Edgewell Personal Care - 10-Q quarterly report FY

In April 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies financial reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The provisions of this Statement that relate to Statement 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in ac cordance with their respective effective dates. The adoption of SFAS 149 will not have a material impact on Energizer's consolidated financial statements.

Highlights / Operating Results

Net sales increased $231.7 for the nine months and $204.1 for the quarter, primarily as a result of the acquisition of SWS, which contributed $205.9 in sales. See the following section for comments on sales changes by segment.

Selling, general and administrative expenses increased $20.1, or 9% in the nine months and $36.1, or 50% for the quarter, mainly due to the SWS acquisition in the current quarter, partially offset by a gain on the sale of an international property of $5.7 in the current quarter and the absence of a $10.0 bad debt write-off related to Kmart’s bankruptcy recorded in the prior nine month period. Selling, general and administrative expenses as a percent of sales, including the items discussed above, were 16.5% and 18.2% in the current nine months and quarter, respectively, compared to 17.9% and 18.4% in the prior nine months and quarter, respectively.

Segment Results

North America Battery

Net sales for North America Battery were $765.6 for the current nine months, down $1.7 as unfavorable pricing and product mix was nearly offset by higher volume of non-alkaline products. Gross margin declined $18.8 for the current nine months as unfavorable pricing and product mix was only partially offset by increased sales of relatively lower margin non-alkaline products. Segment profit declined $8.0 for the current nine months as lower gross margin was partially offset by the absence of the $10.0 bad debt write-off related to Kmart’s bankruptcy in the prior year nine month period.

North America Battery sales for the quarter declined $14.2, or 6% on unfavorable pricing and product mix and lower alkaline volume. The third quarter of 2002 included approximately $19 of additional alkaline sales due to significant incremental shipments to a large customer following a packaging change and sell-in for incremental fourth quarter promotional displays. Excluding these items from the third quarter of 2002, the current quarter alkaline volume was flat, while non-alkaline products contributed $13.9 in incremental sales. Gross margin for the quarter decreased $12.4 primarily due to lower sales. Segment profit decreased $8.7 as lower gross margin was partially offset by lower advertising and promotion expense.

International Battery

Segment profit increased $20.8, or 31% for the nine months and $5.7, or 28% for the quarter, with favorable currencies accounting for $9.8 and $6.8 of the increase, respectively. Excluding currency impacts, segment profit for the nine months increased $11.0 on favorable pricing and product mix and lower overhead and product costs, partially offset by higher advertising and promotion expense. Absent currencies, segment profit for the quarter declined $1.1, as higher advertising and promotion expense more than offset favorable pricing and product mix.

Battery research and development expense was $26.9, or 2.0% of total battery sales for the current nine months compared to $27.2, or 2.1% of sales for the nine months last year. For the quarter, battery research and development expense was $8.8 versus $8.9 for the same quarter last year, representing 2.3% of total battery sales in both periods.

Razors and blades segment sales for the quarter were $205.9, an increase of $43.9 compared to the same quarter last year. The sales growth was primarily attributed to the North America launch of the SWS INTUITION women’s shaving system in April 2003 and favorable currency of $12.8, partially offset by lower sales of legacy SWS products.

Segment profit for the quarter was $16.6, an increase of $8.9 compared to pro forma profit for the same quarter last year, including favorable currency impacts of $3.3. The remaining increase related to sales due to the pipeline fill of INTUITION partially offset by heavy advertising and promotion to support the launch.

Looking forward, SWS will continue to support the INTUITION launch in North America and the rollout in select international markets. SWS plans to launch the QUATTRO men’s shaving system in the fall. Existing product sales will likely be negatively impacted by new product sales, however the amount of such decline is not possible to predict.

During the nine months ended June 30, 2002, Energizer recorded a pre-tax provision for restructuring related to the plan described above of $4.5. Also, as part of other restructuring plans announced in the fourth quarter of fiscal 2001, Energizer recorded provisions for restructuring of $1.4 before taxes, as well as related costs for accelerated depreciation and inventory obsolescence of $2.6 before taxes in the prior nine months. The accelerated depreciation and inventory obsolescence are reflected in cost of products sold.

 

 

Income Taxes

Income taxes, which include federal, state and foreign taxes, were 29.5% for the current nine months. The current nine month income tax provision of $57.2, includes a tax benefit of $20.3 associated with the SWS inventory write-up. Excluding the inventory write-up, the current nine month tax rate was 31.0% compared to a tax rate of 35.5% for the same period last year. The improvement in the tax rate was primarily due to improved foreign operating results and an international property gain not subject to taxation.

 

On March 28, 2003, Energizer acquired the worldwide SWS business from Pfizer, Inc. for $930 plus costs of executing the acquisition and subject to adjustments based on acquired working capital level. The final assumed liabilities will likely include costs to exit certain pre-acquisition activities based on completion of specific evaluations and definitive exit plans.

SWS is the second largest manufacturer and marketer of men’s and women’s wet shave products in the world. SWS products are marketed in over 80 countries, accounting for an estimated 18% market share of the global wet shaving business. Its primary markets are Europe, the United States and Japan.

Energizer views the wet shave products category as attractive within the consumer products industry due to the limited number of manufacturers, the high degree of consumer loyalty, and the ability to improve pricing through innovation. Energizer believes SWS has high quality products, a defensible market position and the opportunity to grow sales and margins. The SWS business is compatible with Energizer's business in terms of common customers, distribution channels, and geographic presence, which should provide opportunities to leverage Energizer's marketing expertise, business organization and scale globally.

SWS’ results of operations are reflected in Energizer’s results beginning in the current quarter. See Note 2 to the Condensed Financial Statements for the pro forma sales, net earnings and earnings per share results if SWS had been part of Energizer’s results for the current and prior nine months and prior quarter.

Energizer used a $550.0 bridge loan, together with currently existing available credit facilities and cash, to fund the SWS acquisition. Energizer refinanced the bridge loan into longer term financing in the current quarter. Energizer’s total borrowings were $1,060.1 at June 30, 2003. See Note 14 to the Condensed Financial Statements for more information on Energizer’s long-term debt. As of June 30, 2003, Energizer’s total debt and financing instruments tied to short-term interest rates (primarily LIBOR) were $586.1. An increase in the applicable short-term rates of one full percentage point would increase annualized financing costs by $5.9.

 

A summary of Energizer’s significant contractual obligations is shown below. See Note 11 to the Condensed Financial Statements for discussion of letters of credit, loan guarantees and guarantees for purchase of goods used in production.

 

 

Energizer’s borrowing facilities require it to maintain a debt to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio of no more than 3.5 to 1.0. As of June 30, 2003, such ratio is 2.4 to 1.0. This ratio could increase if EBITDA earnings levels decline or if cash flow needs are greater than anticipated, which could result in a breach of the ratio covenant and consequent default on its borrowing facilities.

 

Energizer generates accounts receivable from its customers through its ordinary course of business. Substantially all accounts receivable in the U.S. are routinely sold to Energizer Receivables Funding Corporation (the SPE), which is a wholly owned, bankruptcy remote subsidiary of Energizer. The SPE’s only business activities relate to acquiring and selling interests in Energizer’s receivables for which transactions are used as an additional source of liquidity. The SPE sells an undivided percentage ownership interest in each individual receivable to an unrelated party (the Conduit) and uses the cash collected on these receivables to purchase additional receivables from Energizer.

The trade receivables sale facility represents “off-balance sheet financing,” since the Conduit’s ownership interest in the SPE’s accounts receivable results in assets being removed from Energizer’s balance sheet, rather than resulting in a liability to the Conduit. Upon the facility’s termination, the Conduit would be entitled to all cash collections on the SPE’s accounts receivable until its purchased interest was repaid.

 

 

Recently Issued Accounting Standards

See discussion in Note 16 to the Condensed Financial Statements.

 

Energizer advises readers that various risks and uncertainties could affect its financial performance and could cause Energizer's actual results for future periods to differ materially from those anticipated or projected. Energizer’s estimates of battery category unit and value growth, retailer consumption of its battery products, Energizer market share and retailer inventory levels may be inaccurate, or may not reflect significant segments of the retail market. Moreover, Energizer sales volumes in future quarters may lag unit consumption if retailers are currently carrying inventories in excess of Energizer’s estimates, or if those retailers elect to further contract their inventory levels. Unexpected declines in cash flows or margins, or increased competitive activity, could impact Energizer’s ongoing support of its new products, and future sales of INTUITION will depend upon continuing consumer acceptance, demand for competitive products and general economic conditions. Although it is likely that sales of new products will negatively impact sales of existing products, the actual impact cannot be predicted. Energizer’s overall tax rate for the year may be higher or lower than anticipated because of unforeseen changes in the tax laws or applicable rates, higher taxes on repatriated earnings, or changes in foreign loss estimates. General economic conditions, retailer pressure, and competitive activity may negatively impact the outlook for the wet shave products category. Because of that competitive activity, the SWS business may not be able to grow sales or margins, and could lose current market position. Opportunities to integrate SWS activities with Energizer’s, and to leverage Energizer operating strengths, may be limited. Energizer’s debt to EBITDA ratio could increase beyond acce ptable levels if EBITDA earnings levels decrease or if cash flow needs are greater than anticipated, resulting in a breach of the ratio covenant and consequent default on its existing debt facilities. Unforeseen fluctuations in levels of Energizer’s operating cash flows, or inability to maintain compliance with its debt covenants could also limit Energizer’s ability to meet future operating expenses and liquidity requirements, fund capital expenditures, or service its debt as it becomes due. The impact of adverse variable interest rate fluctuations may be more significant than anticipated. Additional risks and uncertainties include those detailed from time to time in Energizer’s publicly filed documents, including Energizer’s Registration Statement on Form 10, its Annual Report on Form 10-K for the Year ended September 30, 2002, its quarterly report on Form 10Q for the period ended December 31, 2002, and its Current Reports on Form 8-K dated April 25, 2000, January 21, 2003, January 27, 2 003, April 23, 2003 and May 30, 2003.

Item 4. Controls and Procedures

J. Patrick Mulcahy, Energizer's Chief Executive Officer, and Daniel J. Sescleifer, Energizer's Executive Vice President and Chief Financial Officer, evaluated Energizer's disclosure controls and procedures within 90 days of the filing date of this Quarterly Report on Form 10-Q, and determined that such controls and procedures were effective and sufficient to ensure compliance with applicable laws and regulations regarding appropriate disclosure in the Quarterly Report, and that there were no material weaknesses in those disclosure controls and procedures. They have also indicated that there were no significant changes in internal controls or other factors that could significantly affect internal controls subsequent to the date of their most recent evaluation of disc losure controls and procedures, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

PART II – OTHER INFORMATION

There is no information required to be reported under any items except those indicated below.

Item 1 – Legal Proceedings

The Company and its wholly owned subsidiary, Eveready Battery, Inc., were served with a lawsuit filed on May 19, 2003 in the Circuit Court for the 20 ^th Judicial Circuit in St. Clair County, Illinois by Amy Lynn Niehaus, individually and on behalf of all others similarly situated. The lawsuit petitions the court to order that it be maintained as a class action on behalf of all present and past customers of the defendants that acquired Eveready’s “Heavy Duty” or “Super Heavy Duty” carbon zinc batteries. The lawsuit alleges that the labeling of carbon zinc batteries in such manner was false and misleading and in violation of various state consumer protection statutes, and seeks compensatory and punitive damages, costs and attorneys’ fees in an amount less than $75,000 per plaintiff or class member. The Company and Eveready believe that they have meritorious defenses to the complaint, and have jointly filed a Motion to Dismiss, as well as a Motion to Transfer Venue. The proceeding is in a preliminary stage and may proceed for a protracted period of time; accordingly, the amount of eventual liability, if any, from the proceeding cannot be determined with certainty. However, in the opinion of the Company’s management, based upon the information presently known, the ultimate liability of the Company and Eveready, if any, arising from the pending legal proceeding, should not be material to the financial position of the Company, but could be material to results of operations or cash flows for a particular quarter or annual period.

Item 6—Exhibits and Reports on Form 8-K

(a)    The following exhibits (listed by numbers corresponding to the Exhibit Table of Item 601 in Regulation S-K) are filed with this report.