Energizer Holdings, Inc. — Q2 FY2019 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2019. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
Business context and material changes
Energizer manufactures and sells household and specialty batteries, portable lighting, and automotive care products. During the period, it acquired Spectrum’s global battery business, including Rayovac and Varta, on January 2, 2019, and its global auto care business, including Armor All, STP and A/C PRO, on January 28, 2019. The acquisitions materially expanded the company’s scale and debt, and their results are included only from the respective closing dates.
The European Commission required the divestiture of the Varta consumer battery, charger, portable power and lighting business in EMEA. Energizer classified the business as held for sale and its operations as discontinued operations; the company expected to complete the sale in early Q4 FY2019.
Financial performance
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Net sales | $556.4 | $374.4 | $1,128.3 | $947.7 |
| Gross profit | $194.2 | $168.5 | $469.7 | $446.8 |
| Net earnings (loss) from continuing operations | $(62.3) | $7.8 | $8.5 | $68.2 |
| Net earnings (loss) attributable to common shareholders | $(76.6) | $7.8 | $(5.8) | $68.2 |
| Diluted continuing-operations EPS | $(0.97) | $0.13 | $0.08 | $1.11 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $13.0 from continuing operations; $1.8 including discontinued operations | $160.6 |
Q2 sales rose 48.6%; management attributed the increase primarily to $186.3 of acquisition sales. Organic sales grew 1.9%, while currency reduced sales by $10.5. For the six-month period, sales rose 19.1%, including $187.3 of acquisition sales; organic sales grew 1.8% and currency reduced sales by $19.5.
Q2 gross margin was 34.9%, down from 45.0%. Excluding current-period acquisition costs and inventory step-up charges, management reported a 40.6% margin, 440 basis points below the prior year, reflecting acquired businesses’ lower margin profile and unfavorable currency. Six-month reported gross margin was down 550 basis points year over year; excluding those costs, it declined 270 basis points.
Q2 acquisition and integration costs were $95.4, including $31.7 in cost of products sold and $33.2 of acquisition-related interest and fees. Reported Q2 interest expense was $77.2, compared with $16.5 a year earlier. Management’s non-GAAP adjusted diluted EPS from continuing operations was $0.20 for Q2 versus $0.45; for six months it was $1.69 versus $2.01. These are non-GAAP measures and exclude specified items.
Liquidity, debt and cash flow
At March 31, 2019, cash and cash equivalents were $332.9, compared with $522.1 at September 30, 2018. Long-term debt was $3,557.1, with $10.0 of current maturities; notes payable were $8.2. The company reported approximately $3.6 billion of aggregate indebtedness. It had no borrowings on its $400.0 revolving facility and $392.4 available after letters of credit.
Six-month operating cash flow from continuing operations was $13.0, versus $160.6 in the prior-year period. Management cited acquisition-related interest and fees and increased working-capital requirements, including receivables at the acquired auto care business. Investing cash outflow was $2,875.0, including $2,403.8 for acquisitions in continuing operations and $450.6 for discontinued operations. Financing cash inflow was $1,438.3, mainly from debt and equity issuances. Total cash, cash equivalents and restricted cash declined by $1,435.4 to $332.9.
The company said it expected operating cash flow and capital-market access to support its needs, while noting that access to financing on acceptable terms is not assured. Debt covenants were in compliance at quarter-end, and management expected continued compliance. Subsequent to quarter-end, it made additional term-loan payments of $75.0.
Outlook, risks and unusual items
- No specific full-year earnings or revenue guidance is stated in the provided filing text. Energizer anticipated FY2019 capital expenditures of approximately $60–$65.
- The company expected the required Varta EMEA divestiture to close in early Q4 FY2019. Failure to complete it within the required timeframe could result in a regulator-directed sale and lower proceeds; sale proceeds are also subject to specified sharing and adjustment terms with Spectrum.
- The acquired auto care business faced ongoing Dayton, Ohio facility operating and shipment issues. Energizer expected to invest approximately $25 million more to address them; there is no assurance the spending will resolve the issues or deliver expected benefits.
- Risks include substantial acquisition-related debt and interest burden, integration and synergy execution, seasonal demand and working capital, unfavorable currency and commodity movements, and potential regulation affecting R-134a refrigerant products.
- The acquired EMEA divestment business generated $80.2 in sales and an $11.0 net loss in the quarter and six-month period. Its loss included inventory fair-value charges, divestiture costs and allocated interest.
- Acquisition purchase-price allocations remained preliminary. The company also reported a $107.2 write-down of assets held for sale recorded by the acquired auto care business during the six months; it was excluded from the company’s pro forma results as transaction-related.
- Management said pending legal matters were not reasonably likely to be material based on information then available. Environmental notices concerning alleged wastewater exceedances at a Brazil facility were disclosed; Spectrum was required, subject to limits, to indemnify certain pre-acquisition environmental liabilities.
Important facts for investors to verify
- Progress and final proceeds from the Varta EMEA divestiture, including any related adjustments and Spectrum payments.
- Whether Dayton facility improvements and integration spending resolve operating disruptions, and whether expected acquisition synergies materialize.
- Debt repayment capacity, interest costs, covenant headroom and access to the revolver amid low operating cash generation.
- Underlying organic sales, margins and cash flow apart from acquisition contributions, purchase-accounting charges and other non-GAAP adjustments.
- Final acquisition valuations, including goodwill and intangible assets, and the effects of the held-for-sale classification.