UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 2009
Commission File No. 001-15401
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, and (2) has been subject to such filing requirements for the past 90 days.
YES: þ NO: o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
YES: o NO:o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES: o NO:þ
Indicate the number of shares of Energizer Holdings, Inc. common stock, $.01 par value, outstanding as of the close of business on July 20, 2009: 69,404,727
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
ENERGIZER HOLDINGS, INC.CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME(Condensed)(Dollars in millions, except per share data - Unaudited)
See accompanying Notes to Condensed Financial Statements
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ENERGIZER HOLDINGS, INC.CONSOLIDATED BALANCE SHEETS(Condensed)(Dollars in millions - Unaudited)
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ENERGIZER HOLDINGS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(Condensed)(Dollars in millions - Unaudited)
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ENERGIZER HOLDINGS, INC.NOTES TO CONDENSED FINANCIAL STATEMENTS June 30, 2009 (Dollars in millions, except per share data – Unaudited)
The accompanying unaudited 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 condensed balance sheet data were derived from audited financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The Company has evaluated subsequent events through the date of this report, July 31, 2009, and has determined that no disclosure is necessary. 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 Holdings, Inc. (the Company) for the year ended September 30, 2008.
Note 1 – Segment noteOperations for the Company are managed via two segments — Household Products (Battery and Lighting Products) and Personal Care (Wet Shave, which is inclusive of the recent acquisition of the Edge/Skintimate shave preparation business, Skin Care, Feminine Care and Infant Care). Segment performance is evaluated based on segment operating profit, exclusive of general corporate expenses, share-based compensation costs, costs associated with most restructuring, integration or business realignment activities and amortization of intangible assets. Financial items, such as interest income and expense, are managed on a global basis at the corporate level.
On June 5, 2009, the Company completed its previously announced acquisition of the Edge and Skintimate shave preparation business of S.C. Johnson & Son, Inc. See Footnote 2. This business will be part of the Personal Care segment within the wet shave brand group. Operating results, from the date of acquisition through June 30, 2009 were immaterial.
The reduction in gross profit in the prior period associated with the write-up and subsequent sale of the inventory acquired in the Playtex acquisition and the integration costs for the Playtex acquisition are not reflected in the Personal Care segment, but rather presented as a separate line item below segment profit, or in the case of integration costs, included as part of General corporate and other expenses, as they are items directly associated with the Playtex acquisition. Such presentation reflects management’s view on how it evaluates segment performance.
For the quarter and nine months ended June 30, 2009, cost of products sold and selling, general and administrative expense (SG&A) reflected favorable adjustments of $1.1 and $24.1, respectively, related to the change in policy under which the Company’s colleagues earn and vest in the Company’s paid time off (PTO). These favorable adjustments were not reflected in the Household Products or Personal Care segments, but rather presented as a separate line below segment profit as it was not operational in nature. Such presentation reflects management’s view on how it evaluates segment performance.
The Company’s operating model includes a combination of stand-alone and combined business functions between the Household Products and Personal Care businesses, varying by country and region of the world. Shared functions include product warehousing and distribution, various transaction processing functions, and in some countries, combined sales forces and management. The Company applies a fully allocated cost basis, in which shared business functions are allocated between the businesses. Such allocations do not represent the costs of such services if performed on a stand-alone basis.
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Historical segment sales and profitability for the quarter and nine months ended June 30, 2009 and 2008, respectively, are presented below.
Supplemental product information is presented below for revenues from external customers:
Total assets by segment are presented below:
Note 2 – Edge acquisitionOn June 5, 2009, the Company completed its previously announced acquisition of the Edge and Skintimate shave preparation business (the Acquisition) from S.C. Johnson & Son, Inc. (SCJ) for $275.0. The Acquisition was funded with proceeds from the completed common stock offering on May 20, 2009. See Footnote 8 for further information. As leading brands in the U.S. men's and women's shave preparation category, Edge and Skintimate are a logical adjacency to the Company’s existing wet shave business conducted in the United States (U.S.) under the Schick brand. The Acquisition consists primarily of intellectual property, finished goods inventory and equipment directly associated with the manufacture of the Edge and Skintimate shave preparation products. SCJ will continue to manufacture product for Energizer under a supply agreement with an initial term of 3 years, with two optional one-year renewals. No SCJ employees will be employed by Energizer and there are no contingent payments, options or commitments associated with the Acquisition.
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We have determined the preliminary fair values of assets acquired and liabilities assumed for purposes of allocating the purchase price, in accordance with Statement of Financial Accounting Standard (SFAS) No. 141, “Business Combinations”. The purchase price allocation is expected to be finalized by the end of fiscal 2009. However, the preliminary allocation is presented based on our initial valuation analysis. For purposes of the preliminary allocation, the Company has estimated a fair value adjustment for inventory based on the estimated selling price of the finished goods acquired at the closing date less the sum of (a) costs of disposal and (b) a reasonable profit allowance for the selling effort of the acquiring entity. The fair value adjustment for the acquired equipment was established using a cost approach. The fair values of the identifiable intangible assets were estimated using various valuation methods including discounted cash flows using both an income and cost approach.
Estimated asset valuations and assumed liabilities may be adjusted before the end of fiscal 2009 as final purchase price allocations are completed. Any changes to the initial estimates of the fair value of assets and liabilities acquired will be allocated to residual goodwill.
The preliminary allocation of the purchase price is as follows:
The preliminary estimate of purchased identifiable intangible assets of $174.5 as of the June 5, 2009 acquisition date, is included in the table below.
Note 3 – Share-based paymentsTotal compensation cost charged against income for the Company’s share-based compensation arrangements was $0.1 and $8.5 for the current quarter and nine months and $4.9 and $17.4 for the third quarter and nine months last year, respectively, and was recorded in SG&A expense. The total income tax benefit recognized in the Consolidated Statements of Earnings for share-based compensation arrangements was $3.1 for the current nine months and $1.9 and $6.4 for the third quarter and nine months last year, respectively.
Restricted Stock Equivalents (RSE)In October 2008, the Company granted RSE awards to key employees which included approximately 265,200 shares that vest ratably over four years. At the same time, the Company granted RSE awards to key senior executives totaling approximately 374,600 which vest as follows: 1) 25% of the total restricted stock equivalents granted vest on the third anniversary of the date of grant; 2) the remainder vests on the date that the Company publicly releases its earnings for its 2011 fiscal year contingent upon the Company’s compounded annual growth rate in diluted earnings per share, subject to certain adjustments (CAGR), for the three year period ending on September 30, 2011. If a CAGR of 15% is achieved, the remaining 75% of the grant vests, with smaller percentages of the remaining 75% vesting if the Company achieves a CAGR between 8% and 15%. The total award expected to vest will be amortized over the vesting period.
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In February 2009, the Company granted RSE awards to key senior executives totaling approximately 296,000 shares. These awards were granted in lieu of (i) each executive’s continued participation in the 2009 annual cash bonus program, (ii) his or her right to receive accruals under the Company’s Supplemental Executive Retirement Plan (an excess pension plan) for calendar year 2009, and (iii) his or her right to receive Company matching accruals under the Company’s Executive Savings Investment Plan (an excess 401(k) plan) for the calendar year. Vesting of the equivalents granted will occur on November 16, 2009, and the number of shares which will vest is contingent upon achievement of individual and Company performance targets for the period from October 1, 2008 through September 30, 2009. The total award expected to vest will be amortized over the vesting period.
Note 4 – Earnings per shareBasic 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 stock options and restricted stock equivalents.
The increase in the weighted average shares outstanding for the quarter was due primarily to the recently completed common stock offering. See Footnote 8 for further details.
The following table sets forth the computation of basic and diluted earnings per share for the quarters and nine months ended June 30, 2009 and 2008, respectively.
At June 30, 2009 and 2008, approximately 0.9 and 0.4 million, respectively, of the Company’s outstanding RSEs and stock options were not included in the diluted net earnings per share calculation because to do so would have been anti-dilutive. In the event the potentially dilutive securities are anti-dilutive on net earnings per share (i.e., have the effect of increasing EPS), the impact of the potentially dilutive securities is not included in the computation.
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Note 5 – Goodwill and intangiblesThe following table sets forth goodwill by segment as of October 1, 2008 and June 30, 2009.
The acquisition of goodwill at June 30, 2009 is due primarily to the valuation of the assets acquired in the Acquisition.
Total amortizable intangible assets other than goodwill at June 30, 2009 are as follows:
The carrying amount of indefinite-lived trademarks and tradenames was $1,748.9 at June 30, 2009, an increase of $157.9 from September 30, 2008. Changes in indefinite-lived trademarks and tradenames are due to the preliminary valuation of the assets acquired in the Acquisition and changes in foreign currency exchange rates. Estimated amortization expense for amortizable intangible assets is $13.1, $12.9, $12.9, $12.9 and $10.4 for the years ending September 30, 2009 through 2013, respectively.
See Footnote 2 for further information on the preliminary valuation of the assets acquired in the Acquisition.
Note 6 – Pension plans and other postretirement benefitsThe Company has several defined benefit pension plans covering substantially all of its employees in the U.S. and certain employees in other countries. The plans provide retirement benefits based on years of service and earnings. 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 below. Health care and life insurance postretirement benefits are also currently provided by the Company for certain groups of retired employees.
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The Company’s net periodic benefit cost for these plans is as follows:
Note 7 – Debt Notes payable at June 30, 2009 and September 30, 2008 consisted of notes payable to financial institutions with original maturities of less than one year of $264.5 and $264.4, respectively, and had a weighted-average interest rate of 3.9% and 4.7%, respectively.
The detail of long-term debt at June 30, 2009 and September 30, 2008 is as follows:
The Company’s total borrowings were $2,855.5 at June 30, 2009, including $725.5 tied to variable interest rates of which $300 is hedged via the interest rate swap noted below. The Company maintains total debt facilities of $3,345.5, of which $479.0 remained available as of June 30, 2009.
During the second quarter, the Company entered into interest rate swap agreements with two major multinational financial institutions that fixed the variable benchmark component (LIBOR) of the Company’s interest rate on $300 of the Company’s variable rate debt for the next four years at an interest rate of 2.61%.
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The Company’s credit agreements consist of a U.S. domestic revolving credit agreement, under which the lenders have committed to lend up to $275 on a revolving credit basis until May 15, 2011, the term loan agreement referred to in the table above and a revolving credit agreement among certain of the Company’s Asian subsidiaries and the lenders referred to therein, guaranteed by the Company, under which the lenders have committed to lend up to $210 (or equivalent in other currencies) until August 24, 2010. Under each of these credit agreements, the Company is subject to a number of restrictive covenants, including a requirement that the ratio of the Company’s indebtedness to its Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) (as defined, calculated on a pro forma basis in the case of permitted acquisitions) not be greater than 4.00 to 1, and not remain above 3.50 to 1 for more than four consecutive quarters. Under the U.S. credit agreements, the interest rate margin and certain fees vary depending on the indebtedness to EBITDA ratio. Under the Company’s private placement note agreements, the ratio of indebtedness to EBITDA may not exceed 4.0 to 1. However, if the ratio is above 3.50 to 1, the Company is required to pay an additional 75 basis points in interest for the period in which the ratio exceeds 3.50 to 1. At June 30, 2009, the ratio of indebtedness to pro forma EBITDA, which reflects the impact of the Acquisition, was 3.15 to 1.
Under the credit agreements, the ratio of the Earnings Before Interest and Taxes (EBIT) (as defined, calculated on a pro forma basis) to total interest expense must exceed 3.00 to 1 for each fiscal quarter. At June 30, 2009, the ratio of its pro forma EBIT, which reflects the impact of the Acquisition, to total interest expense was 4.66 to 1.
The Company anticipates that it will remain in compliance with its current debt covenant requirements in the foreseeable future. However, the current economic environment has added considerable volatility to markets in which the Company operates around the globe and to the accuracy of short term forecasts. In addition, certain elements affecting EBITDA, including, but not limited to, movements in foreign currency exchange rates and the impact of the economic downturn on our customers and consumers, are not within the Company’s control. If the Company fails to comply with the financial covenants referred to above or with other requirements of the credit agreements or private placement note agreements, the lenders would have the right to accelerate the maturity of the debt. Acceleration under one of these facilities would trigger cross defaults on other borrowings. If the Company were to be in default under such agreements, it is likely that the Company would be required to seek amendments or waivers, or to refinance the debt, in whole or in part. The ability of the Company to secure such amendments or waivers or to refinance the debt would depend on conditions in the credit markets and the Company’s financial condition at the time. There is no assurance that the Company could obtain such amendments or waivers or effect such refinancing. Based on the current credit markets, the Company anticipates that a refinancing would likely result in unfavorable credit terms as compared to the Company’s current debt package.
The Company’s fixed rate private placement notes are callable by the Company at any time, subject to a “make whole” premium, which would be required to the extent the applicable benchmark U.S. Treasury yield for each series has declined since issuance.
On May 5, 2009, the Company amended and renewed its existing receivables securitization program, under which the Company sells interests in certain accounts receivable, and which provides funding to the Company of up to $200 with two large financial institutions. The sales of the receivables are effected through a bankruptcy remote special purpose subsidiary of the Company, Energizer Receivables Funding Corporation (ERFC). Funds received under this financing arrangement are treated as borrowings rather than proceeds of accounts receivables sold for accounting purposes. However, borrowings under the program are not considered debt for covenant compliance purposes under the Company’s credit agreements and private placement note agreements. The program is subject to renewal annually on the anniversary date. The total outstanding under this financing arrangement on June 30, 2009 was $200.0.
The counterparties to long-term committed borrowings consist of a number of major multinational financial institutions. The Company continually monitors positions with, and credit ratings of, counterparties both internally and by using outside ratings agencies. The Company has staggered long-term borrowing maturities through 2017 to reduce refinancing risk in any single year and to optimize the use of cash flow for repayment.
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Aggregate maturities of long-term debt, including current maturities, at June 30, 2009 are as follows: $251.0 in year one, $316.0 in year two, $156.0 in year three, $778.0 in year four, $190.0 in year five and $900.0 thereafter.
Note 8 – Shareholders’ EquityOn May 20, 2009, the Company completed the sale of 10,925,000 shares at a price of $49.00 per share. Net proceeds received from the sale of the shares were $510.2, net of fees and expenses, and were used, in part, to acquire the shave preparation business of SCJ on June 5, 2009 for $275.0 and to repay $100 of private placement notes, which matured on June 30, 2009. The remaining net proceeds will be used for general corporate purposes, including the repayment of indebtedness. See Footnote 2 for further information on this acquisition.
The Company did not purchase any shares of its common stock during the quarter ended June 30, 2009 under its July 2006 authorization from the Board of Directors. This authorization granted approval for the Company to acquire up to 10 million shares of its common stock, of which 2.0 million have been repurchased to date. Future purchases may be made from time to time on the open market or through privately negotiated transactions, subject to corporate objectives and the discretion of management.
Note 9 – Financial Instruments Measured At Fair ValueOn October 1, 2008, the Company adopted Statement of Financial Accounting Standard No. 157, “Fair Value Measurements” (SFAS 157) for certain financial assets and liabilities. This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The statement requires that assets and liabilities carried at fair value be classified and disclosed 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. Level 3: Unobservable inputs reflecting the reporting entity’s own assumptions or external inputs from inactive markets.
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Under the SFAS 157 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, 2009 that are measured on a recurring basis during the period, segregated by level within the fair value hierarchy:
In February 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. 157-2, “Effective Date of FASB Statement No. 157”, which delays the effective date of SFAS 157 for one year for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. Based on this guidance, the Company will adopt the provisions of SFAS 157 as they relate to long-lived assets effective October 1, 2009.
On June 30, 2009, the Company adopted FSP No. 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (FSP 107-1). Under FSP 107-1, an entity is required to include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods.
At June 30, 2009, the fair market value of fixed rate long-term debt was $2,058.6 compared to its carrying value of $2,130.0. The book value of the Company’s variable rate debt approximates fair value. The fair value of the long-term debt is estimated using yields obtained from independent pricing sources for similar types of borrowing arrangements.
At June 30, 2009, the fair value of foreign currency, interest rate swap and commodity contracts 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. See Footnote 10 for further information on the fair value of these contracts.
Due to the nature of cash and cash equivalents and short-term borrowings, including notes payable, carrying amounts on the balance sheet approximate fair value.
Note 10 – Derivatives and Other Hedging Instruments Effective January 1, 2009, the Company prospectively implemented the provisions of SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (SFAS 161). SFAS 161 enhances the disclosure requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133) to provide users of financial statements with a better understanding of the objectives of a company’s derivative use and the risks managed.
In the ordinary course of business, the Company enters into contractual arrangements (derivatives) to reduce its exposure to foreign currency, interest rate and commodity price risks. The section below outlines the types of derivatives that existed at June 30, 2009 as well as the Company’s objectives and strategies for holding these derivative instruments.
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Commodity Price Risk — The Company uses raw materials that are subject to price volatility. At times, hedging instruments are used by the Company to reduce exposure to variability in cash flows associated with future purchases of zinc or other commodities. The fair market value of the Company’s outstanding hedging instruments included in Accumulated Other Comprehensive Income was an unrealized pre-tax gain of $1.1 and an unrealized pre-tax loss of $12.8 at June 30, 2009 and 2008, respectively. Over the next twelve months, approximately $0.3 of the gain recognized in Accumulated Other Comprehensive Income will be included in earnings. Contract maturities for these hedges extend into fiscal year 2010. There were 19 open contracts at June 30, 2009.
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 competitive environment. Conversely, a strengthening in currencies relative to the U.S. dollar can improve margins. As a result, the Company has entered into a series of forward currency contracts to hedge the cash flow uncertainty of forecasted inventory purchases due to short term currency fluctuations. The Company’s primary foreign affiliates, which are exposed to U.S. dollar purchases, have the euro, the yen, the British pound, the Canadian dollar and the Australian dollar as their local currencies. At June 30, 2009, the Company had an unrecognized gain on these forward currency contracts accounted for as cash flow hedges of $1.9 recognized in Accumulated Other Comprehensive Income. Assuming foreign exchange rate versus the U.S. dollar remains at June 30, 2009 levels, over the next twelve months, approximately $0.9 of the gain included in Accumulated Other Comprehensive Income will be included in earnings. Contract maturities for these hedges extend into fiscal year 2010. There were 15 open contracts at June 30, 2009.
Interest Rate Risk —The Company has interest rate risk with respect to interest expense on variable rate debt. At June 30, 2009, the Company had $725.5 variable rate debt outstanding. During the second quarter, the Company entered into interest rate swap agreements with two major multinational financial institutions that fixed the variable benchmark component (LIBOR) of the Company’s interest rate on $300 of the Company’s variable rate debt for the next four years. At June 30, 2009, the Company had an unrecognized pre-tax gain on these interest rate swap agreements of $5.8 included in Accumulated Other Comprehensive Income. Over the next twelve months, approximately $1.7 of the gain included in Accumulated Other Comprehensive Income will be recognized in earnings.
Cash Flow HedgesThe Company maintains a number of cash flow hedging programs, as discussed above, to reduce risks related to commodity, foreign currency and interest rate risk. Each of these derivative instruments have a high correlation to the underlying exposure being hedged and have been deemed highly effective in offsetting the associated risk.
Derivatives not Designated in Hedging RelationshipsThe Company holds a share option with a major multinational financial institution to mitigate the impact of changes in certain of the Company’s deferred compensation liabilities, which are tied to the Company’s common stock price. As a result of the decline in the Company’s share price during the quarter ended December 31, 2008, the Company placed a $24.7 deposit with the counterparty, as required under the option agreement. Period activity related to the share option is classified in the same category in the cash flow statement as the period activity associated with the Company’s deferred compensation liability, which was cash flow from operations.
In addition, the Company enters into foreign currency derivative contracts to hedge existing balance sheet exposures. Any losses on these contracts would be fully offset by exchange gains on the underlying exposures, thus they are not subject to significant market risk.
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The following tables provide information on the location and amounts of derivative fair values in the consolidated balance sheet and derivative gains and losses in the consolidated income statement:
FAIR VALUES OF DERIVATIVE INSTRUMENTS
CASH FLOW HEDGING
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DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
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Note 11 – Supplemental Financial Statement Information
Note 12 – Recently Issued Accounting PronouncementsIn May 2009, the FASB issued FASB Statement No. 165, “Subsequent Events" (SFAS 165). This Statement is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. This statement requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. SFAS 165 is effective for the current quarter. The Company has included this disclosure in the lead paragraph to the Notes to Consolidated Financial Statements.
In June 2009, the FASB voted to approve the “FASB Accounting Standards Codification” as the single official source of authoritative, nongovernmental U.S. Generally Accepted Accounting Principles (GAAP). The Codification will be applied to disclosures as of September 30, 2009 for Energizer.
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Energizer Holdings, Inc.Items 2 and 3. Management’s Discussion and Analysis of Financial Condition and Results ofOperations, and Quantitative and Qualitative Disclosures About Market Risk
Highlights / Operating Results
The following discussion is a summary of the key factors management considers necessary in reviewing the Company’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 that are not historical may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. See “Forward-Looking Statements” presented later in this section. This discussion should be read in conjunction with the accompanying unaudited financial statements and notes thereto for the quarter and nine months ended June 30, 2009, the Company’s Quarterly Report on Form 10-Q for the quarter and six months ended March 31, 2009 and the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2008.
Net Earnings for the Company for the quarter ended June 30, 2009 were $72.7, or $1.13 per diluted share, compared to $66.7, or $1.13 per diluted share, for the same quarter last year. Earnings per share are flat versus the prior year despite higher net earnings in the fiscal 2009 quarter due to an increase in the weighted average shares outstanding as a result of the completion of the sale of an additional 10.9 million common shares on May 20, 2009. Weighted average shares outstanding will increase to approximately 70 million for the fiscal fourth quarter of 2009 reflecting the full impact of the sale of the common shares. The impact of the acquisition of the “Edge” and “Skintimate” shave preparation business from S.C. Johnson on June 5, 2009 (the “Acquisition”) was immaterial to the quarter. The current quarter results include the following item:
The prior year quarter results include the following items:
Net Earnings for the nine months ended June 30, 2009 were $260.7, or $4.29 per diluted share, compared to $230.2, or $3.90 per diluted share for the same period last year. Unlike the quarter, the sale of the additional common shares in May 2009 did not have as significant an impact on the weighted average shares outstanding for the nine months ended June 30, 2009 (an increase of approximately 1 million shares) due to the fact that the sale of the common shares did not occur until later in the fiscal third quarter. We expect weighted average shares outstanding to increase by approximately 4 million for fiscal year 2009 as compared to fiscal year 2008 as a result of the new shares. The remaining increase in the weighted average shares outstanding on a full year basis resulting from the sale of the additional common shares will be reflected in fiscal 2010. The current nine months include the following items:
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The prior year nine months results include the following items:
Net sales for the quarter ended June 30, 2009 decreased $69.2, or 6%, due primarily to the impact of currencies, which negatively impacted the year-over-year comparison by approximately $64.
For the nine months ended June 30, 2009, net sales decreased $287.2, or 9%, due to the impact of currencies, which negatively impacted the year-over-year comparison by approximately $188, and lower unit volumes in Household Products, primarily in North America. See “Segment Results” below for further details for the quarter and nine month sales.
Gross profit for the quarter ended June 30, 2009 decreased $51.2, or 10%, due to the unfavorable impact of currencies of approximately $51 for the quarter. Gross margin as a percent of net sales was 45.9% for the quarter ended June 30, 2009. Exclusive of the impact of currencies, gross margin as a percent of net sales was 47.9% for the current quarter, up slightly from 47.7% for the comparable quarter in the prior year.
For the nine months ended June 30, 2009, gross profit decreased $118.1 or 8% due primarily to the negative impact of currencies of approximately $130 and the unfavorable impact of approximately $38 due primarily to lower unit volumes, most notably in Household Products. These negative impacts were offset by the $11.4 favorable impact of the change in the Company’s PTO policy noted in the second quarter, favorable year over year pricing of approximately $18 and the $27.5 unfavorable impact of the Playtex inventory write-up and subsequent sale in the first nine months of fiscal 2008. Gross margin as a percent of net sales was 47.4% for the nine months ended June 30, 2009 as compared to 46.9% for the same period in the prior year. Gross margin as a percent of net sales, exclusive of the impact of currencies and the PTO policy change, was 48.4% for the nine months ended June 30, 2009, as compared to 47.7%, exclusive of the impact of the Playtex inventory write-up at the time of acquisition, for the same period in the prior year.
Selling, general and administrative expense (SG&A) decreased $23.9 for the quarter as compared to the same quarter in the prior year due primarily to the favorable impact of currencies of approximately $13 and lower overhead spending due, in part, to Playtex synergies. For the nine months ended June 30, 2009, SG&A decreased by $73.2 due to favorable currencies of approximately $36, the favorable impact of $12.7 related to the change in the PTO policy noted above, and lower overhead spending.
Advertising and promotion (A&P) expense decreased $20.7, or 15%, for the quarter ended June 30, 2009 due primarily to lower spending of approximately $14 and the favorable impact of currencies of approximately $7. A&P for the quarter ended June 30, 2009 was 12.0% of net sales versus 13.1% of net sales for the same quarter last year.
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For the nine months ended June 30, 2009, A&P decreased $74.1, or 20%, due primarily to lower spending of approximately $54 and the favorable impact of currencies of approximately $20. A&P for the nine months ended June 30, 2009 was 10.1% of net sales versus 11.5% of net sales for the same period last year.
Significant Events
On May 20, 2009, the Company completed the sale of 10.925 million shares of common stock at a price of $49.00. The net proceeds from the sale of the common shares were $510.2, net of fees and expenses associated with the offering. The Company used a portion of the proceeds to fund the Acquisition for $275 in cash. The remaining proceeds will be used for general corporate purposes, including the repayment of debt.
On June 5, 2009, the Company completed the Acquisition for $275. The “Edge” and “Skintimate” brands will be combined with the Company’s Schick-Wilkinson Sword wet shave product line, and the integration is expected to take from three to six months.
The Company believes “Edge,” which is predominately a North American business, holds a leading U.S. market share position in the men’s shave preparation category. The Company believes that “Edge” has strong brand equity and broad distribution across all classes of trade in the U.S. The Company believes the “Skintimate” brand is the U.S. market share leader in women’s shave preparation and has strong brand equity among women in all age groups. The Company views the Acquisition as a natural adjacency to its existing Wet Shave business.
Recent Developments
On July 27, 2009, the Board of Directors approved a restructuring plan designed primarily to re-organize and reduce headcount in the Household Products business. The approved plan provides for an offer of a voluntary enhanced retirement severance package to certain eligible hourly and salaried U.S. employees, and the elimination of additional positions as part of a limited involuntary reduction in force. In the current global recessionary environment, we continue to see cautious retailer inventory investments and unfavorable device trends, primarily in developed markets. It remains difficult to determine how much of the recent category weakness is due to each of these factors as well as other category and competitive dynamics. The Company believes this restructuring plan is advisable to reduce the Company’s overhead cost structure for its Household Products business, right-size manufacturing and sales operations in light of market conditions and ensure alignment with its overall investment strategies.
Costs for the restructuring plan are expected to be in the range of $22 - $28 million, consisting primarily of one-time termination benefits, and we expect the majority of the costs to be recorded in fiscal 2009, although certain aspects of the plan may result in charges during early fiscal 2010. We expect to complete the majority of the re-organization by the end of the first quarter of fiscal 2010. Once completed, the Company expects annualized savings from the restructuring plan to be in the range of $15 to $18 million.
Studies to review the Company’s international manufacturing operations to identify potential cost improvement opportunities will continue to be a common practice. Studies are currently underway, which may result in further restructuring actions. If a restructuring plan is initiated as a result of the studies, we expect that the costs and the associated savings would be considerably lower than the U.S. plan described above. At this time, we are unable to determine if the current studies will result in a restructuring plan, nor can we predict the likelihood or extent of any future restructuring actions.
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Non-GAAP Financial Measures
While the Company reports financial results in accordance with accounting principles generally accepted in the U.S. (“GAAP”), this discussion includes non-GAAP measures. These non-GAAP measures, such as comparisons excluding the impact of currencies, the change in the Company’s PTO policy in 2009 or the negative impact on gross margin due to the write-up and subsequent sale of the inventory acquired in the Playtex acquisition in 2008, are not in accordance with, nor are they a substitute for, GAAP measures. The Company believes these non-GAAP measures provide a more meaningful comparison to the corresponding reported period and assist investors 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.
Segment Results
Operations for the Company are managed via two segments — Household Products (Battery and Lighting Products) and Personal Care (Wet Shave – including the Acquisition, Skin Care, Feminine Care and Infant Care). Segment performance is evaluated based on segment operating profit, exclusive of general corporate expenses, share-based compensation costs, costs associated with most restructuring, integration or business realignment activities and amortization of intangible assets. Financial items, such as interest income and expense, are managed on a global basis at the corporate level.
The operating results for the Acquisition from the closing date of June 5, 2009 to the end of the quarter, were immaterial to the fiscal third quarter results for Energizer and the Personal Care segment.
The reduction in gross profit for the year ended September 30, 2008 associated with the write-up and subsequent sale of inventory acquired in the Playtex acquisition, which occurred on October 1, 2007, is not reflected in the Personal Care segment, but rather is presented as a separate line item below segment profit, as it is directly associated with the Playtex acquisition. This presentation reflects management’s view on how it evaluates segment performance.
For the quarter and nine months ended June 30, 2009, cost of products sold and SG&A expense reflected favorable adjustments of $11.4 and $12.7, respectively, related to the change in policy governing the Company’s PTO. These favorable adjustments were not reflected in the Household Products or Personal Care segments, but rather presented as a separate line below segment profit as it was not considered operational in nature.
Such presentation reflects management’s view on how it evaluates segment performance.
The Company’s operating model includes a combination of stand-alone and combined business functions between the Household Products and Personal Care businesses, varying by country and region of the world. Shared functions include product warehousing and distribution, various transaction processing functions, and in some countries, a combined sales force and management.
This structure is the basis for Energizer’s reportable operating segment information, as included in the tables in Footnote 1 to the Condensed Consolidated Financial Statements for the quarters and nine months ended June 30, 2009 and 2008.
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Household Products
For the quarter, net sales were $468.0, down $69.1, or 13% versus the same quarter last year due partially to unfavorable currencies of approximately $37. Excluding the unfavorable currency impact, net sales declined $33, or 6% as lower sales volume was partially offset by favorable pricing and product mix. The lower sales volume was across all regions and was driven by a reduction in Energizer Max premium alkaline and low margin non-Energizer branded products volume. We estimate overall retail consumption of Energizer Max units globally was down approximately 3% to 4% in the current quarter compared to the same quarter last year. In the current global recessionary environment, we continue to see cautious retailer inventory investments and unfavorable device trends, primarily in developed markets. It remains difficult to determine how much of the recent category weakness is due to each of these factors as well as other category and competitive dynamics. It should be noted that the Company’s broad performance battery portfolio including its lithium offerings has helped Energizer to hold or grow market share in most key markets despite the Energizer Max decline noted above. Overall pricing and product mix was favorable globally driven by early fiscal 2009 price increases in the U.S. and a number of other markets.
Segment profit decreased $14.7 for the quarter as approximately $23 of unfavorable currency impacts and the unfavorable impact of lower volume of $16 was partially offset by favorable pricing and product mix of $10 and lower advertising and promotion expense of $13.
For the nine months, net sales were $1,533.1, down $268.0, or 15% versus the prior nine month period including the impact of approximately $119 of unfavorable currencies. Excluding the unfavorable currency impact, net sales declined $149, or 8% due to lower sales volume most notably in the U.S. The U.S. volume decline reflects significant retail inventory reductions, primarily in the first quarter, and declines in lower margin non-Energizer branded products.
Year to date, segment profit decreased $54.0, including approximately $59 of unfavorable currency. Excluding the impact of the unfavorable currency, segment profit increased approximately $5 as the impact of lower sales noted above was more than offset by reductions in advertising and promotion, overheads and favorable product costs primarily in the first quarter.
Looking ahead, we expect a difficult comparison for the fiscal fourth quarter of 2009 as the prior year quarter included hurricane related sales and an increase in early holiday shipments as customers purchased ahead of the announced U.S. price increase. We estimate product cost will be unfavorable $10 for the remainder of the year due primarily to the impact of lower unit volumes. Finally, as has been evident throughout fiscal 2009, we expect currencies to remain unfavorable for the fiscal fourth quarter as compared to the prior year quarter. However, based on exchange rates as of July 24, 2009, the unfavorable comparison should be moderated somewhat versus the year to date impact as the U.S. dollar has weakened modestly. We currently estimate the unfavorable impact in Household Products will be in range of $10 to $12, primarily in gross margin, as compared to the fiscal fourth quarter of 2008.
Personal Care
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Net Sales for the quarter were $529.5, which is essentially flat versus the prior year. However, on a constant currency basis, net sales increased approximately $28, or 5%, in the quarter. The increase in net sales on a constant currency basis was driven by increases in all product lines. The following product line comparatives are on an “ex currency” basis. Reported net sales comparatives for each product group are presented in the segment footnote of the Condensed Consolidated Financial Statements. Wet Shave net sales increased 4% due to the early success of the Quattro for Women Trimmer, which was launched in the second quarter of fiscal 2009. Skin Care sales increased 6% due to higher shipments of Wet Ones in response to the H1N1 pandemic, and to a lesser extent, higher sales of Suncare, primarily in Latin America and Europe. Infant Care sales increased 10% due to growth in Diaper Genie. Finally, Feminine Care sales increased 6% due to continued strong sales growth of Sport, only partially offset by lower sales of Gentle Glide.
Segment profit for the quarter was $87.8, up $4.6 or 6%, versus the same quarter in the prior year. Excluding the impact of unfavorable currencies of approximately $9, segment profit increased $13 for the quarter due to $6 in incremental Playtex synergies, and the impact of the higher sales noted above. These items were partially offset by higher product costs and unfavorable product mix.
For the nine months ended June 30, 2009, net sales were $1,387.3, a decrease of $19.2, or 1%, including the negative impact of unfavorable currencies of approximately $69. On a constant currency basis, sales increased approximately $49, or 4%. Wet Shave increased 4% on higher disposable volumes, the launch of Quattro for Women Trimmer and higher sales for Quattro men’s systems, partially offset by declines in other legacy system products. Infant Care sales increased 7% due primarily to growth in Diaper Genie products. Skin Care sales increased 3% on higher sales of Suncare and Wet Ones. Feminine Care sales declined 1% as higher sales of Sport were offset by lower sales of Gentle Glide, due, in part, to increased competitive activity.
Segment profit for the nine months ended June 30, 2009 was $280.1, up $27.0 on a reported basis and up approximately $43, or 17%, excluding the impact of unfavorable currencies. This increase on a constant currency basis was due to approximately $26 in incremental Playtex synergies and lower advertising and promotion, which were partially offset by higher product costs and unfavorable product mix.
Incremental synergies are expected to be approximately $5 for the remainder of the fiscal year; however, these will continue to offset certain unfavorable product cost and mix impacts as well as other project investment spending.
As noted in the Household Products discussion, we expect a continuation of the unfavorability in currency rates as compared to the prior year in the fourth fiscal quarter of 2009. At prevailing currency rates as of July 24, 2009, we expect the overall impact of currency to the Personal Care segment profit to be unfavorable in an amount ranging from $8 to $10, primarily in gross margin, for the remainder of fiscal year 2009 as compared to the same time frame in the prior year.
General Corporate and Other Expenses
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For the quarter ended June 30, 2009, general corporate and other expenses were $21.8, down $2.1, due primarily to the impact of Playtex integration costs in the prior year quarter. Corporate and other expenses were $63.5, or down $6.8, for the nine months ended June 30, 2009 as compared to the same period in the prior year due primarily to lower Playtex integration costs in fiscal 2009. Consistent with its historical actions, the Company may engage in further cost reductions to optimize its operating performance, which could result in future charges. See “Recent Developments” presented earlier in this discussion.
Interest Expense and Other Financing Costs For the quarter and nine months ended June 30, 2009, interest expense decreased $9.3 and $28.3, respectively, as compared to the same periods in the prior fiscal year, due to lower average interest costs on variable debt and lower average borrowings. Other net financing items were favorable $7.1 for the quarter, but unfavorable $11.4 for the nine months ended June 30, 2009. For the quarter, a modest weakening of the dollar combined with gains recorded on the settlement of foreign exchange hedging contracts resulted in the favorable quarter comparison. The year to date unfavorable result was due primarily to exchange losses incurred as U.S. dollar-based payables for the Company’s foreign affiliates were unfavorably impacted by the significant strengthening of the U.S. dollar versus most local currencies during the first quarter of fiscal year 2009.
Income Taxes Income taxes, which include federal, state and foreign taxes, were 35.0% of pre-tax income for the quarter as compared to 34.3% in the prior year quarter. For the nine months ended June 30, 2009, incomes taxes as a percent of pre-tax income were 32.7%. Excluding the $11 tax benefit for the write-up and subsequent sale of inventory acquired in the Playtex acquisition during fiscal year 2008, prior year income taxes as a percent of pre-tax income was 32.5% for the nine months ended June 30, 2008.
Liquidity and Capital Resources On May 20, 2009, the Company completed the sale of an additional 10.925 million shares of common stock for $49.00 per share. Net proceeds from the sale of the additional shares were $510.2. The Company used $275 of the net proceeds to complete the purchase of the Acquisition on June 5, 2009, and used $100 to repay private placement notes, which matured on June 30, 2009. The remaining proceeds have contributed significantly to the increase in cash on hand at June 30, 2009 and we expect to use the remaining net proceeds for general corporate purposes including to possibly repay a portion of the scheduled private placement maturities of $200 due November, 2009.
Cash flow from operations is the primary funding source for operating needs and capital investments. Cash flow from operations was $251.5, down $33.6, for the nine months ended June 30, 2009 as compared to $285.1 for the same period last year. Investment in inventory increased approximately $23 during the first nine months of 2009 as compared to a reduction of approximately $21 for the same period last year due to several factors including inventory build to support certain supply chain initiatives, including termination of certain sun care distributor agreements. Other current liabilities as compared to the same period last year decreased by approximately $75 due, in part, to lower advertising and promotional accruals and the impact of the previously discussed change in the PTO policy. Additionally, the Company made a $24.7 deposit in conjunction with its share option contract, which is in place to mitigate the impact of changes in certain of the Company’s deferred compensation liabilities. This deposit is reported on the Other, net line in the Statement of Cash Flows and discussed below under “Market Risk — Stock Price Exposure.” The above negative impacts were partially offset by lower investment in accounts receivable, which decreased by $62 during the nine months ended June 30, 2009 as compared to an increase of $14 for the same period in the prior year due primarily to lower sales in the quarter and the favorable impact of higher operating cash flow before changes in working capital of $48.1, exclusive of the share option deposit noted above.
Capital expenditures were $108.4 for the nine months ended June 30, 2009 and $97.4 for the same period last year. Full year capital expenditures are estimated to be approximately $145 to $150 for 2009.
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The Company currently has approximately 8 million shares remaining on its current 10 million share repurchase authorization. Future purchases may be made from time to time on the open market or through privately negotiated transactions, subject to corporate objectives and the discretion of management.
The Company’s total borrowings were $2,855.5 at June 30, 2009, including $725.5 tied to variable interest rates. The Company maintains total debt facilities of $3,345.5, of which $479.0 remained available as of June 30, 2009. Over the next twelve months, the Company has $251 of scheduled debt maturities. These maturities will be repaid from cash flow from operations, availability under the Company’s revolver facility and from the remaining proceeds from the recent equity issuance. During the second quarter, the Company entered into interest rate swap agreements with two major international financial institutions that fixed the interest rate on $300 of the Company’s variable rate debt for the next four years at an interest rate of 2.61%.
As discussed in Note 7 to the accompanying Unaudited Condensed Consolidated Financial Statements, under the terms of the Company’s credit agreements, the ratio of the Company’s indebtedness to its EBITDA, as defined in the agreements, cannot be greater than 4.00 to 1, and may not remain above 3.50 to 1 for more than four consecutive quarters. If and so long as the ratio is above 3.50 to 1 for any period, the Company is required to pay additional interest expense for the period in which the ratio exceeds 3.50 to 1. The interest rate margin and certain fees vary depending on the indebtedness to EBITDA ratio. Under the Company’s private placement note agreements, the ratio of indebtedness to EBITDA may not exceed 4.0 to 1. However, if the ratio is above 3.50 to 1, the Company is required to pay an additional 75 basis points in interest for the period in which the ratio exceeds 3.50 to 1. In addition, under the credit agreements, the ratio of its current year EBIT, as defined in the agreements, to total interest expense must exceed 3.00 to 1. The Company’s ratio of indebtedness to its EBITDA was 3.15 to 1, and the ratio of its EBIT to total interest expense was 4.66 to 1 as of June 30, 2009. Each of the calculations at June 30, 2009 was pro forma for the Acquisition. The Company anticipates that it will remain in compliance with its debt covenants for the foreseeable future. The expected impact of the difficult fiscal fourth quarter comparative (see Household Products section) coupled with the negative impact on EBITDA resulting from the anticipated restructuring charges (see Recent Developments) should result in an increase in the Company's lndebtedness to EBITDA ratio for the fiscal fourth quarter. The restructuring charges will negatively impact trailing twelve month EBITDA, which is used in the ratio, through the third quarter of fiscal 2010, after which it will roll out of the calculation. Savings from the restructuring program will somewhat mitigate the negative EBITDA impact of the restructuring charges as they are realized during this time frame, and will remain a positive impact on the ratio going forward. We expect that significant cash will remain on the Balance Sheet at September 30, 2009 and anticipate that the cash will be used, in part, to repay a portion of the $200 of maturing private placement notes in November 2009. A reduction of debt via the use of excess cash in this manner would reduce the lndebtedness to EBITDA ratio accordingly. If the Company fails to comply with the financial covenants referred to above or with other requirements of the credit agreements or private placement note agreements, the lenders would have the right to accelerate the maturity of the debt. Acceleration under one of these facilities would trigger cross defaults on other borrowings. As disclosed previously, the Company believes that the cost and long-term nature of its current debt structure is a valuable asset given recent changes in the credit markets due to the global economic crisis. Additionally, the Company believes that reducing overall leverage and maintaining a covenant cushion with a portion of the proceeds of the recent equity offering should provide adequate capital for the Company to pursue its strategic initiatives and provide greater financial and operational flexibility, while helping to preserve the strength of its current favorable debt structure.
On May 5, 2009, the Company amended and renewed its existing receivables securitization program, under which the Company sells interests in certain accounts receivable, and which provides funding to the Company of up to $200 with two large financial institutions. The sales of the receivables are effected through a bankruptcy remote special purpose subsidiary of the Company, Energizer Receivables Funding Corporation (ERFC). Funds received under this financing arrangement are treated as borrowings rather than proceeds of accounts receivables sold for accounting purposes. However, borrowings under the program are not considered debt for covenant compliance purposes under the Company’s credit agreements and private placement note agreements. The program is subject to renewal annually on the anniversary date. At June 30, 2009, a total of $200.0 was outstanding under this facility.
The counterparties to long-term committed borrowings consist of a number of major international financial institutions. The Company continually monitors positions with, and credit ratings of, counterparties both internally and by using outside ratings agencies. The Company has staggered long-term borrowing maturities through 2017 to reduce refinancing risk in any single year and to optimize the use of cash flow for repayment.
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A summary of Energizer’s significant contractual obligations at June 30, 2009 is shown below:
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The Company has contractual purchase obligations for future purchases, which generally extend one to three months. These obligations are primarily purchase orders at fair value that are part of normal operations and are reflected in historical operating cash flow trends. In addition, the Company has various commitments related to service and supply contracts that contain penalty provisions for early termination. As of June 30, 2009, we do not believe such purchase obligations or termination penalties will have a significant effect on our results of operations, financial position or liquidity position in the future.
The Company believes that cash flows from operating activities and periodic borrowings under existing credit facilities will be adequate to meet short-term and long-term liquidity requirements prior to the maturity of the Company’s credit facilities, although no guarantee can be given in this regard.
Market Risk
Currency Rate Exposure 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 competitive environment. Conversely, a strengthening in currencies relative to the U.S. dollar can improve margins. This margin impact coupled with the translation of foreign operating results to the U.S. dollar for financial reporting purposes may have an impact on reported operating profits. See the Segment Results section for further discussion.
The Company generally views its investments in foreign subsidiaries with a functional currency other than the U.S. dollar as long-term. As a result, the Company does not generally hedge these net investments. Capital structuring techniques are used to manage the net investment in foreign currencies, as necessary. Additionally, the Company attempts to limit its U.S. dollar net monetary liabilities in countries with unstable currencies.
From time to time the Company may employ foreign currency hedging techniques to mitigate potential losses in earnings or cash flows on foreign currency transactions, which primarily consist of anticipated intercompany purchase transactions and intercompany borrowings. External purchase transactions and intercompany dividends and service fees with foreign currency risk may also be hedged. The Company’s primary foreign affiliates that are exposed to U.S. dollar purchases have the euro, the yen, the British pound, the Canadian dollar and the Australian dollar as their local currencies.
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The Company uses natural hedging techniques, such as offsetting like foreign currency cash flows, foreign currency derivatives with durations of generally one year or less, including forward exchange contracts, purchased put and call options and zero-cost option collars. Certain of the foreign exchange contracts have been designated as cash flow hedges and are accounted for in accordance with Statement of Financial Accounting Standard No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133).
The Company enters into foreign currency derivative contracts to hedge existing balance sheet exposures. Any losses on these contracts would be fully offset by exchange gains on the underlying exposures, thus they are not subject to significant market risk. At June 30, 2009, the Company had a loss of $1.1 included in earnings on unsettled forward currency contracts. In addition, the Company has entered into a series of forward currency contracts to hedge the cash flow uncertainty of forecasted inventory purchases due to short term currency fluctuations. These transactions are accounted for as cash flow hedges. At June 30, 2009, the Company had an unrecognized pre-tax gain on these forward currency contracts accounted for as cash flow hedges of $1.9 included in Accumulated Other Comprehensive Income.
In addition, the Company has investments in Venezuela, which currently require government approval to convert local currency to U.S. dollars at official government rates. The government approval for currency conversion to satisfy U.S. dollar liabilities to foreign suppliers has been delayed in recent periods, resulting in higher cash balances and higher past due U.S. dollar payables to other Energizer affiliates with our Venezuelan subsidiary. As an alternative, the Company may choose to settle these purchases at a rate equal to the unofficial, parallel currency exchange rate. If the Company was forced to settle its Venezuelan subsidiary’s U.S. dollar liabilities at June 30, 2009 at a rate equal to the unofficial, parallel currency exchange rate as of that date, it would result in a currency exchange loss of approximately $30.
Commodity Price Exposure The Company uses raw materials that are subject to price volatility. The Company will use hedging instruments as it desires to reduce exposure to variability in cash flows associated with future purchases of zinc or other commodities. These hedging instruments are accounted for as cash flow hedges under SFAS 133. At June 30, 2009, the fair market value of the Company’s outstanding hedging instruments included in Accumulated Other Comprehensive Income was an unrealized pre-tax gain of $1.1. Contract maturities for these hedges extend into fiscal year 2010.
Interest Rate Exposure The Company has interest rate risk with respect to interest expense on variable rate debt. At June 30, 2009, the Company had $725.5 of variable rate debt outstanding, of which $300.0 is hedged via an interest rate swap as disclosed below. As a result, after giving effect to the hedged amount, a hypothetical one percentage point increase in variable interest rates would have an annual unfavorable impact of approximately $4.3 on the Company’s earnings before taxes and cash flows, based upon the current variable debt level at June 30, 2009.
During the second quarter, the Company entered into interest rate swap agreements with two major international financial institutions that fixed the variable benchmark component (LIBOR) of the Company’s interest rate on $300 of the Company’s variable rate debt for the next four years. At today’s spread to this benchmark, the interest rate would be 2.61%. These hedging instruments are accounted for under SFAS 133 as cash flow hedges. At June 30, 2009, the Company had an unrecognized gain on these interest rate swap agreements accounted for as cash flow hedges of $5.8 included in Accumulated Other Comprehensive Income.
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Stock Price Exposure At June 30, 2009, the Company held a share option with a major multinational financial institution to mitigate the impact of changes in certain of the Company’s deferred compensation liabilities, which are tied to the Company’s common stock price. The fair market value of the share option was $9.2 as included in other current assets and $21.6 as included in other current liabilities at June 30, 2009 and 2008, respectively. The change in fair value of the total share option for the current quarter and nine months resulted in income of $1.8 and expense of $13.1, respectively, and expense of $9.3 and $20.2 for the same quarter and nine months last year, respectively, and was recorded in SG&A. In addition, as a result of the decline in the Company’s share price during the quarter ended December 31, 2008, the Company placed a $24.7 deposit with the counterparty, as required under the option agreement. Period activity related to the share option is classified in the same category in the cash flow statement as the period activity associated with the Company’s deferred compensation liability, which was cash flow from operations.
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. These statements generally can be identified by the use of forward-looking words or phrases such as “believe,” “expect,” “anticipate,” “may,” “could,” “intend,” “intent,” “belief,” “estimate,” “plan,” “foresee,” “likely,” “will,” “should” 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, performance or achievements to differ materially from those expressed in or 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:
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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.
Item 4. Controls and Procedures
Energizer maintains a system of disclosure controls and procedures which are designed to ensure that information required to be disclosed by the Company in the reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, including the Company’s certifying officers, as appropriate to allow timely decisions regarding required disclosure. Based on an evaluation performed, the Company’s certifying officers have concluded that the disclosure controls and procedures were effective as of June 30, 2009, 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.
There was no change in the Company’s internal control over financial reporting during the quarter ended June 30, 2009, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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 subsidiaries are parties to a number of legal proceedings in various jurisdictions arising out of the operations of the Energizer business. 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.However, based upon present information, Energizer believes that its ultimate liability, if any, arising from pending legal proceedings, asserted legal claims and known potential legal claims which are likely to be asserted, are not reasonably likely to be material to Energizer’s financial position or results of operations, taking into account established accruals for estimated liabilities.
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Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds
On May 15, 2009, the Company commenced an offering for the sale of 10.925 million of its $.01 par value common stock, including 1.425 million shares subject to an underwriters’ over-allotment option, at a price to the public of $49.00 per share. J.P. Morgan Securities Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Deutsche Bank Securities Inc. acted as joint book-running managers, and J.P. Morgan Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated acted as representatives of the underwriters. The offering was made pursuant to the Company’s automatic shelf registration statement on Form S-3 (Registration No. 333-159110), which registered an indeterminate offering amount of securities on a “pay-as-you-go” basis and became effective on May 11, 2009, and a related prospectus and prospectus supplement covering the offered shares filed with the Securities and Exchange Commission.
On May 20, 2009, the sale of all 10.925 million shares was completed, at an aggregate price of $535.3, resulting in net proceeds to the Company of approximately $510.2 after deducting underwriting discounts of $22.8 and estimated other offering expenses of $2.3. No expense payments were to directors, officers, ten percent shareholders or affiliates of the Company.
From the effective date of the registration statement until June 30, 2009, $275 of net proceeds were used by the Company to acquire the “Edge” and “Skintimate” shaving preparation business of S.C. Johnson & Son, Inc., as disclosed in the Company’s Current Report on Form 8-K filed on May 11, 2009, and $100 of net proceeds were used to repay the following indebtedness of the Company:
None of such payments were to directors, officers, ten percent shareholders or affiliates of the Company.
The Company intends to use the remaining net proceeds for general corporate purposes including possibly using a portion of the remaining net proceeds to partially repay $200 of private placement notes maturing in November 2009. Pending their final use, the Company has invested such funds in interest-bearing, investment-grade securities, short-term investments or similar assets.
No shares of Energizer Common Stock were acquired by Energizer during the quarter ended June 30, 2009.
Item 5 — Other Information
On July 27, 2009, the Board of Directors of Energizer approved a restructuring plan designed primarily to re-organize and reduce headcount in the Household Products business. The approved plan provides for an offer of a voluntary enhanced retirement severance package to certain eligible hourly and salaried U.S. employees, and the elimination of additional positions as part of a limited involuntary reduction in force.
In the current global recessionary environment, we continue to see cautious retailer inventory investments and unfavorable device trends, primarily in developed markets. It remains difficult to determine how much of the recent category weakness is due to each of these factions as well as other category and competitive dynamics. Energizer believes this restructuring plan is advisable to reduce the overhead cost structure for its Household Products business, right-size manufacturing and sales operations in light of market conditions and ensure alignment with its overall investment strategies.
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The costs for the restructuring plan are expected to be in the range of $22-$28 million, consisting primarily of one-time termination benefits, and it is expected that the majority of those costs will be recorded in fiscal 2009, although certain aspects of the plan may result in charges during early fiscal 2010. It is expected that the majority of the re-organization will be completed by the end of the first quarter of fiscal 2010. Once completed, Energizer expects annualized savings from the restructuring plan to be in the range of $15 to $18 million.
Item 6 — Exhibits
See the Exhibit Index hereto.
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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.
By:
Daniel J. Sescleifer
Date: July 31, 2009
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EXHIBIT INDEX
The exhibits below are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K.
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