Spectrum Brands Holdings, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Introduction The following is management’s discussion of the financial results, liquidity and other key items related to our performance and should be read in conjunction with the Condensed Consolidated Financial Statements and related notes included in Item 1 of this Quarterly Report on Form 10-Q. Unless the context indicates otherwise, the term the “Company,” “we,” “our,” or “us” are used to refer to Spectrum Brands Holdings, Inc. and its subsidiaries ("SBH") and SB/RH Holdings, LLC and its subsidiaries (“SB/RH”), collectively. Business Overview The Company is a diversified global branded consumer products company. We manage the businesses in three vertically integrated, product-focused segments: (i) Home and Personal Care (“HPC”), (ii) Global Pet Care (“GPC”), and (iii) Home and Garden (“H&G”). The Company manufactures, markets and/or distributes its products globally in the North America (“NA”), Europe, Middle East & Africa (“EMEA”), Latin America (“LATAM”) and Asia-Pacific (“APAC”) regions through a variety of trade channels, including retailers, wholesalers and distributors. We enjoy strong name recognition in our regions under our various brands and patented technologies across multiple product categories. Global and geographic strategic initiatives and financial objectives are determined at the corporate level. Each segment is responsible for implementing defined strategic initiatives and achieving certain financial objectives and has a president responsible for sales and marketing initiatives and the financial results for all product lines within that segment. The segments are supported through center-led shared service operations consisting of finance and accounting, information technology, legal, human resources, supply chain and commercial operations. See Note 20 – Segment Information for more information pertaining to segments of continuing operations. The following is an overview of the consolidated business, by segment, summarizing product types and brands: Segment Products Brands HPC Home Appliances: Small kitchen appliances including toaster ovens, coffeemakers, slow cookers, blenders, hand mixers, grills, food processors, juicers, toasters, irons, kettles, and bread makers. Personal Care: Hair dryers, flat irons and straighteners, rotary and foil electric shavers, personal groomers, mustache and beard trimmers, body groomers, nose and ear trimmers, women's shavers, and haircut kits. Home Appliances: Black & Decker®, Russell Hobbs®, George Foreman®, Toastmaster®, Juiceman®, Farberware®, and Breadman® Personal Care: Remington®, and LumaBella® GPC Companion Animal: Rawhide chews, dog and cat clean-up, training, health and grooming products, small animal food and care products, rawhide-free dog treats, and wet and dry pet food for dogs and cats. Aquatics: Consumer and commercial aquarium kits, stand-alone tanks; aquatics equipment such as filtration systems, heaters and pumps; and aquatics consumables such as fish food, water management and care. Companion Animal: 8IN1® (8-in-1), Dingo®, Nature's Miracle®, Wild Harvest™, Littermaid®, Jungle®, Excel®, FURminator®, IAMS® (Europe only), Eukanuba® (Europe only), Healthy-Hide®, DreamBone®, SmartBones®, ProSense®, Perfect Coat®, eCOTRITION®, Birdola®, Good Boy®, Meowee!®, Wildbird®, and Wafcol® Aquatics: Tetra®, Marineland®, Whisper®, Instant Ocean®, GloFish®, OmegaOne® and OmegaSea® H&G Household: Household pest control solutions such as spider and scorpion killers; ant and roach killers; flying insect killers; insect foggers; wasp and hornet killers; and bedbug, flea and tick control products. Controls: Outdoor insect and weed control solutions, and animal repellents such as aerosols, granules, and ready-to-use sprays or hose-end ready-to-sprays. Repellents: Personal use pesticides and insect repellent products, including aerosols, lotions, pump sprays and wipes, yard sprays and citronella candles. Cleaning: Household surface cleaning, maintenance, and restoration products, including bottled liquids, mops, wipes and markers. Household: Hot Shot®, Black Flag®, Real-Kill®, Ultra Kill®, The Ant Trap® (TAT), and Rid-A-Bug®. Controls: Spectracide®, Garden Safe®, Liquid Fence®, and EcoLogic®. Repellents: Cutter® and Repel®. Cleaning: Rejuvenate® The Company has a trademark license agreement (the "License Agreement") with Stanley Black & Decker ("SBD") pursuant to which we license the Black & Decker® (B&D) brand in North America, Latin America (excluding Brazil) and the Caribbean for four core categories of household appliances within the Company's HPC segment: beverage products, food preparation products, garment care products and cooking products; which was set to expire December 31, 2021. The Company renewed the License Agreement through June 30, 2025, including a sell-off period from April 1, 2025 to June 30, 2025 whereby the Company can continue to sell and distribute but no longer produce products subject to the License Agreement. Under the terms of the License Agreement, we agree to pay SBD royalties based on a percentage of sales, with minimum annual royalty payments of $15.0 million, with the exception of the minimum annual royalty will no longer be applied effective January 1, 2024 through the expiration of the agreement on June 30, 2025. The License Agreement also requires us to comply with maximum annual return rates for products. Subsequent to the completion of the License Agreement, there are no non-competition provisions or restrictions provided following its expiration. See Note 5 - Revenue Recognition for further detail on revenue concentration from B&D branded products. On September 8, 2021, the Company entered into a definitive Asset and Stock Purchase Agreement with ASSA ABLOY AB ("ASSA") to sell its Hardware and Home Improvement ("HHI") segment for cash proceeds of $4.3 billion, subject to customary purchase price adjustments. HHI consists of residential locksets and door hardware, including knobs, levers, deadbolts, handle sets, and electronic and connected locks under the Kwikset®, Weiser®, Baldwin®, Tell Manufacturing®, and EZSET® brands; kitchen and bath faucets and accessories under the Pfister® brand; and builders' hardware consisting of hinges, metal shapes, security hardware, rack and sliding door hardware, and gate hardware under the National Hardware® and FANAL® brands. The Company's assets and liabilities associated with the HHI disposal group have been classified as held for sale and the HHI operations have been classified as discontinued operations for all periods presented and notes to the consolidated financial statements have been updated for all periods presented to exclude information pertaining to discontinued operations and reflect only the continuing operations of the Company. Refer to Note 2 – Divestitures for more information on the HHI divestiture including the assets and liabilities classified as held for sale and income from discontinued operations. The Company is engaged with antitrust regulators in the ongoing regulatory review of the transaction and the Company is currently working to respond to such regulators' requests for additional information. Although the timing and outcome of the regulatory process cannot be predicted, the Company currently expects the merger review process to last for several months. As such, though there can be no assurance when the transaction will close, if at all, the Company does not expect the transaction to close before June 2022. SB/RH is a wholly owned subsidiary of SBH. Spectrum Brands, Inc. (“SBI”), a wholly-owned subsidiary of SB/RH incurred certain debt guaranteed by SB/RH and domestic subsidiaries of SBI. See Note 10 - Debt for more information pertaining to debt. The reportable segments of SB/RH are consistent with the segments of SBH. 33 Table of Contents Acquisitions The Company periodically evaluates strategic transactions that may result in the acquisition of a business or assets that qualify as recognition of a business combination. Acquisitions may impact the comparability of the consolidated or segment financial information with the inclusion of operating results for the acquired business in periods subsequent to acquisition date, the inclusion of acquired assets, both tangible and intangible (including goodwill), and the related amortization and depreciation of acquired assets. Moreover, the comparability of consolidated or segment financial information may be impacted by incremental costs to facilitate the transaction and supporting integration activities of the acquired operations with the consolidated group. The following acquisition activity may have a significant impact on the comparability of the financial results on the condensed consolidated financial statements. • On May 28, 2021, the Company acquired all ownership interests in For Life Products, LLC ("FLP") for a purchase price of $301.5 million. FLP is a leading manufacturer of household cleaning, maintenance, and restoration products sold under the Rejuvenate® brand. The net assets and operating results of FLP are included in the Company’s Condensed Consolidated Statements of Income and reported within the H&G reporting segment for the three month period ended January 2, 2022. • On October 26, 2020, the Company completed the acquisition of Armitage Pet Care Ltd ("Armitage") for $187.7 million. Armitage is a premium pet treats and toys business in Nottingham, United Kingdom including a portfolio of brands that include Armitage's dog treats brand, Good Boy®, cat treats brand, Meowee!®, and Wildbird® bird feed products, among others, that are predominantly sold within the United Kingdom. The net assets and results of operations of Armitage are included in the Company’s Condensed Consolidated Statements of Income and reported within the GPC reporting segment for the three month period ended January 2, 2022 and the three month period ended January 3, 2021, effective as of the acquisition date of October 26, 2020. See Note 3 – Acquisitions in the Notes to the Condensed Consolidated Financial Statements, included elsewhere in this Quarterly Report, for more information. Restructuring Activity We continually seek to improve our operational efficiency, match our manufacturing capacity, and product costs to market demand and better utilize our manufacturing resources. We have undertaken various initiatives to reduce manufacturing and operating costs, which may have a significant impact on the comparability of financial results on the condensed consolidated financial statements. See Note 4 - Restructuring and Related Charges in the Notes to the Condensed Consolidated Financial Statements, included elsewhere in this Quarterly Report for more information. Refinancing Activity Financing activity during and between comparable periods may have a significant impact on the comparability of financial results on the condensed consolidated financial statements. During the year ended September 30, 2021, the Company completed its offering of $500.0 million aggregate principal amount of its 3.875% Notes and entered into a new Term Loan Facility in the aggregate principal amount of $400.0 million on March 3, 2021. The Company also redeemed $250.0 million of the 6.125% Notes and $550.0 million of the 5.75% Notes, with a call premium of $23.4 million and non-cash write-off of unamortized debt issuance costs of $7.9 million recognized as interest expense. COVID-19 The COVID-19 pandemic and the resulting regulations continue to cause economic and social disruptions that contribute to ongoing uncertainties and may have an impact on the operations, cash flow and net assets of the Company. Such impacts may include, but are not limited to, volatility of demand for our products; disruptions and cost implications in manufacturing and supply arrangements; inability of third parties to meet obligations under existing arrangements; and significant changes to the political and economic environments in which we manufacture, sell, and distribute our products. The Company expects a continuing inflationary environment, marked with higher manufacturing and logistics costs as well as continued constraints with transportation and supply chain disruptions. Despite the supply implications, the Company has experienced increased demand for our products compared to pre-pandemic levels. There have also been changes in consumer needs and spending during the COVID-19 pandemic, and while demand for our products remain strong, our teams continue to monitor demand shifts and there can be no assurance as to the level of demand that will prevail throughout the fiscal year. We believe the severity and duration of the COVID-19 pandemic to be uncertain and may contribute to retail volatility and consumer purchase behavior changes. The COVID-19 pandemic has not had a materially negative impact on the Company’s liquidity position and we have not observed any material impairments. We continue to actively monitor our global cash and liquidity, and if necessary, could reinitiate mitigating efforts to manage non-critical spending and assess operating spend to preserve cash and liquidity. We continue to generate operating cash flows to meet our short-term liquidity needs, and we expect to maintain access to the capital markets, although there can be no assurance of our ability to do so. We expect the ultimate significance of the impact on our financial condition, results of operations, and cash flows will be dictated by the length of time that such circumstances continue, which will ultimately depend on the unforeseeable duration and severity of the COVID-19 pandemic, the emergence of variants and the effectiveness of vaccines against these variants, and any governmental and public actions taken in response. 34 Table of Contents Non-GAAP Measurements Our consolidated and segment results contain non-GAAP metrics such as organic net sales, and adjusted EBITDA (“Earnings Before Interest, Taxes, Depreciation, Amortization”) and adjusted EBITDA margin. While we believe organic net sales and adjusted EBITDA are useful supplemental information, such adjusted results are not intended to replace our financial results in accordance with Accounting Principles Generally Accepted in the United States (“GAAP”) and should be read in conjunction with those GAAP results. Organic Net Sales. We define organic net sales as net sales excluding the effect of changes in foreign currency exchange rates and impact from acquisitions (when applicable). We believe this non-GAAP measure provides useful information to investors because it reflects regional and operating segment performance from our activities without the effect of changes in currency exchange rates and acquisitions. We use organic net sales as one measure to monitor and evaluate our regional and segment performance. Organic growth is calculated by comparing organic net sales to net sales in the prior year. The effect of changes in currency exchange rates is determined by translating the period’s net sales using the currency exchange rates that were in effect during the prior comparative period. Net sales are attributed to the geographic regions based on the country of destination. We exclude net sales from acquired businesses in the current year for which there are no comparable sales in the prior year. The following is a reconciliation of reported net sales to organic net sales for the three month period ended January 2, 2022 compared to net sales for the three month period ended January 3, 2021: Three Month Periods Ended (in millions, except %) January 2, 2022 Net Sales Effect of Changes in Currency Net Sales Excluding Effect of Changes in Currency Effect of Acquisitions Organic Net Sales Net Sales January 3, 2021 Variance HPC $ 379.7 $ 5.1 $ 384.8 $ — $ 384.8 $ 378.5 $ 6.3 1.7 % GPC 302.2 2.2 304.4 (8.8) 295.6 275.4 20.2 7.3 % H&G 75.3 — 75.3 (7.7) 67.6 82.3 (14.7) (17.9) % Total $ 757.2 $ 7.3 $ 764.5 $ (16.5) $ 748.0 $ 736.2 11.8 1.6 % 35 Table of Contents Adjusted EBITDA and Adjusted EBITDA Margin. Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP measures used by management, which we believe provide useful information to investors because they reflect ongoing operating performance and trends of our segments, excluding certain non-cash based expenses and/or non-recurring items during each of the comparable periods. They also facilitate comparisons between peer companies since interest, taxes, depreciation, and amortization can differ greatly between organizations as a result of differing capital structures and tax strategies. Adjusted EBITDA is also used for determining compliance with the Company’s debt covenants. EBITDA is calculated by excluding the Company’s income tax expense, interest expense, depreciation expense and amortization expense (from intangible assets) from net income. Adjusted EBITDA further excludes: • Stock based compensation costs consist of costs associated with long-term incentive compensation arrangements that generally consist of non-cash, stock-based compensation. During the three month period ended January 3, 2021, compensation costs included incentive bridge awards previously issued due to changes in the Company’s LTIP that allowed for cash based payment upon employee election but do not qualify for shared-based compensation, which were fully vested in November 2020. See Note 16 - Share Based Compensation in the Notes to the Condensed Consolidated Financial Statements, included elsewhere in this Quarterly Report, for further details; • Restructuring and related charges consist of project costs associated with the restructuring initiatives across the Company's segments. See Note 4 - Restructuring and Related Charges in the Notes to the Condensed Consolidated Financial Statements, included elsewhere in this Quarterly Report, for further details; • Transaction related charges are attributable to costs from qualifying strategic transaction or business opportunities, including an acquisition or divestiture, whether or not consummated, subsequent integration related project costs, divestiture support and incremental separation costs. See Note 1 – Basis of Presentation & Significant Accounting Policies in the Notes to the Condensed Consolidated Financial Statements, included elsewhere in this Quarterly Report, for further details; • Unallocated shared costs associated with discontinued operations from certain shared and center-led administrative functions the Company's business units excluded from income from discontinued operations as they are not a direct cost of the discontinued business but a result of indirect allocations, including but not limited to, information technology, human resources, finance and accounting, supply chain, and commercial operations. Amounts attributable to unallocated shared costs would be mitigated through subsequent strategic or restructuring initiatives, TSAs, elimination of extraneous costs, or re-allocations or absorption of existing continuing operations following the completed sale of the discontinued operations. See Note 2 - Divestitures in Notes to the Condensed Consolidated Financial Statements, included elsewhere in this Quarterly Report for further details; • Non-cash purchase accounting inventory adjustments recognized in earnings from continuing operations subsequent to an acquisition; • Non-cash asset impairments or write-offs realized and recognized in earnings from continuing operations; • Gains attributable to the Company investment in Energizer common stock during the three month period ended January 3, 2021. which the Company subsequently sold its remaining shares in January 2021. See Note 13 – Fair Value of Financial Instruments in the Notes to the Condensed Consolidated Financial Statements, included elsewhere in this Quarterly Report, for further details; • Incremental reserves for non-recurring litigation or environmental remediation activity including the proposed settlement on outstanding litigation matters at our H&G division attributable to significant and unusual nonrecurring claims with no previous history or precedent recognized during the three month period ended January 3, 2021 and the subsequent remeasurement during the three month period ended January 2, 2022; • Incremental costs realized under a three-year tolling agreement entered into with the buyer in consideration with the divestiture of the Coevorden Operations on March 29, 2020, for the continued production of dog and cat food products purchased to support the GPC commercial operations and distribution in Europe; and • Other adjustments are primarily attributable to (1) incremental fines and penalties realized for delayed shipments following the transition of third-party logistics service provider in GPC during the three month period ended January 2, 2022; and (2) costs associated with Salus as they are not considered a component of the continuing commercial products company. Adjusted EBITDA margin is calculated as Adjusted EBITDA as a percentage of reported net sales for the respective period and segment. 36 Table of Contents The following is a reconciliation of net income to Adjusted EBITDA for the three month periods ended January 2, 2022 and January 3, 2021 for SBH. SPECTRUM BRANDS HOLDINGS, INC. (in millions) HPC GPC H&G Corporate Consolidated Three Month Period Ended January 2, 2022 Net income (loss) from continuing operations $ 19.0 $ 11.7 $ (15.8) $ (45.1) $ (30.2) Income tax benefit — — — (16.0) (16.0) Interest expense — — — 21.8 21.8 Depreciation and amortization 7.8 9.2 4.7 3.7 25.4 EBITDA 26.8 20.9 (11.1) (35.6) 1.0 Share and incentive based compensation — — — 5.6 5.6 Restructuring and related charges 0.6 11.4 — 5.4 17.4 Transaction related charges — 2.4 4.3 8.2 14.9 Unallocated shared costs — — — 6.8 6.8 Legal and environmental remediation reserves — — (0.5) — (0.5) Coevorden tolling related charges — 1.5 — — 1.5 Other — 2.5 — 0.1 2.6 Adjusted EBITDA $ 27.4 $ 38.7 $ (7.3) $ (9.5) $ 49.3 Net Sales $ 379.7 $ 302.2 $ 75.3 $ — $ 757.2 Adjusted EBITDA Margin 7.2 % 12.8 % (9.7) % — 6.5 % Three Month Period Ended January 3, 2021 Net income (loss) from continuing operations $ 38.2 $ 34.0 $ (0.5) $ (56.0) $ 15.7 Income tax benefit — — — (4.1) (4.1) Interest expense — — — 23.1 23.1 Depreciation and amortization 8.8 9.7 4.9 3.7 27.1 EBITDA 47.0 43.7 4.4 (33.3) 61.8 Share and incentive based compensation — — — 6.9 6.9 Restructuring and related charges 2.6 1.5 — 4.9 9.0 Transaction related charges 1.3 6.0 — 11.7 19.0 Unallocated shared costs — — — 6.7 6.7 Inventory acquisition step-up — 0.8 — — 0.8 Gain on Energizer investment — — — (6.0) (6.0) Legal and environmental remediation reserves — — 6.0 — 6.0 Coevorden tolling related charges — 1.6 — — 1.6 Other — — — 0.1 0.1 Adjusted EBITDA $ 50.9 $ 53.6 $ 10.4 $ (9.0) $ 105.9 Net Sales $ 378.5 $ 275.4 $ 82.3 $ — $ 736.2 Adjusted EBITDA Margin 13.4 % 19.5 % 12.6 % — 14.4 % 37 Table of Contents The following is a reconciliation of net income to Adjusted EBITDA for the three month periods ended January 2, 2022 and January 3, 2021 for SB/RH. SB/RH HOLDINGS, LLC (in millions) HPC GPC H&G Corporate Consolidated Three Month Period Ended January 2, 2022 Net income (loss) from continuing operations $ 19.0 $ 11.7 $ (15.8) $ (45.0) $ (30.1) Income tax benefit — — — (15.8) (15.8) Interest expense — — — 21.8 21.8 Depreciation and amortization 7.8 9.2 4.7 3.7 25.4 EBITDA 26.8 20.9 (11.1) (35.3) 1.3 Share and incentive based compensation — — — 5.6 5.6 Restructuring and related charges 0.6 11.4 — 5.4 17.4 Transaction related charges — 2.4 4.3 8.2 14.9 Unallocated shared costs — — — 6.8 6.8 Legal and environmental remediation reserves — — (0.5) — (0.5) Coevorden tolling related charges — 1.5 — — 1.5 Other — 2.5 — — 2.5 Adjusted EBITDA $ 27.4 $ 38.7 $ (7.3) $ (9.3) $ 49.5 Net Sales $ 379.7 $ 302.2 $ 75.3 $ — $ 757.2 Adjusted EBITDA Margin 7.2 % 12.8 % (9.7) % — 6.5 % Three Month Period Ended January 3, 2021 Net income (loss) from continuing operations $ 38.2 $ 34.0 $ (0.5) $ (55.6) $ 16.1 Income tax benefit — — — (4.0) (4.0) Interest expense — — — 23.2 23.2 Depreciation and amortization 8.8 9.7 4.9 3.7 27.1 EBITDA 47.0 43.7 4.4 (32.7) 62.4 Share and incentive based compensation — — — 6.9 6.9 Restructuring and related charges 2.6 1.5 — 4.9 9.0 Transaction related charges 1.3 6.0 — 11.7 19.0 Unallocated shared costs — — — 6.7 6.7 Inventory acquisition step-up — 0.8 — — 0.8 Gain on Energizer investment — — — (6.0) (6.0) Legal and environmental remediation reserves — — 6.0 — 6.0 Coevorden tolling related charges — 1.6 — — 1.6 Adjusted EBITDA $ 50.9 $ 53.6 $ 10.4 $ (8.5) $ 106.4 Net Sales $ 378.5 $ 275.4 $ 82.3 $ — $ 736.2 Adjusted EBITDA Margin 13.4 % 19.5 % 12.6 % — 14.5 % 38 Table of Contents Consolidated Results of Operations The following is summarized consolidated results of operations for SBH for the three month periods ended January 2, 2022 and January 3, 2021. (in millions, except %) Three Month Periods Ended Variance January 2, 2022 January 3, 2021 Net sales $ 757.2 $ 736.2 $ 21.0 2.9 % Gross profit 219.3 252.8 (33.5) (13.3) % Gross profit margin 29.0 % 34.3 % (530) bps Operating expenses 243.1 227.0 16.1 7.1 % Interest expense 21.8 23.1 (1.3) (5.6) % Other non-operating expense (income), net 0.6 (8.9) 9.5 n/m Income tax benefit (16.0) (4.1) (11.9) 290.2 % Net (loss) income from continuing operations (30.2) 15.7 (45.9) n/m Income from discontinued operations, net of tax 38.8 57.2 (18.4) (32.2) % Net income 8.6 72.9 (64.3) (88.2) % n/m = not meaningful Net Sales. The following is a summary of net sales by segment for the three month periods ended January 2, 2022 and January 3, 2021 and the principal components of changes in net sales for the respective periods. (in millions, except %) Three Month Periods Ended Variance January 2, 2022 January 3, 2021 HPC $ 379.7 $ 378.5 $ 1.2 0.3 % GPC 302.2 275.4 26.8 9.7 % H&G 75.3 82.3 (7.0) (8.5) % Net Sales $ 757.2 $ 736.2 21.0 2.9 % (in millions) Three Month Periods Ended Net Sales for the period ended January 3, 2021 $ 736.2 Increase in GPC 20.2 Increase in HPC 6.3 Decrease in H&G (14.7) Acquisition sales 16.5 Foreign currency impact, net (7.3) Net Sales for the period ended January 2, 2022 $ 757.2 Gross Profit. Gross profit for the three month period decreased primarily due to accelerated freight and input cost inflation pacing ahead of pricing actions, lower volume compared to prior year post-COVID volume growth and product mix, partially offset by lower productivity. Operating Expenses. Operating expenses for the three month period increased due to an increase in selling, general and administrative expenses of $10.9 million from higher distribution costs and operating inefficiencies from labor inflation and turnover with continued investment in marketing and new product development, offset by lower incentive compensation costs, including share based compensation, with an increase in restructuring and related charges of $8.2 million and decrease in transaction related costs of $4.1 million. Interest Expense. Interest expense for the three month period decreased due to a lower average borrowing rate following refinancing activities in the prior year. Other non-operating income, net. Other non-operating income for the three month period decreased due to realized gains on our investment in Energizer common stock in the prior year which the Company sold its remaining investment in January 2021. Income Taxes. Our estimated annual effective tax rate was impacted for the three month period by income earned outside the U.S. that is subject to U.S. tax, including the U.S. tax on global intangible low taxed income, certain nondeductible expenses, foreign rates that differ from the US federal statutory rate, and state income taxes. During the three month period ended January 2, 2022, the Company recorded a $3.2 million benefit due to the impact of an amended return filed during the quarter and the Company also recognized an additional $2.5 million benefit due to windfalls associated with the vesting of share compensation during the quarter. Income From Discontinued Operations. Income or loss attributable to discontinued operations primarily reflect the income from the discontinued operations of the HHI segment and the incremental changes to tax and legal indemnifications associated with the Company's divestitures of its GBL and GAC divisions to Energizer during the year ended September 30, 2019. Income from discontinued operations attributable to the HHI segment decreased during the three month period ended January 2, 2022 due to lower sales volume following post pandemic volumes in the prior year, increasing inflationary costs and higher freight spend, partially offset by pricing actions and lower depreciation and amortization while held for sale. Noncontrolling Interest. The net income attributable to noncontrolling interest reflects the share of the net income of our subsidiaries, which are not wholly-owned, attributable to the accounting interest. Such amount varies in relation to such subsidiary’s net income or loss for the period and the percentage interest not owned by SBH. 39 Table of Contents SB/RH The following is summarized consolidated results of operations for SB/RH for the three month periods ended January 2, 2022 and January 3, 2021: (in millions, except %) Three Month Periods Ended Variance January 2, 2022 January 3, 2021 Net sales $ 757.2 $ 736.2 $ 21.0 2.9 % Gross profit 219.3 252.8 (33.5) (13.3) % Gross profit margin 29.0 % 34.3 % (530) bps Operating expenses 242.8 226.4 16.4 7.2 % Interest expense 21.8 23.2 (1.4) (6.0) % Other non-operating expense (income), net 0.6 (8.9) 9.5 n/m Income tax benefit (15.8) (4.0) (11.8) 295.0 % Net (loss) income from continuing operations (30.1) 16.1 (46.2) n/m Income from discontinued operations, net of tax 38.8 57.2 (18.4) (32.2) % Net income 8.7 73.3 (64.6) (88.1) % n/m = not meaningful The changes in SB/RH for the three month periods are primarily attributable to the changes in SBH previously discussed. Segment Financial Data Home and Personal Care (in millions, except %) Three Month Periods Ended Variance January 2, 2022 January 3, 2021 Net sales $ 379.7 $ 378.5 $ 1.2 0.3 % Operating income 20.4 36.7 (16.3) (44.4) % Operating income margin 5.4 % 9.7 % (430) bps Adjusted EBITDA $ 27.4 $ 50.9 $ (23.5) (46.2) % Adjusted EBITDA margin 7.2 % 13.4 % (620) bps Net sales for the three month period increased driven by growth in the LATAM region from expanded distribution and strong holiday volumes, partially offset by product availability issues related to supply chain constraints to match continued demand and comparison to post COVID volume growth from replenishment orders and reopening trends in the prior year. Organic net sales increased $6.3 million, or 1.7%, excluding unfavorable foreign exchange impact. Operating income, adjusted EBITDA and margins for the three month period decreased due to accelerated freight and input cost inflation ahead of incremental pricing actions and continued investments in marketing and new product development initiatives, partially offset by productivity improvements. Global Pet Care (in millions, except %) Three Month Periods Ended Variance January 2, 2022 January 3, 2021 Net sales $ 302.2 $ 275.4 $ 26.8 9.7 % Operating income 12.3 34.1 (21.8) (63.9) % Operating income margin 4.1 % 12.4 % (830) bps Adjusted EBITDA $ 38.7 $ 53.6 $ (14.9) (27.8) % Adjusted EBITDA margin 12.8 % 19.5 % (670) bps Net sales for the three month period increased due to continued volume growth in most product categories across regions with increased demand in dog chews and treats and aquatic consumables primarily within mass market retail, acquisition sales of $8.8 million from Armitage, mitigated by COVID related supply disruptions including temporary shut-down of key supplier manufacturing facilities and continued supply chain constraints negatively impacting product availability. Organic net sales increased $20.2 million, or 7.3%, excluding unfavorable foreign currency exchange impact and acquisition sales. Operating income, adjusted EBITDA, and margins for the three month period decreased due to lower volumes and incremental operating costs and inefficiencies from labor inflation and turnover, higher freight and input cost inflation ahead of incremental pricing actions, supply chain constraints, and continued investment in marketing and new product initiatives, partially offset by productivity improvements. Home and Garden (in millions, except %) Three Month Periods Ended Variance January 2, 2022 January 3, 2021 Net sales $ 75.3 $ 82.3 $ (7.0) (8.5) % Operating loss (15.7) (0.5) (15.2) 3,040.0 % Operating loss margin (20.8) % (0.6) % (2,020) bps Adjusted EBITDA $ (7.3) $ 10.4 $ (17.7) n/m Adjusted EBITDA margin (9.7) % 12.6 % (2,230) bps n/m = not meaningful Net sales for the three month period decreased across all product categories due to higher replenishment orders to address lower year-end retailer inventory levels in the prior year coupled with supply chain and transportation challenges in the current period shifting customer product delivery past quarter-end, offset by acquisition sales of $7.7 million from Rejuvenate. Organic net sales decreased $14.7 million, or 17.9%, excluding acquisition sales. Operating income, adjusted EBITDA and margins for the three month period decreased due to freight and input cost inflation, continued marketing and product development investments, and product mix shift towards lower margin product, partially offset by pricing actions and productivity improvements. Liquidity and Capital Resources The following is a summary of the SBH and SB/RH cash flows from continuing operations for the three month periods ended January 2, 2022 and January 3, 2021, respectively. SBH SB/RH Three Month Periods Ended (in millions) January 2, 2022 January 3, 2021 January 2, 2022 January 3, 2021 Operating activities $ (255.8) $ (110.7) $ (288.3) $ (115.3) Investing activities $ (14.0) $ (76.8) $ (14.0) $ (76.8) Financing activities $ 310.0 $ (120.4) $ 342.6 $ (113.6) Cash Flows from Operating Activities Cash flows used in SBH's continuing operations increased $145.1 million primarily due to a decrease in operating results with an increase in cash paid towards working capital for inventory and inflationary costs, coupled with an increase in cash paid for taxes, transaction and restructuring related charges, partially offset by lower cash paid for interest. Cash flows used in SB/RH continuing operations increased $173.0 million primarily due to the items previously discussed above except for an incremental operating cash outflow to its parent company for federal net operating losses under the Company’s tax sharing agreement in the prior year. Cash Flows from Investing Activities Cash flows used in investing activities for SBH continuing operations decreased $62.8 million primarily due to cash paid for the acquisition of Armitage of $129.8 million net proceeds from the sale of Energizer common stock of $60.5 million in the prior year, with an increase in capital expenditures of $6.5 million predominantly due to incremental investments in updating the Company's enterprise-wide operating system to SAP S/4 HANA. Cash flows used in investing activities of SB/RH decreased primarily due to the items previously discussed. Cash Flows from Financing Activities Cash flows provided by financing activities for continuing operations increased $430.4 million primarily due to increased borrowings on the Revolver Facility, partially offset by increase in stock repurchase activity and higher share based stock award withholding payments from vesting on LTIP grants. During the three month period ended January 2, 2022, the Company realized $465.0 million of proceeds from the Revolver Facility with amortizing payments on other outstanding debt of $3.2 million. Refer to Note 10 - Debt in the Notes to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report for more information on debt borrowings. During the three month period ended January 2, 2022, the Company repurchased $110.0 million of treasury stock at an average cost of $97.44 with no issuance of common stock, other than through the Company’s share-based compensation plans. See Note 15 – Shareholders’ Equity in the Notes to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report for further detail. During the three month periods ended January 2, 2022 and January 3, 2021, SBH made cash dividend payments of $17.3 million and $17.8 million, respectively, or $0.42 per share. Cash flows from financing activity of SB/RH increased $456.2 million and is highly dependent upon the financing cash flow activities of SBH. Liquidity Outlook Our ability to generate significant cash flow from operating activities coupled with our expected ability to access the credit markets, enables us to execute our growth strategies and return value to our shareholders. Our ability to make principal and interest payment on borrowings under our debt agreements and our ability to fund planned capital expenditures will depend on the ability to generate cash in the future, which, to a certain extent, is subject to general economic, financial, competitive, regulatory and other conditions. Based upon our current level of operations, existing cash balances and availability under our credit facility, we expect cash flows from operations to be sufficient to meet our operating and capital expenditure requirements for at least the next 12 months. Additionally, we believe the availability under our credit facility and access to capital markets are sufficient to achieve our longer-term strategic plans. As of January 2, 2022, the Company had borrowing availability of $116.0 million, net of outstanding letters of credit, under our credit facility. Liquidity and capital resources of SB/RH are highly dependent upon the cash flow activities of SBH. 40 Table of Contents Short-term financing needs primarily consist of working capital requirements, restructuring initiatives, capital spending, and periodic principal and interest payments on our long-term debt. Long-term financing needs depend largely on potential growth opportunities, including acquisition activity and repayment or refinancing of our long-term obligations. We may, from time-to-time, seek to repurchase shares of our common stock. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, and other factors. Our long-term liquidity may be influenced by our ability to borrow additional funds, renegotiate existing debt, and raise equity under terms that are favorable to us. We also have long-term obligations associated with defined benefit plans with expected minimum required contributions that are not considered significant to the consolidated group. We maintain a capital structure that we believe provides us with sufficient access to credit markets. When combined with strong levels of cash flow from operations, our capital structure has provided the flexibility necessary to pursue strategic growth opportunities and return value to our shareholders. The Company’s access to capital markets and financing costs may depend on the Company’s credit ratings. None of the Company’s current borrowings are subject to default or acceleration as a result of a downgrading of credit ratings, although a downgrade of the Company’s credit ratings could increase fees and interest charges on future borrowings. At January 2, 2022, we were in compliance with all covenants under the Senior Credit Agreement and the indentures governing the 3.875% Notes, 5.00% Notes, 5.50% Notes, 5.75% Notes, and 4.00% Notes. A portion of our cash balance is located outside the U.S. given our international operations. We manage our worldwide cash requirements centrally by reviewing available cash balances across our worldwide group and the cost effectiveness with which this cash can be accessed. We generally repatriate cash from non-U.S. subsidiaries, provided the cost of the repatriation is not considered material. The counterparties that hold our deposits consist of major financial institutions. The majority of our business is not considered seasonal with a year round selling cycle that is overall consistent during the fiscal year with the exception of our H&G segment. H&G sales typically peak during the first six months of the calendar year (the Company's second and third fiscal quarters) due to customer seasonal purchasing patterns and the timing of promotional activity. This seasonality requires the Company to ship large quantities of product ahead of peak consumer buying season that can impact cash flow demands to meet manufacturing and inventory requirements earlier in the fiscal year, as well as extended credit terms and/or promotional discounts throughout the peak season. The Company enters into factoring agreements and customers' supply chain financing arrangements to provide for the sale of certain trade receivables to unrelated third-party financial institutions. The factored receivables are accounted for as a sale without recourse, and the balance of the receivables sold are removed from the Condensed Consolidated Balance Sheet at the time of the sales transaction, with the proceeds received recognized as an operating cash flow. Additionally, the Company facilitates a voluntary supply chain financing program to provide certain of its suppliers with the opportunity to sell receivables due from the Company (the Company's trade payables) to an unrelated third-party financial institution under the sole discretion of the supplier and the participating financial institution. There are no guarantees provided by the Company or its subsidiaries and we do not enter into any agreements with the suppliers regarding their participation. The Company's responsibility is limited to payments on the original terms negotiated with its suppliers, regardless of whether the suppliers sell their receivables to the financial institution, and continue to be recognized as accounts payable on the Company's Condensed Consolidated Balance Sheet with cash flow activity recognized as an operating cash flow. The COVID-19 pandemic has not, as of the date of this report, materially impacted our operations and cash flows and has not had a materially negative impact on the Company’s liquidity position, although there can be no assurance that it won't have a material negative impact on us in the future. Nonetheless, we continue to actively monitor our global cash balances and liquidity, and if necessary, could reinitiate mitigating efforts to manage non-critical spending and assess operating spend to preserve cash and liquidity. Despite recent inflationary costs and rising freight costs, we continue to generate operating cash flows to meet our short-term liquidity needs, and we expect to maintain access to the capital markets, although there can be no assurance of our ability to do so. However, the economic and social disruption attributable to the COVID-19 pandemic could lead to disruption and volatility in the global capital markets, which, depending on future developments, could impact our capital resources and liquidity in the future. During the three month period ended January 2, 2022, there has been no material changes to our debt obligations, lease obligations, employee benefit obligations or other contractual obligations or commercial commitments previously discussed in our Annual Report on Form 10-K for the year ended September 30, 2021. We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. Critical Accounting Policies and Estimates There have been no material changes to our critical accounting estimates as discussed in our Annual Report on Form 10-K for the year ended September 30, 2021. New Accounting Pronouncements See Note 1 – Basis of Presentation and Significant Accounting Policies of Notes to the Condensed Consolidated Financial Statements elsewhere included in this Quarterly Report for information about accounting pronouncements that are newly adopted and recent accounting pronouncements not yet adopted. 41 Table of Contents Guarantor Statements - SB/RH SBI has issued the 5.75% Notes under the 2025 Indenture, the 4.00% Notes under the 2026 Indenture, the 5.00% Notes under the 2029 Indenture, the 5.50% Notes under the 2030 Indenture, and the 3.875% Notes under the 2031 Indentures (collectively, the “Notes”). The Notes are unconditionally guaranteed, jointly and severally, on a senior unsecured basis by SB/RH and SBI’s domestic subsidiaries. The Notes and the related guarantees rank equally in right of payment with all of SBI and the guarantors’ existing and future senior indebtedness and rank senior in right of payment to all of SBI and the guarantors’ future indebtedness that expressively provide for its subordination to the Notes and the related guarantees. Non-guarantor subsidiaries primarily consist of SBI’s foreign subsidiaries. The following financial information consists of summarized financial information of the Obligor, presented on a combined basis. The “Obligor” consists of the financial statements of SBI as the debt issuer, SB/RH as a parent guarantor, and the domestic subsidiaries of SBI as subsidiary guarantors. Intercompany balances and transactions between SBI and the guarantors have been eliminated. Investments in non-guarantor subsidiaries and the earnings or losses from those non-guarantor subsidiaries have been excluded. Three Month Period Ended Year Ended (in millions) January 2, 2022 September 30, 2021 Statements of Operations Data Third party net sales $ 383.2 $ 1,774.2 Intercompany net sales to non-guarantor subsidiaries 4.4 18.8 Net sales 387.6 1,793.0 Gross profit 79.4 555.5 Operating loss (83.2) (79.5) Net loss from continuing operations (84.6) (116.2) Net (loss) income (66.4) 28.6 Net (loss) income attributable to controlling interest (66.4) 28.6 Statements of Financial Position Data Current Assets $ 2,117.0 $ 1,999.1 Noncurrent Assets 2,274.2 2,090.2 Current Liabilities 799.9 936.1 Noncurrent Liabilities 3,552.4 2,881.7 The Obligor’s amounts due from, due to the non-guarantor subsidiaries as of January 2, 2022 and September 30, 2021 are as follows: (in millions) January 2, 2022 September 30, 2021 Statements of Financial Position Data Current receivables from non-guarantor subsidiaries $ 41.5 $ 9.5 Long-term receivable from non-guarantor subsidiaries 393.4 202.8 Current payable to non-guarantor subsidiaries 229.6 266.2 Long-term debt with non-guarantor subsidiaries 360.1 123.3