Energizer Holdings, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended September 30, 2019. The filing also reports fourth-quarter results. Unless noted, amounts are U.S. dollars in millions.
Business context and reporting period
Energizer makes and markets batteries, portable lighting and auto care products, with operations reported in Americas and International segments. FY2019 included the January acquisitions of Spectrum’s global battery business and global auto care business. The Varta consumer battery business in Europe, the Middle East and Africa was classified as held for sale and discontinued operations pending divestiture.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $2,494.5 | $1,797.7 |
| Gross profit / gross margin | $1,003.8 / 40.2% | $830.9 / 46.2% |
| Earnings from continuing operations | $64.7 | $93.5 |
| Diluted EPS from continuing operations | $0.78 | $1.52 |
| Net earnings attributable to common shareholders | $39.1 | $93.5 |
| Operating cash flow from continuing operations | $142.1 | $228.7 |
| Cash and cash equivalents at year-end | $258.5 | $522.1 |
| Working capital | $967.8 | $419.9 |
- Sales rose 38.8%; acquisitions added $660.6, while organic sales increased 4.1%. Unfavorable currency reduced sales by $32.7.
- Segment profit increased 32.8% to $631.5, including acquisition contributions; organic segment profit grew 8.4%.
- Reported gross margin fell 600 basis points. Excluding purchase-accounting inventory step-up and acquisition costs, management reported a 42.6% margin, down 360 basis points, largely reflecting acquired businesses’ lower margin profile.
- Reported interest expense was $226.0, including $65.6 of acquisition-related interest, ticking and financing fees. Cash interest paid was $170.3.
- Gross long-term debt, including current maturities, was $3,515.3; the filing describes total indebtedness as approximately $3.5 billion. The company had $25.0 drawn on its revolving facility and $370.2 available after letters of credit. Management reported compliance with debt covenants.
- Investing cash outflow from continuing operations was $2,514.9, including $2,460.0 for acquisitions. Capital expenditures were $55.1.
- FY2019 fourth-quarter sales were $719.0, gross profit $287.8 and continuing-operations earnings $47.0, compared with $457.2, $208.0 and $1.5, respectively, in FY2018’s fourth quarter.
Material changes versus the prior comparable period
- The Battery and Auto Care acquisitions substantially expanded sales and assets; year-end total assets increased to $5,449.6 from $3,178.8, while long-term debt increased to $3,461.6 from $976.1.
- Acquisition and integration costs were $188.4, versus $84.6 in FY2018. They included inventory step-up, integration and transaction costs, and acquisition-related interest and financing fees.
- Continuing-operations operating cash flow declined by $86.6, which management attributed to lower earnings, higher working capital and acquisition-related cash costs.
- FY2019 included a $13.6 net loss from discontinued operations. The reported $39.1 attributable to common shareholders also reflects $12.0 of mandatory preferred stock dividends.
Outlook, commentary, risks and unusual items
- Management said cash from operations and capital-market access were expected to provide adequate resources for operating and financing needs, while noting that future financing access and terms are not assured. No specific earnings or revenue guidance was provided.
- Management estimated FY2020 capital expenditures of $40–$45 for maintenance, product development and cost reduction, plus $50–$60 of integration-related capital expenditures.
- Integration restructuring plans approved in FY2019 involve manufacturing and distribution facility closures or combinations, are expected to be completed by December 31, 2021, and may incur up to $40 of additional severance and exit costs.
- The planned Varta divestiture was subject to European Commission approval. The agreement provides for €180 million from VARTA AG, subject to adjustments, and a further $200 million contribution from Spectrum; the company estimated contractual adjustments could reach $100 million and anticipated a loss on divestiture.
- Key risks include substantial debt and interest costs; acquisition integration and realization of expected synergies; intense competition and retailer bargaining power; foreign exchange and commodity volatility; customer concentration (Walmart represented 13.8% of sales); seasonal demand; regulatory changes affecting R-134a auto A/C products; cyber and supply-chain disruptions; and environmental, tax, pension and litigation contingencies.
- Environmental liabilities accrued were $8.2, with approximately $2.0 expected to be spent in FY2020. Management said pending legal proceedings were not reasonably likely to be material based on information available, including established accruals.
- The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. The acquired Battery and Auto Care businesses were excluded from the FY2019 internal-control assessment and audit; together they represented 15.0% of year-end assets and 26.3% of annual sales.
Most important facts for investors to verify
- Progress, final purchase-price adjustments and realized proceeds or losses from the Varta divestiture.
- Acquisition integration costs, remaining restructuring charges, and whether anticipated cost savings and synergies materialize.
- Debt repayment capacity, interest expense, covenant headroom and refinancing exposure, given approximately $3.5 billion of debt.
- Underlying organic growth and margins apart from acquired revenue, purchase-accounting adjustments and other excluded items.
- Cash conversion and working-capital trends, including use and cost of receivables factoring.
- Effects of preferred-stock dividends and mandatory conversion on common shareholders’ earnings and dilution.