Energizer Holdings, Inc. — FY2017 Form 10-K
Business context and reporting period
The filing covers the fiscal year ended September 30, 2017, with quarterly results also provided. Energizer manufactures and markets household and specialty batteries and portable lighting, and sells automotive fragrance and appearance products. The auto-care business acquired in July 2016 contributed to the full-year comparison. Operations are reported in Americas, Europe, Middle East and Africa (EMEA), and Asia Pacific.
Financial results and liquidity
- Sales: Revenue was $1,755.7 million, up 7.4% from $1,634.2 million. Growth included $83.1 million from the auto-care acquisition and 3.7% organic growth; unfavorable currency reduced sales by $21.3 million. Batteries generated $1,548.2 million and other products $207.5 million.
- Profit and margins: Gross profit rose to $811.3 million from $712.4 million; gross margin increased to 46.2% from 43.6%. Net earnings were $201.5 million ($3.22 diluted EPS), versus $127.7 million ($2.04) in FY2016. Adjusted diluted EPS, a non-GAAP measure, was $2.98 versus $2.31. FY2017 included a $16.9 million real-estate gain, including a $15.2 million gain on an Asia office-space sale.
- Cash flow: Operating cash flow was $197.2 million, compared with $193.9 million. Capital expenditures were $25.2 million. The company attributed higher receivables and inventory to strong late-year sales, product and portfolio changes, and preparation for FY2018 manufacturing-footprint changes.
- Liquidity and debt: Cash and cash equivalents were $378.0 million, of which 98% was held outside the U.S. Working capital was $438.2 million. Long-term debt, including current maturities, was $992.0 million; notes payable were $104.1 million. The company reported approximately $1.1 billion of aggregate indebtedness and $248.3 million available under its revolving facility after letters of credit. It reported compliance with debt covenants.
- Capital returns: Dividends were $1.10 per share for FY2017. The company repurchased 1.389 million shares during the year for $58.7 million. A $0.29-per-share quarterly dividend was declared for FY2018 after year-end.
Material changes versus FY2016
- Sales increased 7.4%, driven by the acquisition and organic growth, partly offset by currency effects. Organic sales rose 3.7%, reflecting distribution and shelf-space gains, pricing and U.S. hurricane-related demand, partly offset by portfolio-optimization investments.
- Gross margin improved 260 basis points as reported. Management said productivity, material and purchased-product cost favorability, improved overhead absorption and pricing contributed; currency and portfolio investments were offsets.
- Segment profit increased 16.7% to $453.0 million. Americas profit was $310.0 million, EMEA $64.4 million and Asia Pacific $78.6 million.
- Net earnings included the real-estate gain; excluding specified items, adjusted net earnings were $186.8 million versus $144.6 million in FY2016. The company’s non-GAAP adjustments include acquisition/integration and other specified items, so these figures are not directly interchangeable with GAAP results.
Outlook, risks and unusual items
- No quantified earnings or sales guidance is provided. Management expected FY2018 capital expenditures of approximately $30–$35 million, funded from operations, and said inventory levels were expected to begin normalizing during FY2018.
- Management said operating cash flow and capital-market access should provide adequate resources, while noting financing access depends on credit ratings, market liquidity and economic conditions.
- Key risks include intense competition and retailer pricing pressure; declining demand for primary batteries as devices adopt built-in batteries; currency exposure; volatile raw-material and freight costs; customer concentration (Walmart represented 12.1% of FY2017 sales); cyber and IT disruption; and the company’s significant debt.
- Environmental remediation is ongoing: accrued environmental costs were $5.5 million, with about $1.9 million expected to be spent in FY2018. The company said pending legal matters were not reasonably likely to be material, taking recorded accruals into account.
- Other notable items include $8.4 million of FY2017 acquisition and integration costs, a $3.3 million loss on the sale of a non-core promotional-sales business, and a $3.8 million benefit from spin-related restructuring adjustments. The company reported no goodwill or indefinite-lived intangible impairment in FY2017.
- The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective at year-end.
Important facts for investors to verify
- How much of revenue and profit growth is sustainable organic growth versus acquisition contribution, hurricane demand, pricing and other temporary factors.
- Whether FY2018 inventory normalizes as expected and whether receivables and working capital convert into cash.
- The impact of foreign exchange, input-cost changes and competitive pricing on margins, particularly in EMEA and Asia Pacific.
- Debt repayment capacity, covenant headroom, interest-rate exposure and the availability and location of cash held overseas.
- The assumptions behind adjusted earnings, the real-estate gain, acquisition integration, environmental accruals and pension obligations.