Energizer Holdings, Inc. — Q1 FY2017 Form 10-Q
Reporting period: Three months ended December 31, 2016; filed February 1, 2017. The company manufactures household and specialty batteries and portable lights, and since July 2016 also owns HandStands’ automotive fragrance and appearance products. The prior-year quarter did not include HandStands.
Financial performance and liquidity
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Net sales | $559.6 million | $506.8 million |
| Gross profit / gross margin | $271.6 million / 48.5% | $229.8 million / 45.3% |
| Earnings before income taxes | $134.1 million | $94.5 million |
| Net earnings | $95.6 million | $65.5 million |
| Diluted EPS | $1.52 | $1.05 |
| Adjusted diluted EPS (non-GAAP) | $1.51 | $1.16 |
| Operating cash flow | $91.8 million | $95.5 million |
Sales increased 10.4%, including 7.2% organic growth, $27.8 million from the HandStands acquisition and an $11.5 million unfavorable currency effect. Gross margin rose 320 basis points; excluding prior-year restructuring costs, the increase was 290 basis points. Management attributed improvement to productivity, favorable material and purchased-product costs, and stronger volume and overhead absorption, partly offset by foreign exchange.
Cash and equivalents were $297.7 million at quarter-end, versus $287.3 million at September 30, 2016; approximately 95% was held outside the U.S. Current assets were $874.8 million and current liabilities $458.3 million. Long-term debt carrying value was $981.1 million, with $4.0 million of current maturities; note payable was $28.9 million, including $25.0 million outstanding on the revolving facility. The $350 million revolver had $318.3 million available after letters of credit. The company reported compliance with debt covenants and expected to remain compliant. Shareholders’ equity was $17.3 million, compared with a $30.0 million deficit at September 30.
Investing cash use was $0.6 million, including $4.9 million of capital expenditures offset by $4.3 million of asset-sale proceeds. Financing cash use was $63.2 million, including debt repayments, dividends and share repurchases. The quarter-end inventory balance was $231.6 million, down from $289.2 million at September 30; management said inventory was elevated versus the prior-year quarter to support anticipated demand.
Material changes and segment results
- Americas sales rose 16.4% to $365.1 million, with 10.8% organic growth; segment profit increased 24.7% to $123.1 million.
- EMEA sales fell 2.7% to $114.7 million, reflecting a 5.5% currency headwind; segment profit increased 13.5% to $26.1 million.
- Asia Pacific sales rose 6.1% to $79.8 million; segment profit increased 26.7% to $24.7 million.
- Total segment profit rose 23.2% to $173.9 million. The company combined its former Americas reporting regions into one segment beginning in FY2017 and restated prior-period segment data.
- GAAP net earnings increased to $95.6 million, while adjusted net earnings were $95.1 million versus $72.3 million. The comparison reflects, among other items, prior-year spin and restructuring costs and current-year acquisition and integration costs. Adjusted measures are non-GAAP.
Outlook, risks and unusual items
- No specific sales or earnings forecast was provided. FY2017 capital expenditures were expected to be approximately $30–$35 million, funded from operating cash flow. Acquisition and integration costs for FY2017 were expected to be $5–$10 million; $20.1 million had been incurred to date.
- Management cited risks including foreign exchange, competitive and market conditions, commodity costs, customer distribution and market share, execution of strategic initiatives and integration of HandStands, litigation and product liability, and debt covenant and financing access. Currency weakness can pressure margins where pricing responses are unavailable. No commodity hedges were open at quarter-end.
- Legal proceedings arise in the ordinary course; management did not consider potential liabilities, net of accruals, reasonably likely to be material. Environmental costs accrued were $4.5 million; anticipated environmental spending was not expected to materially affect results.
- The quarter included a $1.3 million gain from the sale of a previously closed facility, recorded in spin restructuring. A $1.4 million discrete tax benefit from newly adopted stock-compensation accounting contributed to the lower effective tax rate of 28.7%, versus 30.7%.
- The company declared a $0.275-per-share dividend for Q2 FY2017. It repurchased 182,029 shares under its authorization during the quarter and reported 6.5 million shares remaining for repurchase as of February 1, 2017.
Important facts for investors to verify
- How much of the reported sales and profit growth is recurring organic performance versus acquisition contribution, holiday timing, storm-related demand and distribution gains.
- Whether gross-margin improvement and cost controls can persist, particularly amid currency pressure and increased advertising and overhead spending.
- Working-capital and cash-flow trends: operating cash flow declined year over year despite higher net earnings, with working-capital movements a significant offset.
- Debt, liquidity and cash availability, including the concentration of cash outside the U.S., facility availability, covenant headroom and upcoming debt maturities.
- HandStands integration, expected costs and realization of anticipated efficiencies; the filing does not provide a quantified sales or earnings outlook.