Energizer Holdings, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended September 30, 2016. Amounts are in U.S. dollars; financial figures are in millions except per-share data. Energizer sells household and specialty batteries and portable lighting globally and added automotive fragrance and appearance products through its July 1, 2016 acquisition of HandStands. The company reports North America, Latin America, EMEA, and Asia Pacific segments.
Financial performance
| Metric | FY2016 | FY2015 | Change or context |
|---|---|---|---|
| Net sales | $1,634.2 | $1,631.6 | Up 0.2%; organic sales rose 3.7%, partly offset by $66.9 of unfavorable currency impact. |
| Gross profit / margin | $712.4 / 43.6% | $756.2 / 46.3% | Reported margin declined 270 basis points. Excluding specified acquisition inventory, spin, and integration costs, margin was 44.3%, down 230 basis points. |
| Net earnings / diluted EPS | $127.7 / $2.04 | $(4.0) / $(0.06) | FY2015 included substantial spin and Venezuela deconsolidation charges. |
| Adjusted net earnings / diluted EPS | $144.6 / $2.31 | $177.3 / $2.82 | Non-GAAP adjusted diluted EPS declined. |
| Operating cash flow | $193.9 | $161.8 | Improved by $32.1, helped by earnings and working-capital movements. |
| Cash and cash equivalents | $287.3 | $502.1 | 96.2% of FY2016 cash was held outside the U.S. |
| Debt and available revolver capacity | About $1.05 billion aggregate debt; $290.8 available | — | Company reported compliance with debt covenants. |
| Working capital | $356.4 | $610.5 | Declined year over year. |
Net cash used in investing was $371.2, primarily reflecting $344.0 for the acquisition, net of cash acquired; capital expenditures were $28.7. Dividends declared were $1.00 per share for FY2016. Batteries generated $1,498.0 of sales, versus $1,516.7 in FY2015; other product sales were $136.2, versus $114.9.
Material changes and unusual items
- Organic sales increased $60.4, while the HandStands acquisition contributed $32.3 of sales from its July close through fiscal year-end. Foreign currency reduced sales by $66.9; Venezuela deconsolidation and international go-to-market changes reduced sales by $8.5 and $14.7, respectively.
- Total segment profit was $388.2, down 0.8%. Organic segment profit increased 8.8%, but unfavorable currency reduced it by $46.6. North America segment profit rose 5.5%; Latin America, EMEA, and Asia Pacific segment profit declined on a reported basis.
- Acquisition-related FY2016 items included $10.0 of acquisition and integration costs, $1.2 of bridge-loan interest, and an $8.1 inventory fair-value step-up charge. The acquisition contributed a $3.5 pretax loss in the fourth quarter, including the inventory step-up.
- FY2016 included $16.2 of spin costs and $2.5 of charges for the completed 2013 restructuring project. Management reported cumulative savings exceeding $218 from that restructuring.
- FY2015 results included Energizer’s $65.2 allocated share of the Venezuela deconsolidation charge and $163.9 of spin-related costs, including early debt retirement costs. FY2015’s first three quarters were carve-out results with allocations from former parent Edgewell, limiting comparability with FY2016.
Outlook, risks, and contingencies
- Management did not provide consolidated revenue or earnings guidance in the supplied filing text. It expected FY2017 capital expenditures of approximately $30–$35, funded from operating cash flow, and expected remaining HandStands acquisition and integration costs of $25–$30 in total, with the remaining costs expected in FY2017.
- Management said operating cash flow and capital-market access should provide adequate resources, while noting access depends on credit ratings and market conditions. The board declared a FY2017 first-quarter dividend of $0.275 per share after year-end.
- Key business risks include currency fluctuations, competitive and retailer pricing pressure, possible long-term decline in primary-battery demand, raw-material costs, customer concentration, and acquisition integration and synergy execution. Wal-Mart accounted for 10.4% of FY2016 sales.
- Debt totaled approximately $1.05 billion; debt service, variable rates, covenant restrictions, and refinancing access could constrain flexibility. A $200 variable-rate debt portion was hedged through June 2022; the company reported a 3.55% weighted average rate on variable-rate debt for FY2016.
- Cash is concentrated overseas; repatriating certain foreign earnings could entail tax costs. Approximately $700 of foreign subsidiary earnings were considered indefinitely reinvested; the company estimated potential U.S. tax above $99 if all were repatriated, subject to assumptions.
- Environmental remediation accruals were $4.7 at year-end, with about $1.1 expected to be spent in FY2017. The company said pending legal proceedings were not reasonably likely to be material, taking established accruals into account.
- Other notable exposures include pension funding and assumptions, tax audits and uncertain tax positions, and uncapped separation-related indemnities, including potential tax liabilities if the spin-off’s tax-free treatment were challenged. The independent auditor reported effective internal control over financial reporting; HandStands was excluded from the internal-control assessment and audit.
Investor verification priorities
- Review the reconciliation of GAAP and adjusted earnings, especially the effect of acquisition, spin, restructuring, and tax items.
- Assess whether organic growth and segment profitability can persist after separating currency, acquisition, Venezuela, and go-to-market effects.
- Verify debt maturities, borrowing capacity, interest-rate exposure, covenant headroom, and cash accessibility given the high proportion of cash held overseas.
- Track HandStands integration costs, acquired-business profitability, and whether expected efficiencies and synergies materialize.
- Monitor battery-category trends, retailer concentration and pricing pressure, pension assumptions, environmental remediation, and tax or separation indemnity developments.