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Spectrum Brands Holdings Reports Fiscal 2018 Fourth Quarter Results from Continuing Operations

November 19, 2018

MIDDLETON, Wis.--(BUSINESS WIRE)--Nov 19, 2018--Spectrum Brands Holdings, Inc. (NYSE: SPB; “Spectrum” or the “Company”), a leading global branded consumer products company focused on driving innovation and providing exceptional customer service, today reported results from continuing operations for the fourth quarter of fiscal 2018 ended September 30, 2018.

As previously announced, effective July 13, 2018, the Company completed its merger (the “HRG merger”) with HRG Group, Inc. (“HRG”), its former majority shareholder. Following the completion of the HRG Merger, HRG emerged as the surviving legal entity and was renamed Spectrum Brands Holdings, Inc., with a combined shareholder group of the two former companies. In addition, this press release includes non-GAAP metrics such as organic net sales, adjusted diluted earnings per share (EPS), adjusted EBITDA, adjusted EBITDA margin, organic adjusted EBITDA and adjusted free cash flow. See “Other Supplemental Information” below for reconciliation to comparable GAAP metrics. Also see “Classification of the Company’s Reporting Segments” below for a discussion of the Company’s reporting segments.

“Fiscal 2018 was a year of significant transformation at Spectrum Brands, as we advanced our plan to create a more focused company with improved financial strength and flexibility to drive long-term growth and value,” said David Maura, Chairman and Chief Executive Officer of Spectrum Brands Holdings. “During the year, we completed or entered meaningful transactions and made significant management, operational and strategic changes and investments that are expected to create a more focused and financially stronger business that is well positioned for the future.”

With these transformative actions in fiscal 2018 and following the divestiture of the Company’s Global Batteries and Lighting business and the Global Auto Care business, in fiscal 2019 the Company expects to:

Have meaningfully less leverage, with total debt to adjusted EBITDA expected to decline from 5.8x to approximately 3.5x EBITDA; Consist of a narrower portfolio of four business units (Hardware and Home Improvement, Home & Garden, Pet and Appliances), providing a greater focus and clarity of purpose to produce innovative and exciting new products with excellent customer service; Increase investment in its core businesses units, including in the areas of research and development, innovation, new product development, digital marketing and brand support to drive sustainable and profitable growth; Achieve meaningful organic revenue growth from continuing operations in fiscal 2019 driven by innovation, increased marketing investments, pricing actions, including tariff-related increases, and market share gains; Deliver fiscal 2019 adjusted EBITDA from continuing operations in the $560 to $580 million range after rebasing the Company; and Maintain a strong liquidity position, which at the end of fiscal 2018 was $1.3 billion, including $552 million of cash and $777 million available under the Company’s cash flow revolver.

Fiscal 2018 Fourth Quarter Highlights from Continuing Operations:

Net sales of $787.8 million in the fourth quarter of fiscal 2018 were unchanged compared to $787.8 million last year. Excluding the impact of $3.1 million of unfavorable foreign exchange, organic net sales of $790.9 million increased 0.4 percent versus the prior year. Net loss from continuing operations of $(150.3) million and diluted loss per share from continuing operations of $(3.00) in the fourth quarter of fiscal 2018 compared to a net loss from continuing operations of $(32.5) million and diluted loss per share from continuing operations of ($1.01) in fiscal 2017 primarily due to the write-off from impairment of goodwill, HRG merger costs, lower gross profit and higher distribution costs. Adjusted diluted EPS from continuing operations of $0.79 in the fourth quarter of fiscal 2018 decreased 7.1 percent versus $0.85 last year predominantly due to lower gross profit and higher distribution costs. Operating loss of $(78.8) million in the fourth quarter of fiscal 2018 compared to operating income of $45.8 million last year primarily as a result of the write-off from impairment of goodwill in Global Auto Care, HRG merger costs, operating inefficiencies, input cost inflation and higher distribution costs. Adjusted EBITDA of $134.1 million in the fourth quarter of fiscal 2018 decreased 23.1 percent compared to $174.5 million in fiscal 2017. Excluding the impact of $2.0 million of favorable foreign exchange, organic adjusted EBITDA of $132.1 million fell 24.3 percent versus the prior year. Adjusted EBITDA margin of 17.0 percent in the fourth quarter of fiscal 2018 decreased 520 basis points compared to 22.2 percent in fiscal 2017 primarily due to operating inefficiencies, input cost inflation and higher distribution costs.

While the transformational actions taken are expected to position Spectrum Brands for growth and success in the future, fourth quarter results, notably adjusted EBITDA and margins, were disappointing across the business units, which cumulatively resulted in adjusted EBITDA coming in below expectations as summarized below:

Home & Garden – $12 million driven by lower-than-expected volume, related unfavorable manufacturing variances as production volumes were reduced, an early retailer shutdown of the season, the absence of hurricane-driven demand for insecticides and repellents, lower vendor rebates, and a legal reserve for an emerging claims issue. Global Pet Supplies – $7 million due to lower-than-expected revenue and related unfavorable manufacturing variances as production volumes were reduced. Global Auto Care – $18 million related to low-margin excess and obsolete inventory liquidation, lower volume related to greater-than-expected retailer inventory reductions, Dayton plant inefficiencies, physical inventory adjustments and scrap relating to the facility consolidation projects, and a cumulative correction of duty rates on a significant sourced component. Hardware & Home Improvement – $6 million related to lower growth than forecast.

Adjusted free cash flow of $386 million was also below guidance due to the adjusted EBITDA shortfall in both the Company’s continuing and discontinued operations as well as higher year-end inventory levels than planned.

Fiscal 2018 organic sales growth was encouraging at nearly 2%, driven by HHI and GAC, the Company’s two Pet acquisitions performed very well, and the U.S. Pet business stabilized and has returned to growth.

“With a clear focus and approach to careful capital allocation,” Mr. Maura said, “we expect meaningful reported net sales growth from continuing operations in fiscal 2019 due to new product introductions, increased marketing investments, pricing actions, including tariff-related increases, and market share gains. We also anticipate modest gross margin rate contraction with input cost inflation and tariffs being partly offset by pricing and productivity.”

Mr. Maura also said, “As announced last Thursday, subject to the European Commission’s regulatory review process, we believe that our Company is on track to close in early January 2019 the sale of our Global Battery and Lighting business to Energizer Holdings for $2 billion in cash, subject to a potential downward price adjustment of up to $200 million; as well as the sale to Energizer Holdings of our Global Auto Care business for $938 million in cash and $312 million in equity. We expect to use the significant net proceeds we will receive from these divestitures to primarily reduce debt, increase investment in organic growth initiatives and repurchase shares.”

Fiscal 2018 Fourth Quarter Consolidated Financial Results from Continuing Operations

Net sales of $787.8 million in the fourth quarter of fiscal 2018 were unchanged compared to $787.8 million in fiscal 2017. Excluding the impact of $3.1 million of unfavorable foreign exchange, organic net sales increased 0.4 percent.

Gross profit and gross profit margin in the fourth quarter of fiscal 2018 were $289.9 million and 36.8 percent, respectively, compared to $309.9 million and 39.3 percent, respectively, last year. The gross profit margin percentage decrease was primarily due to operating start-up inefficiencies at the HHI Kansas and GAC Dayton facilities, along with higher input costs and unfavorable mix.

Operating expenses of $368.7 million in the fourth quarter of fiscal 2018 increased compared to $264.1 million in the prior year due principally to the write-off from the impairment of GAC goodwill and HRG merger costs. Operating (loss) of $(78.8) million compared to operating income of $45.8 million last year.

Net loss from continuing operations was $(150.3) million, or $(3.00) diluted loss per share, in the fourth quarter of fiscal 2018 on average diluted shares and common stock equivalents outstanding of 50.0 million. In the fourth quarter of fiscal 2017, net loss from continuing operations was ($32.5) million, or ($1.01) diluted loss per share, on average diluted shares and common stock equivalents outstanding of 32.3 million. Weighted average shares have been retroactively adjusted to reflect the reverse stock split that occurred on July 13, 2018 to facilitate the HRG merger. The decrease in net results was primarily due to the write-off from impairment of GAC goodwill, HRG merger transaction costs, lower gross profit and higher distribution costs. Adjusted diluted EPS from continuing operations of $0.79 in the fourth quarter of fiscal 2018 fell 7.1 percent versus $0.85 last year predominantly due to lower gross profit and higher distribution costs.

As a result of the lower U.S. corporate tax rate due to recently enacted tax reform, fiscal 2018 adjusted EPS reflects a 24.5 percent blended tax rate versus 35.0 percent used in previous years.

Adjusted EBITDA of $134.1 million in the fourth quarter of fiscal 2018 decreased 23.1 percent compared to $174.5 million in fiscal 2017. Excluding the impact of $2.0 million of favorable foreign exchange, organic adjusted EBITDA of $132.1 million decreased 24.3 percent versus the fourth quarter of fiscal 2017. Reported adjusted EBITDA margin declined 520 basis points to 17.0 percent compared to 22.2 percent last year.

Fiscal 2018 Consolidated Financial Results from Continuing Operations

Net sales of $3.15 billion in fiscal 2018 increased 4.5 percent compared to $3.01 billion in fiscal 2017. Excluding the favorable impact of $21.7 million of foreign exchange and acquisition sales of $64.5 million, organic net sales of $3.06 billion in fiscal 2018 increased 1.7 percent from the prior year.

Operating income of $102.0 million in fiscal 2018 decreased 64.0 percent from $283.0 million last year, while operating income margin fell to 3.2 percent versus 9.4 percent in 2017 primarily as a result of the write-off from the impairment of GAC goodwill, HRG Group merger transaction costs, lower gross margin, incremental restructuring costs, and higher distribution costs.

Net income from continuing operations was $230.1 million, or $6.21 diluted earnings per share, in fiscal 2018 on average diluted shares and common stock equivalents outstanding of 37.0 million. In fiscal 2017, net loss from continuing operations was ($121.1) million, or ($3.75) diluted loss per share, on average diluted shares and common stock equivalents outstanding of 32.2 million. The Company generated adjusted diluted EPS of $3.54 in fiscal 2018, unchanged compared to $3.54 last year with lower operating income and higher interest expense being off-set by the lower adjusted income tax rate.

Fiscal 2018 adjusted EBITDA from continuing operations of $561.9 million compared to fiscal 2017 adjusted EBITDA of $639.2 million. Excluding the favorable impact of $1.1 million of foreign exchange and acquisition EBITDA of $22.8 million, organic adjusted EBITDA of $538.0 million decreased 15.8 percent in fiscal 2018 versus the prior year. The reported adjusted EBITDA margin of 17.9 percent in fiscal 2018 fell 330 basis points compared to 21.2 percent in fiscal 2017.

Fiscal 2018 Fourth Quarter Segment Level Data Compared to Prior Year

Hardware & Home Improvement (HHI)

Higher fourth quarter net sales were driven by a continuation of solid demand in residential security, plumbing and builders’ hardware in the U.S., along with a reduction in the customer order backlog at the Kansas distribution center. Excluding unfavorable foreign exchange impacts of $1.6 million, organic net sales increased 3.9 percent.

Improvements in fourth quarter operating income and margin were primarily a result of higher volumes and lower restructuring costs, while decreases in adjusted EBITDA and margin were largely due to higher input costs.

Global Pet Supplies (PET)

Fourth quarter net sales decreased primarily as a result of lower aquatics revenues in the U.S. largely driven from prior-year business exits at a major retailer and in Europe from a temporary customer order backlog from the consolidation of European distribution centers which also negatively impacted branded dog and cat food sales. Also contributing to the decline was a decrease in European dog and cat food sales from the planned exit of a pet food customer tolling agreement of $4.0 million, which negatively affected segment sales by approximately 1.8 percent. Largely offsetting the decline was a strong increase in U.S. companion animal sales, predominantly dog chews and treats. Excluding the impact of unfavorable foreign exchange of $0.9 million, organic net sales decreased 1.9 percent in the fourth quarter.

The operating loss and negative margin were primarily driven by the write-off from impairment of intangible assets. Adjusted EBITDA and margin decreased as a result of lower volumes, volume-related unfavorable manufacturing variances, operating inefficiencies and unfavorable product mix. Excluding unfavorable foreign exchange impacts of $0.5 million, organic adjusted EBITDA of $32.5 million fell 26.1 percent.

Home and Garden (H&G)

Reduced fourth quarter net sales were driven by lower-than-expected volume due to retailer’s early exiting of the category and the lack of repellent and insecticide demand relating to the timing of hurricanes in the prior year, unfavorable promotional timing against a strong 2017, related unfavorable manufacturing variances as production volumes were reduced, lower vendor rebates, and a reserve for a legal claim, partially offset by solid growth in household control category sales.

Lower operating income, adjusted EBITDA and margins decreased predominantly due to lower volumes, unfavorable product mix and higher input costs.

Global Auto Care (GAC)

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