NEWELL BRANDS INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of Newell Brands Inc.’s (“Newell Brands,” the “Company,” “we,” “us” or “our”) consolidated financial condition and results of operations. The discussion should be read in conjunction with the accompanying condensed consolidated financial statements and notes thereto. Forward-Looking Statements This report contains forward-looking statements within the meaning of the federal securities law. These statements generally can be identified by the use of words such as “intend,” “anticipate,” “believe,” “estimate,” “project,” “target,” “plan,” “expect,” “setting up,” “beginning to,” “will,” “should,” “would,” “could,” “resume,” “are confident that,” “remain optimistic that,” “seek to,” or similar statements. The Company cautions that forward-looking statements are not guarantees because there are inherent difficulties in predicting future results. Actual results may differ materially from those expressed or implied in the forward-looking statements. Important factors that could cause actual results to differ materially from those suggested by the forward-looking statements include, but are not limited to: • the Company’s ability to optimize costs and cash flow and mitigate the impact of soft global demand and retailer inventory rebalancing through discretionary and overhead spend management, advertising and promotion expense optimization, demand forecast and supply plan adjustments and actions to improve working capital; • the Company’s dependence on the strength of retail and consumer demand and commercial and industrial sectors of the economy in various countries around the world; • the Company’s ability to improve productivity, reduce complexity and streamline operations; • risks related to the Company’s substantial indebtedness, potential increases in interest rates or changes in the Company’s credit ratings including the failure to maintain financial covenants which if breached could subject us to cross-default and acceleration provisions in our debt documents; • competition with other manufacturers and distributors of consumer products; • major retailers’ strong bargaining power and consolidation of the Company’s customers; • supply chain and operational disruptions in the markets in which we operate, including as a result of geopolitical and macroeconomic conditions and any global military conflicts including those between Russia and Ukraine and in the Middle East; • changes in the prices and availability of labor, transportation, raw materials and sourced products, including significant inflation, and the Company’s ability to offset cost increases through pricing and productivity in a timely manner; • the Company's ability to effectively execute its turnaround plan, including Project Ovid, Project Phoenix, the Network Optimization Project and the Realignment Plan; • the Company’s ability to develop innovative new products, to develop, maintain and strengthen end-user brands and to realize the benefits of increased advertising and promotion spend; • the risks inherent to the Company’s foreign operations, including currency fluctuations, exchange controls and pricing restrictions; • future events that could adversely affect the value of the Company’s assets and/or stock price and require additional impairment charges; • unexpected costs or expenses associated with dispositions; • the cost and outcomes of governmental investigations, inspections, lawsuits, legislative requests or other actions by third parties, including but not limited to those described in Footnote 16 of the Notes to Unaudited Condensed Consolidated Financial Statements , the potential outcomes of which could exceed policy limits, to the extent insured; • the Company’s ability to remediate the material weaknesses in internal control over financial reporting and to maintain effective internal control over financial reporting; • a failure or breach of one of the Company’s key information technology systems, networks, processes or related controls or those of the Company’s service providers; • the impact of United States and foreign regulations on the Company’s operations, including the impact of tariffs and environmental remediation costs and legislation and regulatory actions related to product safety, data privacy and climate change; • the potential inability to attract, retain and motivate key employees; • changes in tax laws and the resolution of tax contingencies resulting in additional tax liabilities; • product liability, product recalls or related regulatory actions; • the Company’s ability to protect its intellectual property rights; • significant increases in the funding obligations related to the Company’s pension plans; and 24 Table of Contents • other factors listed from time to time in our SEC filings, including but not limited to our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q and other filings. The information contained in this Report is as of the date indicated. The Company assumes no obligation to update any forward-looking statements contained in this Report as a result of new information or future events or developments. In addition, there can be no assurance that the Company has correctly identified and assessed all of the factors affecting the Company or that the publicly available and other information the Company receives with respect to these factors is complete or correct. Overview Newell Brands is a leading global consumer goods company with a strong portfolio of well-known brands, including Rubbermaid, Sharpie, Graco, Coleman, Rubbermaid Commercial Products, Yankee Candle, Paper Mate, FoodSaver, Dymo, EXPO, Elmer’s, Oster, NUK, Spontex and Campingaz. Newell Brands is focused on delighting consumers by lighting up everyday moments. The Company sells its products in over 150 countries around the world and has operations on the ground in over 40 of these countries, excluding third-party distributors. Business Strategy Following a comprehensive assessment of key capabilities, effective the second quarter of 2023, the leadership team began implementing an integrated set of new “where to play” and “how to win” strategy choices designed to enable the Company to leverage the scale of the portfolio, while further building upon its operational foundation and strengthening its front-end capabilities. As part of its strategy, the Company is focused on: • Driving meaningful improvement in front-end capabilities, including consumer understanding, brand management, brand communications, innovation and go-to-market execution; • Disproportionately investing in the Company’s largest and most profitable brands, fastest-growing channels and key geographies; • Turning the Company’s scale into a competitive advantage, enabling cost savings that provide fuel for reinvestment; and • Transitioning to a high-performance organization as the Company transforms its culture. The Company is implementing this strategy while continuing to address key challenges such as shifting consumer preferences and behaviors; a highly competitive operating environment; a rapidly changing retail and consumer landscape; continued macroeconomic and geopolitical volatility; a soft macro backdrop; significant inflationary pressures on consumers and an evolving regulatory landscape. Execution of these strategic imperatives, in combination with other initiatives aimed to build operational excellence, will better position the Company for long-term sustainable growth. One such initiative is Project Ovid, a multi-year, customer centric supply chain initiative to transform the Company’s go-to-market capabilities in the U.S., improve customer service levels and drive operational efficiencies. Project Ovid was designed to optimize the Company’s distribution network by creating a single integrated supply chain from 23 business-unit-centric supply chains. The Company continues to implement the remaining phases of this initiative. In May 2023, the Company announced a restructuring and cost savings initiative that is intended to simplify and streamline its North American distribution network (the “Network Optimization Project”) in order to improve the Company’s cost structure and operating margins while maintaining focus on customer and consumer fulfillment. The Company initiated implementation of the Network Optimization Project during the second quarter of 2023 and expects it to be substantially implemented by the end of fiscal year 2024. The Company currently estimates that it will incur approximately $37 million to $49 million in restructuring and restructuring-related charges associated with the execution of the Network Optimization Project. The Company also expects to incur $30 million to $40 million in capital expenditures related to the Network Optimization Project. In January 2023, the Company announced a restructuring and savings initiative (“Project Phoenix”) that was intended to strengthen the Company by leveraging its scale to further reduce complexity, streamline its operating model and drive operational efficiencies. The Company commenced reducing headcount during the first quarter of 2023, and while the program was mostly completed by the end of 2023, charges will continue to be recognized as the Company completes remaining actions in accordance 25 Table of Contents with local regulations and consultation requirements. The Company estimates that it will incur approximately $100 million to $130 million in restructuring and restructuring-related charges in connection with Project Phoenix. In January 2024, the Company announced an organizational realignment, which is expected to strengthen the Company’s front-end commercial capabilities, such as consumer understanding and brand communication, in support of the “where to play” and “how to win” strategy choices the Company unveiled in June of 2023 (the “Realignment Plan”). In addition to improving accountability, the Realignment Plan is designed to unlock operational efficiencies and cost savings, reduce complexity and free up funds for reinvestment. As part of the Realignment Plan, the Company is making several operating model changes, which entail: standing up a cross-functional brand management organization, realigning business unit finance to fully support the new global brand management model, further simplifying and standardizing regional go-to-market organizations, and centralizing domestic retail sales teams, the digital technology team, business-aligned accounting personnel, the Manufacturing Quality team, and the Human Resources functions into the appropriate center-led teams to drive standardization, efficiency and scale with a One Newell approach. The Company will also further optimize the Company’s real estate footprint and pursue other cost reduction initiatives. These actions are expected to be substantially implemented by the end of 2024, subject to local law and consultation requirements. The Company estimates that it will incur approximately $75 million to $90 million in restructuring and restructuring-related charges in connection with the Realignment Plan. In addition, the Company continues to review its operating footprint and non-core brands, which will result in future restructuring charges. Organizational Structure The Company implemented an operating model intended to drive further simplification and unlock additional efficiencies and synergies within the Company, the chief operating decision maker (“CODM”) reviews the businesses as three operating segments: Home and Commercial Solutions, Learning and Development and Outdoor and Recreation. The Company’s three reportable segments are the following: Segment Key Brands Description of Primary Products Home and Commercial Solutions Ball (1) , Calphalon, Crockpot, FoodSaver, Mapa, Mr. Coffee, Oster, Rubbermaid, Rubbermaid Commercial Products, Sistema, Spontex, Sunbeam, WoodWick and Yankee Candle Commercial cleaning and maintenance solutions; closet and garage organization; hygiene systems and material handling solutions; household products, including kitchen appliances; food and home storage products; fresh preserving products; vacuum sealing products; gourmet cookware, bakeware and cutlery and home fragrance products Learning and Development Dymo, Elmer’s, EXPO, Graco, NUK, Paper Mate, Parker and Sharpie Baby gear and infant care products; writing instruments, including markers and highlighters, pens and pencils; art products; activity-based products and labeling solutions Outdoor and Recreation Campingaz, Coleman, Contigo and Marmot Active lifestyle products for outdoor and outdoor-related activities; technical apparel and on-the-go beverageware (1) and Ball ® TM of Ball Corporation, used under license. This structure reflects the manner in which the CODM regularly assesses information for decision-making purposes, including the allocation of resources. The Company also provides general corporate services to its segments which is reported as a non-operating segment, Corporate. See Footnote 15 of the Notes to Unaudited Condensed Consolidated Financial Statements for further information. Recent Developments Current Macroeconomic Conditions The Company continues to be impacted by soft global demand, major retailers’ focus on tight control over inventory levels, inflationary pressures, elevated interest rates and indirect macroeconomic impacts from geopolitical conflicts. These collective macroeconomic trends, the duration or severity of which are highly uncertain, are rapidly changing the retail and consumer landscape and are expected to continue to negatively impact the Company’s operating results, cash flows and financial condition during the current year. 26 Table of Contents To help mitigate the negative impact of these conditions to the operating performance of its businesses, the Company has secured selective pricing increases, accelerated productivity initiatives, optimized advertising and promotion expenses, deployed overhead cost containment efforts, adjusted demand forecasts and supply plans, and taken actions designed to improve working capital. The Company will continue to evaluate other opportunities to improve its financial performance both in the short and long term. Although management has made its best estimates and assumptions based upon current information, actual results could materially differ given the uncertainty of these factors and may require future changes to such estimates and assumptions, including reserves, which may result in future expense or impairment charges. See Footnote 1 of the Notes to Unaudited Condensed Consolidated Financial Statements for further information on use of estimates and risks. Geopolitical Conflicts The global economy has been negatively impacted by military conflicts, such as the Russia-Ukraine conflict and the conflicts in the Middle East. While the Company does not expect these conflicts to have a material impact on its results of operations, it has experienced supply chain disruptions, shortages in raw materials and increased costs for transportation, energy and commodities due in part to the negative impact of these conflicts on the global economy. Further escalation of geopolitical tensions, including increased trade barriers and restrictions on global trade, could result in, among other things, supply disruptions, lower consumer demand, and changes to foreign exchange rates and financial markets, any of which may adversely affect our business and supply chain. Additionally, if these military conflicts escalate beyond their current scope, the Company could be negatively impacted by localized or global economic recessions. See Results of Operations and Footnote 1 of the Notes to Unaudited Condensed Consolidated Financial Statements for further information. Organizational Realignment Plan In January 2024, the Company announced the Realignment Plan, which is expected to strengthen the Company’s front-end commercial capabilities, as further described in the preceding section. The Company initiated the Realignment Plan during the three months ended March 31, 2024 and recorded restructuring charges of $22 million. See Footnote 3 of the Notes to Unaudited Condensed Consolidated Financial Statements for further information. Reclassification of Indefinite-Lived Tradenames In alignment with the Company’s strategy, the Company determined that certain tradenames with aggregate carrying values of $322 million no longer met the criteria to be classified as indefinite-lived tradenames effective January 1, 2024. The estimated useful lives range from 10 to 15 years, which will increase the Company’s annual amortization expense by $25 million, approximately $6 million quarterly. See Footnote 6 of the Notes to Unaudited Condensed Consolidated Financial Statements for further information. Amendment to Credit Revolver The Company had a $1.5 billion senior unsecured revolving credit facility (the “Credit Revolver”) maturing in August 2027. On February 7, 2024, the Company entered into a second amendment to the Credit Revolver agreement. The second amendment reduced the commitments of the lenders from $1.5 billion to $1.0 billion; replaced existing financial covenants with new covenants, including a collateral coverage ratio and total net leverage ratio; provided a guarantee by the Company and certain subsidiaries of all obligations under the Credit Revolver including certain hedging obligations, cash management obligations, and supply chain financing obligations; and granted the lenders under the Credit Revolver a security interest in certain eligible assets and all products and proceeds of the foregoing, subject to certain limitations. See Footnote 8 of the Notes to Unaudited Condensed Consolidated Financial Statements for further information. Debt Rating Downgrades During February 2024, Moody’s Corporation and S&P Global Inc. downgraded the Company’s debt rating to “Ba3” and “BB-”, respectively, which resulted in an interest rate increase of 25 basis points from each rating downgrade. The change to the interest rates as a result of both downgrades will increase the Company’s interest expense by $16 million on an annualized basis (approximately $12 million in 2024). See Footnote 8 of the Notes to Unaudited Condensed Consolidated Financial Statements for further information. 27 Table of Contents Three Months Ended March 31, 2024 vs. Three Months Ended March 31, 2023 Consolidated Operating Results Three Months Ended March 31, (in millions) 2024 2023 $ Change % Change Net sales $ 1,653 $ 1,805 $ (152) (8.4)% Gross profit 504 482 22 4.6% Gross margin 30.5 % 26.7 % Operating income (loss) 16 (36) 52 NM Operating margin 1.0 % (2.0) % Interest expense, net 70 68 2 2.9% Other expense, net 5 12 (7) (58.3)% Loss before income taxes (60) (116) 56 48.3% Income tax benefit (51) (14) (37) NM Income tax rate 85.0 % 12.1 % Net loss $ (9) $ (102) $ 93 91.2% Diluted loss per share $ (0.02) $ (0.25) NM - NOT MEANINGFUL Net sales for the three months ended March 31, 2024 decreased 8%. Net sales were unfavorably impacted by soft global demand, net distribution losses and category exits, partially offset by pricing, mainly in international markets to offset inflation and currency movement. Changes in foreign currency unfavorably impacted net sales by $56 million, or 3%. Gross profit increased compared to prior year. Gross margin also improved to 30.5% as compared with 26.7% in the prior year. The increase in gross profit was driven by productivity, mix and favorable pricing, partially offset by lower sales volume and inflation. Changes in foreign currency exchange rates unfavorably impacted gross profit by $45 million, or 9%. Notable items other than changes in net sales impacting operating income (loss) for the three months ended March 31, 2024 and 2023 were as follows: Three Months Ended March 31, 2024 2023 $ Change Restructuring and restructuring-related costs (See Footnote 3 ) (a) (b) $ 39 $ 51 $ (12) Transactions costs and other (c) (4) 9 (13) Amortization of acquired intangibles (See Footnote 6 ) 25 19 6 (a) For the three months ended March 31, 2024 restructuring-related costs reported in cost of products sold and in SG&A was $8 million and $5 million, respectively, primarily related to facility closures. For the three months ended March 31, 2023, restructuring-related costs reported in cost of products sold and SG&A was $5 million and $8 million, respectively, primarily related to facility closures. Restructuring costs were $26 million and $38 million for the three months ended March 31, 2024 and 2023, respectively. (b) Restructuring-related costs during the three months ended March 31, 2024 related to Project Phoenix and Network Optimization Project were $3 million and $2 million, respectively and $8 million related to other discrete programs. (c) Transaction and other costs for the three months ended March 31, 2024 primarily related to a release of a bad debt reserve due to a recovery of a receivable from an international customer. For the three months ended March 31, 2023 transaction and other costs primarily related to expenses associated with certain legal proceedings. 28 Table of Contents Operating income was $16 million as compared to operating loss of $36 million in the prior year period. The improvement reflects gross productivity, savings from restructuring actions and lower restructuring and restructuring-related charges, partially offset by higher incentive compensation expense, advertising and promotion costs and additional amortization of certain tradenames. Interest expense, net increased due to higher interest rates. The weighted average interest rates for the three months ended March 31, 2024 and 2023 were approximately 5.6% and 4.8%, respectively. See Footnote 8 of the Notes to Unaudited Condensed Consolidated Financial Statements for further information. Other expense, net for three months ended March 31, 2024 and 2023 includes the following items: Three Months Ended March 31, 2024 2023 Foreign exchange losses, net $ 3 $ 2 Discount on factored receivables and other, net 2 10 $ 5 $ 12 The income tax benefit for the three months ended March 31, 2024 was $51 million as compared to $14 million for the three months ended March 31, 2023. The effective tax rate for the three months ended March 31, 2024 was a benefit of 85.0%, due to an increase in the forecasted annual tax rate driven primarily by lower forecasted pretax book income, as compared to 12.1% for the three months ended March 31, 2023. See Footnote 11 of the Notes to Unaudited Condensed Consolidated Financial Statements for further information. Business Segment Operating Results Home and Commercial Solutions Three Months Ended March 31, (in millions) 2024 2023 $ Change % Change Net sales $ 893 $ 971 $ (78) (8.0)% Operating income (loss) 16 (37) 53 NM Operating margin 1.8 % (3.8) % NM - NOT MEANINGFUL Home and Commercial Solutions net sales for the three months ended March 31, 2024 decreased 8%, which reflected soft demand across all businesses, certain category exits as well as net distribution losses, primarily in the Kitchen business, partially offset by pricing. Changes in foreign currency unfavorably impacted net sales by $29 million, or 3%. Operating income for the three months ended March 31, 2024 was $16 million as compared to operating loss of $37 million in the prior year. The improvement in operating results is primarily due to gross productivity, mix, savings from restructuring actions, lower restructuring and restructuring-related charges and release of a bad debt reserve due to a recovery of a receivable from an international customer, partially offset by higher advertising and promotion costs and additional amortization of certain tradenames. 29 Table of Contents Learning and Development Three Months Ended March 31, (in millions) 2024 2023 $ Change % Change Net sales $ 559 $ 564 $ (5) (0.9)% Operating income 94 72 22 30.6% Operating margin 16.8 % 12.8 % Learning and Development net sales for the three months ended March 31, 2024 decreased 1%, as slight growth in the Baby business was offset by a slight decline in the Writing business. For the segment, pricing actions were more than offset by changes in foreign currency, which unfavorably impacted net sales by $15 million, or 3%. Operating income for the three months ended March 31, 2024 increased to $94 million as compared to $72 million in the prior-year period. The increase in operating income is primarily due to gross productivity and savings from restructuring actions, partially offset by higher advertising and promotion costs. Outdoor and Recreation Three Months Ended March 31, (in millions) 2024 2023 $ Change % Change Net sales $ 201 $ 270 $ (69) (25.6)% Operating loss (18) (1) (17) NM Operating margin (9.0) % (0.4) % NM - NOT MEANINGFUL Outdoor and Recreation net sales for the three months ended March 31, 2024 decreased 26% primarily reflecting soft global demand, distribution losses and category exits. Changes in foreign currency unfavorably impacted net sales by $12 million or 4%. Operating loss for the three months ended March 31, 2024 was $18 million as compared to operating loss of $1 million in the prior-year period. The decline was primarily due to lower gross profit leverage, partially offset by gross productivity and savings from restructuring actions. Liquidity and Capital Resources Liquidity The Company believes the extent of the impact of this rapidly changing retail and consumer landscape, which reflects major retailers focus on tight control over inventory levels, inflationary pressures and uncertainty over the volatility and direction of future demand patterns on the Company’s future sales, operating results, cash flows, liquidity and financial condition, will continue to be driven by numerous evolving factors the Company cannot accurately predict and which will vary. As noted in Business Strategy and Recent Developments , the Company has taken actions to further strengthen its financial position and balance sheet, and maintain financial liquidity and flexibility, including amending certain terms of its Credit Revolver. The Company believes these actions and its cash generating capability, together with its borrowing capacity and available cash and cash equivalents, provide adequate liquidity to fund its operations, support its growth platforms, pay down debt and debt maturities as they come due and execute its ongoing business initiatives for the foreseeable future. The Company regularly assesses its cash requirements and the available sources to fund these needs. For further information, refer to Risk Factors in Part I - Item 1A and Recent Developments in Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation s of the Company's most recent Annual Report on Form 10-K, filed on February 21, 2024. 30 Table of Contents At March 31, 2024, the Company had cash and cash equivalents of approximately $372 million, of which approximately $317 million was held by the Company’s non-U.S. subsidiaries. Cash, cash equivalents and restricted cash increased (decreased) as follows for the three months ended March 31, 2024 and 2023 (in millions): 2024 2023 Increase (Decrease) Cash provided by (used in) operating activities $ 32 $ (77) $ 109 Cash used in investing activities (50) (68) 18 Cash provided by financing activities 60 128 (68) Exchange rate effect on cash, cash equivalents and restricted cash (3) (1) (2) Increase (decrease) in cash, cash equivalents and restricted cash $ 39 $ (18) $ 57 The Company has historically generated the majority of its operating cash flow in the third and fourth quarters of the year due to seasonal variations in operating results, the timing of annual performance-based compensation payments, customer program payments, working capital requirements and credit terms provided to customers. Cash Flows from Operating Activities The change in net cash provided by operating activities reflects a reduction of working capital and improvement in operating results, partially offset by higher incentive compensation and restructuring payments in the current year. Cash Flows from Investing Activities The change in cash used in investing activities was primarily due to lower capital expenditures, as significant projects, primarily related to Project Ovid, were mostly executed during the prior year. Cash Flows from Financing Activities The change in net cash used in financing activities was primarily due to a lower quarterly dividend payment in the current year, offset by the period-over-period net change in short-term debt. See Footnote 8 of the Notes to the Unaudited Condensed Consolidated Financial Statements for further information. Capital Resources The Company has a $1.0 billion Credit Revolver that matures in August 2027. The Credit Revolver requires compliance with certain financial covenants. A failure to maintain the Company’s financial covenants and to subsequently remedy a default would impair its ability to borrow under the Credit Revolver and potentially subject the Company to cross-default and acceleration provisions in its debt documents. The Company was in compliance with all of its debt covenants at March 31, 2024. At March 31, 2024, the Company had $231 million of outstanding borrowings under the Credit Revolver and approximately $20 million of outstanding standby letters of credit issued against the Credit Revolver, with a net availability of approximately $749 million. See Footnote 8 of the Notes to the Unaudited Condensed Consolidated Financial Statements for further information. Risk Management From time to time, the Company enters into derivative transactions to hedge its exposures to interest rate, foreign currency rate and commodity price fluctuations. The Company does not enter into derivative transactions for trading purposes. See Footnote 9 of the Notes to Unaudited Condensed Consolidated Financial Statements for further information on the Company's derivative instruments. 31 Table of Contents Significant Accounting Policies and Critical Estimates For further information on significant accounting policies and critical estimates, refer to the Company's most recent Annual Report on Form 10-K, filed on February 21, 2024 and Footnote 1 of the Notes to Unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q. Item 3. Quantitative and Qualitative Disclosures about Market Risk There have been no material changes from the information previously reported under Part II, Item 7A. in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023.