ENERGIZER HOLDINGS, INC. — Q2 FY2016 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2016. Amounts are in U.S. dollars, in millions except per-share data. Energizer is a global manufacturer and marketer of household and specialty batteries and portable lighting. It became an independent public company following its July 1, 2015 spin-off from Edgewell. The prior-year comparison is partly based on allocated carve-out results and may not represent standalone costs.
Key financial results
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Net sales | $334.0 | $356.9 | $840.8 | $858.2 |
| Gross profit | $141.6 | $168.5 | $371.4 | $402.3 |
| Gross margin | 42.4% | 47.2% | 44.2% | 46.9% |
| Net earnings/(loss) | $16.4 | $(69.2) | $81.9 | $(7.5) |
| Diluted EPS | $0.26 | $(1.11) | $1.31 | $(0.12) |
| Adjusted diluted EPS, non-GAAP | $0.30 | $0.44 | $1.46 | $1.58 |
| Operating cash flow | Not separately presented for the quarter | $128.3 | $126.9 |
- Quarterly net sales decreased 6.4%; six-month sales decreased 2.0%. Organic sales increased 0.5% in Q2 and 5.7% in the first half, but were offset by currency, international go-to-market changes and the Venezuela deconsolidation.
- Gross margin declined 480 basis points in Q2 and 270 basis points for the six months. Management cited unfavorable currency, spin/restructuring effects and higher costs from product-improvement and productivity investments; favorable commodity costs and mix partly offset these pressures.
- Cash from operations was $128.3 for the first half; investing used $13.5, including $14.2 of capital expenditures. Financing used $52.3, including $30.9 of dividends and $21.8 of share repurchases. Cash increased $74.2 to $576.3.
- At March 31, current assets were $1,043.4 and current liabilities $400.2; current debt maturities were $4.0. Long-term debt was $983.0, with $9.9 of notes payable. The $250.0 revolving facility had no borrowings; $243.6 remained available after letters of credit. The company reported compliance with debt covenants.
Material changes and segment performance
- GAAP earnings improved substantially from the prior-year loss, which included a $65.2 Venezuela deconsolidation charge allocated to Energizer, as well as much higher spin-related costs. Adjusted diluted EPS, by contrast, declined from $0.44 to $0.30 in Q2 and from $1.58 to $1.46 for the first half.
- Q2 segment profit was $68.4 versus $80.8; first-half segment profit was $209.6 versus $213.8. North America first-half sales rose 6.4% and segment profit rose 13.0%; Latin America organic sales and profit grew, though reported results were affected by currency and Venezuela. EMEA and Asia Pacific reported lower segment profit for the first half.
- Alkaline sales were $199.2 in Q2 versus $224.4 and $540.2 for the first half versus $552.3. Other batteries and lighting products were $134.8 and $300.6, respectively.
- Advertising and sales promotion fell to $18.1 in Q2 from $29.5, partly reflecting prior-year EcoAdvanced launch spending and activity timing. SG&A was $83.4 versus $103.7, but adjusted SG&A as a share of sales was pressured in Q2 by lower reported sales and incremental investment spending.
Outlook, commentary and risks
- No formal full-year revenue or earnings guidance is stated in the provided filing text. Management expected fiscal 2016 investing cash outflows of approximately $30–$35, primarily capital expenditures funded from operations.
- Management cautioned that first-half North America sales strength, partly due to holiday shipment timing and storm-related volume, could be partly offset by retail inventory reductions in the second half. It expected heightened competition in certain developed Asia markets to continue through the balance of the year.
- International go-to-market changes, including exits from some markets and greater use of distributors, were expected to have most of their impact realized by July 1, 2016. Remaining spin costs were estimated at approximately $5.0. North American plant streamlining was expected to finish in fiscal 2016, with total charges not expected to be material.
- Foreign currency is a material risk to sales and margins; management noted local-currency weakness can reduce margins when pricing actions are constrained. The company had $400.0 of variable-rate term debt, half of which had its LIBOR component fixed by a swap through June 2022. A 1% LIBOR change was estimated to affect annual interest expense by approximately $2.0 on the unhedged balance, subject to the loan’s rate floor.
- Venezuela remained deconsolidated because exchange controls continued to limit the company’s ability to control operations and access liquidity. Legal proceedings were described as ordinary-course matters; management did not believe the potential liability, net of accruals, was reasonably likely to be material. Environmental accruals were $4.8.
Important facts for investors to verify
- How much of the sales and margin trend reflects underlying demand versus currency, distributor transitions, Venezuela and prior-year launch comparisons.
- Whether the first-half North America gains reverse as management anticipated retail inventory deloads, and whether Asia competition persists.
- The sustainability of earnings excluding spin, restructuring and other adjustments, given adjusted EPS declined year over year despite the GAAP earnings rebound.
- Cash accessibility and potential tax or regulatory costs: more than 90% of the reported $576.3 cash balance was held outside the United States.
- Debt covenant headroom, variable-rate exposure, and any subsequent changes to capital returns, including dividends and repurchases.