Energizer Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2019; filed August 7, 2019. Amounts are U.S. dollars in millions except per-share data. Comparisons are with the corresponding 2018 periods.
Business context and reporting period
Energizer manufactures and markets household and specialty batteries, lighting, and automotive care products. Results include the January 2019 acquisitions of Spectrum’s global battery and lighting business and global auto care business. The VARTA consumer battery business in Europe, the Middle East and Africa is classified as held for sale and discontinued operations.
Key financial metrics
| Metric | Quarter ended June 30 | Nine months ended June 30 |
|---|---|---|
| Net sales | $647.2; up 64.8% | $1,775.5; up 32.5% |
| Gross profit / gross margin | $246.3 / 38.1% (44.8% prior year) | $716.0 / 40.3% (46.5% prior year) |
| Earnings from continuing operations | $9.2 vs. $23.8 | $17.7 vs. $92.0 |
| Net earnings attributable to common shareholders | $3.0 vs. $23.8 | Loss of $2.8 vs. earnings of $92.0 |
| Diluted EPS from continuing operations | $0.07 vs. $0.39 | $0.15 vs. $1.50 |
| Adjusted diluted EPS from continuing operations (non-GAAP) | $0.37 vs. $0.54 | $2.07 vs. $2.55 |
| Operating cash flow | Not presented for the quarter | $30.4 from continuing operations; $7.0 including discontinued operations |
For the nine months, capital expenditures were $36.4 and acquisition-related investing cash outflows were substantial. Cash and cash equivalents were $206.4 at June 30, down from $522.1 at September 30, 2018. Total liabilities were $5,007.0 and shareholders’ equity was $570.7.
Long-term debt was $3,493.2, with $41.5 of notes payable and $10.0 of current maturities of long-term debt. The company had $40.0 drawn on its $400.0 revolving facility and $352.4 available after letters of credit. It reported compliance with debt covenants.
Material changes versus the prior comparable periods
- Acquisitions drove much of the sales increase: the Battery and Auto Care businesses contributed $247.7 of quarterly sales and $429.1 for the nine months; organic sales increased 3.6% and 2.3%, respectively.
- Quarterly segment profit was $144.8, up 55.7%; nine-month segment profit was $440.6, up 24.1%. These figures include acquired operations and exclude specified corporate and acquisition-related items.
- Gross margin declined. Management attributed the pressure primarily to the acquired businesses’ lower margin profile, purchase-accounting inventory step-ups, unfavorable currency and material costs. Excluding current-period inventory step-ups and acquisition costs, quarterly gross margin was 40.0%, down 480 basis points year over year.
- Interest expense rose to $51.9 for the quarter and $177.3 for the nine months, reflecting higher acquisition-related debt and, for the nine-month period, $65.6 of acquisition-related interest and ticking fees.
- Acquisition and integration costs were $28.0 for the quarter and $159.9 for the nine months. The nine-month figure included inventory step-ups and financing-related costs.
- Operating cash flow from continuing operations fell by $157.6 year over year to $30.4, mainly reflecting an approximately $109 adverse working-capital change, including higher receivables and planned inventory builds.
Outlook, management commentary, risks and unusual items
- No specific full-year revenue, earnings or EPS guidance is provided in the supplied filing text. Management said operating cash flow and access to capital markets are expected to provide adequate resources for operating and financing needs, while noting that future financing access is not assured.
- Management anticipated approximately $60 of fiscal 2019 capital expenditures, including acquisition integration, maintenance, product development and cost-reduction projects.
- The VARTA divestiture was expected to close by the end of calendar 2019, subject to customary conditions. Expected proceeds were approximately $405 before contractual adjustments, which the company estimated could be up to $100; management expected to record a loss on divestiture.
- Key risks include substantial acquisition-related debt and debt-service needs; integration and synergy execution; the divestiture’s completion and terms; foreign exchange, interest-rate and commodity exposure; and seasonality and forecasting of acquired-business demand.
- The filing added risks involving operational issues at the acquired Auto Care business’s Dayton, Ohio facility, for which approximately $25 of additional investment was expected, and regulatory changes affecting R-134a refrigerant products.
- Other notable items include discontinued-operations net losses of $1.8 for the quarter and $12.8 for the nine months, and preliminary acquisition purchase-price allocations that remained subject to change.
Most important facts for investors to verify
- Whether the VARTA divestiture closed, its final proceeds and adjustments, and the resulting gain or loss.
- Progress in integrating the Battery and Auto Care acquisitions, including the Dayton facility investment, service levels, margins and anticipated synergies.
- Debt reduction, interest expense, covenant headroom, and cash generation as working capital normalizes.
- Whether organic sales and segment profit gains persist after separating acquisition effects, currency, and one-time purchase-accounting and integration costs.
- The final acquisition purchase-price allocations and any changes to goodwill, intangible assets, deferred taxes or impairment assessments.