Energizer Holdings, Inc. — Q2 FY2017 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2017. Unaudited; amounts in millions of dollars except per-share data. Energizer makes household and specialty batteries and portable lights, and since July 2016 has also owned HandStands’ automotive care brands.
Financial results and liquidity
| Metric | Q2 FY2017 | Q2 FY2016 | Six months FY2017 | Six months FY2016 |
|---|---|---|---|---|
| Net sales | $359.0 | $334.0 | $918.6 | $840.8 |
| Gross profit | $167.9 | $141.6 | $439.5 | $371.4 |
| Gross margin | 46.8% | 42.4% | 47.8% | 44.2% |
| Net earnings | $46.9 | $16.4 | $142.5 | $81.9 |
| Diluted EPS | $0.75 | $0.26 | $2.27 | $1.31 |
| Adjusted diluted EPS (non-GAAP) | $0.50 | $0.30 | $2.01 | $1.46 |
- Q2 sales rose 7.5%; organic sales were flat, with $29.4 of acquisition contribution offset by $4.4 of unfavorable currency. Six-month sales rose 9.3%, including 4.3% organic growth, 6.8% from the acquisition and a 1.8% currency headwind.
- Q2 gross margin improved 440 basis points as reported and 390 basis points excluding specified restructuring, spin and integration costs. Management cited productivity, lower material and purchased-product costs, and pricing and mix, partly offset by currency.
- Q2 GAAP results included a $15.2 gain on an Asia real-estate sale and $2.5 of spin restructuring income. Adjusted EPS excludes these and other specified items; it is a non-GAAP measure.
- Operating cash flow for the six months was $124.3, versus $128.3 a year earlier. Investing activities provided $10.8, including $23.1 proceeds from asset sales and $12.3 of capital spending; financing used $39.2. Cash increased $84.9 to $372.2.
- At March 31, cash was $372.2 and current assets and liabilities were $922.9 and $471.4, respectively. Balance-sheet debt comprised $979.8 long-term debt, $4.0 current maturities and $83.6 notes payable. The $350 revolving facility had $75.0 drawn and $268.3 available after letters of credit. The company reported covenant compliance and expected to remain compliant.
Material changes and segment performance
- HandStands added $29.4 of Q2 revenue and $4.9 of Q2 pretax earnings; six-month contributions were $57.2 and $9.1. The acquisition was completed July 1, 2016, so the prior-year comparison excludes it.
- Total segment profit increased 37.1% to $93.8 in Q2 and 27.7% to $267.7 for six months. Americas sales rose 12.1% in Q2, including acquisition contribution, while organic sales declined 1.4% amid anticipated retailer inventory de-loading. EMEA sales fell 2.9%, including a 5.8% currency impact; Asia Pacific sales increased 5.7%.
- Six-month operating cash flow was lower despite higher earnings, as year-over-year working-capital movements—particularly inventory—more than offset the earnings improvement. Management said inventory was elevated to support expected second-half demand and product plans.
- The company repriced its Term Loan in March, reducing its spread to LIBOR plus 200 basis points. It also replaced a $200 interest-rate swap, fixing the LIBOR component at 2.03% through June 2022.
- Shareholders’ equity was $66.8, compared with a $30.0 deficit at September 30, 2016. The company paid $35.1 in dividends and repurchased $8.6 of shares during the six months.
Outlook, risks and contingencies
- The filing provides no specific full-year sales or earnings guidance. Management expected fiscal 2017 capital expenditures of approximately $30–$35, funded from operations, and acquisition/integration costs of $5–$10 for the year. Remaining spin costs were expected to be immaterial.
- Management said operating cash flow and access to capital markets should provide adequate resources, while noting that future financing access and terms are not assured. Approximately 98% of cash was held outside the U.S.; repatriation could have tax or regulatory consequences.
- Risks identified include foreign exchange exposure, competition and market-share pressure, commodity costs, customer and product risks, execution of restructuring and acquisition integration, cybersecurity, litigation, and debt covenant and refinancing considerations. No open commodity hedges were reported at quarter-end.
- Pending legal matters were not considered reasonably likely to be material based on information available; environmental costs accrued were $4.3. The filing reported no material change to the risk factors in the prior Form 10-K.
Important facts for investors to verify
- How much of reported earnings growth reflects recurring operations versus the real-estate gain, spin-related credits and other adjustments; review the non-GAAP reconciliations.
- Whether organic sales and margins recover from Q2’s retailer inventory de-loading, and whether the planned second-half inventory supports sell-through.
- Whether HandStands integration delivers expected growth and efficiencies, and whether full-year integration costs remain within the stated range.
- Debt, cash availability and covenant headroom, considering cash location, revolver usage, floating-rate exposure and future capital allocation.
- Currency effects and the sustainability of productivity, pricing and cost improvements across segments.