ENERGIZER HOLDINGS, INC. quarterly report, Q3 FY2018

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Energizer Holdings, Inc. — Q3 FY2018 Form 10-Q

Reporting period: Quarter and nine months ended June 30, 2018. Amounts are in millions of U.S. dollars except per-share data. The statements are unaudited. Energizer manufactures batteries, portable lights and automotive appearance products.

Financial performance

  • Q3 revenue: $392.8, up 5.6% year over year; organic growth was 5.3%, with a 0.3% favorable currency impact. Battery sales were $350.1; other sales were $42.7.
  • Nine-month revenue: $1,340.5, up 3.9%; organic growth was 2.5%, with a 1.4% favorable currency impact.
  • Q3 gross profit and margin: $176.1 and 44.8%, versus $158.0 and approximately 42.5% a year earlier. Management reported margin expansion of 230 basis points, principally from lapping prior-year portfolio-optimization investment, with favorable mix and currency also contributing.
  • Q3 earnings: GAAP net earnings were $23.8, or $0.39 diluted EPS, compared with $24.9 and $0.40. Adjusted diluted EPS, a non-GAAP measure, was $0.54 versus $0.43.
  • Nine-month earnings: GAAP net earnings were $92.0, or $1.50 diluted EPS, versus $167.4 and $2.67. Adjusted diluted EPS was $2.55 versus $2.44. The comparison in GAAP earnings includes the prior-year real estate sale gains and the current-year tax-law charge, among other items.
  • Operating segments: Q3 Americas sales were $241.3 and segment profit $60.4; International sales were $151.5 and segment profit $32.6. Nine-month segment profit was $239.2 in Americas and $115.9 in International. Segment profit excludes specified corporate and other costs and is not GAAP operating income.
  • Costs and interest: Q3 SG&A was $111.9, including $22.4 of acquisition and integration costs; Q3 interest expense was $17.7, including $3.4 of Spectrum-related debt commitment fees. Nine-month acquisition and integration costs were $50.9, including $6.3 of commitment fees.
  • Cash flow: Nine-month operating cash flow was $188.0, up from $145.6, mainly reflecting improved working capital. Capital expenditures were $17.2. Investing cash outflow was $11.1 and financing cash outflow was $37.9. Cash increased by $132.9 to $510.9.
  • Liquidity and debt: Current assets were $1,090.9 and current liabilities $599.3. Long-term debt, net of discounts and fees, was $976.7; notes payable were $174.6, including $165.0 drawn on the revolving facility. The $350.0 revolver had $178.3 available after letters of credit. Shareholders’ equity was $47.8. The company reported compliance with debt covenants at quarter-end.
  • Margins and shareholder returns: Nine-month gross margin increased about 20 basis points. Dividends were $0.29 per share each quarter; $50.0 was spent repurchasing shares during the first nine months, with no open-market repurchases in Q3.

Material changes versus comparable periods

  • Q3 sales increased in both segments. Americas organic sales rose 6.7% and International organic sales 3.0%. Total Q3 segment profit rose 17.3% to $93.0; nine-month organic segment profit declined 1.0%, despite a 2.3% reported increase, as currency contributed favorably.
  • Q3 reported earnings were slightly lower despite higher sales and segment profit. Acquisition-related costs rose materially; the quarter also included a $9.9 gain on foreign-currency contracts associated with the proposed Spectrum financing.
  • Nine-month GAAP net earnings fell by $75.4. The current period included a $30.6 tax charge associated with U.S. tax legislation and $6.0 of acquisition-related withholding tax costs; the prior period included $16.9 of real estate gains and $3.8 of spin restructuring income. Adjusted nine-month diluted EPS increased to $2.55 from $2.44.
  • Cash from operations improved, with management citing approximately $63 of year-over-year working-capital improvement, mainly from receivables. Debt-related short-term borrowings and share repurchases also increased versus the prior-year period.

Outlook, transactions, and risks

  • Spectrum acquisition: Energizer agreed to acquire Spectrum Brands’ global battery, lighting and portable power business for $2.0 billion, subject to adjustments, regulatory approvals and other closing conditions. Management expected closing by the end of calendar 2018. In July 2018, the company issued $500.0 of 6.375% notes and €650.0 of 4.625% notes due 2026, placing proceeds in escrow pending conditions. It expected post-acquisition indebtedness to exceed $3 billion and planned additional term loans and a new revolving facility.
  • The acquisition agreement provides for a potential $100.0 termination fee if the deal has not closed by July 15, 2019 and specified regulatory conditions remain outstanding. The filing highlights financing, regulatory, integration, synergy-realization and increased-leverage risks.
  • Other acquisition: On July 2, 2018, after quarter-end, Energizer acquired the Nu Finish and Scratch Doctor automotive appearance business for $37.7, subject to working-capital adjustments.
  • Spending outlook: Full-year FY2018 capital expenditures were expected to be approximately $30. Management stated that operating cash flow and capital-market access were expected to provide adequate resources, while noting that financing availability and terms cannot be assured. No company-wide revenue or earnings guidance is stated in the provided filing text.
  • Tax and currency: The nine-month effective tax rate was 45.3% versus 25.2%, affected by the Tax Cuts and Jobs Act transition-tax charge and acquisition-related withholding costs. Argentina was deemed highly inflationary effective July 1, 2018; the filing says the resulting impact would depend on exchange rates and the subsidiary’s net monetary position.
  • Other exposures: The company cited foreign-exchange, interest-rate, commodity, competitive, customer, cyber, regulatory and litigation risks. It had no open commodity hedges at June 30. Ordinary-course legal matters were not expected to be material based on information then available; environmental accruals were $5.1 and purchase obligations were approximately $72.4.
  • Management concluded disclosure controls were effective as of June 30, 2018, and reported no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

  • Whether the Spectrum acquisition closed as expected, obtained regulatory clearances without material divestitures, and achieved anticipated integration benefits.
  • Final acquisition financing, post-close debt and interest burden, covenant headroom, and the effect of leverage on liquidity and capital allocation.
  • How much of adjusted earnings improvement is sustainable after excluding acquisition costs, tax items, asset-sale gains and the acquisition-related currency-contract gain.
  • Whether organic growth and margins continue, particularly International segment profitability, which declined on an organic basis for the first nine months.
  • The final tax effects of U.S. tax legislation and any earnings impact from Argentina’s highly inflationary accounting.