214225 Cash Flow Comparison for Nine Months Ended Sep 30 (in millions) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Cash provided by operating activities | $820 | $424 | | Cash provided by (used in) investing activities | $(138) | $581 | | Cash used in financing activities | $(174) | $(1,024) | - Debt rating downgrades by S&P and Moody's eliminated the company's ability to borrow from the commercial paper market on favorable terms, though its ability to borrow under its $1.25 billion Credit Revolver was not affected216226 Quantitative and Qualitative Disclosures about Market Risk The company states that there have been no material changes to the market risk information previously disclosed in its Annual Report on Form 10-K for the fiscal year ended December 31, 2019 - There were no material changes in the company's market risk exposures from what was reported in the 2019 Annual Report on Form 10-K252 Controls and Procedures Management concluded that the company's disclosure controls and procedures were not effective as of September 30, 2020. This is due to a continuing material weakness in internal control over financial reporting related to the accounting for certain aspects of income taxes, specifically state income tax and uncertain tax positions. A remediation plan is underway, including implementing new software, enhancing processes, and hiring experienced personnel - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were not effective as of September 30, 2020254 - A material weakness in internal control over financial reporting persists, related to the accounting for certain aspects of income taxes, including state income tax and uncertain tax positions257 - Management has implemented a remediation plan which includes new tax reporting software, enhanced processes, hiring experienced resources, and extensive training258260 PART II. OTHER INFORMATION Legal Proceedings This section incorporates by reference the information on legal proceedings detailed in Footnote 18 of the financial statements. Key matters include an SEC subpoena regarding sales and accounting practices, shareholder derivative lawsuits, and a securities class action lawsuit - This item refers to the legal proceedings detailed in Footnote 18 of the financial statements261 Risk Factors The company highlights significant risks, with a primary focus on the ongoing COVID-19 pandemic. Key risks include potential reductions or volatility in product demand, disruptions to manufacturing and supply chains, and the failure of third-party partners. The company also notes that if it cannot resume normal operations, it may be unable to maintain compliance with financial covenants in its debt facilities, which could lead to default - The company's business is subject to significant risks from the COVID-19 pandemic, including demand volatility, supply chain disruptions, and failure of third-party suppliers and partners263264 - A key risk is the potential inability to maintain compliance with financial covenants in debt facilities if COVID-19-related disruptions prevent a return to normal operations, which could lead to default and acceleration of debt265267 Unregistered Sales of Equity Securities and Use of Proceeds During the third quarter of 2020, the company purchased 32,200 shares of its own stock at an average price of $15.86 per share. These purchases were made solely to satisfy employees' tax withholding obligations related to the vesting of restricted stock units. The company's share repurchase program expired on December 31, 2019, and was not extended - The company purchased 32,200 shares during Q3 2020 to satisfy employee tax withholding obligations on vested stock awards268269 - The company's share repurchase program expired on December 31, 2019 and has not been renewed268 Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by the CEO and CFO as required by the Sarbanes-Oxley Act of 2002 and XBRL data files - Lists exhibits filed with the report, including CEO/CFO certifications and XBRL data270