Energizer Holdings, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended September 30, 2018. All amounts are U.S. dollars; figures are in millions unless stated otherwise. The filing also reports fourth-quarter results. Energizer sells household and specialty batteries, portable lighting, and automotive fragrance and appearance products through its Americas and International segments.
Financial performance and liquidity
| Metric | FY2018 | FY2017 | Change / context |
|---|---|---|---|
| Net sales | $1,797.7 | $1,755.7 | Up 2.4%; organic sales rose 1.3% |
| Gross profit / margin | $830.9 / 46.2% | $811.3 / 46.2% | Margin flat; higher commodity costs offset favorable currency |
| Earnings before income taxes | $175.2 | $273.3 | Down 35.9% |
| Net earnings | $93.5 | $201.5 | Down 53.6% |
| Diluted EPS | $1.52 | $3.22 | Down 52.8%; adjusted non-GAAP diluted EPS was $3.37 vs. $2.98 |
| Operating cash flow | $228.7 | $197.2 | Up $31.5, primarily from improved working capital |
| Capital expenditures | $24.2 | $25.2 | FY2019 spending expected at $30–$35 |
Batteries generated $1,612.7 of sales (FY2017: $1,548.2); other products generated $185.0 (FY2017: $207.5). Americas sales were $1,135.6 and segment profit $326.1; International sales were $662.1 and segment profit $149.6. Total segment profit increased 5.0% to $475.7.
FY2018 SG&A was $421.7, including $62.9 of acquisition and integration costs; adjusted SG&A was 20.0% of sales versus 20.4% in FY2017. Interest expense rose to $98.4, including $41.9 of Spectrum acquisition-related interest, ticking and commitment fees. The reported effective tax rate was 46.6%, including a $39.1 Tax Act charge and $6.0 of acquisition-related tax withholding costs; the adjusted rate was 23.1%.
At September 30, 2018, cash and cash equivalents were $522.1, of which 99% was outside the U.S.; an additional $1,246.2 was restricted cash held for the proposed Spectrum battery acquisition. Working capital was $419.9. Total liabilities were $3,154.3 and shareholders’ equity was $24.5. Debt included $976.1 of long-term debt, $1,230.7 of debt held in escrow, $247.3 of notes payable and $4.0 of current maturities—approximately $2.46 billion in total. The existing revolving facility had $103.3 available, after letters of credit; the company reported compliance with debt covenants.
Material changes and unusual items
- Sales rose 2.4%, reflecting 1.3% organic growth, 1.1% favorable currency and a 0.1% contribution from Nu Finish; Argentina’s highly inflationary accounting treatment reduced reported sales by 0.1%.
- GAAP earnings declined sharply, while adjusted earnings increased: adjusted net earnings were $207.1 versus $186.8. FY2018 reported results included $84.6 of pre-tax acquisition and integration costs, a $14.1 Canadian pension settlement loss, and the Tax Act and acquisition-related tax charges. The company also recorded a $4.6 gain on real estate sales.
- Operating cash flow improved despite lower GAAP net earnings. Financing cash flow included $1,259.9 of proceeds from debt placed in escrow for the Spectrum battery acquisition.
- Quarterly FY2018 net sales and net earnings were $457.2 and $1.5, respectively, compared with $465.1 and $34.1 in the fourth quarter of FY2017.
- The company acquired Nu Finish and Scratch Doctor for $38.1 in July 2018. The acquisition contributed $2.3 of FY2018 sales.
Outlook, transactions and key risks
No specific FY2019 revenue or earnings guidance is provided. Management expected FY2019 capital expenditures of $30–$35. It anticipated closing the Spectrum battery acquisition at the beginning of calendar 2019, subject to European Commission approval and the proposed remedy, which includes divesting the Varta consumer battery business in Europe. The estimated net purchase price was revised to $1.4–$1.5 billion from the original $2.0 billion. A $100.0 termination fee may apply in specified circumstances if the battery deal does not close by July 15, 2019.
On November 15, 2018, Energizer also agreed to acquire Spectrum’s global auto care business, including Armor All, STP and A/C PRO, for $1.25 billion, comprising an estimated $938 million cash and $312 million in newly issued equity. The deal was expected to close in FY2019’s second quarter, subject to customary conditions and regulatory approval. Spectrum would receive approximately 9% of Energizer’s outstanding common stock after closing.
Principal disclosed risks include substantial leverage and acquisition financing needs; regulatory approval, integration and synergy risks for the Spectrum transactions; intense competition and retailer pricing pressure; currency exposure and Argentina hyperinflation; volatile commodity costs and supply interruptions; changing retail channels and battery-device trends; and environmental, legal, tax, cybersecurity and pension exposures. Environmental accruals were $6.7, with approximately $1.1 expected to be spent in FY2019. Management said pending legal matters were not reasonably likely to be material, based on information available. The independent auditor reported effective internal control over financial reporting.
Most important facts for investors to verify
- Whether and on what terms the EC approved the Spectrum battery transaction and required Varta divestiture, and the final net purchase price and financing.
- Whether the Spectrum auto care acquisition closed as expected, the final cash/equity mix, and dilution to existing shareholders.
- How much of reported earnings deterioration reflects recurring operations versus acquisition costs, tax charges, pension settlement and other adjustments; review both GAAP and non-GAAP reconciliations.
- Post-acquisition debt, interest expense, covenant headroom, unrestricted liquidity and the company’s ability to generate cash while servicing debt.
- Whether organic sales, margins and International segment profitability improve, and the financial effect of currency movements, commodity costs and Argentina’s hyperinflationary status.