Energizer (ENR) - 2019 Q3 - Quarterly Report

PART I — FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including statements of earnings, balance sheets, cash flows, and shareholders' equity, along with detailed notes explaining the company's business, accounting policies, recent acquisitions, divestitures, and other financial details Consolidated Statements of Earnings and Comprehensive Income (Condensed) The condensed consolidated statements of earnings show a significant increase in net sales for both the quarter and nine months ended June 30, 2019, primarily due to recent acquisitions. However, net earnings from continuing operations and diluted EPS decreased substantially compared to the prior year, impacted by higher costs and interest expenses Consolidated Statements of Earnings and Comprehensive Income (Condensed) | Metric | Q3 2019 ($M) | Q3 2018 ($M) | 9M 2019 ($M) | 9M 2018 ($M) | |:------------------------------------------------|:-------------|:-------------|:-------------|:-------------| | Net sales | 647.2 | 392.8 | 1,775.5 | 1,340.5 | | Gross profit | 246.3 | 176.1 | 716.0 | 622.9 | | Earnings from continuing operations | 9.2 | 23.8 | 17.7 | 92.0 | | Net earnings/(loss) attributable to common shareholders | 3.0 | 23.8 | (2.8) | 92.0 | | Basic net earnings per common share - continuing operations | 0.07 | 0.40 | 0.15 | 1.54 | | Diluted net earnings per common share - continuing operations | 0.07 | 0.39 | 0.15 | 1.50 | - Net sales increased significantly for both the quarter (64.8%) and nine months (32.5%) ended June 30, 2019, primarily driven by recent acquisitions[11] - Net earnings from continuing operations decreased by 61.3% for the quarter and 80.7% for the nine months ended June 30, 2019, compared to the prior year[11] Consolidated Balance Sheets (Condensed) The consolidated balance sheet as of June 30, 2019, reflects substantial growth in total assets, liabilities, and shareholders' equity compared to September 30, 2018, largely due to the Battery and Auto Care Acquisitions, which significantly increased goodwill, other intangible assets, and long-term debt Consolidated Balance Sheets (Condensed) | Metric | June 30, 2019 ($M) | September 30, 2018 ($M) | |:-------------------------------------|:-------------------|:------------------------| | Total assets | 5,577.7 | 3,178.8 | | Total liabilities | 5,007.0 | 3,154.3 | | Total shareholders' equity | 570.7 | 24.5 | | Cash and cash equivalents | 206.4 | 522.1 | | Goodwill | 1,062.4 | 244.2 | | Other intangible assets, net | 1,922.2 | 232.7 | | Long-term debt | 3,493.2 | 976.1 | - Total assets increased by $2,398.9 million (75.5%) from September 30, 2018, to June 30, 2019, primarily driven by goodwill and other intangible assets from acquisitions[14] - Total liabilities increased by $1,852.7 million (58.7%), mainly due to a significant rise in long-term debt to fund acquisitions[14] - Total shareholders' equity saw a substantial increase from $24.5 million to $570.7 million, reflecting new equity issuances[14] Consolidated Statements of Cash Flows (Condensed) The consolidated statements of cash flows for the nine months ended June 30, 2019, show a significant decrease in cash from operating activities and a large increase in cash used by investing activities due to major acquisitions. This was largely offset by substantial cash proceeds from financing activities, primarily debt and equity issuances Consolidated Statements of Cash Flows (Condensed) | Metric | 9M 2019 ($M) | 9M 2018 ($M) | |:------------------------------------------------|:-------------|:-------------| | Net cash from operating activities | 7.0 | 188.0 | | Net cash used by investing activities | (2,893.2) | (11.1) | | Net cash from/(used by) financing activities | 1,325.6 | (37.9) | | Net (decrease)/increase in cash, cash equivalents, and restricted cash | (1,561.9) | 132.9 | - Net cash from operating activities decreased significantly from $188.0 million in 2018 to $7.0 million in 2019, primarily due to working capital changes and acquisition-related cash expenditures[17] - Net cash used by investing activities surged to $2,893.2 million in 2019, mainly driven by the Battery and Auto Care Acquisitions totaling $2,453.8 million[17] - Net cash from financing activities was $1,325.6 million in 2019, a substantial increase from a net use of $37.9 million in 2018, reflecting significant debt and equity issuances to fund acquisitions[17] Consolidated Statements of Shareholders' Equity/(Deficit) (Condensed) The consolidated statements of shareholders' equity show a significant increase in total equity from $24.5 million at September 30, 2018, to $570.7 million at June 30, 2019, primarily driven by the issuance of common stock and mandatory convertible preferred stock to fund acquisitions, partially offset by net losses and share repurchases Changes in Shareholders' Equity (9 Months Ended June 30, 2019) | Metric | September 30, 2018 ($M) | June 30, 2019 ($M) | |:-------------------------------------|:------------------------|:-------------------| | Total Shareholders' Equity/(Deficit) | 24.5 | 570.7 | | Additional Paid-in Capital | 217.8 | 867.2 | | Retained Earnings | 177.3 | 109.5 | | Treasury Stock | (129.4) | (161.4) | | Accumulated Other Comprehensive Loss | (241.8) | (245.3) | - Additional paid-in capital increased significantly from $217.8 million to $867.2 million, reflecting proceeds from common stock and preferred stock issuances[19] - Retained earnings decreased from $177.3 million to $109.5 million, impacted by net losses and dividend payments[19] - Treasury stock increased due to common stock repurchases totaling $45.0 million during the nine months ended June 30, 2019[19] Notes to Consolidated (Condensed) Financial Statements This section provides detailed disclosures on the company's business operations, significant accounting policies, recent acquisitions and divestitures, financial instruments, and other material financial information, offering context to the condensed financial statements (1) Description of Business and Basis of Presentation Energizer Holdings, Inc. is a global manufacturer and marketer of household batteries, specialty batteries, portable lights, and automotive fragrance and appearance products. The company recently expanded its portfolio through the Battery Acquisition (Rayovac®, Varta®) and Auto Care Acquisition (Armor All®, STP®, A/C PRO®) in early 2019, and is in the process of divesting the Varta® consumer battery business in EMEA - Energizer acquired Spectrum's global battery, lighting, and portable power business (Battery Acquisition) on January 2, 2019, including Rayovac® and Varta® brands[27] - Energizer acquired Spectrum's global auto care business (Auto Care Acquisition) on January 28, 2019, including Armor All®, STP®, and A/C PRO® brands[28] - The company entered into an agreement on May 29, 2019, to divest the Varta® consumer battery business in Europe, Middle East, and Africa (Divestment Business) to VARTA Aktiengesellschaft for €180.0 million, with Spectrum contributing an additional $200.0 million[29][32] - The Divestment Business's assets and liabilities are classified as held for sale, and its operations as discontinued operations[32] (2) Revenue Recognition The company adopted ASU 2014-09, Revenue from Contracts with Customers, effective October 1, 2018, with no material impact on financial statements. Revenue is primarily recognized at a single point in time upon transfer of title and risk of loss, with net sales reflecting transaction prices reduced by variable consideration such as discounts and promotional programs - Adoption of ASU 2014-09, Revenue from Contracts with Customers, had no material impact on the company's financial statements[36][40] - Revenue is recognized when title, ownership, and risk of loss pass to the customer, typically upon delivery or pickup of finished goods[46] Net Sales by Product Category and Geography | Category/Segment | Q3 2019 ($M) | Q3 2018 ($M) | 9M 2019 ($M) | 9M 2018 ($M) | |:-------------------|:-------------|:-------------|:-------------|:-------------| | Product | | | | | | Batteries | 457.2 | 350.1 | 1,398.5 | 1,204.9 | | Auto Care | 160.8 | 24.1 | 289.9 | 68.9 | | Lights and Licensing | 29.2 | 18.6 | 87.1 | 66.7 | | Total Net Sales| 647.2 | 392.8 | 1,775.5 | 1,340.5 | | Geography | | | | | | Americas | 465.1 | 241.3 | 1,220.2 | 838.5 | | International | 182.1 | 151.5 | 555.3 | 502.0 | | Total Net Sales| 647.2 | 392.8 | 1,775.5 | 1,340.5 | (3) Acquisitions Energizer completed the Battery Acquisition for $2,000.0 million and the Auto Care Acquisition for $1,250.0 million in early 2019, significantly expanding its product portfolios. These acquisitions involved substantial cash and equity considerations, leading to preliminary allocations of purchase price to assets, liabilities, goodwill, and intangible assets, which are subject to finalization - Battery Acquisition completed on January 2, 2019, for a contractual purchase price of $2,000.0 million, funded by senior notes, term loans, and cash on hand[54] - Auto Care Acquisition completed on January 28, 2019, for a contractual purchase price of $1,250.0 million, comprising $937.5 million in cash and $312.5 million in newly-issued common stock[66][68] Preliminary Purchase Price Allocation for Battery Acquisition (as of acquisition date) | Asset/Liability | Amount ($M) | |:--------------------------------|:------------| | Cash and cash equivalents | 37.8 | | Trade receivables | 59.4 | | Inventories | 82.4 | | Assets held for sale | 805.0 | | Property, plant and equipment, net | 138.5 | | Goodwill | 547.2 | | Other intangible assets, net | 747.5 | | Liabilities held for sale | (405.0) | | Net assets acquired | 1,956.2 | Preliminary Purchase Price Allocation for Auto Care Acquisition (as of acquisition date) | Asset/Liability | Amount ($M) | |:--------------------------------|:------------| | Cash and cash equivalents | 3.3 | | Trade receivables | 42.1 | | Inventories | 96.1 | | Property, plant and equipment, net | 66.5 | | Goodwill | 270.1 | | Other intangible assets, net | 972.5 | | Deferred tax assets | 12.1 | | Other liabilities (deferred tax liabilities) | (221.1) | | Net assets acquired | 1,179.2 | Acquisition and Integration Costs (Pre-tax) | Period | Q3 2019 ($M) | 9M 2019 ($M) | Q3 2018 ($M) | 9M 2018 ($M) | |:-------------------|:-------------|:-------------|:-------------|:-------------| | Total Costs | 28.0 | 159.9 | 15.9 | 41.0 | | Cost of products sold | 12.4 | 44.1 | — | — | | SG&A | 15.1 | 63.1 | 22.4 | 44.6 | | Interest expense | — | 65.6 | 3.4 | 6.3 | (4) Divestment The company is divesting the Varta® consumer battery business in EMEA for €180.0 million, with an additional $200.0 million contribution from Spectrum. This business is classified as held for sale and its operations as discontinued, resulting in a net loss from discontinued operations for the quarter and nine months ended June 30, 2019 - The Divestment Business is expected to be sold by the end of calendar year 2019 for €180.0 million, plus a $200.0 million contribution from Spectrum[104] Assets and Liabilities of Divestment Business Classified as Held for Sale (June 30, 2019) | Category | Amount ($M) | |:------------------|:------------| | Assets held for sale | 807.6 | | Liabilities held for sale | 384.9 | Loss from Discontinued Operations (Divestment Business) | Metric | Q3 2019 ($M) | 9M 2019 ($M) | |:------------------------------------------------|:-------------|:-------------| | Net sales | 69.9 | 150.1 | | Loss before income taxes from discontinued operations | (1.4) | (15.3) | | Net loss from discontinued operations | (1.8) | (12.8) | - The loss from discontinued operations for the nine months ended June 30, 2019, included an inventory fair value adjustment of $11.2 million and divestment-related pre-tax costs of $9.9 million[110] (5) Income Taxes The nine-month effective tax rate decreased to 30.3% from 45.3% in the prior year, influenced by disallowed transaction costs from acquisitions and the impact of the U.S. Tax Cuts and Jobs Act (TCJA), which reduced the corporate tax rate to 21% for fiscal year 2019 - The nine-month effective tax rate was 30.3% for 2019, down from 45.3% in 2018[111] - The current year's tax provision included the estimated impact of disallowed transaction costs related to the Battery and Auto Care Acquisitions[111] - The U.S. corporate income tax rate was reduced from 35% to 21% by the Tax Act, effective for Energizer as of January 1, 2018, with the full 21% rate impacting fiscal year 2019[112] - The company completed accounting for the mandatory transition tax, recording an additional $0.7 million in 2019 for state tax impact, bringing the total to $36.7 million[114] (6) Share-Based Payments Total share-based compensation expense for the quarter and nine months ended June 30, 2019, was $6.7 million and $20.8 million, respectively. The company granted Restricted Stock Equivalent (RSE) awards and performance shares to key employees and executives, with vesting contingent on time and performance targets Share-Based Compensation Expense | Period | Q3 2019 ($M) | 9M 2019 ($M) | Q3 2018 ($M) | 9M 2018 ($M) | |:-------------|:-------------|:-------------|:-------------|:-------------| | Total Cost | 6.7 | 20.8 | 7.0 | 21.0 | - In November 2018, the company granted approximately 73,000 RSE shares vesting ratably over four years, 55,000 RSE shares vesting on the third anniversary, and 190,000 performance shares (max 380,000) based on EPS and free cash flow targets[117] (7) Earnings per share Basic and diluted earnings per share calculations reflect the impact of net earnings from continuing and discontinued operations, mandatory preferred stock dividends, and dilutive effects of restricted stock equivalents and performance shares. Mandatory Convertible Preferred Stock (MCPS) was anti-dilutive for all periods and excluded from diluted EPS Basic and Diluted Earnings Per Share | Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 | |:------------------------------------------------|:-------------|:-------------|:-------------|:-------------| | Basic net earnings per common share - continuing operations | $0.07 | $0.40 | $0.15 | $1.54 | | Basic net earnings/(loss) per common share | $0.04 | $0.40 | $(0.04) | $1.54 | | Diluted net earnings per common share - continuing operations | $0.07 | $0.39 | $0.15 | $1.50 | | Diluted net earnings/(loss) per common share | $0.04 | $0.39 | $(0.04) | $1.50 | | Weighted average common shares outstanding - Diluted | 70.6 | 61.4 | 66.5 | 61.4 | - Mandatory Convertible Preferred Stock (MCPS) was considered anti-dilutive and excluded from diluted EPS calculations for all periods presented[127] - Performance-based restricted stock equivalents (0.8 million for Q3/9M 2019, 0.5 million for Q3/9M 2018) were excluded from diluted EPS as performance targets were not achieved[127] (8) Segments Energizer manages operations through two geographic segments: Americas and International. Segment performance is evaluated based on segment operating profit, excluding corporate expenses, share-based compensation, acquisition/integration costs, amortization, and R&D. Both segments showed significant net sales and profit growth, largely driven by recent acquisitions Segment Net Sales and Profit | Metric/Segment | Q3 2019 ($M) | Q3 2018 ($M) | 9M 2019 ($M) | 9M 2018 ($M) | |:-----------------|:-------------|:-------------|:-------------|:-------------| | Net Sales | | | | | | Americas | 465.1 | 241.3 | 1,220.2 | 838.5 | | International | 182.1 | 151.5 | 555.3 | 502.0 | | Total Net Sales| 647.2 | 392.8 | 1,775.5 | 1,340.5 | | Segment Profit | | | | | | Americas | 103.8 | 60.4 | 308.6 | 239.2 | | International | 41.0 | 32.6 | 132.0 | 115.9 | | Total Segment Profit| 144.8 | 93.0 | 440.6 | 355.1 | - Americas net sales increased 92.7% for the quarter and 45.5% for the nine months, with acquisitions contributing significantly[132] - International net sales increased 20.2% for the quarter and 10.6% for the nine months, also boosted by acquisitions[132] - Total segment profit increased 55.7% for the quarter and 24.1% for the nine months, driven by acquisitions and organic growth[132] (9) Goodwill and intangible assets Goodwill and indefinite-lived intangible assets are not amortized but are evaluated annually for impairment. The Battery and Auto Care Acquisitions significantly increased goodwill and indefinite-lived intangible assets, with total intangible assets reaching $1,922.2 million at June 30, 2019 Goodwill by Segment | Segment | October 1, 2018 ($M) | June 30, 2019 ($M) | |:--------------|:---------------------|:-------------------| | Americas | 228.4 | 228.4 | | International | 15.8 | 15.6 | | Unallocated | — | 818.4 | | Total | 244.2 | 1,062.4 | - Goodwill increased by $818.2 million from October 1, 2018, to June 30, 2019, primarily due to the Battery Acquisition ($547.2 million) and Auto Care Acquisition ($270.1 million)[138] Total Intangible Assets, Net (June 30, 2019) | Category | Gross Carrying Amount ($M) | Accumulated Amortization ($M) | Net Carrying Amount ($M) | |:----------------------------------------|:---------------------------|:------------------------------|:-------------------------| | Trademarks and trade names (amortizable) | 61.0 | 8.8 | 52.2 | | Customer relationships | 412.5 | 28.2 | 384.3 | | Proprietary technology | 174.5 | 10.5 | 164.0 | | Trademarks and trade names - indefinite lived | 1,292.4 | — | 1,292.4 | | Total Other intangible assets, net | 1,977.8 | 55.6 | 1,922.2 | - Indefinite-lived intangible assets increased from $76.9 million at September 30, 2018, to $1,292.4 million at June 30, 2019, mainly from the Battery ($513.0 million) and Auto Care ($702.9 million) Acquisitions[141] (10) Debt The company's long-term debt significantly increased to $3,493.2 million at June 30, 2019, from $976.1 million at September 30, 2018, primarily due to new senior secured term loans and senior notes issued to fund the Battery and Auto Care Acquisitions. The company also utilizes interest rate swaps to manage variable rate debt exposure and was in compliance with all debt covenants Long-Term Debt Breakdown | Debt Type | June 30, 2019 ($M) | September 30, 2018 ($M) | |:------------------------------------------------|:-------------------|:------------------------| | Senior Secured Term Loan A Facility due 2021 | 77.5 | — | | Senior Secured Term Loan B Facility due 2025 | 997.5 | — | | 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 of €650.0) | 739.2 | — | | 7.750% Senior Notes due 2027 | 600.0 | — | | Capital lease obligations | 47.4 | — | | Total long-term debt | 3,493.2 | 976.1 | - New debt issuances in 2019 included a $400.0 million revolving credit facility, $200.0 million Term Loan A, $1,000.0 million Term Loan B, $500.0 million USD Senior Notes, €650.0 million Euro Senior Notes, and $600.0 million Senior Notes due 2027[146][149][153] - The company had $1,075.0 million in variable rate debt outstanding at June 30, 2019, with interest rate swaps fixing LIBOR on $200.0 million at 2.03% and on $400.0 million (decreasing quarterly) at 2.47%[196] - As of June 30, 2019, the company was in compliance with all provisions and covenants associated with its debt agreements[158] (11) Pension Plans The company maintains several defined benefit pension plans, with the U.S. plan frozen in fiscal year 2015. For the nine months ended June 30, 2019, the U.S. plan reported a net periodic benefit of $(1.2) million, and International plans reported a net periodic benefit of $(0.4) million Net Periodic Pension (Benefit)/Cost (Nine Months Ended June 30) | Metric | 2019 U.S. ($M) | 2018 U.S. ($M) | 2019 International ($M) | 2018 International ($M) | |:--------------------------------------|:---------------|:---------------|:------------------------|:------------------------| | Service cost | — | — | 0.4 | 0.4 | | Interest cost | 15.3 | 14.1 | 2.3 | 3.2 | | Expected return on plan assets | (19.6) | (22.6) | (3.8) | (4.8) | | Amortization of unrecognized net losses | 3.1 | 3.3 | 0.7 | 1.6 | | Net periodic (benefit)/cost | (1.2) | (5.1) | (0.4) | 0.4 | - The U.S. pension plan was frozen in fiscal year 2015[163] - A pension plan was acquired as part of the Divestment Business with the Battery Acquisition and is included in Liabilities held for sale[168] (12) Shareholders' Equity The company repurchased 1.0 million common shares for $45.0 million during the nine months ended June 30, 2019. Common stock dividends of $0.30 per share were declared quarterly, totaling $61.4 million. Additionally, the company issued 4.7 million common shares for $205.3 million and 2.2 million shares of Series A Mandatory Convertible Preferred Stock (MCPS) for $199.5 million to fund the Auto Care Acquisition - The company repurchased 1,036,000 common shares for $45.0 million during the nine months ended June 30, 2019, at an average price of $43.46 per share[169] - Total common stock dividends declared for the nine months ended June 30, 2019, were $61.4 million, with quarterly dividends of $0.30 per share[172] - In January 2019, the company issued 4,687,498 shares of common stock, generating net proceeds of $205.3 million, and 5,278,921 shares to Spectrum as partial consideration for the Auto Care Acquisition, valued at $240.5 million[174][175] - In January 2019, the company issued 2,156,250 shares of Series A Mandatory Convertible Preferred Stock (MCPS), with net proceeds of $199.5 million, to fund the Auto Care Acquisition[180] - Dividends on MCPS are payable quarterly at an annual rate of 7.50%, with total declared dividends of $7.7 million and paid dividends of $4.0 million for the nine months ended June 30, 2019[182][184] (13) Financial Instruments and Risk Management Energizer uses derivatives solely for hedging identifiable exposures to currency, commodity, and interest rate risks, not for speculative purposes. The company employs cash flow hedges for foreign currency and zinc purchases, and interest rate swaps for variable rate debt. Derivatives not designated as hedges are used for balance sheet exposures - The company uses hedging instruments to reduce exposure to variability in cash flows associated with future purchases of certain materials and commodities, such as zinc[192][193] - Foreign currency risk is managed through forward currency contracts to hedge cash flow uncertainty of inventory purchases, with primary exposures in Euro, British pound, Canadian dollar, and Australian dollar[194][200] - Interest rate risk on variable rate debt is managed through interest rate swap agreements, fixing LIBOR on $200.0 million at 2.03% and on $400.0 million (decreasing quarterly) at 2.47%[196] Estimated Fair Values of Derivatives (June 30, 2019) | Derivative Type | Estimated Fair Value Asset/(Liability) ($M) | |:--------------------------------|:--------------------------------------------| | Foreign currency contracts | 1.3 | | Interest rate swaps | (3.9) | | Zinc contracts | (0.7) | | Foreign currency contracts (non-hedge) | (1.0) | (14) Accumulated Other Comprehensive (Loss)/Income Accumulated Other Comprehensive Loss (AOCI) increased slightly from $(241.8) million at September 30, 2018, to $(245.3) million at June 30, 2019. This change reflects foreign currency translation adjustments, pension activity, and gains/losses from zinc, foreign currency, and interest rate hedging contracts, with some reclassifications to earnings Changes in Accumulated Other Comprehensive (Loss)/Income (9 Months Ended June 30, 2019) | Component | Balance at Sep 30, 2018 ($M) | OCI before Reclassifications ($M) | Reclassifications to Earnings ($M) | Activity related to Discontinued Operations ($M) | Balance at Jun 30, 2019 ($M) | |:----------------------------------------|:-----------------------------|:----------------------------------|:-----------------------------------|:-------------------------------------------------|:-----------------------------| | Foreign Currency Translation Adjustments | (113.6) | 3.3 | — | 1.0 | (109.3) | | Pension Activity | (136.4) | (0.2) | 3.2 | — | (133.4) | | Zinc Contracts | — | (0.5) | — | 0.6 | 0.1 | | Foreign Currency Contracts | 3.3 | 2.9 | (5.2) | — | 1.0 | | Interest Rate Contracts | 4.9 | (8.3) | (0.3) | — | (3.7) | | Total | (241.8) | (2.8) | (2.3) | 1.6 | (245.3) | - Reclassifications to earnings for the nine months ended June 30, 2019, included $7.1 million from cash flow hedges (foreign currency and interest rate contracts) and $(3.8) million from pension items[222] (15) Supplemental Financial Statement Information This section provides detailed breakdowns of 'Other items, net', inventories, other current assets, property, plant and equipment, and other current and non-current liabilities, offering granular insights into specific balance sheet and income statement accounts Other Items, Net (Nine Months Ended June 30) | Item | 2019 ($M) | 2018 ($M) | |:----------------------------------------|:----------|:----------| | Interest income | (1.3) | (1.2) | | Interest income on restricted cash | (5.8) | — | | Foreign currency exchange (gain)/loss | 2.4 | 7.7 | | Pension benefit other than service costs | (2.1) | (5.1) | | Acquisition foreign currency loss/(gain) | (8.1) | (9.9) | | Settlement of acquired business hedging contracts | 1.5 | — | | Transition services agreement income | (0.8) | — | | Other | 0.3 | (0.6) | | Total Other items, net | (13.9)| (9.1) | Inventories (June 30, 2019 vs. September 30, 2018) | Category | June 30, 2019 ($M) | September 30, 2018 ($M) | |:-------------------------|:-------------------|:------------------------| | Raw materials and supplies | 85.6 | 40.0 | | Work in process | 143.2 | 86.5 | | Finished products | 295.5 | 196.6 | | Total inventories | 524.3 | 323.1 | Property, Plant and Equipment, Net (June 30, 2019 vs. September 30, 2018) | Category | June 30, 2019 ($M) | September 30, 2018 ($M) | |:-----------------------------|:-------------------|:------------------------| | Total gross property | 1,025.4 | 823.6 | | Accumulated depreciation | (664.4) | (656.9) | | Total property, plant and equipment, net | 361.0 | 166.7 | (16) Related Party Transactions Following the Battery and Auto Care Acquisitions, Energizer entered into transition service agreements (TSA) and a supply agreement with Spectrum. Spectrum owns 7.7% of Energizer's common shares as of June 30, 2019. These agreements involve mutual provision of back-office support services and supply of goods, resulting in associated expenses, income, and intercompany balances - Spectrum owns 7.7% of Energizer's outstanding common shares as of June 30, 2019, following the Auto Care Acquisition[227] - Energizer and Spectrum entered into transition service agreements (TSA) for back-office support, with Energizer incurring $10.7 million in SG&A expense and $0.7 million in COGS, and recording $0.8 million in income from reverse TSAs for the nine months ended June 30, 2019[230][232] - A supply agreement with Spectrum resulted in $9.2 million in expense for the nine months ended June 30, 2019[233] (17) Legal proceedings/contingencies and other obligations The company is involved in various legal proceedings in the ordinary course of business but believes that any resulting liability is not reasonably likely to be material to its financial position, results of operations, or cash flows. Additionally, Energizer had approximately $22.7 million in purchase obligations at June 30, 2019 - The company believes that its liability from pending legal proceedings is not reasonably likely to be material to its financial position, results of operations, or cash flows[236] - As of June 30, 2019, the company had approximately $22.7 million in purchase obligations for goods and services[237] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Energizer's financial condition and results of operations, including a discussion of non-GAAP measures, forward-looking statements, recent acquisitions and divestitures, operating highlights, segment performance, and liquidity and capital resources Non-GAAP Financial Measures Management uses several non-GAAP financial measures, such as Segment Profit, Adjusted Net Earnings From Continuing Operations, Adjusted Diluted Net Earnings From Continuing Operations Per Common Share (EPS), Organic growth, and Adjusted Selling, General & Administrative (SG&A) as a percent of sales, to provide additional meaningful comparisons and insights into ongoing operating performance, excluding non-recurring items and currency fluctuations - Non-GAAP measures exclude items not reflective of ongoing operating performance, such as acquisition and integration costs and the one-time impact of U.S. tax legislation[241] - Segment Profit excludes general corporate expenses, share-based compensation, acquisition and integration activities, amortization, R&D, gain on sale of real estate, interest expense, and other corporate items[242] - Organic measures adjust for the impact of acquisitions, changes in Argentina Operations (due to hyperinflation), and currency fluctuations[244][245][247] Forward-Looking Statements This section contains forward-looking statements that reflect expectations, estimates, or projections about future results, which are subject to known and unknown risks, uncertainties, and assumptions. Key factors that could cause actual results to differ materially include market conditions, integration challenges, divestiture risks, new product success, customer relationships, strategic initiatives, foreign currency impacts, commodity costs, regulatory changes, and debt compliance - Forward-looking statements are not guarantees of performance and are subject to known and unknown risks, uncertainties, and assumptions[249] - Key risk factors include the ability to integrate acquired businesses, realize projected results and synergies, and successfully close the Varta divestiture[249] - Other significant risks include market trends, ability to attract/retain customers, impact of foreign currency exchange rates, raw material costs, legislative changes, cyber-attacks, and compliance with debt covenants[249] Recent Acquisitions and Divestitures Energizer completed the Battery Acquisition ($2,000.0M) and Auto Care Acquisition ($1,250.0M) in early 2019, significantly boosting revenue but also incurring substantial acquisition and integration costs. The Varta consumer battery business is being divested, with its operations reported as discontinued. The Nu Finish Acquisition ($38.1M) also contributed to revenue - Battery Acquisition (Jan 2, 2019) for $2,000.0 million, contributed $109.1 million in revenue and $6.1 million in income before taxes for Q3 2019[252][254] - Auto Care Acquisition (Jan 28, 2019) for $1,250.0 million, contributed $135.6 million in revenue and $13.6 million in income before taxes for Q3 2019[255][256] - Nu Finish Acquisition (Jul 2, 2018) for $38.1 million, contributed $3.0 million in revenue for Q3 2019[257] Pre-tax Acquisition and Integration Costs | Period | Q3 2019 ($M) | 9M 2019 ($M) | Q3 2018 ($M) | 9M 2018 ($M) | |:-------------------|:-------------|:-------------|:-------------|:-------------| | Total Costs | 28.0 | 159.9 | 15.9 | 41.0 | | Cost of products sold | 12.4 | 44.1 | — | — | | SG&A | 15.1 | 63.1 | 22.4 | 44.6 | | Interest expense | — | 65.6 | 3.4 | 6.3 | Highlights / Operating Results Energizer reported a decrease in Net earnings from continuing operations and Adjusted diluted EPS for both the quarter and nine months ended June 30, 2019, despite significant net sales growth driven by acquisitions. Gross margin percentage declined due to the lower margin profile of acquired businesses and unfavorable currency. SG&A and interest expenses increased, largely due to acquisition-related costs and higher debt Net Earnings and Adjusted Diluted EPS from Continuing Operations | Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 | |:------------------------------------------------|:-------------|:-------------|:-------------|:-------------| | Net earnings from continuing operations | $9.2 | $23.8 | $17.7 | $92.0 | | Adjusted diluted net earnings per diluted share - continuing operations | $0.37 | $0.54 | $2.07 | $2.55 | Total Net Sales Growth Drivers | Driver | Q3 % Chg | 9M % Chg | |:---------------------------|:---------|:---------| | Organic | 3.6% | 2.3% | | Impact of Battery Acquisition | 27.8% | 15.6% | | Impact of Auto Care Acquisition | 34.5% | 16.4% | | Impact of Nu Finish Acquisition | 0.8% | 0.4% | | Change in Argentina operations | —% | (0.3)% | | Impact of currency | (1.9)% | (1.9)% | | Total Net Sales % Chg | 64.8%| 32.5%| - Gross margin percentage for Q3 2019 was 38.1% (40.0% excluding inventory step-up and integration costs), down from 44.8% in prior year, primarily due to the lower margin profile of acquired businesses and unfavorable foreign currencies[280] - Interest expense increased significantly to $51.9 million for Q3 2019 (from $17.7 million) and $177.3 million for 9M 2019 (from $47.6 million), driven by higher debt associated with acquisitions and related financing fees[287][288] Segment Results Both Americas and International segments experienced substantial net sales and segment profit growth for the quarter and nine months ended June 30, 2019, predominantly driven by the positive impact of recent acquisitions. Organic growth also contributed, while unfavorable foreign currency movements partially offset these gains Americas Segment Net Sales and Profit Growth Drivers (Q3 2019) | Driver | Net Sales % Chg | Segment Profit % Chg | |:---------------------------|:----------------|:---------------------| | Organic | 3.0% | 4.6% | | Impact of Battery Acquisition | 37.3% | 21.5% | | Impact of Auto Care Acquisition | 51.7% | 47.7% | | Impact of Nu Finish Acquisition | 1.2% | (0.2)% | | Change in Argentina | —% | (1.0)% | | Impact of currency | (0.5)% | (0.7)% | | Total % Chg | 92.7% | 71.9% | International Segment Net Sales and Profit Growth Drivers (Q3 2019) | Driver | Net Sales % Chg | Segment Profit % Chg | |:---------------------------|:----------------|:---------------------| | Organic | 4.6% | 16.0% | | Impact of Battery Acquisition | 12.7% | 19.3% | | Impact of Auto Care Acquisition | 7.2% | 4.3% | | Impact of Nu Finish Acquisition | 0.1% | 0.3% | | Impact of currency | (4.4)% | (14.1)% | | Total % Chg | 20.2% | 25.8% | - Global segment profit improved by 55.7% for the quarter and 24.1% for the nine months, with acquisitions contributing $49.5 million (Q3) and $89.3 million (9M)[306][309] General Corporate and Global Marketing Expenses General corporate and other expenses increased for both the quarter and nine months ended June 30, 2019, primarily due to costs related to acquisitions. However, legacy business expenses decreased due to lower deferred compensation expense and continuous improvement initiatives. Global marketing expenses remained relatively stable General Corporate and Global Marketing Expenses | Expense Category | Q3 2019 ($M) | Q3 2018 ($M) | 9M 2019 ($M) | 9M 2018 ($M) | |:-----------------------------------|:-------------|:-------------|:-------------|:-------------| | General corporate and other expenses | 29.9 | 24.7 | 78.3 | 71.0 | | Global marketing expense | 3.0 | 4.6 | 12.5 | 13.0 | | Total | 32.9 | 29.3 | 90.8 | 84.0 | | % of Net Sales | 5.1% | 7.5% | 5.1% | 6.3% | - General corporate and other expenses for the legacy business decreased by $3.2 million in Q3 and $7.1 million in 9M, driven by lower mark-to-market expense on deferred compensation and benefits from continuous improvement initiatives[314][316] Liquidity and Capital Resources Energizer's liquidity is focused on operating activities, working capital, strategic investments, and debt reduction. The company's cash position decreased significantly due to substantial cash used for acquisitions, which was largely funded by new debt and equity issuances. Operating cash flow declined due to working capital changes, while financing activities provided significant cash. The company also continued its common stock dividend and share repurchase programs - Cash and cash equivalents were $206.4 million at June 30, 2019, with approximately 96% held outside the U.S[319] - Cash flow from operating activities from continuing operations decreased by $157.6 million to $30.4 million for the nine months ended June 30, 2019, primarily due to working capital changes (increased receivables and inventory) and acquisition-related cash expenditures[325][326][328][329] - Net cash used by investing activities from continuing operations was $2,490.1 million for the nine months ended June 30, 2019, mainly for the Battery ($1,518.4 million) and Auto Care ($935.4 million) Acquisitions[330][331] - Net cash from financing activities from continuing operations was $1,328.5 million for the nine months ended June 30, 2019, driven by $1,800.0 million from debt issuance and $404.8 million from common and preferred stock issuances, partially offset by debt payments and dividends[333][334][335] Contractual Obligations (June 30, 2019) | Obligation Category | Total ($M) | < 1 year ($M) | 1-3 years ($M) | 3-5 years ($M) | > 5 years ($M) | |:-----------------------------------|:-----------|:--------------|:---------------|:---------------|:---------------| | Long-term debt, including current maturities | 3,514.2 | 10.0 | 97.5 | 20.0 | 3,386.7 | | Interest on long-term debt | 1,388.5 | 194.5 | 386.3 | 380.8 | 426.9 | | Operating leases | 164.7 | 22.3 | 29.9 | 87.8 | 24.7 | | Capital leases | 95.1 | 4.7 | 9.4 | 10.1 | 70.9 | | Purchase obligations and other | 22.7 | 22.1 | 0.6 | — | — | | Total | 5,246.2| 297.9 | 523.7 | 502.6 | 3,922.0 | Item 3. Quantitative and Qualitative Disclosures About Market Risk Energizer is exposed to market risks from changes in currency rates, commodity prices, and interest rates, which are managed through hedging instruments. The company uses cash flow hedges for foreign currency and zinc purchases, and interest rate swaps for variable rate debt. Additionally, Argentina's economy has been designated as highly inflationary, impacting financial statement translation Market Risk Sensitive Instruments and Positions The company uses derivatives to hedge identifiable exposures to foreign currency, commodity (zinc), and interest rate risks. Cash flow hedges are in place for forecasted inventory purchases and variable rate debt, while non-designated derivatives hedge balance sheet exposures. The designation of Argentina as a highly inflationary economy impacts the recognition of exchange gains and losses in current earnings - The company uses forward currency contracts as cash flow hedges to mitigate foreign currency risk on forecasted inventory purchases, with primary exposures to Euro, British pound, Canadian dollar, and Australian dollar[349][350] - Zinc purchases are hedged with cash flow contracts extending into 2020, with a pre-tax loss of $0.7 million recognized at June 30, 2019[354] - Interest rate risk on $1,075.0 million of variable rate debt is managed with interest rate swaps, fixing LIBOR on $200.0 million at 2.03% and on $400.0 million (decreasing quarterly) at 2.47%[356] - Effective July 1, 2018, Argentina's economy was designated as highly inflationary, requiring remeasurement of financial statements into USD and reflecting future exchange gains/losses from monetary assets/liabilities in current earnings[358] Item 4. Controls and Procedures The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2019, providing reasonable assurance of accurate and timely reporting. No material changes to internal control over financial reporting occurred during the quarter - Disclosure controls and procedures were effective as of June 30, 2019, providing reasonable assurance of achieving reporting objectives[359] - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2019[360] PART II — OTHER INFORMATION Item 1. Legal Proceedings The company is subject to various legal proceedings in the ordinary course of business. While these matters are often complex and protracted, management believes that any potential liability arising from them is not reasonably likely to be material to the company's financial position, results of operations, or cash flows, considering established accruals - The company is a party to legal proceedings and claims arising in the ordinary course of business[362] - Management believes that any liability from these proceedings is not reasonably likely to be material to the company's financial position, results of operations, or cash flows[362] Item 1A. Risk Factors This section updates the risk factors, highlighting new risks related to the acquired Battery and Auto Care Businesses, including operational dependencies (Dayton, Ohio facility), seasonal volatility, and regulatory changes concerning refrigerant gas R-134a. Significant risks also pertain to the successful closing of the Varta divestiture and the company's substantial debt levels, which could limit operational flexibility and financial capacity - The Acquired Auto Care Business's operations and profitability are highly dependent on the efficient operation of its Dayton, Ohio facility, which has experienced deficiencies and requires additional investment[364] - Sales of certain Acquired Businesses' products are subject to seasonal volatility, making forecasting difficult and exposing the company to risks from unfavorable weather conditions[365] - Changes in governmental regulations regarding the use of refrigerant gas R-134a could materially adversely affect the Acquired Auto Care Business's ability to sell aftermarket A/C products[368][369][370] - The company faces significant risks in successfully closing the divestiture of the Divestment Business, including failure to transfer liabilities, potential third-party claims, and disruption to ongoing business[372][373] - The company's substantial debt of approximately $3.5 billion at June 30, 2019, could adversely affect its business by limiting cash flow, imposing restrictive covenants, and increasing vulnerability to adverse economic conditions[378][379] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the quarter ended June 30, 2019, Energizer repurchased 1,036,000 shares of its common stock for $45.0 million at an average price of $43.46 per share under its existing authorization. As of August 6, 2019, 2.8 million shares remain available for repurchase Common Stock Repurchases (Q3 2019) | Period | Total Number of Shares Purchased | Average Price Per Share ($) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | |:-----------------|:---------------------------------|:----------------------------|:---------------------------------------------------------------------------------| | June 1 - June 30 | 1,036,356 | 43.46 | 1,036,000 | - As of August 6, 2019, 2.8 million shares remain available for repurchase under the 7.5 million share authorization approved in July 2015[344] Item 6. Exhibits This section provides a comprehensive index of exhibits filed with the Form 10-Q, including various agreements (e.g., Separation and Distribution, Tax Matters, Employee Matters, Transition Services, Acquisition Agreements) and corporate governance documents (e.g., Articles of Incorporation, Bylaws, Certificate of Designations) SIGNATURES This section contains the official signatures, certifying the due authorization and filing of the report on behalf of Energizer Holdings, Inc. by its Executive Vice President and Chief Financial Officer