Energizer Holdings, Inc. — Q1 FY2018 10-Q
Reporting period: Quarter ended December 31, 2017; unaudited. Energizer manufactures and markets household and specialty batteries, portable lights, and automotive fragrance and appearance products. Financial amounts are in U.S. dollars, millions except per-share data.
Financial results and position
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net sales | $573.3 | $559.6 |
| Gross profit / margin | $278.3 / 48.5% | $271.6 / 48.5% |
| Earnings before income taxes | $119.0 | $134.1 |
| Net earnings | $60.4 | $95.6 |
| Diluted EPS | $0.98 | $1.52 |
| Operating cash flow | $141.0 | $91.8 |
- Sales rose 2.4%: organic sales increased 1.1% and currency contributed 1.3%. Pricing and portfolio initiatives helped; U.S. retailer merchandising changes, the comparison with prior-year storm-related volume, and a divestiture partly offset growth.
- GAAP net earnings included an approximately $31.0 one-time tax charge related to the Tax Cuts and Jobs Act. Adjusted diluted EPS, a non-GAAP measure, was $1.55 versus $1.51, up 2.6%. The reported effective tax rate was 49.2%; the adjusted rate was 23.4%.
- Gross margin was unchanged year over year. Management cited pricing and favorable currency, offset by less favorable overhead absorption and continuous-improvement investment. SG&A was $99.2 versus $84.4, including $5.7 of acquisition costs; adjusted for acquisition costs in both periods, SG&A increased $9.9, primarily due to business-process initiatives. Advertising and promotion expense rose to $37.3 from $34.3.
- Total segment profit was $172.3, down 0.9%; excluding favorable currency, it declined 3.7%. Americas profit was flat at $123.1; EMEA fell to $25.5 from $26.1 and Asia Pacific to $23.7 from $24.7.
- Operating cash flow increased by $49.2, primarily due to a $38.5 year-over-year improvement in working capital, including higher collections. Capital expenditures were $5.5; investing cash outflow was $5.5. Cash increased to $454.3 from $378.0.
- At December 31, cash was $454.3 and current assets were $1,039.0 against current liabilities of $546.9. Long-term debt, net of discount and including current maturities, was approximately $981.9; notes payable were $110.5. The company had $255.8 available under its revolving facility after letters of credit. Cash was substantially held outside the U.S.
- Cash used in financing was $63.9, including $50.0 of share repurchases and $17.6 of dividends. The company repurchased approximately 1.13 million shares at an average $44.41 per share.
Changes, outlook, and material matters
- Tax legislation: The newly enacted U.S. tax law reduced the federal corporate rate to 21%; Energizer expected a blended federal statutory rate of approximately 24.5% for FY2018. The company recorded a provisional $30.0 mandatory transition-tax expense and approximately $1.0 from deferred-tax remeasurement. It had not completed its analysis, and final transition impacts could differ, potentially materially.
- Proposed acquisition: After quarter-end, Energizer agreed to acquire Spectrum Brands’ global battery, lighting, and portable power business for $2.0 billion in cash, subject to adjustments and regulatory and other conditions. Energizer expected closing by the end of calendar 2018 and planned to use cash and committed debt financing, including a new term loan and senior notes, while retaining its existing 2025 notes. The company reported $5.7 of related Q1 acquisition costs. A $100.0 termination fee may apply in specified circumstances if the transaction has not closed by July 15, 2019. Completion, financing, regulatory remedies, integration, and expected synergies are significant risks.
- Operating outlook: No specific sales or earnings guidance is stated in the filing. FY2018 capital expenditures were expected to be approximately $30–$35, funded from operating cash flow. Management said cash from operations and capital-market access were expected to support operating and financing needs, while noting that future financing access on acceptable terms is not assured.
- Debt and risks: The company reported compliance with debt covenants and expected to remain in compliance. Variable-rate debt creates interest-rate exposure; a swap fixed the LIBOR component on $200.0 of debt through June 2022. Currency weakness can pressure margins, and no commodity-hedging instruments were open at quarter-end. Legal matters were not considered reasonably likely to have a material financial effect based on information then available; accrued environmental costs were $5.2.
- Accounting and balance-sheet item: Early adoption of ASU 2016-16 removed a $59.2 deferred charge from other assets and recorded a cumulative-effect adjustment to retained earnings. Other adopted accounting updates had immaterial or presentation effects. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- How the provisional tax-law charges and transition-tax liability are finalized, and how the new tax rate affects future reported and adjusted earnings.
- Whether the Spectrum transaction receives required approvals, closes on the expected timetable, and can be financed on acceptable terms; also monitor potential divestitures, leverage, integration costs, and the termination-fee conditions.
- Whether organic sales growth and segment profitability improve as pricing, portfolio initiatives, and continuous-improvement spending progress.
- Whether working-capital-driven cash-flow strength is sustained, alongside planned capital spending, dividends, repurchases, and acquisition financing.
- Foreign-exchange and interest-rate exposure, covenant compliance, and the availability of cash held outside the U.S.