Energizer Holdings, Inc. — Q1 FY2019 Form 10-Q
Reporting period: Three months ended December 31, 2018. Unaudited results; amounts in U.S. dollars unless stated otherwise. Energizer manufactures household and specialty batteries, portable lights, and automotive fragrance and appearance products.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Net sales | $571.9 million | $573.3 million | Down 0.2% |
| Gross profit / margin | $275.5 million / 48.2% | $278.3 million / 48.5% | Margin down 30 bps |
| Earnings before income taxes | $90.0 million | $119.0 million | Down 24.4% |
| Net earnings | $70.8 million | $60.4 million | Up 17.2% |
| Diluted EPS | $1.16 | $0.98 | Up 18.4% |
| Adjusted diluted EPS (non-GAAP) | $1.64 | $1.55 | Up 5.8% |
| Cash from operations | $118.9 million | $141.0 million | Down $22.1 million |
Organic sales increased 1.7%, offset by unfavorable currency effects of $9.0 million and a $3.3 million decline related to Argentina. Adjusted net earnings were $100.2 million versus $95.5 million. Adjusted measures exclude acquisition and integration costs and specified tax effects and are non-GAAP.
Americas sales were $373.5 million, essentially flat, while segment profit fell 5.7% to $116.1 million. International sales declined 0.9% to $198.4 million, but segment profit rose 11.0% to $54.6 million. Total segment profit decreased 0.9% to $170.7 million.
Cash, liquidity and debt
- Cash and cash equivalents were $607.3 million at December 31, 2018, up from $522.1 million at September 30. Restricted cash was $2,456.5 million, largely acquisition financing held in escrow; it was not ordinary operating cash and was released after quarter-end.
- Operating cash flow was $118.9 million; capital expenditures were $4.8 million. Financing activities provided $1,183.6 million, principally reflecting $1.2 billion of debt proceeds placed in escrow. Dividends paid were $19.8 million.
- At quarter-end, reported debt included $987.0 million of long-term debt before discounts, $2,445.2 million of debt held in escrow before discounts, and $275.1 million of notes payable. The company also had $260.0 million drawn on its $350.0 million revolving facility and $83.3 million available after letters of credit.
- Management reported compliance with debt covenants. It stated that cash from operations and capital-market access were expected to support operating and financing needs, while noting financing access depends on market conditions and credit factors.
Material changes, acquisitions and unusual items
- Reported earnings included $36.5 million of acquisition and integration-related costs in the company’s non-GAAP reconciliation, including $32.4 million of interest and ticking fees on acquisition debt held in escrow. Other items included $5.8 million of interest income on restricted cash and a $9.0 million favorable foreign-currency gain on escrowed funds.
- Interest expense was $48.2 million, up from $13.4 million; excluding the $32.4 million of acquisition-related interest and ticking fees, management attributed the increase to higher borrowings and rates.
- The effective tax rate was 21.3%, versus 49.2% a year earlier. The prior-year comparison included a substantial one-time Tax Act impact; the company recorded a further $1.5 million transition-tax amount in the current quarter.
- After quarter-end, Energizer completed the Spectrum global battery, lighting and portable power acquisition on January 2, 2019, for initial cash consideration of $1,956.2 million, and the global auto care acquisition on January 28 for $938.7 million cash plus 5.3 million shares valued at $240.5 million.
- Acquisition funding included new term loans and senior notes, a January 2019 $600 million senior-note offering at 7.750%, and equity issuance. The company also issued mandatory convertible preferred stock with a 7.50% annual dividend rate. On closing the battery acquisition, it used escrowed proceeds to fund the purchase and repay existing term-loan and revolving-facility borrowings.
Outlook, risks and contingencies
- The filing gives no specific consolidated sales or earnings guidance. It anticipates fiscal 2019 capital expenditures of approximately $30–$35 million, excluding the acquired businesses.
- European Commission approval of the battery acquisition required divestiture of the Varta consumer battery, lighting, charger and portable-power business in EMEA. Energizer expected to complete the divestiture in the first half of calendar 2019. Failure to meet the required process or timing could reduce proceeds or result in the Commission taking responsibility for the divestiture.
- The filing identifies integration and leverage risks from the acquisitions. It specifically warns that the acquired auto care business’s Dayton, Ohio facility has experienced operational and shipment disruptions and working-capital issues; Energizer expected to invest approximately $25 million more, with no assurance the spending would resolve the issues or yield benefits.
- Other disclosed risks include acquired-business seasonality and weather sensitivity, potential regulation of R-134a refrigerant products, currency and interest-rate exposure, commodity costs, and the ability to service substantial debt. Management reported $49.7 million of purchase obligations and $6.4 million of accrued environmental costs; it did not expect environmental spending to be material to overall results.
- Ordinary-course legal proceedings were disclosed; the company said pending matters were not reasonably likely to be material after established accruals. Disclosure controls were deemed effective as of December 31, 2018, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Post-acquisition debt, interest expense, covenant headroom and liquidity after deployment of restricted cash and repayment of prior facilities.
- Integration costs, expected synergies and operating performance of the acquired battery and auto care businesses, especially remediation progress at the Dayton facility.
- Timing, terms and net proceeds of the required Varta EMEA divestiture, including potential purchase-price sharing or shortfall payments.
- Whether organic growth and International segment improvement can persist amid currency headwinds, promotional spending and margin pressure.
- Potential dilution and dividend obligations from common-stock and mandatory-convertible-preferred issuances used to finance the acquisitions.