Item 1A. Risk Factors
Item 1A. Risk Factors
Information about our risk factors is contained in Item 1A of our 2023 Annual Report, and in Item 1A of our Quarterly Reports on Form 10-Q for quarterly periods subsequently filed. We believe that as of June 30, 2024, there have been no material changes in our risk factors from those disclosed in Item 1A of our 2023 Annual Report, and in Item 1A of our Quarterly Reports on Form 10-Q for quarterly periods subsequently filed. The risk factors set forth below supplement the risk factors previously disclosed in Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year ended September 30, 2023 and our Quarterly Reports on Form 10-Q.
Risks Related to our Business Operations
Our plans to separate our HPC business into an independent, publicly traded company may not be completed on the currently contemplated timeline or at all and may not achieve the intended benefits.
We plan to divest of our HPC business through a sale or spin of the segment. A spin off would be through a pro rata distribution of shares to our common stockholders and the recognition of two distinct and independent, publicly traded companies. The proposed spin is subject to various conditions, is complex in nature, and may be affected by unanticipated developments, credit and equity markets, or changes in market conditions. As independent, publicly traded companies, each of the resulting companies will be smaller and less diversified than the existing company, with a narrower business focus, and they may be more vulnerable to changing market conditions.
We may not be able to achieve the full strategic and financial benefits that we anticipate to result from the separation, or such benefits may be delayed or not occur at all. We may experience negative reactions from financial markets if we do not complete the separation in a reasonable time period, or at all. Following the proposed separation, the combined value of the shares of the two publicly traded companies may not be equal to or greater than what the value of our common stock would have been had the proposed separation not occurred. In addition, the cost and resources required to effectuate the separation may be significantly higher than what we currently anticipate.
Any of these factors could have a material adverse effect on our business, financial condition, results of operations, cash flows or the price of our common stock.
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Risks Related to Indebtedness and Financing Abilities
Servicing our existing and future debt may require a significant amount of cash, and we may not have sufficient cash flow from our business to settle exchanges of the Exchangeable Notes in cash, repay the Exchangeable Notes at maturity, or repurchase the Exchangeable Notes as required following a fundamental change.
In May 2024, Spectrum Brands, Inc. (“SBI”) issued $350.0 million aggregate principal amount of Exchangeable Notes, which are unconditionally guaranteed, jointly and severally, on a senior unsecured basis by SBH and, subject to certain exceptions, each of SBI’s existing and future domestic subsidiaries that guarantee other debt securities issued by SBI or SBH in the form of senior unsecured notes or convertible or exchangeable notes. Prior to March 1, 2029, the Exchangeable Notes are exchangeable at the option of the holders only under certain conditions or upon occurrence of certain events as described in Note 8 - Debt within the Notes to the Condensed Consolidated Financial Statements, included elsewhere in this Quarterly Report on Form 10-Q. Upon any exchange of the Exchangeable Notes, SBI is required to settle the principal amount (or, if less, the conversion value) of the Exchangeable Notes in cash upon any exchange of the Exchangeable Notes. As a result, if holders of the Exchangeable Notes elect to exchange their Exchangeable Notes, SBI will be required to make cash payments in respect of the Exchangeable Notes being exchanged. Holders of the Exchangeable Notes also have the right to require SBI to repurchase all or a portion of their Exchangeable Notes upon the occurrence of a “fundamental change” (as defined in the indenture governing the Exchangeable Notes) at a repurchase price equal to 100% of the principal amount of the Exchangeable Notes to be repurchased, plus accrued and unpaid interest, if any. If the Exchangeable Notes have not previously been exchanged, redeemed or repurchased, SBI will be required to repay the outstanding principal amount of the Exchangeable Notes, plus accrued and unpaid interest, if any, in cash at maturity. The Exchangeable Notes are scheduled to mature on June 1, 2029.
SBI’s ability to make required cash payments in connection with exchanges of the Exchangeable Notes, repurchase the Exchangeable Notes in the event of a fundamental change, or to repay or refinance the Exchangeable Notes at maturity will depend on market conditions and our past and expected future performance, which is subject to economic, financial, competitive, and other factors beyond our and SBI’s control. We also may not use the cash proceeds we raised through the issuance of the Exchangeable Notes in an optimally productive and profitable manner.
In addition, SBI’s ability to repurchase or pay cash upon exchange or at maturity of the Exchangeable Notes may be limited by law, regulatory authority or the terms of our other then-existing indebtedness. SBI’s failure to repurchase Exchangeable Notes following a fundamental change or to pay cash upon exchange or at maturity of the Exchangeable Notes as required by the indenture would constitute a default under such indenture. A default under the indenture or the fundamental change itself could also lead to a default under our senior credit facility, our other outstanding indebtedness, or agreements governing our future indebtedness and could have a material adverse effect on our business, results of operations, and financial condition. If the payment of the related indebtedness were to be accelerated after any applicable notice or grace periods, SBI and/or the guarantors party to the indenture governing the Exchangeable Notes may not have sufficient funds to repay the indebtedness and repurchase the Exchangeable Notes or to pay cash upon exchange or at maturity of the Exchangeable Notes.
The capped call transactions we entered into in connection with the issuance of the Exchangeable Notes may affect the value of our common stock.
In connection with the issuance of the Exchangeable Notes, we entered into privately negotiated capped call transactions with various option counterparties (the “Capped Calls”). The Capped Calls cover, subject to customary anti-dilution adjustments, the aggregate number of shares of our common stock initially underlying the Exchangeable Notes. The Capped Calls are expected generally to reduce the potential dilution to our common stock and/or offset any potential cash payments we are required to make in excess of the principal amount upon any exchange of the Exchangeable Notes, with such reduction or offset, as the case may be, subject to a cap based on the cap price, which is currently approximately $159.36 per share of our common stock.
From time to time, the counterparties to the Capped Calls (the “option counterparties”) or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the Exchangeable Notes. This activity could also cause or prevent an increase or a decrease in the market price of our common stock or the Exchangeable Notes.
Aspects of the Capped Calls may not operate as planned and may affect the value of the Exchangeable Notes and our common stock, and we are subject to counterparty credit risk with respect to the Capped Calls.
In connection with the pricing of the Exchangeable Notes, we entered into the Capped Calls. Please refer to Note 8 - Debt within the Notes to the Condensed Consolidated Financial Statements, included elsewhere in this Quarterly Report on Form 10-Q. The Capped Calls are expected generally to reduce the potential dilution to our common stock and/or offset any potential cash payments we are required to make in excess of the principal amount upon any exchange of the Exchangeable Notes, with such reduction or offset, as the case may be, subject to a cap based on the cap price. The Capped Calls are complex transactions that are not part of the terms of the Exchangeable Notes and may not operate as planned. If the Capped Calls do not operate as we intend, it may have an effect on the price of the Exchangeable Notes or our common stock.
The option counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions following any exchange of the Exchangeable Notes, any repurchase of the Exchangeable Notes by us on any fundamental change repurchase date or any redemption date, or, if we exercise our option to terminate the relevant portion of the Capped Calls, any other date on which the Exchangeable Notes are retired by us. This activity could cause or avoid an increase or a decrease in the market price of our common stock or the Exchangeable Notes, which could affect the ability of a holder to exchange the Exchangeable Notes and, to the extent the activity occurs during any observation period related to an exchange of Exchangeable Notes, could affect the number of shares of common stock, if any, and value of the consideration that a holder will receive upon exchange of the Exchangeable Notes.
The option counterparties are financial institutions, and we are subject to the risk that they might default under the Capped Calls. Our exposure to the credit risk of the option counterparties is not secured by any collateral. If an option counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under our transactions with that option counterparty. Our exposure will depend on many factors, but, generally, the increase in our exposure will be correlated with increases in the market price or the volatility of our common stock. In addition, upon a default by an option counterparty, we may suffer adverse tax consequences and more dilution than we currently anticipate with respect to our common stock. We can provide no assurances as to the financial stability or viability of any option counterparty.
The conditional exchange feature of the Exchangeable Notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional exchange feature of the Exchangeable Notes is triggered, holders of the Exchangeable Notes will be entitled to exchange the Exchangeable Notes at any time during specified periods at their option. If one or more holders elect to exchange their Exchangeable Notes, SBI would be required to settle any exchanged principal amount of such Exchangeable Notes through the payment of cash, which could adversely affect our and/or SBI’s liquidity. In addition, even if holders do not elect to exchange their Exchangeable Notes, SBI could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Exchangeable Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
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The accounting method for the Exchangeable Notes could adversely affect our financial condition and results.
We have adopted accounting guidance that simplifies the accounting for convertible debt that may be settled in cash. As a result, the Exchangeable Notes are recorded on our balance sheet at face value less unamortized debt issuance costs, with interest expense reflecting the cash coupon plus the amortization of the capitalized issuance costs. Additionally, we apply the if-converted method to the Exchangeable Notes in calculating earnings per share, which may reduce our reported diluted earnings per share to the extent that the exchange value of the Exchangeable Notes of such Exchangeable Notes exceeds their principal amount.
Because SBI must settle at least a portion of the Exchangeable Notes in cash, the exchange of the Exchangeable Notes could materially and adversely affect our and SBI’s financial position and liquidity. Before March 1, 2029, holders of the Exchangeable Notes will have the right to exchange their Exchangeable Notes only upon the occurrence of certain events. From and after March 1, 2029, holders of the Exchangeable Notes may exchange their Exchangeable Notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date. However, many of the conditions that permit the exchange of the Exchangeable Notes before March 1, 2029 are beyond our and SBI’s control. SBI could be required to expend a significant amount of cash to settle exchanges, which could significantly harm our and SBI’s financial position and liquidity.
We cannot be sure whether changes may be made to the current accounting standards related to the Exchangeable Notes, or otherwise, that could have a material effect on our reported financial results.
Provisions in the indenture for the Exchangeable Notes may deter or prevent a strategic transaction that may be favorable to you.
If a fundamental change occurs prior to the maturity date of the Exchangeable Notes, subject to a limited exception, holders of the Exchangeable Notes will have the right, at their option, to require SBI to repurchase all or a portion of their Exchangeable Notes. In addition, if a “make-whole fundamental change” (as defined in the indenture governing the Exchangeable Notes) occurs prior the maturity date, SBI will in some cases be required to increase the exchange rate for a holder that elects to exchange all or a portion of its Exchangeable Notes in connection with such make-whole fundamental change. Furthermore, the Exchangeable Notes indenture will prohibit SBI from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes SBI’s obligations under the Exchangeable Notes. These and other provisions in the indenture could increase the cost of acquiring us or otherwise discourage a third party from acquiring us or removing incumbent management, including in a transaction that you may view as favorable.
The issuance of additional stock, including common stock delivered upon exchange of the Exchangeable Notes, will dilute all other shareholders.
The issuance of additional stock in connection with acquisitions, financings, our equity incentive plans, the Exchangeable Notes, or otherwise will dilute all other shareholders. Our restated certificate of incorporation authorizes us to issue up to two hundred million shares of common stock with such rights and preferences as may be determined by our board of directors. Subject to compliance with applicable rules and regulations, we may issue all of these shares that are not already outstanding without any action or approval by our shareholders. We intend to continue to evaluate strategic acquisitions or opportunities in the future. We may pay for such acquisitions or opportunities, in part or in full, through the issuance of additional equity securities. Further, the exchange of some or all of the Exchangeable Notes will dilute the ownership interests of existing shareholders to the extent SBI delivers shares of our common stock upon exchange of any of the Exchangeable Notes.
The issuance, delivery or sale of shares of our common stock, or rights to acquire shares of our common stock, could depress the trading price of our common stock and the Exchangeable Notes.
SBI or we may conduct future offerings of our common stock, preferred stock or other securities that are convertible into or exercisable or exchangeable for our common stock to finance our operations or fund acquisitions, or for other purposes. In addition, we have reserved shares of our common stock, which are available for issuance or delivery in the future under our equity incentive plan. The indenture for the Exchangeable Notes will not restrict our or SBI’s ability to issue additional equity securities in the future. If SBI delivers or we issue additional shares of our common stock or rights to acquire shares of our common stock, if any, or if our existing stockholders sell a substantial amount of our common stock, or if the market perceives that such issuances, deliveries or sales may occur, then the trading price of our common stock and, accordingly, the Exchangeable Notes may significantly decline. In addition, SBI’s delivery or our issuance of additional shares of our common stock will dilute the ownership interests of our existing common stockholders, including Exchangeable Note holders who have received shares of our common stock upon exchange of their Exchangeable Notes.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.