Filing summary
Entity and period: The supplied filing is Energizer Holdings, Inc.’s unaudited Form 10-Q for the quarter ended December 31, 2010 (fiscal 2011 first quarter), compared with the quarter ended December 31, 2009. This does not appear to be an Edgewell Personal Care filing; investors should confirm the intended issuer.
Financial performance
| Metric | Q1 FY2011 | Q1 FY2010 |
|---|---|---|
| Net sales | $1,177.1 million | $1,176.7 million |
| Gross profit / gross margin | $554.9 million / 47.1% | $560.2 million / 47.6% |
| Operating profit, segments combined | $239.9 million | $299.0 million |
| Earnings before income taxes | $162.5 million | $198.5 million |
| Net earnings | $110.4 million | $125.7 million |
| Diluted EPS | $1.55 | $1.78 |
| Cash flow from operations | $(1.0) million | $97.3 million |
| Capital expenditures | $18.6 million | $23.2 million |
Reported sales were essentially flat. Gross margin fell 0.5 percentage point, with management attributing about 120 basis points of pressure to coupons and trade promotions supporting the Schick Hydro launch, partly offset by favorable mix. Advertising and promotion expense rose $40.0 million to $128.7 million (10.9% of sales versus 7.5%). SG&A increased $23.9 million; R&D increased $2.0 million to $23.4 million. Interest expense declined $2.8 million to $29.2 million.
Other financing expense was $3.2 million, versus $35.6 million in the prior-year quarter, which included a $25.5 million Venezuela devaluation charge. The current quarter included a $2.3 million Venezuela charge. The effective tax rate was 32.0%, compared with 36.7%; excluding the prior-year Venezuela charge, the prior-year rate was 32.5%.
Segments and material changes
- Household Products: Sales were $668.5 million, down 5%; segment profit was $163.3 million, down $15.5 million. Sales weakness reflected Venezuela, holiday shipments shifted to the prior quarter, and loss of some lower-margin volume.
- Personal Care: Sales were $508.6 million, up 8%, including about $27 million from ASR; excluding ASR and Venezuela, sales rose about 4%. Segment profit fell to $76.6 million from $120.2 million, principally due to launch-related advertising, promotions, and overhead costs.
- American Safety Razor acquisition: Completed November 23, 2010, for $301 million cash. The company used about $129 million of cash and borrowings under its receivables securitization program. ASR joined Personal Care. Purchase-price allocation remained preliminary, with finalization expected by March 2011; related valuation estimates could change.
- ASR deal, severance, inventory valuation, and integration-related costs reduced reported results. Management said it did not expect the transaction to be accretive to reported FY2011 EPS, but expected modest accretion excluding one-time deal and integration costs.
Cash, debt, and liquidity
Cash and equivalents were $444.1 million at December 31, 2010, down from $629.7 million at September 30. Operating cash flow was slightly negative, as $163.0 million of cash flow before working-capital changes was more than offset by a $164.0 million working-capital outflow. Investing activities used $288.4 million, including the $267.1 million net cash outflow for the acquisition; financing activities provided $108.7 million.
Total borrowings were $2,395.1 million, including $203.1 million of short-term notes payable and $2,192.0 million of long-term debt including current maturities. Committed facilities totaled $2,670.1 million, with $259.7 million available. The company reported leverage of 2.59 times pro forma EBITDA and EBIT-to-interest coverage of 5.60 times, and said it expected to remain in material covenant compliance. A $275 million revolving facility matures in May 2011 and management intended to renew it, while noting renewal and terms were not assured. The receivables securitization program, with $172 million outstanding, also renews annually in May.
Outlook, risks, and contingencies
- FY2011 reported EPS guidance was $4.30–$4.50, including expected Household Products restructuring charges. Excluding unusual items, primarily restructuring, guidance was $5.10–$5.30.
- Management expected Household Products segment profit to decline for the year and Personal Care segment profit to increase modestly. Household Products sales were expected to see low-single-digit growth for the remainder of the year, supported by ending pack upsizing and U.S. price increases; expected benefit was $14–$16 million.
- Expected FY2011 Household Products restructuring charges were $65–$85 million, with annual savings of $25–$35 million expected by the end of FY2012. The quarter included $1.2 million of restructuring charges.
- Management expected raw-material costs to be $20–$25 million unfavorable for the remainder of FY2011 versus the prior-year period, and about $15 million of incremental Household Products investment spending for the remainder of the year. A&P was expected to be 11%–12% of FY2011 sales.
- Liquidity risks include debt-facility renewals, covenant requirements and refinancing. Market risks include foreign-currency and Venezuela exposure, variable-rate debt, and volatile commodity costs. A 1 percentage-point increase in variable rates was estimated to raise annual pretax expense and cash outflow by about $4 million after hedging.
- The company reported approximately $22 million of net monetary assets in Venezuela and said restrictions and exchange-rate uncertainty prevented it from predicting the eventual U.S.-dollar conversion value. Pending legal matters were not considered reasonably likely to be material based on information available, taking recorded accruals into account.
- Management stated cash from operations and periodic borrowing should meet liquidity needs, but gave no guarantee. The filing reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Investor verification points
- Confirm the issuer: the filing identifies Energizer Holdings, Inc., not Edgewell Personal Care Co.
- Review subsequent filings for final ASR purchase-price allocation, integration costs, and realized contribution to earnings and cash flow.
- Track Schick Hydro promotional spending and its effect on gross margin, sales, and Personal Care segment profit.
- Compare restructuring charges and savings with the stated $65–$85 million cost and $25–$35 million annual savings ranges.
- Monitor cash conversion and working capital, the May 2011 facility renewals, debt maturities, and covenant headroom.
- Assess Venezuela currency restrictions, commodity and currency exposures, and the assumptions underlying FY2011 guidance.