By Eric Smith
Shares of Newell Brands Inc. dropped $4.53, or 20.9 percent, to $17.16 at market close Friday after the company earlier in the day reported a sharp decline in fourth-quarter operating earnings as it absorbed a $157 million impairment charge.
Revenues declined 6 percent to $2.3 billion, missing Wall Street’s targets by $90 million. The company attributed the drop to headwinds from the adoption of the new 2018 revenue recognition standard, unfavorable foreign exchange and a decline in core sales.
The company took a hit across its financial benchmarks because of recent divestitures. Following the two divestitures made last quarter—Jostens and Pure Fishing—Newell’s portfolio now includes Paper Mate, Sharpie, Dymo, EXPO, Parker, Elmer’s, Coleman, Marmot, Oster, Sunbeam, FoodSaver, Mr. Coffee, Graco, Baby Jogger, NUK, Calphalon, Rubbermaid, Contigo, First Alert and Yankee Candle.
Normalized net income from discontinued operations was $107 million, down from $196 million in the year-ago quarter, largely due to the loss of contribution from businesses that had been divested throughout the year, including Waddington, Rawlings and Goody, plus the aforementioned Jostens and Pure Fishing.
And the company is looking to shed even more assets as part of its ongoing Accelerated Transformation Plan designed to create a “simpler, faster and stronger Newell Brands,” recently appointed CFO Christopher Peterson said on Friday morning’s earnings conference call with analysts, his first since joining the company last fall.
“We’ve made considerable progress on the divestiture front throughout 2018, and have completed transactions that have generated over $5 billion of after-tax proceeds,” Peterson said. “As we embark upon the final wave of divestitures, we have decided to split up the Consumer and Commercial Solutions business and sell the MAPA and Spontex businesses in a separate transaction from the remainder of Consumer and Commercial Solutions, which is largely Rubbermaid Commercial Products along with Rubbermaid Outdoor, Closet and Garage and Quickie. As a result of this decision, we now expect the divestiture timeline to extend until the end of 2019, and our guidance assumes these two businesses are sold in the second half of the year.”
Looking more broadly at Newell’s ATP, here the five core areas where the company is hoping to make progress and further transform in 2019, said Michael Polk, president and CEO, on Friday’s earnings call.
- Turn the business to a consistent pattern of delivery. Polk: “This means setting appropriate milestones and delivering against them, and strengthening our operating discipline to make the business more predictable and efficient.”
- Optimize cost structure. Polk: This means “delivering on our ongoing savings programs and extracting the retained corporate costs, related to the Accelerated Transformation Plan divestitures. We’ve made good progress on costs over the summer and into the fall, with more actions to follow in 2019.”
- Increase cash flow. Polk: The company is focused on on “driving profitable growth in transforming our working capital by reducing complexity across our business system. Over the next two years we expect to reduce our continuing operations SKU count by over 35 percent. This effort, coupled with other working capital initiatives, should yield significantly improved working capital ratios and free cash flow productivity.”
- Shape and focus Newell’s portfolio on the most attractive businesses. Polk: “Executing the divestitures as described in the Accelerated Transformation Plan, and perhaps more importantly, they’re making sharp choices, allocating the most resource to the most attractive businesses, deploying more A&P and innovation activity to those businesses with the greatest potential for accelerated growth and performance.”
- Reposition the organization. Polk: The goal is to pivot toward “more consistent and sustained operating performance, restructuring division and function designs, while simultaneously strengthening and upgrading talent. In the fourth quarter, we made progress in all five of these areas. Specifically, we delivered sequential improvement in core sales growth in all segments.”
“We are laser focused on strengthening the operational performance and financial flexibility of the company,” Polk said. “While we know we have much more work to do, the fourth quarter was another quarter of sequential progress.”
Newell indeed has its work cut out after last quarter’s performance. Digging deeper into Q4, the company’s $157 million non-cash impairment charge was from continuing operations primarily associated with intangible assets in certain acquired businesses. The impairment charge is attributable to the latest cash flow projections associated with these businesses.
Reported operating income was $17.8 million, or 0.8 percent of sales, compared with $142 million, or 5.7 percent of sales, in the prior year period, as improved gross margin and a reduction in overhead, integration and restructuring costs, were more than offset by the impact of the non-cash impairment charge and an increase in accrued incentive compensation. Normalized operating income was $268 million compared with $267 million in the prior year period. Normalized operating margin was 11.4 percent compared to 10.7 percent in the prior year period.
The company reported a tax benefit of $254 million compared with a benefit of $1.5 billion in the prior year period, with the difference primarily attributable to the absence of the $1.4 billion benefit from tax reform in 2017. The normalized tax rate was negative 30 percent, for a benefit of $49.5 million, compared with 3.7 percent, or a provision of $5.4 million, in the prior year period.
Newell’s reported net income of $208 million compared with $1.7 billion in the prior year period, with the decline primarily attributable to the absence of the tax benefit recorded in 2017. Continuing operations posted net income of $164 million compared with $1.5 billion in the fourth quarter of last year.
The company’s discontinued operations resulted in net income of $44.3 million, down from $154 million in the year-ago period. Reported diluted EPS for the total company were 46 cents, down significantly from $3.38 in the prior-year period. Reported diluted EPS from continuing operations were 36 cents versus $3.07 in the prior-year period. And reported diluted EPS from discontinued operations were 10 cents compared with 31 cents in the prior-year period.
Normalized net income for the total company was $321 million, or 71 cents per share, beating analysts’ estimates by 4 cents and compared with $335 million, or 68 cents per share, in the prior year period. Normalized diluted earnings per share from continuing operations were 47 cents, compared with 28 cents in the prior year period. Normalized diluted earnings per share from discontinued operations were 24 cents compared with 40 cents in the prior year period.
Photo courtesy Newell Brands