Energizer (ENR) - 2022 Q1 - Quarterly Report

PART I — FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the company's unaudited condensed consolidated financial statements for the quarter ended December 31, 2021 Consolidated Statements of Earnings and Comprehensive Income (Condensed) Consolidated Statements of Earnings and Comprehensive Income (Condensed) (In millions, except per share data) | Metric | Q4 2021 | Q4 2020 | | :--- | :--- | :--- | | Net sales | $846.3 | $848.6 | | Gross profit | $311.6 | $337.9 | | Earnings before income taxes | $76.5 | $87.3 | | Net earnings | $60.0 | $67.1 | | Net earnings attributable to common shareholders | $56.0 | $63.1 | | Basic net earnings per common share | $0.84 | $0.92 | | Diluted net earnings per common share | $0.83 | $0.91 | | Total comprehensive income | $78.7 | $69.5 | Consolidated Balance Sheets (Condensed) Consolidated Balance Sheets (Condensed) (In millions) | Metric | Dec 31, 2021 | Sep 30, 2021 | | :--- | :--- | :--- | | Total current assets | $1,550.3 | $1,439.5 | | Total assets | $5,109.9 | $5,007.5 | | Total current liabilities | $1,015.5 | $946.4 | | Total liabilities | $4,700.5 | $4,651.8 | | Total shareholders' equity | $409.4 | $355.7 | | Total liabilities and shareholders' equity | $5,109.9 | $5,007.5 | Consolidated Statements of Cash Flows (Condensed) Consolidated Statements of Cash Flows (Condensed) (In millions) | Metric | Q4 2021 | Q4 2020 | | :--- | :--- | :--- | | Net cash (used by)/from operating activities | $(54.6) | $76.3 | | Net cash used by investing activities | $(24.0) | $(74.8) | | Net cash from/(used by) financing activities | $61.4 | $(955.2) | | Net decrease in cash, cash equivalents, and restricted cash | $(17.7) | $(944.2) | | Cash, cash equivalents, and restricted cash, end of period | $221.2 | $305.6 | Consolidated Statements of Shareholders' Equity (Condensed) Consolidated Statements of Shareholders' Equity (Condensed) (Amounts in millions) | Metric | Sep 30, 2021 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Shareholders' Equity | $355.7 | $409.4 | | Net earnings | — | $60.0 | | Dividends to common shareholders | — | $(20.1) | | Dividends to preferred shareholders | — | $(4.0) | | Other comprehensive income | — | $18.7 | Notes to Consolidated (Condensed) Financial Statements Description of Business and Basis of Presentation - Energizer Holdings, Inc is a global manufacturer, marketer, and distributor of primary batteries, portable lights, and auto care products[20][21][22] - The financial statements are condensed and prepared in accordance with Article 10 of Regulation S-X, with segment disclosures recast as of October 1, 2021[24] - The Company adopted ASU 2019-12 Income Taxes (Topic 740) as of October 1, 2021, which did not materially impact the financial statements[25] Revenue Recognition - Revenue is primarily generated from finished product sales, recognized when control transfers to the customer, typically upon delivery or pickup[27] - Sales are distributed globally through various retail channels, including mass merchandisers, food, drug, convenience stores, and e-commerce[26] Net Sales by Products and Markets (In millions) | Category | Q4 2021 | Q4 2020 | | :--- | :--- | :--- | | By Products: | | | | Batteries | $701.7 | $708.7 | | Auto Care | $106.1 | $104.7 | | Lights | $38.5 | $35.2 | | By Markets: | | | | North America | $508.9 | $516.9 | | Modern Markets | $165.3 | $174.5 | | Developing Markets | $115.4 | $108.3 | | Distributors Markets | $56.7 | $48.9 | | Total Net Sales | $846.3 | $848.6 | Acquisitions - The Formulations Acquisition was completed on December 1, 2020, for a cash purchase price of $51.2 million to enhance innovation capabilities[34] - Acquisition and integration costs totaled $16.5 million in Q1 fiscal 2022, down from $18.3 million in Q1 fiscal 2021[42][46] Formulations Acquisition Purchase Price Allocation (In millions) | Asset/Liability | Amount | | :--- | :--- | | Goodwill | $28.7 | | Other intangible assets, net | $20.5 | | Net assets acquired | $50.2 | Restructuring - The 2019 restructuring program, focused on manufacturing and distribution network integration, was substantially completed by December 31, 2021[48] - A new 2020 restructuring program, aimed at reorganizing the global supply chain, was also substantially completed by December 31, 2021[49] Total Restructuring Related Expense (In millions) | Program | Q4 2021 | Q4 2020 | | :--- | :--- | :--- | | 2019 Restructuring Program | $3.9 | $6.6 | | 2020 Restructuring Program | $1.4 | $4.0 | | Total | $5.3 | $10.6 | Earnings per share - For Q4 2021, the conversion of Mandatory Convertible Preferred Stock (MCPS) was not dilutive, and mandatory preferred stock dividends were included in the dilution calculation[63] Basic and Diluted Earnings Per Share (In millions, except per share data) | Metric | Q4 2021 | Q4 2020 | | :--- | :--- | :--- | | Net earnings attributable to common shareholders | $56.0 | $63.1 | | Weighted average common shares outstanding - Basic | 66.8 | 68.5 | | Basic net earnings per common share | $0.84 | $0.92 | | Weighted average common shares outstanding - Diluted | 67.1 | 73.5 | | Diluted net earnings per common share | $0.83 | $0.91 | Segments - As of October 1, 2021, Energizer changed its reportable operating segments from geographical to product groupings (Battery & Lights and Auto Care)[66] - Segment performance is evaluated based on segment operating profit, excluding general corporate expenses and other specified items[66] Net Sales and Segment Profit by Product Grouping (In millions) | Metric | Q4 2021 | Q4 2020 | | :--- | :--- | :--- | | Net Sales: | | | | Batteries & Lights | $740.2 | $743.9 | | Auto Care | $106.1 | $104.7 | | Total Net Sales | $846.3 | $848.6 | | Segment Profit: | | | | Batteries & Lights | $168.4 | $180.5 | | Auto Care | $(0.2) | $18.3 | | Total Segment Profit | $168.2 | $198.8 | Goodwill and intangible assets - Goodwill and indefinite-lived intangible assets are not amortized but are evaluated annually for impairment, with balances recast for new segments[74] Goodwill by Segment (In millions) | Segment | Oct 1, 2021 | Dec 31, 2021 | | :--- | :--- | :--- | | Batteries & Lights | $900.3 | $900.7 | | Auto Care | $153.5 | $152.6 | | Total | $1,053.8 | $1,053.3 | Total Other Intangible Assets, Net (In millions) | Category | Dec 31, 2021 | Sep 30, 2021 | | :--- | :--- | :--- | | Total Amortizable intangible assets | $490.6 | $505.6 | | Trademarks and trade names - indefinite lived | $1,365.6 | $1,365.7 | | Total Other intangible assets, net | $1,856.2 | $1,871.3 | Debt - The Company amended its Credit Agreement on December 31, 2021, increasing the 2020 Revolving Facility to $500.0 million[82] - As of December 31, 2021, the Company had $182.5 million outstanding under the 2020 Revolving Facility, with $309.5 million remaining available[84][88] Long-Term Debt Details (In millions) | Debt Type | Dec 31, 2021 | Sep 30, 2021 | | :--- | :--- | :--- | | Senior Secured Term Loan Facility due 2027 | $1,191.0 | $1,194.0 | | 4.750% Senior Notes due 2028 | $600.0 | $600.0 | | 4.375% Senior Notes due 2029 | $800.0 | $800.0 | | 3.50% Senior Notes due 2029 (Euro Notes of €650.0) | $739.1 | $752.7 | | Capital lease obligations | $43.6 | $44.3 | | Total long-term debt, including current maturities | $3,373.7 | $3,391.0 | | Less current portion | $(14.2) | $(14.3) | | Less unamortized debt premium and debt issuance fees | $(41.2) | $(43.3) | | Total long-term debt | $3,318.3 | $3,333.4 | Pension Plans - The Company operates several defined benefit pension plans for U.S. and international employees, with the U.S. plan frozen in fiscal year 2014[94] Net Periodic Pension (Benefit)/Cost (In millions) | Component | Q4 2021 (U.S.) | Q4 2020 (U.S.) | Q4 2021 (International) | Q4 2020 (International) | | :--- | :--- | :--- | :--- | :--- | | Service cost | $— | $— | $0.2 | $0.2 | | Interest cost | $3.2 | $3.2 | $0.5 | $0.4 | | Expected return on plan assets | $(5.7) | $(5.5) | $(0.8) | $(0.8) | | Amortization of unrecognized net losses | $1.6 | $1.8 | $0.1 | $0.4 | | Net periodic (benefit)/cost | $(0.9) | $(0.5) | $— | $0.2 | Shareholders' Equity - An Accelerated Share Repurchase (ASR) program in Q4 fiscal 2021 resulted in the delivery of approximately 2.0 million shares at an average price of $38.30[96][97] - Common stock dividends declared were $0.30 per share for Q1 and Q2 fiscal 2022[101][103] - Subsequent to the quarter, all outstanding MCPS automatically converted into approximately 4.7 million shares of common stock[104] Financial Instruments and Risk Management - The Company uses derivatives to manage market risks from currency rates, interest rates, and commodity prices, not for speculative purposes[106][109][110][111][115] - As of December 31, 2021, the Company had variable rate debt of $1,373.5 million, with an interest rate swap fixing LIBOR at 0.95% on a notional value of $700.0 million[115][116] Estimated Fair Values of Derivatives Designated as Cash Flow Hedges (In millions) | Derivative Type | Dec 31, 2021 (Asset) | Sep 30, 2021 (Asset) | | :--- | :--- | :--- | | Foreign currency contracts | $3.7 | $5.0 | | Interest rate swap | $17.0 | $11.7 | | Zinc contracts | $5.1 | $4.7 | | Total | $25.8 | $21.4 | Accumulated Other Comprehensive (Loss)/Income Changes in Accumulated Other Comprehensive (Loss)/Income (AOCI) (In millions) | Component | Sep 30, 2021 Balance | OCI before Reclassifications | Reclassifications to Earnings | Dec 31, 2021 Balance | | :--- | :--- | :--- | :--- | :--- | | Foreign Currency Translation Adjustments | $(109.8) | $12.3 | $— | $(97.5) | | Pension Activity | $(134.4) | $(0.1) | $— | $(133.2) | | Zinc Contracts | $3.6 | $2.3 | $(2.0) | $3.9 | | Foreign Currency Contracts | $3.6 | $0.9 | $(0.8) | $3.7 | | Interest Rate Contracts | $6.6 | $3.4 | $1.4 | $11.4 | | Total | $(230.4) | $18.8 | $(0.1) | $(211.7) | Reclassifications out of AOCI to Earnings (In millions) | AOCI Component | Q4 2021 Amount | Q4 2020 Amount | Affected Line Item | | :--- | :--- | :--- | :--- | | Foreign currency contracts | $(1.0) | $2.6 | Cost of products sold | | Interest rate contracts | $1.8 | $1.3 | Interest expense | | Zinc contracts | $(2.6) | $0.8 | Cost of products sold | | Amortization of defined benefit pension actuarial loss | $1.7 | $2.2 | Other items, net (not shown in table) | Supplemental Financial Statement Information Other Items, Net (In millions) | Component | Q4 2021 | Q4 2020 | | :--- | :--- | :--- | | Interest income | $(0.2) | $(0.1) | | Foreign currency exchange loss | $1.3 | $1.3 | | Pension benefit other than service costs | $(1.1) | $(0.5) | | Other | $0.2 | $0.1 | | Total Other items, net | $0.2 | $0.8 | Inventories (In millions) | Component | Dec 31, 2021 | Sep 30, 2021 | | :--- | :--- | :--- | | Raw materials and supplies | $138.8 | $118.8 | | Work in process | $208.3 | $206.3 | | Finished products | $408.8 | $403.2 | | Total inventories | $755.9 | $728.3 | Other Current Liabilities (In millions) | Component | Dec 31, 2021 | Sep 30, 2021 | | :--- | :--- | :--- | | Accrued advertising, sales promotion and allowances | $31.5 | $19.5 | | Accrued trade allowances | $75.7 | $57.3 | | Accrued salaries, vacations and incentive compensation | $31.3 | $65.4 | | Accrued interest expense | $11.4 | $16.5 | | Restructuring reserve | $2.2 | $5.7 | | Income taxes payable | $48.3 | $30.3 | | Other | $182.2 | $162.1 | | Total other current liabilities | $382.6 | $356.8 | Legal proceedings/contingencies and other obligations - The Company is subject to various legal proceedings, with current liabilities not deemed material to its financial position or results[146][149] - As of December 31, 2021, the Company had approximately $33.2 million in purchase obligations under supply and service contracts[150] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition, operating results, and liquidity, covering performance, risks, and non-GAAP measures Forward-Looking Statements - The document contains forward-looking statements reflecting expectations about future results, sales, margins, costs, and earnings[154] - These statements are subject to risks including economic conditions, competition, COVID-19 impacts, and supply chain disruptions[154] Non-GAAP Financial Measures - Management uses non-GAAP financial measures to provide meaningful comparisons by excluding items not reflective of ongoing operations[158] - Key non-GAAP measures include Segment Profit, Adjusted Net Earnings, Adjusted Diluted EPS, and Organic sales[160][161][162][163][164][165] COVID-19 - The COVID-19 pandemic continued to pose significant risks in Q1 fiscal 2022, impacting demand and disrupting the global supply chain[166][167] - The Company faced higher operating costs due to elevated commodity prices and unprecedented transportation cost pressures[168] - Labor availability remains a major challenge across most U.S. sites, leading to increased investment in incremental safety stock[169] Acquisition and Integration Costs - SG&A expenses for Q4 2021 were primarily driven by integration of acquired IT systems, consulting costs, and retention-related compensation[175] Pre-tax Acquisition and Integration Costs (In millions) | Expense Category | Q4 2021 | Q4 2020 | | :--- | :--- | :--- | | Costs of products sold | $6.0 | $7.7 | | Selling, general and administrative expense | $9.4 | $10.4 | | Research and development expense | $1.1 | $0.1 | | Other items, net | $— | $0.1 | | Total | $16.5 | $18.3 | Restructuring Costs - Both the 2019 and 2020 restructuring programs were substantially completed by December 31, 2021[177][178] - The Company expects to achieve estimated total cost savings of $55 million to $60 million by the end of the current fiscal year[182] Total Pre-tax Restructuring Expense (In millions) | Period | Q4 2021 | Q4 2020 | | :--- | :--- | :--- | | Total | $5.3 | $10.6 | Highlights / Operating Results - Net sales decreased by $2.3 million (0.3%) YoY, as pricing actions were offset by unfavorable currency impacts and lapping prior-year demand[188][189][190] - Adjusted gross margin percentage decreased by 320 basis points YoY, driven by higher operating and transportation costs[191][193] Key Financial Results (In millions, except per share data) | Metric | Q4 2021 | Q4 2020 | | :--- | :--- | :--- | | Net earnings | $60.0 | $67.1 | | Diluted net earnings per common share | $0.83 | $0.91 | | Adjusted diluted net earnings per common share | $1.03 | $1.17 | | Total Net sales | $846.3 | $848.6 | | Reported Gross margin percentage | 36.8% | 39.8% | | Adjusted Gross margin percentage | 37.5% | 40.7% | | Selling, general, and administrative expense (SG&A) | $122.1 | $124.1 | | Adjusted SG&A | $111.6 | $113.7 | | Advertising and sales promotion expense (A&P) | $51.7 | $49.6 | | Research and Development (R&D) | $8.9 | $7.6 | | Interest expense | $37.0 | $47.3 | | Loss on extinguishment of debt | $— | $5.7 | | Effective tax rate | 21.6% | 23.1% | | Adjusted effective tax rate | 21.6% | 22.6% | Segment Results - Battery & Lights organic net sales declined by 0.2% due to an expected decrease in battery demand compared to strong prior-year sales[202][203] - Auto Care net sales increased by 1.3% YoY, driven by new distribution and price increases[202][205] - Global reported segment profit decreased by 15.4% YoY, with organic operating profit declining by 17.3% due to lower sales and higher costs[207] - Auto Care segment profit decreased significantly due to increased product input costs negatively impacting gross margin[208] Segment Profit Change (In millions) | Segment | Q4 2021 Change | Q4 2021 % Change | | :--- | :--- | :--- | | Batteries & Lights | $(12.1) | (6.7)% | | Auto Care | $(18.5) | (101.1)% | | Total Segment Profit | $(30.6) | (15.4)% | General Corporate - The decrease in general corporate expenses was primarily driven by reduced stock compensation expense, partially offset by higher IT spending[210] General Corporate and Other Expenses (In millions) | Metric | Q4 2021 | Q4 2020 | | :--- | :--- | :--- | | General corporate and other expenses | $21.7 | $24.0 | | % of Net Sales | 2.6% | 2.8% | Liquidity and Capital Resources - Future cash needs will focus on operating activities, strategic investments, and debt reductions, funded by operations and capital markets[211] - As of December 31, 2021, the Company had $221.2 million in cash and cash equivalents, with approximately 98% held outside the U.S[212][213] - The Company was in compliance with all debt covenants as of December 31, 2021, and expects to remain so for the next twelve months[215] Operating Activities - The $130.9 million decrease in cash flow from operating activities was primarily driven by a $109 million change in working capital[216] - Despite negative cash flow from operations in the quarter, the Company anticipates positive cash flow for the full fiscal year 2022[218] Cash Flow from Operating Activities (In millions) | Metric | Q4 2021 | Q4 2020 | | :--- | :--- | :--- | | Net cash (used by)/from operating activities | $(54.6) | $76.3 | Investing Activities - Total investing cash outflows of $55 million to $65 million are anticipated for capital expenditures in fiscal 2022[220] Net Cash Used by Investing Activities (In millions) | Metric | Q4 2021 | Q4 2020 | | :--- | :--- | :--- | | Net cash used by investing activities | $(24.0) | $(74.8) | | Capital expenditures | $(24.4) | $(8.4) | | Acquisitions, net of cash acquired and working capital settlements | $0.4 | $(66.4) | Financing Activities - Q4 2021 financing activities included a $94.2 million net increase in short-term debt and $2.5 million in debt issuance costs[221] - Q4 2020 financing activities were significantly impacted by debt refinancing, including $550.0 million in debt issuance and $1,383.3 million in payments[222][224] Net Cash from/(used by) Financing Activities (In millions) | Metric | Q4 2021 | Q4 2020 | | :--- | :--- | :--- | | Net cash from/(used by) financing activities | $61.4 | $(955.2) | | Net increase in debt with original maturities of 90 days or less | $94.2 | $1.2 | | Dividends paid on common stock | $(20.5) | $(22.7) | | Dividends paid on mandatory convertible preferred stock | $(4.0) | $(4.0) | | Common stock purchased | $— | $(21.3) | Dividends - The Board declared a cash dividend of $0.30 per common share for Q1 and Q2 fiscal 2022, with all MCPS subsequently converting to common stock[225][226] Share Repurchases - An Accelerated Share Repurchase (ASR) program in Q4 fiscal 2021 resulted in the acquisition of approximately 2.0 million shares at an average price of $38.30[227] - Future share repurchases will be determined by the Board based on market conditions and capital allocation objectives[228][229] Other Matters Environmental Matters - Accrued environmental costs were $9.5 million at December 31, 2021, and are not expected to materially affect the Company's financial position[231] Contractual Obligations - The Company has long-term debt obligations of $3,330.1 million, with $12.0 million due within the next twelve months[233] - Material future purchase commitments for goods and services total $33.2 million[235] - Total future operating and finance lease payments are $165.0 million and $84.0 million, respectively[237] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to currency, commodity, and interest rate risks and its strategies for managing them Market Risk Sensitive Instruments and Positions - The Company's market risk arises from potential losses due to adverse changes in currency rates, commodity prices, and interest rates[238] Derivatives Designated as Cash Flow Hedging Relationships - Energizer uses forward currency contracts to hedge cash flow uncertainty from forecasted inventory purchases[241] - Unrealized pre-tax gains on these forward currency contracts were $3.7 million at December 31, 2021[241] Derivatives Not Designated as Cash Flow Hedging Relationships - Foreign currency derivative contracts not designated as cash flow hedges are used to hedge existing balance sheet exposures[243] - The change in fair value of these contracts resulted in a $1.9 million gain in Q4 2021, compared to a $0.9 million loss in Q4 2020[243] Commodity Price Exposure - The Company uses zinc contracts to reduce exposure to cash flow variability from future zinc purchases[244][245] - The pre-tax unrealized gain on zinc contracts was $5.1 million at December 31, 2021[245] Interest Rate Exposure - Energizer has interest rate risk on its variable rate debt, which totaled $1,373.5 million at December 31, 2021[246] - An interest rate swap fixed the variable benchmark component (LIBOR) at 0.95% on $700.0 million of variable rate debt[248][249] - For Q4 2021, the weighted average interest rate on variable rate debt, inclusive of the interest rate swap, was 2.94%[249] Argentina Currency Exposure and Hyperinflation - Effective July 1, 2018, Argentina's economy was designated as highly inflationary, requiring financial statements to be remeasured into U.S. dollars[250] - The ongoing impact of highly inflationary accounting is difficult to determine as it depends on exchange rate movements[250] Item 4. Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and internal control over financial reporting - The CEO and CFO concluded that disclosure controls and procedures were effective as of December 31, 2021[251] - No material changes to the Company's internal control over financial reporting occurred during the quarter ended December 31, 2021[252] PART II — OTHER INFORMATION Item 1. Legal Proceedings The company addresses its involvement in legal proceedings, concluding that potential liabilities are not expected to be material - The Company is party to legal proceedings and claims in various jurisdictions, with accruals established for probable and estimable losses[254] - Based on current information, any liability from pending legal claims is not reasonably likely to be material to the Company's financial position[254] Item 1A. Risk Factors This section notes no material changes to the risk factors disclosed in the company's most recent Annual Report on Form 10-K - There have been no material changes to the risk factors previously discussed in the Company's Annual Report on Form 10-K filed on November 16, 2021[255] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on the company's equity security purchases during the first quarter of fiscal 2022 - The Company acquired 450,522 shares in Q1 fiscal 2022 as part of the $75.0 million Accelerated Share Repurchase (ASR) program[258] - 58,059 shares were purchased during the quarter to satisfy tax withholding obligations related to restricted stock vesting[258] Purchases of Equity Securities (Q1 Fiscal 2022) | Period | Total Number of Shares Purchased | Average Price Per Share | | :--- | :--- | :--- | | October 1 - October 31 | 140 | $39.64 | | November 1 - November 30 | 508,441 | $33.93 | | December 1 - December 31 | — | — | | Total | 508,581 | $33.93 | Item 6. Exhibits This section provides an index of exhibits filed with the Form 10-Q, including corporate governance and credit agreement documents - The exhibit index lists various documents, including corporate governance documents, credit agreements, and amendments[261] - It also includes certifications of periodic financial reports by the CEO and CFO pursuant to the Sarbanes-Oxley Act of 2002[261]