Newell Brands on Monday announced revenue from continuing operations of $2.2 billion, down from $2.5 billion in the same quarter a year ago due to the completed divestitures of The Waddington Group and Rawlings Sporting Goods Co. Inc. and divestiture processes initiated on other assets.
The company is in the process of selling Jostens, Pure Fishing, Consumer & Commercial Solutions, Process Solutions, Goody and U.S. Playing Cards. The company’s portfolio shift was part of the so-called accelerated transformation plan that saw Newell begin to “right-size” its portfolio.
Newell Brands reported normalized net income of $401 million, or diluted earnings per share of 82 cents, compared with $422 million, or 87 cents in the prior year. The company beat Wall Street estimates by 5 cents.
Diluted earnings per share for the company were 27 cents compared with 46 cents in the prior year, with the decrease largely attributable to the loss on the sale of Rawlings, impairment charges, principally on assets held in discontinued operations and the impact of lower sales volume, which more than offset the benefit from cost savings and the gain on the sale of Waddington.
“We continue to prioritize deleveraging, with gross debt in Q2 2018 $900 million below prior year and plans in motion to de-lever by nearly an incremental $900 million by the end of Q3 2018,” said Michael Polk, president and CEO of Newell Brands. “In the context of these significant changes and a very challenging U.S. retail environment, we delivered second quarter results generally in line with expectations. While there is much more to do, we are acting decisively to make Newell Brands a simpler, faster and stronger company.
“Reigniting performance on our continuing businesses is a critical priority, and we expect sequential improvement in our operating results in the back half of 2018 despite increased inflation, worsening foreign exchange and the negative impact of tariffs. While the retail landscape remains difficult, consumer macros are generally good, and we expect core sales on our continuing businesses to recover to growth by the fourth quarter, with margins improving as a result of strong savings programs and broad-based price increases. Adjusted for the estimated negative 20 cents per share impact in the second half of 2018 related to the divestiture of Waddington and Rawlings, we expect to deliver between $2.45 and $2.65 of normalized EPS in 2018.”
Other factors contributing the revenue decline included the negative impact of the adoption of the 2018 revenue recognition standard, and a decline in core sales primarily attributable to the retailer disruption to the Baby business created by the liquidation of Toys ‘R’ Us stores in the U.S., significant inventory de-stocking in the Writing office superstore and distributive trade channels and the absence of the prior year Slime pipeline build on Elmer’s.
Reported gross margin was 35.2 percent compared with 34.7 percent in the prior year, as the benefit from cost savings, synergies and lower integration and acquisition-related costs more than offset the impact of input cost inflation and the negative mix effect of lower Writing sales. Normalized gross margin was 35.1 percent compared with 35.6 percent in the prior year.
Reported operating income was $84.2 million, or 3.8 percent of sales, compared with $92.3 million, or 3.7 percent of sales, in the prior year, reflecting the impact of synergies, cost savings and lower integration and acquisition-related costs, offset by input cost inflation and negative mix associated with lower Writing sales. Normalized operating income was $239 million compared with $313 million in the prior year. Normalized operating margin was 10.9 percent compared to 12.4 percent in the prior year.
The reported tax expense for the quarter was $53.0 million compared with a benefit of $71.5 million in the prior year, primarily driven by prior year tax benefits associated with integration of certain legal entities. The normalized tax rate was 4.6 percent, compared with 5.5 percent in the prior year.
The company reported total net income of $132 million compared with $223 million in the prior year. Continuing operations posted a net loss of $76.1 million compared with net income of $16.6 million last year, with the decline primarily attributable to the transitory but significant sales volume decline on Baby and Writing, and $53.0 million in tax expense as compared with a benefit of $71.5 million in the prior year, partially offset by significant costs savings and a reduction in integration and restructuring charges. Discontinued operations contributed net income of $208 million, including a $598 million gain related to the sale of the Waddington business, an impairment charge of $454 million related to the Process Solutions business and a loss of $136 million related to the sale of the Rawlings business, compared with $206 million in the year-ago period.
Operating cash flow was $11.2 million, compared with $56.8 million in the prior year as prior year results included a significant one-time working capital benefit related to a business divested in 2017. Current year results were driven by positive working capital movements, lower cash restructuring costs and lower cash taxes.
New Reporting Segments
As of June 30, 2018, Newell Brands is reporting its financial results in three segments: Food & Appliances, Home & Outdoor Living and Learning & Development. The Other segment includes results for businesses that were divested during 2017. The company has aligned its seven continuing operating divisions for reporting purposes to the three segments as follows:
Second Quarter 2018 Operating Segment Results
The Food & Appliances segment generated net sales of $621 million compared with $705 million in the prior year. Net sales versus prior year were negatively impacted by foreign exchange, the new 2018 revenue recognition standard, the pull-forward from Q2 2018 into Q1 2018 of inventory in Latin America related to the April 1 go-live of SAP, softness in the fresh preserving business related to the late start to Spring in most of the U.S. and competitive challenges in the U.S. Beverage Appliance category, partially offset by strong innovation driven growth on Calphalon Space Saving Cookware and Crock-Pot Express Crock. Reported operating income was $40.4 million compared with $70.8 million in the prior year. Reported operating margin was 6.5 percent of sales compared with 10.0 percent of sales in the prior year. The contraction is largely due to inflation net of pricing and negative mix associated with lower volumes in Latin America related to the Q1 2018 SAP pull-forward. Normalized operating income was $50.4 million versus $84.1 million last year. Normalized operating margin was 8.1 percent of sales compared with 11.9 percent in the prior year.
The Home & Outdoor Living segment generated net sales of $742 million compared with $795 million in the prior year. Net sales versus prior year were negatively impacted by the new 2018 revenue recognition standard, Home Fragrance softness in EMEA and weakness on Outdoor related to the late Spring and some lost distribution in the U.S., partially offset by strong growth on First Alert and Home Fragrance in U.S. mass channel. Reported operating income was $9.4 million compared with $39.6 million in the prior year. The contraction is largely due to higher restructuring costs, other one-time costs and lower sales volume on the U.S. Outdoor and EMEA Home Fragrance businesses. Reported operating margin was 1.3 percent of sales compared with 5.0 percent in the prior year. Normalized operating income was $50.5 million compared with $60.0 million in the prior year. Normalized operating margin was 6.8 percent of sales compared with 7.5 percent last year.
The Learning & Development segment generated net sales of $839 million compared with $990 million in the prior year. Net sales versus prior year were negatively impacted by the new 2018 revenue recognition standard, core sales declines due to the retailer disruption to the Baby business created by the Toys ‘R’ Us liquidation of its stores in the U.S., significant inventory destocking in the Writing category’s office superstore and distributive trade channels and the absence of 2017 pipeline build on Slime by Elmer’s. Reported operating income was $196 million compared with $224 million in the prior year. Reported operating margin was 23.3 percent of sales compared with 22.6 percent in the prior year. The improvement in operating margin was due to significant progress on productivity, reduced customer programming and strong synergy and savings impact, partially offset by inflation and fixed cost absorption related to Writing finished goods inventory reduction. Normalized operating income was $208 million versus $237 million last year. Normalized operating margin was 24.8 percent of sales compared with 23.9 percent last year.
Outlook for the Twelve Months Ending December 31, 2018
Newell Brands’ adjusted 2018 full year guidance for normalized EPS and operating cash flow assumes full year ownership of all businesses held for sale, with the exception of the Waddington and Rawlings businesses, which were divested as of June 29, 2018. The 2018 adjustments to full-year guidance for the divestiture of Waddington and Rawlings are approximately $0.20 of normalized EPS and $250 million of operating cash flow, including incremental cash taxes on the transactions.
Interest expense is now expected to be favorable to prior outlook as a result of accelerated deleveraging related to the allocation of deal proceeds. Tax rate is now expected to be favorable to prior guidance due to new tax planning benefits. Full year 2018 weighted average share count is now projected at approximately 480 million shares with weighted average share count estimated at 475 million in Q3 2018 and 470 million in Q4 2018 as a result of share repurchases related to allocation of deal proceeds in the second half of 2018.
The company expects second half normalized operating margins of 12.0 percent to 12.4 percent and core sales growth to sequentially improve from down low single digits percent in Q3 2018 to up low single digits percent in Q4 2018. Both measures include only results from continuing operations. Core sales in 2018 are calculated on a constant currency basis in line with industry practice. Core sales guidance excludes the impact of foreign currency, acquisitions until their first anniversary and completed divestitures.
