NEWELL BRANDS INC. The following discussion and analysis provides information which management believes is relevant to an assessment and understanding ofNewell 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 Forward-looking statements in this Quarterly Report on Form 10-Q (this "Quarterly Report") are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements generally can be identified by the use of words such as "intend," "anticipate," "believe," "estimate,", "explore", "project," "target," "plan," "expect," "setting up," "beginning to," "will," "should," "would," "resume," or similar statements. The Company cautions that forward-looking statements are not guarantees because there are inherent difficulties in predicting future results, including the impact of the COVID-19 pandemic. In addition, there are no assurances that the Company will complete any or all of the potential transactions, or other initiatives referenced here. 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 manage the demand, supply, and operational challenges associated with the actual or perceived effects of the COVID-19 pandemic; •the Company's dependence on the strength of retail, commercial and industrial sectors of the economy in various parts of the world; •competition with other manufacturers and distributors of consumer products; •major retailers' strong bargaining power and consolidation of the Company's customers; •risks related to the Company's substantial indebtedness, potential increases in interest rates or additional adverse changes in the Company's credit ratings; •the Company's ability to improve productivity, reduce complexity and streamline operations; •future events that could adversely affect the value of our assets and/or stock price and require additional impairment charges; •the Company's ability to remediate the material weakness in internal control over financial reporting and to maintain effective internal control over financial reporting; •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 promotion and spend; •the Company's ability to complete planned divestitures, and other unexpected costs or expenses associated with dispositions; •changes in the prices of raw materials and sourced products and the Company's ability to obtain raw materials and sourced products in a timely manner; •the impact of governmental investigations, inspections, lawsuits or other activities by third parties; •the risks inherent to the Company's foreign operations, including currency fluctuations, exchange controls and pricing restrictions; •a failure of one of the Company's key information technology systems, networks, processes or related controls or those of the Company's services providers; •the impact ofU.S. or foreign regulations on the Company's operations, including the escalation of tariffs on imports into theU.S. and exports toCanada ,China and theEuropean Union and environmental remediation costs; •the potential inability to attract, retain and motivate key employees; •newTreasury or tax regulations 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 •other factors listed from time to time in ourSEC filings, including but not limited to our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. 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. 33 -------------------------------------------------------------------------------- Table of Contents OverviewNewell Brands is a global marketer of consumer and commercial products that make life better every day for consumers, where they live, learn, work and play. Our products are marketed under a strong portfolio of leading brands, including Paper Mate®, Sharpie®, Dymo®, EXPO®, Parker®, Elmer's®, Coleman®, Marmot®, Oster®, Sunbeam®, FoodSaver®, Mr. Coffee®, Rubbermaid Commercial Products®, Graco®, Baby Jogger®, NUK®, Calphalon®, Rubbermaid®, Contigo®, First Alert®, Mapa®, Spontex®, Quickie® and Yankee Candle®. The Company sells its products in nearly 200 countries around the world and has operations on the ground in nearly 100 of these countries. Business Strategy The Company is currently executing a turnaround strategy, with the vision of building a global, next generation consumer products company that can unleash the full potential of its brands in a fast moving omni-channel environment. These strategies are designed to address key challenges facing the Company, including: shifting consumer preferences and behaviors; a highly competitive operating environment; a rapidly changing retail landscape, including the growth in e-commerce; continued macroeconomic and political volatility; and an evolving regulatory landscape. The Company has identified the following strategic imperatives to address and adapt to these challenges during its turnaround period: •Strengthen the portfolio by investing in attractive categories aligned with its capabilities and strategy; •Sustainable profitable growth by focusing on innovation, as well as growth in digital marketing, e-commerce and its international businesses; •Attractive margins by driving productivity and overhead savings to reinvest into the business; •Cash efficiency by improving key working capital metrics, resulting in a lower cash conversion cycle; and •Build a winning team through engagement and focusing the best people on the right things. Execution on these strategic imperatives will better position the Company for long-term sustainable growth in order to achieve its short-to-near-term goals of: •Growing core sales; •Improving operating margins; •Accelerating cash conversion cycle; and •Strengthening organizational capability and employee engagement.
Organizational Structure
The Company's four primary reportable segments are as follows:
Segment Key Brands Description of Primary Products Appliances and Cookware Calphalon®, Crock-Pot®, Mr. Coffee®,
Household products, including kitchen appliances,
Oster® and Sunbeam® gourmet cookware, bakeware and cutlery
Food and Commercial Ball® (1), FoodSaver®, Rubbermaid®, Food storage and home storage products, fresh preserving
Rubbermaid Commercial Products®, products, vacuum sealing products, commercial cleaning
Sistema®, Mapa®, Quickie® and Spontex® and maintenance solutions, hygiene systems and material
handling solutions
Home and Chesapeake Bay Candle®, Coleman®, Products for outdoor and outdoor-related activities, Outdoor Living
Contigo®, ExOfficio®, First Alert®, home fragrance products and connected home and security
Marmot®, WoodWick® and Yankee Candle®
Learning and Aprica®, Baby Jogger®, Dymo®, Elmer's®, Writing instruments, including markers and highlighters, Development
EXPO®, Graco®, Mr. Sketch®, NUK®, Paper pens and pencils; art products; activity-based adhesive
Mate®, Parker®, Prismacolor®, Sharpie®, and cutting products; labeling solutions; baby gear and
Tigex® Waterman® and X-Acto® infant care products
(1) Ball® TM of Ball Corporation, used under license.
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The Company also provides general corporate services to its segments which is
reported as a non-operating segment, Corporate. See Footnote 17 of the Notes to
the Unaudited Condensed Consolidated Financial Statements for further
information.
Recent Developments
Coronavirus (COVID-19)
Beginning late in the fourth quarter and into 2020, COVID-19 emerged and
subsequently spread globally, ultimately being declared as a pandemic by the
World Health Organization . The pandemic has resulted in various federal, state
and local governments as well as private entities mandating restrictions,
including travel restrictions, restrictions on public gatherings, closure of
non-essential commerce, stay at home orders and quarantining of people who may
have been exposed to the virus. The Company began to experience significant
COVID-19 related disruption to its business in three primary areas:
•Supply chain. While the majority of the Company's factories are considered
essential in their applicable jurisdictions and are operational, the company is
experiencing disruption at certain of its facilities. Of its 135 manufacturing
and distribution facilities, approximately 20 are temporarily closed, the most
significant of which are its South Deerfield, MA , Home Fragrance plant, its
Mexicali, Mexico and India Writing facilities and its Juarez, Mexico Connected
Home and Security facility, all of which were closed in line with state
government guidelines. The Mexicali, Mexico facility has since reopened on a
limited basis and is currently in the process of ramping up to full operations.
The Company is also facing intermittent transportation and logistical
challenges.
•Retail. While the Company's largest retail customers are experiencing a surge
in sales as their stores remain open, a number of secondary customers, primarily
in the specialty and department store channels, have temporarily closed their
brick and mortar doors. These dynamics, in combination with some retailers'
prioritization of essential items, have had a meaningful impact on retailers'
order patterns. In addition, the Company temporarily closed its Yankee Candle
retail stores in North America as of mid-March.
•Consumer demand patterns. As the quarantine phase of the pandemic has taken
hold, consumer purchasing behavior has strongly shifted to certain focused
categories. While certain of the Company's businesses have benefited from this
shift, including Food and Commercial, others have seen significant slowing.
In response to the COVID-19 pandemic, the Company has focused on three
priorities: protecting the health and well-being of its employees; maintaining
financial viability and business continuity; and keeping manufacturing
facilities and distribution centers operating, where deemed prudent, to provide
products to our consumers. The Company has established internal protocols
including the establishment of a COVID-19 task force to monitor the situation,
as well as communications and guidance issued by foreign, federal, state and
local governments. In the first quarter 2020, the Company instituted mandatory
work-from-home policies for employees able to work from home in various
locations around the world and implemented a number of precautionary measures at
its manufacturing plants, warehouses, distribution centers and R&D centers to
reduce person to person contact and improve the personal safety for our
front-line employees. Furthermore, beginning in mid-March 2020 , the Company
began temporarily closing all of the world-wide retail stores within its Home
and Outdoor Living segment. While most of the Company's manufacturing and
distribution sites remain open, the Company has also experienced temporary
closure of certain key operating facilities in the Home and Outdoor Living and
Learning & Development segments, and additional COVID-19 related closures could
further disrupt the Company's supply chain. The Company continues to monitor
developments, including government requirements and recommendations at the
national, state, and local level to evaluate possible cessation or extensions to
all or part of such initiatives. As part of the Company's efforts to contain
costs and maintain financial liquidity and flexibility, it has taken certain
actions including: instituting a hiring freeze for non-essential roles,
furloughed all field-based and most corporate retail employees in North America ,
effective April 1, 2020 , tightened discretionary spending as well as reducing
and optimizing advertising and promotional expenses.
As the COVID-19 pandemic continues to evolve, the Company believes the extent of
the impact to its businesses, operating results, cash flows, liquidity and
financial condition will be primarily driven by the severity and duration of the
pandemic, the pandemic's impact on the U.S. and global economies and the timing,
scope and effectiveness of federal, state and local governmental responses to
the pandemic. Those primary drivers are beyond the Company's knowledge and
control, and as a result, at this time it is difficult to predict the cumulative
impact, both in terms of severity and duration, COVID-19 will have on its sales,
operating results, cash flows and financial condition. However, the effects that
the Company has experienced in the first quarter have been material to its
operating results and we anticipate the Company's second quarter results will
worsen sequentially. Furthermore, the impact to the Company's businesses,
operating results, cash flows, liquidity and financial condition may be further
adversely impacted if the current circumstances continue to exist for a
prolonged period of time.
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During the first quarter of 2020, the Company concluded that an impairment
triggering event had occurred as a result of the COVID-19 global pandemic. See
Footnotes 1 and 7 of the Notes to the Unaudited Condensed Consolidated Financial
Statements, Goodwill and Other Indefinite-Lived Intangible Asset Trigger Event,
Liquidity and Capital Resources, Significant Accounting Policies and Critical
Estimates for information and Risk Factors in Part II, Item 1A.
During the first quarter of 2020, the Company concluded that a triggering event had occurred for all of its reporting units as a result of the COVID-19 global pandemic. Pursuant to the authoritative literature the Company performed an impairment test and determined that certain of its indefinite-lived intangible assets in the Appliances and Cookware, Home and Outdoor Living and Learning and Development segments were impaired. During the three months endedMarch 31, 2020 , the Company recorded an aggregate non-cash charge of$1.3 billion to reflect impairment of these indefinite-lived trade names as their carrying values exceeded their fair values. In addition, the Company determined that its goodwill associated with its Appliances and Cookware segment was impaired. During, the three months endedMarch 31, 2020 , the Company recorded a non-cash charge of$212 million to reflect the impairment of its goodwill as its carrying value exceeded its fair value.
See Footnotes 1 and 7 of the Notes to the Unaudited Condensed Consolidated Financial Statements and Significant Accounting Policies and Critical Estimates for information.
Ratings Downgrades and Commercial Paper Access
OnMarch 9, 2020 , Moody's Corporation ("Moody's") downgraded the Company's debt rating to "Ba1" based on a view that the Company would fail to meet Moody's target debt level for 2020. Prior to that, onNovember 1, 2019 , S&P Global Inc. ("S&P") downgraded the Company's debt rating to "BB+" as S&P believed the Company would fail to meet S&P's target debt level for 2019. As a result of both downgrades, the Company's ability to borrow under its commercial paper program was eliminated. Previously, the Company was able to issue commercial paper up to a maximum of$800 million provided there was a sufficient amount available for borrowing under the Company's$1.25 billion unsecured revolving credit facility that matures inDecember 2023 ("the Credit Revolver"). The Company's ability to borrow under the Credit Revolver was not affected by the downgrades. The interest rate for borrowings under the Credit Revolver is the borrowing period referenced LIBOR rate plus 127.5 basis points. As such, the Company does not expect any change in its ability to access liquidity in the short term as a result of the downgrades. AtMarch 31, 2020 , the Company had$40 million outstanding under its commercial paper program, which was subsequently repaid in April when the Company accessed$125 million under the Credit Revolver. AtMarch 31, 2020 , the Company did not have any amounts outstanding under the Credit Revolver. Subsequently onApril 15, 2020 , Fitch Ratings ("Fitch") downgraded the Company's debt rating to "BB" as they believed the Company would fail to meet Fitch's target debt level for 2020. Certain of the Company's senior notes aggregating to approximately$4.5 billion are subject to an interest rate adjustment of 25 basis points as a result of each downgrade, for a total of 50 basis points. This increase to the interest rates of the Company's senior notes subject to adjustment is expected to increase the Company's interest expense for 2020 by approximately$17 million and approximately$23 million on an annualized basis. The Fitch downgrade did not impact the interest rates on any of the Company's senior notes.
See Footnote 9 of the Notes to the Unaudited Condensed Consolidated Financial Statements and Liquidity and Capital Resources for further information.
Impacts of Tariffs
The United States Trade Representative ("USTR") has imposed increased tariffs on
some Chinese goods imported into the United States , resulting in increased costs
for the Company. The Company has been successful at securing from the USTR
exemptions and exclusions for some of its products, with the most notable
exemptions being for certain of its baby gear products, which represents a
substantial portion of the Company's tariff exposure. The Company has largely
mitigated its tariff exposure, in part through pricing, productivity and, in
some cases, relocation. The Phase 1 agreement signed on January 15, 2020 with
China reduced tariffs under List 4a from 15% to 7.5%, effective February 14,
2020 , and suspended tariffs under List 4b at 15%, which were due to go into
effect on December 15, 2019 . The terms of the agreement significantly reduced
the estimated impact on tariffs for 2020. In spite of the agreement, a full year
of previously implemented tariffs, could have a material impact on the Company's
operating results and cash flows, with an estimated gross impact of
approximately $75 million in 2020, primarily relating to its Appliances and
Cookware, Consumer and Commercial, and Outdoor and Recreation businesses. During
the three months ended March 31, 2020 , the gross impact was approximately $20
million . The Company will continue to monitor the trade negotiations and deploy
mitigation efforts to offset the gross exposure. However, there can be no
assurance that the Company will be successful in its mitigation efforts.
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New Treasury Regulations
OnJune 18, 2019 , theU.S. Treasury and the Internal Revenue Service released temporary regulations under IRC Section 245A ("Section 245A") as enacted by the 2017 U.S. Tax Reform Legislation ("2017 Tax Reform") and IRC Section 954(c)(6) (the "Temporary Regulations") to apply retroactively to the date the 2017 Tax Reform was enacted. The Temporary Regulations seek to limit the 100% dividends received deduction permitted by Section 245A for certain dividends received from controlled foreign corporations and to limit the applicability of the look-through exception to foreign personal holding company income for certain dividends received from controlled foreign corporations. Before the retroactive application of the Temporary Regulations, the Company benefited in 2018 from both the 100% dividends received deduction and the look-through exception to foreign personal holding company income. The Company has analyzed the Temporary Regulations and concluded that the relevant Temporary Regulations were not validly issued. Therefore, the Company has not accounted for the effects of the Temporary Regulations in its Condensed Consolidated Financial Statements for the period endingMarch 31, 2020 . The Company believes it has strong arguments in favor of its position and believes it has met the more likely than not recognition threshold that its position will be sustained. However, due to the inherent uncertainty involved in challenging the validity of regulations as well as a potential litigation process, there can be no assurances that the relevant Temporary Regulations will be invalidated or that a court of law will rule in favor of the Company. If the Company's position on the Temporary Regulations is not sustained, the Company would be required to recognize an income tax expense of approximately$180 million to$220 million related to an income tax benefit from fiscal year 2018 that was recorded based on regulations in existence at the time. In addition, the Company may be required to pay any applicable interest and penalties. The Company intends to vigorously defend its position.
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