Razors and Blades
| | Quarter ended December 31, |
| | 2003 | 2002 pro forma |
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| Net sales | $ | 203.0 | | $ | 184.0 | |
| Segment Profit | $ | 34.4 | | $ | 29.1 | |
Energizer’s acquisition of SWS was completed on March 28, 2003; therefore, SWS results are only included in the attached historical financial statements for the last half of the fiscal year. The comparison of the current quarter is versus pro forma SWS results for the quarter ending December 31, 2002 as shown in Note 4 to the Condensed Financial Statements
Razors and Blades sales for the quarter were $203.0, an increase of $19.0, or 10%, compared to the same quarter last year. The sales growth was primarily attributable to the new men’s and women’s shaving systems,QUATTROandIntuition, and favorable currency of $15.5, partially offset by anticipated sales declines in other SWS product lines, which were negatively impacted by new product sale s.
Segment profit for the quarter was $34.4, an increase of $5.3, or 18%, compared to pro forma profit for the same quarter last year. Higher gross margin from new product sales and favorable currency impact of $4.4 were partially offset by significantly higher advertising and promotion expense in support of theQUATTROlaunch, and to a lesser extent,Intuition.
Looking forward,IntuitionandQUATTROsales are expected to fuel year over year sales growth for the remainder of the fiscal year, including continuing new product rollout to additional international markets. Legacy product sales will likely continue to be negatively impacted by new product sales; however the amount of such decline cannot be accurately predicted. For the second fiscal quarter of 2004, we anticipate that Razors and Blades segment results will be substantially imp roved over unusually low results in the same quarter last year. Razors and Blades segment results for the quarter ended March 31, 2003 include approximately $12.0 for manufacturing startup and advertising and promotion expenses associated with the launch of the Intuition women’s shaving system beginning in April 2003 and enhanced support for existing product lines.
General Corporate and Other Expenses
Corporate and other expenses increased $9.6 for the quarter primarily due to costs related to the integration of SWS and higher compensation, legal and administrative costs.
Intellectual Property Rights Income
In the quarter ended December 31, 2002, Energizer recorded income of $6.0 pre-tax, or $3.7 after-tax, related to the licensing of intellectual property rights.
Interest Expense and Other Financing Costs
Interest expense increased $2.8 due to SWS acquisition debt, partially offset by substantially lower interest rates. Other net financing income increased $1.6 primarily due to foreign currency gains in the current quarter.
Income Taxes
Income taxes, which include federal, state and foreign taxes, were 30.6% for the current quarter, including $6.7 of previously unrecognized tax benefits related to prior year losses. Absent such benefits, the tax rate for the first quarter was 34.6% compared to 36.0% for the same period last year, mainly driven by improved earnings in lower tax rate jurisdictions.
Financial Condition
At December 31, 2003, working capital was $528.7, compared to $515.6 at September 30, 2003 and $437.8 at December 31, 2002. The increase in working capital from September 30, 2003 was due to higher receivables as a result of higher sales in the current quarter. The increase in working capital from December 31, 2002 is primarily due to the acquisition of SWS.
Energizer’s total borrowings were $1,004.3 at December 31, 2003. As of December 31, 2003, Energizer’s total debt and financing instruments tied to variable interest rates (primarily LIBOR) were $629.3. An increase in the applicable short-term rates of one full percentage point would increase annualized financing costs by $6.3.
A summary of Energizer’s significant contractual obligations is shown below. See Note 9 to the Condensed Financial Statements for discussion of letters of credit, loan guarantees and guarantees for the purchase of goods used in production.
| | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
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Long-term debt, including current maturities | $ | 930.2 | $ | 20.0 | $ | 165.2 | $ | 155.0 | $ | 590.0 |
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Notes payable | | 74.1 | | 74.1 | | | | | | |
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| Operating leases | | 94.2 | | 13.8 | | 21.6 | | 14.7 | | 44.1 |
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Total | | 1,098.5 | | 107.9 | | 186.8 | | 169.7 | | 634.1 |
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Cash flow from operations was $158.3 for the quarter ended December 31, 2003, up $15.1 from the same period a year ago primarily due to the acquisition of SWS. Cash used in investing activities includes capital expenditures of $18.7 in the current quarter compared to capital expenditures of $5.9 in the same quarter last year. The increase in capital expenditures is primarily due to higher battery production equipment spending and the inclusion of SWS. Cash flow from financing activities includes the purchase of $127.9 of treasury stock in the current quarter. Energizer purchased approximately 3.4 million shares of its common stock during the current quarter under its September 2003 authorization from the Board of Directors. Subsequent to December 31, 2003 through January 30, 2004 an additional 0.5 million shares were purchased. On January 26, 2004, the Board of Directors replaced its last authorization with a new authorization to purchase up to ten million shares of Energizer Common Stock. 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.
Under the terms of Energizer’s debt facilities, the ratio of Energizer’s total indebtedness to its Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) (as defined by the facility agreement and pro forma in the current year) cannot be greater than 3.5 to 1, and the ratio of its current year pro forma EBIT to total interest expense must exceed 3.5 to 1. Energizer’s ratio of total indebtedness to its pro forma EBITDA was 2.3 to 1, and the ratio of its pro forma EBIT to total interest expense was 9.4 to 1 as of December 31, 2003.
Energizer believes that cash flows from operating activities and periodic borrowings under available credit facilities will be adequate to meet short-term and long-term liquidity requirements prior to the maturity of Energizer’s credit facilities, and that it will be able to maintain all of its borrowing covenants, including the debt to EBITDA ratio, although no guarantee can be given in this regard.
Special Purpose Entity
Energizer generates accounts receivable from its customers through the ordinary course of business. A pool of domestic trade accounts receivable are routinely sold to Energizer Receivables Funding Corporation (the SPE), which is a wholly owned, bankruptcy-remote special purpose entity subsidiary of Energizer. The SPE’s only business activities relate to acquiring and selling interests in Energizer’s receivables, and it is 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 our 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 has been repaid.
The terms of the agreements governing this facility qualify trade receivables sale transactions for "sale treatment" under generally accepted accounting principles. As such, Energizer is required to account for the SPE’s transactions with the Conduit as a sale of accounts receivable instead of reflecting the Conduit’s net investment as debt with a pledge of accounts receivable as collateral. Absent this "sale treatment," Energizer’s balance sheet would reflect additional accounts receivable and short-term debt and lower other current assets. See further discussion in Note 8 to the Condensed Consolidated Financial Statements.
Forward-Looking Statements
Statements made in this document that are not historical, particularly statements regarding estimates of battery category growth, retailer consumption of Energizer’s products, Energizer’s market share in the battery category, retail inventory levels, and razor and blade sales growth and segment results during upcoming fiscal quarters, as well as the impact of new products on existing product sales, Energizer’s compliance with debt covenants, including the covenant with respect to its debt to EBITDA ratio, and its continuing ability to meet liquidity requirements, may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Energizer cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made.
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 growth and value increase, retail consumption of its battery products on a unit and volume basis, 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 ret ailers elect to further contract their inventory levels. Competitive activity, whether involving pricing, new products and/or promotional expenditures, could negatively impact sales growth of the new SWS shaving systems, as well as future quarter segment results. Furthermore, the impact of the new shaving systems on existing product sales is difficult to determine with any accuracy, but it is likely that existing product sales of similar category products will decline with the growing acceptance of new products. Energizer’s debt to EBITDA ratio could increase beyond acceptable 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. 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, 2003, and its Current Report on Form 8-K dated April 25, 2000.
