Energizer (ENR) - 2019 Q2 - Quarterly Report

PART I — FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents Energizer's unaudited consolidated financial statements, including earnings, balance sheets, cash flows, and shareholders' equity, reflecting recent acquisitions Consolidated Statements of Earnings and Comprehensive Income (Condensed) Energizer reported a net loss of $62.3 million for the quarter and a decrease in net earnings for the six months, primarily due to increased interest and acquisition costs Net Sales and Gross Profit (in millions) | Metric | Qtr Ended Mar 31, 2019 | Qtr Ended Mar 31, 2018 | 6M Ended Mar 31, 2019 | 6M Ended Mar 31, 2018 | | :------------- | :--------------------- | :--------------------- | :-------------------- | :-------------------- | | Net Sales | $556.4 | $374.4 | $1,128.3 | $947.7 | | Gross Profit | $194.2 | $168.5 | $469.7 | $446.8 | Net (Loss)/Earnings from Continuing Operations (in millions) | Metric | Qtr Ended Mar 31, 2019 | Qtr Ended Mar 31, 2018 | 6M Ended Mar 31, 2019 | 6M Ended Mar 31, 2018 | | :------------------------------------- | :--------------------- | :--------------------- | :-------------------- | :-------------------- | | Net (loss)/earnings from continuing operations | $(62.3) | $7.8 | $8.5 | $68.2 | Basic and Diluted EPS from Continuing Operations | Metric | Qtr Ended Mar 31, 2019 | Qtr Ended Mar 31, 2018 | 6M Ended Mar 31, 2019 | 6M Ended Mar 31, 2018 | | :------------------------------------- | :--------------------- | :--------------------- | :-------------------- | :-------------------- | | Basic EPS - continuing operations | $(0.97) | $0.13 | $0.08 | $1.14 | | Diluted EPS - continuing operations | $(0.97) | $0.13 | $0.08 | $1.11 | Consolidated Balance Sheets (Condensed) Total assets and liabilities significantly increased to $5,642.3 million and $4,997.0 million respectively, driven by recent acquisitions and increased debt Key Balance Sheet Figures (in millions) | Metric | March 31, 2019 | September 30, 2018 | | :------------------------- | :------------- | :----------------- | | Total Assets | $5,642.3 | $3,178.8 | | Total Liabilities | $4,997.0 | $3,154.3 | | Total Shareholders' Equity | $645.3 | $24.5 | | Goodwill | $1,012.4 | $244.2 | | Other Intangible Assets, net | $1,936.8 | $232.7 | Consolidated Statements of Cash Flows (Condensed) Operating cash flow decreased to $1.8 million, while investing activities used $2,875.0 million and financing provided $1,438.3 million, primarily due to acquisitions Cash Flow Summary (Six Months Ended March 31, in millions) | Metric | 2019 | 2018 | | :---------------------------------------- | :--------- | :------- | | Net cash from operating activities | $1.8 | $160.6 | | Net cash used by investing activities | $(2,875.0) | $(11.3) | | Net cash from financing activities | $1,438.3 | $(45.4) | | Acquisitions, net of cash acquired | $(2,403.8) | — | | Cash, cash equivalents, and restricted cash, end of period | $332.9 | $490.3 | Consolidated Statements of Shareholders' Equity/(Deficit) (Condensed) Shareholders' equity increased to $645.3 million, primarily driven by common and preferred stock issuances for acquisitions, offset by net loss and dividends Shareholders' Equity Changes (in millions, except shares in thousands) | Metric | March 31, 2019 | September 30, 2018 | | :----------------------------------- | :------------- | :----------------- | | Total Shareholders' Equity/(Deficit) | $645.3 | $24.5 | | Additional Paid-in Capital | $860.5 | $217.8 | | Retained Earnings | $127.9 | $177.3 | | Common Stock (Shares in thousands) | 69,875 | 59,608 | - Issuance of common stock contributed $445.8 million to additional paid-in capital for the six months ended March 31, 2019[18] - Issuance of preferred stock contributed $199.5 million to additional paid-in capital for the six months ended March 31, 2019[18] Notes to Consolidated (Condensed) Financial Statements This section provides detailed notes explaining the company's accounting policies, significant transactions, and financial statement components 1.5.1 Description of Business and Basis of Presentation (Note 1) Energizer, a global battery and auto care product manufacturer, expanded its portfolio through recent acquisitions, with a portion of the Varta business classified as held for sale - Energizer is a global manufacturer, marketer, and distributor of household batteries, specialty batteries, portable lights, and automotive fragrance and appearance products[22][23] - On January 2, 2019, Energizer completed the Battery Acquisition, expanding its battery portfolio with Rayovac® and Varta® brands[24][28] - On January 28, 2019, Energizer completed the Auto Care Acquisition, adding Armor All®, STP®, and A/C PRO® brands to its auto care portfolio[25] - The Varta consumer battery, chargers, portable power, and portable lighting business in the Europe, Middle East and Africa region (EMEA) has been classified as held for sale and discontinued operations, with divestiture expected in early Q4 fiscal 2019[28] 1.5.2 Revenue Recognition (Note 2) The company adopted ASU 2014-09 with no material impact, recognizing revenue from product sales at the point of transfer, with net sales of $556.4 million for the quarter - The Company adopted ASU 2014-09, Revenue from Contracts with Customers, effective October 1, 2018, with no material impact to financial statements[32][36] - Revenue is recognized at a single point in time when title, ownership, and risk of loss pass to the customer, typically upon delivery or pickup of finished goods[43] - Net sales reflect transaction prices reduced by variable consideration, including discounts and promotional programs, which are accrued at the time of sale[44][45] Net Sales by Product (in millions) | Product | Qtr Ended Mar 31, 2019 | 6M Ended Mar 31, 2019 | | :----------------- | :--------------------- | :-------------------- | | Batteries | $419.4 | $941.3 | | Auto Care | $108.6 | $129.1 | | Lights and Licensing | $28.4 | $57.9 | | Total Net Sales | $556.4 | $1,128.3 | Net Sales by Geography (in millions) | Region | Qtr Ended Mar 31, 2019 | 6M Ended Mar 31, 2019 | | :----------------- | :--------------------- | :-------------------- | | North America | $323.9 | $664.9 | | Latin America | $57.7 | $90.2 | | Americas | $381.6 | $755.1 | | Modern Markets | $102.5 | $229.9 | | Developing Markets | $44.9 | $94.6 | | Distributors Markets | $27.4 | $48.7 | | International | $174.8 | $373.2 | | Total Net Sales | $556.4 | $1,128.3 | 1.5.3 Acquisitions (Note 3) Energizer completed three acquisitions totaling over $3.2 billion, significantly increasing goodwill and intangible assets, and incurring $131.9 million in integration costs for the six months - Battery Acquisition completed on January 2, 2019, for a contractual purchase price of $2,000.0 million, adding Rayovac® and Varta® brands[50] - Auto Care Acquisition completed on January 28, 2019, for a contractual purchase price of $1,250.0 million (comprised of cash and newly-issued common stock), adding Armor All®, STP®, and A/C PRO® brands[60][61] - Nu Finish Acquisition completed on July 2, 2018, for $38.1 million[74] Preliminary Purchase Price Allocation for Battery Acquisition (as of acquisition date, in millions) | Asset/Liability | Amount | | :------------------------- | :------- | | Cash and cash equivalents | $37.8 | | Inventories | $81.0 | | Assets held for sale | $855.0 | | Goodwill | $498.6 | | Other intangible assets, net | $747.5 | | Liabilities held for sale | $(405.0) | Preliminary Purchase Price Allocation for Auto Care Acquisition (as of acquisition date, in millions) | Asset/Liability | Amount | | :------------------------- | :--------- | | Cash and cash equivalents | $3.3 | | Inventories | $97.8 | | Goodwill | $268.4 | | Other intangible assets, net | $972.5 | | Other liabilities | $(221.1) | Acquisition and Integration Costs (Pre-tax, in millions) | Period | Qtr Ended Mar 31, 2019 | 6M Ended Mar 31, 2019 | | :------------------------- | :--------------------- | :-------------------- | | Total Costs | $95.4 | $131.9 | | Costs of products sold | $31.7 | $31.7 | | SG&A | $29.1 | $48.0 | | Interest expense | $33.2 | $65.6 | Pro Forma Financial Information (in millions, except per share data) | Metric | 6M Ended Mar 31, 2019 | | :------------------------------------------------------------------ | :-------------------- | | Pro forma net sales | $1,353.2 | | Pro forma net earnings/(loss) from continuing operations | $103.2 | | Pro forma diluted net earnings/(loss) per common share - continuing operations | $1.34 | 1.5.4 Divestment (Note 4) The Varta EMEA business was classified as held for sale, with $848.2 million in assets and a net loss of $11.0 million from discontinued operations for the quarter - The Divestment Business (Varta EMEA) was classified as held for sale and discontinued operations, with the sale expected in early Q4 fiscal 2019[95] Divestment Business Assets and Liabilities Held for Sale (March 31, 2019, in millions) | Category | Amount | | :--------- | :------- | | Assets | $848.2 | | Liabilities | $389.6 | Net Loss from Discontinued Operations (in millions) | Metric | Qtr/6M Ended Mar 31, 2019 | | :-------------------------------------- | :------------------------ | | Net sales | $80.2 | | Loss before income taxes | $(13.9) | | Net loss from discontinued operations | $(11.0) | 1.5.5 Income Taxes (Note 5) The six-month effective tax rate was 46.9%, influenced by disallowed acquisition costs and a finalized mandatory transition tax totaling $37.5 million - The six-month effective tax rate was 46.9% for March 31, 2019, compared to 50.1% for the prior year comparative period[100] - The current year provision included the estimated impact of disallowed transaction costs related to the Battery and Auto Care Acquisitions[100] - The Company finalized accounting for the mandatory transition tax, recording an additional $1.5 million, for a total tax of $37.5 million[103] - The Company elected to treat Global Intangible Low Taxed Income (GILTI) as a current period expense[104] 1.5.6 Share-Based Payments (Note 6) Share-based compensation costs totaled $14.1 million for the six months, reflecting RSE awards and performance shares granted in November 2018 Total Share-Based Compensation Cost (in millions) | Period | Qtr Ended Mar 31, 2019 | 6M Ended Mar 31, 2019 | | :------------------------- | :--------------------- | :-------------------- | | Total Compensation Cost | $7.6 | $14.1 | - In November 2018, the Company granted RSE awards of approximately 73,000 shares (vesting ratably over four years) and 55,000 shares (vesting on the third anniversary)[108] - Approximately 190,000 performance shares were granted in November 2018, vesting subject to meeting target amounts for cumulative adjusted EPS and cumulative free cash flow over a three-year period[108] 1.5.7 Earnings per Share (Note 7) Basic and diluted net loss per share from continuing operations was $(0.97) for the quarter, with Mandatory Convertible Preferred Stock excluded as anti-dilutive Basic and Diluted EPS from Continuing Operations | Metric | Qtr Ended Mar 31, 2019 | 6M Ended Mar 31, 2019 | | :------------------------------------- | :--------------------- | :-------------------- | | Basic EPS - continuing operations | $(0.97) | $0.08 | | Diluted EPS - continuing operations | $(0.97) | $0.08 | Weighted Average Common Shares Outstanding (in millions) | Metric | Qtr Ended Mar 31, 2019 | 6M Ended Mar 31, 2019 | | :------------------------------------- | :--------------------- | :-------------------- | | Weighted average common shares - Basic | 67.3 | 63.5 | | Weighted average common shares - Diluted | 67.3 | 64.6 | - The Company's Mandatory Convertible Preferred Stock (MCPS) was considered anti-dilutive for all periods and excluded from diluted earnings per share calculations[115] 1.5.8 Segments (Note 8) Energizer operates in Americas and International segments, with both showing increased net sales and segment profit for the quarter, driven by acquisitions - Operations are managed via two major geographic reportable segments: Americas and International[117] - Segment performance is evaluated based on segment operating profit, exclusive of general corporate expenses, share-based compensation, acquisition and integration activities, amortization, and R&D costs[117] Segment Net Sales (Qtr Ended March 31, in millions) | Segment | 2019 | 2018 | | :------------ | :----- | :----- | | Americas | $381.6 | $224.1 | | International | $174.8 | $150.3 | | Total | $556.4 | $374.4 | Segment Profit (Qtr Ended March 31, in millions) | Segment | 2019 | 2018 | | :------------ | :---- | :--- | | Americas | $88.7 | $55.7 | | International | $36.4 | $34.1 | | Total | $125.1 | $89.8 | Total Segment Assets (in millions) | Segment | March 31, 2019 | September 30, 2018 | | :------------ | :------------- | :----------------- | | Americas | $1,047.1 | $504.2 | | International | $652.3 | $851.5 | | Total | $1,699.4 | $1,355.7 | 1.5.9 Goodwill and Intangible Assets (Note 9) Goodwill and indefinite-lived intangible assets significantly increased to $1,012.4 million and $1,292.6 million, respectively, primarily due to recent acquisitions - Goodwill and indefinite-lived intangible assets are not amortized but are evaluated annually for impairment[125] Goodwill by Segment (in millions) | Segment | Balance at Oct 1, 2018 | Battery Acquisition | Auto Care Acquisition | Balance at Mar 31, 2019 | | :------------ | :--------------------- | :------------------ | :-------------------- | :---------------------- | | Americas | $228.4 | — | — | $228.4 | | International | $15.8 | — | — | $16.0 | | Unallocated | — | $498.6 | $268.4 | $768.0 | | Total | $244.2 | $498.6 | $268.4 | $1,012.4 | - Indefinite-lived intangible assets increased to $1,292.6 million at March 31, 2019, from $76.9 million at September 30, 2018, primarily due to the Battery Acquisition ($513.0 million) and Auto Care Acquisition ($702.9 million)[127] Total Intangible Assets (March 31, 2019, in millions) | Category | Gross Amount | Accumulated Amortization | Net Carrying Amount | | :---------------------------------------- | :----------- | :----------------------- | :------------------ | | Total Amortizable intangible assets | $685.4 | $41.2 | $644.2 | | Trademarks and trade names - indefinite lived | $1,292.6 | — | $1,292.6 | | Total Other intangible assets, net | $1,978.0 | $41.2 | $1,936.8 | 1.5.10 Debt (Note 10) Total long-term debt surged to $3,627.1 million due to new credit agreements and senior note issuances to finance recent acquisitions Long-Term Debt Breakdown (in millions) | Debt Type | March 31, 2019 | September 30, 2018 | | :-------------------------------------- | :------------- | :----------------- | | Senior Secured Term Loan A Facility due 2021 | $150.0 | — | | Senior Secured Term Loan B Facility due 2025 | $1,000.0 | — | | 5.50% Senior Notes due 2025 | $600.0 | $600.0 | | 6.375% Senior Notes due 2026 | $500.0 | — | | 4.625% Senior Notes due 2026 (Euro Notes) | $729.2 | — | | 7.750% Senior Notes due 2027 | $600.0 | — | | Capital lease obligations | $47.9 | — | | Total long-term debt, including current maturities | $3,627.1 | $988.0 | - Entered into a new credit agreement on December 17, 2018, providing a $400.0 million revolving credit facility and $1,200.0 million in term loans (Term Loan A and B)[131] - Finalized pricing of $600.0 million in 7.750% Senior Notes due 2027 on January 17, 2019, to fund the Auto Care Acquisition[136] - Finalized pricing of $500.0 million in 6.375% Senior Notes and €650.0 million in 4.625% Senior Notes due 2026 in June 2018, with proceeds used for the Battery Acquisition[138][139] - Entered into interest rate swap agreements to fix the variable benchmark component (LIBOR) on $200.0 million of debt at 2.03% (through June 2022) and on $400.0 million of debt at 2.47% (effective Oct 1, 2018, decreasing quarterly until Dec 31, 2020)[140][141] Aggregate Maturities of Long-Term Debt (as of March 31, 2019, in millions) | Year | Long-term debt | Capital leases | | :-------- | :------------- | :------------- | | 2020 | $10.0 | $4.8 | | 2021 | $60.0 | $4.8 | | 2022 | $110.0 | $4.7 | | 2023 | $10.0 | $4.6 | | 2024 | $10.0 | $5.3 | | Thereafter | $3,379.2 | $72.6 | 1.5.11 Pension Plans (Note 11) The company sponsors defined benefit pension plans, with a net periodic pension benefit of $(0.4) million for the U.S. plan and $(0.1) million for International for the quarter - The Company has several defined benefit pension plans, with the U.S. plan frozen in fiscal year 2015[147] Net Periodic Pension (Benefit)/Cost (Qtr Ended March 31, in millions) | Component | U.S. | International | | :-------------- | :----- | :------------ | | Service cost | — | $0.2 | | Interest cost | $5.1 | $0.8 | | Expected return | $(6.5) | $(1.3) | | Amortization | $1.0 | $0.2 | | Net periodic (benefit)/cost | $(0.4) | $(0.1) | - A pension plan was acquired as part of the Divestment Business and is included in Liabilities held for sale[153] 1.5.12 Shareholders' Equity (Note 12) The company paid $40.8 million in common stock dividends and issued common and preferred stock totaling $404.8 million to fund the Auto Care Acquisition - The Board of Directors declared a cash dividend of $0.30 per share of common stock for the first and second quarters of fiscal 2019[155] - Total dividends paid on common stock were $40.8 million for the six months ended March 31, 2019[156] - In January 2019, the Company issued 4,687,498 shares of common stock, generating net proceeds of $205.3 million, used to fund a portion of the Auto Care Acquisition[158] - On January 28, 2019, 5,278,921 shares of common stock were issued to Spectrum as partial consideration for the Auto Care Acquisition, valued at $240.5 million[159] - In January 2019, the Company issued 2,156,250 shares of Series A Mandatory Convertible Preferred Stock (MCPS), generating net proceeds of $199.5 million, used to fund the Auto Care Acquisition[164] - Dividends on MCPS are payable quarterly at an annual rate of 7.50% of the liquidation preference ($100.00 per share)[166] 1.5.13 Financial Instruments and Risk Management (Note 13) Energizer manages market risks from currency, commodity, and interest rates using derivatives, with Argentina's highly inflationary economy impacting financial statement translation - The Company uses derivatives only for identifiable exposures to manage market risk from currency rates, interest rates, and commodity prices, not for speculative purposes[172][175] - In February 2019, the Company entered into a hedging contract on zinc purchases, recognized a pre-tax gain of $0.2 million at March 31, 2019, and classified it as a cash flow hedge[177] - Energizer uses forward currency contracts to hedge cash flow uncertainty of forecasted inventory purchases, with an unrealized pre-tax gain of $3.6 million at March 31, 2019[184] - The Company uses interest rate swap agreements to fix the variable benchmark component (LIBOR) on $200.0 million and $400.0 million of its variable rate debt[180] - At March 31, 2019, the estimated fair value of the Company's financial assets and liabilities carried at fair value are primarily classified as Level 2 inputs[198][201] 1.5.14 Accumulated Other Comprehensive (Loss)/Income (Note 14) Accumulated other comprehensive loss improved to $(227.5) million, influenced by foreign currency translation, pension activity, and cash flow hedges Accumulated Other Comprehensive (Loss)/Income (in millions) | Metric | March 31, 2019 | September 30, 2018 | | :---------------------------------------- | :------------- | :----------------- | | Balance at period end | $(227.5) | $(241.8) | | Foreign Currency Translation Adjustments | $(97.0) | $(113.6) | | Pension Activity | $(134.3) | $(136.4) | | Zinc Contracts | $1.5 | — | | Foreign Currency Contracts | $2.8 | $3.3 | | Interest Rate Contracts | $(0.5) | $4.9 | - OCI before reclassifications for the six months ended March 31, 2019, was $14.7 million[202] - Total reclassifications to earnings for the six months ended March 31, 2019, amounted to $1.7 million[206] 1.5.15 Supplemental Financial Statement Information (Note 15) "Other items, net" showed $(13.1) million income for six months, while inventories and property, plant, and equipment significantly increased due to acquisitions Other Items, Net (in millions) | Item | Qtr Ended Mar 31, 2019 | 6M Ended Mar 31, 2019 | | :---------------------------------------- | :--------------------- | :-------------------- | | Interest income | $(0.7) | $(1.0) | | Interest income on restricted cash | — | $(5.8) | | Foreign currency exchange loss | $3.8 | $2.7 | | Pension benefit other than service costs | $(0.7) | $(1.4) | | Acquisition foreign currency gains | — | $(9.0) | | Settlement of acquired business hedging contracts | $1.5 | $1.5 | | Transition services agreement income | $(0.1) | $(0.1) | | Total Other items, net | $3.8 | $(13.1) | Inventories (in millions) | Category | March 31, 2019 | September 30, 2018 | | :--------------------- | :------------- | :----------------- | | Raw materials and supplies | $89.3 | $40.0 | | Work in process | $130.2 | $86.5 | | Finished products | $271.6 | $196.6 | | Total inventories | $491.1 | $323.1 | Property, Plant and Equipment, Net (in millions) | Category | March 31, 2019 | September 30, 2018 | | :------------------------------------- | :------------- | :----------------- | | Total gross property | $1,016.8 | $823.6 | | Accumulated depreciation | $(653.1) | $(656.9) | | Total property, plant and equipment, net | $363.7 | $166.7 | 1.5.16 Related Party Transactions (Note 16) Energizer incurred $5.4 million in TSA expenses and $4.4 million from a supply agreement with Spectrum, a related party, following recent acquisitions - Spectrum owns 7.6% of Energizer's outstanding common shares as of March 31, 2019, following the Auto Care Acquisition[211] - Energizer and Spectrum entered into transition service agreements (TSA) and reverse TSAs for back office support services[214] - For the quarter and six months ended March 31, 2019, the Company incurred $5.0 million in SG&A and $0.4 million in COGS for TSA expenses[216] - The Company recorded $0.1 million in income in Other items, net, related to reverse transition services agreements provided[216] - A supply agreement with Spectrum resulted in an expense of $4.4 million for the quarter and six months ended March 31, 2019[217] 1.5.17 Legal Proceedings/Contingencies and Other Obligations (Note 17) The company faces various legal proceedings, with liabilities not expected to be material, and has $41.1 million in purchase obligations - The Company is subject to a number of legal proceedings in various jurisdictions arising out of its operations[219] - The Company believes that its liability, if any, arising from pending legal proceedings is not reasonably likely to be material to its financial position, results of operations, or cash flows[219] - At March 31, 2019, the Company had approximately $41.1 million of purchase obligations[221] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section discusses Energizer's financial condition, operating results, and liquidity, including the impact of recent acquisitions and non-GAAP measures 2.1 Non-GAAP Financial Measures Management utilizes non-GAAP measures like Segment Profit and Adjusted EPS to assess ongoing performance, excluding acquisition costs, currency impacts, and one-time tax effects - Non-GAAP financial measures are used to provide meaningful comparisons to historical or future periods by excluding items not reflective of ongoing operating performance, such as acquisition and integration costs and one-time tax impacts[225] - Segment Profit excludes general corporate and other expenses, global marketing expenses, R&D expenses, amortization expense, interest expense, other items, net, and charges related to acquisition and integration[226] - Adjusted Net Earnings From Continuing Operations and Adjusted Diluted Net Earnings From Continuing Operations Per Common Share (EPS) exclude the impact of acquisition and integration costs and the one-time impact of new U.S. tax legislation[227] - Organic growth is a non-GAAP measure that excludes or adjusts for the impact of acquisitions, changes in Argentina Operations, and the impact of currency from foreign exchange rate changes[228] 2.2 Forward-Looking Statements Forward-looking statements are subject to risks including market conditions, acquisition integration, divestiture challenges, competitive pressures, and debt covenants - Forward-looking statements are not guarantees of performance and are inherently subject to known and unknown risks, uncertainties, and assumptions that could cause actual results to differ materially[233] - Key factors that could cause actual results to differ include market and economic conditions, ability to integrate businesses and realize synergies, ability to divest the Varta® consumer battery business, success of new products, customer distribution, strategic initiatives, competitive pressure, cost savings, foreign currency exchange rates, raw material costs, legislative/regulatory changes, cyber-attacks, litigation, and compliance with debt covenants[233] 2.3 Recent Acquisitions Overview Energizer completed Battery ($2,000.0 million), Auto Care ($1,250.0 million), and Nu Finish ($38.1 million) acquisitions, incurring $131.9 million in pre-tax integration costs for six months - The Battery Acquisition was completed on January 2, 2019, for $2,000.0 million, including Rayovac® and Varta® brands[236] - The Auto Care Acquisition was completed on January 28, 2019, for $1,250.0 million, including Armor All®, STP®, and A/C PRO® brands[239] - The Nu Finish Acquisition was completed on July 2, 2018, for $38.1 million[241] Pre-tax Acquisition and Integration Costs (in millions) | Period | Qtr Ended Mar 31, 2019 | 6M Ended Mar 31, 2019 | | :------------------------- | :--------------------- | :-------------------- | | Total Costs | $95.4 | $131.9 | | Costs of products sold | $31.7 | $31.7 | | SG&A | $29.1 | $48.0 | | Interest expense | $33.2 | $65.6 | 2.4 Highlights / Operating Results The company reported a $62.3 million net loss for Q2 2019, despite 48.6% net sales growth to $556.4 million driven by acquisitions, with gross margin declining to 34.9% Net (Loss)/Earnings from Continuing Operations (in millions) | Metric | Qtr Ended Mar 31, 2019 | Qtr Ended Mar 31, 2018 | | :------------------------------------- | :--------------------- | :--------------------- | | Net (loss)/earnings from continuing operations | $(62.3) | $7.8 | Adjusted Diluted EPS from Continuing Operations | Metric | Qtr Ended Mar 31, 2019 | Qtr Ended Mar 31, 2018 | Change (%) | | :------------------------------------- | :--------------------- | :--------------------- | :--------- | | Adjusted diluted EPS - continuing operations | $0.20 | $0.45 | -55.6% | Total Net Sales Drivers (Qtr Ended Mar 31, 2019, in millions) | Driver | Amount | % Chg | | :------------------------- | :----- | :---- | | Net sales - FY '18 | $374.4 | | | Organic | $7.1 | 1.9% | | Impact of Battery Acquisition | $99.9 | 26.7% | | Impact of Auto Care Acquisition | $84.5 | 22.6% | | Impact of Nu Finish Acquisition | $1.9 | 0.5% | | Change in Argentina operations | $(0.9) | (0.2)%| | Impact of currency | $(10.5)| (2.9)%| | Net sales - FY '19 | $556.4 | 48.6% | - Gross margin percentage for Q2 2019 was 34.9%, down from 45.0% in the prior year, primarily due to the lower margin rate profile of acquired businesses and unfavorable foreign currency movement, and a $31.7 million inventory step-up[263] - Interest expense for Q2 2019 was $77.2 million, significantly higher than $16.5 million in Q2 2018, primarily due to higher debt associated with acquisitions, including $33.2 million in issuance fees and ticking fees[270] - The effective tax rate for Q2 2019 was 46.9%, compared to 50.1% in the prior year, influenced by disallowed transaction costs from acquisitions and the one-time impact of U.S. tax legislation[276] 2.5 Segment Results Americas net sales grew 70.3% to $381.6 million and International net sales grew 16.3% to $174.8 million, both driven by acquisitions and organic growth Americas Net Sales Drivers (Qtr Ended Mar 31, 2019, in millions) | Driver | Amount | % Chg | | :------------------------- | :----- | :---- | | Net sales - FY '18 | $224.1 | | | Organic | $2.0 | 0.9% | | Impact of Battery Acquisition | $78.1 | 34.9% | | Impact of Auto Care Acquisition | $77.9 | 34.8% | | Impact of Nu Finish Acquisition | $1.8 | 0.8% | | Change in Argentina | $(0.9) | (0.4)%| | Impact of currency | $(1.4) | (0.7)%| | Net Sales - FY '19 | $381.6 | 70.3% | International Net Sales Drivers (Qtr Ended Mar 31, 2019, in millions) | Driver | Amount | % Chg | | :------------------------- | :----- | :---- | | Net sales - FY '18 | $150.3 | | | Organic | $5.1 | 3.4% | | Impact of Battery Acquisition | $21.8 | 14.5% | | Impact of Auto Care Acquisition | $6.6 | 4.4% | | Impact of Nu Finish Acquisition | $0.1 | 0.1% | | Impact of currency | $(9.1) | (6.1)%| | Net Sales - FY '19 | $174.8 | 16.3% | Americas Segment Profit Drivers (Qtr Ended Mar 31, 2019, in millions) | Driver | Amount | % Chg | | :------------------------- | :----- | :---- | | Segment Profit - FY '18 | $55.7 | | | Organic | $1.7 | 3.1% | | Impact of Battery Acquisition | $7.1 | 12.7% | | Impact of Auto Care Acquisition | $24.0 | 43.1% | | Impact of Nu Finish Acquisition | $1.5 | 2.7% | | Change in Argentina | $(0.4) | (0.7)%| | Impact of currency | $(0.9) | (1.7)%| | Segment Profit - FY '19 | $88.7 | 59.2% | International Segment Profit Drivers (Qtr Ended Mar 31, 2019, in millions) | Driver | Amount | % Chg | | :------------------------- | :----- | :---- | | Segment Profit - FY '18 | $34.1 | | | Organic | $1.9 | 5.6% | | Impact of Battery Acquisition | $6.0 | 17.6% | | Impact of Auto Care Acquisition | $0.7 | 2.1% | | Impact of Nu Finish Acquisition | — | —% | | Impact of currency | $(6.3) | (18.6)%| | Segment Profit - FY '19 | $36.4 | 6.7% | 2.6 General Corporate and Global Marketing Expenses General corporate and global marketing expenses increased to $36.1 million for the quarter, but decreased to 6.5% of net sales due to acquisition-driven sales growth General Corporate and Global Marketing Expenses (in millions) | Expense Category | Qtr Ended Mar 31, 2019 | Qtr Ended Mar 31, 2018 | 6M Ended Mar 31, 2019 | 6M Ended Mar 31, 2018 | | :--------------------------------- | :--------------------- | :--------------------- | :-------------------- | :-------------------- | | General corporate and other expenses | $29.7 | $24.7 | $48.4 | $46.3 | | Global marketing expense | $6.4 | $5.2 | $9.5 | $8.4 | | Total | $36.1 | $29.9 | $57.9 | $54.7 | | % of Net Sales | 6.5% | 8.0% | 5.1% | 5.8% | - The increase in general corporate and other expenses for the quarter was primarily due to the lapping of a reduction in legal reserves in the prior year fiscal quarter, partially offset by lower compensation costs and mark-to-market expense[299] 2.7 Liquidity and Capital Resources Cash and cash equivalents were $332.9 million, with operating cash flow decreasing to $13.0 million, while investing used $2,424.4 million and financing provided $1,439.3 million for acquisitions - Energizer's primary future cash needs are centered on operating activities, working capital, strategic investments, and debt reductions[303] - Cash and cash equivalents were $332.9 million at March 31, 2019, with approximately 70% held outside of the U.S[304] - Cash flow from operating activities from continuing operations was $13.0 million for the six months ended March 31, 2019, a decrease of $147.6 million from the prior year, primarily due to acquisition-related cash expenditures and working capital changes[310] - Net cash used by investing activities from continuing operations was $2,424.4 million for the six months ended March 31, 2019, primarily for the Battery Acquisition ($1,468.4 million) and the cash portion of the Auto Care Acquisition ($935.4 million)[312][313] - Net cash from financing activities from continuing operations was $1,439.3 million for the six months ended March 31, 2019, driven by $1,800.0 million from debt issuance, $205.3 million from common stock issuance, and $199.5 million from Mandatory Preferred Convertible Stock issuance[315] - Dividends paid on common stock totaled $40.8 million for the six months ended March 31, 2019[315] - No shares were repurchased on the open market during the first six months of fiscal 2019 under the 7.5 million share repurchase authorization[322] 2.8 Other Matters Accrued environmental costs were $7.1 million and are not material, while purchase obligations totaled $41.1 million - Accrued environmental costs were $7.1 million at March 31, 2019[324] - Environmental costs are not expected to have a material effect on total capital and operating expenditures, earnings, or competitive position[324] - At March 31, 2019, the Company had approximately $41.1 million of purchase obligations[326] Item 3. Quantitative and Qualitative Disclosures About Market Risk Energizer manages market risks from currency, commodity, and interest rates using derivatives, with Argentina's highly inflationary economy impacting financial statement translation - The Company is exposed to market risk from adverse changes in currency rates, commodity prices, and interest rates, and uses derivatives for identifiable exposures[327] - Forward currency contracts are used to hedge cash flow uncertainty of forecasted inventory purchases, with an unrealized pre-tax gain of $3.6 million at March 31, 2019[329] - A hedging contract on zinc purchases was entered into in February 2019, resulting in a pre-tax gain of $0.2 million at March 31, 2019[335] - Interest rate swaps are used to fix the variable benchmark component (LIBOR) on $600.0 million of variable rate debt[336] - Effective July 1, 2018, Argentina's economy was designated as highly inflationary, requiring remeasurement of financial statements into USD and reflecting exchange gains and losses from monetary assets and liabilities in current earnings[338] Item 4. Controls and Procedures Disclosure controls and procedures were effective as of March 31, 2019, with no material changes to internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were effective as of March 31, 2019, providing reasonable assurance of accurate and timely reporting[341] - There was no change in the Company's internal control over financial reporting during the quarter ended March 31, 2019, that materially affected or is reasonably likely to materially affect it[342] PART II — OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal proceedings, with any resulting liabilities not expected to be material to its financial position or operations - The Company and its affiliates are subject to a number of legal proceedings in various jurisdictions arising out of its operations[344] - Accruals are established for contingencies where the incurrence of a loss is probable and can be reasonably estimated[344] - Based on present information, the Company believes its liability from pending legal proceedings is not reasonably likely to be material to its financial position, results of operations, or cash flows[344] Item 1A. Risk Factors New risk factors include operational dependence on the Dayton facility, seasonal volatility, R-134a regulations, divestiture risks for Varta EMEA, and substantial acquisition-related debt - The operations and profitability of the Acquired Auto Care Business are highly dependent on the efficient operation of its Dayton, Ohio facility, which has experienced business disruptions and requires additional investment[346] - The Acquired Businesses are subject to seasonal volatility, particularly the Auto Care Business, which can be significantly impacted by unfavorable weather conditions and makes forecasting difficult[347] - Changes in governmental regulations regarding the use of refrigerant gas R-134a could have a material adverse effect on the ability of the Acquired Auto Care Business to sell its aftermarket A/C products[350][351] - The divestiture of the Varta® consumer battery, chargers, portable power, and portable lighting business in EMEA involves significant risks and uncertainties, including the inability to find potential buyers on favorable terms or within the required timeline, and potential asset impairment charges[354][355][358] - The Company's significant debt level of approximately $3.6 billion at March 31, 2019, incurred to finance acquisitions, could adversely affect cash flow, limit future growth opportunities, and impose restrictive covenants[362][363] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company purchased 262 equity shares for tax withholding, with no open market repurchases under the 7.5 million share authorization during the quarter Purchases of Equity Securities (Q2 Fiscal 2019) | Period | Total Number of Shares Purchased | Average Price Per Share | | :------------------------- | :------------------------------- | :---------------------- | | January 1 - January 31 | — | — | | February 1 - February 28 | 152 | $47.66 | | March 1 - March 31 | 110 | $45.09 | | Total | 262 | $46.58 | - The 262 shares purchased during the quarter relate to the surrender of common stock to satisfy tax withholding obligations in connection with the vesting of restricted stock or execution of net exercises[372] - No shares were repurchased on the open market during the quarter under the 7.5 million share repurchase authorization approved on July 1, 2015[373] - As of May 7, 2019, 3.8 million shares remain available for repurchase under the authorization[323] Item 6. Exhibits This section lists exhibits filed with Form 10-Q, including various agreements, corporate governance documents, debt instruments, and certifications - The Exhibit Index lists various agreements, including Separation and Distribution, Tax Matters, Employee Matters, Transition Services, and multiple Acquisition Agreements[376] - Corporate governance documents such as the Third Amended and Restated Articles of Incorporation, Bylaws, and Certificate of Designations for Preferred Stock are included[376][378] - Debt-related documents, including Supplemental Indentures for various Senior Notes, are part of the exhibits[379][380] - Certifications of periodic financial reports by the Chief Executive Officer and Chief Financial Officer are filed herewith[379][380][381]