Business context and reporting period
Energizer Holdings, Inc. filed its Form 10-K for the fiscal year ended September 30, 2015. The company manufactures and sells household and specialty batteries and portable lighting products under brands including Energizer and Eveready. It completed its tax-free spin-off from Edgewell Personal Care Company on July 1, 2015 and began operating as an independent, publicly traded company.
Important comparability caveat: fiscal 2015’s first three quarters, and all of fiscal 2014 and 2013, include carve-out financial data and expense allocations from Edgewell. Fiscal 2015’s fourth quarter was the first quarter with stand-alone results.
Key financial metrics
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Net sales | $1,631.6 million | $1,840.4 million |
| Gross profit / gross margin | $756.2 million / 46.3% | $850.4 million / 46.2% |
| Operating profit | Filing text does not provide a single GAAP operating-profit figure | Filing text does not provide a single GAAP operating-profit figure |
| Net earnings (loss) | $(4.0) million | $157.3 million |
| Diluted EPS | $(0.06) | $2.53 |
| Adjusted net earnings / diluted EPS (non-GAAP) | $177.3 million / $2.82 | $207.9 million / $3.35 |
| Cash from operating activities | $161.8 million | $219.9 million |
| Capital expenditures | $40.4 million | $28.4 million |
| Cash and cash equivalents, year-end | $502.1 million | $89.6 million |
| Debt | $998.0 million long-term debt, including current maturities; plus $5.2 million notes payable | No long-term debt reported |
| Working capital, year-end | $658.7 million | $366.7 million |
Reported SG&A was $426.3 million, or 26.1% of sales, versus $391.3 million, or 21.3%, in 2014. Excluding specified separation, restructuring, integration and transition costs, SG&A was 20.0% of sales versus 19.8%. Fiscal 2015’s effective tax rate was 455.1%, distorted by the Venezuela deconsolidation charge, which received no tax benefit; management reported a 27.0% adjusted effective rate excluding specified unusual items.
Fiscal 2015 fourth-quarter sales were $399.1 million and net earnings were $23.1 million, compared with $486.7 million and $46.5 million, respectively, in fiscal 2014’s fourth quarter. The 2015 fourth quarter was the first post-spin quarter.
Material changes versus prior periods
- Sales fell 11.3% year over year. The company attributed $109.7 million of the decline to currency, $17.3 million to the change in Venezuela results, and $16.4 million to international go-to-market changes; organic sales declined 3.6%.
- Alkaline battery sales decreased to $1,044.9 million from $1,167.6 million; other batteries and lighting sales decreased to $586.7 million from $672.8 million.
- Gross profit declined $94.2 million, mainly due to lower sales and approximately $99 million of unfavorable currency effects. Reported gross margin was nearly flat; excluding currency, Venezuela and go-to-market effects, management cited a 330-basis-point improvement, primarily from cost reductions.
- Total segment profit declined 12.8% to $391.5 million, including $66.9 million of unfavorable currency effects. Excluding specified currency, Venezuela and go-to-market effects, organic segment profit increased 3.9%.
- Operating cash flow fell $58.1 million to $161.8 million, reflecting lower earnings and separation-related cash costs, partly offset by a $64.2 million working-capital improvement.
- The company recorded $163.9 million of fiscal 2015 spin-related costs, including $97.6 million in SG&A, $39.1 million of spin restructuring, and $26.7 million for early debt retirement. It also recorded a $65.2 million Venezuela deconsolidation charge and $9.6 million of restructuring expense related to the earlier program.
Outlook, management commentary, risks and contingencies
- Management expected $10–$15 million of additional pre-tax spin costs through fiscal 2016 and projected fiscal 2016 investing cash outflows of approximately $35–$45 million, largely for capital expenditures. It stated that capital spending was expected to be funded from operations.
- Management said the 2013 restructuring program was concluded in fiscal 2015, with estimated total savings exceeding $218 million; the full savings run-rate was reflected by June 30, 2015. It did not expect further material charges from that program.
- The company warned that recent U.S. dollar strength was expected to continue adversely affecting near-term segment profit. More than half of fiscal 2015 sales were outside the United States, and 95% of year-end cash was held outside the U.S.; repatriation may involve tax costs or regulatory constraints.
- Key business risks include intense competition and retailer pricing pressure, declining primary-battery demand as more devices use built-in rechargeable systems, customer concentration and order cancellations, commodity and currency volatility, and risks associated with the transition to distributors and operating as a newly independent company.
- Debt totaled approximately $1 billion. The company had $243.6 million available under its $250 million revolving facility after letters of credit, and reported compliance with debt covenants. Debt service, restrictive covenants and access to future financing remain risks.
- Venezuela was deconsolidated effective March 31, 2015 because currency controls restricted exchangeability and access to cash. The company recorded its $65.2 million allocated charge and no longer includes the subsidiary’s operating results after that date, except for cash-received transactions.
- Environmental remediation accruals were $4.2 million, with $1.5 million expected to be spent in fiscal 2016; the company was identified as a potentially responsible party at eight federal Superfund sites. Management did not consider pending legal proceedings reasonably likely to be material, taking recorded accruals into account.
- The company declared a $0.25-per-share quarterly dividend and expected regular quarterly dividends, but future payments are at the board’s discretion. It authorized repurchases of up to 7.5 million shares; none were made in fiscal 2015, although approximately 580,000 shares were repurchased after year-end through the report date.
- The spin-off’s tax-free treatment depends on representations and ongoing restrictions. The filing describes potentially uncapped indemnification obligations between Energizer and Edgewell, and limits on certain acquisitions, equity issuances and other transactions during the two years after separation.
Most important facts for investors to verify
- Whether post-spin stand-alone costs, systems and distribution arrangements affect margins and cash generation differently from the allocated historical results.
- How much of sales and segment-profit performance reflects underlying demand versus foreign exchange, shipment timing, retailer distribution and go-to-market changes.
- The sustainability of adjusted earnings and restructuring savings, and the remaining spin costs expected in fiscal 2016.
- Debt repayment capacity, covenant headroom, refinancing needs and the practical availability of overseas cash.
- Exposure to Venezuela, environmental and tax contingencies, and obligations under the separation and tax matters agreements.