Business context and reporting period
The supplied filing is Energizer Holdings, Inc.’s unaudited Form 10-Q for the quarter and nine months ended June 30, 2012—not a filing under the name Edgewell Personal Care Co. Energizer reported two segments: Personal Care (including Wet Shave, Skin Care, Feminine Care and Infant Care) and Household Products (batteries and lighting).
Financial performance
| Metric | Quarter ended June 30, 2012 | Nine months ended June 30, 2012 |
|---|---|---|
| Net sales | $1,124.1 million, down 8.9% | $3,424.0 million, down 0.7% |
| Gross profit / margin | $528.8 million / 47.0% | $1,610.5 million / 47.0% |
| Net earnings | $70.2 million | $291.9 million |
| Diluted EPS | $1.06 | $4.40 |
| Operating cash flow | Not separately provided for the quarter | $346.8 million |
Nine-month adjusted diluted EPS, a non-GAAP measure, was $4.46 versus $4.09 a year earlier; quarterly adjusted diluted EPS was $1.18 versus $1.37. The filing cautions that these measures supplement, rather than replace, GAAP results.
Segments and changes versus prior year
- Personal Care: quarterly sales were $673.5 million, down 7.1%; segment profit was $109.4 million, down 16.2%. Nine-month sales were $1,889.4 million, up 2.4% as reported (including $46.2 million of incremental ASR sales), and segment profit was $361.2 million, up 9.3%.
- Household Products: quarterly sales were $450.6 million, down 11.5%; segment profit was $69.5 million, down 13.1%. Nine-month sales were $1,534.6 million, down 4.2%; segment profit was $287.4 million, down 2.7%.
- Quarterly company sales declined 6.6% organically and 2.3% from unfavorable currency. Management cited weak battery-category demand, inventory de-stocking, lost U.S. shelf space and displays, and increased competition. Personal Care also faced softness in several product lines, partly offset by Hydro refills and new product launches.
- Reported gross margin rose 60 basis points in both periods. Excluding currency, management reported improvement of 130 basis points for the quarter and 90 basis points year to date, citing lower product costs and favorable mix.
- Quarterly GAAP net earnings and diluted EPS increased from $65.9 million and $0.94; nine-month figures rose from $215.4 million and $3.04. Comparisons include unusual items: the prior-year periods included substantial restructuring charges and early-debt-retirement costs, while 2012 included a $13.5 million litigation accrual and favorable prior-year tax adjustments. Nine-month 2012 restructuring income included a gain on sale of the closed Swiss battery facility.
Cash, debt and liquidity
Nine-month operating cash flow was $346.8 million versus $176.4 million a year earlier, reflecting higher earnings and a smaller working-capital cash outflow. Capital expenditures were $76.4 million; management estimated approximately $100 million for fiscal 2012. Cash was $632.1 million at June 30, 2012, compared with $471.2 million at September 30, 2011.
Total borrowings were $2,470.9 million, including $60.0 million outstanding under the receivables securitization facility. Long-term debt, including current maturities, was $2,371.6 million; current maturities were $233.0 million. The company issued $500 million of 4.7% senior notes due 2022 and used net proceeds to repay debt, including $335 million of term loans and $100 million of private-placement notes. A $108 million term loan remained due December 2012; management expected to repay it with cash and other borrowing capacity. Revolving-credit availability was $430.2 million. Debt/EBITDA covenant ratio was 2.9x and EBIT/interest coverage was 5.2x.
The company repurchased $211.5 million of shares in the nine-month period. After quarter-end, it declared a first quarterly dividend of $0.40 per share, payable September 13, 2012, and reported additional share repurchases through July 27.
Outlook, commentary and risks
- Management said the growth outlook had become more challenging due to weak battery trends, heightened competition and softening economic conditions. It was conducting an enterprise-wide review of its operating model and planned to update investors, including potential charges and savings, in November alongside its initial fiscal 2013 outlook.
- Management expected fourth-quarter advertising and promotion spending to be below the prior year in dollars and as a share of sales. It expected a normalized fiscal 2012 effective tax rate of 30%–30.5%, excluding favorable prior-year tax adjustments.
- Key exposures include foreign exchange, commodity prices, variable-rate debt, restricted Venezuelan currency conversion, and competitive and category weakness. The company had approximately $40 million in net monetary assets in Venezuela and stated the eventual conversion rate was uncertain.
- A July 2012 jury verdict in the Munchkin false-advertising litigation was approximately $13.5 million; the company accrued that amount as of June 30, before judgment was entered, and was evaluating post-judgment motions and/or appeal. Other legal proceedings were described as not reasonably likely to be material based on information available.
- Annual impairment testing of indefinite-lived trademarks was still in process. The filing said there were no impairment indicators as of June 30, but prior-year valuations for the Playtex and Wet Ones brands had been relatively close to carrying value.
- Management reported disclosure controls effective as of June 30, 2012, and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the intended issuer: the supplied 10-Q is for Energizer Holdings, Inc., not Edgewell Personal Care Co.
- Review the basis and exclusions in adjusted EPS and organic-sales measures, and distinguish these from GAAP results.
- Track battery-category demand, customer shelf-space and display changes, competitive promotions, and Personal Care product performance.
- Monitor repayment or refinancing of the remaining $108 million December 2012 term loan, covenant headroom, and cash availability, including the location and accessibility of overseas cash.
- Follow the Munchkin case outcome, the fiscal 2013 operating-model review, and the pending annual impairment testing for brands.