Business context and reporting period
Energizer Holdings, Inc. filed this unaudited Form 10-Q for the quarter ended December 31, 2022, the first quarter of fiscal 2023. The company manufactures and sells batteries and lights, and automotive appearance, performance, refrigerant and fragrance products through its Batteries & Lights and Auto Care segments. Amounts below are in millions of U.S. dollars unless stated otherwise.
Financial results and liquidity
| Metric | Q1 FY2023 | Prior-year quarter |
|---|---|---|
| Net sales | $765.1 | $846.3 |
| Gross profit / reported gross margin | $298.3 / 39.0% | $311.6 / 36.8% |
| Net earnings | $49.0 | $60.0 |
| Diluted EPS | $0.68 | $0.83 |
| Adjusted diluted EPS (non-GAAP) | $0.72 | $1.03 |
| Operating cash flow | $161.0 | $(54.6) |
| Capital expenditures | $9.5 | $24.4 |
- Reported sales fell 9.6%; organic sales declined 5.4%. Currency reduced sales by $29.4 and the Russia exit reduced them by $7.5, partly offset by a $1.3 Argentina contribution.
- Adjusted gross margin was 39.0%, up 150 basis points from 37.5% in the prior-year quarter. Pricing, Project Momentum savings and exiting lower-margin business helped; product costs and currency were offsets.
- Segment profit was $148.9, down 11.5%. Batteries & Lights profit declined 17.9% to $138.3; Auto Care improved from a $0.2 loss to $10.6.
- Interest expense rose to $42.9 from $37.0, primarily reflecting higher interest rates. The effective tax rate was 21.3%, versus 21.6%.
- Operating cash flow improved by $215.6 year over year, driven primarily by approximately $227 of working-capital changes, including receivables collections, lower inventory investment and payment timing. This quarter’s cash generation should be viewed in light of that working-capital comparison.
- Cash and cash equivalents were $280.3 at quarter-end. Current assets were $1,601.9 and current liabilities $697.0.
- Debt carrying value was approximately $3.52 billion, including current maturities. The company had no revolver borrowings and $492.9 of availability after letters of credit; it reported compliance with debt covenants. Long-term debt fair value was below carrying value.
- Common dividends paid were $21.8; the declared quarterly dividend was $0.30 per share.
Material changes and unusual items
- Sales declines reflected holiday-order timing, weaker category volumes amid higher retail prices and retailer inventory management, and the exit of some lower-margin battery customers and products. Pricing actions partially offset the declines.
- Project Momentum began in November 2022. Q1 restructuring expense was $6.6. The prior-year quarter included $16.5 of acquisition and integration costs and $1.1 of acquisition earn-out expense; these were absent in the current quarter.
- The company recorded a $2.9 gain on extinguishment of debt after repurchasing senior notes and paying down term debt. During the quarter it paid $25.0 of term-loan principal and retired $25.0 face value of senior notes for $21.6 cash; it prepaid another $50.0 of term debt in January 2023.
- Other comprehensive loss was $29.6, including foreign-currency translation and hedge-related movements; total comprehensive income was $19.4.
Outlook, risks and contingencies
- Project Momentum is expected to produce $80–$100 of annual pretax savings, including $65–$80 from restructuring and $15–$20 from continuous-improvement and working-capital initiatives. Management expected approximately $30–$40 of savings in fiscal 2023. Restructuring is expected to be substantially complete by September 2024, with $40–$50 of operating costs and $35–$45 of capital expenditures through fiscal 2024. The company had realized $0.6 of savings through Q1.
- Management anticipated fiscal 2023 capital expenditures of approximately $55–$65. It stated that operating cash flow and access to capital markets were expected to fund needs, while noting that future financing access on acceptable terms is not assured.
- Management cited continuing inflation in manufacturing, transportation and commodities, currency exposure, supply-chain and logistics risks, and COVID-19-related demand and supply uncertainty. Currency had an adverse $10.0 impact on pretax earnings, or $0.11 per share, year over year.
- Legal proceedings arise in the ordinary course; management said pending matters were not reasonably likely to be material after considering accruals. Accrued environmental costs were $14.6. Purchase obligations were $17.2, including $10.2 due within twelve months.
- The company reported no material changes to the risk factors in its fiscal 2022 Form 10-K. It also reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales volumes, retailer inventory patterns and pricing sustain or improve, particularly in Batteries & Lights and Auto Care.
- Whether Project Momentum delivers its savings targets and margin recovery, and how its restructuring costs and capital spending develop.
- Whether operating cash flow remains strong after the quarter’s favorable working-capital movements normalize.
- How higher rates, foreign exchange, commodity costs and substantial debt affect interest expense, margins and debt reduction.
- Whether the company maintains covenant compliance and adequate liquidity while funding dividends, investment and contractual obligations.