ENERGIZER HOLDINGS, INC. - Quarter Report: 2022 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 10-Q
_______________________________
| (Mark One) | |||||
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended June 30, 2022
Or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from to
Commission File Number: 001-36837
____________________________________________________________________________________________________________
ENERGIZER HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
| Missouri | 36-4802442 | ||||||||||
| (State or other jurisdiction of | (I. R. S. Employer | ||||||||||
| incorporation or organization) | Identification No.) | ||||||||||
| 533 Maryville University Drive | |||||||||||
| St. Louis, | Missouri | 63141 | |||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
| (314) | 985-2000 | ||||||||||
| (Registrant’s telephone number, including area code) | |||||||||||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common Stock, par value $.01 per share | ENR | New York Stock Exchange | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | |||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||
| Emerging growth company | ☐ | |||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares of Energizer Holdings, Inc. common stock, $.01 par value, outstanding as of the close of business on August 4, 2022: 71,254,741.
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| INDEX | |||||
| Page | |||||
| PART I — FINANCIAL INFORMATION | |||||
| Item 1. Financial Statements (Unaudited) | |||||
Consolidated Statements of Earnings and Comprehensive Income (Condensed) for the Quarters and Nine Months Ended June 30, 2022 and 2021 | |||||
Consolidated Balance Sheets (Condensed) as of June 30, 2022 and September 30, 2021 | |||||
Consolidated Statements of Cash Flows (Condensed) for the Nine Months Ended June 30, 2022 and 2021 | |||||
Consolidated Statements of Shareholders' Equity (Condensed) for the Nine Months Ended June 30, 2022 and 2021 | |||||
| Notes to Consolidated (Condensed) Financial Statements | |||||
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | |||||
| Item 4. Controls and Procedures | |||||
| PART II — OTHER INFORMATION | |||||
| Item 1. Legal Proceedings | |||||
| Item 1A. Risk Factors | |||||
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | |||||
| Item 6. Exhibits | |||||
| EXHIBIT INDEX | |||||
| SIGNATURES | |||||
3
ENERGIZER HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(Condensed)
(In millions, except per share data - Unaudited)
| For the Quarters Ended June 30, | For the Nine Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net sales | $ | 728.0 | $ | 721.8 | $ | 2,259.7 | $ | 2,255.5 | |||||||||||||||
| Cost of products sold | 444.0 | 448.5 | 1,425.7 | 1,373.8 | |||||||||||||||||||
| Gross profit | 284.0 | 273.3 | 834.0 | 881.7 | |||||||||||||||||||
| Selling, general and administrative expense | 118.9 | 117.5 | 364.4 | 365.4 | |||||||||||||||||||
| Advertising and sales promotion expense | 38.5 | 44.1 | 109.8 | 120.8 | |||||||||||||||||||
| Research and development expense | 8.5 | 8.2 | 25.3 | 24.8 | |||||||||||||||||||
| Amortization of intangible assets | 15.4 | 15.2 | 45.8 | 46.0 | |||||||||||||||||||
| Interest expense | 41.1 | 38.6 | 116.4 | 125.0 | |||||||||||||||||||
| Loss on extinguishment of debt | — | 27.6 | — | 103.3 | |||||||||||||||||||
| Other items, net | (3.5) | (1.5) | 2.7 | (0.8) | |||||||||||||||||||
| Earnings before income taxes | 65.1 | 23.6 | 169.6 | 97.2 | |||||||||||||||||||
| Income tax provision | 12.7 | 2.8 | 38.2 | 19.5 | |||||||||||||||||||
| Net earnings | 52.4 | 20.8 | 131.4 | 77.7 | |||||||||||||||||||
| Mandatory preferred stock dividends | — | (4.0) | (4.0) | (12.1) | |||||||||||||||||||
| Net earnings attributable to common shareholders | $ | 52.4 | $ | 16.8 | $ | 127.4 | $ | 65.6 | |||||||||||||||
| Basic net earnings per common share | $ | 0.73 | $ | 0.25 | $ | 1.83 | $ | 0.96 | |||||||||||||||
| Diluted net earnings per common share | $ | 0.73 | $ | 0.24 | $ | 1.82 | $ | 0.95 | |||||||||||||||
| Weighted average shares of common stock - Basic | 71.3 | 68.4 | 69.5 | 68.4 | |||||||||||||||||||
| Weighted average shares of common stock - Diluted | 71.7 | 68.6 | 69.9 | 68.7 | |||||||||||||||||||
| Statements of Comprehensive Income: | |||||||||||||||||||||||
| Net earnings | $ | 52.4 | $ | 20.8 | $ | 131.4 | $ | 77.7 | |||||||||||||||
| Other comprehensive (loss)/income, net of tax expense/(benefit) | |||||||||||||||||||||||
| Foreign currency translation adjustments | (5.9) | (1.4) | 29.1 | 24.8 | |||||||||||||||||||
Pension activity, net of tax of $0.4 and $1.3 for the quarter and nine months ended June 30, 2022, respectively, and $0.0 and $1.3 for the quarter and nine months ended June 30, 2021, respectively. | 2.7 | 1.4 | 5.8 | 3.4 | |||||||||||||||||||
Deferred gain/(loss) on hedging activity, net of tax of $2.2 and $11.6 for the quarter and nine months ended June 30, 2022, respectively and $(1.1) and $4.7 for the quarter and nine months ended June 30, 2021, respectively. | 7.3 | (3.6) | 37.6 | 15.2 | |||||||||||||||||||
| Total comprehensive income | $ | 56.5 | $ | 17.2 | $ | 203.9 | $ | 121.1 | |||||||||||||||
The above financial statements should be read in conjunction with the Notes to Consolidated (Condensed) Financial Statements (Unaudited).
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ENERGIZER HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Condensed)
(In millions - Unaudited)
| Assets | June 30, 2022 | September 30, 2021 | |||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 199.5 | $ | 238.9 | |||||||
Trade receivables, less allowance for doubtful accounts of $2.3 and $2.9, respectively | 346.4 | 292.9 | |||||||||
| Inventories | 901.8 | 728.3 | |||||||||
| Other current assets | 193.3 | 179.4 | |||||||||
| Total current assets | 1,641.0 | 1,439.5 | |||||||||
| Property, plant and equipment, net | 370.5 | 382.9 | |||||||||
| Operating lease assets | 102.7 | 112.3 | |||||||||
| Goodwill | 1,034.9 | 1,053.8 | |||||||||
| Other intangible assets, net | 1,837.8 | 1,871.3 | |||||||||
| Deferred tax asset | 19.7 | 21.7 | |||||||||
| Other assets | 176.0 | 126.0 | |||||||||
| Total assets | $ | 5,182.6 | $ | 5,007.5 | |||||||
| Liabilities and Shareholders' Equity | |||||||||||
| Current liabilities | |||||||||||
| Current maturities of long-term debt | $ | 12.0 | $ | 12.0 | |||||||
| Current portion of capital leases | 0.6 | 2.3 | |||||||||
| Notes payable | 61.4 | 105.0 | |||||||||
| Accounts payable | 372.8 | 454.8 | |||||||||
| Current operating lease liabilities | 15.4 | 15.5 | |||||||||
| Other current liabilities | 311.2 | 356.8 | |||||||||
| Total current liabilities | 773.4 | 946.4 | |||||||||
| Long-term debt | 3,544.6 | 3,333.4 | |||||||||
| Operating lease liabilities | 92.1 | 102.3 | |||||||||
| Deferred tax liability | 102.6 | 91.3 | |||||||||
| Other liabilities | 170.2 | 178.4 | |||||||||
| Total liabilities | 4,682.9 | 4,651.8 | |||||||||
| Shareholders' equity | |||||||||||
| Common stock | 0.8 | 0.7 | |||||||||
| Mandatory convertible preferred stock | — | — | |||||||||
| Additional paid-in capital | 847.7 | 832.0 | |||||||||
| Retained earnings | 58.7 | (5.0) | |||||||||
| Treasury stock | (249.6) | (241.6) | |||||||||
| Accumulated other comprehensive loss | (157.9) | (230.4) | |||||||||
| Total shareholders' equity | 499.7 | 355.7 | |||||||||
| Total liabilities and shareholders' equity | $ | 5,182.6 | $ | 5,007.5 | |||||||
The above financial statements should be read in conjunction with the Notes to Consolidated (Condensed) Financial Statements (Unaudited).
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ENERGIZER HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Condensed)
(In millions - Unaudited)
| For the Nine Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash Flow from Operating Activities | |||||||||||
| Net earnings | $ | 131.4 | $ | 77.7 | |||||||
| Non-cash integration and restructuring charges | 3.0 | 4.5 | |||||||||
| Depreciation and amortization | 89.0 | 88.7 | |||||||||
| Deferred income taxes | (0.7) | 2.1 | |||||||||
| Share-based compensation expense | 9.9 | 13.3 | |||||||||
| Gain on capital lease termination | (4.5) | — | |||||||||
| Loss on extinguishment of debt | — | 103.3 | |||||||||
| Non-cash charges for Brazil flood | 9.2 | — | |||||||||
| Non-cash charges for exiting the Russian market | 13.4 | — | |||||||||
| Non-cash items included in income, net | 12.4 | 12.8 | |||||||||
| Other, net | 0.9 | (3.5) | |||||||||
| Changes in current assets and liabilities used in operations | (370.2) | (281.4) | |||||||||
| Net cash (used by)/from operating activities | (106.2) | 17.5 | |||||||||
| Cash Flow from Investing Activities | |||||||||||
| Capital expenditures | (65.8) | (42.7) | |||||||||
| Proceeds from sale of assets | 0.5 | — | |||||||||
| Acquisition of intangible assets | (14.6) | — | |||||||||
| Acquisitions, net of cash acquired and working capital settlements | 1.0 | (67.2) | |||||||||
| Net cash used by investing activities | (78.9) | (109.9) | |||||||||
| Cash Flow from Financing Activities | |||||||||||
| Cash proceeds from issuance of debt with original maturities greater than 90 days | 300.0 | 1,982.6 | |||||||||
| Payments on debt with maturities greater than 90 days | (10.6) | (2,770.2) | |||||||||
| Net (decrease)/increase in debt with original maturities of 90 days or less | (43.8) | 106.6 | |||||||||
| Payments to terminate capital lease obligations | (5.1) | — | |||||||||
| Premiums paid on extinguishment of debt | — | (141.1) | |||||||||
| Debt issuance costs | (7.6) | (27.6) | |||||||||
| Payment of contingent consideration | — | (3.9) | |||||||||
| Dividends paid on common stock | (64.1) | (63.8) | |||||||||
| Dividends paid on mandatory convertible preferred stock | (8.1) | (12.1) | |||||||||
| Common stock purchased | — | (21.3) | |||||||||
| Taxes paid for withheld share-based payments | (2.3) | (6.7) | |||||||||
| Net cash from/(used by) financing activities | 158.4 | (957.5) | |||||||||
| Effect of exchange rate changes on cash | (12.7) | 7.8 | |||||||||
| Net decrease in cash, cash equivalents, and restricted cash | (39.4) | (1,042.1) | |||||||||
| Cash, cash equivalents, and restricted cash, beginning of period | 238.9 | 1,249.8 | |||||||||
| Cash, cash equivalents, and restricted cash, end of period | $ | 199.5 | $ | 207.7 | |||||||
The above financial statements should be read in conjunction with the Notes to Consolidated (Condensed) Financial Statements (Unaudited).
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ENERGIZER HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Condensed)
(Amounts in millions, Shares in thousands - Unaudited)
| Number of Shares | Amount | |||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Preferred Stock | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive (Loss)/Income | Treasury Stock | Total Shareholders' Equity | ||||||||||||||||||||||||
| September 30, 2021 | 2,156 | 66,864 | $ | — | $ | 0.7 | $ | 832.0 | $ | (5.0) | $ | (230.4) | $ | (241.6) | $ | 355.7 | ||||||||||||||||
| Net earnings | — | — | — | — | — | 60.0 | — | — | 60.0 | |||||||||||||||||||||||
| Share-based payments | — | — | — | — | 1.3 | — | — | — | 1.3 | |||||||||||||||||||||||
| Common stock purchased | — | (451) | — | — | 15.0 | — | — | (15.0) | — | |||||||||||||||||||||||
| Activity under stock plans | — | 133 | — | — | (8.3) | — | — | 6.1 | (2.2) | |||||||||||||||||||||||
Dividends to common shareholders ($0.30 per share) | — | — | — | — | — | (20.1) | — | — | (20.1) | |||||||||||||||||||||||
Dividends to preferred shareholders ($1.875 per share) | — | — | — | — | — | (4.0) | — | — | (4.0) | |||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 18.7 | — | 18.7 | |||||||||||||||||||||||
| December 31, 2021 | 2,156 | 66,546 | $ | — | $ | 0.7 | $ | 840.0 | $ | 30.9 | $ | (211.7) | $ | (250.5) | $ | 409.4 | ||||||||||||||||
| Net earnings | — | — | — | — | — | 19.0 | — | — | 19.0 | |||||||||||||||||||||||
| Share-based payments | — | — | — | — | 5.1 | — | — | — | 5.1 | |||||||||||||||||||||||
| Conversion of preferred stock to common stock | (2,156) | 4,687 | — | 0.1 | — | — | — | — | 0.1 | |||||||||||||||||||||||
| Activity under stock plans | — | 17 | — | — | (0.7) | (0.1) | — | 0.7 | (0.1) | |||||||||||||||||||||||
Dividends to common shareholders ($0.30 per share) | — | — | — | — | — | (21.9) | — | — | (21.9) | |||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 49.7 | — | 49.7 | |||||||||||||||||||||||
| March 31, 2022 | — | 71,250 | $ | — | $ | 0.8 | $ | 844.4 | $ | 27.9 | $ | (162.0) | $ | (249.8) | $ | 461.3 | ||||||||||||||||
| Net earnings | — | — | — | — | — | 52.4 | — | — | 52.4 | |||||||||||||||||||||||
| Share-based payments | — | — | — | — | 3.5 | — | — | — | 3.5 | |||||||||||||||||||||||
| Activity under stock plans | — | 4 | — | — | (0.2) | — | 0.2 | — | ||||||||||||||||||||||||
Dividends to common shareholders ($0.30 per share) | — | — | — | — | — | (21.6) | — | — | (21.6) | |||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 4.1 | — | 4.1 | |||||||||||||||||||||||
| June 30, 2022 | — | 71,254 | $ | — | $ | 0.8 | $ | 847.7 | $ | 58.7 | $ | (157.9) | $ | (249.6) | $ | 499.7 | ||||||||||||||||
The above financial statements should be read in conjunction with the Notes to Consolidated (Condensed) Financial Statement
(Unaudited).
7
ENERGIZER HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Condensed)
(Amounts in millions, Shares in thousands - Unaudited)
| Number of Shares | Amount | |||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Preferred Stock | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive (Loss)/Income | Treasury Stock | Total Shareholders' Equity | ||||||||||||||||||||||||
| September 30, 2020 | 2,156 | 68,518 | $ | — | $ | 0.7 | $ | 859.2 | $ | (66.2) | $ | (307.7) | $ | (176.9) | $ | 309.1 | ||||||||||||||||
| Net earnings | — | — | — | — | — | 67.1 | — | — | 67.1 | |||||||||||||||||||||||
| Share-based payments | — | — | — | — | 4.0 | — | — | — | 4.0 | |||||||||||||||||||||||
| Common stock purchased | — | (500) | — | — | — | — | — | (21.3) | (21.3) | |||||||||||||||||||||||
| Activity under stock plans | — | 314 | — | — | (20.6) | (0.9) | — | 14.8 | (6.7) | |||||||||||||||||||||||
| Deferred compensation plan | — | 22 | — | — | (1.0) | — | — | 1.0 | — | |||||||||||||||||||||||
Dividends to common shareholders ($0.30 per share) | — | — | — | — | — | (21.0) | — | — | (21.0) | |||||||||||||||||||||||
Dividends to preferred shareholders ($1.875 per share) | — | — | — | — | — | (4.0) | — | — | (4.0) | |||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 2.4 | — | 2.4 | |||||||||||||||||||||||
| December 31, 2020 | 2,156 | 68,354 | $ | — | $ | 0.7 | $ | 841.6 | $ | (25.0) | $ | (305.3) | $ | (182.4) | $ | 329.6 | ||||||||||||||||
| Net loss | — | — | — | — | — | (10.2) | — | — | (10.2) | |||||||||||||||||||||||
| Share-based payments | — | — | — | — | 5.4 | — | — | — | 5.4 | |||||||||||||||||||||||
| Activity under stock plans | — | 12 | — | — | (0.6) | — | — | 0.6 | — | |||||||||||||||||||||||
Dividends to common shareholders ($0.30 per share) | — | — | — | — | — | (20.9) | — | — | (20.9) | |||||||||||||||||||||||
Dividends to preferred shareholders ($1.875 per share) | — | — | — | — | — | (4.1) | — | — | (4.1) | |||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 44.6 | — | 44.6 | |||||||||||||||||||||||
| March 31, 2021 | 2,156 | 68,366 | $ | — | $ | 0.7 | $ | 846.4 | $ | (60.2) | $ | (260.7) | $ | (181.8) | $ | 344.4 | ||||||||||||||||
| Net earnings | — | — | — | — | — | 20.8 | — | — | 20.8 | |||||||||||||||||||||||
| Share-based payments | — | — | — | — | 3.9 | — | — | — | 3.9 | |||||||||||||||||||||||
| Activity under stock plans | — | 1 | — | — | — | — | — | — | — | |||||||||||||||||||||||
Dividends to common shareholders ($0.30 per share) | — | — | — | — | — | (20.9) | — | — | (20.9) | |||||||||||||||||||||||
Dividends to preferred shareholders ($1.875 per share) | — | — | — | — | — | (4.0) | — | — | (4.0) | |||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (3.6) | — | (3.6) | |||||||||||||||||||||||
| June 30, 2021 | 2,156 | 68,367 | $ | — | $ | 0.7 | $ | 850.3 | $ | (64.3) | $ | (264.3) | $ | (181.8) | $ | 340.6 | ||||||||||||||||
The above financial statements should be read in conjunction with the Notes to Consolidated (Condensed) Financial Statement (Unaudited).
8
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)
(1) Description of Business and Basis of Presentation
Description of Business - Energizer Holdings, Inc. and its subsidiaries (Energizer or the Company) is a global manufacturer, marketer and distributor of primary batteries, portable lights, and auto care appearance, performance, refrigerants and fragrance products.
Batteries and lights are sold under the Energizer®, Eveready®, Rayovac® and Varta® brand names following the 2019 acquisition of Spectrum Holdings, Inc.'s (Spectrum) global battery, lighting, and portable power business (Battery Acquisition). Energizer offers batteries using lithium, alkaline, carbon zinc, nickel metal hydride, zinc air and silver oxide constructions.
Automotive appearance, performance, refrigerants and fragrance products are sold under the Refresh Your Car!®, California Scents®, Driven®, Bahama & Co.®, LEXOL®, Eagle One®, Armor All®, STP®, and A/C PRO® brands following the 2019 acquisition of Spectrum's global auto care business (Auto Care Acquisition).
Basis of Presentation - The accompanying Consolidated (Condensed) Financial Statements include the accounts of Energizer and its subsidiaries. All significant intercompany transactions are eliminated. Energizer has no material equity method investments, variable interests or non-controlling interests.
The accompanying Consolidated (Condensed) Financial Statements have been prepared in accordance with Article 10 of Regulation S-X and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The year-end Consolidated (Condensed) Balance Sheet was derived from the audited financial statements included in Energizer's Report on Form 10-K, but does not include all disclosures required by U.S. GAAP. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair statement of our operations, financial position and cash flows
have been included. Certain reclassifications have been made to the prior year financial statements to conform to the current presentation, including the recast of our segment related disclosures to align with our new reportable segments as of October 1, 2021. Refer to Note 6, Segments, for additional information. Operating results for any quarter are not necessarily indicative of the results for any other quarter or for the full year. These statements should be read in conjunction with the financial statements and notes thereto for Energizer for the year ended September 30, 2021 included in the Annual Report on Form 10-K dated November 16, 2021.
Recently Adopted Accounting Pronouncements – In December 2019, the FASB issued ASU 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendment simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC 740 and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020. The Company adopted this standard as of October 1, 2021 and the adoption of this standard did not have a material impact on the Company's consolidated (condensed) financial statements.
(2) Revenue Recognition
The Company, through its operating subsidiaries, is one of the world’s largest manufacturers, marketers and distributors of household batteries, specialty batteries and lighting products, and is a leading designer and marketer of automotive fragrance, appearance, performance and air conditioning recharge products. The Company distributes its products to consumers through numerous retail locations worldwide, including mass merchandisers and warehouse clubs, food, drug and convenience stores, electronics specialty stores and department stores, hardware and automotive centers, e-commerce and military stores. The Company sells to its customers through a combination of a direct sales force and exclusive and non-exclusive third-party distributors and wholesalers.
The Company’s revenue is primarily generated from the sale of finished product to customers. Sales predominantly contain a single delivery element, or performance obligation, and revenue is recognized at a single point in time when title, ownership and risk of loss pass to the customer. This typically occurs when finished goods are delivered to the customer or when finished goods are picked up by a customer or customer’s carrier, depending on contract terms.
North America sales are generally through large retailers with nationally or regionally recognized brands.
9
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)
Our International sales, which includes Latin America, are comprised of modern trade, developing and distributor market groups. Modern trade, which is most prevalent in Western Europe and more developed economies throughout the world, generally refers to sales through large retailers with nationally or regionally recognized brands. Developing markets generally include sales by wholesalers or small retailers who may not have a national or regional presence. Distributors are utilized in other markets where the Company does not have a direct sales force. Each market's determination is based on the predominant customer type or sales strategy utilized in the market.
As discussed in Note 6, Segments, following the completion of the Battery and Auto Care Acquisition integrations in fiscal 2022, the Company has changed its reportable segments to better reflect what the chief operating decision maker is reviewing to make organizational decisions and resource allocations. Therefore, the Company has recast the product and market information for the quarter and nine months ended June 30, 2021 by recasting the Battery and Auto Care licensing and other sales within each product category, and Latin America within the respective Modern, Developing and Distributors markets as appropriate.
Supplemental product and market information is presented below for revenues from external customers for the quarters and nine months ended June 30, 2022 and 2021:
| For the Quarters Ended June 30, | For the Nine Months Ended June 30, | ||||||||||||||||||||||
| Net Sales by products | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Batteries | $ | 500.1 | $ | 485.0 | $ | 1,690.3 | $ | 1,709.1 | |||||||||||||||
| Auto Care | 196.4 | 209.1 | 471.4 | 456.0 | |||||||||||||||||||
| Lights | 31.5 | 27.7 | 98.0 | 90.4 | |||||||||||||||||||
| Total Net Sales | $ | 728.0 | $ | 721.8 | $ | 2,259.7 | $ | 2,255.5 | |||||||||||||||
| For the Quarters Ended June 30, | For the Nine Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net Sales by markets | |||||||||||||||||||||||
| North America | $ | 472.1 | $ | 465.5 | $ | 1,398.7 | $ | 1,401.7 | |||||||||||||||
| Modern Markets | 110.9 | 111.8 | 391.4 | 405.9 | |||||||||||||||||||
| Developing Markets | 96.4 | 94.9 | 311.7 | 297.9 | |||||||||||||||||||
| Distributors Markets | 48.6 | 49.6 | 157.9 | 150.0 | |||||||||||||||||||
| Total Net Sales | $ | 728.0 | $ | 721.8 | $ | 2,259.7 | $ | 2,255.5 | |||||||||||||||
(3) Acquisitions
Formulations Acquisition - During the first quarter of fiscal 2021, the Company entered into an agreement with Green Global Holdings, LLC to acquire a North Carolina-based company that specializes in developing formulations for cleaning tasks (Formulations Acquisition). On December 1, 2020, the Formulations Acquisition was completed for a cash purchase price of $51.2. During the first quarter of fiscal 2022, the working capital settlement was finalized, reducing the purchase price by $1.0, of which $0.4 was paid to the Company in the first quarter of fiscal 2022 and the remaining $0.6 was settled in the third quarter of fiscal 2022. The product formulations acquired are both sold to customers directly and licensed to manufacturers. This acquisition is expected to bring significant innovation capabilities in formulations to the Company.
The acquisition is being accounted for as a business combination using the acquisition method of accounting which requires assets acquired and liabilities assumed to be recognized at fair value as of the acquisition date. The fair value of proprietary technology acquired and customer relationships were determined by applying the multi-period excess earnings method under the income approach.
10
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)
The following table outlines the purchase price allocation:
| Trade receivables | $ | 1.3 | |||
| Inventories | 0.1 | ||||
| Goodwill | 28.7 | ||||
| Other intangible assets, net | 20.5 | ||||
| Operating lease assets | 0.5 | ||||
| Accounts payable | (0.2) | ||||
| Current operating lease liabilities | (0.2) | ||||
| Other current liabilities | (0.2) | ||||
| Operating lease liabilities | (0.3) | ||||
| Net assets acquired | $ | 50.2 | |||
The table below identifies the purchased intangible assets of $20.5:
| Total | Weighted Average Useful Lives | |||||||||||||
| Proprietary technology | $ | 19.5 | 7 | |||||||||||
| Customer relationships | 1.0 | 15 | ||||||||||||
| Total Other intangible assets, net | $ | 20.5 | ||||||||||||
The Company finalized their purchase price accounting in the first quarter of fiscal 2022. The goodwill acquired in this acquisition is attributable to the value the Company expects to achieve from the significant innovation capabilities in formulations that the acquired company will bring to our organization, as well as the workforce acquired. The goodwill was allocated to the Americas segment prior to the Company's reorganization of our reportable segments on October 1, 2021. Refer to Note 7, Goodwill and intangible assets, for additional details. The goodwill is deductible for tax purposes.
In conjunction with the acquisition, the Company entered into incentive compensation agreements with certain key personnel. These agreements allow for potential earn out payments of up to $35.0 based on the achievement of a combination of financial and product development and commercialization performance targets and continued employment with the Company over three performance years. These agreements are not considered a component of the acquisition purchase price but rather as employee compensation arrangements. During the nine months ended June 30, 2021, $1.1 was recorded on the Consolidated (Condensed) Statement of Earnings and Comprehensive Income in Selling, general and administrative expense relating to the first performance year earn-out. There was no earn out expense recorded in the quarter ended June 30, 2022. The first performance year earn-out of $4.5 was settled and paid during the quarter ended June 30, 2022. No amounts have been recognized for the second or third performance years under the agreement at June 30, 2022.
FDK Indonesia Acquisition - During the fourth quarter of fiscal 2020, the Company entered into an agreement with FDK Corporation to acquire its subsidiary PT FDK Indonesia, a battery manufacturing facility (FDK Indonesia Acquisition). On October 1, 2020, the Company completed the acquisition for a contractual purchase price of $18.2. After contractual and working capital adjustments, the Company initially paid cash of $16.9 and had a working capital adjustment of $0.7 in fiscal 2021. The acquisition of the FDK Indonesia facility increased the Company's alkaline battery production capacity and allows for the avoidance of future planned capital expenditures. The Company finalized their purchase price accounting in the fourth fiscal quarter of 2021.
Pro Forma Financial Information- Pro forma results for the Formulations Acquisition and FDK Indonesia Acquisition were not considered material and, as such, are not included.
Acquisition and Integration Costs- Acquisition and integration costs incurred during fiscal year 2022 and 2021 relate to the FDK Indonesia Acquisition, Formulations Acquisition, and the Battery and Auto Care Acquisitions which occurred in fiscal year 2019. The Company incurred pre-tax acquisition and integration costs of $16.5 during the nine months ended June 30, 2022 and $19.5 and $54.6 for the quarter and the nine months ended June 30, 2021, respectively. No acquisition or integration costs were incurred during the quarter ended June 30, 2022.
11
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)
Pre-tax costs recorded in Cost of products sold were $6.0 for the nine months ended June 30, 2022 and $9.6 and $24.6 for the quarter and nine months ended June 30, 2021, respectively, primarily related to the facility exit and restructuring related costs, discussed in Note 4, Restructuring.
Pre-tax acquisition and integration costs recorded in Selling, general and administrative expense (SG&A) were $9.4 for the nine months ended June 30, 2022 and $9.7 and $28.7 for the quarter and nine months ended June 30, 2021, respectively. The SG&A expenses incurred during the nine months ended June 30, 2022 primarily related to the integration of the acquired information technology systems, consulting costs, and retention-related compensation costs. The SG&A expenses incurred during the quarter and nine months ended June 30, 2021 primarily related to the integration of the Battery and Auto Care acquisitions, including costs of integrating the auto care information technology systems of the businesses, consulting costs associated with the 2020 restructuring program discussed in Note 4, Restructuring, and legal fees incurred for the fiscal 2021 acquisitions.
For the nine months ended June 30, 2022, the Company recorded $1.1 of pre-tax acquisition and integration related costs in research and development. The fiscal 2022 costs primarily related to severance and R&D asset write-offs. For the quarter and nine months ended June 30, 2021, the Company recorded $0.1 and $1.1, respectively, of pre-tax acquisition and integration related costs in research and development.
For the quarter and nine months ended June 30, 2021, the Company recorded $0.1 and $0.2 of pre-tax acquisition and integration related Other items, net, respectively.
(4) Restructuring
In the fourth fiscal quarter of 2019, the Company began implementing restructuring related integration plans for our manufacturing and distribution networks. These plans include the closure and combination of distribution and manufacturing facilities in order to reduce complexity and realize greater efficiencies in our manufacturing, packaging and distribution processes. All activities within these plans were substantially completed by December 31, 2021, and the Company does not expect to incur additional material charges associated with these plans.
Part of this plan was the exit of our Dixon, IL leased packaging facility, which the Company vacated during the first quarter of fiscal 2022. In the third quarter of fiscal 2022, the Company entered into a termination agreement with the landlord. Since the Company has already vacated the facility as a part of the 2019 restructuring program, most assets associated with the location have already been fully depreciated. The termination of this lease resulted in a gain of $4.5 recognized in Other items, net during the third quarter of fiscal 2022. Refer to Note 8 - Debt for additional information on the termination of this capital lease.
In the fourth fiscal quarter of 2020, the Company initiated a new restructuring program with a primary focus on reorganizing its global end-to-end supply chain network and ensuring accountability by category. This program included streamlining the Company’s end-to-end supply chain model to enable rapid response to category specific demands and enhancing our ability to better serve our customers. Planning and execution of this program began in fiscal year 2021 and this program was substantially complete by December 31, 2021. The Company does not expect to incur additional material charges associated with this program.
12
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)
The pre-tax expense for charges related to the restructuring plans for the quarters and nine months ended June 30, 2022 and 2021 are noted in the table below and were reflected in the Consolidated (Condensed) Statement of Earnings and Comprehensive Income:
| For the Quarters Ended June 30, | For the Nine Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| 2019 Restructuring Program | |||||||||||||||||||||||
| Cost of products sold | |||||||||||||||||||||||
| Severance and related benefit costs | $ | — | $ | — | $ | (0.1) | $ | (0.1) | |||||||||||||||
| Accelerated depreciation & asset write-offs | — | 1.2 | 1.2 | 4.0 | |||||||||||||||||||
Other exit costs(1) | — | 4.4 | 2.8 | 14.1 | |||||||||||||||||||
| Other items, net | |||||||||||||||||||||||
| Gain on termination of capital lease | (4.5) | — | (4.5) | — | |||||||||||||||||||
| 2019 Restructuring Total | $ | (4.5) | $ | 5.6 | $ | (0.6) | $ | 18.0 | |||||||||||||||
| 2020 Restructuring Program | |||||||||||||||||||||||
| Cost of products sold | |||||||||||||||||||||||
| Severance and related benefit costs | $ | — | $ | 0.5 | $ | 0.2 | $ | 0.5 | |||||||||||||||
Other restructuring related costs(2) | — | 3.3 | 1.1 | 5.3 | |||||||||||||||||||
| Selling, general and administrate expense | |||||||||||||||||||||||
| Severance and related benefit costs | — | 0.1 | 0.1 | 0.3 | |||||||||||||||||||
Other restructuring related costs(2) | — | 0.3 | — | 7.5 | |||||||||||||||||||
| Research and development expense | |||||||||||||||||||||||
| Severance and related benefit costs | — | 0.2 | — | 0.2 | |||||||||||||||||||
| 2020 Restructuring Total | $ | — | $ | 4.4 | $ | 1.4 | $ | 13.8 | |||||||||||||||
| Total restructuring related (benefit)/expense | $ | (4.5) | $ | 10.0 | $ | 0.8 | $ | 31.8 | |||||||||||||||
(1) Includes charges primarily related to consulting, relocation, environmental investigatory and mitigation costs, and other facility exit costs.
(2) Primarily includes consulting fees for the restructuring program.
Although the Company's restructuring costs are recorded outside of segment profit, if allocated to our reportable segments, the restructuring costs noted above for the nine months ended June 30, 2022 would be incurred within the Battery & Lights segment in the amounts of $0.6 and the Auto Care segment in the amount of $0.2. For the quarter ended June 30, 2022, all of the gain would have been incurred within the Battery & Lights segment.
If allocated to the Company's new reportable segments in the prior year, $7.4 and $28.5 of the restructuring costs would have been incurred within the Battery & Lights segment during the quarter and nine months ended June 30, 2021, respectively, and $2.6 and $3.3 would have been incurred within the Auto Care segment during the quarter and nine months ended June 30, 2021, respectively.
13
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)
The following table summarizes the activity related to the 2019 restructuring program for the nine months ended June 30, 2021 and 2022:
| Utilized | |||||||||||||||||||||||||||||
| September 30, 2020 | Charge to Income | Cash | Non-Cash | June 30, 2021 1 | |||||||||||||||||||||||||
| Severance & termination related costs | $ | 5.3 | $ | (0.1) | $ | 3.6 | $ | — | $ | 1.6 | |||||||||||||||||||
| Accelerated depreciation & asset write-offs | — | 4.0 | — | 4.0 | — | ||||||||||||||||||||||||
| Other exit costs | 2.9 | 14.1 | 14.5 | — | 2.5 | ||||||||||||||||||||||||
| Total | $ | 8.2 | $ | 18.0 | $ | 18.1 | $ | 4.0 | $ | 4.1 | |||||||||||||||||||
| September 30, 2021 | Charge to Income | Cash | Non-Cash | June 30, 2022 1 | |||||||||||||||||||||||||
| Severance & termination related costs | $ | 1.4 | $ | (0.1) | $ | 1.2 | $ | — | $ | 0.1 | |||||||||||||||||||
| Accelerated depreciation & asset write-offs | — | 1.2 | — | 1.2 | — | ||||||||||||||||||||||||
| Other exit costs | 2.2 | 2.8 | 5.0 | — | — | ||||||||||||||||||||||||
| Net gain on sale of fixed assets | 0.5 | — | 0.5 | — | — | ||||||||||||||||||||||||
| Gain on termination of capital lease (2) | — | (4.5) | 5.1 | (9.6) | — | ||||||||||||||||||||||||
| Total | $ | 4.1 | $ | (0.6) | $ | 11.8 | $ | (8.4) | $ | 0.1 | |||||||||||||||||||
(1) At June 30, 2021 and 2022, the restructuring reserve is recorded on the Consolidated (Condensed) Balance Sheet in Other current liabilities.
(2) The Gain on termination of capital lease includes the removal of the Company's capital lease obligation of $9.8, offset by a termination fee, decommissioning and brokerage costs, and immaterial fixed asset write-offs associated with the leased location. Refer to Note 8 - Debt for additional information.
The following table summarizes the activity related to the 2020 restructuring program for the nine months ended June 30, 2021 and 2022:
| Utilized | |||||||||||||||||||||||||||||
| September 30, 2020 | Charge to Income | Cash | Non-Cash | June 30, 2021 1 | |||||||||||||||||||||||||
| Severance & termination related costs | $ | 0.4 | $ | 1.0 | $ | 0.5 | $ | — | $ | 0.9 | |||||||||||||||||||
| Other restructuring related costs | 0.8 | 12.8 | 12.0 | — | 1.6 | ||||||||||||||||||||||||
| Total | $ | 1.2 | $ | 13.8 | $ | 12.5 | $ | — | $ | 2.5 | |||||||||||||||||||
| September 30, 2021 | Charge to Income | Cash | Non-Cash | June 30, 2022 1 | |||||||||||||||||||||||||
| Severance & termination related costs | $ | 0.9 | $ | 0.3 | $ | 0.5 | $ | — | $ | 0.7 | |||||||||||||||||||
| Other restructuring related costs | 0.7 | 1.1 | 1.8 | — | — | ||||||||||||||||||||||||
| Total | $ | 1.6 | $ | 1.4 | $ | 2.3 | $ | — | $ | 0.7 | |||||||||||||||||||
(1) At June 30, 2021 and 2022, the restructuring reserve is recorded on the Consolidated (Condensed) Balance Sheet in Other current liabilities.
14
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)
(5) Earnings per share
Basic earnings per share is based on the average number of common shares outstanding during the period. Diluted earnings per share is based on the average number of shares used for the basic earnings per share calculation, adjusted for the dilutive effect of restricted stock equivalent (RSE) awards, performance share awards, deferred compensation equity plans and the conversion of the Mandatory convertible preferred stock (MCPS).
During the second quarter of fiscal year 2022, the MCPS were converted to approximately 4.7 million shares of Common stock. For the nine months ended June 30, 2022, the issued common shares are included in the basic weighted average common shares outstanding for the period subsequent to the conversion, and included in the diluted calculation prior to their conversion using the if-converted method and are only included if the conversion would be further dilutive to the calculation.
For fiscal 2021 periods prior to the conversion, the shares are included in the calculation of diluted earnings per share using the if-converted method and are only included if the conversion would be further dilutive to the calculation.
The following table sets forth the computation of basic and diluted earnings per share for the quarters and nine months ended June 30, 2022 and 2021:
| (in millions, except per share data) | For the Quarters Ended June 30, | For the Nine Months Ended June 30, | |||||||||||||||||||||
| Basic net earnings per share | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Net earnings | $ | 52.4 | $ | 20.8 | $ | 131.4 | $ | 77.7 | |||||||||||||||
| Mandatory preferred stock dividends | — | (4.0) | (4.0) | (12.1) | |||||||||||||||||||
| Net earnings attributable to common shareholders | $ | 52.4 | $ | 16.8 | $ | 127.4 | $ | 65.6 | |||||||||||||||
| Weighted average common shares outstanding - Basic | 71.3 | 68.4 | 69.5 | 68.4 | |||||||||||||||||||
| Basic net earnings per common share | $ | 0.73 | $ | 0.25 | $ | 1.83 | $ | 0.96 | |||||||||||||||
| Diluted net earnings per share | |||||||||||||||||||||||
| Weighted average common shares outstanding - Basic | 71.3 | 68.4 | 69.5 | 68.4 | |||||||||||||||||||
| Dilutive effect of RSE | 0.2 | 0.1 | 0.1 | 0.1 | |||||||||||||||||||
| Dilutive effect of performance shares | 0.1 | — | 0.2 | 0.1 | |||||||||||||||||||
| Dilutive effect of stock based deferred compensation plan | 0.1 | 0.1 | 0.1 | 0.1 | |||||||||||||||||||
| Weighted average common shares outstanding - Diluted | 71.7 | 68.6 | 69.9 | 68.7 | |||||||||||||||||||
| Diluted net earnings per common share | $ | 0.73 | $ | 0.24 | $ | 1.82 | $ | 0.95 | |||||||||||||||
For the quarter and nine months ended June 30, 2022, 0.4 million and 0.4 million RSEs were anti-dilutive and not included in the diluted net earnings per share calculation. For the quarter and nine months ended June 30, 2021, 0.1 million RSEs were anti-dilutive and not included in the diluted net earnings per share calculation.
Performance based RSEs of 1.6 million and 1.6 million were excluded for the quarter and nine months ended June 30, 2022, respectively, and 1.4 million and 1.3 million were excluded for the quarter and nine months ended June 30, 2021, respectively, as they were anti-dilutive or the performance targets for those awards have not been achieved as of the end of the applicable period.
The Company's MCPS, prior to conversion and for the fiscal 2022 year to date period, were considered anti-dilutive for all periods and excluded from the calculation of diluted earnings per share.
15
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)
(6) Segments
As of October 1, 2021, the Company changed its reportable operating segments from two geographical segments, previously Americas and International, to two product groupings, Battery & Lights and Auto Care. This change came with the completion of the Battery and Auto Care Acquisition integrations in fiscal 2022. The Company changed its reporting structure to better reflect what the chief operating decision maker is reviewing to make organizational decisions and resource allocations. The Company has recast the information for the quarter and nine months ended June 30, 2021 to align with this presentation.
Segment performance is evaluated based on segment operating profit, exclusive of general corporate expenses (including share-based compensation costs), amortization of intangibles, acquisition and integration activities, including restructuring charges, acquisition earn out, the costs of the flooding of our manufacturing facility in Brazil, the costs of exiting the Russian market, and other items determined to be corporate in nature. Financial items, such as interest income and expense, gain on capital lease termination and loss on extinguishment of debt are managed on a global basis at the corporate level. The exclusion of acquisition and integration costs from segment results reflects management’s view on how it evaluates segment performance.
Energizer’s operating model includes a combination of standalone and shared business functions between the product segments, varying by country and region of the world. Shared functions include the sales and marketing functions, as well as human resources, IT and finance shared service costs. Energizer applies a fully allocated cost basis, in which shared business functions are allocated between segments. Such allocations are estimates, and do not represent the costs of such services if performed on a standalone basis.
Segment sales and profitability for the quarters and nine months ended June 30, 2022 and 2021 are presented below:
16
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)
| For the Quarters Ended June 30, | For the Nine Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net Sales | |||||||||||||||||||||||
| Batteries & Lights | $ | 531.6 | $ | 512.7 | $ | 1,788.3 | $ | 1,799.5 | |||||||||||||||
| Auto Care | 196.4 | 209.1 | 471.4 | 456.0 | |||||||||||||||||||
| Total net sales | $ | 728.0 | $ | 721.8 | $ | 2,259.7 | $ | 2,255.5 | |||||||||||||||
| Segment Profit | |||||||||||||||||||||||
| Batteries & Lights | $ | 142.7 | $ | 113.9 | $ | 406.4 | $ | 419.8 | |||||||||||||||
| Auto Care | 12.9 | 31.7 | 37.0 | 78.9 | |||||||||||||||||||
| Total segment profit | 155.6 | 145.6 | $ | 443.4 | $ | 498.7 | |||||||||||||||||
| General corporate and other expenses (1) | (27.6) | (21.5) | (74.9) | (71.3) | |||||||||||||||||||
| Amortization of intangible assets | (15.4) | (15.2) | (45.8) | (46.0) | |||||||||||||||||||
| Acquisition and integration costs (2) | — | (19.5) | (16.5) | (54.6) | |||||||||||||||||||
| Acquisition earn out (3) | — | (1.2) | (1.1) | (2.3) | |||||||||||||||||||
| Interest expense | (41.1) | (38.6) | (116.4) | (125.0) | |||||||||||||||||||
| Exit of Russian market (4) | — | — | (14.0) | — | |||||||||||||||||||
| Gain on capital lease terminations (5) | 4.5 | — | 4.5 | — | |||||||||||||||||||
| Brazil flood damage (6) | (9.9) | — | (9.9) | — | |||||||||||||||||||
| Loss on extinguishment of debt | — | (27.6) | — | (103.3) | |||||||||||||||||||
| Other items, net - Adjusted (7) | (1.0) | 1.6 | 0.3 | 1.0 | |||||||||||||||||||
| Total earnings before income taxes | $ | 65.1 | $ | 23.6 | $ | 169.6 | $ | 97.2 | |||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Batteries & Lights | $ | 12.5 | $ | 12.5 | $ | 36.4 | $ | 36.4 | |||||||||||||||
| Auto Care | 2.5 | 2.3 | 6.8 | 6.3 | |||||||||||||||||||
| Total segment depreciation and amortization | $ | 15.0 | $ | 14.8 | $ | 43.2 | $ | 42.7 | |||||||||||||||
| Amortization of intangible assets | 15.4 | 15.2 | 45.8 | 46.0 | |||||||||||||||||||
| Total depreciation and amortization | $ | 30.4 | $ | 30.0 | $ | 89.0 | $ | 88.7 | |||||||||||||||
(1) Included in SG&A in the Consolidated (Condensed) Statement of Earnings and Comprehensive Income.
(2) Acquisition and integration costs were included in the following lines in the Consolidated (Condensed) Statement of Earnings and Comprehensive Income:
| For the Quarters Ended June 30, | For the Nine Months Ended June 30, | ||||||||||||||||||||||
| Acquisition and integration costs | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Cost of products sold | $ | — | $ | 9.6 | $ | 6.0 | $ | 24.6 | |||||||||||||||
| Selling, general and administrative expense | — | 9.7 | 9.4 | 28.7 | |||||||||||||||||||
| Research and development expense | — | 0.1 | 1.1 | 1.1 | |||||||||||||||||||
| Other items, net | — | 0.1 | — | 0.2 | |||||||||||||||||||
| Total acquisition and integration costs | $ | — | $ | 19.5 | $ | 16.5 | $ | 54.6 | |||||||||||||||
(3) This represents the earn out achieved through June 30, 2022 and 2021 under the incentive agreements entered into with the Formulations Acquisition and is recorded in SG&A on the Consolidated (Condensed) Statement of Earnings and Comprehensive Income.
(4) These are the costs associated with the Company's exit of the Russian market during the second quarter of fiscal 2022. Exiting the Russian market resulted in the impairment of inventory recorded in Cost of products sold of $0.7, impairment of other assets and severance recorded in SG&A of $5.8 and currency impacts recorded in Other items, net of $7.5 on the Consolidated (Condensed) Statement of Earnings and Comprehensive Income.
(5) This represents the termination of a capital lease in the quarter ended June 30, 2022 associated with a facility that was exited as a part of the Company's 2019 Restructuring program. The gain was recorded in Other items, net in the Consolidated (Condensed) Statement of Earnings.
17
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)
(6) These are the costs associated with the May 2022 flooding of our manufacturing facility in Brazil, which were recorded in Cost of products sold on the Consolidated (Condensed) Statement of Earnings. The majority is related to write-off of damaged inventory.
(7) Other items, net on the Consolidated (Condensed) Statement of Earnings and Comprehensive Income included costs associated with the exit of the Russian market of $7.5 for the nine months ended June 30, 2022, the $4.5 gain on the termination of a capital lease for the quarter and nine months ended June 30, 2022 and acquisition related costs of $0.1 and $0.2 for the quarter and nine months ended June 30, 2021, respectively, which have been reclassified for the reconciliation above.
Corporate assets shown in the following table include cash, all financial instruments, pension assets, amounts indemnified by Spectrum per the purchase agreements and tax asset balances that are managed outside of operating segments. The asset balances as of September 30, 2021 have been recast to align with our new reportable segments.
| Total Assets | June 30, 2022 | September 30, 2021 | |||||||||
| Batteries & Lights | $ | 1,417.4 | $ | 1,302.7 | |||||||
| Auto Care | 468.7 | 367.8 | |||||||||
| Total segment assets | $ | 1,886.1 | $ | 1,670.5 | |||||||
| Corporate | 423.8 | 411.9 | |||||||||
| Goodwill and other intangible assets | 2,872.7 | 2,925.1 | |||||||||
| Total assets | $ | 5,182.6 | $ | 5,007.5 | |||||||
(7) Goodwill and intangible assets
Goodwill and intangible assets deemed to have an indefinite life are not amortized, but are evaluated annually for impairment as part of our annual business planning cycle in the fourth fiscal quarter, or when indicators of a potential impairment are present.
The following table sets forth goodwill by segment as of October 1, 2021 and June 30, 2022. The balances at October 1, 2021 have been recast to align with our new reportable segments:
| Batteries & Lights | Auto Care | Total | |||||||||||||||
| Balance at October 1, 2021 | $ | 900.3 | $ | 153.5 | $ | 1,053.8 | |||||||||||
| Formulations Acquisition working capital finalization | — | (1.0) | (1.0) | ||||||||||||||
| Cumulative translation adjustment | (17.0) | (0.9) | (17.9) | ||||||||||||||
| Balance at June 30, 2022 | $ | 883.3 | $ | 151.6 | $ | 1,034.9 | |||||||||||
Energizer had indefinite-lived intangible assets of $1,364.6 at June 30, 2022 and $1,365.7 at September 30, 2021. The difference between the periods is driven by currency adjustments.
During the quarter ended June 30, 2022, the Company purchased auto care appearance trade names and formulas in Latin America through an asset acquisition for $14.6. Approximately $7 was assigned as the value to trade name and formula intangibles acquired, respectively. The weighted average useful life for both acquired intangibles is 10 years.
18
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)
Total intangible assets at June 30, 2022 are as follows:
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||
| Trademarks and trade names | $ | 66.0 | $ | (20.5) | $ | 45.5 | |||||||||||
| Customer relationships | 394.2 | (106.4) | 287.8 | ||||||||||||||
| Patents | 33.9 | (15.3) | 18.6 | ||||||||||||||
| Proprietary technology | 172.5 | (76.0) | 96.5 | ||||||||||||||
| Proprietary formulas | 29.2 | (5.4) | 23.8 | ||||||||||||||
| Vendor relationships | 7.4 | (6.4) | 1.0 | ||||||||||||||
| Total Amortizable intangible assets | 703.2 | (230.0) | 473.2 | ||||||||||||||
| Trademarks and trade names - indefinite lived | 1,364.6 | — | 1,364.6 | ||||||||||||||
| Total Other intangible assets, net | $ | 2,067.8 | $ | (230.0) | $ | 1,837.8 | |||||||||||
Total intangible assets at September 30, 2021 were as follows:
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||
| Trademarks and trade names | $ | 59.5 | $ | (17.8) | $ | 41.7 | |||||||||||
| Customer relationships | 395.0 | (87.1) | 307.9 | ||||||||||||||
| Patents | 34.5 | (13.5) | 21.0 | ||||||||||||||
| Proprietary technology | 172.5 | (59.6) | 112.9 | ||||||||||||||
| Proprietary formulas | 21.9 | (3.0) | 18.9 | ||||||||||||||
| Vendor relationships | 8.0 | (4.8) | 3.2 | ||||||||||||||
| Total Amortizable intangible assets | 691.4 | (185.8) | 505.6 | ||||||||||||||
| Trademarks and trade names - indefinite lived | 1,365.7 | — | 1,365.7 | ||||||||||||||
| Total Other intangible assets, net | $ | 2,057.1 | $ | (185.8) | $ | 1,871.3 | |||||||||||
(8) Debt
The detail of long-term debt was as follows:
| June 30, 2022 | September 30, 2021 | ||||||||||
| Senior Secured Term Loan Facility due 2027 | $ | 1,185.0 | $ | 1,194.0 | |||||||
| 6.500% Senior Notes due 2027 | 300.0 | — | |||||||||
| 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) | 681.4 | 752.7 | |||||||||
| Capital lease obligations | 32.7 | 44.3 | |||||||||
| Total long-term debt, including current maturities | $ | 3,599.1 | $ | 3,391.0 | |||||||
| Less current portion | (12.6) | (14.3) | |||||||||
| Less unamortized debt premium and debt issuance fees | (41.9) | (43.3) | |||||||||
| Total long-term debt | $ | 3,544.6 | $ | 3,333.4 | |||||||
Credit Agreement - In December 2020, the Company entered in a Credit Agreement which provided for a 5-year $400.0 revolving credit facility (2020 Revolving Facility) and a $550.0 Term Loan due December 2027, which was then amended and increased to $1,200.0 in January 2021. The $550.0 of proceeds were used to pay down the remaining balances on the Term Loan A facility due in 2022, Term Loan B facility due in 2025 and the amounts outstanding on the existing 2018 Revolving Credit Facility. The pay down of the Term Loan A and B facilities were deemed to be extinguishments and the Company wrote-off $5.7 of deferred financing fees during the first fiscal quarter of 2021.
19
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)
On January 7, 2021, the Company amended the Credit Agreement and borrowed an incremental $650.0 on the Term Loan. The Company utilized the proceeds to fund the redemption of the Company’s outstanding $600.0 7.750% Senior Notes due 2027 (2027 Notes) at a redemption price equal to 110.965% of the aggregate principal amount. As a result, the Company paid a redemption premium of $66.6 during the quarter ended March 31, 2021. The Company also wrote off deferred financings fees associated with the 2027 Notes resulting in a total loss on extinguishment recognized in the quarter ended March 31, 2021 of $70.0.
On June 23, 2021, the Company completed a bond offering for €650 Senior Notes due in 2029 at 3.50% (2029 EUR Notes). Also on June 23, 2021, the proceeds from the offering, combined with cash on hand, were used to satisfy its outstanding legal obligation on the €650 Senior Notes due in 2026 at 4.625% (2026 EUR Notes). The Company used approximately $45.9 of cash on hand to fund the redemption costs, accrued interest and fees associated with the redemption of the 2026 EUR Notes and issuance of the 2029 EUR Notes. The Company paid a redemption premium of $18.6 during the quarter ended June 30, 2021. The Company also wrote off deferred financing and interest and fees associated with the 2026 EUR Notes resulting in a total loss on extinguishment recognized in the quarter ended June 30, 2021 of $27.6.
On December 31, 2021, the Company amended the Credit Agreement to increase the 2020 Revolving Facility to $500.0.
Borrowings under the Term Loan require quarterly principal payments at a rate of 0.25% of the original principal balance, or $3.0. Borrowings under the 2020 Revolving Facility bear interest at a rate per annum equal to, at the option of the Company, LIBOR or the Base Rate (as defined) plus the applicable margin. The Term Loan bears interest at a rate per annum equal to, at the option of the Company, LIBOR or Base Rate (as defined) plus the applicable margin. The Credit Agreement also contains customary affirmative and restrictive covenants.
As of June 30, 2022, the Company had $60.0 of outstanding borrowings under the 2020 Revolving Facility and $8.0 of outstanding letters of credit. Taking into account outstanding letters of credit, $432.0 remained available under the 2020 Revolving Facility as of June 30, 2022. As of June 30, 2022 and September 30, 2021, the Company's weighted average interest rate on short-term borrowings was 4.2% and 2.5%, respectively.
Senior Notes - On March 8, 2022, the Company completed a bond offering for $300.0 Senior Notes due in 2027 at 6.500% (2027 Notes). The proceeds from the offering were used to repay a portion of the indebtedness outstanding under the 2020 Revolving Facility and to pay fees and expenses related to the offering. The 2027 Notes were sold to qualified institutional buyers and will not be registered under federal or applicable state securities laws. Interest is payable semi-annually in June and December. The 2027 Notes are jointly and severally guaranteed on an unsecured basis by each of the Company's domestic restricted subsidiaries that is a borrower or guarantor under the Credit Agreement.
On September 30, 2020, the Company completed a bond offering for $800.0 Senior Notes due in 2029 at 4.375% (2029 Notes). On October 16, 2020, the Company used the proceeds from the sale of the 2029 Notes to fund the redemption of all the $750.0 Senior Notes due in 2026 at 6.375%. The Company paid a redemption premium of $55.9 in the first fiscal quarter of 2021 related to this redemption.
Debt issuance fees paid associated with the Credit Agreements, Term Loans and 2027 Notes were $7.6 and $27.6 in the nine months ended June 30, 2022 and 2021, respectively.
Interest Rate Swaps - In conjunction with the term loan refinance in December 2020, the Company entered into an interest rate swap with an effective date of December 22, 2020, that fixed the variable benchmark component (LIBOR) at an interest rate of 0.95% on variable rate debt of $550.0. On January 22, 2021, the notional value increased to $700.0 and will stay at that value through December 22, 2024. The notional value will decrease by $100.0 on December 22, 2024 and by $100.0 each year thereafter until its termination date on December 22, 2027.
Refer to Note 11, Financial Instruments and Risk Management, for additional information on the Company's interest rate swap transactions.
Notes payable - The notes payable balance was $61.4 at June 30, 2022 and $105.0 at September 30, 2021. The June 30, 2022 balance was comprised of $60.0 of outstanding borrowings on the 2020 Revolving Facility and $1.4
20
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)
of other borrowings related to foreign affiliates. The September 30, 2021 balance was all outstanding borrowings on the 2020 Revolving Facility.
Debt Covenants - The agreements governing the Company's debt contain certain customary representations and warranties, affirmative, negative and financial covenants and provisions relating to events of default. If the Company fails to comply with these covenants or with other requirements of these debt agreements, the lenders may have the right to accelerate the maturity of the debt. Acceleration under one of these debt agreements would trigger cross defaults to other borrowings. As of June 30, 2022, the Company was in compliance with the provisions and covenants associated with its debt agreements.
The counterparties to long-term committed borrowings consist of a number of major financial institutions. The Company consistently monitors positions with, and credit ratings of, counterparties both internally and by using outside ratings agencies.
Capital lease obligations - In April 2022, the Company entered into a termination agreement with the landlord of our capital lease in Dixon, IL. The Company terminated the lease agreement, which went into 2028, reducing our capital lease obligations by $9.8. The termination agreement required the Company to pay a termination fee of $4.0, as well as decommissioning costs and brokerage fees. Since the Company has already vacated the facility as a part of the 2019 restructuring program, most assets associated with the location have already been fully depreciated. The termination of this lease resulted in a gain of $4.5 recognized in Other items, net during the third quarter of fiscal 2022.
Debt Maturities - Aggregate maturities of long-term debt as of June 30, 2022 are as follows:
| Long-term debt | |||||
| One year | $ | 12.0 | |||
| Two year | 12.0 | ||||
| Three year | 12.0 | ||||
| Four year | 12.0 | ||||
| Five year | 12.0 | ||||
| Thereafter | 3,506.4 | ||||
| Total long-term debt payments due | $ | 3,566.4 | |||
(9) Pension Plans
The Company has several defined benefit pension plans covering many of its employees in the U.S. and certain employees in other countries. The plans provide retirement benefits based on various factors including years of service and in certain circumstances, earnings. Most plans are now frozen to new entrants and for additional service.
21
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)
The Company’s net periodic pension (benefit)/cost for these plans are as follows:
| For the Quarters Ended June 30, | |||||||||||||||||||||||
| U.S. | International | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Service cost | $ | — | $ | — | $ | 0.2 | $ | 0.2 | |||||||||||||||
| Interest cost | 3.2 | 3.1 | 0.5 | 0.4 | |||||||||||||||||||
| Expected return on plan assets | (5.7) | (5.5) | (0.9) | (0.8) | |||||||||||||||||||
| Amortization of unrecognized net losses | 1.7 | 1.8 | 0.2 | 0.4 | |||||||||||||||||||
| Net periodic (benefit)/cost | $ | (0.8) | $ | (0.6) | $ | — | $ | 0.2 | |||||||||||||||
| For the Nine Months Ended June 30, | |||||||||||||||||||||||
| U.S. | International | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Service cost | $ | — | $ | — | $ | 0.6 | $ | 0.6 | |||||||||||||||
| Interest cost | 9.6 | 9.5 | 1.4 | 1.2 | |||||||||||||||||||
| Expected return on plan assets | (17.1) | (16.5) | (2.6) | (2.4) | |||||||||||||||||||
| Amortization of unrecognized net losses | 4.9 | 5.4 | 0.6 | 1.2 | |||||||||||||||||||
| Net periodic (benefit)/cost | $ | (2.6) | $ | (1.6) | $ | — | $ | 0.6 | |||||||||||||||
The service cost component of the net periodic (benefit)/cost above is recorded in Selling, general and administrative expense on the Consolidated (Condensed) Statement of Earnings and Comprehensive Income, while the remaining components are recorded to Other items, net.
The Company also sponsors or participates in a number of other non-U.S. pension arrangements, including various retirement and termination benefit plans, some of which are required by local law or coordinated with government-sponsored plans, which are not significant in the aggregate and, therefore, are not included in the information presented above.
(10) Shareholders' Equity
During the second quarter of fiscal 2022, all outstanding shares of the Company's 7.50% Series A MCPS automatically converted into shares of the Company's common stock, par value $0.01 per share, at a rate of 2.1739 shares of the Company's common stock for each share of preferred stock. This resulted in the issuance of approximately 4.7 million shares of common stock.
In November 2020, the Board of Directors approved a share repurchase program for up to 7.5 million shares of its common stock.
During the fourth quarter of fiscal 2021, the Company entered into a $75.0 accelerated share repurchase (ASR) program. Under the terms of the agreement, approximately 1.5 million shares were delivered in fiscal 2021 and an additional approximately 0.5 million shares were delivered upon termination of the agreement on November 18, 2021. The total number of shares delivered was based on the volume-weighted average stock prices (VWAP) of the Company’s common stock during the ASR period of $38.30. The Company paid the full amount of the ASR in fiscal 2021 and recorded $60.0 of treasury stock representing the approximately 1.5 million shares delivered in fiscal 2021 and the remaining $15.0 was recorded as Additional paid in capital. With the delivery of the additional shares in the first quarter of fiscal 2022, the $15.0 was reclassified to treasury stock on the Consolidated (Condensed) Balance Sheet.
Future share repurchases, if any, will be determined by the Company based on its evaluation of the market conditions, capital allocation objectives, legal and regulatory requirements and other factors.
22
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)
On November 15, 2021, the Board of Directors declared a cash dividend for the first quarter of fiscal 2022 of $0.30 per share of common stock, payable on December 15, 2021, to all shareholders of record as of the close of business on November 30, 2021.
On January 31, 2022, the Board of Directors declared a cash dividend for the second quarter of fiscal 2022 of $0.30 per share of common stock, payable on March 16, 2022, to all shareholders of record as of the close of business on February 22, 2022.
On May 2, 2022, the Board of Directors declared a cash dividend for the third quarter of fiscal 2022 of $0.30 per share of common stock, payable on June 17, 2022, to all shareholders of record as of the close of business on May 25, 2022.
During the nine months ended June 30, 2022 and 2021, total dividends declared were $63.6 and $62.8, respectively. The payments made of $64.1 and $63.8 during the nine months ended June 30, 2022 and 2021, respectively, included the cumulative dividends paid upon the vesting of restricted shares during the periods.
The Company paid a cash dividend of $1.875 per share of MCPS on October 15, 2021 which had been declared in fiscal 2021. On November 15, 2021, the Board of Directors declared a cash dividend of $1.875 per share of MCPS to all shareholders of record as of the close of January 1, 2022, which was paid on January 15, 2022.
Subsequent to the end of the fiscal quarter, on August 1, 2022, the Board of Directors declared a cash dividend for the fourth quarter of fiscal 2022 of $0.30 per share of common stock, payable on September 13, 2022, to all shareholders of record as of the close of business on August 23, 2022.
(11) Financial Instruments and Risk Management
The market risk inherent in the Company's operations creates potential earnings volatility arising from changes in currency rates, interest rates and commodity prices. The Company's policy allows derivatives to be used only for identifiable exposures and, therefore, the Company does not enter into hedges for trading or speculative purposes where the sole objective is to generate profits.
Concentration of Credit Risk—The counterparties to derivative contracts consist of a number of major financial institutions and are generally institutions with which the Company maintains lines of credit. The Company does not enter into derivative contracts through brokers nor does it trade derivative contracts on any other exchange or over-the-counter markets. Risk of currency positions and mark-to-market valuation of positions are strictly monitored at all times.
The Company continually monitors positions with, and credit ratings of, counterparties both internally and by using outside rating agencies. While nonperformance by these counterparties exposes Energizer to potential credit losses, such losses are not anticipated.
In the ordinary course of business, the Company may enter into contractual arrangements (derivatives) to reduce its exposure to commodity price and foreign currency risks. The section below outlines the types of derivatives that existed at June 30, 2022 and September 30, 2021, as well as the Company's objectives and strategies for holding these derivative instruments.
Commodity Price Risk—The Company uses raw materials that are subject to price volatility. At times, the Company uses hedging instruments to reduce exposure to variability in cash flows associated with future purchases of certain materials and commodities.
Foreign Currency Risk—A significant portion of Energizer’s product cost is more closely tied to the U.S. dollar than to the local currencies in which the product is sold. As such, a weakening of currencies relative to the U.S. dollar results in margin declines unless mitigated through pricing actions, which are not always available due to the economic or competitive environment. Conversely, a strengthening of currencies relative to the U.S. dollar can improve margins. The primary currencies to which Energizer is exposed include the Euro, the British pound, the Canadian dollar and the Australian dollar. However, the Company also has significant exposures in many other currencies which, in the aggregate, may have a material impact on the Company's operations.
23
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)
Additionally, Energizer’s foreign subsidiaries enter into internal and external transactions that create nonfunctional currency balance sheet positions at the foreign subsidiary level. These exposures are generally the result of intercompany purchases, intercompany loans and, to a lesser extent, external purchases, and are revalued in the foreign subsidiary’s local currency at the end of each period. Changes in the value of the non-functional currency balance sheet positions in relation to the foreign subsidiary’s local currency results in a transaction gain or loss recorded in Other items, net on the Consolidated (Condensed) Statement of Earnings and Comprehensive Income. The primary currency to which Energizer’s foreign subsidiaries are exposed is the U.S. dollar.
Interest Rate Risk—The Company has interest rate risk with respect to interest expense on variable rate debt. At June 30, 2022, the Company had variable rate debt outstanding of $1,245.0 under the 2020 Term Loan and 2020 Revolving Facility.
In December 2020, the Company entered into an interest rate swap (2020 Interest rate swap) with an effective date of December 22, 2020, that fixed the variable benchmark component (LIBOR) at an interest rate of 0.95% on variable rate debt of $550.0. The notional value increased to $700.0 on January 22, 2021 and will stay at that value through December 22, 2024. The notional value will decrease by $100.0 on December 22, 2024 and by $100.0 each year thereafter until its termination date on December 22, 2027. The notional value of the swap was $700.0 at June 30, 2022.
Derivatives Designated as Cash Flow Hedging Relationships—The Company has entered into a series of forward currency contracts to hedge the cash flow uncertainty of the forecasted payment of inventory purchases due to short term currency fluctuations. Energizer’s foreign affiliates, which have the largest exposure to U.S. dollar purchases, have the Euro, the British pound, the Canadian dollar and the Australian dollar as their local currencies. These foreign currencies represent a significant portion of Energizer's foreign currency exposure. At June 30, 2022 and September 30, 2021, Energizer had an unrealized pre-tax gain of $9.2 and $5.0, respectively, on these forward currency contracts accounted for as cash flow hedges included in Accumulated other comprehensive loss on the Consolidated (Condensed) Balance Sheets. Assuming foreign exchange rates versus the U.S. dollar remain at June 30, 2022 levels, over the next 12 months, $9.0 of the pre-tax gain included in Accumulated other comprehensive loss is expected to be recognized in earnings. Contract maturities for these hedges extend into fiscal year 2023. There were 62 open foreign currency contracts at June 30, 2022, with a total notional value of approximately $174.
The Company has entered into hedging contracts on future zinc purchases to reduce exposure to variability in cash flows associated with price volatility. The contracts are determined to be cash flow hedges and qualify for hedge accounting. The contract maturities for these hedges extend into the fourth fiscal quarter of 2023. There were seven open contracts at June 30, 2022, with a total notional value of approximately $31. The unrealized pre-tax loss recognized on the zinc contracts was $3.8 at June 30, 2022 and the unrealized pre-tax gain recognized on zinc contracts was $4.7 at September 30, 2021. These were included in Accumulated other comprehensive loss on the Consolidated (Condensed) Balance Sheet.
At June 30, 2022 and September 30, 2021, Energizer recorded an unrealized pre-tax gain of $62.3 and $11.7, respectively, on the 2020 Interest rate swap agreement, both of which were included in Accumulated other comprehensive loss on the Consolidated (Condensed) Balance Sheet.
Derivatives not Designated in Hedging Relationships—Energizer enters into foreign currency derivative contracts, which are not designated as cash flow hedges for accounting purposes, to hedge existing balance sheet exposures. Any gains or losses on these contracts are expected to be offset by corresponding exchange losses or gains on the underlying exposures, and as such are not subject to significant market risk. There were nine open foreign currency derivative contracts which are not designated as cash flow hedges at June 30, 2022, with a total notional value of approximately $93.
24
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)
The following table provides the Company's estimated fair values as of June 30, 2022 and September 30, 2021, and the amounts of gains and losses on derivative instruments classified as cash flow hedges for the quarters and the nine months ended June 30, 2022 and 2021, respectively:
| At June 30, 2022 | For the Quarter Ended June 30, 2022 | For the Nine Months Ended June 30, 2022 | ||||||||||||||||||||||||||||||
| Derivatives designated as Cash Flow Hedging Relationships | Estimated Fair Value Asset/(Liability) (1) | Gain/(Loss) Recognized in OCI (2) | Gain/(Loss) Reclassified From OCI into Income (3)(4) | Gain/(Loss) Recognized in OCI (2) | Gain/(Loss) Reclassified From OCI into Income (3) (4) | |||||||||||||||||||||||||||
| Foreign currency contracts | $ | 9.2 | $ | 9.1 | $ | 2.7 | $ | 9.7 | $ | 5.5 | ||||||||||||||||||||||
| Interest rate swap | 62.3 | 12.0 | (1.3) | 48.8 | (4.8) | |||||||||||||||||||||||||||
| Zinc contracts | (3.8) | (7.7) | 2.3 | (1.7) | 6.8 | |||||||||||||||||||||||||||
| Total | $ | 67.7 | $ | 13.4 | $ | 3.7 | $ | 56.8 | $ | 7.5 | ||||||||||||||||||||||
| At September 30, 2021 | For the Quarter Ended June 30, 2021 | For the Nine Months Ended June 30, 2021 | ||||||||||||||||||||||||||||||
| Derivatives designated as Cash Flow Hedging Relationships | Estimated Fair Value Asset (1) | (Loss)/Gain Recognized in OCI (2) | (Loss)/Gain Reclassified From OCI into Income (3)(4) | (Loss)/Gain Recognized in OCI (2) | (Loss)/Gain Reclassified From OCI into Income (3)(4) | |||||||||||||||||||||||||||
| Foreign currency contracts | $ | 5.0 | $ | (0.4) | $ | (3.0) | $ | (5.7) | $ | (9.0) | ||||||||||||||||||||||
| Interest rate swap | 11.7 | (7.9) | (1.8) | 8.8 | (4.9) | |||||||||||||||||||||||||||
| Zinc contracts | 4.7 | 0.8 | 2.0 | 4.6 | 1.7 | |||||||||||||||||||||||||||
| Total | $ | 21.4 | $ | (7.5) | $ | (2.8) | $ | 7.7 | $ | (12.2) | ||||||||||||||||||||||
(1) All derivative assets are presented in Other current assets or Other assets. All derivative liabilities are presented in Other current liabilities or Other liabilities.
(2) OCI is defined as other comprehensive income.
(3) Gain/(Loss) reclassified to Income was recorded as follows: Foreign currency contracts in Cost of products sold, interest rate contracts in Interest expense, and commodity contracts in Cost of products sold.
(4) Each of these hedging relationships has derivative instruments with a high correlation to the underlying exposure being hedged and has been deemed highly effective in offsetting the underlying risk.
25
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)
The following table provides estimated fair values as of June 30, 2022 and September 30, 2021 and the gains and losses on derivative instruments not classified as cash flow hedges for the quarters and nine months ended June 30, 2022 and 2021, respectively:
| At June 30, 2022 | For the Quarter Ended June 30, 2022 | For the Nine Months Ended June 30, 2022 | ||||||||||||||||||
| Estimated Fair Value Asset (1) | Gain Recognized in Income (2) | Gain Recognized in Income (2) | ||||||||||||||||||
| Foreign currency contracts | $ | 0.3 | $ | 1.9 | $ | 5.3 | ||||||||||||||
| At September 30, 2021 | For the Quarter Ended June 30, 2021 | For the Nine Months Ended June 30, 2021 | ||||||||||||||||||
| Estimated Fair Value Liability (1) | Loss Recognized in Income (2) | Loss Recognized in Income (2) | ||||||||||||||||||
| Foreign currency contracts | $ | — | $ | (0.3) | $ | (0.9) | ||||||||||||||
(1) All derivative assets and liabilities are presented in Other current assets or Other assets and Other current liabilities or Other liabilities, respectively.
(2) Gain / (Loss) recognized in Income was recorded as foreign currency in Other items, net.
Energizer has the following recognized financial assets resulting from those transactions that meet the scope of the disclosure requirements as necessitated by applicable accounting guidance for balance sheet offsetting.
| Offsetting of derivative assets | ||||||||||||||||||||||||||||||||||||||||||||
| At June 30, 2022 | At September 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||
| Description | Balance Sheet location | Gross amounts of recognized assets | Gross amounts offset in the Balance Sheet | Net amounts of assets presented in the Balance Sheet | Gross amounts of recognized assets | Gross amounts offset in the Balance Sheet | Net amounts of assets presented in the Balance Sheet | |||||||||||||||||||||||||||||||||||||
| Foreign Currency Contracts | Other Current Assets, Other Assets | $ | 9.9 | $ | — | $ | 9.9 | $ | 5.8 | $ | (0.6) | $ | 5.2 | |||||||||||||||||||||||||||||||
| Offsetting of derivative liabilities | ||||||||||||||||||||||||||||||||||||||||||||
| At June 30, 2022 | At September 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||
| Description | Balance Sheet location | Gross amounts of recognized liabilities | Gross amounts offset in the Balance Sheet | Net amounts of liabilities presented in the Balance Sheet | Gross amounts of recognized liabilities | Gross amounts offset in the Balance Sheet | Net amounts of liabilities presented in the Balance Sheet | |||||||||||||||||||||||||||||||||||||
| Foreign Currency Contracts | Other Current Liabilities, Other Liabilities | $ | (0.4) | $ | — | $ | (0.4) | $ | (0.8) | $ | 0.6 | $ | (0.2) | |||||||||||||||||||||||||||||||
Fair Value Hierarchy—Accounting guidance on fair value measurements for certain financial assets and liabilities requires that assets and liabilities carried at fair value be classified in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
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ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)
Level 3: Unobservable inputs reflecting the reporting entity’s own assumptions or external inputs from inactive markets.
Under the fair value accounting guidance hierarchy, an entity is required to maximize the use of quoted market prices and minimize the use of unobservable inputs. The following table sets forth the Company's financial assets and liabilities, which are carried at fair value, as of June 30, 2022 and September 30, 2021 that are measured on a recurring basis during the period, segregated by level within the fair value hierarchy:
| Level 2 | |||||||||||
| Assets/(Liabilities) at estimated fair value: | June 30, 2022 | September 30, 2021 | |||||||||
| Deferred compensation | $ | (23.3) | $ | (25.1) | |||||||
| Derivatives - Foreign Currency contracts | 9.2 | 5.0 | |||||||||
| Derivatives - Foreign Currency contracts (non-hedge) | 0.3 | — | |||||||||
| Derivatives - Interest Rate Swap contracts | 62.3 | 11.7 | |||||||||
| Derivatives - Zinc contracts | (3.8) | 4.7 | |||||||||
| Net Assets / (Liabilities) at estimated fair value | $ | 44.7 | $ | (3.7) | |||||||
Energizer had no Level 1 financial assets or liabilities, other than pension plan assets, and no Level 3 financial assets or liabilities at June 30, 2022 and September 30, 2021.
Due to the nature of cash and cash equivalents carrying amounts on the balance sheets approximate estimated fair value. The estimated fair value of cash was determined based on level 1 inputs and cash equivalents and restricted cash are determined based on Level 2 inputs.
At June 30, 2022, the estimated fair value of the Company's unfunded deferred compensation liability is determined based upon the quoted market prices of investment options that are offered under the plan. The estimated fair value of foreign currency contracts, interest rate swap and zinc contracts, as described above, is the amount that the Company would receive or pay to terminate the contracts, considering first, quoted market prices of comparable agreements, or in the absence of quoted market prices, such factors as interest rates, currency exchange rates and remaining maturities.
At June 30, 2022, the fair market value of fixed rate long-term debt was $1,848.0 compared to its carrying value of $2,381.4, and at September 30, 2021, the fair market value of fixed rate long-term debt was $2,156.1 compared to its carrying value of $2,152.7. The estimated fair value of the long-term debt is estimated using yields obtained from independent pricing sources for similar types of borrowing arrangements. The estimated fair value of fixed rate long-term debt has been determined based on Level 2 inputs.
(12) Accumulated Other Comprehensive (Loss)/Income
The following table presents the changes in accumulated other comprehensive (loss)/income (AOCI), net of tax by component:
| Foreign Currency Translation Adjustments | Pension Activity | Zinc Contracts | Foreign Currency Contracts | Interest Rate Contracts | Total | ||||||||||||||||||||||||||||||
Balance at September 30, 2021 | $ | (109.8) | $ | (134.4) | $ | 3.6 | $ | 3.6 | $ | 6.6 | $ | (230.4) | |||||||||||||||||||||||
| OCI before reclassifications | 29.1 | 1.6 | (1.3) | 7.3 | 37.3 | 74.0 | |||||||||||||||||||||||||||||
| Reclassifications to earnings | — | 4.2 | (5.2) | (4.1) | 3.6 | (1.5) | |||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | (80.7) | $ | (128.6) | $ | (2.9) | $ | 6.8 | $ | 47.5 | $ | (157.9) | |||||||||||||||||||||||
27
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)
The following table presents the reclassifications out of AOCI to earnings:
| For the Quarters Ended June 30, | For the Nine Months Ended June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Details of AOCI Components | Amount Reclassified from AOCI (1) | Amount Reclassified from AOCI (1) | Affected Line Item in the Combined Statements of Earnings | |||||||||||||||||||||||
| Gains and losses on cash flow hedges | ||||||||||||||||||||||||||
| Foreign currency contracts | $ | (2.7) | $ | 3.0 | $ | (5.5) | $ | 9.0 | Cost of products sold | |||||||||||||||||
| Interest rate contracts | 1.3 | 1.8 | 4.8 | 4.9 | Interest expense | |||||||||||||||||||||
| Zinc contracts | (2.3) | (2.0) | (6.8) | (1.7) | Cost of products sold | |||||||||||||||||||||
| (3.7) | 2.8 | (7.5) | 12.2 | Loss / (earnings) before income taxes | ||||||||||||||||||||||
| 0.9 | (0.7) | 1.8 | (3.0) | Income tax expense / (benefit) | ||||||||||||||||||||||
| $ | (2.8) | $ | 2.1 | $ | (5.7) | $ | 9.2 | Net (earnings) / loss | ||||||||||||||||||
| Amortization of defined benefit pension items | ||||||||||||||||||||||||||
| Actuarial loss | 1.9 | 2.2 | 5.5 | 6.6 | (2) | |||||||||||||||||||||
| (0.4) | (0.5) | (1.3) | (1.5) | Income tax benefit | ||||||||||||||||||||||
| $ | 1.5 | $ | 1.7 | $ | 4.2 | $ | 5.1 | Net loss | ||||||||||||||||||
| Total reclassifications to earnings | $ | (1.3) | $ | 3.8 | $ | (1.5) | $ | 14.3 | Net (earnings)/loss | |||||||||||||||||
(1) Amounts in parentheses indicate credits to Consolidated (Condensed) Statement of Earnings and Comprehensive Income.
(2) This AOCI component is included in the computation of net periodic pension (benefit)/cost (see Note 9, Pension Plans, for further details).
(13) Supplemental Financial Statement Information
The components of certain income statement accounts are as follows:
| For the Quarters Ended June 30, | For the Nine Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Other items, net | |||||||||||||||||||||||
Interest income | $ | (0.2) | $ | (0.2) | $ | (0.7) | $ | (0.5) | |||||||||||||||
| Foreign currency exchange loss/(gain) | 2.5 | (0.9) | 3.7 | 0.9 | |||||||||||||||||||
Pension benefit other than service costs | (1.0) | (0.6) | (3.2) | (1.6) | |||||||||||||||||||
| Exit of Russian market | — | — | 7.5 | — | |||||||||||||||||||
| Gain on capital lease termination | (4.5) | — | (4.5) | — | |||||||||||||||||||
| Other | (0.3) | 0.2 | (0.1) | 0.4 | |||||||||||||||||||
Total Other items, net | $ | (3.5) | $ | (1.5) | $ | 2.7 | $ | (0.8) | |||||||||||||||
28
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)
The components of certain balance sheet accounts are as follows:
| June 30, 2022 | September 30, 2021 | ||||||||||
| Inventories | |||||||||||
| Raw materials and supplies | $ | 154.5 | $ | 118.8 | |||||||
| Work in process | 274.5 | 206.3 | |||||||||
| Finished products | 472.8 | 403.2 | |||||||||
| Total inventories | $ | 901.8 | $ | 728.3 | |||||||
| Other Current Assets | |||||||||||
| Miscellaneous receivables | $ | 25.2 | $ | 21.4 | |||||||
| Due from Spectrum | 6.2 | 16.3 | |||||||||
| Prepaid expenses | 104.5 | 98.3 | |||||||||
| Value added tax collectible from customers | 29.5 | 28.3 | |||||||||
| Other | 27.9 | 15.1 | |||||||||
| Total other current assets | $ | 193.3 | $ | 179.4 | |||||||
| Property, Plant and Equipment | |||||||||||
| Land | $ | 14.4 | $ | 14.4 | |||||||
| Buildings | 121.5 | 121.4 | |||||||||
| Machinery and equipment | 828.4 | 822.9 | |||||||||
| Construction in progress | 57.0 | 62.4 | |||||||||
| Capital leases | 41.1 | 52.7 | |||||||||
| Total gross property | 1,062.4 | 1,073.8 | |||||||||
| Accumulated depreciation | (691.9) | (690.9) | |||||||||
| Total property, plant and equipment, net | $ | 370.5 | $ | 382.9 | |||||||
| Other Current Liabilities | |||||||||||
| Accrued advertising, sales promotion and allowances | $ | 27.2 | $ | 19.5 | |||||||
| Accrued trade allowances | 50.0 | 57.3 | |||||||||
| Accrued freight & warehousing | 40.4 | 26.8 | |||||||||
| Accrued salaries, vacations and incentive compensation | 49.7 | 65.4 | |||||||||
| Accrued interest expense | 11.7 | 16.5 | |||||||||
| Income taxes payable | 33.3 | 30.3 | |||||||||
| Other | 98.9 | 141.0 | |||||||||
| Total other current liabilities | $ | 311.2 | $ | 356.8 | |||||||
| Other Liabilities | |||||||||||
| Pensions and other retirement benefits | $ | 62.3 | $ | 66.2 | |||||||
| Deferred compensation | 20.3 | 25.1 | |||||||||
| Mandatory transition tax | 16.7 | 16.7 | |||||||||
| Other non-current liabilities | 70.9 | 70.4 | |||||||||
| Total other liabilities | $ | 170.2 | $ | 178.4 | |||||||
(14) Legal proceedings/contingencies and other obligations
Legal proceedings/contingencies - The Company and its affiliates are subject to a number of legal proceedings in various jurisdictions arising out of its operations. Many of these legal matters are in preliminary stages and involve complex issues of law and fact, and may proceed for protracted periods of time. The amount of liability, if any, from these proceedings cannot be determined with certainty. The Company and its affiliates are a party to legal proceedings and claims that arise during the ordinary course of business. The Company reviews our legal
29
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)
proceedings and claims, regulatory reviews and inspections and other legal proceedings on an ongoing basis and follows appropriate accounting guidance when making accrual and disclosure decisions. The Company establishes accruals for those contingencies where the incurrence of a loss is probable and can be reasonably estimated, and discloses the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for our financial statements to not be misleading. The Company does not record liabilities when the likelihood that the liability has been incurred is probable, but the amount cannot be reasonably estimated. Based upon present information, the Company believes that its liability, if any, arising from such pending legal proceedings, asserted legal claims and known potential legal claims which are likely to be asserted, is not reasonably likely to be material to the Company's financial position, results of operations, or cash flows, when taking into account established accruals for estimated liabilities.
Other obligations - In the ordinary course of business, the Company also enters into supply and service contracts. These contracts can include either volume commitments or fixed expiration dates, termination provisions and other standard contractual considerations. At June 30, 2022, the Company had approximately $25.2 of purchase obligations under these contracts.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion is meant to provide investors with information management believes is helpful in reviewing Energizer’s historical-basis results of operations, operating segment results, and liquidity and capital resources. Statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) that are not historical may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You should read the following MD&A in conjunction with the Consolidated (Condensed) Financial Statements (unaudited) and corresponding notes included herein.
All amounts discussed are in millions of U.S. dollars, unless otherwise indicated.
Forward-Looking Statements
This document contains both historical and forward-looking statements. Forward-looking statements are not based on historical facts but instead reflect our expectations, estimates or projections concerning future results or events, including, without limitation, the future sales, gross margins, costs, earnings, cash flows, tax rates and performance of the Company. These statements generally can be identified by the use of forward-looking words or phrases such as “believe,” “expect,” “expectation,” “anticipate,” “may,” “could,” "will," “intend,” “belief,” “estimate,” “plan,” “target,” “predict,” “likely,” “should,” “forecast,” “outlook,” or other similar words or phrases. These statements are not guarantees of performance and are inherently subject to known and unknown risks, uncertainties and assumptions that are difficult to predict and could cause our actual results to differ materially from those indicated by those statements. We cannot assure you that any of our expectations, estimates or projections will be achieved. The forward-looking statements included in this document are only made as of the date of this document and we disclaim any obligation to publicly update any forward-looking statement to reflect subsequent events or circumstances. Numerous factors could cause our actual results and events to differ materially from those expressed or implied by forward-looking statements, including, without limitation:
•Global economic and financial market conditions, including the conditions resulting from the ongoing conflict between Russia and Ukraine as well as the COVID-19 pandemic, and actions taken by our customers, suppliers, other business partners and governments in markets in which we compete might materially and negatively impact us.
• Competition in our product categories might hinder our ability to execute our business strategy, achieve profitability, or maintain relationships with existing customers.
• Changes in the retail environment and consumer preferences could adversely affect our business, financial condition and results of operations.
• We must successfully manage the demand, supply, and operational challenges brought about by the COVID-19 pandemic and any other disease outbreak, including epidemics, pandemics, or similar widespread public health concerns.
• Loss or impairment of the reputation of our Company or our leading brands or failure of our marketing plans could have an adverse effect on our business.
• Loss of any of our principal customers could significantly decrease our sales and profitability.
• Our ability to meet our growth targets depends on successful product, marketing and operations innovation and successful responses to competitive innovation and changing consumer habits.
• We are subject to risks related to our international operations, including currency fluctuations, which could adversely affect our results of operations.
• If we fail to protect our intellectual property rights, competitors may manufacture and market similar products, which could adversely affect our market share and results of operations.
• Our reliance on certain significant suppliers subjects us to numerous risks, including possible interruptions in supply, which could adversely affect our business.
• Our business is vulnerable to the availability of raw materials, our ability to forecast customer demand and our ability to manage production capacity.
• Changes in production costs, including raw material prices, freight and labor, have adversely affected, and in the future could erode, our profit margins and negatively impact operating results.
• The manufacturing facilities, supply channels or other business operations of the Company and our suppliers may be subject to disruption from events beyond our control.
• We may be unable to generate anticipated cost savings (including from our restructuring programs), successfully implement our strategies, or efficiently manage our supply chain and manufacturing processes, and our profitability and cash flow could suffer as a result.
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• Sales of certain of our products are seasonal and adverse weather conditions during our peak selling seasons for certain auto care products could have a material adverse effect.
• A failure of a key information technology system could adversely impact our ability to conduct business.
• We rely significantly on information technology and any inadequacy, interruption, theft or loss of data, malicious attack, integration failure, failure to maintain the security, confidentiality or privacy of sensitive data residing on our systems or other security failure of that technology could harm our ability to effectively operate our business and damage the reputation of our brands.
• We have significant debt obligations that could adversely affect our business and our ability to meet our obligations.
• We may experience losses or be subject to increased funding and expenses related to our pension plans.
• The estimates and assumptions on which our financial projections are based may prove to be inaccurate, which may cause our actual results to materially differ from our projections, which may adversely affect our future profitability, cash flows and stock price.
• If we pursue strategic acquisitions, divestitures or joint ventures, we might experience operating difficulties, dilution, and other consequences that may harm our business, financial condition, and operating results, and we may not be able to successfully consummate favorable transactions or successfully integrate acquired businesses.
• The 2019 Auto Care and Battery acquisitions may have liabilities that are not known to us and the acquisition agreements may not provide us with sufficient indemnification with respect to such liabilities.
• Our business involves the potential for claims of product liability, labeling claims, commercial claims and other legal claims against us, which could affect our results of operations and financial condition and result in product recalls or withdrawals.
• Our business is subject to increasing regulation in the U.S. and abroad, the uncertainty and cost of future compliance and consequence of non-compliance with which may have a material adverse effect on our business.
• Increased focus by governmental and non-governmental organizations, customers, consumers and shareholders on sustainability issues, including those related to climate change, may have an adverse effect on our business, financial condition and results of operations and damage our reputation.
• We are subject to environmental laws and regulations that may expose us to significant liabilities and have a material adverse effect on our results of operations and financial condition.
• We cannot guarantee that any share repurchase program will be fully consummated or that any share repurchase program will enhance long-term stockholder value, and share repurchases could increase the volatility of the price of our stock and diminish our cash reserves.
In addition, other risks and uncertainties not presently known to us or that we consider immaterial could affect the accuracy of any such forward-looking statements. The list of factors above is illustrative, but by no means exhaustive. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. Additional risks and uncertainties include those discussed herein and detailed from time to time in our other publicly filed documents, including those described under the heading “Risk Factors” in our Form 10-K filed with the Securities and Exchange Commission on November 16, 2021, and included in Part II, Item 1A "Risk Factors" of this Form 10-Q.
Non-GAAP Financial Measures
The Company reports its financial results in accordance with accounting principles generally accepted in the U.S. ("GAAP"). However, management believes that certain non-GAAP financial measures provide users with additional meaningful comparisons to the corresponding historical or future period. These non-GAAP financial measures exclude items that are not reflective of the Company's on-going operating performance, such as acquisition and integration costs, an acquisition earn out, the costs of the May 2022 flooding at our Brazilian manufacturing facility, the costs of exiting the Russian market, the gain on the termination of our capital lease and the loss on extinguishment of debt. In addition, these measures help investors to analyze year over year comparability when excluding currency fluctuations as well as other Company initiatives that are not on-going. We believe these non-GAAP financial measures are an enhancement to assist investors in understanding our business and in performing analysis consistent with financial models developed by research analysts. Investors should consider non-GAAP measures in addition to, not as a substitute for, or superior to, the comparable GAAP measures. In addition, these non-GAAP measures may not be the same as similar measures used by other companies due to possible differences in methods and in the items being adjusted.
32
We provide the following non-GAAP measures and calculations, as well as the corresponding reconciliation to the closest GAAP measure:
Segment Profit. This amount represents the operations of our two reportable segments including allocations for shared support functions. General corporate and other expenses, intangible amortization expense, interest expense, the gain on the termination of our capital lease, loss on extinguishment of debt, other items, net, the charges related to acquisition and integration costs, including restructuring charges, an acquisition earn out, the costs of the flooding of our manufacturing facility in Brazil, and the costs of exiting our Russian market have all been excluded from segment profit.
Adjusted Net Earnings and Adjusted Diluted Net Earnings Per Common Share (EPS). These measures exclude the impact of the costs related to acquisition and integration, an acquisition earn out, the costs of the flooding of our manufacturing facility in Brazil, the costs of exiting the Russian market, the gain on the termination of our capital lease and the loss on extinguishment of debt.
Non-GAAP Tax Rate. This is the tax rate when excluding the pre-tax impact of acquisition and integration, an acquisition earn out, the costs of the flooding of our manufacturing facility in Brazil, the costs of exiting the Russian market, the gain on the termination of our capital lease and the loss on extinguishment of debt, as well as the related tax impact for these items, calculated utilizing the statutory rate for where the impact was incurred.
Organic. This is the non-GAAP financial measurement of the change in revenue, segment profit or other margins that excludes or otherwise adjusts for the change in Russia and Argentina Operations and impact of currency from the changes in foreign currency exchange rates as defined below:
Change in Russia Operations. The Company exited the Russian market in the second quarter of fiscal 2022 due to the increased global and economic and political uncertainty resulting from the ongoing conflict between Russia and Ukraine. This adjusts for the change in Russian sales and segment profit from the prior year.
Change in Argentina Operations. The Company is presenting separately all changes in sales and segment profit from our Argentina affiliate due to the designation of the economy as highly inflationary as of July 1, 2018.
Impact of currency. The Company evaluates the operating performance of our Company on a currency neutral basis. The impact of currency is the difference between the value of current year foreign operations at the current period ending USD exchange rate, compared to the value of the current year foreign operations at the prior period ending USD exchange rate, as well as the impact of hedging on the currency fluctuations.
Adjusted Selling, General & Administrative (SG&A) and Gross Margin as a percent of sales. Detail for adjusted gross margin and adjusted SG&A as a percent of sales are also supplemental non-GAAP measures. These measures exclude the impact of costs related to acquisition and integration, an acquisition earn out, the costs of the flooding of our manufacturing facility in Brazil and the costs of exiting the Russian market.
COVID-19
Energizer continues to be impacted by the Coronavirus (COVID-19) pandemic and its related effects. Overall, the impact of the COVID-19 pandemic on the Company's results of operations in the first nine months of fiscal 2022 was primarily driven by factors related to disruption in our global supply chain and changes in demand for products. While it is not feasible to identify or quantify all the other direct and indirect implications on the Company's results of operations, below are factors that the Company believes have affected its results for fiscal 2022 compared to fiscal 2021.
•The Company has faced higher operating costs due to the global supply chain constraints, including for raw materials and transportation.
•Labor availability continues to be a challenge across most of the Company's U.S. sites.
•The Company has invested in incremental safety stock to partially mitigate the impacts of the continued volatility of the global supply network.
The full impact of COVID-19 on our financial and operating performance will depend significantly on the duration and severity of the pandemic and related disruption to our global supply chain, the emergence of variants and the
33
effectiveness of vaccines against these variants, and any future government actions affecting consumers and the economy in general, among other factors beyond our knowledge or control.
Exit of Russian Market
During the second quarter of fiscal 2022, the Company exited the Russian market due to global economic and political uncertainty related to the conflict between Russian and the Ukraine and the resultant sanctions imposed on Russia.
While neither Russia nor Ukraine constitutes a material portion of our business, a significant escalation or expansion of economic disruption or the conflict's current scope could disrupt our supply chain, broaden inflationary costs, and have a material adverse effect on our results of operations. Our Russian subsidiary comprised approximately one percent of our business.
With the decision to exit the Russian market, the Company terminated the employment of all our Russian colleagues and reviewed our Russian assets for impairment. Exiting the Russian market resulted in the impairment of inventory recorded to Cost of products sold of $0.7, impairment of other assets and severance recorded to SG&A of $5.8, and currency impacts recorded in Other items, net of $7.5 in the nine months ended June 30, 2022.
Brazil Manufacturing Plant Flood
In May 2022, the Company's Jaboatao, Brazil battery manufacturing facility had severe flooding due to historic levels of rain in the area. The plant was not operational for the month of June, however some production began again in July. The Company has an insurance policy with an approximate $10 deductible. For the three and nine months ended June 30, 2022, the Company recorded costs related to the flood of $9.9 in Cost of products sold, primarily related to damaged inventory at the plant. Based on the insurance plan deductible, the Company anticipates that further losses from the damage should be minimal.
Acquisition and Integration Costs
Acquisition and integration costs incurred during fiscal year 2022 and 2021 relate to the FDK Indonesia Acquisition, Formulations Acquisition, and the Battery and Auto Care Acquisitions which occurred in fiscal year 2019. The Company incurred pre-tax acquisition and integration costs of $16.5 during the nine months ended June 30, 2022 and $19.5 and $54.6 for the quarter and the nine months ended June 30, 2021, respectively. No acquisition or integration costs were incurred during the quarter ended June 30, 2022.
Pre-tax costs recorded in Cost of products sold were $6.0 for the nine months ended June 30, 2022 and $9.6 and $24.6 for the quarter and nine months ended June 30, 2021, respectively, primarily related to the facility exit and restructuring related costs, discussed in Note 4, Restructuring.
Pre-tax acquisition and integration costs recorded in SG&A were $9.4 for the nine months ended June 30, 2022 and $9.7 and $28.7 for the quarter and nine months ended June 30, 2021, respectively. The SG&A expenses incurred during the nine months ended June 30, 2022 primarily related to the integration of the acquired information technology systems, consulting costs, and retention-related compensation costs. The SG&A expenses incurred during the quarter and nine months ended June 30, 2021 primarily related to the integration of the Battery and Auto Care acquisitions, including costs of integrating the auto care information technology systems of the businesses, consulting costs associated with the 2020 restructuring program discussed in Note 4, Restructuring, and legal fees incurred for the fiscal 2021 acquisitions.
For the nine months ended June 30, 2022, the Company recorded $1.1 of pre-tax acquisition and integration related costs in research and development. The fiscal 2022 costs primarily related to severance and R&D asset write-offs. For the quarter and nine months ended June 30, 2021, the Company recorded $1.0 and $1.1 respectively, of pre-tax acquisition and integration related costs in research and development.
For the quarter and nine months ended June 30, 2021, the Company recorded $0.1 and $0.2, respectively, of pre-tax acquisition and integration related Other items, net.
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Restructuring Costs
In the fourth fiscal quarter of 2019, the Company began implementing restructuring related integration plans for our manufacturing and distribution networks. These plans include the closure and combination of distribution and manufacturing facilities in order to reduce complexity and realize greater efficiencies in our manufacturing, packaging and distribution processes. All activities within this plan were substantially complete by December 31, 2021.
Part of this plan was the exit of our Dixon, IL leased packaging facility, which the Company vacated during the first quarter of fiscal 2022. In the third quarter of fiscal 2022, the Company entered into a termination agreement with the landlord. The Company terminated the lease agreement, which went into 2028, reducing our capital lease obligations by $9.8. The termination agreement required the Company to pay a termination fee of $4.0, as well as decommissioning costs and brokerage fees. Since the Company has already vacated the facility as a part of the 2019 restructuring program, most assets associated with the location have already been fully depreciated. The termination of this lease resulted in a gain of $4.5 recognized in Other items, net during the third quarter of fiscal 2022.
In the fourth fiscal quarter of 2020, the Company initiated a new restructuring program with a primary focus on reorganizing our global end-to-end supply chain network and ensuring accountability by category. This program included streamlining the Company’s end-to-end supply chain model to enable rapid response to category specific demands and enhancing our ability to better serve our customers. Planning and execution of this program began in fiscal year 2021, with all programs substantially complete by December 31, 2021.
The Pre-tax gain on capital lease termination of $4.5 recorded in Other items, net was the only restructuring item recognized during the quarter ended June 30, 2022. Pre-tax expenses incurred within the quarter ended June 30, 2021 were $10.0. The total pre-tax expense related to these restructuring plans for the nine months ended June 30, 2022 and 2021 was $0.8 and $31.8, respectively. These expenses consisted of charges for employee severance, retention, related benefit costs, accelerated depreciation, asset write-offs, relocation, environmental investigatory and mitigation costs, consulting costs and other exit costs, offset by the gain on capital lease termination in fiscal 2022. The costs were reflected in Cost of products sold, Selling, general and administrative expense, Research & development, and Other items, net on the Consolidated (Condensed) Statements of Earnings and Comprehensive Income.
Although the Company's restructuring costs are recorded outside of segment profit, if allocated to our reportable segments, the restructuring costs noted above for the nine months ended June 30, 2022 would be incurred within the Battery & Lights segment in the amounts of $0.6 and the Auto Care segment in the amount of $0.2. For the quarter ended June 30, 2022, all of the gain would have been incurred within the Battery & Lights segment. If allocated to the Company's new reportable segments in the prior year, $7.4 and $28.5 of the restructuring costs would have been incurred within the Battery & Lights segment during the quarter and nine months ended June 30, 2021, respectively, and $2.6 and $3.3 would have been incurred within the Auto Care segment during the quarter and nine months ended June 30, 2021, respectively.
Total pre-tax charges relating to the 2019 restructuring program since inception were $60.6 and total pre-tax charges relating to the 2020 restructuring program since inception were $19.4.
The first fiscal quarter of 2022 marked the conclusion of both the 2019 and 2020 restructuring programs. We do not expect to incur additional material charges for these programs. The Company is still on track to achieve the estimated $55 to $60 of total cost savings annually by the end of this fiscal year.
Refer to Note 4, Restructuring, to the Consolidated (Condensed) Financial Statements for additional discussion on our restructuring costs.
Highlights / Operating Results
Financial Results (in millions, except per share data)
Energizer reported third fiscal quarter Net earnings of $52.4, or $0.73 per diluted common share, compared to a Net earnings of $20.8, or $0.24 per diluted common share, in the prior year third fiscal quarter. Adjusted diluted net
35
earnings per common share was $0.77 for the third fiscal quarter as compared to $0.74 in the prior year quarter, an increase of 4%.
For the nine months ended June 30, 2022, Energizer reported Net earnings of $131.4, or $1.82 per diluted common share, compared to Net earnings of $77.7, or $0.95 per diluted common share in the prior year comparable period. Adjusted diluted net earnings per common share was $2.26 for the nine months period as compared to the $2.69 in the prior year comparable period.
Net earnings and Diluted net earnings per common share for the time periods presented were impacted by certain items related to acquisition and integration costs, an acquisition earn out, the costs of the flooding of our manufacturing facility in Brazil, costs to exit the Russian market, the gain on the termination of our capital lease and the loss on extinguishment of debt as described in the tables below. The impact of these items is provided below as a reconciliation of Net earnings and Diluted net earnings per common share to Adjusted net earnings and Adjusted diluted net earnings per common share, which are non-GAAP measures. See disclosure on Non-GAAP Financial Measures above.
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| For the Quarters Ended June 30, | For the Nine Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net earnings attributable to common shareholders | $ | 52.4 | $ | 16.8 | $ | 127.4 | $ | 65.6 | |||||||||||||||
| Mandatory preferred stock dividends | — | (4.0) | (4.0) | (12.1) | |||||||||||||||||||
| Net earnings | 52.4 | 20.8 | 131.4 | 77.7 | |||||||||||||||||||
| Pre-tax adjustments | |||||||||||||||||||||||
| Acquisition and integration (1) | — | 19.5 | 16.5 | 54.6 | |||||||||||||||||||
| Acquisition earn out (2) | — | 1.2 | 1.1 | 2.3 | |||||||||||||||||||
| Loss on extinguishment of debt | — | 27.6 | — | 103.3 | |||||||||||||||||||
| Exit of Russian market (3) | — | — | 14.0 | — | |||||||||||||||||||
| Gain on capital lease termination (4) | (4.5) | — | (4.5) | — | |||||||||||||||||||
| Brazil flood damage (5) | 9.9 | — | 9.9 | — | |||||||||||||||||||
| Total adjustments, pre-tax | $ | 5.4 | $ | 48.3 | $ | 37.0 | $ | 160.2 | |||||||||||||||
| After tax adjustments | |||||||||||||||||||||||
| Acquisition and integration | — | 14.8 | 13.0 | 42.1 | |||||||||||||||||||
| Acquisition earn out | — | 0.9 | 0.8 | 1.7 | |||||||||||||||||||
| Loss on extinguishment of debt | — | 18.1 | — | 76.1 | |||||||||||||||||||
| Exit of Russian market | — | — | 14.3 | — | |||||||||||||||||||
| Gain on capital lease termination | (3.4) | — | (3.4) | — | |||||||||||||||||||
| Brazil flood damage | 6.5 | — | 6.5 | — | |||||||||||||||||||
| Total adjustments, after tax | $ | 3.1 | $ | 33.8 | $ | 31.2 | $ | 119.9 | |||||||||||||||
| Adjusted net earnings (6) | $ | 55.5 | $ | 54.6 | $ | 162.6 | $ | 197.6 | |||||||||||||||
| Mandatory preferred stock dividends | — | (4.0) | (4.0) | (12.1) | |||||||||||||||||||
| Adjusted net earnings attributable to common shareholders | $ | 55.5 | $ | 50.6 | $ | 158.6 | $ | 185.5 | |||||||||||||||
| Diluted net earnings per common share | $ | 0.73 | $ | 0.24 | $ | 1.82 | $ | 0.95 | |||||||||||||||
Adjustments (per common share) | |||||||||||||||||||||||
| Acquisition and integration | — | 0.22 | 0.18 | 0.57 | |||||||||||||||||||
| Acquisition earn out | — | 0.01 | 0.01 | 0.02 | |||||||||||||||||||
| Loss on extinguishment of debt | — | 0.27 | — | 1.04 | |||||||||||||||||||
| Exit of Russian market | — | — | 0.20 | — | |||||||||||||||||||
| Gain on capital lease termination | (0.05) | — | (0.05) | — | |||||||||||||||||||
| Brazil flood damage | 0.09 | — | 0.09 | — | |||||||||||||||||||
| Impact for diluted share calculation (7) | — | — | 0.01 | 0.11 | |||||||||||||||||||
| Adjusted diluted net earnings per diluted common share (7) | $ | 0.77 | $ | 0.74 | $ | 2.26 | $ | 2.69 | |||||||||||||||
| Weighted average shares of common stock - Diluted | 71.7 | 68.6 | 69.9 | 68.7 | |||||||||||||||||||
| Adjusted Weighted average shares of common stock - Diluted (7) | 71.7 | 68.6 | 71.8 | 73.4 | |||||||||||||||||||
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(1) Acquisition and integration costs were included in the following lines in the Consolidated (Condensed) Statement of Earnings and Comprehensive Income:
| For the Quarters Ended June 30, | For the Nine Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Cost of products sold | $ | — | $ | 9.6 | $ | 6.0 | $ | 24.6 | |||||||||||||||
| SG&A | — | 9.7 | 9.4 | 28.7 | |||||||||||||||||||
| Research and development | — | 0.1 | 1.1 | 1.1 | |||||||||||||||||||
| Other items, net | — | 0.1 | — | 0.2 | |||||||||||||||||||
| Acquisition and integration related items | $ | — | $ | 19.5 | $ | 16.5 | $ | 54.6 | |||||||||||||||
(2) This represents the earn out achieved through June 30, 2022 and 2021 under the incentive agreements entered into with the fiscal 2021 acquisition of a formulations company, and is recorded in SG&A on the Consolidated (Condensed) Statement of Earnings and Comprehensive Income.
(3) These are the costs associated with the Company's exit of the Russian market during the second quarter of fiscal 2022. Exiting the Russian market resulted in the impairment of inventory recorded in Cost of products sold of $0.7, impairment of other assets and severance recorded in SG&A of $5.8 and currency impacts recorded in Other items, net of $7.5 on the Consolidated (Condensed) Statement of Earnings and Comprehensive Income.
(4) This represents the termination of a capital lease in the quarter ended June 30, 2022 associated with a facility that was exited as a part of the Company's 2019 Restructuring program. The gain was recorded in Other items, net in the Consolidated (Condensed) Statement of Earnings.
(5) These are the costs associated with the May 2022 flooding of our Brazilian manufacturing facility, which were recorded in Cost of products sold on the Consolidated (Condensed) Statement of Earnings. The majority is related to damaged inventory.
(6) The effective tax rate for the Adjusted - Non-GAAP Earnings and Diluted EPS for the quarters ended June 30, 2022 and 2021 was 21.3% and 24.1%, respectively, and for the nine months ended June 30, 2022 and 2021 was 21.3% and 23.2%, respectively, as calculated utilizing the statutory rate for where the costs were incurred.
(7) During the nine months ended June 30, 2022, the mandatory convertible preferred shares were converted to approximately 4.7 million common stock. The full conversion was dilutive and the mandatory preferred stock dividends are excluded from net earnings in the Adjusted dilution calculation.
For the quarter ended June 30, 2021, the conversion of the mandatory convertible preferred stock is not dilutive and the mandatory preferred stock dividends are included in the adjusted dilution calculation. For the nine months ended June 30, 2021, the Adjusted diluted net earnings per common share assumes the conversion of the mandatory convertible preferred stock to 4.7 million shares of common stock, and excludes the mandatory preferred stock dividends from net earnings as that is more dilutive to the calculation.
Highlights
| Total Net sales | For the Quarter Ended June 30, 2022 | For the Nine Months Ended June 30, 2022 | |||||||||||||||||||||
| $ Change | % Chg | $ Change | % Chg | ||||||||||||||||||||
| Net sales - prior year | $ | 721.8 | $ | 2,255.5 | |||||||||||||||||||
| Organic | 27.3 | 3.8 | % | 38.0 | 1.7 | % | |||||||||||||||||
| Change in Russia | (7.9) | (1.1) | % | (10.2) | (0.5) | % | |||||||||||||||||
| Change in Argentina | 5.5 | 0.8 | % | 9.3 | 0.4 | % | |||||||||||||||||
| Impact of currency | (18.7) | (2.6) | % | (32.9) | (1.4) | % | |||||||||||||||||
| Net Sales - current year | $ | 728.0 | 0.9 | % | $ | 2,259.7 | 0.2 | % | |||||||||||||||
See non-GAAP measure disclosures above.
Net sales were $728.0 for the third fiscal quarter of 2022, an increase of $6.2 as compared to the prior year quarter, driven by the following items:
•Organic Net sales increased 3.8% primarily driven by the following items:
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•Pricing executed in both battery and auto care drove an organic increase of approximately 10%; and
•New distribution across both segments, in both North America and International markets, contributed approximately 1% to organic growth.
•Offsetting these increases were volume declines in both battery and auto care related to the previously mentioned pricing actions, the lapping of elevated demand in the prior year and the impact of inflationary pressures, resulted in a 7.5% decrease to organic sales.
•Unfavorable movement in foreign currencies resulted in decreased sales of $18.7, or 2.6%.
Net sales for the nine months ended June 30, 2022 were $2,259.7, an increase of $4.2 as compared to the prior year comparative period, driven by the following items:
•Organic Net sales increased 1.7% primarily driven by the following items:
◦Pricing executed in both battery and auto care drove an organic increase of approximately 5.5%; and
◦New distribution globally across both battery and auto care contributed approximately 1% to organic growth.
◦In addition to the pricing and distribution gains, we experienced higher than expected battery volumes. However the net volume impact was an approximate 5% decrease to organic sales as a result of lapping the elevated battery demand in the prior year and declines in both battery and auto care related to the previously mentioned pricing actions.
•Unfavorable movement in foreign currencies resulted in decreased sales of $32.9, or 1.4%
Gross margin percentage on a reported basis for the third fiscal quarter of 2022 was 39.0%, compared to 37.9% in the prior year. Excluding costs related to Brazilian flood damage of $9.9 and prior year integration costs of $9.6, adjusted gross margin was 40.4% compared to 39.2% in the prior year, an increase of 120 basis points from prior year.
Gross margin percentage on a reported basis for the nine months ended June 30, 2022 was 36.9%, compared to 39.1% in the prior year comparative period. Excluding costs related to Brazilian flood damage of $9.9, the inventory write downs in Russia of $0.7 and $6.0 of acquisition and integration costs in the current year and $24.6 in the prior year period, adjusted gross margin was 37.6% compared to 40.2%, in the prior year, a decrease of 260 basis points from the prior year.
Quarter Ended June 30, 2022 | Nine Months Ended June 30, 2022 | |||||||||||||||||||||||||
| Reported | Adjusted | Reported | Adjusted | |||||||||||||||||||||||
Gross Margin - FY'21 | 37.9 | % | 39.2 | % | 39.1 | % | 40.2 | % | ||||||||||||||||||
| Pricing | 5.7 | % | 5.6 | % | 3.2 | % | 3.2 | % | ||||||||||||||||||
| Product cost impacts | (3.9) | % | (3.9) | % | (6.5) | % | (6.5) | % | ||||||||||||||||||
| Reduction in integration costs, net of Brazil flood and Russia exit impact | (0.1) | % | — | % | 0.3 | % | — | % | ||||||||||||||||||
| Reduction of FY21 COVID-19 cost impact | — | % | — | % | 0.5 | % | 0.5 | % | ||||||||||||||||||
| Synergy realization | — | % | — | % | 0.3 | % | 0.3 | % | ||||||||||||||||||
| Currency impact and other | (0.6) | % | (0.5) | % | — | % | (0.1) | % | ||||||||||||||||||
Gross Margin - FY'22 | 39.0 | % | 40.4 | % | 36.9 | % | 37.6 | % | ||||||||||||||||||
The Gross margin increase for the third fiscal quarter of 2022 was largely driven by the positive impact of executed price increases in battery and auto care partially offset by a continuation of higher operating costs, including
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transportation, material and labor, consistent with ongoing inflationary trends and negative currency impacts. We expect input cost inflation to remain elevated throughout the rest of fiscal 2022.
The Gross margin decrease for the nine months ended June 30, 2022 was largely driven by a continuation of higher operating costs, including transportation, material and labor, consistent with ongoing inflationary trends. Partially offsetting these margin impacts was the positive impact of executed price increases in battery and auto care, the elimination of prior year COVID-19 costs and synergies of approximately $6.
Selling, general, and administrative expense (SG&A) was $118.9 in the third fiscal quarter of 2022, or 16.3% of Net sales, as compared to $117.5, or 16.3% of Net sales, in the prior year period. Included in the third fiscal quarter of 2021 results were integration costs of $9.7 and an acquisition earn out of $1.2. Excluding integration costs and the acquisition earn out from the prior year, adjusted SG&A was $106.6, or 14.8% of Net sales. The increase was primarily driven by environmental costs related to a legacy facility that has been sold by the Company, recycling fees, and IT spending related to our investment in digital transformation.
SG&A was $364.4 for the nine months ended June 30, 2022, or 16.1% of net sales, as compared to $365.4, or 16.2% of net sales, in the prior year comparative period. Included in the nine months ended June 30, 2022 were costs of exiting the Russian market of $5.8 and included in the nine months ended June 30, 2022 and 2021 results were acquisition and integration costs of $9.4 and $28.7, respectively, and acquisition earn out costs of $1.1 and $2.3, respectively. Excluding the Russian exit costs, integration costs and acquisition earn out, adjusted SG&A was $348.1, or 15.4% of Net sales in the nine months ended June 30, 2022 and was $334.4, or 14.8% of Net sales in the prior year period. The increase was primarily driven by increased environmental costs related to a legacy facility that has been sold by the Company, recycling fees, travel and higher IT spending related to our digital transformation, partially offset by reduced compensation expense year over year.
Advertising and sales promotion expense (A&P) was $38.5, or 5.3% of net sales, in the third fiscal quarter of 2022, as compared to $44.1, or 6.1% of Net sales, in the third fiscal quarter of 2021. A&P was $109.8, or 4.9% of Net sales, for the nine months ended June 30, 2022 as compared to $120.8, or 5.4% of Net sales, in the prior year comparative period.
Research and Development (R&D) was $8.5, or 1.2% of Net sales, for the quarter ended June 30, 2022, as compared to $8.2, or 1.1% of Net sales, in the prior year comparative period. For the nine months ended June 30, 2022, R&D was $25.3, or 1.1% of net sales, as compared to $24.8, or 1.1% of net sales, in the prior year comparative period.
Interest expense was $41.1 for the third fiscal quarter of 2022 compared to $38.6 for the prior year comparative period. For the nine months ended June 30, 2022, interest expense was $116.4 as compared to $125.0 for the prior year comparative period. The current quarter increase is related to the additional interest on the $300.0 Senior Notes issued in the second quarter of fiscal 2022. The interest savings in the nine months ended June 30, 2022 was primarily driven by the debt refinancing activity that occurred in the later part of fiscal 2021, slightly offset by the additional interest on the $300.0 Senior Notes issued in the second quarter of fiscal 2022.
Loss on extinguishment of debt was $27.6 and $103.3 for the quarter and nine months ended June 30, 2021, respectively. The Loss on extinguishment of debt was the result of the Company's transactions to refinance its Revolver, Term Loans, and 2027 Senior Notes during the first half of fiscal 2021, and the transaction to refinance its 2026 €650 Senior Notes during the third quarter of fiscal 2021. The Company also amended certain covenants in its credit agreement, which created additional capacity and flexibility.
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Other items, net is summarized below, and was a benefit of $3.5 and $1.5 for the third fiscal quarter of 2022 and 2021, respectively. Other items, net was an expense of $2.7 and benefit of $0.8 for the nine months ended June 30, 2022 and 2021, respectively.
| For the Quarters Ended June 30, | For the Nine Months Ended June 30, | ||||||||||||||||||||||
| Other items, net | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Interest income | $ | (0.2) | $ | (0.2) | $ | (0.7) | $ | (0.5) | |||||||||||||||
| Foreign currency exchange loss/(gain) | 2.5 | (0.9) | 3.7 | 0.9 | |||||||||||||||||||
| Pension benefit other than service costs | (1.0) | (0.6) | (3.2) | (1.6) | |||||||||||||||||||
| Exit of Russian market | — | — | 7.5 | — | |||||||||||||||||||
| Gain on termination of capital lease | (4.5) | — | (4.5) | — | |||||||||||||||||||
| Other | (0.3) | 0.2 | (0.1) | 0.4 | |||||||||||||||||||
| Total Other items, net | $ | (3.5) | $ | (1.5) | $ | 2.7 | $ | (0.8) | |||||||||||||||
The effective tax rate on a year to date basis was 22.5% as compared to 20.1% in the prior year. Excluding the impact of the acquisition and integration costs, acquisition earn out, Brazil flood damage, costs of exiting the Russian market, gain on capital lease termination and loss on extinguishment in debt, the year to date adjusted effective tax rate was 21.3% as compared to 23.2% in the prior year. The decrease was due to higher foreign earnings in the current year.
Segment Results
As of October 1, 2021, the Company has changed its reportable segments from two geographical segments, previously Americas and International, to two product groupings, Battery & Lights and Auto Care. This change came with the completion of the Battery and Auto Care Acquisition integrations in fiscal 2022. The Company changed its reporting structure to better reflect what the chief operating decision maker is reviewing to make organizational decisions and resource allocations. The Company has recast the information for the quarter and nine months ended June 30, 2021 to align with this presentation.
Segment performance is evaluated based on segment operating profit, exclusive of general corporate expenses (including share-based compensation costs), amortization of intangibles, acquisition and integration activities, including restructuring charges, acquisition earn out, the costs of the May 2022 flooding at our Brazilian manufacturing facility, costs of exiting the Russian market and other items determined to be corporate in nature. Financial items, such as interest income and expense, gain on capital lease termination and loss on extinguishment of debt are managed on a global basis at the corporate level. The exclusion of acquisition and integration costs from segment results reflects management’s view on how it evaluates segment performance.
Energizer’s operating model includes a combination of standalone and shared business functions between the product segments, varying by country and region of the world. Shared functions include the sales and marketing functions, as well as human resources, IT and finance shared service costs. Energizer applies a fully allocated cost basis, in which shared business functions are allocated between segments. Such allocations are estimates, and do not represent the costs of such services if performed on a standalone basis.
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| Segment Net Sales | Quarter Ended June 30, 2022 | Nine Months Ended June 30, 2022 | |||||||||||||||||||||
| $ Change | % Chg | $ Change | % Chg | ||||||||||||||||||||
| Batteries & Lights | |||||||||||||||||||||||
| Net sales - prior year | $ | 512.7 | $ | 1,799.5 | |||||||||||||||||||
| Organic | 38.0 | 7.4 | % | 19.7 | 1.1 | % | |||||||||||||||||
| Change in Russia | (7.8) | (1.5) | % | (10.1) | (0.6) | % | |||||||||||||||||
| Change in Argentina | 5.5 | 1.1 | % | 9.3 | 0.5 | % | |||||||||||||||||
| Impact of currency | (16.8) | (3.3) | % | (30.1) | (1.6) | % | |||||||||||||||||
| Net sales - current year | $ | 531.6 | 3.7 | % | $ | 1,788.3 | (0.6) | % | |||||||||||||||
| Auto Care | |||||||||||||||||||||||
| Net sales - prior year | $ | 209.1 | $ | 456.0 | |||||||||||||||||||
| Organic | (10.7) | (5.1) | % | 18.3 | 4.0 | % | |||||||||||||||||
| Change in Russia | (0.1) | — | % | (0.1) | — | % | |||||||||||||||||
| Impact of currency | (1.9) | (1.0) | % | (2.8) | (0.6) | % | |||||||||||||||||
| Net sales - current year | $ | 196.4 | (6.1) | % | $ | 471.4 | 3.4 | % | |||||||||||||||
| Total Net Sales | |||||||||||||||||||||||
| Net sales - prior year | $ | 721.8 | $ | 2,255.5 | |||||||||||||||||||
| Organic | 27.3 | 3.8 | % | 38.0 | 1.7 | % | |||||||||||||||||
| Change in Russia | (7.9) | (1.1) | % | (10.2) | (0.5) | % | |||||||||||||||||
| Change in Argentina | 5.5 | 0.8 | % | 9.3 | 0.4 | % | |||||||||||||||||
| Impact of currency | (18.7) | (2.6) | % | (32.9) | (1.4) | % | |||||||||||||||||
| Net sales - current year | $ | 728.0 | 0.9 | % | $ | 2,259.7 | 0.2 | % | |||||||||||||||
Results for the Quarter Ended June 30, 2022
Battery & Lights reported Net sales increased 3.7% as compared to the prior year. Excluding unfavorable foreign currency impact of $16.8, or 3.3%, unfavorable impact from exiting Russian operations of $7.8, or 1.5%, and the favorable impact of Argentina operations of $5.5, or 1.1%, organic net sales increased $38.0, or 7.4%, for the third fiscal quarter. The organic increase was due to global price increases (approximately 10.5%) and new distribution in battery & lights (approximately 1%). This increase was partially offset by the expected decline in battery demand compared to the elevated demand in the prior year period (approximately 4%).
Auto Care reported Net sales decreased 6.1%, as compared to the prior year. Excluding the unfavorable foreign currency impact of $1.9, or 1.0%, organic Net sales decreased $10.7, or 5.1%. The organic decrease in sales was driven by lower volumes in our refrigerant business and the negative impact elevated gas prices had on miles driven, consumer foot traffic in the category, and a tendency for drivers deferring non-critical maintenance (approximately 16%). This decrease was partially offset by price increases in North America (approximately 9%) and new distribution (approximately 2%).
Results for the Nine Months Ended June 30, 2022
Battery & Lights reported Net sales decreased 0.6% as compared to the prior year. Excluding unfavorable foreign currency impact of $30.1, or 1.6%, unfavorable impact from exiting Russian operations of $10.1, or 0.6%, and the favorable impact of Argentina operations of $9.3, or 0.5%, organic net sales increased $19.7, or 1.1%, for the nine months ended June 30, 2022. The organic increase was due to pricing increases (approximately 7%) and new distribution in battery & lights (approximately 1%). This was partially offset by the expected decline in battery demand compared to the elevated COVID-19 related sales in the prior year period (approximately 7%).
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Auto Care reported Net sales increased 3.4%, as compared to the prior year. Excluding the unfavorable foreign currency impact of $2.8, or 0.6%, organic Net sales increased $18.3, or 4.0%. The organic increase in Net sales was driven by price increases in North America (approximately 7.5%) and new distribution in both the North American and International markets (approximately 2%). This was offset by a decrease in volumes to prior year related to the previously mentioned pricing actions, the lapping of elevated demand in the prior year and the negative impact higher gas prices had on miles driven, consumer foot traffic in the category, and a tendency to defer auto maintenance, particularly impacting our AC recharge business (approximately 5.5%).
| Segment Profit | Quarter Ended June 30, 2022 | Nine Months Ended June 30, 2022 | |||||||||||||||||||||
| $ Change | % Chg | $ Change | % Chg | ||||||||||||||||||||
| Batteries & Lights | |||||||||||||||||||||||
| Segment profit - prior year | $ | 113.9 | $ | 419.8 | |||||||||||||||||||
| Organic | 35.7 | 31.3 | % | (7.0) | (1.7) | % | |||||||||||||||||
| Change in Russia | (1.8) | (1.6) | % | (2.3) | (0.5) | % | |||||||||||||||||
| Change in Argentina | 3.2 | 2.8 | % | 7.3 | 1.7 | % | |||||||||||||||||
| Impact of currency | (8.3) | (7.2) | % | (11.4) | (2.7) | % | |||||||||||||||||
| Segment profit - current year | $ | 142.7 | 25.3 | % | $ | 406.4 | (3.2) | % | |||||||||||||||
| Auto Care | |||||||||||||||||||||||
| Segment profit - prior year | $ | 31.7 | $ | 78.9 | |||||||||||||||||||
| Organic | (17.5) | (55.2) | % | (39.9) | (50.6) | % | |||||||||||||||||
| Change in Russia | — | — | % | — | — | % | |||||||||||||||||
| Impact of currency | (1.3) | (4.1) | % | (2.0) | (2.5) | % | |||||||||||||||||
| Segment profit - current year | $ | 12.9 | (59.3) | % | $ | 37.0 | (53.1) | % | |||||||||||||||
| Total Segment Profit | |||||||||||||||||||||||
| Segment profit - prior year | $ | 145.6 | $ | 498.7 | |||||||||||||||||||
| Organic | 18.2 | 12.5 | % | (46.9) | (9.4) | % | |||||||||||||||||
| Change in Russia | (1.8) | (1.2) | % | (2.3) | (0.5) | % | |||||||||||||||||
| Change in Argentina | 3.2 | 2.2 | % | 7.3 | 1.5 | % | |||||||||||||||||
| Impact of currency | (9.6) | (6.6) | % | (13.4) | (2.7) | % | |||||||||||||||||
| Segment profit - current year | $ | 155.6 | 6.9 | % | $ | 443.4 | (11.1) | % | |||||||||||||||
Refer to Note 6, Segments, in the Consolidated (Condensed) Financial Statements for a reconciliation from segment profit to earnings before income taxes.
Results for the Quarter Ended June 30, 2022
Global reported segment profit increased 6.9% as compared to the prior year. Excluding the unfavorable impact of currency of 6.6%, the unfavorable impact of exiting the Russian market of 1.2%, and favorable Argentina operations of 2.2%, organic operating profit increased $18.2, or 12.5%. The organic increase was driven by the higher organic Net sales discussed above, as well as the improvement in gross margin from the pricing actions this year and lower A&P spending. This was partially offset by higher SG&A costs compared to prior year due to the increase in environmental and recycling fees.
Battery & Lights reported segment profit increased by 25.3% as compared to the prior year. Organic segment profit increased by $35.7, or 31.3%, due to the higher organic Net sales discussed above, as well as the improvement in gross margin from the pricing actions this year and lower A&P spending. This was partially offset by higher SG&A costs compared to prior year due to the increase in environmental and recycling fees.
Auto Care reported segment profit decreased as compared to the prior year driven by the unfavorable organic segment profit decline of $17.5. The decline was driven by the organic revenue decline noted above as well as
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increased product input costs which negatively impacted gross margin. These declines were partially offset by a slight decrease in A&P and SG&A spend this year.
Results for the Nine Months Ended June 30, 2022
Global reported segment profit decreased 11.1% as compared to the prior year. Excluding the unfavorable impact of currency of 2.7%, the unfavorable impact of exiting the Russian market of 0.5%, and the favorable Argentina operations of 1.5%, organic operating profit decreased $46.9, or 9.4%. The organic decrease was driven by the increased operating costs including higher labor, tariffs and transportation costs, which unfavorably impacted gross margin as well as higher SG&A compared to prior year. Partially offsetting this decline was an increase in organic Net sales discussed above and lower A&P.
Battery & Lights reported segment profit decreased by 3.2% as compared to the prior year. Organic segment profit decreased by $7.0, or 1.7%, due to increased operating costs including higher labor, tariffs and transportation costs, which unfavorably impacted gross margin, even with the increase in organic Net sales discussed above. Further impacting the decline was higher SG&A. Partially offsetting this decline was lower A&P.
Auto Care reported segment profit decreased as compared to the prior year driven by the unfavorable organic segment profit decline of $39.9. The organic revenue growth in Auto Care noted above was not enough to offset the increased product input costs which negatively impacted gross margin. Partially offsetting this decline was lower A&P.
| General Corporate | For the Quarters Ended June 30, | For the Nine Months Ended June 30, | |||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| General corporate and other expenses | $ | 27.6 | $ | 21.5 | $ | 74.9 | $ | 71.3 | |||||||||||||||
| % of Net Sales | 3.8 | % | 3.0 | % | 3.3 | % | 3.2 | % | |||||||||||||||
For the quarter ended June 30, 2022, General corporate and other expenses were $27.6, an increase of $6.1 as compared to the prior year comparative period. For the nine months ended June 30, 2022, General corporate and other expenses were $74.9, an increase of $3.6 as compared to the prior year comparative period. The current period increase was driven by higher IT spending related to our digital transformation and increased travel expense, partially offset by lower mark to market expense on our deferred compensation plans and lower stock compensation expense.
Liquidity and Capital Resources
Energizer’s primary future cash needs will be centered on operating activities, working capital, strategic investments and debt reductions. We believe that our future cash from operations, together with our access to capital markets, will provide adequate resources to fund our operating and financing needs. Our access to, and the availability of, financing on acceptable terms in the future will be affected by many factors, including: (i) our financial condition and prospects, (ii) for debt, our credit rating, (iii) the liquidity of the overall capital markets and (iv) the current state of the economy. There can be no assurances that we will continue to have access to capital markets on terms acceptable to us. See the “Risk Factors” section of our Annual Report on Form 10-K for the year ended September 30, 2021 filed with the Securities and Exchange Commission on November 16, 2021 for additional information.
Cash is managed centrally with net earnings reinvested locally and working capital requirements met from existing liquid funds. At June 30, 2022, Energizer had $199.5 of cash and cash equivalents, approximately 96% of which was held outside of the U.S. Given our extensive international operations, a significant portion of our cash is denominated in foreign currencies. We manage our worldwide cash requirements by reviewing available funds among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. The repatriation of cash balances from certain of our subsidiaries could have adverse tax consequences or be subject to regulatory capital requirements; however, those balances are generally available without legal restrictions to fund ordinary business operations.
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In December 2020, the Company entered into a Credit Agreement which provided for a 5-year $400.0 revolving credit facility (2020 Revolving Facility) and a $1,200.0 Term Loan due December 2027. In December 2021, the Company amended the Credit Agreement to increase the 2020 Revolving Facility to $500.0.
The borrowings under the Term Loan require quarterly principal payments at a rate of 0.25% of the original principal balance. Borrowings under the 2020 Revolving Facility bear interest at a rate per annum equal to, at the option of the Company, LIBOR or the Base Rate (as defined) plus the applicable margin. The Term Loan bears interest at a rate per annum equal to, at the option of the Company, LIBOR or Base Rate (as defined) plus the applicable margin.
On March 8, 2022, the Company completed a bond offering for $300.0 Senior Notes due in 2027 at 6.500%. The proceeds from the offering were used to repay a portion of the indebtedness outstanding under the 2020 Revolving Facility and to pay fees and expenses related to the offering.
As of June 30, 2022, the Company had $60.0 of outstanding borrowing under the 2020 Revolving Facility and $8.0 of outstanding letters of credit. Taking into account outstanding letters of credit, $432.0 remained available as of June 30, 2022. The Company is in compliance with the provisions and covenants associated with its debt agreements, and expects to remain in compliance throughout the next twelve months.
In April 2022, the Company entered into a termination agreement with the landlord of our capital lease in Dixon, IL. The Company terminated the lease agreement, which went into 2028, reducing our capital lease obligations by $9.8. The termination agreement required the Company to pay a termination fee of $4.0, as well as decommissioning costs and brokerage fees. Since the Company has already vacated the facility as a part of the 2019 restructuring program, most assets associated with the location have already been fully depreciated.The termination of this lease resulted in a gain of $4.5 recognized in Other items, net during the third quarter of fiscal 2022.
Operating Activities
Cash flow used by operating activities was $106.2 in the nine months ended June 30, 2022, as compared to cash flow from operating activities of $17.5 in the prior year period. This change in cash flows of $123.7 was primarily driven by working capital changes year over year of approximately $89 which was primarily a result of the following:
•Approximately $38 in increased inventory investment compared to the prior year due to inflation, the impact of a more elongated supply chain and increased safety stock; and
•Approximately $73 due to changes in accounts payable, offset by approximately $21 due to changes in accrued interest, both of which were driven by timing of payments.
In addition, the decrease in cash flow from operating activities was driven by the year over year decline in Net earnings of approximately $50 when excluding the prior period Loss on extinguishment of debt from the prior year, which was included as a financing cash outflow.
For the nine months ended June 30, 2021, as well as fiscal year 2021, cash flow from operating activities was positive. For the nine months ended June 30, 2022, the Company had net earnings of $131.4 and is expecting to have positive net earnings for the full fiscal year. The current period negative cash flow from operations is due to movement in our working capital balances as discussed above, and not indicative of our overall operating activities. As anticipated, the inventory balance remained elevated through June 30, 2022 due to the continued volatility of the global supply chain, and we do expect an inventory reduction by year end. Additionally, our other working capital balances are expected to return to more normalized levels and the Company is anticipating positive cash flow from operating activities for the full fiscal year 2022.
Investing Activities
Net cash used by investing activities was $78.9 and $109.9 for the nine months ended June 30, 2022 and 2021, respectively, and consisted of the following:
•Capital expenditures of $65.8 and $42.7 in the nine months ended June 30, 2022 and 2021, respectively,
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•Acquisitions of intangible assets of $14.6 relating to the auto care appearance trade names and formulas acquired in Latin America during the nine months ended June 30, 2022; and
•Acquisitions, net of cash acquired and working capital settlement was an inflow of $1.0 from the Formulations Acquisition working capital settlement in the nine months ended June 30, 2022 and cash used of $67.2 for the FDK Indonesia Acquisition and Formulations Acquisition in fiscal 2021.
Total Investing cash outflows of approximately $55 to $65 are anticipated in fiscal 2022 for capital expenditures relating to maintenance, product development and cost reduction investments. Through June 30, 2022, the Company incurred additional investing cash outflows totaling approximately $23 for the remaining investment in integration related capital expenditures for the Battery and Auto Care Acquisitions. The Company will also weigh market conditions and other capital needs, the potential impact of COVID-19 and other factors deemed relevant, in the decisions to prioritize or delay funding and may adjust these projected amounts if necessary.
Financing Activities
Net cash from financing activities was $158.4 for the nine months ended June 30, 2022 as compared to cash used by financing activities of $957.5 in the prior fiscal year period. For the nine months ended June 30, 2022, cash from financing activities consists of the following:
•Cash proceeds from the issuance of debt with original maturities greater than 90 days of $300.0 relating to the new Senior Note due in 2027 issuance the second quarter of fiscal 2022;
•Payments of debt with original maturities greater than 90 days of $10.6, related to the quarterly principal payments on the Term Loan;
•Net decrease in debt with original maturities of 90 days or less of $43.8 primarily related to borrowing under our 2020 Revolving Facility;
•Payments to terminate capital lease obligations of $5.1 related to the termination of our Dixon IL packaging facility lease;
•Debt issuance costs of $7.6 relating to the amendment of the Credit Agreement in December 2021 and the issuance of the $300 Senior Note due in 2027;
•Dividends paid on common stock of $64.1 (see below);
•Dividends paid on mandatory convertible preferred stock (MCPS) of $8.1 (see below); and
•Taxes paid for withheld share-based payments of $2.3.
For the nine months ended June 30, 2021, cash used by financing activities consisted of the following:
•Cash proceeds from the issuance of debt with original maturities greater than 90 days of $1,982.6 relating to the Term Loan funded in December 2020 and January 2021, and the June 2021 issuance of €650.0 Senior Notes due in 2029 (2029 EUR Notes);
•Payments of debt with maturities greater than 90 days of $2,770.2, primarily related to the October 2020 repayment of the $750.0 Senior Notes due in 2026 (2026 Notes), the $319.4 repayment of the Term Loan A and $313.5 Term Loan B in December 2020, the January 2021 repayment of the $600.0 Senior Notes due in 2027 (2027 Notes), and the June 2021 repayment of the €650.0 Senior Notes due in 2026 (2026 EUR Notes);
•Net increase in debt with original maturities of 90 days or less of $106.6 primarily related to borrowing under our 2020 Revolving Facility;
•Premiums paid on extinguishment of debt of $141.1 funded the October 2020 redemption of the 2026 Notes, the January 2021 redemption of the 2027 Notes, and the June 2021 repayment of the 2026 EUR Notes;
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•Debt issuance costs of $27.6 relating to the funding of the Term Loan in December 2020 and January 2021 and the 2029 EUR Notes in June 2021;
•Payment of contingent consideration of $3.9 related to the achievement of a CAE acquisition earn out threshold;
•Dividends paid on common stock of $63.8;
•Dividends paid on mandatory convertible preferred stock (MCPS) of $12.1;
•Common stock repurchases of $21.3 at an average price of $42.61 per share; and
•Taxes paid for withheld share-based payments of $6.7.
Dividends
On November 15, 2021, the Board of Directors declared a cash dividend for the first quarter of fiscal 2022 of $0.30 per share of common stock, payable on December 15, 2021. On January 31, 2022, the Board of Directors declared a cash dividend for the second quarter of 2022 of $0.30 per share of common stock payable on March 16, 2022. On May 2, 2022, the Board of Directors declared a cash dividend for the third quarter of 2022 of $0.30 per share of common stock, payable on June 17, 2022.
The Company paid a cash dividend of $1.875 per share of MCPS on October 15, 2021 which had been declared in fiscal 2021. On November 15, 2021, the Board of Directors declared a cash dividend of $1.875 per share of MCPS to all shareholders of record as of the close of January 1, 2022. During the quarter ended March 31, 2022, all of the MCPS automatically converted to approximately 4.7 million of the Company's common stock and no additional dividends will be paid on the MCPS.
Subsequent to the end of the fiscal quarter, on August 1, 2022, the Board of Directors declared a cash dividend for the fourth quarter of fiscal 2022 of $0.30 per share of common stock, payable on September 13, 2022, to all shareholders of record as of the close of business on August 23, 2022.
Share Repurchases
In November 2020, the Company's Board of Directors put in place a new authorization for the Company to acquire up to 7.5 million shares of its common stock. The Company entered into a $75.0 accelerated share repurchase (ASR) program in the fourth quarter of fiscal 2021. Under the terms of the agreement, approximately 1.5 million shares were delivered in fiscal 2021 and an additional 0.5 million were delivered upon termination of the agreement on November 18, 2021. The Company acquired in total approximately 2.0 million shares at an average weighted price of $38.30 under the ASR.
Future share repurchases, if any, will be determined by the Company based on its evaluation of the market conditions, capital allocation objectives, legal and regulatory requirements and other factors. Share repurchases may be effected through open market purchases or privately negotiated transactions, including repurchase plans that satisfy the conditions of Rule 10b5-1 of the Securities Exchange Act of 1934.
The timing, declaration, amount and payment of future dividends to shareholders or repurchases of the Company’s Common stock will fall within the discretion of our Board of Directors. The Board’s decisions regarding the payment of dividends or repurchase of shares will depend on many factors, such as our financial condition, earnings, capital requirements, debt service obligations, covenants associated with certain of our debt service obligations, industry practice, legal requirements, regulatory constraints and other factors that our Board of Directors deems relevant.
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Other Matters
Environmental Matters
Accrued environmental costs at June 30, 2022 were $15.9. The majority of our environmental reserve increase in the quarter was related to remediation costs associated with a legacy facility that has been sold by the Company. It is difficult to quantify with certainty the cost of environmental matters, particularly remediation and future capital expenditures for environmental control equipment. Total environmental capital expenditures and operating expenses are not expected to have a material effect on our total capital and operating expenditures, earnings or competitive position. However, current environmental spending estimates could be modified as a result of changes in our plans or our understanding of underlying facts, changes in legal requirements, including any requirements related to global climate change, or other factors.
Contractual Obligations
The Company believes it has sufficient liquidity to fund its operations and meet its short-term and long-term obligations. The Company's material future obligations include the contractual and purchase commitments described below.
The Company has a contractual commitment to repay its long-term debt of $3,566.4 based on the defined terms of our debt agreements. Within the next twelve months, the company is obligated to pay $12.0 of this total debt. Our interest commitments based on the current debt balance and LIBOR rate on drawn debt at June 30, 2022 is $913.5, with $147.8 expected within the next twelve months. The company has entered into an interest rate swap agreement that fixed the variable benchmark component (LIBOR) on $700.0 of variable rate debt. Refer to Note 8, Debt, for further details.
The Company has a long-term obligation to pay a mandatory transition tax of $16.7. No payments are required until fiscal 2024.
Additionally, Energizer has material future purchase commitments for goods and services which are legally binding and that specify all significant terms including price and/or quantity. Total future commitments for these obligations over the next 5 years is $25.2. Of this amount, $15.5 is due within the next twelve months. Refer to Note 14, Legal proceeding/contingencies and other obligations, for additional details.
Energizer is also party to various service and supply contracts that generally extend approximately one to three months. These arrangements are primarily individual, short-term purchase orders for routine goods and services at market prices, which are part of our normal operations and are reflected in historical operating cash flow trends. These contracts can generally be canceled at our option at any time. We do not believe such arrangements will adversely affect our liquidity position.
Finally, Energizer has operating and financing leases for real estate, equipment, and other assets that include future minimum payments with initial terms of one year or more. Total future operating and finance lease payments at June 30, 2022 are $153.3 and $69.8, respectively. Within the next twelve months, operating and finance lease payments are expected to be $19.5 and $2.7, respectively.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Sensitive Instruments and Positions
The market risk inherent in the Company's financial instruments’ positions represents the potential loss arising from adverse changes in currency rates, commodity prices and interest rates. The following risk management discussion and the estimated amounts generated from the sensitivity analysis are forward-looking statements of market risk assuming certain adverse market conditions occur. The Company's derivatives are used only for identifiable exposures, and we have not entered into hedges for trading purposes where the sole objective is to generate profits.
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Derivatives Designated as Cash Flow Hedging Relationships
A significant share of Energizer's product cost is more closely tied to the U.S. dollar than to the local currencies in which the product is sold. As such, a weakening of currencies relative to the U.S. dollar results in margin declines unless mitigated through pricing actions, which are not always available due to the economic or competitive environment. Conversely, strengthening of currencies relative to the U.S. dollar can improve reported results. The primary currencies to which Energizer is exposed include the Euro, the British pound, the Canadian dollar and the Australian dollar. However, the Company also has significant exposures in many other currencies which, in the aggregate, may have a material impact on the Company's operations.
The Company has entered into a series of forward currency contracts to hedge the cash flow uncertainty of forecasted payment of inventory purchases due to short term currency fluctuations. Energizer’s foreign affiliates, which have the largest exposure to U.S. dollar purchases, have the Euro, the British pound, the Canadian dollar and the Australian dollar as their local currencies. These foreign currencies represent a significant portion of Energizer's foreign currency exposure. At June 30, 2022 and September 30, 2021, Energizer had unrealized pre-tax gains of $9.2 and $5.0, respectively, on these forward currency contracts accounted for as cash flow hedges, included in Accumulated other comprehensive loss on the Consolidated (Condensed) Balance Sheets. Assuming foreign exchange rates versus the U.S. dollar remain at June 30, 2022 levels over the next twelve months, $9.0 of the pre-tax gain included in Accumulated other comprehensive loss at June 30, 2022 is expected to be recognized in earnings. Contract maturities for these hedges extend into fiscal year 2023.
Derivatives Not Designated as Cash Flow Hedging Relationships
Energizer's foreign subsidiaries enter into internal and external transactions that create nonfunctional currency balance sheet positions at the foreign subsidiary level. These exposures are generally the result of intercompany purchases, intercompany loans and to a lesser extent, external purchases, and are revalued in the foreign subsidiary’s local currency at the end of each period. Changes in the value of the non-functional currency balance sheet positions in relation to the foreign subsidiary’s local currency results in an exchange gain or loss recorded in Other items, net on the Consolidated (Condensed) Statements of Earnings and Comprehensive Income. The primary currency to which Energizer’s foreign subsidiaries are exposed is the U.S. dollar.
The Company enters into foreign currency derivative contracts which are not designated as cash flow hedges for accounting purposes to hedge balance sheet exposures. Any gains or losses on these contracts are expected to be offset by exchange gains or losses on the underlying exposures, thus they are not subject to significant market risk. The change in estimated fair value of the foreign currency contracts for the quarters ended June 30, 2022 and 2021 resulted in gain of $1.9 and loss of $0.3, respectively, and a gain of $5.3 and a loss of $0.9 for the nine months ended June 30, 2022 and 2021, respectively. These gains and losses were recorded in Other items, net on the Consolidated (Condensed) Statements of Earnings and Comprehensive Income.
Commodity Price Exposure
The Company uses raw materials that are subject to price volatility. At times, the Company uses hedging instruments to reduce exposure to variability in cash flows associated with future purchases of certain materials and commodities.
The Company has entered into hedging contracts on future zinc purchases to reduce exposure to variability in cash flows associated with price volatility. The contracts are determined to be cash flow hedges and qualify for hedge accounting. The contract maturity for these hedges extend into the fourth fiscal quarter of 2023. There were 7 open contracts at June 30, 2022, with a total notional value of approximately $31. The pre-tax unrealized loss on the zinc contracts was $3.8 at June 30, 2022 and the pre-tax unrealized gain on the zinc contracts was $4.7 at September 30, 2021. These were included in Accumulated other comprehensive loss on the Consolidated (Condensed) Balance Sheet.
Interest Rate Exposure
The Company has interest rate risk with respect to interest expense on variable rate debt. At June 30, 2022, Energizer had variable rate debt outstanding of $1,245.0 under the 2020 Term Loan and 2020 Revolving Facility.
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In December 2020, the Company entered into a new interest rate swap (2020 Interest rate swap) with an effective date of December 22, 2020, that fixed the variable benchmark component (LIBOR) at an interest rate of 0.95% on variable rate debt of $550.0. The notional value increased to $700.0 on January 22, 2021, and will stay at that value through December 22, 2024. The notional value will decrease by $100.0 on December 22, 2024 and by $100.0 each year thereafter until its termination date on December 22, 2027.
At June 30, 2022 and September 30, 2021, Energizer recorded a unrealized pre-tax gain of $62.3 and $11.7 on the 2020 Interest rate swap, respectively. At June 30, 2022, our weighted average interest rate on variable rate debt, inclusive of the interest rate swap, was 3.5%.
Argentina Currency Exposure and Hyperinflation
Effective July 1, 2018, the financial statements for our Argentina subsidiary were consolidated under the rules governing the translation of financial information in a highly inflationary economy. Under U.S. GAAP, an economy is considered highly inflationary if the cumulative inflation rate for a three year period meets or exceeds 100 percent. The Argentina economy exceeded the three year cumulative inflation rate of 100 percent as of June 2018. If a subsidiary is considered to be in a highly inflationary economy, the financial statements of the subsidiary must be remeasured into the Company’s reporting currency (U.S. dollar) and future exchange gains and losses from the remeasurement of monetary assets and liabilities are reflected in current earnings, rather than exclusively in the equity section of the balance sheet, until such time as the economy is no longer considered highly inflationary. It is difficult to determine what continuing impact the use of highly inflationary accounting for Argentina may have on our consolidated financial statements as such impact is dependent upon movements in the applicable exchange rates between the local currency and the U.S. dollar and the amount of monetary assets and liabilities included in our affiliates' balance sheet.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain a comprehensive set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) designed to ensure that information required to be disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported accurately and within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to Energizer's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Based on that evaluation performed, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of June 30, 2022, to provide reasonable assurance of the achievement of these objectives. Notwithstanding the foregoing, there can be no assurance that the Company's disclosure controls and procedures will detect or uncover all failures of persons within the Company and its consolidated subsidiaries to report material information otherwise required to be set forth in the Company's reports.
The Chief Executive Officer and Chief Financial Officer have also determined in their evaluation that there was no change in the Company's internal control over financial reporting during the quarter ended June 30, 2022 that has materially affected or is reasonably likely to materially affect the Company's internal control over financial reporting.
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PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its affiliates are subject to a number of legal proceedings in various jurisdictions arising out of its operations. Many of these legal matters are in preliminary stages and involve complex issues of law and fact, and may proceed for protracted periods of time. The amount of liability, if any, from these proceedings cannot be determined with certainty. We are a party to legal proceedings and claims that arise during the ordinary course of business. We review our legal proceedings and claims, regulatory reviews and inspections and other legal proceedings on an ongoing basis and follow appropriate accounting guidance when making accrual and disclosure decisions. We establish accruals for those contingencies where the incurrence of a loss is probable and can be reasonably estimated, and we disclose the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for our financial statements to not be misleading. We do not record liabilities when the likelihood that the liability has been incurred is probable, but the amount cannot be reasonably estimated. Based upon present information, the Company believes that its liability, if any, arising from such pending legal proceedings, asserted legal claims and known potential legal claims which are likely to be asserted, is not reasonably likely to be material to the Company's financial position, results of operations, or cash flows, when taking into account established accruals for estimated liabilities.
Item 1A. Risk Factors
Our Annual Report on Form 10-K for the year ended September 30, 2021, which was filed with the Securities and Exchange Commission on November 16, 2021, contains a detailed discussion of risk factors that could materially adversely affect our business, operating results or financial condition. Except as follows, there have been no material changes in our risk factors from those disclosed in Part I, Item 1A to our Annual Report on Form 10-K for the fiscal year ended September 30, 2021.
We are subject to risks related to our international operations, including currency fluctuations, which could adversely affect our results of operations.
We currently conduct our business on a worldwide basis, with more than 40% of our sales in fiscal year 2021 arising from foreign countries, and a significant portion of our production capacity and cash is located overseas. Consequently, we are subject to a number of risks associated with doing business in foreign countries, including:
•price controls and related government actions;
•the possibility of nationalization, expropriation, confiscatory taxation or other similar government action;
•the inability to repatriate foreign-based cash for strategic needs in the U.S., either at all or without incurring significant income tax and earnings consequences, as well as the heightened counterparty, internal control and country-specific risks associated with
•holding cash overseas;
•the effect of foreign income taxes, value-added taxes and withholding taxes, including the inability to recover amounts owed to us by a government authority without extended proceedings or at all;
•the effect of the U.S. tax treatment of foreign source income and losses, and other restrictions on the flow of capital between countries;
•adverse changes in local investment, local employment, local training or exchange control regulations;
•legal and regulatory constraints, including the imposition of tariffs, trade restrictions, price, profit or other government controls,
•labor laws, immigration restrictions, travel restrictions, including as a result of COVID-19 or other outbreaks of infectious diseases, import and export laws or other government actions generating a negative impact on our business, including changes in trade policies that may be implemented;
•currency fluctuations, including the impact of hyper-inflationary conditions in certain economies, particularly where exchange controls limit or eliminate our ability to convert from local currency;
•political or economic instability, labor disputes, government nationalization of business or industries, government corruption and civil unrest, including political or economic instability in the countries of the Eurozone, Egypt, Russia, the Middle East and certain markets in Latin America;
•difficulties in hiring and retaining qualified employees;
•employment litigation related to employees, contractors and suppliers, particularly in Latin America and Europe;
•difficulties in obtaining or unavailability of raw materials;
•difficulty in enforcing contractual and intellectual property rights;
•lack of well-established or reliable, and impartial legal systems in certain countries where we operate;
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•challenges relating to enforcement of or compliance with local laws and regulations and with U.S. laws affecting operations outside of the U.S., including without limitation, the FCPA; and
•risks related to natural disasters, terrorism, social unrest and other events beyond our control.
For example, Russia’s invasion of Ukraine could lead to disruption, instability and volatility in global markets and industries that could negatively impact our business, financial condition or results of operations. The United States and certain other countries have imposed sanctions on Russia and could impose further sanctions that could disrupt international commerce and the global economy. Given these recent sanctions and export restrictions imposed by the United States and foreign government bodies, in March 2022 we exited the Russian market. The impact of these government measures and our exit of our operations in Russia, as well as any further retaliatory actions taken by Russia, the United States, and other foreign governments, is currently unknown and they could adversely affect our business, results of operations, supply chain, intellectual property, customers or employees and may expose us to adverse legal proceedings in Russia in the future. Potential impacts related to the conflict could include, without limitation, additional unilateral or multilateral export control and sanctions measures, supply chain and logistics disruptions, adverse global economic conditions resulting from escalating geopolitical tensions and the exclusion of Russian financial institutions from the global banking system, volatility and fluctuations in foreign currency exchange rates and interest rates, volatility and inflationary pressures on raw materials, and heightened cybersecurity threats, which could adversely impact our business, financial condition or results of operations.
Additionally, Brexit has created and may continue to create legal, political and economic uncertainties and impacts, including disruptions to trade and free movement of goods, services and people to and from the United Kingdom, disruptions to our workforce or the workforce of our suppliers or business partners, and increased foreign exchange volatility with respect to the British pound. All of the foregoing risks could have a significant adverse impact on our ability to commercialize our products on a competitive basis in international markets and may have a material adverse effect on our business, financial condition and results of operations.
We are also exposed to foreign currency exchange rate risks with respect to our net sales, net earnings and cash flow driven by movements of the U.S. dollar relative to other currencies. A weakening of the currencies in which generate sales relative to the currencies in which costs are denominated would decrease net earnings and cash flow, and. our foreign currency hedges only offset a portion of our exposure to foreign currency fluctuations, including devaluations. Foreign currency fluctuations also may affect our ability to achieve sales growth. A weakening of foreign currencies in which we generate sales relative to the U.S. dollar would decrease our net sales. Accordingly, our reported net earnings may be negatively affected by changes in foreign exchange rates.
Furthermore, the imposition of tariffs and/or increases in tariffs on various products by the U.S. and other countries has introduced greater uncertainty with respect to trade policies and government regulations affecting trade between the U.S. and other countries. New and increased tariffs have subjected, and may in the future subject, us to additional costs and expenditures of resources. Major developments in trade relations, including the imposition of new or increased tariffs by the U.S. and/or other countries, and any emerging nationalist trends in specific countries could negatively affect the trade environment and consumer purchasing behavior and have a material adverse effect on our financial condition and results of operations.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table reports purchases of equity securities during the third quarter of fiscal 2022 by Energizer and any affiliated purchasers pursuant to SEC rules, including any treasury shares withheld to satisfy employee withholding obligations upon vesting of restricted stock and the execution of net exercises.
| Issuer Purchases of Equity Securities | ||||||||||||||
| Period | Total Number of Shares Purchased (1) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | Maximum Number That May Yet Be Purchased Under the Plans or Programs (2) | ||||||||||
| April 1 - April 30 | — | $ | — | — | 5,041,940 | |||||||||
| May 1 - May 31 | — | $ | — | — | 5,041,940 | |||||||||
| June 1 - June 30 | 2,175 | $ | 27.95 | — | 5,041,940 | |||||||||
| Total | 2,175 | $ | 27.95 | — | 5,041,940 | |||||||||
(1) 2,175 shares purchased during the quarter relate to the surrender to the Company of shares of common stock to satisfy tax withholding obligations in connection with the vesting of restricted stock or execution of net exercises.
(2) On November 12, 2020, the Board of Directors approved a new share repurchase authorization for the repurchase of up to 7.5 million shares, which replaced the previous authorization that was outstanding.
Item 6. Exhibits
See the Exhibit Index hereto.
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EXHIBIT INDEX
The exhibits below are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K.
| Exhibit No. | Description of Exhibit | |||||||
| Third Amended and Restated Articles of Incorporation of Energizer Holdings, Inc. (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed January 29, 2018). | ||||||||
| Fourth Amended and Restated Bylaws of Energizer Holdings, Inc. (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed November 17, 2020). | ||||||||
| Certificate of Designations of the 7.50% Series A Mandatory Convertible Preferred Stock of Energizer Holdings, Inc., filed with the Secretary of State of the State of Missouri and effective January 17, 2019 (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed January 18, 2019). | ||||||||
| Certification of periodic financial report by the Chief Executive Officer of Energizer Holdings, Inc. pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||||||||
| Certification of periodic financial report by the Chief Financial Officer of Energizer Holdings, Inc. pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||||||||
| Certification of periodic financial report pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by the Chief Executive Officer of Energizer Holdings, Inc. | ||||||||
| Certification of periodic financial report pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by the Chief Financial Officer of Energizer Holdings, Inc. | ||||||||
| 101.INS* | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document. | |||||||
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |||||||
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document. | |||||||
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |||||||
* Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ENERGIZER HOLDINGS, INC. | |||||||||||
| Registrant | |||||||||||
| By: | /s/ John J. Drabik | ||||||||||
| John J. Drabik | |||||||||||
| Executive Vice President and Chief Financial Officer | |||||||||||
| Date: | August 8, 2022 | ||||||||||
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