Energizer Holdings, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly period ended June 30, 2016, the third quarter of fiscal 2016; results also cover the nine months ended that date. Energizer manufactures and markets household and specialty batteries and portable lighting. It completed its spin-off from Edgewell on July 1, 2015. The prior-year quarter and nine-month results include carve-out financial data and allocated costs, limiting comparability with current standalone results.
Financial performance
| Metric | Quarter ended June 30 | Nine months ended June 30 |
|---|---|---|
| Net sales | $361.0 million, down 3.6% | $1,201.8 million, down 2.5% |
| Gross profit / margin | $153.7 million / 42.6%; margin down 300 bps | $525.1 million / approximately 43.7%; margin down 280 bps |
| Net earnings (loss) | $24.2 million vs. $(19.6) million | $106.1 million vs. $(27.1) million |
| Diluted EPS | $0.39 vs. $(0.32); adjusted non-GAAP EPS $0.32 vs. $0.64 | $1.70 vs. $(0.44); adjusted non-GAAP EPS $1.77 vs. $2.23 |
| Operating cash flow | Not separately reported for the quarter | $141.9 million vs. $102.9 million |
| Capital expenditures | Not separately reported for the quarter | $17.8 million vs. $31.1 million |
Gross-margin pressure reflected unfavorable currency, productivity initiatives and costs supporting product innovation, partly offset by favorable commodity costs and productivity savings. Nine-month operating cash flow less capital expenditures was approximately $124.1 million, a derived measure.
Balance sheet, debt and liquidity
At June 30, 2016, cash and cash equivalents were $567.1 million; current assets were $1,062.5 million and current liabilities $406.8 million. Long-term debt, including current maturities, was $997.0 million, plus $9.3 million of foreign-affiliate notes payable. The company had no borrowings on its $250 million revolving facility at quarter-end and $243.6 million of availability after letters of credit. More than 95% of cash was outside the U.S.; repatriation may have tax consequences or regulatory constraints.
For the nine months, financing used $68.6 million, including $46.4 million of dividends and $21.8 million for repurchases of 600,000 shares. The company reported compliance with debt covenants at June 30.
Material changes and management commentary
- Quarterly organic sales increased 1.2%, but unfavorable currency reduced sales by $12.6 million and international go-to-market changes by $5.2 million. For nine months, organic sales rose 4.4%, offset by currency impacts of $61.3 million, go-to-market changes of $14.7 million and the Venezuela deconsolidation impact of $8.5 million.
- North America sales rose 1.7% in the quarter; Asia Pacific sales fell 11.9%, including organic sales decline of 4.5% amid heightened competition. Management expected elevated competition in certain Asian developed markets to continue through the remainder of fiscal 2016.
- Quarterly segment profit was $74.8 million, down 9.6%; nine-month segment profit was $284.4 million, down 4.1%. Currency was a significant drag, particularly in Latin America, EMEA and Asia Pacific.
- The quarter’s GAAP profit included approximately $8.8 million of favorable prior-year tax-accrual and spin-related adjustments. Current-period acquisition costs were $4.1 million. Prior-year comparisons were also affected by substantial spin costs, restructuring charges, early debt-retirement costs and the $65.2 million Venezuela deconsolidation charge.
Outlook, transactions and risks
- On July 1, 2016, after quarter-end, Energizer acquired HandStands for $340 million plus preliminary working-capital adjustments of $3.6 million, net of acquired cash and subject to further adjustment. The preliminary allocation included $209.4 million of goodwill and $157.9 million of identifiable intangibles; valuations were not final. Management cited portfolio expansion, customer access and supply-chain efficiencies as expected benefits.
- Management expected $30–$35 million of HandStands acquisition and integration costs over 12–15 months, including approximately $17–$19 million in fiscal Q4 2016. In July, the company amended its revolver capacity to $350 million; acquisition bridge and revolver borrowings were subsequently partly repaid with cash on hand.
- Management anticipated fiscal 2016 investing cash outflows of approximately $30–$35 million, primarily capital expenditures, funded from operations. The board declared a fiscal Q4 dividend of $0.25 per share and announced an intention to increase the regular quarterly dividend to $0.275 beginning fiscal 2017; future dividends remain subject to board approval.
- Key exposures include foreign exchange and currency controls, commodity costs, competition and customer distribution, acquisition integration and synergy realization, debt and covenant obligations, and the possible effects of Brexit on European operations and currencies. No commodity hedges were open at quarter-end. A 1% LIBOR change was estimated to affect annual interest expense by approximately $2.0 million on the unhedged variable-rate portion.
- Environmental liabilities accrued were $4.7 million. The company stated that pending legal matters were not reasonably likely to have a material financial effect, considering recorded accruals. Disclosure controls were judged effective as of June 30, 2016.
Important facts for investors to verify
- Reconcile GAAP and adjusted earnings, including the tax adjustments and the non-GAAP exclusions; assess the sustainability of reported and adjusted profitability.
- Review final HandStands purchase accounting, funding, post-acquisition debt and cash balances, integration costs, and evidence of expected synergies.
- Monitor organic sales and segment margins separately from currency, market exits and the prior-year carve-out effects, especially in Asia Pacific and Latin America.
- Assess how much overseas cash is practically available for U.S. needs and how foreign-exchange movements, Brexit and currency controls affect results and liquidity.
- Confirm future capital spending, dividend declarations, debt-covenant compliance and revolver availability against the company’s post-acquisition position.