Energizer (ENR) - 2019 Q1 - Quarterly Report

PART I — FINANCIAL INFORMATION Energizer Holdings, Inc.'s unaudited condensed consolidated financial statements and notes for Q4 2018 Item 1. Financial Statements (Unaudited) Energizer Holdings, Inc. presents its unaudited condensed consolidated financial statements and notes for Q4 2018 Consolidated Statements of Earnings and Comprehensive Income (Condensed) Net earnings for Q4 2018 increased to $70.8 million, with diluted EPS rising to $1.16 Financial Metrics Summary (Millions) | Metric | Q4 2018 (Millions) | Q4 2017 (Millions) | | :---------------------------------------- | :----------------- | :----------------- | | Net sales | $571.9 | $573.3 | | Gross profit | $275.5 | $278.3 | | Earnings before income taxes | $90.0 | $119.0 | | Income tax provision | $19.2 | $58.6 | | Net earnings | $70.8 | $60.4 | | Basic net earnings per share | $1.19 | $1.00 | | Diluted net earnings per share | $1.16 | $0.98 | | Total comprehensive income | $64.9 | $71.5 | Consolidated Balance Sheets (Condensed) Total assets significantly increased to $4,416.1 million at December 31, 2018, primarily due to a rise in restricted cash Balance Sheet Overview (Millions) | Metric | Dec 31, 2018 (Millions) | Sep 30, 2018 (Millions) | | :----------------------------------- | :---------------------- | :---------------------- | | Cash and cash equivalents | $607.3 | $522.1 | | Total current assets | $1,208.8 | $1,171.1 | | Restricted cash | $2,456.5 | $1,246.2 | | Total assets | $4,416.1 | $3,178.8 | | Total current liabilities | $832.0 | $751.2 | | Long-term debt held in escrow | $2,346.2 | $1,230.7 | | Total liabilities | $4,345.7 | $3,154.3 | | Total shareholders' equity | $70.4 | $24.5 | Consolidated Statements of Cash Flows (Condensed) Net cash from operating activities decreased to $118.9 million for Q4 2018, while financing activities generated a $1,183.6 million inflow Cash Flow Summary (Millions) | Metric | Q4 2018 (Millions) | Q4 2017 (Millions) | | :------------------------------------------------------------------ | :----------------- | :----------------- |\ | Net cash from operating activities | $118.9 | $141.0 | | Net cash used by investing activities | ($4.7) | ($5.5) | | Net cash from/(used by) financing activities | $1,183.6 | ($63.9) | | Net increase in cash, cash equivalents, and restricted cash | $1,295.5 | $76.3 | | Cash, cash equivalents, and restricted cash, end of period | $3,063.8 | $454.3 | Consolidated Statements of Shareholders' Equity/(Deficit) (Condensed) Shareholders' equity increased to $70.4 million at December 31, 2018, driven by net earnings, partially offset by dividends Shareholders' Equity Components (Millions) | Metric | Dec 31, 2018 (Millions) | Sep 30, 2018 (Millions) | | :----------------------------------- | :---------------------- | :---------------------- | | Common Stock | $0.6 | $0.6 | | Additional Paid-in Capital | $208.2 | $217.8 | | Retained Earnings | $226.1 | $177.3 | | Treasury Stock | ($116.8) | ($129.4) | | Accumulated Other Comprehensive Loss | ($247.7) | ($241.8) | | Total Shareholders' Equity/(Deficit) | $70.4 | $24.5 | - Net earnings contributed $70.8 million to retained earnings during Q4 2018[16] - Dividends to shareholders for Q4 2018 totaled $18.4 million ($0.30 per share)[16] Notes to Consolidated (Condensed) Financial Statements These notes detail Energizer's business, accounting policies, acquisitions, tax impacts, share-based compensation, segment reporting, debt, and financial instruments (1) Description of Business and Basis of Presentation Energizer is a global manufacturer of batteries and automotive products, with unaudited financials prepared under Regulation S-X - Energizer is a global manufacturer and marketer of household batteries, specialty batteries, portable lights, and automotive fragrance and appearance products[20] - The company adopted ASU 2014-09 and ASU 2018-15 effective October 1, 2018, with no material impact on retained earnings or capitalized implementation costs[23][24] - ASU 2016-02 (Leases) and ASU 2017-12 (Hedging Activities) are effective for Energizer beginning October 1, 2019, with impact under evaluation[26][27][29] (2) Revenue Recognition The company adopted the new five-step revenue recognition model effective October 1, 2018, with no material impact - Revenue is recognized when title, ownership, and risk of loss pass to the customer, typically upon delivery or pickup of finished goods[40] - Net sales are reduced by variable consideration, including discounts and estimated payments/allowances for promotional programs[41][42] Net Sales by Category (Millions) | Net Sales Category | Q4 2018 (Millions) | Q4 2017 (Millions) | | :----------------- | :----------------- | :----------------- | | Batteries | $524.3 | $524.5 | | Other | $47.6 | $48.8 | | Total Net Sales | $571.9 | $573.3 | Net Sales by Region (Millions) | Net Sales by Region | Q4 2018 (Millions) | Q4 2017 (Millions) | | :------------------ | :----------------- | :----------------- | | North America | $341.0 | $335.0 | | Latin America | $32.5 | $38.1 | | Americas Total | $373.5 | $373.1 | | Modern Markets | $127.4 | $130.0 | | Developing Markets | $49.7 | $46.6 | | Distributors Markets| $21.3 | $23.6 | | International Total | $198.4 | $200.2 | | Total Net Sales | $571.9 | $573.3 | (3) Acquisitions Energizer completed two major acquisitions post-quarter: Spectrum's global battery business for $2,000.0 million and its global auto care business for $1,250.0 million - On January 2, 2019, Energizer completed the acquisition of Spectrum Brands' global battery, lighting, and portable power business for $2,000.0 million, funded by senior notes, term loans, and cash[47] - The Battery Acquisition was conditioned on the divestiture of the Varta® consumer battery business in EMEA, expected in the first half of calendar year 2019[49] - On January 28, 2019, Energizer completed the acquisition of Spectrum's global auto care business for $1,250.0 million, comprising $937.5 million in cash and $312.5 million in newly-issued common stock[50][51] - The Nu Finish® and Scratch Doctor® brands were acquired on July 2, 2018, for $38.1 million, contributing $1.0 million in revenue for Q4 2018[59] Nu Finish Acquisition - Preliminary Purchase Price Allocation (Millions) | Nu Finish Acquisition - Preliminary Purchase Price Allocation (Millions) | | :--------------------------------------------------------------------- | | Accounts receivable: $2.4 | | Inventory: $0.9 | | Goodwill: $14.7 | | Other identifiable intangible assets: $21.8 | | Accounts payable: ($1.7) | | Net assets acquired: $38.1 | (4) Income Taxes The effective tax rate for Q4 2018 was 21.3%, significantly lower than 49.2% in the prior year, due to the U.S. Tax Cuts and Jobs Act - The three-month effective tax rate was 21.3% for Q4 2018, down from 49.2% in Q4 2017[62] - The Tax Act reduced the corporate income tax rate from 35% to 21%, with a full 21% impact starting fiscal year 2019[63][65] - An additional $1.5 million was recorded for the mandatory transition tax in Q4 2018, bringing the total to $37.5 million[68] (5) Share-Based Payments Total share-based compensation expense was $6.5 million for Q4 2018, slightly down from $6.7 million in the prior year Total Share-Based Compensation Cost (Millions) | Metric | Q4 2018 (Millions) | Q4 2017 (Millions) | | :----------------------------------- | :----------------- | :----------------- | | Total share-based compensation cost | $6.5 | $6.7 | - In November 2018, RSE awards of approximately 73,000 shares (ratable vesting over four years) and 55,000 shares (vesting on third anniversary) were granted[71] - Additionally, 190,000 performance shares were granted, vesting based on cumulative adjusted EPS and free cash flow targets over three years[71] (6) Earnings per share Basic EPS for Q4 2018 was $1.19, and diluted EPS was $1.16, reflecting an increase from the prior year Earnings Per Share Summary | Metric | Q4 2018 | Q4 2017 | | :------------------------------------------- | :------ | :------ | | Net earnings (Millions) | $70.8 | $60.4 | | Basic average shares outstanding (Millions) | 59.7 | 60.2 | | Diluted average shares outstanding (Millions)| 61.0 | 61.5 | | Basic earnings per common share | $1.19 | $1.00 | | Diluted earnings per common share | $1.16 | $0.98 | - For Q4 2018, 0.1 million restricted stock equivalents were anti-dilutive and excluded from diluted EPS calculations[79] (7) Segments Energizer manages operations through Americas and International segments, with performance evaluated based on segment operating profit - The company's reportable segments are Americas and International, a change from prior reporting[82] - Segment performance is assessed using segment operating profit, which excludes general corporate expenses, share-based compensation, acquisition and integration activities, amortization, R&D, and other corporate items[83] Segment Sales and Profit (Millions) | Segment Sales and Profit (Millions) | Q4 2018 | Q4 2017 | | :---------------------------------- | :------ | :------ | | Net Sales - Americas | $373.5 | $373.1 | | Net Sales - International | $198.4 | $200.2 | | Total Net Sales | $571.9 | $573.3 | | Segment Profit - Americas | $116.1 | $123.1 | | Segment Profit - International | $54.6 | $49.2 | | Total Segment Profit | $170.7 | $172.3 | Total Assets by Segment (Millions) | Total Assets by Segment (Millions) | Dec 31, 2018 | Sep 30, 2018 | | :--------------------------------- | :----------- | :----------- | | Americas | $507.7 | $504.2 | | International | $891.2 | $851.5 | | Total segment assets | $1,398.9 | $1,355.7 | | Corporate | $2,544.0 | $1,346.3 | | Goodwill and other intangible assets | $473.2 | $476.8 | | Total assets | $4,416.1 | $3,178.8 | (8) Goodwill and intangible assets Goodwill remained stable at $244.0 million at December 31, 2018, with amortizable intangible assets decreasing to $152.6 million Goodwill by Segment (Millions) | Goodwill by Segment (Millions) | Oct 1, 2018 | Dec 31, 2018 | | :----------------------------- | :---------- | :----------- | | Americas | $228.4 | $228.3 | | International | $15.8 | $15.7 | | Total | $244.2 | $244.0 | Amortizable Intangible Assets (Millions) | Amortizable Intangible Assets (Millions) | Gross Carrying Amount (Dec 31, 2018) | Accumulated Amortization (Dec 31, 2018) | Net Carrying Amount (Dec 31, 2018) | | :--------------------------------------- | :----------------------------------- | :-------------------------------------- | :--------------------------------- | | Trademarks | $44.3 | $6.8 | $37.5 | | Customer relationships | $99.6 | $15.1 | $84.5 | | Patents | $34.5 | $6.4 | $28.1 | | Proprietary formulas | $2.4 | $0.1 | $2.3 | | Non-compete | $0.5 | $0.3 | $0.2 | | Total intangible assets | $181.3 | $28.7 | $152.6 | (9) Debt Energizer's total long-term debt was $987.0 million at December 31, 2018, with an additional $2,346.2 million held in escrow for the Battery Acquisition Debt Overview (Millions) | Debt Type (Millions) | Dec 31, 2018 | Sep 30, 2018 | | :-------------------------------------------------- | :----------- | :----------- | | Senior Secured Term Loan B Facility due 2022 | $387.0 | $388.0 | | 5.50% Senior Notes due 2025 | $600.0 | $600.0 | | Total long-term debt, including current maturities | $987.0 | $988.0 | | Total long-term debt held in escrow | $2,346.2 | $1,230.7 | | Notes payable | $275.1 | $247.3 | - The company had a $350.0 million senior secured revolving credit facility, with $260.0 million outstanding and $6.7 million in letters of credit as of December 31, 2018, which were repaid on January 2, 2019[95][98][110] - New 2018 Term Loans ($200.0 million 3-year Term Loan A and $1,000.0 million 7-year Term Loan B) and 2026 Notes ($500.0 million USD and €650.0 million Euro) were funded into escrow and released on January 2, 2019, to finance the Battery Acquisition[100][102][105][107] - Energizer uses interest rate swaps to fix variable rate debt components (LIBOR) on $200.0 million at 2.03% through June 2022 and on $400.0 million at 2.47% through December 2020[108][109] (10) Pension Plans Net periodic pension benefit for U.S. and International plans was ($0.4 million) and ($0.1 million), respectively, for Q4 2018 Net Periodic Pension (Benefit)/Cost (Millions) | Net Periodic Pension (Benefit)/Cost (Millions) | Q4 2018 (U.S.) | Q4 2017 (U.S.) | Q4 2018 (International) | Q4 2017 (International) | | :--------------------------------------------- | :------------- | :------------- | :---------------------- | :---------------------- | | Service Cost | — | — | $0.1 | $0.2 | | Interest Cost | $5.1 | $4.7 | $0.7 | $1.1 | | Expected return on plan assets | ($6.5) | ($7.5) | ($1.2) | ($1.6) | | Amortization of unrecognized net losses | $1.0 | $1.0 | $0.3 | $0.5 | | Settlement charge | — | $0.1 | — | — | | Net periodic (benefit)/cost | ($0.4) | ($1.7) | ($0.1) | $0.2 | - The U.S. pension plan was frozen in fiscal year 2015[116] (11) Shareholders' Equity No shares were repurchased in Q1 fiscal 2019, but a $0.30 per share cash dividend was declared, and significant stock was issued post-quarter - No shares were repurchased in Q1 fiscal 2019, but 1,126,379 shares were repurchased for $50.0 million in Q1 fiscal 2018[120] - A cash dividend of $0.30 per common share was declared for Q1 fiscal 2019, totaling $18.4 million[121] - In January 2019, 4,687,498 common shares were issued, generating $205.9 million net proceeds, and 2,156,250 shares of Series A Mandatory Convertible Preferred Stock (MCPS) were issued, generating $209.1 million net proceeds, both to fund the Auto Care Acquisition[122][128] - The MCPS will convert automatically on January 15, 2022, into 1.7892 to 2.1739 common shares, paying cumulative quarterly dividends at an annual rate of 7.50% of its $100.00 liquidation preference[129][130] (12) Financial Instruments and Risk Management Energizer manages market risks using derivatives solely for hedging, reporting unrealized pre-tax gains on interest rate swaps and forward currency contracts - The company uses derivatives to hedge against commodity price, foreign currency, and interest rate risks, not for speculative purposes[136][139] - As of December 31, 2018, Energizer had an unrecognized pre-tax gain of $2.9 million on interest rate swap contracts and $4.7 million on forward currency contracts, both included in Accumulated other comprehensive loss[144][148] - The primary currencies of exposure for foreign currency risk include the Euro, British pound, Canadian dollar, and Australian dollar[141] Derivatives Designated as Cash Flow Hedging Relationships (Millions) | Derivatives Designated as Cash Flow Hedging Relationships (Millions) | Estimated Fair Value (Dec 31, 2018) | Gain/(Loss) Recognized in OCI (Q4 2018) | Gain/(Loss) Reclassified OCI into Income (Q4 2018) | | :----------------------------------------------------------------- | :---------------------------------- | :-------------------------------------- | :------------------------------------------------- | | Foreign currency contracts | $4.7 | $3.2 | $2.8 | | Interest rate contracts | $2.9 | ($4.8) | ($0.1) | | Total | $7.6 | ($1.6) | $2.7 | - The fair value of fixed rate long-term debt was $588.4 million (carrying value $600.0 million) and escrowed fixed rate long-term debt was $1,210.2 million (carrying value $1,245.2 million) at December 31, 2018, determined using Level 2 inputs[163] (13) Accumulated Other Comprehensive (Loss)/Income Accumulated Other Comprehensive Loss increased to ($247.7 million) at December 31, 2018, primarily due to foreign currency translation adjustments AOCI Components (Millions) | AOCI Component (Millions) | Sep 30, 2018 | OCI before Reclassifications (Q4 2018) | Reclassifications to Earnings (Q4 2018) | Dec 31, 2018 | | :---------------------------------------- | :----------- | :------------------------------------- | :-------------------------------------- | :----------- | | Foreign Currency Translation Adjustments | ($113.6) | ($3.7) | — | ($117.3) | | Pension Activity | ($136.4) | — | $1.1 | ($135.3) | | Hedging Activity (Interest Rate Contracts)| $3.3 | $2.5 | ($2.2) | $3.6 | | Hedging Activity (Interest) | $4.9 | ($3.7) | $0.1 | $1.3 | | Total | ($241.8) | ($4.9) | ($1.0) | ($247.7) | Reclassifications out of AOCI to Earnings (Millions) | Reclassifications out of AOCI to Earnings (Millions) | Q4 2018 | Q4 2017 | | :--------------------------------------------------- | :------ | :------ | | Gains and losses on cash flow hedges (Net) | $2.1 | ($2.3) | | Amortization of defined benefit pension items (Net) | ($1.1) | ($1.2) | | Total reclassifications to earnings | $1.0 | ($3.5) | (14) Supplemental Financial Statement Information This section details various income statement and balance sheet accounts, with "Other items, net" showing $16.9 million income in Q4 2018 Other Items, Net (Millions) | Other Items, Net (Millions) | Q4 2018 | Q4 2017 | | :----------------------------------------- | :------ | :------ | | Interest income | ($0.2) | ($0.5) | | Interest income on restricted cash | ($5.8) | — | | Foreign currency exchange (gain)/loss | ($1.1) | $4.1 | | Pension benefit other than service costs | ($0.7) | ($1.6) | | Acquisition foreign currency gains | ($9.0) | — | | Other | ($0.1) | ($0.7) | | Total Other items, net | ($16.9) | $1.3 | Inventories Breakdown (Millions) | Inventories (Millions) | Dec 31, 2018 | Sep 30, 2018 | | :--------------------- | :----------- | :----------- | | Raw materials and supplies | $47.7 | $40.0 | | Work in process | $80.6 | $86.5 | | Finished products | $161.9 | $196.6 | | Total inventories | $290.2 | $323.1 | Property, Plant and Equipment, Net (Millions) | Property, Plant and Equipment, Net (Millions) | Dec 31, 2018 | Sep 30, 2018 | | :-------------------------------------------- | :----------- | :----------- | | Total gross property | $814.2 | $823.6 | | Accumulated depreciation | ($651.6) | ($656.9) | | Total property, plant and equipment, net | $162.6 | $166.7 | (15) Legal proceedings/contingencies and other obligations Energizer accrues for probable and estimable legal losses and had $49.7 million in purchase obligations at December 31, 2018 - The company establishes accruals for legal contingencies where a loss is probable and reasonably estimable, believing current liabilities are not reasonably likely to be material[173] - As of December 31, 2018, Energizer had approximately $49.7 million in purchase obligations for goods and services[174] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Energizer's financial condition, operating results, and liquidity, including acquisitions, segment performance, and cash flow Non-GAAP Financial Measures Energizer uses non-GAAP measures like Segment Profit and Adjusted EPS to provide insights into ongoing operating performance, excluding specific non-recurring items - Non-GAAP measures exclude items not reflective of ongoing operating performance, such as acquisition and integration costs and the one-time impact of new U.S. tax legislation[178] - Segment Profit excludes general corporate expenses, share-based compensation, acquisition and integration activities, amortization, R&D, interest expense, and other corporate items[179] - Organic measures adjust for the impact of acquisitions, changes in Argentina Operations (due to hyperinflation), and currency fluctuations[181][182][184] Forward-Looking Statements This section contains forward-looking statements subject to known and unknown risks, including market conditions, new product success, acquisition integration, and regulatory changes - Forward-looking statements are subject to known and unknown risks, uncertainties, and assumptions that could cause actual results to differ materially[186] - Key risk factors include market and economic conditions, new product success, customer retention, strategic initiative execution, foreign currency rates, raw material costs, legislative changes, cyber-attacks, litigation, and debt covenant compliance[186] Battery Acquisition Energizer completed the acquisition of Spectrum Brands' global battery business for $2,000.0 million on January 2, 2019, conditioned on the Varta® divestiture - The Battery Acquisition was completed on January 2, 2019, for $2,000.0 million, with an initial cash payment of $1,956.2 million[189] - The European Commission approved the acquisition conditioned on Energizer divesting the Varta® consumer battery, chargers, portable power, and portable lighting business in EMEA[191] - Energizer retains rights to the Varta brand in Latin America and Asia Pacific, and Spectrum's global Rayovac®-branded consumer and hearing aid batteries business[191] Auto Care Acquisition Energizer acquired Spectrum's global auto care business on January 28, 2019, for $1,250.0 million, funded by new senior notes and equity issuances - The Auto Care Acquisition was completed on January 28, 2019, for a contractual purchase price of $1,250.0 million[192][193] - Consideration included $938.7 million in cash and 5.3 million newly-issued common shares to Spectrum, valued at $240.5 million[193] - Funding for the cash portion came from new senior notes ($600.0 million at 7.750% due 2027) and the issuance of common stock and Series A mandatory convertible preferred stock[194] - Pre-tax acquisition and integration costs for Q4 2018 totaled $51.3 million, including $32.4 million in interest expense related to escrowed debt for the Battery Acquisition[196][197] Nu Finish Acquisition The Nu Finish® and Scratch Doctor® brands were acquired on July 2, 2018, for $38.1 million, contributing $1.0 million in Q4 2018 revenue - The Nu Finish acquisition was completed on July 2, 2018, for $38.1 million[199] - It generated $1.0 million in revenue for Q4 2018, with an immaterial impact on earnings before income taxes[199] Highlights / Operating Results Energizer reported net earnings of $70.8 million ($1.16 diluted EPS) for Q1 fiscal 2019, up from $60.4 million, with adjusted diluted EPS increasing by 5.8% Financial Highlights (Millions) | Metric | Q1 FY19 (Millions) | Q1 FY18 (Millions) | YoY Change (%) | | :---------------------------------------- | :----------------- | :----------------- | :------------- | | Reported Net Earnings | $70.8 | $60.4 | 17.2% | | Reported Diluted EPS | $1.16 | $0.98 | 18.4% | | Adjusted Net Earnings (Non-GAAP) | $100.2 | $95.5 | 4.9% | | Adjusted Diluted EPS (Non-GAAP) | $1.64 | $1.55 | 5.8% | Net Sales Drivers (Millions) | Net Sales Drivers (Millions) | Q1 FY18 Net Sales | Change | % Chg | | :--------------------------- | :---------------- | :----- | :---- | | Organic | | $9.9 | 1.7% | | Impact of acquisition | | $1.0 | 0.2% | | Change in Argentina operations | | ($3.3) | (0.6)%| | Impact of currency | | ($9.0) | (1.5)%| | Q1 FY19 Net Sales | $571.9 | ($1.4) | (0.2)%| - Gross margin percentage decreased by 30 basis points to 48.2% in Q1 FY19, primarily due to unfavorable foreign currency movements, partially offset by lower production costs[210] - Interest expense increased significantly to $48.2 million in Q1 FY19 from $13.4 million in Q1 FY18, largely due to $32.4 million in interest and ticking fees related to the Battery Acquisition's escrowed debt[214] - Other items, net, was an income of $16.9 million in Q1 FY19, compared to an expense of $1.3 million in Q1 FY18, driven by interest income on restricted cash ($5.8 million) and acquisition foreign currency gains ($9.0 million)[216][217] Segment Results Global segment profit declined by 0.9% to $170.7 million, while organic segment profit increased by 4.0%, with International segment profit improving by 11.0% Net Sales by Segment (Millions) | Net Sales by Segment (Millions) | Q1 FY18 | Organic Change | Argentina Change | Acquisition Impact | Currency Impact | Q1 FY19 | % Chg | | :------------------------------ | :------ | :------------- | :--------------- | :----------------- | :-------------- | :------ | :---- | | Americas | $373.1 | $4.7 (1.3%) | ($3.3) (0.9%) | $1.0 (0.3%) | ($2.0) (0.6%) | $373.5 | 0.1% | | International | $200.2 | $5.2 (2.6%) | — | — | ($7.0) (3.5%) | $198.4 | (0.9)%| | Total Net Sales | $573.3 | $9.9 (1.7%) | ($3.3) (0.6%) | $1.0 (0.2%) | ($9.0) (1.5%) | $571.9 | (0.2)%| Segment Profit by Segment (Millions) | Segment Profit by Segment (Millions) | Q1 FY18 | Organic Change | Argentina Change | Acquisition Impact | Currency Impact | Q1 FY19 | % Chg | | :----------------------------------- | :------ | :------------- | :--------------- | :----------------- | :-------------- | :------ | :---- | | Americas | $123.1 | ($4.2) (3.4%) | ($1.9) (1.5%) | $0.5 (0.4%) | ($1.4) (1.2%) | $116.1 | (5.7)%| | International | $49.2 | $11.1 (22.6%) | — | — | ($5.7) (11.6%) | $54.6 | 11.0% |\ | Total Segment Profit | $172.3 | $6.9 (4.0%) | ($1.9) (1.1%) | $0.5 (0.3%) | ($7.1) (4.1%) | $170.7 | (0.9)%| General Corporate and Global Marketing Expenses General corporate and other expenses decreased by $2.9 million to $18.7 million in Q1 fiscal 2019, mainly due to lower compensation costs General Corporate and Global Marketing Expense (Millions) | Expense Category (Millions) | Q1 FY19 | Q1 FY18 | | :----------------------------------------- | :------ | :------ | | General corporate and other expenses | $18.7 | $21.6 | | Global marketing expense | $3.1 | $3.2 | | General corporate and global marketing expense | $21.8 | $24.8 | - The decrease in general corporate expenses was primarily due to higher compensation costs and mark-to-market expense on unfunded deferred compensation liability in the prior year[231] Liquidity and Capital Resources Energizer expects to fund operations and investments through cash from operations and capital markets, holding $607.3 million in cash at December 31, 2018 - Energizer's primary future cash needs are for operating activities, working capital, and strategic investments, expected to be funded by cash from operations and capital markets[233] - At December 31, 2018, the company had $607.3 million in cash and cash equivalents, with a significant portion held outside the U.S[234] - Post-quarter, the Battery Acquisition ($1,956.2 million cash) was funded by senior notes and term loans, and the Auto Care Acquisition ($938.7 million cash, $240.5 million equity) was funded by new senior notes and equity issuances[236][237] Operating Activities Cash flow from operating activities decreased by $22.1 million to $118.9 million for Q4 2018, due to lower net earnings from acquisition-related cash expenditures Cash Flow from Operating Activities (Millions) | Metric | Q4 2018 (Millions) | Q4 2017 (Millions) | | :--------------------------------------- | :----------------- | :----------------- | | Cash flow from operating activities | $118.9 | $141.0 | - The decrease in operating cash flow was mainly driven by lower net earnings due to cash expenditures for the Spectrum acquisition, including interest and ticking fees on escrowed debt[240] Investing Activities Net cash used by investing activities was $4.7 million for Q4 2018, primarily consisting of capital expenditures Investing Activities Summary (Millions) | Metric | Q4 2018 (Millions) | Q4 2017 (Millions) | | :----------------------------------- | :----------------- | :----------------- | | Capital expenditures | ($4.8) | ($5.5) | | Proceeds from sale of assets | $0.1 | — | | Net cash used by investing activities| ($4.7) | ($5.5) | - Excluding the acquired businesses, anticipated capital expenditures for fiscal year 2019 are $30 million to $35 million for maintenance, product development, and cost reduction[242] Financing Activities Net cash from financing activities was $1,183.6 million for Q4 2018, driven by $1,200.0 million in debt issuance proceeds Financing Activities Summary (Millions) | Metric | Q4 2018 (Millions) | Q4 2017 (Millions) | | :------------------------------------------------------------------ | :----------------- | :----------------- | | Cash proceeds from issuance of debt (>90 days) | $1,200.0 | — | | Net increase in debt (<=90 days) | $28.0 | $6.5 | | Dividends paid | ($19.8) | ($17.6) | | Debt issuance costs | ($16.5) | — | | Common stock purchased | — | ($50.0) | | Net cash from/(used by) financing activities | $1,183.6 | ($63.9) | Dividends A cash dividend of $0.30 per common share was declared for Q1 fiscal 2019, totaling $18.0 million - A cash dividend of $0.30 per common share was declared for Q1 fiscal 2019, paid on December 13, 2018, totaling $18.0 million[245] - Post-quarter, a $0.30 per common share dividend and a $1.8333 per MCPS share dividend were declared for Q2 fiscal 2019[246][247] Share Repurchases No shares were repurchased on the open market during Q1 fiscal 2019, with 3.8 million shares remaining available for repurchase - No shares were repurchased on the open market during Q1 fiscal 2019 under the 7.5 million share repurchase authorization approved in July 2015[248][298] - As of February 5, 2019, 3.8 million shares remain available for repurchase under the current authorization[249] Other Matters Accrued environmental costs were $6.4 million at December 31, 2018, with no material impact expected, and total contractual obligations were $5,004.0 million - Accrued environmental costs were $6.4 million at December 31, 2018, with no material effect expected on total capital and operating expenditures, earnings, or competitive position[250] Contractual Obligations (Millions) | Contractual Obligations (Millions) | Total | Less than 1 year | 1 - 3 years | 3 - 5 years | More than 5 years | | :--------------------------------- | :-------- | :--------------- | :---------- | :---------- | :---------------- | | Long-term debt, including current maturities | $987.0 | $4.0 | $8.0 | $375.0 | $600.0 | | Long-term debt held in escrow, including current maturities | $2,445.2 | $60.0 | $170.0 | $20.0 | $2,195.2 | | Interest on long-term debt | $1,147.0 | $173.0 | $335.7 | $299.2 | $339.1 | | Notes payable | $275.1 | $275.1 | — | — | — | | Operating leases | $61.9 | $13.9 | $17.3 | $4.5 | $26.2 | | Pension plans | $3.5 | $3.5 | — | — | — | | Purchase obligations and other | $49.7 | $41.5 | $8.2 | — | — | | Mandatory transition tax | $34.6 | $1.5 | $5.8 | $5.7 | $21.6 | | Total | $5,004.0 | $572.5 | $545.0 | $704.4 | $3,182.1 | Item 3. Quantitative and Qualitative Disclosures About Market Risk Energizer is exposed to market risks from currency, commodity, and interest rates, using derivatives for hedging, and has designated Argentina's economy as highly inflationary Market Risk Sensitive Instruments and Positions Market risk arises from adverse changes in currency rates, commodity prices, and interest rates, with derivatives used exclusively for hedging, not speculation - Market risk arises from potential losses due to adverse changes in currency rates, commodity prices, and interest rates[254] - Derivatives are used only for identifiable exposures and not for trading or speculative purposes[254] Derivatives Designated as Cash Flow Hedging Relationships Energizer uses forward currency contracts to hedge forecasted inventory purchases, with an unrealized pre-tax gain of $4.7 million at December 31, 2018 - Forward currency contracts are used to hedge cash flow uncertainty of forecasted inventory purchases due to short-term currency fluctuations[256] - Primary currency exposures include the Euro, British pound, Canadian dollar, and Australian dollar[255] - At December 31, 2018, there was an unrealized pre-tax gain of $4.7 million on these cash flow hedges, expected to be recognized in earnings over the next 12 months[256] Derivatives Not Designated as Cash Flow Hedging Relationships Foreign currency derivative contracts hedge existing balance sheet exposures, with gains or losses expected to offset corresponding exchange gains or losses - Foreign currency derivative contracts are used to hedge existing balance sheet exposures and are not designated as cash flow hedges[259] - Gains or losses on these contracts are expected to be offset by corresponding exchange gains or losses on the underlying exposures, limiting market risk[259] Commodity Price Exposure The company's raw materials are subject to price volatility, and while hedging instruments may be used in the future, none were open at December 31, 2018 - Energizer uses raw materials subject to price volatility and may use hedging instruments in the future[260] - As of December 31, 2018, there were no open derivative or hedging instruments for future purchases of raw materials or commodities[260] Interest Rate Exposure Energizer faces interest rate risk on its $1,600.0 million variable rate debt, using interest rate swaps to fix LIBOR on $200.0 million at 2.03% and on $400.0 million at 2.47% - Energizer had $1,600.0 million in variable rate debt outstanding at December 31, 2018[261] - Interest rate swaps fix LIBOR on $200.0 million of debt at 2.03% through June 2022 and on $400.0 million of debt at 2.47% through December 2020[261] - The weighted average interest rate on variable rate debt, including swaps, was 4.74% for Q4 2018[262] Argentina Currency Exposure and Hyperinflation Effective July 1, 2018, Argentina's economy was designated as highly inflationary, requiring its subsidiary's financial statements to be remeasured into U.S. dollars - Effective July 1, 2018, Argentina's economy was designated as highly inflationary, requiring its subsidiary's financial statements to be remeasured into U.S. dollars[263] - Under highly inflationary accounting, future exchange gains and losses from monetary assets and liabilities are reflected in current earnings[263] Item 4. Controls and Procedures Energizer's CEO and CFO concluded that disclosure controls and procedures were effective as of December 31, 2018, with no material changes to internal control over financial reporting - The CEO and CFO concluded that disclosure controls and procedures were effective as of December 31, 2018, ensuring accurate and timely reporting of information[265] - No material changes to the company's internal control over financial reporting occurred during Q4 2018[266] PART II — OTHER INFORMATION This section covers Energizer's legal proceedings, updated risk factors related to recent acquisitions, equity sales, and a comprehensive exhibit index Item 1. Legal Proceedings Energizer is involved in various legal proceedings, with accruals made for probable and estimable losses, and management believes liabilities are not material - The company is subject to legal proceedings in various jurisdictions arising from its operations[268] - Accruals are established for contingencies where a loss is probable and can be reasonably estimated[268] - Management believes that any liability from pending legal proceedings is not reasonably likely to be material to the company's financial position, results of operations, or cash flows[268] Item 1A. Risk Factors This section updates risk factors, adding new risks related to the acquired Battery and Auto Care Businesses, including operational dependencies, seasonal volatility, and significant acquisition debt Risks Related to the Acquired Battery Business and the Acquired Auto Care Business The acquired businesses introduce new risks, including operational dependencies on specific facilities, seasonal sales volatility, and potential impacts from governmental regulations - The Acquired Auto Care Business's operations and profitability are highly dependent on the efficient operation of its Dayton, Ohio facility, which has experienced disruptions and requires additional investment[270] - Sales of certain Acquired Businesses' products are seasonal, with peaks in the first six months of the calendar year for auto care, making forecasting difficult and exposing the business to adverse weather conditions[271] - Changes in governmental regulations regarding refrigerant gas R-134a or its substitutes could materially adversely affect the Acquired Auto Care Business's ability to sell aftermarket A/C products[274][275][276] We may not be able to successfully complete the divestiture of the Varta® consumer battery, chargers, portable power and portable lighting business in the Europe, the Middle East and Africa region, including manufacturing and distribution facilities in Germany (the "Varta Divestment Business"). Energizer faces significant risks in divesting the Varta Divestment Business as required by the European Commission, including finding a suitable buyer and potential third-party claims - The European Commission conditioned the Battery Acquisition approval on the divestiture of the Varta Divestment Business within six months[278] - Divestiture risks include inability to find buyers, failure to transfer liabilities/operations, retention of indemnification obligations, third-party claims, challenges in separating intellectual property, and disruption to ongoing business[279] - Failure to complete the divestiture within the allotted timeframe could lead to the European Commission assuming responsibility, potentially resulting in significantly lower proceeds[282] - The divestiture will result in transition services between parties, increasing the risk of business disruption[285] Our debt to finance the acquisitions of the Acquired Businesses is significant and could adversely affect our business and our ability to meet our obligations. Energizer's total outstanding indebtedness was approximately $3.7 billion at December 31, 2018, which could limit cash flow for growth and increase vulnerability to economic downturns - Total outstanding indebtedness was approximately $3.7 billion at December 31, 2018, with an additional $600.0 million incurred in January 2019 for the Auto Care Acquisition[286] - Significant debt could require a substantial portion of cash flow for payments, limit funds for future growth, impose restrictive covenants, increase vulnerability to adverse economic conditions, and create a competitive disadvantage[287] - The company may not generate sufficient cash flow to service all debt, potentially forcing asset disposals, equity capital raises, or debt restructuring, which may not be successful[291][292] Despite our high debt level, we may still be able to incur significant additional amounts of debt, which could further exacerbate the risks associated with our substantial debt. Despite high debt levels, Energizer and its subsidiaries may incur substantial additional debt due to qualifications and exceptions in existing debt restrictions, exacerbating risks - The company and its subsidiaries may incur substantial additional debt in the future, despite existing high debt levels[290] - Restrictions on additional debt in indentures and credit agreements are subject to significant qualifications and exceptions, allowing for further debt incurrence[290] We may not be able to generate sufficient cash to service all of our debt, including the notes, and fund our working capital and capital expenditures, and we may be forced to take other actions to satisfy our obligations under our debt, which may not be successful. Energizer's ability to meet debt obligations depends on future operating performance, and insufficient cash flow could lead to liquidity problems or default - The ability to make scheduled debt payments depends on future operating performance and cash flow, which are subject to uncontrollable economic, financial, and regulatory factors[291] - Insufficient cash flows could lead to liquidity problems, forcing the company to reduce investments, dispose of assets, seek additional equity, or restructure/refinance debt[292] - Failure to make scheduled debt payments could result in default, acceleration of debt, foreclosure on assets, and potential bankruptcy or liquidation[293] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q1 fiscal 2019, Energizer purchased 136,802 shares for $52.14 per share to satisfy tax withholding obligations, with no open market repurchases Share Repurchase Activity | Period | Total Number of Shares Purchased (1) | Average Price Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | Maximum Number That May Yet Be Purchased Under the Plans or Programs (2) | | :------------------------- | :----------------------------------- | :---------------------- | :----------------------------------------------------------------------------------- | :------------------------------------------------------------------------- | | October 1 - October 31 | 554 | $57.40 | — | 3,838,791 | | November 1 - November 30 | 136,248 | $52.12 | — | 3,838,791 | | December 1 - December 31 | — | — | — | 3,838,791 | | Total | 136,802 | $52.14 | — | | - 136,802 shares were purchased during the quarter to satisfy tax withholding obligations for restricted stock vesting and net exercises[297] - No shares were repurchased on the open market under the July 1, 2015, share repurchase authorization during the quarter[298] Item 6. Exhibits This section refers to the Exhibit Index, which lists all exhibits filed with the Form 10-Q, including various agreements and certifications - This item directs to the Exhibit Index for a list of all exhibits filed with the report[299] EXHIBIT INDEX The Exhibit Index provides a comprehensive list of documents filed as exhibits to the Form 10-Q, including agreements, corporate governance, and certifications - The Exhibit Index lists various agreements, corporate documents, debt instruments, and certifications filed as exhibits[301][302][303][304][305][307] SIGNATURES This section contains the required signatures, certifying the report was signed by Timothy W. Gorman, EVP and CFO of Energizer Holdings, Inc., on February 5, 2019 - The report is signed by Timothy W. Gorman, Executive Vice President and Chief Financial Officer of Energizer Holdings, Inc., on February 5, 2019[310][312]