General Corporate Expenses
General corporate expenses decreased $2.9 for the quarter as higher stock-based compensation expense was more than offset by lower project costs. For the nine months, general corporate expenses were essentially flat, as higher stock-based compensation expense was offset by lower project costs and legal expenses.
Restructuring and Related Charges
Total pre-tax charges related to the Company’s European restructuring projects were $3.2 in the current quarter comprised of exit costs of $0.7 and $2.5 for other costs related to the project, which consist of training, systems integration, relocation and other activities. For the nine months, charges related to those same projects were $11.1, which included exit costs of $3.2 and $7.9 for other costs related to the project, which consist of training, systems integration, relocation and other activities. Of the total costs, $3.0 and $10.3 for the current quarter and nine months, respectively, was recorded in SG&A expense and the rest was recorded in Cost of Products Sold. Cost savings of $16 to $18 are expected in fiscal 2007, of which approximately $12 has been realized in the first nine months. It is expected that the projects will result in $21 to $24 of annualized cost savings once fully implemented in fiscal 2008.
In the quarter and nine months ending June 30, 2006, the Company recorded $12.3 and $17.0, respectively, of restructuring and related charges. These include exit costs of $10.5 and $15.2 in the quarter and nine months ended June 30, 2006, respectively. These exit costs are reflected in SG&A expense and represent employee severance, contract terminations and other exit costs, as well as $1.8 for other costs associated with the project for the same periods. See Footnote 2 to the Condensed Financial Statements for information on the accruals for these plans.
Interest Expense and Other Financing Costs
Interest expense increased $2.8 and $15.0 for the quarter and nine months, respectively, on higher average borrowings, resulting from share repurchases and higher interest rates. Other net financing items were favorable $6.2 and $12.4 for the quarter and nine months, respectively, primarily due to higher interest income and exchange gains compared to exchange losses in the same period a year ago.
Income Taxes
Income taxes, which include federal, state and foreign taxes, were 18.4% and 28.3% for the current quarter and nine month periods, respectively, compared to 17.1% and 28.2% for the same quarter and nine month periods last year, respectively. The current quarter and nine months include $4.3 of favorable previously unrecognized tax benefits related to prior years’ foreign losses in Mexico and $3.5 of adjustments to reduce prior year tax accruals. Adjustments to reduce prior year tax accruals of $8.6 were recorded in the same quarter and nine month periods last year. The current quarter includes an adjustment necessary to bring the nine month tax rate to the estimated full year rate.
Excluding the items discussed above, the rate for the current quarter and nine months is 30.5%, respectively, compared to 31.0% in both the quarter and nine month periods last year.
Liquidity and Capital Resources
Cash flow from operations is the primary funding source for operating needs and capital investments. Cash flow from operations was $342.2 at June 30, 2007, an increase of $77.7 from the same period last year, in line with increased earnings. Lower cash flow from collection of accounts receivable was more than offset by liquidation of inventory, changes in current liabilities and other items. At June 30, 2007, working capital was $927.2, compared to $708.2 at September 30, 2006 and $658.3 at June 30, 2006. The increase in working capital from September 30, 2006 was primarily due to higher cash and cash equivalents on hand in the current period. Working capital increased $268.9 when comparing the current period to June 30, 2006, primarily due to higher cash and cash equivalents and receivables, partially offset by higher other current liabilities.
Capital expenditures were $52.6 at June 30, 2007 and $59.5 at June 30, 2006. Capital expenditures for the current and prior year quarter were funded by cash flow from operations.
The Company purchased approximately 0.8 million shares of its common stock during the nine months ended June 30, 2007, with none in the current quarter, leaving 8.0 million shares remaining on the current 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 $1,705.7 at June 30, 2007, $230.7 of which is tied to variable interest rates (primarily LIBOR). An increase in the applicable short-term rates of one full percentage point would increase annualized pre-tax financing costs by $2.3.
Under the terms of Energizer’s debt facilities, the ratio of Energizer’s indebtedness to its Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) cannot be greater than 4.0 to 1, and may not remain above 3.5 to 1 for more than four consecutive quarters. In addition, the ratio of its current year EBIT to total interest expense must exceed 3.0 to 1. Energizer’s ratio of indebtedness to its EBITDA was 2.7 to 1, and the ratio of its EBIT to total interest expense was 5.4 to 1 as of June 30, 2007. Failure to comply with the above ratios or other covenants could result in acceleration of maturity, which could trigger cross defaults on other borrowings. The Company believes that covenant violations resulting in acceleration of maturity is unlikely. The Company’s fixed rate debt is callable by the Company, subject to a “make whole” premium, which would be required to the extent the underlying benchmark U.S. treasury yield has declined since issuance.
A summary of Energizer’s significant contractual obligations at June 30, 2007 is shown below:
| | | Total | | | Less than 1 year | | | 1-3 years | | | 3-5 years | | | More than 5 years | |
| | | | | | | | | | | | | | | | |
| Long-term debt, including current maturities | | $ | 1,642.0 | | | $ | 160.0 | | | $ | 395.0 | | | $ | 457.0 | | | $ | 630.0 | |
| Interest on long-term debt | | | 380.8 | | | | 82.3 | | | | 138.3 | | | | 90.8 | | | | 69.4 | |
| Operating leases | | | 44.2 | | | | 12.9 | | | | 17.5 | | | | 9.2 | | | | 4.6 | |
| Total | | $ | 2,067.0 | | | $ | 255.2 | | | $ | 550.8 | | | $ | 557.0 | | | $ | 704.0 | |
| | | | | | | | | | | | | | | | | | | | | |
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 the 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, 2007, 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.
As previously discussed, the Company has entered into a definitive agreement to acquire Playtex subject to certain conditions and contingencies. The acquisition will require approximately $1,900 for purchase of all outstanding shares of Playtex, assumption or repayment of outstanding Playtex debt and other transaction costs. In addition to cash on hand and debt facilities currently in place, the Company will need to secure additional financing of $1,200 to $1,400. The Company believes it will be able to obtain such financing at similar risk spreads of existing credit facilities and will be able to maintain the debt facility ratios described above.
The Company believes that, prior to and following the acquisition of Playtex, cash flows from operating activities and periodic borrowings 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
The Company uses raw materials that are subject to price volatility. Hedging instruments are used by the Company 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 under FAS 133 as cash flow hedges. At June 30, 2007, the fair market value of the Company's outstanding hedging instruments was an unrealized pre-tax loss of $13.2. Contract maturities for these hedges extend into fiscal year 2009.
During the current nine months, the Company discontinued hedge accounting treatment for some of its contracts, most of which were settled or unwound during the nine months. These contracts no longer met the accounting requirements of a cash flow hedge because it was probable that the original forecasted transactions will not occur by the end of the originally specified time period. The pre-tax losses on these hedges of $2.3 were recorded in Cost of Products Sold.
See Footnote 9 to the Condensed Financial Statement for additional information.
The Company holds a net-cash settled prepaid share option (PSO) with a financial institution to mitigate the impact of changes in the Company’s deferred compensation liabilities tied to the Company’s stock. The fair market value of the PSO, is included in other current assets and was $53.3 and $34.8 at June 30, 2007 and 2006, respectively. Under accounting rules, the PSO is a hybrid security consisting of a host loan instrument and an embedded derivative instrument, which is carried at fair value. The change in fair value of the total PSO for the current quarter and nine months resulted in income of $7.6 and $17.2, respectively, and income of $3.3 and $1.9 for the same quarter and nine months last year, respectively, was recorded in SG&A.
Recently issued accounting pronouncements
See discussion in Footnote 10 to the Consolidated Financial Statements.
Cautionary Note Regarding Forward-Looking Statements
Statements in this Quarterly Report on Form 10Q that are not historical, particularly statements regarding anticipated 4th quarter material cost increases and the impact of the Company’s implemented price increases in offsetting those higher product costs, the anticipated closing date for the Company’s acquisition of Playtex Products, Inc., growth in the retail battery category, retail consumption of Energizer’s battery products, Energizer’s share of the retail battery category, as well as its share of the wet shave category in primary markets, Energizer’s effective tax rate, anticipated cost savings from European restructuring, future repurchases by the Company of its common stock, the likelihood of violation of the Company’s existing debt covenants, its ability to obtain financing for its acquisition of Playtex at similar risk spreads, and without violating existing debt covenants, and the adequacy of cash flows pre- and post- acquisition to meet liquidity requirements, may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Company cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made.
The Company advises readers that various risks and uncertainties could affect its financial performance and could cause the Company’s actual results for future periods to differ materially from those anticipated or projected. The impact of product cost increases could be more significant than anticipated, as it is difficult to predict with any accuracy whether raw material, energy and other input costs will stabilize or continue to increase, since such costs are impacted by multiple economic, political and other factors outside of the Company’s control. Higher than anticipated product cost increases, competitive promotional activity, or pricing or promotional demands from retailer customers, could limit the effectiveness of implemented price increases in future periods. The anticipated closing of the acquisition of Playtex Products, Inc. could be impacted by failure to obtain regulatory approvals and other conditions required for closing, or the inability to obtain the approval of Playtex's shareholders. Energizer’s estimates of battery category value trends, retail consumption of its battery products on a volume basis, battery and razor and blades market share, and retailer inventory levels are based solely on limited data available to Energizer and management’s reasonable assumptions about market conditions, and consequently may be inaccurate, or may not reflect significant segments of the retail market. The Company’s effective tax rate for the year could be impacted by legislative or regulatory changes by federal, state and local, and foreign, taxing authorities, as well as by the profitability or losses of the Company’s various subsidiary operations in both high-tax and low-tax countries. Estimates of costs savings from the Company's restructuring projects may be impacted by a number of factors, including limits on available efficiencies, unforeseen integration complexities, and greater than anticipated ongoing operating expenses associated with the combined operations. Unanticipated changes in the borrowing markets or unanticipated demands of lenders could impact the Company’s ability to obtain financing for the acquisition of Playtex at risk spreads similar to its current financing. The Company’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 and, post-acquisition, Playtex operating cash flows, or inability to maintain compliance with the Company’s debt covenants could also limit the Company’s ability to meet future operating expenses and liquidity requirements, fund capital expenditures, or service its debt as it becomes due. In addition, other risks and uncertainties not presently known to us or that we consider immaterial could affect the accuracy of any such forward-looking statements. The Company does not undertake any obligation to update any forward-looking statements to reflect events that occur or circumstances that exist after the date on which they were made. 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, 2006, its quarterly reports on Form 10-Q for the quarters ended December 31, 2006, and March 31, 2007, and its Current Reports on Form 8-K dated April 25, 2000 and July 13, 2007.
Item 4. Controls and Procedures.
Ward M. Klein, 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 as of June 30, 2007, the end of the Company’s third fiscal quarter of 2007, 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 during the Company’s third fiscal quarter of 2007 there were no changes which have materially affected, or are reasonably likely to materially affect, the Company’s internal controls 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, should not be material to Energizer’s financial position, taking into account established accruals for estimated liabilities.
Item 1A.—Risk Factors
On July 12, 2007, the Company and Playtex Products, Inc. ("Playtex") signed a definitive agreement pursuant to which the Company agreed to acquire all of the outstanding shares of Playtex at a price of $18.30 per share, and would assume all of the outstanding debt of Playtex. The transaction is subject to regulatory approval, and to approval of the shareholders of Playtex. Execution of the definitive agreement, and the anticipated consummation of the transaction create additional risk factors for the Company.
The anticipated closing of the acquisition in the fall of 2007 could be impacted by failure to obtain regulatory or shareholder approval. Unanticipated changes in the borrowing markets or unanticipated demands of lenders could impact the Company's ability to obtain financing for the acquisition of Playtex at risk spreads similar to its current financing. The Company'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 and, post-acquisition, Playtex operating cash flows, or inability to maintain compliance with the Company's 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. Following closing, risks include failure to integrate the businesses successfully, or a longer than anticipated time frame for integration, the possibility that the revenues, growth prospects, synergies and cost savings, and any other benefits expected from the acquisition may not be fully realized or may take longer to realize than expected, and the risk that disruptions to the businesses of either company could result in revenue or earnings declines, or harm relationships with customers, employees or suppliers.
Item 2—Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Purchases of Equity Securities
No shares of common stock were purchased during the quarter ending June 30, 2007.
Item 6—Exhibits
The following exhibit (listed by number corresponding to the Exhibit Table of Item 601 in Regulation S-K) are hereby incorporated by reference to Energizer’s Current Report on Form 8-K dated as of July 13, 2007.
| 2.1 | Agreement and Plan of Merger among Energizer Holdings, Inc., ETKM, Inc. and Playtex Products, Inc. |
| 99.1 | Stockholder Agreement by and among Energizer Holdings, Inc. and the individuals and other parties listed therein. |
The following exhibits (listed by numbers corresponding to the Exhibit Table of Item 601 in Regulation S-K) are filed with this report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ENERGIZER HOLDINGS, INC.
Registrant
By:
Daniel J. Sescleifer
Executive Vice President and Chief Financial Officer
Date: July 27, 2007
