Energizer Holdings, Inc. — Form 10-Q Summary
Reporting period: Second fiscal quarter and six months ended March 31, 2018. Unaudited results; amounts are in U.S. dollars unless noted. Energizer manufactures household and specialty batteries, portable lights, and automotive fragrance and appearance products.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $374.4 million, up 4.3% year over year | $947.7 million, up 3.2% |
| Gross profit / margin | $168.5 million / 45.0%; margin down 180 basis points | $446.8 million / approximately 47.1%; margin down 70 basis points |
| Net earnings | $7.8 million, versus $46.9 million | $68.2 million, versus $142.5 million |
| Diluted EPS | $0.13, versus $0.75 | $1.11, versus $2.27 |
| Adjusted diluted EPS (non-GAAP) | $0.45, versus $0.50 | $2.01, flat year over year |
| Operating cash flow | Not presented for the quarter | $160.6 million, versus $124.3 million |
Quarterly sales growth included 1.8% organic growth and a 2.5% favorable currency effect. Six-month growth included 1.4% organic growth and a 1.8% favorable currency effect. Batteries generated $330.3 million of quarterly sales and $854.8 million for the six months.
Quarterly segment profit was $55.7 million in the Americas, down 7.9%, and $34.1 million internationally, up 2.4%. Six-month segment profit was $178.8 million in the Americas, down 2.6%, and $83.3 million internationally, down 1.0%. Management cited unfavorable product/customer mix, weaker overhead absorption, higher commodity costs, and increased advertising as pressures on segment profitability.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $490.3 million at March 31, 2018, compared with $378.0 million at September 30, 2017. Substantially all cash was held outside the U.S.
- Current assets were $1,047.8 million and current liabilities $552.3 million. Long-term debt, including current maturities, was $990.0 million; notes payable were $147.4 million. The company reported $203.3 million of remaining availability under its $350 million revolving facility after letters of credit.
- Operating cash flow of $160.6 million was attributed primarily to approximately $34 million of year-over-year working-capital improvement. Capital expenditures were $11.3 million; financing cash outflows were $45.4 million.
- The company repurchased $50.0 million of shares during the six months and paid $35.0 million in dividends. The quarterly dividend was $0.29 per share; a further $0.29 dividend was declared after quarter-end.
- Management expected fiscal 2018 capital expenditures of approximately $30–$35 million and stated that operating cash flow and capital-market access should provide resources for operating and financing needs.
Material changes, outlook and risks
- Spectrum transaction: Energizer agreed to acquire Spectrum Brands’ global battery, lighting and portable power business for $2.0 billion in cash, subject to purchase-price adjustments and regulatory and other closing conditions. The company expected closing in the second half of calendar 2018 and planned to use cash and committed debt financing. It reported $25.1 million of acquisition and integration costs for the six months, including $2.9 million of debt commitment fees in interest expense, and $5.5 million of acquisition-related tax withholding expense.
- The agreement provides for a $100 million termination fee in specified circumstances if the transaction has not closed by July 15, 2019. The company identified regulatory clearance, financing, integration, increased leverage and transaction failure as material risks; it expected to incur more than $2 billion of indebtedness to finance the acquisition.
- Taxes: The six-month effective tax rate was 50.1%, including a $31.2 million one-time tax-law impact and the $5.5 million acquisition-related withholding cost. The filing describes provisional tax calculations and says final effects of the Tax Cuts and Jobs Act could differ. Adjusted six-month diluted EPS was $2.01.
- Operating pressures: Quarterly gross margin declined 180 basis points. Management cited unfavorable mix, overhead absorption and commodity costs; currency was favorable to reported sales and international segment profit. Weaker currencies versus the U.S. dollar can pressure margins, and pricing responses may be constrained by competition and market conditions.
- Other items: Prior-year comparisons benefited from a $15.2 million real-estate sale gain and $2.5 million of spin-related restructuring income; there were no comparable items in 2018. Legal proceedings were described as not reasonably likely to be material based on information available. Environmental accruals were $5.1 million and purchase obligations approximately $83 million.
- Management reported disclosure controls effective at March 31, 2018, and no material change in internal control over financial reporting during the quarter. The filing reported no material changes to previously disclosed risk factors apart from the added Spectrum acquisition risks.
Most important facts for investors to verify
- Progress and timing of Spectrum regulatory approvals, financing terms, purchase-price adjustments, and expected integration costs and benefits.
- How the planned acquisition financing affects total debt, interest expense, covenant headroom, liquidity and future capital allocation.
- Whether organic sales growth and pricing can offset gross-margin pressure from mix, overhead absorption and commodities.
- The final tax effects of the Tax Cuts and Jobs Act and the treatment of acquisition-related tax and transaction costs.
- That GAAP earnings fell sharply while adjusted EPS declined less in the quarter and was flat for the six-month period; assess the reconciliation and recurring nature of excluded items.