Business context and reporting period
Energizer Holdings, Inc. is a global manufacturer and marketer of household and specialty batteries, portable lighting, and automotive care products. This unaudited Form 10-Q covers the first quarter of fiscal 2020, the three months ended December 31, 2019; comparisons are to the quarter ended December 31, 2018 unless noted. Results include the Battery and Auto Care businesses acquired from Spectrum in January 2019. The Varta consumer battery business in EMEA is presented as discontinued operations and held for sale.
Financial results and key metrics
Amounts are in millions of dollars, except per-share data.
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Net sales | $736.8 | $571.9 |
| Gross profit / reported gross margin | $301.3 / 40.9% | $275.5 / 48.2% |
| Continuing operations net earnings | $45.8 | $70.8 |
| Continuing diluted EPS | $0.60 | $1.16 |
| Adjusted continuing diluted EPS (non-GAAP) | $0.85 | $1.64 |
| Operating cash flow, continuing operations | $133.5 | $118.9 |
| Capital expenditures | $11.7 | $4.8 |
- Net earnings attributable to common shareholders were $42.1, after $4.0 of mandatory convertible preferred stock dividends. Total net earnings, including discontinued operations, were $46.1.
- Excluding $6.9 of integration costs, gross margin was 41.8%, 640 basis points below the prior-year rate. Management cited acquired-business margins, customer mix, currency, tariffs and higher product costs; improved pricing and synergies partly offset these pressures.
- Cash and cash equivalents were $293.5 at December 31, 2019, versus $258.5 at September 30, 2019. Total cash from operations, including discontinued operations, was $123.5; total cash increased $35.0 during the quarter.
- Total debt, including current maturities and capital lease obligations, was $3,500.6; notes payable were an additional $28.1. The company reported $68.4 of current debt maturities. It had $20.0 drawn on its $400.0 revolving facility and $372.7 available after letters of credit. Debt covenants were met.
- Current assets were $2,067.7 and current liabilities were $1,144.9, including substantial held-for-sale balances of $805.5 in assets and $387.1 in liabilities.
Changes versus the prior comparable period
- Reported sales rose 28.8%, but organic sales declined 3.4%. The $186.9 contribution from the acquisitions more than accounted for reported growth; unfavorable currency reduced sales by $2.5.
- Battery sales were $621.9 versus $521.9; Auto Care sales were $78.7 versus $20.5; Lights and Licensing sales were $36.2 versus $29.5. Acquired-business contribution and changes in business scope limit direct comparability.
- Segment profit increased to $181.4 from $170.7, while organic segment profit declined $25.4 (14.9%). Americas segment profit rose to $129.2 from $116.1, aided by acquisitions; International segment profit fell to $52.2 from $54.6.
- Continuing earnings and EPS fell despite higher sales. Reported interest expense was $51.0 versus $48.2, while the prior-year quarter included $16.9 of other income, primarily acquisition escrow-related gains and interest. Current-quarter results included a $4.2 debt-extinguishment loss.
- Adjusted continuing diluted EPS declined 48.2%, from $1.64 to $0.85. The adjustment excludes acquisition and integration costs and the debt-extinguishment loss; prior-year adjustments also included the one-time tax-law impact.
Outlook, management commentary, risks and unusual items
- On January 2, 2020, after quarter-end, Energizer sold the Varta consumer battery business to VARTA AG for a contractual €180.0, subject to adjustments. Initial combined proceeds from VARTA AG and Spectrum were approximately $345. Management estimated a preliminary pretax loss of $80–$90 and said final purchase-price adjustments remained outstanding. Proceeds were subsequently used to pay down Term Loan B borrowings; the amount paid was not specified in the filing text.
- The Varta business generated $115.8 in quarterly sales and $0.3 in discontinued-operations net earnings, after $7.5 of income tax expense. Its operations included $5.2 of interest expense.
- Integration restructuring is expected to be completed by December 31, 2021. The quarter included $6.3 of restructuring charges; management expects approximately $55 of additional costs and annual savings of $60–$65 by the end of calendar 2021. Savings realization began in Q1 FY2020.
- Management expected FY2020 capital expenditures of approximately $40–$45, plus $50–$60 of integration-related capital spending. It stated that operating cash generation and capital-market access were expected to support funding needs, while noting financing access is not assured. No full-year earnings or revenue guidance is provided in the supplied filing text.
- Key stated risks include acquisition integration and synergy execution, competitive and market conditions, pricing and customer trends, tariffs and commodity costs, currency movements, interest rates and LIBOR transition, restructuring execution, debt covenant compliance, and litigation or product liability matters. The company said legal matters were not reasonably likely to have a material effect based on information then available; it reported no material changes to the prior Form 10-K risk factors.
- Other notable items: the company adopted the new lease standard, recognizing operating lease assets of $82.9 and liabilities of $84.0; it also entered into a 16-year operating lease expected to create a material asset and liability when it commences. Disclosure controls were deemed effective as of December 31, 2019.
Important facts for investors to verify
- Final proceeds, purchase-price adjustments and realized loss from the Varta divestiture, as well as the resulting debt repayment.
- Whether the acquired businesses and remaining portfolio deliver expected integration benefits, restructuring savings and margin improvement.
- Underlying demand and organic sales trends, including holiday shipment timing, pricing effects, competitive pressure and regional performance.
- Cash conversion and working-capital trends: operating cash flow benefited from a Spanish VAT settlement and timing of accruals, while receivables increased amid reduced factoring.
- Debt levels, interest expense, covenant compliance and liquidity, including the effect of variable rates and foreign-currency exposure.
- Execution and cost of the restructuring and new long-term lease obligations, alongside the company’s planned FY2020 capital spending.