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Feb. 5, 2020, 1:24 p.m. EST

10-Q: ENERGIZER HOLDINGS, INC.

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is meant to provide investors with information that management believes helpful in reviewing Energizer'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 ("MD&A") that are not historical may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You should read the following MD&A in conjunction with the Consolidated Financial Statements (unaudited) and corresponding notes included herein.

All amounts discussed are in millions of U.S. dollars, unless otherwise indicated.

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, including, without limitation, the future sales, gross margins, costs, earnings, cash flows, tax rates and performance of the Company. These statements generally can be identified by the use of forward-looking words or phrases such as "believe," "expect," "expectation," "anticipate," "may," "could," "intend," "belief," "estimate," "plan," "target," "predict," "likely," "should," "forecast," "outlook," 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 to differ materially from those 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:

market and economic conditions;

market trends in the categories in which we compete;

our ability to integrate businesses, to realize the projected results of the acquired businesses, and to obtain expected cost savings, synergies and other anticipated benefits of the acquired businesses within the expected timeframe, or at all;

the impact of the acquired businesses on our business operations;

the success of new products and the ability to continually develop and market new products;

our ability to attract, retain and improve distribution with key customers;

our ability to continue planned advertising and other promotional spending;

our ability to timely execute strategic initiatives, including restructurings, and international go-to-market changes in a manner that will positively impact our financial condition and results of operations and does not disrupt our business operations;

the impact of strategic initiatives, including restructurings, on our relationships with employees, customers and vendors;

our ability to maintain and improve market share in the categories in which we operate despite heightened competitive pressure;

financial strength of disturbers and suppliers;

our ability to improve operations and realize cost savings;

the impact of foreign currency exchange rates and currency controls, as well as offsetting hedges;

the impact of adverse or unexpected weather conditions;

uncertainty from the expected discontinuance of LIBOR and the transition to any other interest rate benchmark;

the impact of raw materials and other commodity costs;

the impact of legislative changes or regulatory determinations or changes by federal, state and local, and foreign authorities, including customs and tariff determinations, as well as the impact of potential changes to tax laws, policies and regulations;

costs and reputational damage associated with cyber-attacks or information security breaches or other events;

the impact of advertising and product liability claims and other litigation; and

compliance with debt covenants and maintenance of credit ratings as well as the impact of interest and principal repayment of our existing and any future debt.

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 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. Additional risks and uncertainties include those detailed from time to time in our publicly filed documents, including those described under the heading "Risk Factors" in our Form 10-K filed with the Securities and Exchange Commission on November 19, 2019.

Non-GAAP Financial Measures

The Company reports its financial results in accordance with accounting principles generally accepted in the U.S. ("GAAP"). However, management believes that certain non-GAAP financial measures provide users with additional meaningful comparisons to the corresponding historical or future period. These non-GAAP financial measures exclude items that are not reflective of the Company's on-going operating performance, such as acquisition and integration costs and related items, loss on extinguishment of debt, and the one-time impact of the new U.S. tax legislation. In addition, these measures help investors to analyze year over year comparability when excluding currency fluctuations, acquisition activity as well as other company initiatives that are not on-going. We believe these non-GAAP financial measures are an enhancement to assist investors in understanding our business and 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. In addition, these non-GAAP measures may not be the same as similar measures used by other companies due to possible differences in method and in the items being adjusted.

We provide the following non-GAAP measures and calculations, as well as the corresponding reconciliation to the closest GAAP measure:

Segment Profit. This amount represents the operations of our two reportable segments including allocations for shared support functions. General corporate and other expenses, Global marketing expenses, R&D expenses, Amortization expense, Interest expense, Other items, net and charges related to Acquisition and integration have all been excluded from segment profit.

Adjusted Net Earnings From Continuing Operations and Adjusted Diluted Net Earnings From Continuing Operations Per Common Share (EPS). These measures exclude the impact of the costs related to acquisition and integration, the loss on extinguishment of debt and the one-time impact of the new U.S. income tax legislation.

Non-GAAP Tax Rate. This is the tax rate when excluding the pre-tax impact of acquisition and integration and the loss on extinguishment of debt, as well as the related tax impact for these items, calculated utilizing the statutory rate for where the impact was incurred, as well as the one-time impact of the new U.S. tax legislation.

Organic. This is the non-GAAP financial measurement of the change in revenue, segment profit or other margins that excludes or otherwise adjusts for the impact of acquisitions, change in Argentina Operations and impact of currency from the changes in foreign currency exchange rates as defined below:

Impact of acquisitions. Energizer completed the Auto Care Acquisition on January 28, 2019 and Battery Acquisition on January 2, 2019. These adjustments include the impact of the acquisitions' ongoing operations contributed to each respective income statement caption for the first year's operations directly after the acquisition date. This does not include the impact of acquisition and integration costs associated with any acquisition.

Battery Acquisition

On January 2, 2019, the Company completed its acquisition of Spectrum Holdings, Inc.'s (Spectrum) global battery, lighting, and portable power business for a contractual purchase price of $2,000.0, subject to certain purchase price adjustments (Battery Acquisition). The Battery Acquisition included the Rayovac(R) and Varta(R) brands (Acquired Battery Business). For the quarter ended December 31, 2019 the revenue associated with the Battery Acquisition was $125.5 and the income before income taxes was $17.1.

Subsequent to the quarter, on January 2, 2020, the Company sold the Varta(R) consumer battery business in the Europe, Middle East and Africa regions, including manufacturing and distribution facilities in Germany (Divestment Business) to VARTA Aktiengesellschaft (VARTA AG) for a contractual purchase price of ?180.0, subject to purchase price adjustments (Varta Divestiture). In addition, pursuant to the terms of the Battery Acquisition agreement, Spectrum also contributed cash proceeds toward this sale. Total initial proceeds received were approximately $345, which will be subject to a final true up based upon the closing balance sheet. Refer to Note 4, Divestment, for further discussion. The Company is evaluating the impact of the divestiture and currently estimates a pre-tax loss of between $80 and $90 based on the preliminary cash proceeds.

Auto Care Acquisition

On January 28, 2019, the Company acquired Spectrum's global auto care business, including the Armor All(R), STP(R), and A/C PRO(R) brands (Acquired Auto Care Business) for a contractual purchase price of $1,250.0, subject to certain purchase price adjustments (Auto Care Acquisition). For the quarter ended December 31, 2019, the revenue associated with the Auto Care Acquisition was $61.4 and the income before income taxes was $0.4.

Acquisition and Integration Costs

The Company incurred pre-tax acquisition and integration costs related to the Battery Acquisition and Auto Care Acquisition of $19.3 and $36.5 in the quarters ended December 31, 2019 and 2018, respectively.

Pre-tax costs recorded in Costs of products sold were $6.9 for the quarter ended December 31, 2019, primarily related to the facility exit and restructuring related costs, discussed in Note 5, Restructuring.

Pre-tax acquisition and integration costs recorded in SG&A were $11.1 and $18.9 for the quarters ended December 31, 2019 and 2018, respectively. The current year costs are related to the integration of the Battery Acquisition and Auto Care Acquisition, including consulting fees and costs of integrating the information technology systems of the businesses. The prior year costs are related to legal, consulting and advisory fees to assist with obtaining regulatory approval around the globe and to plan for the closing.

For the quarter ended December 31, 2019 the Company recorded $0.4 in research and development.

Also, included in the pre-tax acquisition costs for the quarter ended December 31, 2018 was $32.4 of interest expense, including ticking fees, related to the escrowed debt for the Battery Acquisition.

Included in Other items, net were pre-tax expenses of $0.9 and pre-tax income of $14.8 in the quarters ended December 31, 2019 and 2018, respectively. Other items, net for the quarter ended December 31, 2019 included a $2.2 loss related to the hedge contract on the proceeds from the Varta Divestiture, offset by $1.0 gain on the sale of assets, and $0.3 transition services income. Other items, net for the quarter ended December 31, 2018 included pre-tax gain of $9.0 related to the favorable movement in the escrowed USD restricted cash held in our European Euro functional entity and interest income of $5.8 earned on the Restricted cash funds held in escrow associated with the Battery Acquisition.

Restructuring Costs

In the fourth fiscal quarter of 2019, Energizer's Board of Directors approved restructuring related integration plans for our manufacturing and distribution networks. These plans include the closure and combination of distribution and manufacturing facilities in order to reduce complexity and realize greater efficiencies in our manufacturing, packaging and distribution processes. All activities within this plan are expected to be completed by December 31, 2021.

The total pre-tax expense related to the restructuring plans for the quarter ended December 31, 2019 were $6.3, and consisted of charges for employee severance, retention, related benefit costs, accelerated depreciation, asset write-offs, relocation, environmental investigatory and mitigation costs, and other exit costs. These costs were reflected in Cost of products sold on the Consolidated Statement of Earnings and Comprehensive Income, and were incurred within the Americas and International segments in the amount of $5.9 and $0.4, respectively. Total pre-tax charges relating to the restructuring since inception were $18.4. At December 31, 2019, the restructuring reserve is recorded on the Consolidated (Condensed) Balance sheet in Other current liabilities of $6.9 and Other liabilities of $4.5.

Energizer expects to incur additional severance and related benefit costs and other exit-related costs associated with these plans of approximately $55 through the end of calendar 2021. Total cost savings by the end of calendar 2021 are expected to be approximately $60 to $65 annually, primarily to be realized within Cost of products sold. Realization of cost savings from the restructuring plans began in the first quarter of fiscal 2020.

Refer to Note 5 for additional discussion on our restructuring costs.

Highlights / Operating Results

Financial Results (in millions, except per share data)

Energizer reported first fiscal quarter Net earnings from continuing operations of $45.8, or $0.60 per diluted common share. This compares to Net earnings from continuing operations of $70.8, or $1.16 per diluted common share, in the prior year first fiscal quarter. Adjusted diluted net earnings from continuing operations per common share was $0.85 for the first fiscal quarter as compared to $1.64 in the prior year quarter, a decrease of 48.2%.







                                                                        For the Quarter Ended December 31,
                                                                          2019                     2018
        Net earnings attributable to common shareholders           $          42.1         $             70.8
        Mandatory preferred stock dividends                                   (4.0 )                        -
        Net earnings                                               $          46.1         $             70.8
        Net earnings from discontinued operations                              0.3                          -
        Net earnings from continuing operations                    $          45.8         $             70.8
        Pre-tax adjustments
        Acquisition and integration (1)                            $          19.3         $             36.5
        Loss on extinguishment of debt (2)                                     4.2                          -
        Total adjustments, pre-tax                                 $          23.5         $             36.5
        After tax adjustments
        Acquisition and integration                                $          14.7         $             27.9
        Loss on extinguishment of debt                                         3.2                          -
        One-time impact of the new U.S. Tax Legislation                          -                        1.5
        Total adjustments, after tax                               $          17.9         $             29.4
        Adjusted net earnings from continuing operations (3)       $          63.7         $            100.2
        Mandatory preferred stock dividends                                   (4.0 )                        -
        Adjusted net earnings from continuing operations
        attributable to common shareholders                        $          59.7         $            100.2
        Diluted net earnings per common share - continuing
        operations                                                 $          0.60         $             1.16
        Adjustments
        Acquisition and integration                                           0.21                       0.46
        Loss on extinguishment of debt                                        0.04                          -
        One-time impact of new U.S. tax legislation                              -                       0.02
        Adjusted diluted net earnings per diluted common share -
        continuing operations                                      $          0.85         $             1.64
        Weighted average shares of common stock - Diluted                     70.2                       61.0
        


(1) Acquisition and integration costs were included in the following lines in the Consolidated (Condensed) Statement of Earnings and Comprehensive Income:

Feb 05, 2020

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