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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-10747
Duracell International Inc.
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(Exact name of registrant as specified in its charter)
Delaware 06-1240267
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Berkshire Corporate Park, Bethel, CT 06801
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 796-4000
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
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Number of Shares of Common Stock, Par Value $.01,
Outstanding as of October 26, 1996 120,410,100
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DURACELL INTERNATIONAL INC.
TABLE OF CONTENTS
Page No.
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PART I. FINANCIAL INFORMATION:
Consolidated Unaudited Financial Statements
Consolidated Income Statement for the Three Fiscal Months 1
Ended September 28, 1996 and September 30, 1995
Consolidated Balance Sheet - September 28, 1996 and 2
June 30, 1996
Statement of Consolidated Cash Flows for the Three Fiscal 3
Months Ended September 28, 1996 and September 30, 1995
Notes to Consolidated Financial Statements 4-6
Management's Discussion and Analysis of Results of Operations 7-9
and Financial Condition
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 10
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Duracell International Inc.
Consolidated Income Statement
(Unaudited)
For the Three Fiscal Months Ended
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September 28, September 30,
In millions, except per share amounts 1996 1995
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Revenue $ 596.9 $ 538.9
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Operating expenses:
Cost of products sold 238.7 200.7
Selling, general and administrative expenses 244.8 234.9
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Total operating expenses 483.5 435.6
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Operating income 113.4 103.3
Interest expense 6.6 6.9
Other expense 3.4 1.0
Mark-to-market (gain) loss (3.4) 7.6
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Income before income taxes 106.8 87.8
Provision for income taxes 40.9 34.2
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Net income $ 65.9 $ 53.6
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Earnings per share $ 0.54 $ 0.44
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Weighted average shares and share equivalents
outstanding 121.2 120.6
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Cash dividends per share on common stock $ 0.29 $ 0.26
======== ========
See notes to consolidated financial statements.
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Duracell International Inc.
Consolidated Balance Sheet
September 28, June 30,
In millions 1996 1996
(unaudited)
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ASSETS
Current assets:
Cash and cash equivalents $ 33.9 $ 43.6
Accounts receivable, less allowance of $21.2 and $22.6 535.7 473.3
Inventories 327.5 318.4
Deferred income taxes 30.1 31.4
Prepaid and other current assets 55.6 59.3
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Total current assets 982.8 926.0
Property, plant and equipment, net of accumulated depreciation of
$291.6 and $279.3 527.2 492.1
Intangibles, net of accumulated amortization of $384.4 and $374.3 1,260.3 1,271.7
Other assets 42.8 38.7
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Total assets $2,813.1 $2,728.5
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LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 131.6 $ 136.8
Short-term borrowings 38.4 54.0
Accrued liabilities 222.4 195.4
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Total current liabilities 392.4 386.2
Long-term debt 564.4 521.1
Postretirement benefits other than pensions 103.8 103.3
Deferred income taxes 245.1 260.8
Other non-current liabilities 62.0 53.9
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Total liabilities 1,367.7 1,325.3
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Commitments and contingencies
Equity:
Common stock and capital surplus 1,158.7 1,148.8
Retained earnings 367.0 335.7
Accumulated translation adjustment (39.1) (40.1)
Treasury stock (41.2) (41.2)
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Total equity 1,445.4 1,403.2
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Total liabilities and equity $2,813.1 $2,728.5
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See notes to consolidated financial statements.
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Duracell International Inc.
Statement of Consolidated Cash Flows
(Unaudited)
For the Three Fiscal Months Ended
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September 28, September 30,
In millions 1996 1995
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Operating activities:
Net income $ 65.9 $ 53.6
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation 12.6 11.7
Amortization 12.7 11.7
Provision for deferred taxes (4.1) (7.3)
Other noncash items (1.4) 10.1
(Increase) decrease in:
Accounts receivable (60.4) (64.5)
Inventories (8.5) 0.7
Other working capital 26.6 48.6
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Cash provided by operating activities 43.4 64.6
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Investing activities:
Purchase of property, plant and equipment (46.9) (28.8)
Proceeds from sale of assets and other (5.7) (0.1)
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Cash used by investing activities (52.6) (28.9)
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Financing activities:
Issuance of common stock 8.7 3.5
Dividends paid (34.6) (30.7)
Issuance (repayment) of revolving credit borrowings, net (3.3) 5.4
Issuance of commercial paper, net 46.4 1.4
Net change in other borrowings and other (16.8) (13.8)
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Cash provided (used) by financing activities 0.4 (34.2)
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Effect of exchange rate changes on cash (0.9) 0.8
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Increase (decrease) in cash and cash equivalents (9.7) 2.3
Cash and cash equivalents, beginning of period 43.6 35.0
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Cash and cash equivalents, end of period $ 33.9 $ 37.3
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Cash paid during the period for:
Interest $ 8.9 $ 8.7
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Taxes $ 5.4 $ 2.1
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See notes to consolidated financial statements.
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DURACELL INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in millions except per share amounts)
(unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements of Duracell International Inc.
(the "Company") are unaudited, but in the opinion of management contain
all adjustments which are of a normal and recurring nature necessary to
present fairly the financial position and the results of operations and
cash flows for the periods presented.
The results of operations for these periods are not necessarily
indicative of the results to be expected for the full year. Worldwide
battery sales are significantly greater in the second half of the
calendar year than the first half due to consumers' traditionally
strong purchases during the holiday season.
The Company's fiscal year ends June 30.
Inventories
Inventories are valued at the lower of cost or market using the
first-in, first-out method.
Advertising
Accruals for advertising costs are recorded in interim periods based
upon forecasted expenditures for the current fiscal year and charged to
expense proportionally to the ratio of year-to-date sales to the most
recent forecast of annual sales.
Earnings Per Share
Earnings per share is calculated by dividing net income by the weighted
average number of common shares and share equivalents outstanding
during the period.
2. INVENTORIES
The cost of inventories by stage of manufacture was:
September 28, June 30,
1996 1996
---- ----
Finished goods $ l88.4 $ 174.2
Work in process 88.8 87.3
Raw materials and supplies 50.3 56.9
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Total $ 327.5 $ 318.4
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3. EQUITY
The Company paid cash dividends of $0.29 and $0.26 per share of common
stock during the first three months of fiscal 1997 and 1996,
respectively. Total dividends paid during these periods were $34.6 and
$30.7, respectively.
Common stock and capital surplus increased $9.9 reflecting proceeds of
$8.7 from stock option exercises and $1.2 of tax benefits arising from
stock option transactions.
4. MARK-TO-MARKET
The Company uses forward foreign currency contracts to effectively
protect its cash flows against unfavorable movements in exchange rates.
The majority of the forward contracts are used to protect against
currency-driven intercompany product costs. In accordance with current
accounting standards, the Company defers unrealized gains and losses
arising from contracts that hedge existing and identified foreign
currency firm third party commitments until the realized transaction
occurs. Unrealized gains and losses arising from contracts that hedge
anticipated intercompany transactions are recorded currently in income,
on the "mark-to-market" line. These unrealized gains and losses will
fluctuate from quarter to quarter and represent timing issues only,
with no economic benefit or cost to the Company until realized. Upon
realization, the gains or losses arising on the forward contracts are
offset by gains or losses on the related foreign currency exposures.
5. COMMITMENTS AND CONTINGENCIES
In September, 1994, the Company entered into an administrative order by
consent with the U.S. Environmental Protection Agency ("EPA")
whereunder it has submitted to the EPA a plan for a complete remedial
investigation and feasibility study ("RIFS") relating to mercury and
volatile organic compounds contamination at its Lexington, North
Carolina manufacturing site. The investigation work under the RIFS has
been completed and certain supplemental investigatory activities are
presently being discussed with the EPA. Comprehensive remediation
actions have taken place at the Lexington site over many years, but
additional remediation work will be necessary based upon the outcome of
the RIFS. As of September 28, 1996, the Company believes that
reasonably estimable investigatory and remediation costs will be
approximately $6, which is fully reserved. However, site investigation
is not yet complete and the remediation plan has not been agreed to by
the EPA. The Company believes that if additional remedial work is
required, such additional remediation would not likely exceed an
additional $10.
6. PROPOSED MERGER
On September 12, 1996 it was announced that the Company had signed an
agreement to merge with The Gillette Company ("Gillette"). The merger
is expected to be completed by the end of calendar 1996, following
approval of both Duracell and Gillette shareholders. Under the terms of
the merger agreement, each outstanding share of Duracell common stock
will be exchanged for .904 shares of Gillette common stock. In the
event the merger is not completed because of specific conditions
outlined in the merger agreement, a fee of $150 plus expenses (not to
exceed $15) shall be payable to Gillette. In connection with the
merger, the Company will incur
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approximately $40 of expenses for legal, accounting and investment
banking fees. Because the majority of these fees are payable only if
the merger is consummated, such fees will be recorded upon completion
of the merger.
7. SUBSEQUENT EVENT
On October 21, 1996 the Company purchased the SUNPOWER trademark and
consumer battery sales and distribution operations in South Korea from
STC Corporation for approximately $109. SUNPOWER is a leading alkaline
battery brand in South Korea.
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Management's Discussion and Analysis of Results of Operations and Financial
Condition
RESULTS OF OPERATIONS
Summarized below are the results of operations for the three fiscal months ended
September 28, 1996 and September 30, 1995 (in millions, except per share
amounts):
THREE FISCAL MONTHS ENDED % CHANGE
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SEPT. 28, SEPT. 30,
1996 1995 REPORTED PERF. *
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Alkaline unit volume:
North America 402.5 371.8 8 8
Europe 168.2 149.8 12 12
Other International Markets 178.6 171.9 4 4
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749.3 693.5 8 8
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Revenue:
North America $ 337.8 $ 312.9 8 8
Europe 139.9 135.7 3 3
Other International Markets 119.2 90.3 32 36
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$ 596.9 $ 538.9 11 11
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Operating income:
North America $ 90.6 $ 87.7 3 3
Europe 27.6 26.8 3 1
Other International Markets 18.8 11.5 63 67
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137.0 126.0 9 9
Corporate/R&D (23.6) (22.7) (4) (4)
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$ 113.4 $ 103.3 10 10
Interest expense 6.6 6.9 4 1
Other expense 3.4 1.0 NM NM
Mark-to-market (gain) loss (3.4) 7.6 NM NM
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Income before income taxes 106.8 87.8 22 20
Tax expense 40.9 34.2 (20) (19)
Effective tax rate 38.3% 38.9% 0.6pp 0.6pp
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Net income $ 65.9 $ 53.6 23 20
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Earnings Per Share $ 0.54 $ 0.44 23 20
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* Performance - adjusted for foreign exchange (i.e., foreign currency
translation, defined as the impact of translating the income statement from
local currency to U.S. dollars).
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OVERVIEW
Earnings for the first quarter ended September 28, 1996 were $64 million or
$0.53 per share before an unrealized accounting gain, an increase of 10% from
$0.48 per share in the year-earlier quarter. Inclusive of the unrealized
accounting gain, which resulted from "marking to market" the Company's forward
foreign currency contracts for intercompany purchases, net income totaled $66
million, or $0.54 per share.
NORTH AMERICA
Alkaline volume grew 8%, reflecting continued alkaline market growth (i.e.
device growth), led by the mass merchandiser chains and warehouse clubs, and
market share gains. Sales also increased 8%, reflecting the volume growth and
the benefits of price increases implemented during July 1996, as well as
increased nickel metal hydride revenues. Partially offsetting these factors was
the impact of unfavorable product mix, including larger size multipacks. Higher
costs associated with manufacturing new DURACELL PowerCheck batteries plus the
ongoing trend toward larger pack sizes restricted operating income growth in
North America to just 3% in the quarter.
EUROPE
Alkaline volume increased 12%, due to strong demand for DURACELL PowerCheck
batteries, distribution gains in Eastern Europe, higher shipments of
non-Duracell brand batteries and promotional activity. However, the impact of
larger pack sizes, pricing pressures and increased volumes in the lower priced
markets of Eastern Europe held revenue and operating income growth to 3%.
OTHER INTERNATIONAL MARKETS
Alkaline volume growth was 4% for the quarter--below recent trends. Continuing
geographic expansion and broader distribution in China, economic stability in
Brazil and favorable year-on-year comparisons in Mexico were partially offset by
economic weakness in Venezuela and Australia as well as the transition to a
direct sales force in portions of Southern Asia.
The revenue increase of 32% reflects the volume growth, pricing actions and the
incremental sales from Eveready South Africa (acquired during the fourth quarter
of fiscal 1996). Operating income increased faster than revenue as a result of
operating leverage, bolstered by the acquisition of Eveready South Africa.
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FINANCIAL CONDITION
Three Fiscal Months Ended
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September 28, September 30,
1996 1995
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Cash provided by operating activities ..................... $ 43.4 $ 64.6
Capital expenditures ...................................... 46.9 28.8
Dividends paid ............................................ 34.6 30.7
Debt reduction (borrowings), net .......................... (26.2) 7.0
CASH FLOW
Cash provided by operating activities was used principally for continued
investment in the business through capital expenditures and the payment of cash
dividends to shareholders. Cash provided by operating activities decreased as a
result of working capital changes related to continued growth. Capital
expenditures increased for alkaline capacity expansion at existing manufacturing
sites, construction of new alkaline manufacturing facilities in China and India,
and equipment for the production of lithium ion batteries.
The Company will rely on cash generated from operations to fund its future
working capital and capital expenditure requirements needed to support continued
alkaline growth, geographic expansion and investment in high power rechargeable
batteries. Funds available from unused bank credit facilities will be used
primarily to fund seasonal working capital during the year when receivables and
inventories rise to meet operating requirements.
Dividends paid increased 13%, as a result of the February 1996 per share
dividend increase from $0.26 per share to $0.29 per share.
As of September 28, 1996, the Company had $818 million in contractually
committed lines of credit from long-term bank credit facilities under which $530
million was outstanding. Commitments under the facilities are used to support
commercial paper, of which $480 million was outstanding at September 28, 1996.
The Company's commercial paper program is rated investment grade. Unused
borrowing capacity under its principal bank credit facilities at September 28,
1996 was $288 million.
Taxes paid ($5.4 million) were low in relation to the tax provision ($40.9
million) due to the timing of tax payments.
PROPOSED MERGER
On September 12, 1996 it was announced that the Company had signed an agreement
to merge with The Gillette Company ("Gillette"). The merger is expected to be
completed by the end of calendar 1996, following approval of both Duracell and
Gillette shareholders. Under the terms of the merger agreement, each outstanding
share of Duracell common stock will be exchanged for .904 shares of Gillette
common stock. In the event the merger is not completed because of specific
conditions outlined in the merger agreement, a fee of $150 million plus expenses
(not to exceed $15 million) shall be payable to Gillette. In connection with the
merger, the Company will incur approximately $40 million of expenses for legal,
accounting and investment banking fees. Because the majority of these fees are
payable only if the merger is consummated, such fees will be recorded upon
completion of the merger.
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PART II
OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(i) Statement re: computation of earnings per share.
(b) Reports on Form 8-K
On September 16, 1996, the Company filed a report on Form 8-K.
This filing explained the Company's proposed merger with The
Gillette Company.
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SIGNATURE
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.
DURACELL INTERNATIONAL INC.
November 7, 1996
By: Robert A. Burgholzer, Jr.
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Robert A. Burgholzer, Jr.
Vice President and Controller
(Principal Accounting Officer)
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
11 (i) Statement re: computation of earnings per share
27 Financial data schedule