Business context and reporting period
Energizer Holdings, Inc. manufactures and markets household and specialty batteries, portable lights, and automotive care products. This unaudited Form 10-Q covers the fiscal quarter and six months ended March 31, 2020; comparisons are with the periods ended March 31, 2019. The results include the battery and auto care businesses acquired from Spectrum in 2019. The Varta consumer battery business was sold on January 2, 2020 and is reported as discontinued operations.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $587.0 million, up 5.5% | $1,323.8 million, up 17.3% |
| Gross margin | 40.1%, versus 34.9% | 40.6%, versus 41.6% |
| Continuing-operations earnings | $13.7 million, versus a $62.3 million loss | $59.5 million, versus $8.5 million |
| Adjusted diluted continuing-operations EPS | $0.37, versus $0.20 | $1.22, versus $1.69 |
| Net earnings/(loss) | $(117.7) million | $(71.6) million |
| Operating cash flow | Not separately reported for the quarter | $86.3 million total; $99.2 million from continuing operations |
Quarterly sales growth reflected 2.7% organic growth and an additional month of Auto Care acquisition sales; unfavorable currency reduced sales by $7.4 million. Six-month sales growth was acquisition-led: organic sales declined 0.4%, while acquisitions contributed $210.6 million. Quarterly adjusted gross margin improved 100 basis points to 41.6%, but six-month adjusted gross margin declined 270 basis points to 41.7%; management cited acquired-business mix, product/channel mix, currency, tariffs and COVID-19 operating effects among the pressures. Adjusted figures are non-GAAP.
Balance sheet, debt and liquidity
At March 31, 2020, cash and cash equivalents were $277.9 million; current assets were $1,266.1 million and current liabilities $892.9 million. Long-term debt, including current maturities and capital leases, was $3,141.9 million; notes payable were a further $184.1 million, including $173.0 million drawn on the revolving credit facility. Shareholders’ equity was $373.7 million, down from $543.8 million at September 30, 2019.
During the six months, the company generated $99.2 million of operating cash from continuing operations and spent $27.7 million on capital expenditures. It used $339.3 million in continuing-operations financing cash flow, including $747.2 million of debt repayments, dividends and $45.0 million of share repurchases. The Varta sale generated approximately $345.8 million in cash proceeds, used to repay term-loan debt. The company reported compliance with debt covenants at quarter-end.
After quarter-end, Energizer drew the remaining $219.7 million available under its revolver, then completed a $250 million add-on offering of 6.375% notes due 2026 and used proceeds to repay revolver borrowings and offering costs. As of May 1, it reported nearly $600 million of cash and approximately $200 million of revolver availability. Required debt repayments over the following 12 months were $93 million.
Material changes, outlook and risks
- Varta divestiture: The sale produced a pre-tax loss of $137.6 million, driving most of the quarter’s discontinued-operations loss. Working-capital settlement and other contractual adjustments remained pending, expected in the third fiscal quarter.
- COVID-19: Battery demand increased in key North American markets, while auto care demand was hurt by reduced travel; battery and auto care businesses also experienced softness in Latin America and Asia. The company cited modest incremental operating costs and significant uncertainty over demand, supply chains and operating conditions. It offered no specific full-year earnings guidance in the provided filing text.
- Restructuring: The company expects approximately $50 million of additional exit and severance costs through calendar 2021, with annual savings of approximately $60–$65 million by the end of that year. Plans include manufacturing and distribution facility closures and combinations.
- Investment and liquidity: Fiscal 2020 capital spending was projected at $30–$35 million for maintenance, product development and cost reduction, plus $50–$60 million of integration-related capital expenditures. Management said it could defer or reduce spending to preserve flexibility, potentially slowing growth or affecting its business plan.
- Other exposures: Risks include high indebtedness and debt service, covenant compliance, foreign exchange and commodity-price movements, LIBOR transition, acquisition integration, and legal and environmental matters. The company reported $8.2 million of accrued environmental costs and $19.8 million of purchase obligations; it said pending legal matters were not reasonably likely to be material based on information then available.
Most important facts for investors to verify
- Whether the Varta sale’s final working-capital and contractual adjustments materially change proceeds or the recorded loss.
- Whether post-quarter financing leaves the company with the reported cash and revolver availability, and how debt, interest costs and leverage evolve.
- Whether COVID-19-driven battery demand persists or reverses, and the extent of continuing weakness in auto care, Latin America and Asia.
- Progress toward the restructuring’s estimated $60–$65 million annual savings, alongside the remaining approximately $50 million of expected costs.
- How acquisition-driven revenue growth, organic sales trends and gross-margin pressures develop in subsequent periods.