Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion is a summary of the key factors management considers necessary in reviewing the Company's 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 audited Consolidated Financial Statements and corresponding notes included elsewhere in this Annual Report. This MD&A contains forward-looking statements. The matters discussed in these forward-looking statements are subject to risk, uncertainties, and other factors that could cause actual results to differ materially from those projected or implied in the forward-looking statements. Please see Part I. Item 1A “Risk Factors” above and “Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements.
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. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. Numerous factors could cause our actual results and events to differ materially from those expressed or implied by forward-looking statements including, but not limited to, those discussed in Part I, Item 1A, “Risk Factors," as updated from time to time in the Company’s SEC filings.
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 impairment of goodwill and intangible assets, acquisition and integration costs, restructuring costs, an acquisition earn out, the costs of the May 2022 flooding of our Brazilian manufacturing facility, the costs of exiting the Russian market, the gain on finance lease termination, the loss on extinguishment of debt and the one-time impact of Tax structuring and the Coronavirus Aid, Relief and Economic Security (CARES) Act. 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, amortization expense, impairment of goodwill and intangible assets, interest expense, loss on extinguishment of debt, the gain on finance lease termination, other items, net, the charges
related to acquisition and integration costs, restructuring costs, an acquisition earn out, the costs of the flooding of our manufacturing facility in Brazil and the costs of exiting the Russian market have all been excluded from segment profit.
Adjusted net earnings from continuing operations and Adjusted Diluted net earnings per common share - continuing operations (EPS). These measures exclude the impact of the impairment of goodwill and intangible assets, costs related to acquisition and integration, restructuring costs, an acquisition earn out, the costs of the flooding of our manufacturing facility in Brazil, the costs of exiting the Russian market, the gain on finance lease termination, the loss on extinguishment of debt and the one-time impact of Tax structuring and the CARES Act.
Non-GAAP Tax Rate. This is the tax rate when excluding the pre-tax impact of impairment of goodwill and intangible assets, acquisition and integration costs, restructuring costs, an acquisition earn out, the costs of the flooding of our manufacturing facility in Brazil, the costs of exiting the Russian market, the gain on finance lease termination 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 Tax structuring and the CARES Act.
Organic. This is the non-GAAP financial measurement of the change in revenue or segment profit that excludes or otherwise adjusts for the impact of acquisitions, change in Russia and Argentina operations and the impact of currency from the changes in foreign currency exchange rates as defined below:
Impact of acquisitions. Energizer completed two acquisitions in the first fiscal quarter of 2021, a battery plant in Indonesia on October 1, 2020 and a formulation company in the United States on December 1, 2020 (Formulations Acquisition). These adjustments include the impact each acquisition's on-going 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.
Change in Russia Operations. The Company exited the Russian market in the second quarter of fiscal 2022 due to the increased global and economic and political uncertainty resulting from the ongoing conflict between Russia and Ukraine. This adjusts for the change in Russian sales and segment profit from the prior year post exit.
Change in Argentina Operations. The Company is presenting separately all changes in sales and segment profit from our Argentina affiliate due to the designation of the economy as highly inflationary as of July 1, 2018.
Impact of currency. The Company evaluates the operating performance of our Company on a currency neutral basis. The impact of currency is the difference between the value of current year foreign operations at the current period ending USD exchange rate, compared to the value of the current year foreign operations at the prior period ending USD exchange rate, as well as the impact of hedging on the currency fluctuation.
Adjusted Gross Profit, Adjusted Gross Margin and adjusted Selling, General & Administrative (SG&A) as a percent of sales. Details for adjusted gross margin and adjusted SG&A as a percent of sales are also supplemental non-GAAP measure disclosures. These measures exclude the impact of costs related to acquisition and integration, restructuring costs, an acquisition earn out, the costs of exiting the Russian market and the costs of the flooding of our manufacturing facility in Brazil.
Coronavirus (COVID-19)
For the fiscal year ended September 30, 2022, Energizer continued to be impacted by the coronavirus (COVID-19) pandemic and its related effects. Overall, the impact of the COVID-19 pandemic on the Company's results of operations was primarily driven by factors related to disruption in our global supply chain and changes in demand for products. While it is not feasible to identify or quantify all the other direct and indirect implications on the Company's results of operations, below are factors that the Company believes have affected its results for fiscal 2022 compared to fiscal 2021.
•The Company has faced higher operating costs due to the global supply chain constraints, including for raw materials and transportation.
•Labor availability continues to be a challenge across most of the Company's sites in the US and Singapore.
•The Company has invested in incremental safety stock to partially mitigate the impacts of the continued volatility of the global supply network.
An inflationary environment marked by higher manufacturing and transportation costs as well as increased commodity costs is expected to continue into fiscal 2023. While we did not experience significant disruptions in our operations during fiscal 2022, the risks of future negative impacts due to transportation, logistical or supply constraints and higher commodity
costs for certain raw materials remain present, and the Company continues to experience corresponding incremental costs and gross margin pressures.
The full impact of COVID-19 on our financial and operating performance will depend significantly on the duration and severity of the pandemic and related disruption to our global supply chain, the emergence of variants and the effectiveness of vaccines against these variants, and any future government actions affecting consumers and the economy in general, among other factors beyond our knowledge or control.
For further discussion of the possible impacts of the COVID-19 pandemic and other recent events on our business, financial conditions and results of operations, see "Risk Factors" in Part I, Item 1A of this Report.
Exit of Russian Market
During the second quarter of fiscal 2022, the Company exited the Russian market due to global economic and political uncertainty related to the conflict between Russian and the Ukraine and the resultant sanctions imposed on Russia.
While neither Russia nor Ukraine constitutes a material portion of our business, a significant escalation or expansion of economic disruption or the conflict's current scope could disrupt our supply chain, broaden inflationary costs, and have a material adverse effect on our results of operations. Our Russian subsidiary comprised approximately one percent of our business.
With the decision to exit the Russian market, the Company terminated the employment of all our Russian colleagues and reviewed our Russian assets for impairment. Exiting the Russian market resulted in additional Costs of products sold of $1.3 related to the impairment of inventory in Russia and shipping costs to get inventory to other markets, impairment of other assets and severance recorded to SG&A of $5.8, and currency impacts recorded in Other items, net of $7.5 in fiscal 2022.
Brazil Manufacturing Plant Flood
In May 2022, the Company's Jaboatao, Brazil battery manufacturing facility had severe flooding due to historic levels of rain in the area. The plant was not operational for the month of June, however some production began again in July and the majority is now back on line. The Company has an insurance policy with an approximate $10 deductible. For the twelve months ended September 30, 2022, the Company recorded costs related to the flood net of insurance proceeds of $9.7 in Cost of products sold, primarily related to damaged inventory at the plant. Based on the insurance plan deductible, the Company anticipates that further losses from the damage should be minimal.
Fiscal Year 2021 Acquisitions
During the fourth quarter of fiscal 2020, the Company entered into an agreement with FDK Corporation to acquire its subsidiary PT FDK Indonesia, a battery manufacturing facility (FDK Acquisition). On October 1, 2020, the Company completed the acquisition for a contractual purchase price of $18.2. After contractual and working capital adjustments, the Company paid cash of $16.9 and a working capital adjustment of $0.7 during fiscal 2021. The acquisition of the FDK Indonesia facility increased the Company's alkaline battery production capacity and allows us to avoid future planned capital expenditures.
On December 1, 2020 the Company acquired a North Carolina-based company that specializes in developing formulations for cleaning tasks. Their products are both sold to customers directly and licensed to manufacturers. This acquisition is expected to bring significant innovation capabilities in formulations to our organization. The purchase price and total cash paid for the acquisition was $51.2. During fiscal 2022, the working capital settlement was finalized, reducing the purchase price by $1.0.
Battery Acquisition
On January 2, 2019, the Company acquired Spectrum Brands Holdings, Inc.'s (Spectrum) global battery, lighting and portable power business (Battery Acquisition) including the brands Rayovac® and Varta® (Acquired Battery Business). The acquisition expanded our battery portfolio globally with the addition of a strong value brand.
On January 2, 2020, the Company sold the Varta® consumer battery business in the Europe, Middle East and Africa regions, including manufacturing and distribution facilities in Germany (Varta Divestiture or Divestment Business) to VARTA Aktiengesellschaft (VARTA AG). These operations were included as discontinued operations for all periods presented.
Auto Care Acquisition
On January 28, 2019, the Company acquired Spectrum’s global auto care business, including Armor All®, STP®, and A/C PRO® brands (Auto Care Acquisition).
Acquisition and Integration Costs
The Company incurred pre-tax acquisition and integration costs related to the above acquisitions of $16.5, $68.9 and $68.0 in the twelve months ended September 30, 2022, 2021, and 2020, respectively.
Pre-tax costs recorded in Costs of products sold were $6.0, $33.7, and $32.0 for the twelve months ended September 30, 2022, 2021, and 2020, respectively, which primarily related to the integration restructuring costs of $5.2, $31.9 and $29.3 as discussed in Note 6, Restructuring.
Pre-tax acquisition and integration costs recorded in SG&A were $9.4, $40.0 and $38.8 for the twelve months ended September 30, 2022, 2021 and 2020, respectively. In fiscal 2022 the SG&A expenses primarily related to the integration of acquired information technology systems, consulting costs, and retention-related compensation costs. In fiscal 2021 and 2020 these expenses primarily related to consulting fees for the 2020 restructuring program, success incentives, and costs of integrating the information technology systems of the Battery and Auto Care Acquisition businesses.
For the twelve months ended September 30, 2022, 2021 and 2020 the Company recorded $1.1, $1.1 and $1.3 in Research and development, respectively.
Included in Other items, net was pre-tax income of $5.9 and $4.1 in the twelve months ended September 30, 2021 and 2020, respectively. The pre-tax income recorded in fiscal 2021 was primarily driven by the gain on a sale of assets of $3.3, which was part of the integration restructuring discussed in Note 6.
The pre-tax income recorded in fiscal 2020 was primarily driven by pre-acquisition insurance proceeds of $4.9 and $1.0 gain on the sale of assets and $0.9 of transition services income, offset by a $2.2 loss related to the hedge contract on the proceeds from the Varta Divestiture and $0.5 of other items.
Restructuring Costs
Subsequent to the fiscal year-end, the Board of Directors approved a profit recovery program, Project Momentum, which includes an enterprise-wide restructuring focused on recovering operating margins, optimizing our manufacturing, distribution and global supply chain networks, and enhancing our organizational efficiency across both segments. The restructuring component of the program is expected to generate $65 to $80 of annual pre-tax savings and the Company estimates that it will incur one-time costs of $40 to $50 over the next two years. During the fourth quarter, the Company accrued $0.9 of consulting costs related to the design of the program. Additionally, along side the restructuring component of the program, Project Momentum includes continuous improvement and working capital initiatives that are designed to strengthen our balance sheet, focus on cash flow, and generate P&L savings of approximately $15 to $20 annually. Total expected pre-tax savings of Project Momentum are between $80 and $100 with approximately $30 to $40 of those savings to be recognized in fiscal year 2023.
In the fourth fiscal quarter of 2019, the Company began implementing 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 were substantially complete by December 31, 2021.
Part of this plan was the exit of our Dixon, IL leased packaging facility, which the Company vacated during the first quarter of fiscal 2022. In the third quarter of fiscal 2022, the Company entered into a termination agreement with the landlord. The Company terminated the lease agreement, which went into 2028, reducing the finance lease obligations by $9.8. The termination agreement required the Company to pay a termination fee of $4.0, as well as decommissioning costs and brokerage fees. Since the Company has already vacated the facility as part of the 2019 restructuring program, most assets associated with the location have already been fully depreciated. The termination of this lease resulted in a gain of $4.5 recognized in Other items, net during fiscal 2022.
In the fourth fiscal quarter of 2020, the Company initiated a new restructuring program with a primary focus on reorganizing our global end-to-end supply chain network and ensuring accountability by category. This program includes streamlining the Company’s end-to-end supply chain model to enable rapid response to category specific demands and enhancing our ability to better serve our customers. Planning and execution of this program began in fiscal year 2021, with all programs substantially complete by December 31, 2021.
The total pre-tax expense related to these restructuring plans for the twelve months ended September 30, 2022, 2021 and 2020 were $1.7, $36.8, and $30.3, respectively. These consisted of charges for employee severance, retention, related benefit costs, accelerated depreciation, asset write-offs, relocation, environmental investigatory and mitigation costs, consulting costs and other exit costs, offset by a gain on finance lease termination in fiscal 2022. The costs were reflected in Cost of products sold, Selling, general and administrative expense, Research and development, and Other items, net on the Consolidated Statements of Earnings and Comprehensive Income.
Although the Company's restructuring costs are recorded outside of segment profit, if allocated to our new reportable segments, the restructuring costs noted above fiscal 2022 would have been included in our Batteries & Lights and Auto Care segments in the amount of $1.3 and $0.4, respectively. The restructuring costs noted above for fiscal year 2021 would have been included in our Batteries & Lights and Auto Care segments in the amount of $30.7 and $6.1, respectively. The restructuring costs noted above for fiscal year 2020 would have been incurred within our Batteries & Lights and Auto Care segments in the amount of $21.7 and $8.6, respectively.
Total pre-tax charges relating to the 2019 restructuring program since inception were $60.6. Total pre-tax charges relating to the 2020 restructuring program since inception are $19.4.
Fiscal 2022 marks the conclusion of the 2019 and 2020 Restructuring programs. The full amount of savings are now included within our run-rate cost structure. Energizer estimates that total project savings were approximately $55 to $60. The primary impact of the savings were reflected in Cost of products sold. Savings related to the restructuring programs have been fully realized as of September 30, 2022. We do not expect to incur additional material charges for these programs.
Refer to Note 6 Restructuring for further detail.
Overview
General
Energizer, through its operating subsidiaries, is one of the world’s largest manufacturers, marketers and distributors of household batteries, specialty batteries and lighting products, and a leading designer and marketer of automotive appearance, performance, refrigerant, and freshener products. Energizer manufactures, markets and/or licenses one of the most extensive product portfolios of household batteries, specialty batteries, auto care products and portable lights. Energizer is the beneficiary of over 100 years of expertise in the battery and portable lighting products industries. Its brand names, Energizer, Eveready and Rayovac, have worldwide recognition for innovation, quality and dependability, and are marketed and sold around the world.
Energizer has a long history of innovation within our categories. Since our commercialization of the first dry-cell battery in 1893 and the first flashlight in 1899, we have been committed to developing and marketing new products to meet evolving consumer needs and consistently advancing battery technology as the universe of devices powered by batteries has evolved. Over the past 100+ years we have developed or brought to market:
•the first flashlight;
•the first dry cell alkaline battery;
•the first mercury-free alkaline battery; and
•Energizer Ultimate Lithium®, the world’s longest-lasting AA and AAA battery for high-tech devices.
Energizer offers batteries using many technologies including lithium, alkaline, carbon zinc, nickel metal hydride, zinc air, and silver oxide. These products are sold globally under the Energizer, Eveready and Rayovac brands, including hearing aid batteries, and the Varta brand in Latin America and Asia Pacific. These products include primary, rechargeable, specialty and hearing aid batteries and are offered in the performance, premium and price segments.
In addition, we offer auto care products in the appearance, fragrance, performance and air conditioning recharge product categories. The appearance and fragrance categories include protectants, wipes, tire and wheel care products, glass cleaners, leather care products, air fresheners and washes designed to clean, shine, refresh and protect interior and exterior automobile surfaces under the brand names Armor All, Nu Finish, Refresh Your Car!, LEXOL, Eagle One, California Scents, Driven, Bahama & Co, Carnu, Grand Prix, Kit and Tempo.
The performance product category includes STP branded fuel and oil additives, functional fluids and other performance chemical products that benefit from a rich heritage in the car enthusiast and racing scenes, characterized by a commitment to technology, performance and motor sports partnerships for over 60 years. The brand equity of STP also provides for attractive licensing opportunities that augment our presence in our core performance categories.
The air conditioning recharge product category includes do-it-yourself automotive air conditioning recharge products led by the A/C PRO brand name, along with other refrigerant and recharge kits, sealants and accessories.
In addition, we offer an extensive line of lighting products designed to meet a variety of consumer needs. We distribute and market lighting products including handheld, headlights, lanterns, and area lights. In addition to the Energizer, Eveready and Rayovac brands, we market our flashlights under the Hard Case, Dolphin, and WeatherReady® sub-brands. In addition to batteries and portable lights, Energizer licenses the Energizer, Eveready and Rayovac brands to companies developing consumer solutions in solar, automotive batteries, portable power for critical devices (like smart phones), generators, power tools, household light bulbs and other lighting products.
Through our global supply chain, global manufacturing footprint and seasoned commercial organization, we seek to meet diverse customer demands within each of the markets we serve. Energizer distributes its portfolio of batteries, auto care and lighting products through a global sales force and global distributor model. We sell our products in multiple retail and business-to-business channels, including: mass merchandisers, club, electronics, food, home improvement, dollar store, auto, drug, hardware, e-commerce, convenience, sporting goods, hobby/craft, office, industrial, medical and catalog.
We use the Energizer name and logo as our trademark as well as those of our subsidiaries. Product names appearing throughout are trademarks of Energizer. This MD&A also may refer to brand names, trademarks, service marks and trade names of other companies and organizations, and these brand names, trademarks, service marks and trade names are the property of their respective owners.
Operations for Energizer are managed via two major reportable product groupings: Battery & Lights and Auto Care.
Financial Results
Net loss from continuing operations for the fiscal year ended September 30, 2022 was $231.5, or a loss of $3.37 per diluted common share, compared to net earnings from continuing operations of $160.9, or $2.11 per diluted common share, and $46.8, or $0.44 per diluted common share, for the fiscal years ended September 30, 2021 and 2020, respectively.
Net (loss)/earnings from continuing operations and diluted net (loss)/earnings from continuing operations per common share for the time periods presented were impacted by certain items related to impairment of goodwill and intangible assets, costs related to acquisition and integration, restructuring costs, an acquisition earn out, the costs of the flooding of our manufacturing facility in Brazil, the costs of exiting the Russian market, the gain on finance lease termination, the loss on extinguishment of debt and the one-time impact of Tax structuring and the CARES Act as described in the tables below. The impact of these items on reported net (loss)/earnings from continuing operations and reported diluted net (loss)/earnings from continuing operations per common share are provided below as a reconciliation to arrive at respective non-GAAP measures. See disclosure under Non-GAAP Financial Measures above.
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| For the Twelve Months Ended September 30, |
| 2022 | | 2021 | | 2020 |
| Net (loss)/earnings attributable to common shareholders | $ | (235.5) | | | $ | 144.7 | | | $ | (109.5) | |
| Mandatory preferred stock dividends | (4.0) | | | (16.2) | | | (16.2) | |
| Net (loss)/earnings | (231.5) | | | 160.9 | | | (93.3) | |
| Net loss from discontinued operations, net of tax | — | | | — | | | (140.1) | |
| Net (loss)/earnings from continuing operations | $ | (231.5) | | | $ | 160.9 | | | $ | 46.8 | |
| Pre-tax adjustments | | | | | |
| Acquisition and integration (1) | 16.5 | | | 68.9 | | | 68.0 | |
| Acquisition earn out (2) | 1.1 | | | 3.4 | | | — | |
| Impairment of goodwill & intangible assets | 541.9 | | | — | | | — | |
| Loss on extinguishment of debt | — | | | 103.3 | | | 94.9 | |
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| Project Momentum Restructuring costs (3) | 0.9 | | | — | | | — | |
| Exit of Russian market (4) | 14.6 | | | — | | | — | |
| Gain on finance lease termination (5) | (4.5) | | | — | | | — | |
| Brazil flood damage, net of insurance proceeds (6) | 9.7 | | | — | | | — | |
| Total adjustments, pre-tax | $ | 580.2 | | | $ | 175.6 | | | $ | 162.9 | |
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| Total adjustments, after tax (7) | $ | 452.6 | | | $ | 94.5 | | | $ | 130.0 | |
| Adjusted net earnings from continuing operations | $ | 221.1 | | | $ | 255.4 | | | $ | 176.8 | |
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| For the Twelve Months Ended September 30, |
| 2022 | | 2021 | | 2020 |
| Diluted net (loss)/earnings per common share - continuing operations | $ | (3.37) | | | $ | 2.11 | | | $ | 0.44 | |
| Adjustments | | | | | |
| Acquisition and integration | 0.17 | | | 0.79 | | | 0.79 | |
| Acquisition earn out | — | | | 0.03 | | | — | |
| Impairment of goodwill & intangible assets | 5.86 | | | — | | | — | |
| Loss on extinguishment of debt | — | | | 1.11 | | | 1.05 | |
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| Project Momentum Restructuring related costs | 0.01 | | | — | | | — | |
| Exit of Russian market | 0.17 | | | — | | | — | |
| Gain on finance lease termination | (0.05) | | | — | | | — | |
| Brazil flood damage, net of insurance proceeds | 0.14 | | | — | | | — | |
| Tax structuring (8) | — | | | (0.56) | | | — | |
| One-time impact of the CARES Act | — | | | — | | | 0.03 | |
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| Impact for diluted share calculation (9) | 0.14 | | | — | | | — | |
| Adjusted diluted net earnings per diluted share - continuing operations | $ | 3.08 | | | $ | 3.48 | | | $ | 2.31 | |
| Weighted average shares of common stock - Diluted | 69.9 | | | 68.7 | | | 69.5 | |
| Adjusted weighted average shares of common stock - Diluted (9) | 71.7 | | | 68.7 | | | 69.5 | |
(1) Acquisition and integration costs were included in the following lines in the Consolidated Statement of Earnings and Comprehensive Income:
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| Twelve Months Ended September 30, |
| 2022 | | 2021 | | 2020 |
| Cost of products sold (COGS) | $ | 6.0 | | | $ | 33.7 | | | $ | 32.0 | |
| Selling, general and administrative expense (SG&A) | 9.4 | | | 40 | | | 38.8 | |
| Research and development expense | 1.1 | | | 1.1 | | | 1.3 | |
| Other items, net | — | | | (5.9) | | | (4.1) | |
| Total acquisition and integration costs | $ | 16.5 | | | $ | 68.9 | | | $ | 68.0 | |
(2) This represents the estimated earn out achieved through September 30, 2022 and 2021 under the incentive agreements entered into with the Formulations Acquisition and is recorded in SG&A on the Consolidated Statement of Earnings and Comprehensive Income.
(3) This represents consulting fees recorded in SG&A as part of the Momentum Restructuring project discussed above.
(4) These are the costs associated with the Company's exit of the Russian market during the second quarter of fiscal 2022. Exiting the Russian market resulted in additional COGS of $1.3 related to the impairment of inventory in Russia and shipping costs to get inventory to other markets, impairment of other assets and severance recorded to SG&A of $5.8, and currency impacts recorded in Other items, net of $7.5 in fiscal 2022.
(5) This represents the termination of finance lease in fiscal 2022 associated with a facility that was exited as part of the Company's 2019 Restructuring program. The gain was recorded in Other items, net in the Consolidated Statement of Earnings and Comprehensive Income.
(6) These are the costs associated with the May 2022 flooding of our Brazilian manufacturing facility, which were recorded in COGS. The majority is related to damaged inventory.
(7) The effective tax rate for the Adjusted - Non-GAAP Net earnings from continuing operations and Diluted net earnings from continuing operations per common share was 19.5%, 22.6% and 23.3% for the years ended September 30, 2022, 2021 and 2020, respectively, as calculated utilizing the statutory rate for where the costs were incurred.
(8) Represents the impact of a reduction to deferred tax liabilities due to tax structuring activities.
(9) During the year ended September 30, 2022, the mandatory convertible preferred shares were converted to approximately 4.7 million common stock. The full conversion was dilutive and the mandatory preferred stock dividends are excluded from net earnings in the Adjusted dilution calculation. In addition, the dilutive restricted stock equivalent awards are included in the shares calculation on an adjusted basis.
For the twelve months ended September 30, 2021 and 2020, the conversion of the mandatory convertible preferred stock is not dilutive and the mandatory preferred stock dividends are included in the adjusted dilution calculation.
Operating Results
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| Net Sales | | For the Years Ended September 30, |
| | 2022 | | % Chg | | 2021 | | % Chg | | |
| Net sales - prior year | | $ | 3,021.5 | | | | | $ | 2,744.8 | | | | | |
| Organic | | 94.4 | | | 3.1 | % | | 200.5 | | | 7.3 | % | | |
| Impact of FY21 Acquisitions | | — | | | — | % | | 27.0 | | | 1.0 | % | | |
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| Change in Russia Operations | | (19.3) | | | (0.6) | % | | — | | | — | % | | |
| Change in Argentina Operations | | 11.9 | | | 0.4 | % | | 6.8 | | | 0.2 | % | | |
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| Impact of currency | | (58.4) | | | (2.0) | % | | 42.4 | | | 1.6 | % | | |
| Net sales - current year | | $ | 3,050.1 | | | 0.9 | % | | $ | 3,021.5 | | | 10.1 | % | | |
Net sales for the year ended September 30, 2022 were $3,050.1, an increase of 0.9% from the prior year. Organic net sales increased 3.1% primarily due to:
•Pricing executed in both battery and auto care drove an organic increase of approximately 7.6%; and
•New distribution globally across both battery and auto care contributed approximately 0.8% to organic growth.
•Offsetting these increases was a net volume decrease of approximately 5.3% as a result of lapping the elevated battery demand in the prior year and declines in both battery and auto care related to the previously mentioned pricing actions.
Net sales for the year ended September 30, 2021 were $3,021.5, an increase of 10.1%. Organic net sales increased 7.3% primarily due to:
•New distribution globally and across both reportable segments, contributed approximately 3.9% of the increase;
•Increased year over year global demand contributed approximately 2.6%, driven by higher battery sales earlier in the fiscal year and increased auto care sales throughout the fiscal year; and
•Favorable pricing contributed approximately 0.8% to the organic increase.
For further discussion regarding net sales in each of our reportable product segments, including a summary of reported versus organic changes, please see the section titled “Segment Results” provided below.
Gross Profit
Gross profit dollars were $1,119.5 in fiscal 2022 versus $1,161.4 in fiscal 2021. Excluding the current and prior year acquisition and integration costs of $6.0 and $33.7, respectively, and the current year impact of costs from the flooding of our Brazilian manufacturing facility of $9.7 and exiting the Russian market of $1.3, gross profit dollars were $1,136.5 in fiscal 2022 versus $1,195.1 in fiscal 2021. The decrease in gross profit dollars was driven by higher operating costs, including transportation, material and labor costs, consistent with ongoing inflationary trends. The later part of fiscal 2022 was further impacted by operating inefficiencies related to reduced production volumes as the Company lowered overall inventory levels on hand. Partially offsetting these margin impacts was the positive impact of executed price increases in battery and auto care, the elimination of prior year COVID-19 costs and synergies of approximately $6.
Gross profit dollars were $1,161.4 in fiscal 2021 versus $1,081.9 in fiscal 2020. Excluding the current and prior year acquisition and integration costs of $33.7 and $32.0, respectively, gross profit dollars were $1,195.1 in fiscal 2021 versus $1,113.9 in fiscal 2020. The increase in gross profit dollars was due to the organic revenue growth discussed above, impact of FY21 acquisitions and approximately $50 of synergies achieved during the year, partially offset by the higher input costs, including labor, commodities, tariffs and transportation costs, consistent with ongoing inflationary trends.
Gross margin as a percent of net sales for fiscal 2022 was 36.7% versus 38.4% in the prior year. Excluding the current and prior year acquisition and integration costs, and the current year impact of costs from the flooding of our Brazilian manufacturing facility and exiting the Russian market, gross margin was 37.3%, down 230 basis points from prior year. Gross margin as a percent of net sales for fiscal 2021 was 38.4% versus 39.4% in the prior year. Excluding the current and prior year acquisition and integration costs, gross margin was 39.6%, down 100 basis points from prior year.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended
September 30, 2022 | | Year Ended
September 30, 2021 |
| | Reported | | Adjusted | | Reported | | Adjusted |
Gross Margin - Beg of Year | | 38.4 | % | | 39.6 | % | | 39.4 | % | | 40.6 | % |
| Pricing | | 4.3 | % | | 4.3 | % | | — | % | | — | % |
| Mix impacts | | — | % | | — | % | | (0.6) | % | | (0.6) | % |
| Product cost impacts | | (5.8) | % | | (5.8) | % | | (2.8) | % | | (2.8) | % |
| Reduction in integration costs, net of Brazil flood and Russia exit impact | | 0.6 | % | | — | % | | (0.1) | % | | — | % |
| Lower margin rate profile of the FY 21 acquired businesses | | — | % | | — | % | | (0.2) | % | | (0.2) | % |
| Reduction of FY COVID-19 cost impact | | 0.4 | % | | 0.4 | % | | 0.6 | % | | 0.6 | % |
| Synergy realization | | 0.2 | % | | 0.2 | % | | 1.8 | % | | 1.8 | % |
| Currency impact and other | | (1.4) | % | | (1.4) | % | | 0.3 | % | | 0.2 | % |
Gross Margin - End of Year | | 36.7 | % | | 37.3 | % | | 38.4 | % | | 39.6 | % |
Selling, General and Administrative (SG&A)
SG&A expenses were $484.5 in fiscal 2022, or 15.9% of net sales, as compared to $487.2, or 16.1% of net sales for fiscal 2021, and $483.3, or 17.6% of net sales for fiscal 2020. Included in SG&A in fiscal 2022, 2021 and 2020 were acquisition and integration costs of $9.4, $40.0 and $38.8, respectively. Fiscal 2022 and 2021 also included an acquisition earn out of $1.1 and $3.4, respectively, related to the Formulations Acquisition. Fiscal 2022 also included $5.8 related to the exit of the Russian market and $0.9 of Project Momentum consulting costs.
In fiscal 2022, SG&A excluding acquisition and integration costs, the earn out, costs from exiting the Russian market and Project Momentum costs was $467.3 or 15.3%, compared to fiscal 2021 of $443.8 or 14.7%. The increase was primarily driven by increased environmental costs related to a legacy facility that has been sold by the Company, recycling fees, travel and higher IT spending related to our investment in digital transformation.
In fiscal 2021, SG&A excluding acquisition and integration costs was $443.8 or 14.7%, compared to fiscal 2020 of $444.5 or 16.2%. The decrease, as a percent of Net sales, was driven by synergy realization and higher net sales while SG&A expense remained consistent with prior year.
Advertising and Sales Promotion (A&P)
A&P was $137.1 in fiscal 2022, a decrease of $25.0 as compared to fiscal 2021. A&P as a percent of net sales was 4.5%, 5.4% and 5.4% in fiscal years 2022, 2021 and 2020, respectively.
Research and Development
R&D expense was $34.7 in fiscal 2022, $34.5 in fiscal 2021, $35.4 in fiscal 2020. As a percent of net sales, R&D expense was consistent as a percentage of sales at 1.1% in fiscal 2022, 1.1% in fiscal 2021, and 1.3% in fiscal 2020.
Amortization Expense
Amortization expense for fiscal 2022 was $61.1 compared to $61.2 in fiscal 2021 and $56.5 in fiscal 2020. The fiscal 2022 and 2021 results included the full year of amortization on the Custom Accessories Europe (CAE) acquisition, as well as amortization for the Formulations Acquisition, discussed in Note 4.
Impairment of goodwill and intangible assets
Impairment of goodwill and intangible assets for fiscal 2022 was $541.9. This included a non-cash impairment on the Armor All trade name of $370.4, STP trade name of $26.3, Rayovac trade name of $127.8 and a non-cash impairment related to the Auto Care International reporting unit goodwill of $17.4. For Armor All and STP, the non-cash impairments were primarily due to declines in their respective Auto Care category projections late in the fourth quarter of fiscal 2022, significant increases in input costs, and a higher discount rate. The Rayovac non-cash impairment was primarily caused by significant sustained currency headwinds in the fourth quarter of fiscal 2022, which are expected to continue into fiscal 2023, a decrease in the
branded sales forecast, increases in input costs, and a higher discount rate. The goodwill non-cash impairment was primarily driven by significant sustained currency headwinds in the fourth quarter of fiscal 2022, which are expected to continue into fiscal 2023, declines in the Auto Care category projections late in the fourth quarter of fiscal 2022, and an increased discount rate.
Interest expense
Interest expense for fiscal 2022 was $158.4, as compared to fiscal 2021 expense of $161.8 and $195.0 in fiscal 2020. The Company took advantage of favorable debt markets in fiscal 2021 and 2020 and refinanced its long-term debt resulting in a decline of interest expense of $3.4 in fiscal 2022 compared to fiscal 2021 and $33.2 in fiscal 2021 compared to fiscal 2020.
Loss on extinguishment of debt
The Loss on the extinguishment of debt was $103.3 for fiscal year 2021 and relates to the Company's refinancing of its €650.0 Senior Notes due in 2026 in June 2021, the redemption of the $600.0 Senior Notes due in 2027 in January 2021 and the term loan refinancing in December 2020. The Company also amended certain covenants in its credit agreement, which created additional capacity and flexibility.
The Loss on the extinguishment of debt was $94.9 for fiscal year 2020 and relates to the Company's July 2020 redemption of its $600.0 Senior Notes due in 2025 and the redemption of the $750.0 Senior Notes due in 2026, which were redeemed subsequent to year-end on October 16, 2020. The loss also includes the write off of deferred financing fees related to the term loan refinancing in December 2019.
Other Items, Net
Other items, net was expense of $7.3, income of $2.9 and expense of $2.0 in fiscal 2022, 2021 and 2020, respectively, and is summarized below:
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended September 30, |
| | 2022 | | 2021 | | 2020 |
| Other items, net | | | | | | |
Interest income | | $ | (1.0) | | | $ | (0.7) | | | $ | (0.6) | |
Foreign currency exchange loss | | 7.8 | | | 5.5 | | | 8.7 | |
Pension benefit other than service costs | | (4.1) | | | (1.9) | | | (1.7) | |
| Acquisition foreign currency loss | | — | | | — | | | 2.2 | |
| Pre-acquisition insurance proceeds | | — | | | — | | | (4.9) | |
| Exit of Russian market | | 7.5 | | | — | | | — | |
| Gain on finance lease termination | | (4.5) | | | — | | | — | |
| Transition services agreement income | | — | | | — | | | (0.9) | |
| Gain on sale of assets | | — | | | (3.3) | | | (1.0) | |
Other | | 1.6 | | | (2.5) | | | 0.2 | |
Total Other items, net | | $ | 7.3 | | | $ | (2.9) | | | $ | 2.0 | |
Income Taxes
For fiscal 2022, the effective tax rate was a benefit of 24.2%. The current year rate was unfavorably impacted by the tax impact of the goodwill impairment. Excluding the impact of our non-GAAP adjustments, the year to date adjusted effective tax rate was 19.5% as compared to 22.6% in the prior year. The decrease in the rate versus prior year is primarily due to the release of reserves from statute limitations and settlements with tax authorities.
For fiscal 2021, the effective tax rate was a benefit of 4.3%. The current year rate was favorably impacted by tax structuring resulting in a reduction to a deferred tax liability and the favorable tax impact resulting from the refinancing of the €650.0 Senior Notes due in 2026 in June 2021. Excluding the impact of our non-GAAP adjustments, the year to date adjusted effective tax rate was 22.6% as compared to 23.3% in the prior year. The decrease in the rate versus prior year is due to the favorable return to provision adjustments and decreases in certain limited expenses.
For fiscal 2020, the effective tax rate was 30.9%. The current year rate includes costs related to acquisition and integration in addition to the unfavorable impact of $1.8 for the CARES Act, which was signed into law on March 27, 2020 and provides, among other things, increased interest deduction limitations to companies which can decrease overall cash taxes paid. Excluding the impact of these non-GAAP adjustments, the year to date adjusted effective tax rate was 23.3% as compared to 18.5% in the prior year. The increase in the rate versus prior year is due to the country mix of earnings which drove a higher foreign tax rate as well as the expiration of certain tax holidays in foreign jurisdictions.
Energizer’s effective tax rate is highly sensitive to the mix of countries from which earnings or losses are derived. Declines in earnings in lower tax rate countries, earnings increases in higher tax rate countries, repatriation of foreign earnings or foreign operating losses in the future could increase future tax rates. In addition, the enactment of legislation implementing changes in the U.S. on the taxation of international business activities or the adoption of other U.S. tax reform could impact our effective tax rate in the future.
Argentina Hyperinflation
Effective July 1, 2018, the financial statements for our Argentina subsidiary are consolidated under the rules governing the translation of financial information in a highly inflationary economy. Under U.S. GAAP, an economy is considered highly inflationary if the cumulative inflation rate for a three year period meets or exceeds 100 percent. The Argentina economy exceeded the three year cumulative inflation rate of 100 percent as of June 2018. If a subsidiary is considered to be in a highly inflationary economy, the financial statements of the subsidiary must be remeasured into the Company’s reporting currency (U.S. dollar) and future exchange gains and losses from the remeasurement of monetary assets and liabilities are reflected in current earnings, rather than exclusively in the equity section of the balance sheet, until such time as the economy is no longer considered highly inflationary. It is difficult to determine what continuing impact the use of highly inflationary accounting for Argentina may have on our consolidated financial statements as such impact is dependent upon movements in the applicable exchange rates between the local currency and the U.S. dollar and the amount of monetary assets and liabilities included in our affiliates balance sheet.
Segment Results
As of October 1, 2021, the Company changed its reportable operating segments from two geographical segments, previously Americas and International, to two product groupings, Battery & Lights and Auto Care. This change came with the completion of the Battery and Auto Care Acquisition integrations in fiscal 2022. The Company changed its reporting structure to better reflect what the chief operating decision maker is reviewing to make organizational decisions and resource allocations. The Company has recast the information for the fiscal years ended September 30, 2021 and 2020 to align with this presentation.
Segment performance is evaluated based on segment operating profit, exclusive of general corporate expenses (including share-based compensation costs), amortization of intangibles, impairment of goodwill and intangible assets, acquisition and integration activities, including restructuring charges, acquisition earn out, the costs of the flooding of our manufacturing facility in Brazil, the costs of exiting the Russian market, and other items determined to be corporate in nature. Financial items, such as interest income and expense, gain on finance lease termination and loss on extinguishment of debt are managed on a global basis at the corporate level. The exclusion of acquisition and integration and restructuring costs from segment results reflects management’s view on how it evaluates segment performance. The Company also excludes amortization of intangibles and impairment of goodwill and intangible assets from segments as these are non-cash items related to the original purchase of the intangibles and not utilized to evaluate current segment performance.
Energizer’s operating model includes a combination of standalone and shared business functions between the product segments, varying by country and region of the world. Shared functions include the sales and marketing functions, as well as human resources, IT and finance shared service costs. Energizer applies a fully allocated cost basis, in which shared business functions are allocated between segments. Such allocations are estimates, and do not represent the costs of such services if performed on a standalone basis.
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| | | | | | | | | | |
| Segment Net Sales | | For the Years Ended September 30, |
| | 2022 | | % Chg | | 2021 | | % Chg | | |
| Batteries & Lights | | | | | | | | | | |
| Net sales - prior year | | $ | 2,402.8 | | | | | $ | 2,223.5 | | | | | |
| Organic | | 84.8 | | | 3.5 | % | | 113.3 | | | 5.1 | % | | |
| Change in Russia operations | | (19.0) | | | (0.8) | % | | — | | | — | % | | |
| Impact of FY21 Acquisitions | | — | | | — | % | | 23.3 | | | 1.0 | % | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Change in Argentina operations | | 11.8 | | | 0.5 | % | | 6.8 | | | 0.3 | % | | |
| Impact of currency | | (53.1) | | | (2.2) | % | | 35.9 | | | 1.7 | % | | |
| Net sales - current year | | $ | 2,427.3 | | | 1.0 | % | | $ | 2,402.8 | | | 8.1 | % | | |
| Auto Care | | | | | | | | | | |
| Net sales - prior year | | $ | 618.7 | | | | | $ | 521.3 | | | | | |
| Organic | | 9.6 | | | 1.6 | % | | 87.2 | | | 16.7 | % | | |
| Change in Russia operations | | (0.3) | | | — | % | | — | | | — | % | | |
| Impact of FY21 Acquisitions | | — | | | — | % | | 3.7 | | | 0.7 | % | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Change in Argentina operations | | 0.1 | | | — | % | | — | | | — | % | | |
| Impact of currency | | (5.3) | | | (0.9) | % | | 6.5 | | | 1.3 | % | | |
| Net sales - current year | | $ | 622.8 | | | 0.7 | % | | $ | 618.7 | | | 18.7 | % | | |
| Total Net Sales | | | | | | | | | | |
| Net sales - prior year | | $ | 3,021.5 | | | | | $ | 2,744.8 | | | | | |
| Organic | | 94.4 | | | 3.1 | % | | 200.5 | | | 7.3 | % | | |
| Change in Russia operations | | (19.3) | | | (0.6) | % | | — | | | — | % | | |
| Impact of FY21 Acquisitions | | — | | | — | % | | 27.0 | | | 1.0 | % | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Change in Argentina operations | | 11.9 | | | 0.4 | % | | 6.8 | | | 0.2 | % | | |
| Impact of currency | | (58.4) | | | (2.0) | % | | 42.4 | | | 1.6 | % | | |
| Net sales - current year | | $ | 3,050.1 | | | 0.9 | % | | $ | 3,021.5 | | | 10.1 | % | | |
Total net sales for the twelve months ended September 30, 2022 increased 0.9%, due to organic sales increase of $94.4, or 3.1%, and an $11.9 increase from our Argentina operations, which were deemed to be highly inflationary. Partially offsetting these increases was the decrease in sales from exiting the Russian market of $19.3, or 0.6%, and unfavorable impact of currency of $58.4, or 2.0%. Segment sales results for the twelve months ended September 30, 2022 are as follows:
•Batteries & Lights net sales improved 1.0% versus the prior fiscal year. This increase was primarily driven by organic net sales growth of 3.5% due to pricing increases (approximately 7.5%) and new distribution in battery & lights (approximately 0.5%). This was partially offset by the expected decline in battery demand compared to the elevated COVID-19 related sales in the prior year period (approximately 4.5%).
•Auto Care net sales improved 0.7% versus the prior fiscal year. This increase was driven by organic net sales growth of 1.6% due to global price increases (approximately 8.0%) and new distribution in both the North American and International markets (approximately 1.5%). This was offset by a decrease in volumes to prior year related to the previously mentioned pricing actions, the lapping of elevated demand in the prior year and the negative impact higher gas prices had on miles driven, consumer foot traffic in the category, and a tendency to defer auto maintenance, particularly impacting our AC recharge business (approximately 8.0%).
Total net sales for the twelve months ended September 30, 2021 increased 10.1%, including organic sales increase
of $200.5, or 7.3%, sales related to the FY21 acquisitions of $27.0, or 1.0%, a $6.8 increase from our Argentina operations, which were deemed to be highly inflationary, and favorable impact of currency of $42.4, or 1.6%. Segment sales results for the twelve months ended September 30, 2021 are as follows:
• Battery & Lights net sales improved 8.1% versus the prior fiscal year. This increase was driven by organic net sales growth of 5.1% due to distribution gains primarily in North and Latin America (approximately 3.0%),
strong replenishment due to elevated COVID-19 demand primarily in the International markets (approximately 1.5%) and favorable pricing (approximately 1.0%).
• Auto Care net sales improved 18.7% versus the prior fiscal year. This increase was driven by organic net sales growth of 16.7% due to increased distribution gains (approximately 8.5%) and strong replenishment (approximately 7.0%) primarily in North America, as well as favorable pricing (approximately 1.0%).
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| | | | | | | | | |
| Segment Profit | For the Years Ended September 30, |
| 2022 | | % Chg | | 2021 | | % Chg | | |
| Batteries & Lights | | | | | | | | | |
| Segment Profit - prior year | $ | 553.6 | | | | | $ | 512.6 | | | | | |
| Organic | 14.6 | | | 2.6 | % | | 23.8 | | | 4.6 | % | | |
| Change in Russia operations | (4.0) | | | (0.7) | % | | — | | | — | % | | |
| Impact of FY21 Acquisitions | — | | | — | % | | 1.4 | | | 0.3 | % | | |
| | | | | | | | | |
| | | | | | | | | |
| Change in Argentina operations | 9.6 | | | 1.7 | % | | 5.8 | | | 1.1 | % | | |
| Impact of currency | (20.2) | | | (3.6) | % | | 10.0 | | | 2.0 | % | | |
| Segment Profit - current year | $ | 553.6 | | | — | % | | $ | 553.6 | | | 8.0 | % | | |
| Auto Care | | | | | | | | | |
| Segment Profit - prior year | $ | 98.2 | | | | | $ | 79.4 | | | | | |
| Organic | (48.2) | | | (49.1) | % | | 13.6 | | | 17.1 | % | | |
| Change in Russia operations | — | | | — | % | | — | | | — | % | | |
| Impact of FY21 Acquisitions | — | | | — | % | | 1.1 | | | 1.4 | % | | |
| | | | | | | | | |
| | | | | | | | | |
| Change in Argentina operations | 0.1 | | | 0.1 | % | | 0 | | — | % | | |
| Impact of currency | (3.6) | | | (3.5) | % | | 4.1 | | | 5.2 | % | | |
| Segment Profit - current year | $ | 46.5 | | | (52.6) | % | | $ | 98.2 | | | 23.7 | % | | |
| Total Segment Profit | | | | | | | | | |
| Segment Profit - prior year | $ | 651.8 | | | | | $ | 592.0 | | | | | |
| Organic | (33.6) | | | (5.2) | % | | 37.4 | | | 6.3 | % | | |
| Change in Russia operations | (4.0) | | | (0.6) | % | | — | | | — | % | | |
| Impact of FY21 Acquisitions | — | | | — | % | | 2.5 | | | 0.4 | % | | |
| | | | | | | | | |
| | | | | | | | | |
| Change in Argentina operations | 9.7 | | | 1.5 | % | | 5.8 | | | 1.0 | % | | |
| Impact of currency | (23.8) | | | (3.6) | % | | 14.1 | | | 2.4 | % | | |
| Segment Profit - current year | $ | 600.1 | | | (7.9) | % | | $ | 651.8 | | | 10.1 | % | | |
Refer to Note 10, Segments, in the Consolidated Financial Statements for a reconciliation from segment profit to (Loss)/earnings before income taxes.
Total segment profit in fiscal 2022 was $600.1, a decrease of 7.9% versus the prior fiscal year. The decline was driven by organic segment profit decrease of 5.2%, unfavorable movement in foreign currency of $23.8, or 3.6% and the change in Russian operating profit of $4.0 from exiting the Russian market. These decreases were offset by $9.7, or 1.5%, of favorable changes in Argentina operations. Segment operating profit results for the twelve months ended September 30, 2022 are as follows:
•Battery & Lights segment profit was $553.6, flat versus the prior fiscal year. The organic profit increase was $14.6, or 2.6%, and was driven by top-line growth and lower A&P spending. This growth was partially offset by increased operating costs including higher labor, tariffs and transportation costs, which unfavorably impacted gross margin, as well as higher overhead spending.
•Auto Care segment profit was $46.5, a decrease of $51.7, or 52.6%, versus the prior fiscal year. Organic segment profit decreased $48.2, or 49.1%. The organic revenue growth in Auto Care noted above was not enough to offset the increased product input costs which negatively impacted gross margin. Partially offsetting this decline was lower A&P.
Total segment profit in fiscal 2021 was $651.8, an increase of 10.1% versus the prior fiscal year, driven by an
increase of $2.5, or 0.4% from the impact of FY21 acquisitions, organic segment profit improvement of 6.3%, favorable movement in foreign currency of $14.1, or 2.4% and favorable changes in Argentina operations of $5.8, or 1.0%. Segment operating profit results for the twelve months ended September 30, 2021 are as follows:
•Battery & Lights segment profit was $553.6, an increase of $41.0, or 8.0%, versus the prior fiscal year. The organic segment profit increased $23.8, or 4.6%, driven by top-line net sales growth. This was partially offset by higher operating costs, which unfavorably impacted gross margin as well as planned higher A&P spending.
•Auto Care segment profit was $98.2, an increase of $18.8, or 23.7%, versus the prior fiscal year. The organic segment profit increased $13.6, or 17.1%, driven by top-line net sales growth. This was partially offset by higher overhead spending and planned higher A&P spending in the period.
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| GENERAL CORPORATE | | For the Years Ended September 30, |
| | 2022 | | 2021 | | 2020 |
| General corporate and other expenses | | $ | 101.6 | | | $ | 96.0 | | | $ | 103.8 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| % of net sales | | 3.3 | % | | 3.2 | % | | 3.8 | % |
For fiscal 2022, general corporate expenses were $101.6, an increase of $5.6 compared to fiscal 2021 expense of $96.0. The increase was driven by increased travel expense, and increased bonus and stock compensation expense, partially offset by lower mark to market expense on our deferred compensation plans. For fiscal 2021, general corporate expenses were $96.0, a decrease of $7.8 compared to fiscal 2020 expense of $103.8. The decrease was driven by synergy realization, a reduction in compensation expense and reduced spending, due in part to travel restrictions imposed as a result of COVID-19. These decreases were partially offset by higher legal and corporate development costs and mark to market expenses on our deferred compensation plans.
Liquidity and Capital Resources
Energizer’s primary future cash needs are centered on operating activities, working capital and strategic investments. We believe that our future cash from operations, together with our access to capital markets, will provide adequate resources to fund our short-term and long-term operating and financing needs. Our access to, and the availability of, financing on acceptable terms in the future will be affected by many factors, including, but not limited to: (i) our financial condition and prospects, (ii) for debt, our credit rating, (iii) the liquidity of the overall capital markets and (iv) the current state of the economy. There can be no assurances that we will continue to have access to capital markets on terms acceptable to us. See “Risk Factors” for a further discussion.
Cash is managed centrally with net earnings reinvested locally and working capital requirements met from existing liquid funds. At September 30, 2022, Energizer had $205.3 of cash and cash equivalents, approximately 74% of which was outside of the U.S. Given our extensive international operations, a significant portion of our cash is denominated in foreign currencies. We manage our worldwide cash requirements by reviewing available funds among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. The repatriation of cash balances from certain of our subsidiaries could have adverse tax consequences or be subject to regulatory capital requirements, however, those balances are generally available without legal restrictions to fund ordinary business operations.
On December 22, 2020, the Company entered into a Credit Agreement (2020 Credit Agreement) which provided for a 5-year $400.0 revolving credit facility (2020 Revolving Facility) and a $1,200.0 Term Loan due December 2027. On December 31, 2021 the Company amended the Credit Agreement to increase the 2020 Revolving Facility to $500.0.
The borrowings under the Term Loan require quarterly principal payments at a rate of 0.25% of the original principal balance. Borrowings under the 2020 Revolving Facility bear interest at a rate per annum equal to, at the option of the Company, LIBOR or the Base Rate (as defined) plus the applicable margin. The Term Loan bears interest at a rate per annum equal to, at the option of the Company, LIBOR or Base Rate (as defined) plus the applicable margin.
The 2020 Revolving Facility replaced the previously outstanding Revolving Credit Facility entered into in 2018. As of September 30, 2022, the Company had no borrowings outstanding under the 2020 Revolving Facility and $8.0 of outstanding letters of credit. Taking into account outstanding letters of credit, $492.0 remained available as of September 30, 2022.
Debt Covenants
The agreements governing the Company's debt contain certain customary representations and warranties, affirmative, negative and financial covenants, and provisions relating to events of default. If the Company fails to comply with these covenants or with other requirements of these agreements, the lenders may have the right to accelerate the maturity of the debt. Acceleration under one of these facilities would trigger cross defaults to other borrowings. As of September 30, 2022, the Company was in compliance with the provisions and covenants associated with its debt agreements, and expects to remain in compliance for the next 12 months.
Operating Activities
Cash flow from operating activities from continuing operations is the primary funding source for operating needs and capital investments. Cash flow from operating activities was $1.0 in fiscal 2022, $179.7 in fiscal 2021, and $389.3 in fiscal 2020.
Cash flow from operating activities from continuing operations was $1.0 in fiscal 2022 as compared to $179.7 in the prior fiscal year. This decrease of $178.7 was primarily driven by working capital changes year over year of approximately $165. The working capital change of approximately $165 was primarily a result of the following:
•Approximately $195 in increased accounts receivable due to higher current year sales compared to prior year and reduced factoring relating to those accounts receivables, offset by approximately $29 of changes in accrued sales allowances.
•Approximately $161 due to changes in accounts payable, offset by approximately $26 due to changes in accrued interest, both of which were driven by timing of payments.
•These changes were partially offset by approximately $118 less of an inventory investment compared to the prior year as the Company was proactively building safety stock in the prior year and reduced the investment in the current year as inventory levels return to a more normalized level.
Cash flow from operating activities from continuing operations was $179.7 in fiscal 2021 as compared to $389.3 in fiscal 2020. This change of $209.6 was primarily driven by working capital changes year over year of approximately $282, partially offset by the increase in cash earnings of approximately $97. The working capital change of approximately $282 was primarily a result of the following:
•Approximately $172 in increased inventory investment compared to the prior year as we have taken a proactive approach to invest in incremental safety stock given the continued volatility of the global supply network–including uncertainty around product sourcing, transportation challenges and labor availability;
•Approximately $45 due to changes in accounts payable and accrued interest driven by timing of payments;
•Approximately $38 in accounts receivable due to higher current year sales compared to prior year; and
•The prior year receipt of approximately $30 related to the agreement and final cash settlement from the Central Authority in Spain on a Spanish VAT refund payment.
Investing Activities
Net cash used by investing activities from continuing operations was $90.9 in fiscal 2022 and $126.4 in fiscal 2021, and $64.0 in fiscal 2020, and consisted of the following:
•Capital expenditures were $77.8, $64.9, and $65.3 in fiscal years 2022, 2021, and 2020, respectively.
•Proceeds from asset sales were $0.6, $5.7, and $6.4 in fiscal 2022, 2021, and 2020, respectively. The fiscal 2021 proceeds primarily related to the sale of our Guatemala manufacturing facility acquired with the Battery Acquisition. The fiscal 2020 proceeds primarily represent insurance proceeds received from property, plant and equipment utilized by the Acquired Battery Business damaged in a flood.
•Acquisitions of intangible assets of $14.7 relating to the auto care appearance trade names and formulas acquired in Latin America during fiscal 2022.
•Acquisitions, net of cash acquired and working capital payments, were an inflow of $1.0 in fiscal 2022, and outflow of, $67.2, and $5.1 in fiscal 2021, and 2020, respectively. The fiscal 2022 inflow was from the Formulations Acquisition working capital settlement. The fiscal 2021 payments related to the acquired Indonesia battery plant and the Formulations Acquisition. The majority of the fiscal 2020 payment was due to the finalization of working capital adjustments with Spectrum for the Auto Care Acquisition while $1.5 was utilized to complete the CAE acquisition.
Investing cash outflows of approximately $55 to $65 are anticipated in fiscal 2023 for capital expenditures relating to maintenance, product development and cost reduction investments.
Financing Activities
Net cash from financing activities from continuing operations was $79.1 in fiscal 2022 and $394.2 in fiscal 2020. Net used by financing activities from continuing operations was $1,069.1 in fiscal 2021.
For fiscal 2022, cash flow from financing activities from continuing operations consists of the following:
•Cash proceeds from issuance of debt with original maturities greater than 90 days of $300.0 relating to the new Senior Notes due in 2027 issuance in the second quarter of fiscal 2022;
•Payments on debt with maturities greater than 90 days of $13.7, primarily related to the quarterly principal payments on the Term Loan;
•Net decrease in debt with original maturities of 90 days or less of $99.0, primarily related to repayments of borrowings under our 2020 Revolving Facility;
•Debt issuance costs of $7.6 relating to the amendment of the Credit Agreement in December 2021 and the issuance of the $300.0 Senior Notes due in 2027;
•Payments to terminate finance lease obligations of $5.1 related to the termination of our Dixon IL packaging facility lease;
•Dividends paid on common stock of $84.9 during fiscal 2022 (see below);
•Dividends paid on Mandatory Convertible Preferred Stock (MCPS) of $8.1 during fiscal 2022 (see below); and
•Taxes paid for withheld share-based payments of $2.5.
For fiscal 2021, cash flow from financing activities from continuing operations consists of the following:
•Cash proceeds from issuance of debt with original maturities greater than 90 days of $1,982.6 relating to the Term Loan funded in December 2020 and January 2021, and the June 2021 issuance of €650.0 Senior Notes due in 2029 (2029 EUR Notes);
•Payments on debt with maturities greater than 90 days of $2,773.8, primarily related to the October 2020 repayment of the $750.0 Senior Notes due in 2026 (2026 Notes), the $319.4 repayment of the Term Loan A and $313.5 Term Loan B in December 2020, the January 2021 repayment of the $600.0 Senior Notes due in 2027 (2027 Notes), and the June 2021 repayment of the €650.0 Senior Notes due in 2026 (2026 EUR Notes);
•Net increase in debt with original maturities of 90 days or less of $102.1, primarily related to borrowings under our 2020 Revolving Facility;
•Debt issuance costs of $29.0 relating to the funding of the Term Loan in December 2020 and January 2021 and the 2029 EUR Notes in June 2021;
•Premiums paid on extinguishment of debt of $141.1 funded the October 2020 redemption of the 2026 Notes, the January 2021 redemption of the 2027 Notes, and the June 2021 repayment of the 2026 EUR Notes;
•Dividends paid on common stock of $83.9 during fiscal 2021;
•Dividends paid on Mandatory Convertible Preferred Stock (MCPS) of $16.2 during fiscal 2021;
•Purchase of treasury stock of $96.3 representing the cash paid for stock repurchases including the $75.0 Accelerated Share Repurchase program;
•Payment of contingent consideration of $6.8 related to the achievement of a CAE acquisition earn out threshold; and
•Taxes paid for withheld share-based payments of $6.7.
For fiscal 2020, cash flow from financing activities from continuing operations consists of the following:
•Cash proceeds from issuance of debt with original maturities greater than 90 days of $2,020.6 related to the December 2019 refinancing of $365.0 of the 2018 Term Loan, the April 2020 add on offering of $250.0 of our 6.375% Senior Notes due in 2026, the July 2020 offering of $600.0 of our 4.750% Senior Notes due in 2028 and the September 2020 offering of $800.0 of our 4.375% Senior Notes due in 2029;
•Payments on debt with maturities greater than 90 days of $1,393.5, related to the Term Loan refinancing in December 2019, the repayment of $345.8 of debt from the proceeds of the Varta divestiture, the redemption of $600.0 of our 5.50% Senior Notes due 2025 as well as required quarterly payments on the 2018 Term Loan A and 2018 Term Loan B;
•Payments of debt with maturities of 90 days or less of $30.2, primarily related to repayment of borrowings on our Revolving Credit Facility;
•Debt issuance costs of $26.5 relating to our Term Loan refinancing, the add on offering of $250.0 of our 6.37% Senior Notes due in 2026, the offering of $600.0 of our 4.750% Senior Notes due in 2028 and an offering of $800.0 of our 4.375% Senior Notes due in 2029;
•Premiums paid on extinguishment of debt of $18.3 relate to the redemption of our $600.0 5.50% Senior Notes due in 2025 that occurred in July 2020;
•Dividends paid on common stock of $85.4 during fiscal 2020;
•Dividends paid on MCPS of $16.2 during fiscal 2020;
•Purchase of treasury stock representing the cash paid for stock repurchases under the current authorization during the twelve months ended September 30, 2020; and
•Taxes paid for withheld share-based payments of $11.3.
Dividends
Total dividends declared to common shareholders were $85.5, and $84.9 was paid in fiscal 2022. For preferred shareholders, total dividends declared $4.0 and paid to preferred shareholders were $8.1. The payment included an accrued dividend from fiscal 2021. During fiscal 2022 all of the MCPS automatically converted to approximately 4.7 million of the Company's common stock and no additional dividends will be paid on the MCPS.
Subsequent to the fiscal year end, on November 7, 2022, the Board of Directors declared a dividend for the first quarter of fiscal 2023 of $0.30 per share of common stock, payable on December 16, 2022, to all shareholders of record as of the close of business on November 28, 2022.
Share Repurchases
In November 2020, the Company's Board of Directors approved an authorization for Energizer to acquire up to 7.5 million shares of its common stock. The Company entered into a $75.0 accelerated share repurchase (ASR) program in the fourth quarter of fiscal 2021. Under the terms of the agreement, approximately 1.5 million shares were delivered in fiscal 2021
and an additional 0.5 million were delivered upon termination of the agreement on November 18, 2021. The Company acquired in total approximately 2.0 million shares at an average weighted price of $38.30 under the ASR. No additional shares were repurchased in fiscal 2022.
Future share repurchase, if any, would be made on the open market and the timing and the amount of any purchases will be determined by the Company based on its evaluation of the market conditions, capital allocation objectives, legal and regulatory requirements and other factors. Share repurchases may be effected through open market purchases or privately negotiated transactions, including repurchase plans that satisfy the conditions of Rule 10b5-1 of the Securities Exchange Act of 1934.
On August 16, 2022, the U.S. government enacted the Inflation Reduction Act (IRA) which, among other changes, created a new corporate alternative minimum tax (AMT) based on adjusted financial statement income and imposes a 1% excise tax on corporate stock repurchases. The effective date of these provisions is January 1, 2023. The Company does not expect the enactment of the IRA will have an impact on the Company’s financial statements in 2022. Any excise tax incurred on corporate stock repurchases will generally be recognized as part of the cost basis of the treasury stock acquired and not reported as part of income tax expense.
The timing, declaration, amount and payment of future dividends to shareholders or repurchases of the Company’s Common stock will fall within the discretion of our Board of Directors. The Board’s decisions regarding the payment of dividends or repurchase of shares will depend on many factors, such as our financial condition, earnings, capital requirements, debt service obligations, covenants associated with certain of our debt service obligations, industry practice, legal requirements, regulatory constraints and other factors that our Board of Directors deems relevant.
Contractual Obligations and Commitments
The Company believes it has sufficient liquidity to fund its operations and meet its short-term and long-term obligations. The Company's material future obligations include the contractual and purchase commitments described below.
The Company has a contractual commitment to repay its long-term debt of $3,519.1 based on the defined terms of our debt agreements. Within the next twelve months, the company is obligated to pay $12.0 of this total debt. Our interest commitments based on the current debt balance and LIBOR rate on drawn debt at September 30, 2022 is $917.4 with $152.9 expected within the next twelve months. The company has entered into an interest rate swap agreement that fixed the variable benchmark component (LIBOR) on $700.0 of variable rate debt. Refer to Note 13 Debt for further details.
The Company has a long-term obligation to pay a mandatory transition tax of $16.7. No payments are required until fiscal 2024.
Additionally, Energizer has material future purchase commitments for goods and services which are legally binding and that specify all significant terms including price and/or quantity. Total future commitments for these obligations over the next 5 years is $21.5. Of this amount, $13.4 is due within the next twelve months. Refer to Note 18 Other Commitments and Contingencies for further details. Energizer is also party to various service and supply contracts that generally extend approximately one to three months. These arrangements are primarily individual, short-term purchase orders for routine goods and services at market prices, which are part of our normal operations and are reflected in historical operating cash flow trends. These contracts can generally be canceled at our option at any time. We do not believe such arrangements will adversely affect our liquidity position.
Finally, Energizer has operating and financing leases for real estate, equipment, and other assets that include future minimum payments with initial terms of one year or more. Total future operating and finance lease payments at September 30, 2022 are $146.2 and $68.6, respectively. Within the next twelve months, operating and finance lease payments are expected to be $19.4 and $2.5, respectively. Refer to Note 11 Leases for further details.
Other Matters
Environmental Matters
The operations of Energizer are subject to various federal, state, foreign and local laws and regulations intended to protect the public health and the environment. These regulations relate primarily to worker safety, air and water quality, underground fuel storage tanks and waste handling and disposal. Under the Comprehensive Environmental Response, Compensation and Liability Act, Energizer has been identified as a “potentially responsible party” (PRP) and may be required
to share in the cost of cleanup with respect to certain federal “Superfund” sites. It may also be required to share in the cost of cleanup with respect to state-designated sites or other sites outside of the U.S.
Accrued environmental costs at September 30, 2022 were $15.4, of which approximately $5.3 is expected to be spent during fiscal 2023. It is difficult to quantify with certainty the cost of environmental matters, particularly remediation and future capital expenditures for environmental control equipment. Current environmental spending estimates could be modified as a result of changes in our plans or our understanding of underlying facts, changes in legal requirements or the enforcement or interpretation of existing requirements.
Legal Proceedings
The Company and its affiliates are subject to a number of legal proceedings in various jurisdictions arising out of its operations. 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. We are a party to legal proceedings and claims that arise during the ordinary course of business. We review our legal proceedings and claims, regulatory reviews and inspections on an ongoing basis and follow appropriate accounting guidance when making accrual and disclosure decisions. We establish accruals for those contingencies where the incurrence of a loss is probable and can be reasonably estimated, and we disclose the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for our financial statements to not be misleading. We do not record liabilities when the likelihood that the liability has been incurred is probable, but the amount cannot be reasonably estimated. Based upon present information, the Company believes that its liability, if any, arising from such pending legal proceedings, asserted legal claims and known potential legal claims which are likely to be asserted, is not reasonably likely to be material to the Company's financial position, results of operations, or cash flows, taking into account established accruals for estimated liabilities.
Critical Accounting Policies and Estimates
The methods, estimates, and judgments Energizer uses in applying its most critical accounting policies have a significant impact on the results the Company reports in its Consolidated Financial Statements. Specific areas, among others, requiring the application of management’s estimates and judgment include assumptions pertaining to accruals for consumer and trade-promotion programs, pension benefit costs, acquisition, intangible assets and goodwill, uncertain tax positions, the reinvestment of undistributed foreign earnings and tax valuation allowances. On an ongoing basis, Energizer evaluates its estimates, but actual results could differ materially from those estimates.
The Company's critical accounting policies have been reviewed with the Audit Committee of the Board of Directors. A summary of Energizer’s significant accounting policies is contained in Note 2, Summary of Significant Accounting Policies, of the Notes to the Consolidated Financial Statements. This listing is not intended to be a comprehensive list of all of Energizer’s accounting policies.
•Revenue Recognition - The Company measures revenue as the amount of consideration for which it expects to be entitled in exchange for transferring goods. Net sales reflect the transaction prices for contracts, which include units shipped at selling list prices reduced by variable consideration as determined by the terms of each individual contract. Discounts are offered to customers for early payment and an estimate of the discount is recorded as a reduction of net sales in the same period as the sale. Our standard sales terms generally include payments within 30 to 60 days and are final with returns or exchanges not permitted unless a special exception is made. Our Auto Care channel terms are longer, in some cases up to 365 days, in which case we use our Trade receivables factoring program for more timely collection. Reserves are established based on historical data and recorded in cases where the right of return does exist for a particular sale. The Company does not offer warranties on products.
Energizer offers a variety of programs, primarily to its retail customers, designed to promote sales of its products. Such programs require periodic payments and allowances based on estimated results of specific programs and are recorded as a reduction to net sales. Methodologies for determining these provisions are dependent on specific customer pricing and promotional practices, which range from contractually fixed percentage price reductions to reimbursement based on actual occurrence or performance. Where applicable, future reimbursements are estimated based on a combination of historical patterns and future expectations regarding specific in-market product performance. Energizer accrues, at the time of sale, the estimated total payments and allowances associated with each transaction. Customers redeem trade promotions in the form of payments from the accrued trade allowances or invoice credits against trade receivables. Additionally, Energizer offers programs directly to consumers to promote the sale of its products. Energizer continually assesses the adequacy of accruals for customer and consumer promotional program costs not yet
paid. To the extent total program payments differ from estimates, adjustments may be necessary. Historically, these adjustments have not been material.
The Company’s contracts with customers do not have significant financing components or non-cash consideration and the Company does not have unbilled revenue or significant amounts of prepayments from customers. Revenue is recorded net of the taxes we collect on behalf of governmental authorities which are generally included in the price to the customer. Shipping and handling activities are accounted for as contract fulfillment costs and recorded in Cost of products sold.
•Pension Plans - The determination of the Company’s obligation and expense for pension benefits is dependent on certain assumptions developed by the Company and used by actuaries in calculating such amounts. Assumptions include, among others, the discount rate, future salary increases and the expected long-term rate of return on plan assets. Actual results that differ from assumptions made, or impacts to the obligation that are due to changes to assumptions, are recognized on the balance sheet and subsequently amortized to earnings over future periods. Significant differences in actual experience or significant changes in macroeconomic conditions resulting in changes to assumptions may materially affect pension obligations. In determining the discount rate, the Company uses the yield on high-quality bonds in conjunction with the cash flows of its plans’ estimated payouts. For the U.S. plans, which were frozen January 1, 2014 and represent the Company’s most significant obligations, we consider the Mercer Above-Mean yield curve in determining the discount rates.
Of the assumptions listed above, changes in the expected long-term rate of return on plan assets and changes in the discount rate used in developing plan obligations will likely have the most significant impact on the Company’s annual earnings, prospectively. Based on plan assets at September 30, 2022, a 100 basis point decrease or increase in expected asset returns would increase or decrease the Company’s U.S. pre-tax pension expense by $4.1. In addition, poor asset performance may increase and accelerate the rate of required pension contributions in the future. Uncertainty related to economic markets and the availability of credit may produce changes in the yields on corporate bonds rated as high-quality. As a result, discount rates based on high-quality corporate bonds may increase or decrease leading to lower or higher, respectively, pension obligations. A 100 basis point decrease in the discount rate would increase U.S. pension obligations by $29.8 at September 30, 2022.
As allowed under GAAP, the Company’s U.S. qualified pension plan's impact on earnings is determined using Market Related Value, which recognizes market appreciation or depreciation in the portfolio over five years and therefore reduces the short-term impact of market fluctuations.
•Business Combinations - The Company allocates the cost of an acquired business to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The Company uses a variety of information sources to determine the value of acquired assets and liabilities including: third-party appraisers for the values and lives of property, identifiable intangibles and inventories; actuaries for defined benefit retirement plans; and legal counsel or other advisors to assess the obligations associated with legal, environmental or other claims. The excess value of the cost of an acquired business over the estimated fair value of the assets acquired and liabilities assumed is recognized as goodwill.
During fiscal 2021, Energizer used variations of the income approach in determining the fair value of the amortizable intangible assets acquired for the Formulations Acquisition. The Company utilized multi-period excess earnings methods for determining the fair value of the proprietary technology and customer relationships acquired. Our determination of the fair value of these assets involved the use of significant estimates and assumptions related to the revenue growth rates and discount rates. Our determination of the fair value of customer relationships also involved assumptions related to customer attrition rates.
•Intangible Assets - Significant judgment is required in assigning the respective useful lives of intangible assets. Certain brand intangibles are expected to have indefinite lives based on their history and our plans to continue to support and build the acquired brands. Other intangible assets are expected to have determinable useful lives. Our assessment of intangible assets that have an indefinite life and those that have a determinable life is based on a number of factors including the competitive environment, market share, brand history, underlying product life cycles, operating plans and the macroeconomic environment. Our estimates of the useful lives of determinable-lived intangible assets are primarily based on the same factors. The carrying value of determinable-lived intangible assets are amortized to expense over the estimated useful life. The value of indefinite-lived intangible assets is not amortized, but is tested at least annually for impairment. The Company assesses the appropriateness of an indefinite life being assigned to certain intangible assets as a part of this annual impairment analysis. The useful life of a determinable-
lived intangible asset would be reassessed if a triggering event was identified that indicated a potential change in the value or use of our determinable-lived assets. A change in the useful life of these assets could have a material impact on our financial statements.
The Company has certain trade names with indefinite lives that are reviewed for impairment during the fourth quarter of each fiscal year following the annual forecasting process, or more frequently if facts and circumstances indicate the trade name may be impaired. The Company has the option to perform a qualitative assessment to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of such an intangible asset is less than its carrying amount. However, the Company can elect not to perform the qualitative assessment, and is then required to perform a quantitative impairment test that involves a comparison of the estimated fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
In the fourth quarter of fiscal 2022, a quantitative assessment was performed over the Armor All, STP and Rayovac trade names, resulting in non-cash impairments of $370.4, $26.3 and $127.8, respectively. For Armor All and STP, the non-cash impairments were primarily due to declines in their respective Auto Care category projections late in the fourth quarter of fiscal 2022, significant increases in input costs, and a higher discount rate. The Rayovac non-cash impairment was primarily caused by significant sustained currency headwinds in the fourth quarter of fiscal 2022, which are expected to continue into fiscal 2023 and are included within the cash flow models, a decrease in the branded sales forecast, increases in input costs, and a higher discount rate. The quantitative estimated fair values were determined using the multi-period excess earnings method, which requires significant assumptions for each brand, including estimates related to revenue growth rates, gross margin rates, operating expenses (SG&A, R&D and A&P), and discount rates. The projections for the Armor All, STP and Rayovac fair value models are generated using the Company’s three-year strategic plan, the Company's annual budget plan for fiscal 2023, and long-term category projections, to determine forecasted cash flows and operating data. Specifically, revenue growth assumptions are based on historical trends and management’s expectations for future growth by brand and category. Gross margin rate assumptions are based on historical trends and management's cost cutting strategies. Operating expenses are based on historical trends and management's annual budget plan for fiscal 2023, as well as long-term operating and advertising strategies. The discount rates used in the trade name fair value estimates ranged between 9.5% and 10.0%, and are based on a weighted-average cost of capital utilizing industry market data of similar companies. The new carrying values for Armor All, STP, and Rayovac trade names are $228.5, $76.4, and $422.2, respectively.
Changes in the assumptions used to estimate the fair value of our indefinite-lived intangible assets could result in additional impairment charges in future periods, which could be material. Additionally, certain factors have the potential to create variances in the estimated fair values of our indefinite-lived intangible assets, which could also result in material impairment charges. These factors include (i) failure to achieve forecasted revenue growth rates, (ii) failure to achieve cost cutting and margin improvement initiatives the Company is implementing, (iii) failure to meet forecasted operating expenses, or (iv) increases in the discount rate. Specifically, a 50 basis point increase in the discount rate would result in an increase to the trade name impairment of approximately $48.
STP is within the fuel and oil additives category and due to the current expectation for an increased percentage of electric vehicles in the car parc over the long term, the Company has converted the STP trade name into a definite-life intangible asset with a 25 year useful life. This conversion will result in additional pre-tax amortization expense of approximately $3.0 in fiscal 2023.
Finally, in the fourth quarter of fiscal 2022, a qualitative analysis was performed over the Energizer, Eveready and Varta trade names and no impairments were identified. These indefinite lived intangible assets have a combined carrying value of $111.8.
For the years ended September 30, 2021 and 2020, the Company completed the annual assessments and no impairments were identified.
•Goodwill - In fiscal 2022, the Company changed its reportable segments and correspondingly reallocated goodwill to the new reporting units: Battery & Lights North America, Battery & Lights International, Auto Care North America and Auto Care International. The Company performed an assessment of goodwill at October 1, 2021 before the change in segments, noting no impairments identified. Goodwill was reallocated to the new reporting units based on the relative fair value of each reporting unit on October 1, 2021.
The Company completed its annual goodwill impairment analysis in the fourth fiscal quarter for each of these reporting units. As part of the annual goodwill impairment analysis, the Company estimated the fair value of each reporting unit under the income approach utilizing a discounted cash flow model which incorporates significant
estimates and assumptions, including future cash flows driven by revenue and gross margin projections and discount rates reflecting the risk inherent in future cash flows. The Company uses the three-year strategic plan, the annual budget plan for fiscal 2023, and long-term category projections, to determine forecasted cash flows and operating data for the discounted cash flow model. Specifically, revenue growth assumptions are based on historical trends and management’s expectations for future growth by category. Gross margin rate assumptions are based on historical trends and management's cost cutting strategies. The discount rates are based on a weighted-average cost of capital utilizing industry market data of similar companies.
As a part of the annual assessment, the Company identified a non-cash impairment of the Auto Care International reporting unit of $17.4. This non-cash impairment was primarily driven by significant sustained currency headwinds in the fourth quarter of fiscal 2022, which are expected to continue into fiscal 2023 and are included within the cash flow models, declines in the Auto Care category projections late in the fourth quarter of fiscal 2022, and an increased discount rate. There is no remaining goodwill allocated to this reporting unit after the non-cash impairment.
The Battery & Lights reporting units estimated fair value exceeded their carrying values by more than 100%. The estimated fair value of the Auto Care North America reporting unit, which has a total of $134.2 of goodwill, exceeded its carrying value by 12%. Determining the fair value of a reporting unit requires the use of significant judgment, estimates and assumptions. Changes in the assumptions used to estimate the fair value of our reporting units could result in impairment charges in future periods. Additionally, certain factors have the potential to create variances in the estimated fair values of our reporting units, which also could result in impairment charges. These factors include (i) failure to achieve forecasted revenue growth rates, (ii) failure to achieve cost cutting and margin improvement initiatives the Company is implementing, or (iii) increases in the discount rate. An increase in discount rates, a reduction in projected cash flows or a combination of the two could lead to a reduction in the estimated fair values, which may result in impairment charges that could materially impact our financial statements in any given year. Specifically, for the Auto Care North America reporting unit, a 50 basis point increase in the discount rate would result in the fair value exceeding the carrying value by 5%.
While the Company believes that the estimates and assumptions underlying the valuation methodology are reasonable, these estimates and assumptions could have a significant impact on whether an impairment charge is recognized, and also on the magnitude of any such charge. The results of an impairment analysis are as of a point in time. There is no assurance that actual future earnings or cash flows of the reporting units will not decline significantly from these projections. The Company will monitor any changes to these assumptions and will evaluate goodwill as deemed warranted during future periods.
For the years ended September 30, 2021 and 2020, the Company completed the annual assessments and no impairments were identified.
•Income Taxes - The Company's annual effective income tax rate is determined based on our income, statutory tax rates and the tax impacts of items treated differently for tax purposes than for financial reporting purposes. Tax law requires certain items be included in the tax return at different times than the items are reflected in the financial statements. Some of these differences are permanent, such as expenses that are not deductible in our tax return, and some differences are temporary, reversing over time, such as depreciation expense. These temporary differences create deferred tax assets and liabilities.
The Company estimates income taxes and the effective income tax rate in each jurisdiction that it operates. This involves estimating taxable earnings, specific taxable and deductible items, the likelihood of generating sufficient future taxable income to utilize deferred tax assets, the portion of the income of foreign subsidiaries that is expected to be remitted to the U.S. and be taxable and possible exposures related to future tax audits. Deferred tax assets are evaluated on a subsidiary by subsidiary basis to ensure that the asset will be realized. Valuation allowances are established when the realization is not deemed to be more likely than not. Future performance is monitored, and when objectively measurable operating trends change, adjustments are made to the valuation allowances accordingly. To the extent the estimates described above change, adjustments to income taxes are made in the period in which the estimate is changed.
In determining whether a valuation allowance against the net deferred tax assets are warranted, the Company assesses all available positive and negative evidence such as prior earnings history, expected future earnings, carry-back and carry-forward periods and the feasibility of ongoing tax strategies that could potentially enhance the likelihood of the realization of a deferred tax asset. After the evaluation of all available positive and negative evidence, the conclusion was that it is more likely than not that the Company will generate enough future taxable income to realize the U.S. net deferred tax asset on its balance sheet as of September 30, 2022. The Company will continue to regularly assess the
potential for realization of net deferred tax assets in future periods. Changes in future earnings projections, among other factors, may result in a valuation allowance against some or all of the net deferred tax assets, which may materially impact income tax expense in the period if it is determined that these factors have changed.
The Company operates in multiple jurisdictions with complex tax and regulatory environments, which are subject to differing interpretations by the taxpayer and the taxing authorities. At times, we may take positions that management believes are supportable, but are potentially subject to successful challenges by the appropriate taxing authority. The Company evaluates its tax positions and establishes liabilities in accordance with guidance governing accounting for uncertainty in income taxes. The Company reviews these tax uncertainties in light of the changing facts and circumstances, such as the progress of tax audits, and adjusts them accordingly. The Company's policy on accounting for tax on the global intangible low-taxed income is to treat the taxes due as a period expense when incurred.
In general, it is our practice and intention to permanently reinvest the earnings of our foreign subsidiaries and repatriate earnings only when the tax impact is zero or very minimal. No provision has been provided for taxes that would result upon repatriation of our foreign investments to the United States. We intend to reinvest these earnings indefinitely in our foreign subsidiaries to fund local operations, fund strategic growth objectives, and fund capital projects. See Note 7, Income Taxes, of the Notes to Consolidated Financial Statements for further discussion.
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendment simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC 740 and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020. The Company adopted this standard as of October 1, 2021 and the adoption of this standard did not have a material impact on the Company's consolidated financial statements.
Item 8. Financial Statements and Supplementary Data.
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| Audited Consolidated Financial Statements | Page |
Report of Independent Registered Public Accounting Firm (PCAOB ID 238) | |
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| Consolidated Balance Sheets | |
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| Notes to Consolidated Financial Statements | |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Energizer Holdings, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Energizer Holdings, Inc. and its subsidiaries (the “Company”) as of September 30, 2022 and 2021, and the related consolidated statements of earnings and comprehensive income, of shareholders’ equity and of cash flows for each of the three years in the period ended September 30, 2022, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of September 30, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue Recognition - Trade Promotion Programs
As described in Notes 2 and 20 to the consolidated financial statements, the Company offers a variety of programs, primarily to its retail customers, designed to promote sales of its products. These programs resulted in an allowance for trade promotions of $129.5 million, which is reflected as a reduction in trade receivables, net and $57.7 million of accrued trade promotions within other current liabilities as of September 30, 2022. Such programs require periodic payments and allowances based on estimated results of specific programs and are recorded as a reduction to net sales. Methodologies for determining these provisions are dependent on specific customer pricing and promotional practices, which range from contractually fixed percentage price reductions to reimbursement based on actual occurrence or performance. Where applicable, future reimbursements are estimated based on a combination of historical patterns and future expectations regarding specific in-market product performance. Management accrues, at the time of sale, the estimated total payments and allowances associated with each transaction. Customers redeem trade promotions in the form of payments from the accrued trade allowances or invoice credits against trade receivables.
The principal considerations for our determination that performing procedures relating to revenue recognition for trade promotion programs is a critical audit matter are (i) the significant judgment by management when developing the allowance for trade promotions and accrued trade promotions and (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to historical patterns and future expectations regarding specific in-market product performance used to estimate the allowance for trade promotions and accrued trade promotions recorded by management.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the completeness, accuracy, and valuation of the estimated allowance for trade promotions and accrued trade promotions. These procedures also included, among others, (i) testing management’s process for developing the allowance for trade promotions and accrued trade promotions; (ii) testing the completeness and accuracy of the underlying data used in the estimates; and (iii) evaluating the reasonableness of the significant assumptions used by management related to historical patterns and future expectations regarding specific in-market product performance. Evaluating management’s significant assumptions related to historical patterns and future expectations regarding specific in-market product performance involved evaluating whether the assumptions used by management were reasonable considering (i) the historical performance of similar trade programs; (ii) testing payments and invoice credits related to these trade programs; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit.
Indefinite-Lived Intangible Assets Impairment Assessments - Armor All, STP, and Rayovac Trade Names
As described in Note 12 to the consolidated financial statements, the Company’s consolidated other intangible assets, net balance was $1,295.8 million as of September 30, 2022, of which the carrying values for Armor All, STP, and Rayovac trade names were $228.5 million, $76.4 million, and $422.2 million, respectively. Intangible assets deemed to have an indefinite life are not amortized, but are reviewed annually for impairment of value or when indicators of a potential impairment are present. During the annual impairment assessment, management identified non-cash impairments of the Armor All, STP, and Rayovac trade names of $370.4 million, $26.3 million, and $127.8 million, respectively. The quantitative estimated fair values were determined using the multi-period excess earnings method, which requires significant assumptions for each brand, including estimates related to revenue growth rates, gross margin rates, operating expenses, and discount rates.
The principal considerations for our determination that performing procedures relating to the indefinite-lived intangible assets impairment assessments for certain trade names is a critical audit matter are (i) the significant judgment by management when developing the fair value estimates of the Armor All, STP, and Rayovac trade names; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to revenue growth rates, gross margin rates, operating expenses, and discount rates; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to
management’s indefinite-lived intangible assets impairment assessments, including controls over the valuation of the Armor All, STP, and Rayovac trade names. These procedures also included, among others, (i) testing management’s process for developing the fair value estimates of the Armor All, STP, and Rayovac trade names; (ii) evaluating the appropriateness of the multi-period excess earnings method; (iii) testing the completeness and accuracy of the underlying data used in the fair value methods; and (iv) evaluating the reasonableness of the significant assumptions used by management related to revenue growth rates, gross margin rates, operating expenses, and discount rates. Evaluating management’s significant assumptions related to revenue growth rates, gross margin rates, and operating expenses involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the brands; (ii) consistency with external market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of the multi-period excess earnings method and (ii) the reasonableness of the significant assumption related to the discount rates.
Goodwill Impairment Assessment - Auto Care North America Reporting Unit
As described in Note 12 to the consolidated financial statements, the Company’s goodwill balance was $1,003.1 million as of September 30, 2022, of which $134.2 million relates to the Auto Care North America reporting unit. Goodwill is not amortized, but is reviewed annually for impairment of value or when indicators of a potential impairment are present. As part of the annual goodwill impairment analysis, management estimated the fair value of each reporting unit under the income approach utilizing a discounted cash flow model which incorporates significant estimates and assumptions, including future cash flows driven by revenue and gross margin projections and discount rates reflecting the risk inherent in future cash flows.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the Auto Care North America reporting unit is a critical audit matter are (i) the significant judgment by management when developing the fair value estimate of the Auto Care North America reporting unit; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to revenue and gross margin projections and the discount rate; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the Auto Care North America reporting unit. These procedures also included, among others, (i) testing management’s process for developing the fair value estimate of the reporting unit; (ii) evaluating the appropriateness of the discounted cash flows model; (iii) testing the completeness and accuracy of the underlying data used in the fair value model; and (iv) evaluating the reasonableness of the significant assumptions used by management related to revenue and gross margin projections and the discount rate. Evaluating management’s significant assumptions related to revenue and gross margin projections involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit; (ii) consistency with external market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of the discounted cash flows model and (ii) the reasonableness of the significant assumption related to the discount rate.
/s/PricewaterhouseCoopers LLP
St. Louis, Missouri
November 15, 2022
We have served as the Company’s auditor since 2014.
ENERGIZER HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(Dollars in millions, except per share data)
| | | | | | | | | | | | | | | | | | | | |
| | | FOR THE YEARS ENDED
SEPTEMBER 30, |
| Statement of Earnings | | 2022 | | 2021 | | 2020 |
| Net sales | | $ | 3,050.1 | | | $ | 3,021.5 | | | $ | 2,744.8 | |
| Cost of products sold | | 1,930.6 | | | 1,860.1 | | | 1,662.9 | |
| Gross profit | | $ | 1,119.5 | | | $ | 1,161.4 | | | $ | 1,081.9 | |
| Selling, general and administrative expense | | 484.5 | | | 487.2 | | | 483.3 | |
| Advertising and sales promotion expense | | 137.1 | | | 162.1 | | | 147.1 | |
| Research and development expense | | 34.7 | | | 34.5 | | | 35.4 | |
| Amortization of intangible assets | | 61.1 | | | 61.2 | | | 56.5 | |
| Impairment of goodwill and intangible assets | | 541.9 | | | — | | | — | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Interest expense | | 158.4 | | | 161.8 | | | 195.0 | |
| Loss on extinguishment of debt | | — | | | 103.3 | | | 94.9 | |
| Other items, net | | 7.3 | | | (2.9) | | | 2.0 | |
| (Loss)/Earnings before income taxes | | $ | (305.5) | | | $ | 154.2 | | | $ | 67.7 | |
| Income tax (benefit)/provision | | (74.0) | | | (6.7) | | | 20.9 | |
| Net (loss)/earnings from continuing operations | | $ | (231.5) | | | $ | 160.9 | | | $ | 46.8 | |
Net loss from discontinued operations, net of income tax benefit of $1.2 in 2020 | | — | | | — | | | (140.1) | |
| Net (loss)/earnings | | $ | (231.5) | | | $ | 160.9 | | | $ | (93.3) | |
| Mandatory preferred stock dividends | | (4.0) | | | (16.2) | | | (16.2) | |
| Net (loss)/earnings attributable to common shareholders | | $ | (235.5) | | | $ | 144.7 | | | $ | (109.5) | |
| | | | | | |
| Earnings Per Share | | | | | | |
| Basic net (loss)/earnings per common share - continuing operations | | $ | (3.37) | | | $ | 2.12 | | | $ | 0.44 | |
| Basic net loss per common share - discontinued operations | | — | | | — | | | (2.03) | |
| Basic net (loss)/earnings per common share | | $ | (3.37) | | | $ | 2.12 | | | $ | (1.59) | |
| | | | | | |
| Diluted net (loss)/earnings per common share - continuing operations | | $ | (3.37) | | | $ | 2.11 | | | $ | 0.44 | |
| Diluted net loss per common share - discontinued operations | | — | | | — | | | (2.02) | |
| Diluted net (loss)/earnings per common share | | $ | (3.37) | | | $ | 2.11 | | | $ | (1.58) | |
| | | | | | |
| Weighted average shares of common stock - Basic | | 69.9 | | 68.2 | | 68.8 |
| Weighted average shares of common stock- Diluted | | 69.9 | | 68.7 | | 69.5 |
| | | | | | |
| Dividend Per Common Share | | $ | 1.20 | | | $ | 1.20 | | | $ | 1.20 | |
| | | | | | |
| Statement of Comprehensive Income | | | | | | |
| Net (loss)/earnings | | $ | (231.5) | | | $ | 160.9 | | | $ | (93.3) | |
| Other comprehensive income/(loss), net of tax (benefit)/expense | | | | | | |
| Foreign currency translation adjustments | | 32.1 | | | 27.6 | | | (13.4) | |
Pension activity, net of tax of $(2.9) in 2022, $8.7 in 2021, and $3.5 in 2020 | | (6.1) | | | 29.1 | | | 9.8 | |
Deferred gain/(loss) on hedging activity, net of tax of $19.1 in 2022, $6.4 in 2021, and $(1.5) in 2020 | | 59.1 | | | 20.6 | | | (5.8) | |
| | | | | | |
| Total comprehensive (loss)/income | | $ | (146.4) | | | $ | 238.2 | | | $ | (102.7) | |
The above financial statements should be read in conjunction with the Notes To Consolidated Financial Statements.
ENERGIZER HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except share count and par values)
| | | | | | | | | | | | | | |
| | | SEPTEMBER 30, |
| | | 2022 | | 2021 |
| Assets | | | | |
| Current assets | | | | |
| Cash and cash equivalents | | $ | 205.3 | | | $ | 238.9 | |
| | | | |
| Trade receivables, net | | 421.7 | | | 292.9 | |
| Inventories | | 771.6 | | | 728.3 | |
| Other current assets | | 191.4 | | | 179.4 | |
| | | | |
| Total current assets | | $ | 1,590.0 | | | $ | 1,439.5 | |
| | | | |
| Property, plant and equipment, net | | 362.1 | | | 382.9 | |
| Operating lease assets | | 100.1 | | | 112.3 | |
| Goodwill | | 1,003.1 | | | 1,053.8 | |
| Other intangible assets, net | | 1,295.8 | | | 1,871.3 | |
| Deferred tax asset | | 61.8 | | | 21.7 | |
| Other assets | | 159.2 | | | 126.0 | |
| Total assets | | $ | 4,572.1 | | | $ | 5,007.5 | |
| | | | |
| Liabilities and Shareholders' Equity | | | | |
| Current liabilities | | | | |
| Current maturities of long-term debt | | $ | 12.0 | | | $ | 12.0 | |
| Current portion of finance leases | | 0.4 | | | 2.3 | |
| Notes payable | | 6.4 | | | 105.0 | |
| Accounts payable | | 329.4 | | | 454.8 | |
| Current operating lease liabilities | | 15.8 | | | 15.5 | |
| Other current liabilities | | 333.9 | | | 356.8 | |
| | | | |
| Total current liabilities | | $ | 697.9 | | | $ | 946.4 | |
| Long-term debt | | 3,499.4 | | | 3,333.4 | |
| | | | |
| Operating lease liabilities | | 88.2 | | | 102.3 | |
| Deferred tax liability | | 17.9 | | | 91.3 | |
| Other liabilities | | 138.1 | | | 178.4 | |
| Total liabilities | | $ | 4,441.5 | | | $ | 4,651.8 | |
| Shareholders' equity | | | | |
| | | | |
| | | | |
Common stock, $0.01 par value, 77,074,245 and 72,386,840 shares issued | | | | |
| in 2022 and 2021, respectively | | 0.8 | | | 0.7 | |
Mandatory convertible preferred stock, $0.01 par value, 0 and 2,156,250 shares | | | | |
| in 2022 and 2021, respectively | | — | | | — | |
| Additional paid-in capital | | 828.7 | | | 832.0 | |
| Retained losses | | (304.7) | | | (5.0) | |
Common stock in treasury, at cost, 5,804,660 and 5,522,538 shares | | | | |
| in 2022 and 2021, respectively | | (248.9) | | | (241.6) | |
| | | | |
| Accumulated other comprehensive loss | | (145.3) | | | (230.4) | |
| Total shareholders' equity | | $ | 130.6 | | | $ | 355.7 | |
| Total liabilities and shareholders' equity | | $ | 4,572.1 | | | $ | 5,007.5 | |
The above financial statements should be read in conjunction with the Notes To Consolidated Financial Statements.
ENERGIZER HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
| | | | | | | | | | | | | | | | | | | | |
| | | FOR THE YEARS ENDED SEPTEMBER 30, |
| Cash Flow from Operating Activities | | 2022 | | 2021 | | 2020 |
| | | | | | |
| Net (loss)/earnings | | $ | (231.5) | | | $ | 160.9 | | | $ | (93.3) | |
| Loss from discontinued operations, net of tax | | — | | | — | | | (140.1) | |
| Net (loss)/earnings from continuing operations | | $ | (231.5) | | | $ | 160.9 | | | $ | 46.8 | |
| | | | | | |
| Non-cash integration and restructuring charges | | 3.0 | | | 8.9 | | | 17.8 | |
| Impairment of goodwill and intangible assets | | 541.9 | | | — | | | — | |
| Depreciation and amortization | | 121.6 | | | 118.5 | | | 111.9 | |
| Deferred income taxes | | (135.3) | | | (62.9) | | | (34.8) | |
| Share based compensation expense | | 13.2 | | | 10.2 | | | 24.5 | |
| Gain on finance lease termination | | (4.5) | | | — | | | — | |
| Loss on extinguishment of debt | | — | | | 103.3 | | | 94.9 | |
| Gain on sale of real estate | | — | | | (3.3) | | | — | |
| | | | | | |
| | | | | | |
| | | | | | |
| Non-cash charges for Brazil flood | | 9.7 | | | — | | | — | |
| Non-cash charges for exiting the Russian market | | 12.6 | | | — | | | — | |
| Non-cash items included in income, net | | 6.2 | | | 17.3 | | | 23.1 | |
| Other, net | | (1.7) | | | (3.9) | | | (7.1) | |
Changes in assets and liabilities used in operations, net of acquisitions | | | | | | |
| (Increase)/decrease in trade receivables, net | | (185.5) | | | 9.5 | | | 47.8 | |
| Increase in inventories | | (94.2) | | | (211.8) | | | (39.8) | |
| Decrease/(increase) in other current assets | | 20.6 | | | (7.4) | | | 53.4 | |
| (Decrease)/increase in accounts payable | | (113.8) | | | 51.4 | | | 76.2 | |
| Increase/(decrease) in other current liabilities | | 38.7 | | | (11.0) | | | (25.4) | |
| Net cash from operating activities from continuing operations | | $ | 1.0 | | | $ | 179.7 | | | $ | 389.3 | |
| Net cash used by operating activities from discontinued operations | | — | | | — | | | (12.9) | |
| Net cash from operating activities | | $ | 1.0 | | | $ | 179.7 | | | $ | 376.4 | |
| Cash Flow from Investing Activities | | | | | | |
| Capital expenditures | | (77.8) | | | (64.9) | | | (65.3) | |
| Proceeds from sale of assets | | 0.6 | | | 5.7 | | | 6.4 | |
| Acquisition of intangible assets | | (14.7) | | | — | | | — | |
| Acquisitions, net of cash acquired and working capital settlements | | 1.0 | | | (67.2) | | | (5.1) | |
| Net cash used by investing activities from continuing operations | | $ | (90.9) | | | $ | (126.4) | | | $ | (64.0) | |
| Net cash from investing activities from discontinued operations | | — | | | — | | | 280.9 | |
| Net cash (used by)/from investing activities | | $ | (90.9) | | | $ | (126.4) | | | $ | 216.9 | |
| Cash Flow from Financing Activities | | | | | | |
| | | | | | |
| Cash proceeds from issuance of debt with maturities greater than 90 days | | 300.0 | | | 1,982.6 | | | 2,020.6 | |
| Payments on debt with maturities greater than 90 days | | (13.7) | | | (2,773.8) | | | (1,393.5) | |
| Net (decrease)/increase in debt with maturities 90 days or less | | (99.0) | | | 102.1 | | | (30.2) | |
| Debt issuance costs | | (7.6) | | | (29.0) | | | (26.5) | |
| Payments to terminate finance leases obligations | | (5.1) | | | — | | | — | |
| Premiums paid on extinguishment of debt | | — | | | (141.1) | | | (18.3) | |
| | | | | | |
| | | | | | |
| Dividends paid on common stock | | (84.9) | | | (83.9) | | | (85.4) | |
| Dividends paid on mandatory convertible preferred shares | | (8.1) | | | (16.2) | | | (16.2) | |
| Common stock purchased | | — | | | (96.3) | | | (45.0) | |
| | | | | | |
| Payment of contingent consideration | | — | | | (6.8) | | | — | |
| Taxes paid for withheld share-based payments | | (2.5) | | | (6.7) | | | (11.3) | |
| Net cash from/(used by) financing activities from continuing operations | | $ | 79.1 | | | $ | (1,069.1) | | | $ | 394.2 | |
| Net cash used by financing activities from discontinued operations | | — | | | — | | | (1.1) | |
| Net cash from/(used by) financing activities | | $ | 79.1 | | | $ | (1,069.1) | | | $ | 393.1 | |
| Effect of exchange rate changes on cash | | (22.8) | | | 4.9 | | | 4.9 | |
| Net (decrease)/increase in cash, cash equivalents, and restricted cash from continuing operations | | (33.6) | | | (1,010.9) | | | 724.4 | |
| Net increase in cash, cash equivalents, and restricted cash from discontinued operations | | — | | | — | | | 266.9 | |
| Net (decrease)/increase in cash, cash equivalents, and restricted cash | | $ | (33.6) | | | $ | (1,010.9) | | | $ | 991.3 | |
| Cash, cash equivalents, and restricted cash, beginning of period | | 238.9 | | | 1,249.8 | | | 258.5 | |
| Cash, cash equivalents, and restricted cash, end of period | | $ | 205.3 | | | $ | 238.9 | | | $ | 1,249.8 | |
The above financial statements should be read in conjunction with the Notes To Consolidated Financial Statements.
ENERGIZER HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in millions, shares in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of Shares | Amount | | | | | | |
| Preferred Shares Outstanding | Common Shares Outstanding | Preferred Stock | Common Stock | Additional Paid-in Capital | Retained Earnings/(Losses) | | Accumulated Other Comprehensive (Loss)/Income | Treasury Stock | Total Shareholders' Equity |
Balance,
September 30, 2019 | 2,156 | | 68,902 | | $ | — | | $ | 0.7 | | $ | 870.3 | | $ | 129.5 | | | $ | (298.3) | | $ | (158.4) | | $ | 543.8 | |
| Net earnings from continuing operations | — | | — | | — | | — | | — | | 46.8 | | | — | | — | | 46.8 | |
| Net loss from discontinued operations | — | | — | | — | | — | | — | | (140.1) | | | — | | — | | (140.1) | |
| Share based payments | — | | — | | — | | — | | 24.5 | | — | | | — | | — | | 24.5 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Common stock purchased | — | | (980) | | — | | — | | — | | — | | | — | | (45.0) | | (45.0) | |
| Activity under stock plans | — | | 471 | | — | | — | | (29.9) | | (2.2) | | | — | | 20.8 | | (11.3) | |
| Deferred compensation plan | — | | 125 | | — | | — | | (5.7) | | — | | | — | | 5.7 | | — | |
| Dividends to common shareholders | — | | — | | — | | — | | — | | (84.0) | | | — | | — | | (84.0) | |
| Dividends to preferred shareholders | — | | — | | — | | — | | — | | (16.2) | | | — | | — | | (16.2) | |
| Other comprehensive loss | — | | — | | — | | — | | — | | — | | | (9.4) | | — | | (9.4) | |
Balance,
September 30, 2020 | 2,156 | | 68,518 | | $ | — | | $ | 0.7 | | $ | 859.2 | | $ | (66.2) | | | $ | (307.7) | | $ | (176.9) | | $ | 309.1 | |
| Net earnings | — | | — | | — | | — | | — | | 160.9 | | | — | | — | | 160.9 | |
| | | | | | | | | | |
| Share based expense | — | | — | | — | | — | | 10.2 | | — | | | — | | — | | 10.2 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Common stock purchases | — | | (2,008) | | — | | — | | (15.0) | | — | | | — | | (81.3) | | (96.3) | |
| Activity under stock plans | — | | 332 | | — | | — | | (21.4) | | (0.9) | | | — | | 15.6 | | (6.7) | |
| Deferred compensation plan | — | | 22 | | — | | — | | (1.0) | | — | | | — | | 1.0 | | — | |
| Dividends to common shareholders | — | | — | | — | | — | | — | | (82.6) | | | — | | — | | (82.6) | |
| Dividends to preferred shareholders | — | | — | | — | | — | | — | | (16.2) | | | — | | — | | (16.2) | |
| Other comprehensive loss | — | | — | | — | | — | | — | | — | | | 77.3 | | — | | 77.3 | |
Balance,
September 30, 2021 | 2,156 | | 66,864 | | $ | — | | $ | 0.7 | | $ | 832.0 | | $ | (5.0) | | | $ | (230.4) | | $ | (241.6) | | $ | 355.7 | |
| Net loss | — | | — | | — | | — | | — | | (231.5) | | | — | | — | | (231.5) | |
| | | | | | | | | | |
| Share-based payments | — | | — | | — | | — | | 13.2 | | — | | | — | | — | | 13.2 | |
Conversion of preferred stock to common stock | (2,156) | | 4,687 | | — | | 0.1 | | — | | — | | | — | | — | | 0.1 | |
| Common stock purchased | — | | (451) | | — | | — | | 15.0 | | — | | | — | | (15.0) | | — | |
| Activity under stock plans | — | | 170 | | — | | — | | (10.1) | | (0.1) | | | — | | 7.7 | | (2.5) | |
| | | | | | | | | | |
| Dividends to common shareholders | — | | — | | — | | — | | (21.4) | | (64.1) | | | — | | — | | (85.5) | |
| Dividends to preferred shareholders | — | | — | | — | | — | | — | | (4.0) | | | — | | — | | (4.0) | |
| Other comprehensive income | — | | — | | — | | — | | — | | — | | | 85.1 | | — | | 85.1 | |
| Balance, September 30, 2022 | — | | 71,270 | | $ | — | | $ | 0.8 | | $ | 828.7 | | $ | (304.7) | | | $ | (145.3) | | $ | (248.9) | | $ | 130.6 | |
The above financial statements should be read in conjunction with the Notes To Consolidated Financial Statements.
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
(1) Description of Business and Basis of Presentation
Description of Business – Energizer Holdings, Inc. and its subsidiaries (Energizer or the Company) is a global manufacturer, marketer and distributor of household batteries, specialty batteries and portable lights under the Energizer®, Eveready® and Rayovac® brand names globally, as well as the Varta® brand name in Latin America and Asia Pacific. Energizer offers batteries using lithium, alkaline, carbon zinc, nickel metal hydride, zinc air and silver oxide constructions.
Energizer is also a leading designer and marketer of auto care products in the appearance, fragrance, performance, and air conditioning recharge product categories under the Armor All®, Nu Finish®, Refresh Your Car!®, LEXOL®, Eagle One®, California Scents®, Driven®, Bahama & Co®, STP® and A/C Pro® trade names and expanded our portfolio in Latin America to add the Carnu®, Grand Prix®, Kit® and Tempo® trademarks.
On July 1, 2015, Energizer completed its legal separation from our former parent company, Edgewell Personal Care Company (Edgewell), via a tax free spin-off (the Spin-off or Spin). Energizer operates as an independent, publicly traded company on the New York Stock Exchange trading under the symbol "ENR."
On January 2, 2019, Energizer expanded its battery portfolio with the acquisitions of Spectrum Holdings, Inc.’s (Spectrum) global battery, lighting, and portable power business (Battery Acquisition). The Battery Acquisition included the Rayovac and Varta brands (Acquired Battery Business).
On January 28, 2019, Energizer further expanded its auto care portfolio with the acquisition of Spectrum's global auto care business (Auto Care Acquisition). The Auto Care Acquisition included the Armor All, STP, and A/C PRO brands (Acquired Auto Care Business).
On January 2, 2020, the Company sold the Varta® 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). This business was acquired as part of the Battery Acquisition and was required to be divested per regulatory requirements. Pursuant to the terms of the Battery Acquisition agreement, Spectrum also contributed cash proceeds toward this sale. Total cash proceeds received, including related hedging arrangements, net of the final working capital settlement, were $323.1 and the Company recorded a pre-tax loss of $141.6. Refer to Note 5, Divestment, for further discussion.
Basis of Presentation – The consolidated financial statements include the accounts of Energizer and its subsidiaries. All significant intercompany transactions are eliminated. Energizer has no material equity method investments, variable interests or non-controlling interests.
As a result of the Varta Divestiture, the respective operations of the Divestment Business, including a loss recorded on divestment, have been classified as discontinued operations in the accompanying Consolidated Statements of Earnings and Comprehensive Income and Statements of Cash Flows for fiscal years 2020. There were no operations for the twelve months ended September 30, 2022 and 2021, and no assets or liabilities associated with this business as of September 30, 2022 or 2021. See Note 5 - Divestment for more information on the discontinued operations.
(2) Summary of Significant Accounting Policies
Energizer’s significant accounting policies, which conform to GAAP and are applied on a consistent basis in all years presented, except as indicated, are described below.
Use of Estimates – The preparation of the Company's Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. On an ongoing basis, Energizer evaluates its estimates, including those related to customer promotional programs and incentives, product returns, bad debts, the carrying value of inventories, intangible and other long-lived assets, income taxes, pensions and other postretirement benefits, share-based compensation, contingencies and acquisitions. Actual results could differ materially from those estimates. In regard to ongoing impairment testing of goodwill and indefinite lived intangible assets, significant deterioration in future cash flow projections, changes in discount rates used in discounted cash flow models or changes in other assumptions used in estimating fair values, versus those anticipated at the time of the initial acquisition, as well as subsequent estimated valuations, could result
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
in impairment charges that may materially affect the financial statements in a given year. Refer to Note 12 Goodwill & Intangibles for additional information.
Cash and Cash Equivalents – Cash and cash equivalents consist of cash on hand and marketable securities with original maturities of three months or less. At September 30, 2022 and 2021, Energizer had $205.3 and $238.9, respectively, in available cash, 73.5% and 94.8% of which was outside of the U.S., respectively. The Company has extensive operations, including a significant manufacturing footprint outside of the U.S. We manage our worldwide cash requirements by reviewing available funds among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. The repatriation of cash balances from certain of our subsidiaries could have adverse tax consequences or be subject to regulatory capital requirements; however, those balances are generally available without legal restrictions to fund ordinary business operations. Our intention is to reinvest these funds indefinitely.
Restricted Cash – The Company defines restricted cash as cash that is legally restricted as to withdrawal or usage. There was no restricted cash at September 30, 2022 and 2021.
Foreign Currency Translation – Financial statements of foreign operations where the local currency is the functional currency are translated using end-of-period exchange rates for assets and liabilities and average exchange rates during the period for results of operations. Related translation adjustments are reported as a component within accumulated other comprehensive loss in the equity section of the Consolidated Balance Sheets.
Effective July 1, 2018, the financial statements for our Argentina subsidiary are consolidated under the rules governing the translation of financial information in a highly inflationary economy. Under U.S. GAAP, an economy is considered highly inflationary if the cumulative inflation rate for a three year period meets or exceeds 100 percent. The Argentina economy exceeded the three year cumulative inflation rate of 100 percent as of June 2018. If a subsidiary is considered to be in a highly inflationary economy, the financial statements of the subsidiary must be remeasured into the Company’s reporting currency (U.S. dollar) and future exchange gains and losses from the remeasurement of monetary assets and liabilities are reflected in current earnings, rather than exclusively in the equity section of the balance sheet, until such time as the economy is no longer considered highly inflationary.
Financial Instruments and Derivative Securities – Energizer uses financial instruments, from time to time, in the management of foreign currency, interest rate risk and commodity price risks that are inherent to its business operations. Such instruments are not held or issued for trading purposes. Every derivative instrument (including certain derivative instruments embedded in other contracts) is required to be recorded on the balance sheet at fair value as either an asset or liability. Changes in fair value of recorded derivatives are required to be recognized in earnings unless specific hedge accounting criteria are met.
Foreign exchange instruments, including currency forwards, are used primarily to reduce cash transaction exposures and to manage other translation exposures. Foreign exchange instruments used are selected based on their risk reduction attributes, costs and the related market conditions. The Company has designated certain foreign currency contracts as cash flow hedges for accounting purposes as of September 30, 2022 and 2021.
The Company has interest rate risk with respect to interest expense on variable rate debt. In December 2020, the Company terminated their previously existing interest rate swap agreements and entered into an interest rate swap (2020 interest rate swap) with an effective date on December 22, 2020, that fixed the variable benchmark component (LIBOR) at an interest rate of 0.95% on variable debt of $550.0. The notional value increased to $700.0 on January 22, 2021, and will stay at that value through December 22, 2024. The notional value will decrease by $100.0 on December 22, 2024 and by $100.0 each year thereafter until its termination date on December 22, 2027. The notional value of the swap was $700.0 at September 30, 2022.
Energizer uses raw materials that are subject to price volatility. The Company may use hedging instruments to reduce exposure to variability in cash flows associated with future purchases of commodities. At September 30, 2022 and 2021, the Company had derivative contracts for the future purchases of zinc.
Cash Flow Presentation – The Consolidated Statements of Cash Flows are prepared using the indirect method, which reconciles net (loss)/earnings to cash flow from operating activities. The reconciliation adjustments include the removal of timing differences between the occurrence of operating receipts and payments and their recognition in net (loss)/earnings. The adjustments also remove cash flows arising from investing and financing activities, which are presented separately from operating activities. Cash flows from foreign currency transactions and operations are translated at an average exchange rate for the period. Cash flows from hedging activities are included in the same category as the items being hedged, which is primarily
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
operating activities. Cash payments related to income taxes are classified as operating activities. Cash flows are also distinguished between our continuing operations and our discontinued operations.
Trade Receivables, net – Trade receivables are stated at their net realizable value. The allowance for trade promotions reflects management's estimate of the amount of trade promotions that customers will take as an invoice reduction, rather than receiving cash payments for the trade allowances earned. See additional discussion on the trade allowances in the revenue recognition discussion further in this note. The allowance for doubtful accounts reflects the Company's best estimate of probable losses inherent in the receivables portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other currently available information. Receivables that the Company has factored at September 30, 2022 and 2021 are excluded from the Trade receivables, net balance. Bad debt expense is included in Selling, general and administrative expense (SG&A) in the Consolidated Statements of Earnings and Comprehensive Income.
Trade Receivables, net consists of: | | | | | | | | | | | | | | |
| | September 30, |
| | 2022 | | 2021 |
| Trade receivables | | $ | 554.1 | | | $ | 431.8 | |
| Allowance for trade promotions | | (129.5) | | | (136.0) | |
| Allowance for doubtful accounts | | (2.9) | | | (2.9) | |
| Trade receivables, net | | $ | 421.7 | | | $ | 292.9 | |
Trade Receivables Factoring - Energizer enters into various factoring agreements and early pay programs with our customers to sell our trade receivables under non-recourse agreements in exchange for cash proceeds. In December 2021, the Company amended its credit agreement, and as a part of the amendment, the maximum on sold receivables was increased. The current credit agreement now allows for Energizer to sell accounts receivable up to a maximum of $600.0 annually.
During fiscal years 2022 and 2021, the Company sold $578.9 and $494.8, respectively, of receivables under this program. At September 30, 2022 and 2021, Energizer had $123.3 and $149.7, respectively, of outstanding sold receivables, which are excluded from the Trade receivables, net balance above. In some instances, we may continue to service the transferred receivables after factoring has occurred. However, any servicing of the trade receivable does not constitute significant continuing involvement and we do not carry any material servicing assets or liabilities. These receivables qualify for sales treatment under ASC 860 Transfers and Servicing, and the proceeds for the sale of these receivables is included in net cash from operating activities in the Consolidated Statement of Cash Flows.
As of September 30, 2022 and 2021, cash from factored receivables collected but not yet due to the bank included in Other current liabilities was $2.8 and $6.3, respectively. Additionally, the fees associated with factoring our receivables were $7.5, $3.5 and $4.7 during the years ended September 30, 2022, 2021, and 2020, respectively. Any discounts and factoring fees related to these receivables are expensed as incurred in the Consolidated Statement of Earnings and Comprehensive Income in Selling, general and administrative expense.
Inventories – Inventories are valued at the lower of cost and net realizable value, with cost generally being determined using average cost or the first-in, first-out (FIFO) method. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The Company records a reserve for excess and obsolete inventory based upon the historical usage rates, sales patterns of its products and specifically-identified obsolete inventory.
Capitalized Software Costs – Capitalized software costs are included in Other assets. These costs are amortized using the straight-line method over periods of related benefit ranging from three to seven years. Expenditures related to capitalized software are included in the Capital expenditures caption in the Consolidated Statements of Cash Flows. For the twelve months ended September 30, 2022, 2021 and 2020, amortization expense was $10.4, $8.3 and $8.1, respectively.
Property, Plant and Equipment, net – Property, plant and equipment, net is stated at historical costs. Expenditures for new facilities and expenditures that substantially increase the useful life of property, including interest during construction, are capitalized and reported in the Capital expenditures caption in the Consolidated Statements of Cash Flows. Maintenance, repairs and minor renewals are expensed as incurred. When property is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts, and gains or losses on the disposition are reflected in earnings.
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
Property, plant and equipment, net held under finance leases are amortized on a straight-line bases over the shorter of the lease term or estimated useful life of the asset and such amortization is included in depreciation expense.
Depreciation is generally provided on the straight-line basis by charges to pre-tax earnings at rates based on estimated useful lives. Estimated useful lives range from two to twenty-five years for machinery and equipment and three to thirty years for buildings and building improvements. Depreciation expense in 2022, 2021, and 2020 was $53.1, $53.7, and $63.2, respectively, including accelerated depreciation charges of $3.0, $4.7 and $15.9 in 2022, 2021, and 2020, respectively, primarily related to the IT integration assets and certain manufacturing assets including property, plant and equipment located at facilities that are being consolidated as part of the integration of the Battery and Auto Care Acquisitions.
Estimated useful lives are periodically reviewed and, when appropriate, changes are made prospectively. When certain events or changes in operating conditions occur, asset lives may be adjusted and an impairment assessment may be performed on the recoverability of the carrying amounts.
Acquisitions – Energizer accounts for the acquisition of a business using the acquisition method of accounting and allocates the cost of an acquired business to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess value of the cost of an acquired business over the fair value of the assets acquired and liabilities assumed is recognized as goodwill. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to assets acquired and liabilities assumed with the corresponding offset to goodwill.
During fiscal 2021, Energizer used variations of the income approach in determining the fair value of the amortizable intangible assets acquired as part of an acquisition to acquire a company that specializes in developing formulations for cleaning tasks. The Company utilized multi-period excess earnings methods for determining the fair value of the proprietary technology and customer relationships acquired. Our determination of the fair value of these assets involved the use of significant estimates and assumptions related to the revenue growth rates and discount rates. Our determination of the fair value of customer relationships also involved assumptions related to customer attrition rates.
Energizer believes that the fair value assigned to the assets acquired and liabilities assumed in the acquisition noted above are based on reasonable assumptions and estimates that marketplace participants would use. However, our assumptions are inherently risky and actual results could differ from those estimates. Adverse changes in the judgments, assumptions and estimates used in future measurements of fair value, including discount rates or future operating results and related cash flow projections, could result in an impairment of goodwill or intangible assets that would require a non-cash charge to the consolidated statements of operations and may have a material effect on our financial condition and operating results.
Goodwill and Other Intangible Assets – Goodwill and indefinite-lived intangibles are not amortized, but are evaluated annually for impairment as part of the Company's annual business planning cycle in the fourth fiscal quarter, or when indicators of a potential impairment are present. Intangible assets with finite lives are amortized on a straight-line basis over expected lives. Such intangibles are also evaluated for impairment including ongoing monitoring of potential impairment indicators. During the fiscal year 2022 annual impairment analysis during the fourth quarter, the Company identified indefinite lived trade name impairments for Armor All, STP, and Rayovac of $370.4, $26.3, and $127.8, respectively. The Company also identified a goodwill impairment for the Auto Care International reporting unit of $17.4. Refer to Note 12 - Goodwill and Intangible Assets for additional information.
Impairment of Long-Lived Assets – Energizer reviews long-lived assets, other than goodwill and other intangible assets for impairment, when events or changes in business circumstances indicate that the remaining useful life may warrant revision or that the carrying amount of the long-lived asset may not be fully recoverable. Energizer performs undiscounted cash flow analysis to determine if impairment exists. If impairment is determined to exist, any related impairment loss is calculated based on estimated fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less cost of disposal.
Revenue Recognition – The Company measures revenue as the amount of consideration for which it expects to be entitled in exchange for transferring goods. Net sales reflect the transaction prices for contracts, which include units shipped at selling list prices reduced by variable consideration as determined by the terms of each individual contract. Discounts are offered to customers for early payment and an estimate of the discount is recorded as a reduction of net sales in the same period as the sale. Our standard sales terms generally include payments within 30 to 60 days and are final with returns or exchanges not permitted unless a special exception is made. Our Auto Care channel terms are longer, in some cases up to 365 days, in which case we use our Trade Receivables factoring program for more timely collection. Reserves are established based on historical
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
data and recorded in cases where the right of return does exist for a particular sale. The Company does not offer warranties on products.
Energizer offers a variety of programs, primarily to its retail customers, designed to promote sales of its products. Such programs require periodic payments and allowances based on estimated results of specific programs and are recorded as a reduction to net sales. Methodologies for determining these provisions are dependent on specific customer pricing and promotional practices, which range from contractually fixed percentage price reductions to reimbursement based on actual occurrence or performance. Where applicable, future reimbursements are estimated based on a combination of historical patterns and future expectations regarding specific in-market product performance. Energizer accrues, at the time of sale, the estimated total payments and allowances associated with each transaction. Customers redeem trade promotions in the form of payments from the accrued trade allowances or invoice credits against trade receivables. Additionally, Energizer offers programs directly to consumers to promote the sale of its products. Energizer continually assesses the adequacy of accruals for customer and consumer promotional program costs not yet paid. To the extent total program payments differ from estimates, adjustments may be necessary. Historically, these adjustments have not been material.
The Company’s contracts with customers do not have significant financing components or non-cash consideration and the Company does not have unbilled revenue or significant amounts of prepayments from customers. Revenue is recorded net of the taxes we collect on behalf of governmental authorities which are generally included in the price to the customer. Shipping and handling activities are accounted for as contract fulfillment costs and recorded in Cost of products sold.
Advertising and Sales Promotion Costs – The Company advertises and promotes its products through national and regional media and expenses such activities as incurred. Advertising costs were $105.9, $122.5, and $115.1 for the fiscal years ended September 30, 2022, 2021, 2020, respectively.
Research and Development Costs - The Company expenses research and development costs as incurred.
Income Taxes – Our annual effective income tax rate is determined based on our income, statutory tax rates and the tax impacts of items treated differently for tax purposes than for financial reporting purposes. Tax law requires certain items be included in the tax return at different times than the items are reflected in the financial statements. Some of these differences are permanent, such as expenses that are not deductible in our tax return, and some differences are temporary, reversing over time, such as depreciation expense. These temporary differences create deferred tax assets and liabilities.
The Company estimates income taxes and the effective income tax rate in each jurisdiction that it operates. This involves estimating taxable earnings, specific taxable and deductible items, the likelihood of generating sufficient future taxable income to utilize deferred tax assets, the portion of the income of foreign subsidiaries that is expected to be remitted to the U.S. and be taxable and possible exposures related to future tax audits. Deferred tax assets are evaluated on a subsidiary by subsidiary basis to ensure that the asset will be realized. Valuation allowances are established when the realization is not deemed to be more likely than not. Future performance is monitored, and when objectively measurable operating trends change, adjustments are made to the valuation allowances accordingly. To the extent the estimates described above change, adjustments to income taxes are made in the period in which the estimate is changed.
In determining whether a valuation allowance against the net deferred tax assets are warranted, the Company assesses all available positive and negative evidence such as prior earnings history, expected future earnings, carry-back and carry-forward periods and the feasibility of ongoing tax strategies that could potentially enhance the likelihood of the realization of a deferred tax asset. After the evaluation of all available positive and negative evidence, the conclusion was that it is more likely than not that the Company will generate enough future taxable income to realize the U.S. net deferred tax asset on its balance sheet as of September 30, 2022. The Company will continue to regularly assess the potential for realization of net deferred tax assets in future periods. Changes in future earnings projections, among other factors, may result in a valuation allowance against some or all of the net deferred tax assets, which may materially impact income tax expense in the period if it is determined that these factors have changed.
The Company operates in multiple jurisdictions with complex tax and regulatory environments, which are subject to differing interpretations by the taxpayer and the taxing authorities. At times, the Company may take positions that management believes are supportable, but are potentially subject to successful challenges by the appropriate taxing authority. The Company evaluates its tax positions and establishes liabilities in accordance with guidance governing accounting for uncertainty in income taxes. The Company reviews these tax uncertainties in light of the changing facts and circumstances, such as the progress of tax
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
audits, and adjusts them accordingly. The Company's policy on accounting for tax on the global intangible low-taxed income (GILTI) is to treat the taxes due as a period expense when incurred.
In general, it is our practice and intention to permanently reinvest the earnings of our foreign subsidiaries and repatriate earnings only when the tax impact is zero or very minimal. No provision has been provided for taxes that would result upon repatriation of our foreign investments to the United States. We intend to reinvest these earnings indefinitely in our foreign subsidiaries to fund local operations, fund strategic growth objectives, and fund capital projects. See Note 7, Income Taxes, of the Notes to Consolidated Financial Statements for further discussion.
Share-Based Payments – The Company grants restricted stock equivalents, which generally vest over two to four years. Stock compensation expense is measured at the grant date based on the estimated fair value of the award and is recognized on a straight-line basis over the full restriction period of the award, with forfeitures recognized as they occur.
Estimated Fair Values of Financial Instruments – Certain financial instruments are required to be recorded at the estimated fair value. Changes in assumptions or estimation methods could affect the fair value estimates; however, we do not believe any such changes would have a material impact on our financial condition, results of operations or cash flows. Other financial instruments including cash and cash equivalents, restricted cash, and short-term borrowings, including notes payable, are recorded at cost, which approximates estimated fair value.
Reclassifications - Certain reclassifications have been made to the prior year financial statements to conform to the current presentation, including the recast of our segment related disclosures to align with our new reportable segments as of October 1, 2021. Refer to Note 10, Segments, for additional information.
Recently Issued Accounting Pronouncements – In December 2019, the FASB issued ASU 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendment simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC 740 and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020. The Company adopted this standard as of October 1, 2021 and the adoption of this standard did not have a material impact on the Company's consolidated financial statements.
(3) Revenue
Nature of Our Business - The Company, through its operating subsidiaries, is one of the world’s largest manufacturers, marketers and distributors of household batteries, specialty batteries and lighting products, and a leading designer and marketer of automotive fragrance, appearance, performance and air conditioning recharge products. We distribute our products to consumers through numerous retail locations worldwide, including mass merchandisers and warehouse clubs, food, drug and convenience stores, electronics specialty stores and department stores, hardware and automotive centers, e-commerce and military stores. We sell to our customers through a combination of a direct sales force and exclusive and non-exclusive third-party distributors and wholesalers.
Our North America sales are generally through large retailers with nationally or regionally recognized brands. Our International sales, which includes Latin America, are comprised of modern trade, developing and distributor market groups. Modern trade, which is most prevalent in Western Europe and more developed economies throughout the world, generally refers to sales through large retailers with nationally or regionally recognized brands. Developing markets generally include sales by wholesalers or small retailers who may not have a national or regional presence. Distributors are utilized in other markets where the Company does not have a direct sales force. Each market's determination is based on the predominant customer type or sales strategy utilized in the market.
As discussed in Note 10, Segments, following the completion of the Battery and Auto Care Acquisition integrations in fiscal 2022, the Company has changed its reportable segments from geographical segments, previously Americas and International, to two product groupings, Batteries & Lights and Auto Care, in order to better reflect what the chief operating decision maker is reviewing to make organizational decisions and resource allocations. Therefore, the Company has recast the product and market information for the twelve months ended September 30, 2021 and 2020 by recasting the Battery and Auto Care licensing and other sales within each product category, and Latin America within the respective Modern, Developing and Distributors markets as appropriate.
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
Supplemental product and market information is presented below for revenues from external customers for the twelve months ended September 30, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
| For the Twelve Months Ended September 30, |
| Net Sales | 2022 | | 2021 | | 2020 |
| Batteries | $ | 2,298.2 | | | $ | 2,276.9 | | | $ | 2,109.1 | |
| Auto Care | 622.8 | | | 618.7 | | | 521.3 | |
| Lights | 129.1 | | | 125.9 | | | 114.4 | |
| Total Net Sales | $ | 3,050.1 | | | $ | 3,021.5 | | | $ | 2,744.8 | |
| | | | | | | | | | | | | | | | | |
| For the Twelve Months Ended September 30, |
| Net Sales | 2022 | | 2021 | | 2020 |
| North America | $ | 1,932.0 | | | $ | 1,902.1 | | | $ | 1,753.0 | |
| Modern Markets | 515.9 | | | 528.8 | | | 461.8 | |
| Developing Markets | 400.9 | | | 393.3 | | | 342.0 | |
| Distributor Markets | 201.3 | | | 197.3 | | | 188.0 | |
| Total Net Sales | $ | 3,050.1 | | | $ | 3,021.5 | | | $ | 2,744.8 | |
When Performance Obligations are Satisfied - The Company’s revenue is primarily generated from the sale of finished product to customers. Sales predominantly contain a single delivery element, or performance obligation, and revenue is recognized at a single point in time when title, ownership and risk of loss pass to the customer. This typically occurs when finished goods are delivered to the customer or when finished goods are picked up by a customer or customer’s carrier, depending on contract terms.
(4) Acquisitions
Formulations Acquisition - During the first quarter of fiscal 2021, the Company entered into an agreement with Green Global Holdings, LLC to acquire a North Carolina-based company that specializes in developing formulations for cleaning tasks (Formulations Acquisition). On December 1, 2020, the Formulations Acquisition was completed for a cash purchase price of $51.2. During fiscal 2022, the working capital settlement was finalized, reducing the purchase price by $1.0. The product formulations are both sold to customers directly and licensed to manufacturers. This acquisition is expected to bring significant innovation capabilities in formulations to the Company.
The acquisition is being accounted for as a business combination using the acquisition method of accounting which requires assets acquired and liabilities assumed to be recognized at fair value as of the acquisition date. The fair value of proprietary technology acquired and customer relationships were determined by applying the multi-period excess earnings method under the income approach.
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
The following table outlines the purchase price allocation:
| | | | | |
| |
| Trade receivables | $ | 1.3 | |
| Inventories | 0.1 | |
| |
| |
| Other intangible assets, net | 20.5 | |
| Operating lease assets | 0.5 | |
| Accounts payable | (0.2) | |
| Current operating lease liabilities | (0.2) | |
| Other current liabilities | (0.2) | |
| Operating lease liabilities | (0.3) | |
| Total identifiable net assets | $ | 21.5 | |
| Goodwill | 28.7 | |
| Net assets acquired | $ | 50.2 | |
The table below identifies the purchased intangible assets of $20.5:
| | | | | | | | | | | | | | |
| | Total | | Weighted Average Useful Lives |
| Proprietary formulas | | $ | 19.5 | | | 7 |
| Customer relationships | | 1.0 | | | 15 |
| | | | |
| Total Other intangible assets, net | | $ | 20.5 | | | |
The Company finalized their purchase price accounting in fiscal 2022. The goodwill acquired in this acquisition is attributable to the value the Company expects to achieve from the significant innovation capabilities in formulations that the acquired company will bring to our organization, as well as the workforce acquired. The goodwill was allocated to the Americas segment prior to the Company's reorganization of our reportable segments on October 1, 2021. Refer to Note 12, Goodwill and intangible assets, for additional details. The goodwill is deductible for tax purposes.
In conjunction with the acquisition, the Company entered into incentive compensation agreements with certain key personnel. These agreements allow for potential earn out payments of up to $35.0 based on the achievement of a combination of financial and product development and commercialization performance targets and continued employment with the Company over three performance years. These agreements are not considered a component of the acquisition purchase price but rather as employee compensation arrangements. The Company recognized expense of $1.1 and $3.4 in the twelve months ended September 30, 2022 and 2021, respectively. This was recorded on the Consolidated Statement of Earnings and Comprehensive Income in Selling, general and administrative expense and was paid out during fiscal 2022. No amounts have been recognized for the
second or third performance years under the agreement at September 30, 2022.
FDK Indonesia Acquisition - During fourth quarter of fiscal 2020, the Company entered into an agreement with FDK Corporation to acquire its subsidiary PT FDK Indonesia, a battery manufacturing facility (FDK Indonesia Acquisition). On October 1, 2020, the Company completed the acquisition for a contractual purchase price of $18.2. After contractual and working capital adjustments, the Company paid cash of $16.9 and had a working capital adjustment of $0.7 in fiscal 2021. The acquisition of the FDK Indonesia facility increased the Company's alkaline battery production capacity and allows for the avoidance of future planned capital expenditures.
The Company finalized their purchase price accounting in the fourth fiscal quarter of 2021. The FDK Indonesia Acquisition is being accounted for as a business combination using the acquisition method of accounting which requires assets acquired and liabilities assumed to be recognized at fair value as of the acquisition date. The fair value of the Property, plant and equipment were estimated using the cost approach. After determining the fair value of the real property acquired, which was greater than the purchase price, the acquisition resulted in a bargain purchase gain of $0.6, which was recorded in Other items, net on the Company’s Consolidated Statement of Earnings. No goodwill or intangibles were identified with the purchase.
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
The following table outlines the purchase price allocation as of the date of acquisition:
| | | | | |
| Cash and cash equivalents | $ | 1.7 | |
| Trade receivables | 4.3 | |
| Inventories | 7.8 | |
| Other current assets | 1.1 | |
| Property, plant and equipment, net | 19.4 | |
| |
| |
| Other assets | 2.8 | |
| Accounts payable | (10.7) | |
| Other current liabilities | (0.5) | |
| Deferred tax liabilities | (0.8) | |
| Other liabilities | (6.9) | |
| Net assets acquired | $ | 18.2 | |
Custom Accessories Europe Acquisition - On January 31, 2020, the Company entered into a share purchase agreement to acquire Custom Accessories Europe Group International Limited (CAE) for $1.9 in cash. CAE is a well-established marketer of branded automotive accessories throughout the United Kingdom and Europe. CAE partners with major automotive accessory brand owners to identify and develop complimentary brand extensions supported by sourcing and distribution activities. The purchase agreement had earn out payments that could increase the purchase price up to $9.9 if certain financial metrics are achieved over the next three years. During fiscal 2021, CAE achieved the full earn out threshold under the share purchase agreement, resulting in the full consideration of $9.9 to be paid out, including contingent consideration payments of $6.8 during the year. The Company has allocated the purchase price to the assets acquired and liabilities assumed, resulting in identified intangible assets for vendor relationships of approximately $8.0, which will be amortized over the three-year lives of the vendor agreements.
Pro Forma Financial Information- Pro forma results for the Formulations Acquisition, FDK Indonesia Acquisition and CAE acquisition were not considered material and, as such, are not included.
Acquisition and Integration Costs- Acquisition and integration costs incurred during fiscal years 2022, 2021 and 2020 relate to the FDK Indonesia Acquisition, Formulations Acquisition, the Battery Acquisition and the Auto Care Acquisition. Pre-tax costs incurred were $16.5, $68.9 and $68.0 in the twelve months ended September 30, 2022, 2021, and 2020, respectively.
Pre-tax costs recorded in Costs of products sold were $6.0, $33.7, and $32.0 for the twelve months ended September 30, 2022, 2021, and 2020, respectively, which primarily related to facility exit and integration restructuring costs of $5.2, $31.9 and $29.3 as discussed in Note 6, Restructuring.
Pre-tax acquisition and integration costs recorded in SG&A were $9.4, $40.0 and $38.8 for the twelve months ended September 30, 2022, 2021 and 2020, respectively. In fiscal 2022 the SG&A expenses primarily related to the integration of acquired information technology systems, consulting costs, and retention-related compensation costs. In fiscal 2021 and 2020 these expenses primarily related to consulting fees for the 2020 restructuring program, success incentives, and costs of integrating the information technology systems of the Battery and Auto Care Acquisition businesses.
For the twelve months ended September 30, 2022, 2021 and 2020 the Company recorded $1.1, $1.1 and $1.3 in Research and development, respectively.
Included in Other items, net was pre-tax income of $5.9 and $4.1 in the twelve months ended September 30, 2021 and 2020, respectively. The pre-tax income recorded in fiscal 2021 was primarily driven by the gain on a sale of assets of $3.3, which was part of the integration restructuring discussed in Note 6.
The pre-tax income recorded in fiscal 2020 was primarily driven by pre-acquisition insurance proceeds of $4.9, a $1.0 gain on the sale of assets and $0.9 of transition services income, offset by a $2.2 loss related to the hedge contract on the proceeds from the Varta Divestiture and $0.5 of other items.
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
(5) Divestment
As discussed in Note 1, Description of Business and Basis of Presentation, the Divestment Business was classified as discontinued operations in the accompanying Consolidated Statement of Earnings and Comprehensive Income as of September 30, 2020. There were no operations for the twelve months ended September 30, 2022 and 2021, or assets or liabilities held for sale as of September 30, 2022 or 2021.
On May 29, 2019, the Company entered into a definitive agreement with VARTA AG to sell the Divestment Business for €180.0, subject to approval by the European Commission and certain purchase price adjustments. On January 2, 2020, the Company sold the business to VARTA AG. Total cash proceeds, including related hedging arrangements, net of the final working capital settlement, were $323.1 from Varta AG and Spectrum. Spectrum contributed proceeds pursuant to the terms of the Battery Acquisition agreement.
For the twelve months ended September 30, 2020, the Company has recorded a pre-tax loss of $141.6 for the divestment, which includes contractual adjustments and recognition of tax and other indemnifications under the definitive purchase agreement. Under the definitive purchase agreement, the Company indemnified VARTA AG for certain tax liabilities that existed as of the divestment date. As previously disclosed, Spectrum has further indemnified the Company for those liabilities that arose from the tax years prior to the Company's acquisition of the Divestment Business. An indemnification asset and liability, where necessary, has been recorded to reflect these arrangements.
The following table summarizes the components of Loss from discontinued operations in the accompanying Consolidated Statement of Earnings and Comprehensive Income for the twelve months ended September 30, 2020:
| | | | | |
| For the Year Ended |
| September 30, 2020 |
| Net sales | $ | 115.8 | |
| Cost of products sold | 88.2 | |
| Gross profit | 27.6 | |
| Selling, general and administrative expense | 18.0 | |
| Advertising and sales promotion expense | 0.3 | |
| Research and development expense | 0.8 | |
| Interest expense | 12.1 | |
| Loss on sale of business | 141.6 | |
| Other items, net | (3.9) | |
| Loss before income taxes from discontinued operations | (141.3) | |
| Income tax benefit | (1.2) | |
| Net loss from discontinued operations | $ | (140.1) | |
Included in the Net loss from discontinued operations for the twelve months ended September 30, 2020, are the deferred financing fee write off related to the pre-payment of debt from the divestment proceeds of $6.9, divestment related pre-tax costs of $1.7 and allocated pre-tax interest expense of $5.0.
(6) Restructuring
In the fourth fiscal quarter of 2019, the Company began implementing 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 were substantially complete by December 31, 2021 and the Company does not expect to incur additional material charges associated with these plans.
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
Part of this plan was the exit of our Dixon, IL leased packaging facility, which the Company vacated during the first quarter of fiscal 2022. In the third quarter of fiscal 2022, the Company entered into a termination agreement with the landlord. The Company terminated the lease agreement, which went into 2028, reducing the finance lease obligations by $9.8. The termination agreement required the Company to pay a termination fee of $4.0, as well as decommissioning costs and brokerage fees. Since the Company has already vacated the facility as a part of the 2019 restructuring program, most assets associated with the location have already been fully depreciated. The termination of this lease resulted in a gain of $4.5 recognized in Other items, net during fiscal 2022.
In the fourth fiscal quarter of 2020, the Company initiated a new restructuring program with a primary focus on reorganizing its global end-to-end supply chain network and ensuring accountability by category. This program includes streamlining the Company’s end-to-end supply chain model to enable rapid response to category specific demands and enhancing our ability to better serve our customers. Planning and execution of this program began in fiscal year 2021 and this program was substantially complete by December 31, 2021 and the Company does not expect to incur additional material charges associated with these plans.
The pre-tax expense for charges related to the restructuring plans for the twelve months ended September 30, 2022, 2021 and 2020 are noted in the table below and were reflected in Cost of products sold, Selling, general and administrative expense, Research and development, and Other items, net on the Consolidated Statement of Earnings and Comprehensive Income:
| | | | | | | | | | | | | | | | | |
| For the Years Ended September 30, |
| 2022 | | 2021 | | 2020 |
| 2019 Restructuring Program | | | | | |
| Costs of products sold | | | | | |
| Severance and related benefit costs | $ | (0.1) | | | $ | 0.1 | | | $ | 0.8 | |
| Accelerated depreciation and asset write-offs | 1.2 | | | 6.7 | | | 12.0 | |
Other exit costs(1) | 2.8 | | | 16.5 | | | 16.3 | |
| Other items, net | | | | | |
Gain on termination of finance lease(2) | $ | (4.5) | | | — | | | — | |
Gain on sale of fixed assets(3) | $ | — | | | (3.3) | | | — | |
| Total 2019 Restructuring costs | $ | (0.6) | | | $ | 20.0 | | | $ | 29.1 | |
| 2020 Restructuring Program | | | | | |
| Costs of products sold | | | | | |
| Severance and related benefit costs | $ | 0.2 | | | $ | 0.5 | | | $ | — | |
Other restructuring related costs(4) | 1.1 | | | 8.1 | | | 0.2 | |
| Selling, general and administrate expense | | | | | |
| Severance and related benefit costs | 0.1 | | | 0.5 | | | 0.4 | |
Other restructuring related costs(4) | — | | | 7.5 | | | 0.6 | |
| Research and development expense | | | | | |
| Severance and related benefit costs | — | | | 0.2 | | | — | |
| Total 2020 Restructuring Costs | $ | 1.4 | | | $ | 16.8 | | | $ | 1.2 | |
| Project Momentum Restructuring | | | | | |
| Selling, general and administrate expense | | | | | |
Other restructuring related costs(4) | $ | 0.9 | | | $ | — | | | $ | — | |
| Total Momentum Restructuring Costs | $ | 0.9 | | | $ | — | | | $ | — | |
| Total restructuring related expense | $ | 1.7 | | | $ | 36.8 | | | $ | 30.3 | |
(1) Includes charges primarily related to environmental investigatory and mitigation costs, consulting, relocation and other facility exit costs.
(2) The gain relates to the exit of our Dixon, IL leased packaging facility, which was a finance leased location. The Company vacated the facility and entered into a termination agreement with the landlord during fiscal year 2022.
(3) Relates to the sale of the Guatemala battery manufacturing facility in September 2021 net of closing costs, legal fees, and fixed asset write-offs. Net cash proceeds were $5.5.
(4) Primarily includes consulting fees for the restructuring program.
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
Although the Company's restructuring costs are recorded outside of segment profit, if allocated to our new reportable segments, the restructuring costs noted above for fiscal 2022 would have been included in our Batteries & Lights and Auto Care segments in the amount of $1.3 and $0.4, respectively. The restructuring costs noted above for fiscal year 2021 would have been included in our Batteries & lights and Auto Care segments in the amount of $30.7 and $6.1, respectively. The restructuring costs noted above for fiscal year 2020 would have been incurred within our Batteries & Lights and Auto Care segments in the amount of $21.7 and $8.6, respectively.
The following table summarizes the activity related to the 2019 restructuring program for the twelve Months Ended September 30, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Utilized | | |
| September 30, 2019 | | Charge to Income | | | Cash | | Non-Cash | | September 30, 2020 |
| Severance & termination related costs | $ | 9.8 | | | $ | 0.8 | | | | $ | 5.3 | | | $ | — | | | $ | 5.3 | |
| Accelerated depreciation & asset write-offs | — | | | 12.0 | | | | — | | | 12.0 | | | — | |
| Other exit costs | — | | | 16.3 | | | | 13.4 | | | — | | | 2.9 | |
| Total | $ | 9.8 | | | $ | 29.1 | | | | $ | 18.7 | | | $ | 12.0 | | | $ | 8.2 | |
| | | | | | | | |
| September 30, 2020 | | Charge to Income | | | Cash | | Non-Cash | | September 30, 2021 (1) |
| Severance & termination related costs | $ | 5.3 | | | $ | 0.1 | | | | $ | 4.0 | | | $ | — | | | $ | 1.4 | |
| Accelerated depreciation & asset write-offs | — | | | 6.7 | | | | — | | | 6.7 | | | — | |
| Gain on sale of fixed assets | — | | | (3.3) | | | | (5.5) | | | 1.7 | | | 0.5 | |
| Other exit costs | 2.9 | | | 16.5 | | | | 17.2 | | | — | | | 2.2 | |
| Total | $ | 8.2 | | | $ | 20.0 | | | | $ | 15.7 | | | $ | 8.4 | | | $ | 4.1 | |
| | | | | | | | |
| September 30, 2021 | | Charge to Income | | | Cash | | Non-Cash | | September 30, 2022 (1) |
| Severance & termination related costs | $ | 1.4 | | | $ | (0.1) | | | | $ | 1.2 | | | $ | — | | | $ | 0.1 | |
| Accelerated depreciation & asset write-offs | — | | | 1.2 | | | | — | | | 1.2 | | | — | |
| Gain on sale of fixed assets | 0.5 | | | — | | | | 0.5 | | | — | | | — | |
| Gain on termination of finance lease | — | | | (4.5) | | | | 5.1 | | | (9.6) | | | — | |
| Other exit costs | 2.2 | | | 2.8 | | | | 5.0 | | | — | | | — | |
| Total | $ | 4.1 | | | $ | (0.6) | | | | $ | 11.8 | | | $ | (8.4) | | | $ | 0.1 | |
(1) At September 30, 2022 and 2021, the restructuring reserve is recorded on the Consolidated Balance Sheet in Other current liabilities.
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
The following table summarizes the activity related to the 2020 restructuring program for the Twelve Months Ended September 30, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Utilized | | |
| September 30, 2019 | | Charge to Income | | | Cash | | Non-Cash | | September 30, 2020 |
| Severance & termination related costs | $ | — | | | $ | 0.4 | | | | $ | — | | | $ | — | | | $ | 0.4 | |
| Other restructuring related costs | — | | | 0.8 | | | | — | | | — | | | 0.8 | |
| Total | $ | — | | | $ | 1.2 | | | | $ | — | | | $ | — | | | $ | 1.2 | |
| | | | | | | | | | |
| September 30, 2020 | | Charge to Income | | | Cash | | Non-Cash | | September 30, 2021 (1) |
| Severance & termination related costs | $ | 0.4 | | | $ | 1.2 | | | | $ | 0.7 | | | $ | — | | | $ | 0.9 | |
| Other restructuring related costs | 0.8 | | | 15.6 | | | | 15.7 | | | — | | | $ | 0.7 | |
| Total | $ | 1.2 | | | $ | 16.8 | | | | $ | 16.4 | | | $ | — | | | $ | 1.6 | |
| | | | | | | | | | |
| September 30, 2021 | | Charge to Income | | | Cash | | Non-Cash | | September 30, 2022 (1) |
| Severance & termination related costs | $ | 0.9 | | | $ | 0.3 | | | | $ | 0.5 | | | $ | — | | | $ | 0.7 | |
| Other restructuring related costs | $ | 0.7 | | | $ | 1.1 | | | | $ | 1.8 | | | $ | — | | | — | |
| Total | $ | 1.6 | | | $ | 1.4 | | | | $ | 2.3 | | | $ | — | | | $ | 0.7 | |
(1) At September 30, 2022 and 2021, the restructuring reserve is recorded on the Consolidated Balance Sheet in Other current liabilities.
Subsequent to the fiscal year-end, the Board of Directors approved a profit recovery program, Project Momentum, which includes an enterprise-wide restructuring focused on recovering operating margins, optimizing our manufacturing, distribution, and global supply chain networks, and enhancing our organizational efficiency across both segments. During the fourth quarter, the Company accrued $0.9 of consulting costs related to the design of the program.
(7) Income Taxes
The (benefit)/provisions for income taxes consisted of the following:
| | | | | | | | | | | | | | | | | |
| For the Years Ended September 30, |
| | 2022 | | 2021 | | 2020 |
| Current: | | | | | |
| United States - Federal | $ | (1.9) | | | $ | 4.7 | | | $ | 13.5 | |
| State | 3.5 | | | 1.6 | | | 3.0 | |
| Foreign | 59.7 | | | 49.9 | | | 39.2 | |
| Total current | $ | 61.3 | | | $ | 56.2 | | | $ | 55.7 | |
| Deferred: | | | | | |
| United States - Federal | (113.1) | | | (57.8) | | | (29.4) | |
| State | (14.2) | | | (3.8) | | | (3.1) | |
| Foreign | (8.0) | | | (1.3) | | | (2.3) | |
| Total deferred | $ | (135.3) | | | $ | (62.9) | | | $ | (34.8) | |
| (Benefit)/provision for income taxes | $ | (74.0) | | | $ | (6.7) | | | $ | 20.9 | |
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
The source of pre-tax (loss)/earnings was:
| | | | | | | | | | | | | | | | | |
| For the Years Ended September 30, |
| | 2022 | | 2021 | | 2020 |
| United States | $ | (554.5) | | | $ | (90.1) | | | $ | (114.1) | |
| Foreign | 249.0 | | | 244.3 | | | 181.8 | |
| Pre-tax (loss)/earnings | $ | (305.5) | | | $ | 154.2 | | | $ | 67.7 | |
A reconciliation of income tax (benefit)/provision with the amounts computed at the statutory federal income tax rate follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended September 30, |
| | 2022 | | 2021 | | 2020 |
| Computed tax at federal statutory rate | $ | (64.2) | | | 21.0 | % | | $ | 32.4 | | | 21.0 | % | | $ | 14.2 | | | 21.0 | % |
| State income taxes, net of federal tax benefit | (9.7) | | | 3.2 | | | 0.2 | | | 0.1 | | | (0.7) | | | (1.0) | |
| Foreign rate differential | 4.4 | | | (1.4) | | | 0.8 | | | 0.5 | | | 2.0 | | | 3.0 | |
| Other taxes including repatriation of foreign earnings and GILTI | 2.4 | | | (0.8) | | | 5.5 | | | 3.6 | | | 4.4 | | | 6.5 | |
| Foreign tax incentives | (2.8) | | | 0.9 | | | (3.7) | | | (2.4) | | | (3.6) | | | (5.3) | |
| Uncertain tax positions | (10.1) | | | 3.3 | | | 0.2 | | | 0.1 | | | 2.1 | | | 3.1 | |
| Nondeductible transaction expenses | — | | | — | | | — | | | — | | | 1.0 | | | 1.5 | |
| Debt refinancing | — | | | — | | | (3.4) | | | (2.2) | | | — | | | — | |
| Tax structuring | — | | | — | | | (39.5) | | | (25.6) | | | — | | | — | |
| Other, net | 6.0 | | | (2.0) | | | 0.8 | | | 0.6 | | | 1.5 | | | 2.1 | |
| Total | $ | (74.0) | | | 24.2 | % | | $ | (6.7) | | | (4.3) | % | | $ | 20.9 | | | 30.9 | % |
The Company has been granted two foreign tax incentives providing for a reduced tax rate on profits related to certain battery productions. One incentive expired in December 2019 and the second expires in March 2023.
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
The deferred tax assets and deferred tax liabilities at the end of each year are as follows:
| | | | | | | | | | | |
| September 30, |
| | 2022 | | 2021 |
| Deferred tax assets: | | | |
| Accrued liabilities | $ | 30.1 | | | $ | 33.6 | |
| Deferred and stock-related compensation | 10.8 | | | 11.2 | |
| Tax loss carryforwards and tax credits | 22.2 | | | 23.9 | |
| Intangible assets | 2.6 | | | 2.5 | |
| Pension plans | 6.2 | | | 5.6 | |
| Inventory differences and other tax assets | 14.7 | | | 13.0 | |
| Operating lease assets | 24.0 | | | 27.2 | |
| Interest expense limited under Sec 163j | 110.6 | | | 90.5 | |
| Gross deferred tax assets | 221.2 | | | 207.5 | |
| Deferred tax liabilities: | | | |
| Depreciation and property differences | (25.2) | | | (25.7) | |
| Intangible assets | (87.8) | | | (200.5) | |
| Operating lease liabilities | (23.8) | | | (25.9) | |
| Other tax liabilities | (28.9) | | | (9.9) | |
| Gross deferred tax liabilities | (165.7) | | | (262.0) | |
| Valuation allowance | (11.6) | | | (15.1) | |
| | | |
| Net deferred tax assets/(liabilities) | $ | 43.9 | | | $ | (69.6) | |
Future expirations of tax loss carryforwards and tax credits, if not utilized, are $4.9 between fiscal years 2023 and 2025 at September 30, 2022. In addition, there are $10.6 of tax loss carryforwards and credits with no expiration at September 30, 2022. The valuation allowance is primarily attributed to tax loss carryforwards and tax credits outside the U.S.
In general, it is our practice and intention to permanently reinvest the earnings of our foreign subsidiaries and repatriate earnings only when the tax impact is zero or very minimal. No provision has been provided for taxes that would result upon repatriation of our foreign investments to the United States. At September 30, 2022, approximately $1,099 of basis differential in our investment in foreign affiliates was considered indefinitely invested in those businesses. We estimate that the U.S. federal income tax liability that could potentially arise if indefinitely invested basis of foreign subsidiaries were repatriated in full to the U.S. would be significant. While it is not practicable to calculate a specific potential U.S. tax exposure due to changing statutory rates in foreign jurisdictions over time, as well as other factors, we estimate the potential U.S. tax may be in excess of $231, if all unrealized basis differences were repatriated assuming foreign cash was available to do so.
The unrecognized tax benefits activity is summarized below:
| | | | | | | | | | | | | | | | | |
| | | | | |
| For the Years Ended September 30, |
| | 2022 | | 2021 | | 2020 |
| Unrecognized tax benefits, beginning of year | $ | 13.5 | | | $ | 14.2 | | | $ | 12.8 | |
| Additions based on current year tax positions and acquisitions | — | | | 0.1 | | | 0.1 | |
| Additions based on prior year tax positions and acquisitions | — | | | 2.6 | | | 2.8 | |
| Reductions for prior year tax positions | — | | | — | | | (0.6) | |
| Settlements with taxing authorities/statute expirations | (4.3) | | | (3.4) | | | (0.9) | |
| | | | | |
| Unrecognized tax benefits, end of year | $ | 9.2 | | | $ | 13.5 | | | $ | 14.2 | |
Included in the unrecognized tax benefits noted above are $9.2 of uncertain tax positions that would affect Energizer’s effective tax rate, if recognized. Energizer does not expect any significant increases or decreases to their unrecognized tax benefits within twelve months of this reporting date. In the Consolidated Balance Sheets, unrecognized tax benefits are classified as Other liabilities (non-current) to the extent that payments are not anticipated within one year.
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
Energizer classifies accrued interest and penalties related to unrecognized tax benefits in the income tax provision. The accrued interest and penalties are not included in the table above. Energizer has accrued $3.0 of interest (net of the deferred tax asset of $0.1) and penalties of $1.2 at September 30, 2022, $6.8 of interest (net of the deferred tax asset of $1.1) and penalties of $3.4 at September 30, 2021, and $4.9 of interest (net of the deferred tax asset of $0.7) and penalties of $3.9 at September 30, 2020. Interest was computed on the difference between the tax position recognized in accordance with GAAP and the amount expected to be taken in the Company's tax return.
The Company files income tax returns in the U.S. federal jurisdiction, various cities and states, and more than 50 foreign jurisdictions where Energizer has operations. U.S. federal, state and local income tax returns for tax years ended September 30, 2018 and after remain subject to examination by the Internal Revenue Service. There are open examinations in the U.S. and at some of the foreign entities and the status of income tax examinations varies by jurisdiction. At this time, Energizer does not anticipate any material adjustments to its financial statements resulting from tax examinations currently in progress.
The Company is contractually indemnified by Spectrum for any tax liability of the Acquired Battery and Auto Care Businesses arising from tax years prior to the acquisitions. The Company is also contractually obligated to pay Spectrum any tax benefit it receives in a tax year after the acquisitions as a result of an indemnification payment made by Spectrum. An indemnification asset and liability, where necessary, has been recorded to reflect this arrangement. The Company has also indemnified VARTA AG for certain tax liabilities that existed as of the divestment date. An indemnification asset or liability, where necessary, has been recorded to reflect these arrangements.
(8) Share-Based Payments
The Board of Directors adopted the Energizer Holdings, Inc. Equity Incentive Plan (the 2015 Plan) on July 1, 2015, upon completion of the Spin-off. Under the terms of the Plan, stock options, restricted stock awards, restricted stock equivalents, stock appreciation rights and performance-based stock awards may be granted to directors, officers and employees of the Company. The Plan authorizes a maximum number of 10 million common shares to be awarded.
On January 27, 2020, the Company's shareholders approved the Energizer Holdings, Inc. Omnibus Incentive Plan (Omnibus Plan). The Omnibus Plan replaces and supersedes the 2015 Plan. No new awards will be issued under the 2015 Plan, though the terms of the 2015 Plan will continue to govern all awards granted under that plan.
The Omnibus Plan authorized 6.5 million shares to be awarded, as well as the 0.3 million shares that were still available for grant under the 2015 Plan. Under the Omnibus Plan, stock options, stock appreciation rights, restricted stock and restricted stock units (time-based or performance-based), other stock awards and cash-based awards may be granted to directors, officers and employees of the Company. For purposes of determining the number of shares available for future issuance under the Omnibus Plan, awards other than stock options and stock appreciation rights, will reduce the shares available for future issuance by two for every one share awarded. Stock options and stock appreciation rights reduce the shares available for future issuance on a one-for-one basis. At September 30, 2022, there were 4.3 million shares available for future awards under the Plan.
Total compensation cost charged against income for Energizer’s share-based compensation arrangements was $13.2, $10.2 and $24.5 for the years ended September 30, 2022, 2021 and 2020, respectively, and was recorded in SG&A expense. The total income tax benefit recognized in the Consolidated Statements of Earnings and Comprehensive Income for share-based compensation arrangements was $2.1, $2.3 and $4.7 for the years ended September 30, 2022, 2021 and 2020, respectively.
Restricted Stock Equivalents (RSE)
In November 2018, the Company granted RSE awards to a group of key employees which included approximately 73,000 shares that vest ratably over four years. The closing stock price on the date of the grant used to determine the award fair value was $60.25.
In November 2019, the Company granted RSE awards to a group of key employees of approximately 134,000 shares that vest ratably over four years and granted RSE awards to a group of key executives of approximately 81,000 shares that vest on the third anniversary of the date of grant. In addition, the Company granted approximately 306,000 performance shares to a group of key employees and key executives that will vest subject to meeting target amounts for both cumulative adjusted earnings per share and cumulative free cash flow as a percentage of sales over the three year performance period. These performance
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
measures are equally weighted in determining the final share award with the maximum award payout of approximately 612,000 shares. The closing stock price on the date of the grant used to determine the award fair value was $43.10. Subsequent to year-end, the performance shares issued in November 2019 were all cancelled as the three year performance metrics were not achieved.
In November 2020, the Company granted RSE awards to a group of key employees of approximately 120,000 shares that vest ratably over four years and granted RSE awards to a group of key executives of approximately 71,000 shares that vest on the third anniversary of the date of grant. In addition, the Company granted approximately 272,000 performance shares to a group of key employees and key executives that will vest subject to meeting target amounts for both cumulative adjusted earnings per share and cumulative free cash flow as a percentage of sales over the three year performance period. These performance measures are equally weighted in determining the final share award with the maximum award payout of approximately 544,000 shares. The closing stock price on the date of the grant used to determine the award fair value was $42.98.
In November 2021, the Company granted RSE awards to a group of key employees of approximately 140,000 shares that vest ratably over four years and granted RSE awards to a group of key executives of approximately 113,000 shares that vest on the third anniversary of the date of grant. In addition, the Company granted approximately 393,000 performance shares to a group of key employees and key executives that will vest subject to two performance requirements. Half of the awards will vest based on meeting target amounts for cumulative adjusted earnings per share and the other half will vest based on total shareholder return ("TSR") metrics compared to the Company's performance peer group over the three year performance period. These performance measures are equally weighted with the maximum award payout of approximately 786,000 shares. The closing stock price on the date of the grant used to determine the award fair value for the cumulative adjusted earnings per share portion of the award was $38.75.
The portion of the November 2021 performance awards that are contingent upon achievement of the TSR have a 45.7% fair value premium added to the closing stock price on the date of the grant based on a simulation of outcomes under a Monte Carlo valuation model. The assumptions for the valuation of TSR performance shares granted during the year ended September 30, 2022 are summarized in the table below:
| | | | | |
| Fiscal Year 2022 |
| Expected term (in years) | 3.0 |
| Expected volatility | 42.3 | % |
| Expected dividend rate | 3.1 | % |
| Expected risk-free rate | 0.8 | % |
| Fair value of TSR award at grant | $56.45 |
The expected volatility rate for Energizer and the peer companies was based on historical stock price movements. The risk free rate is based on the U.S. Treasury constant maturities yield on the grant date for the remaining length of the performance period.
The following table summarizes the Company's RSE activity (including performance awards at stretch) during the current fiscal year (shares in millions):
| | | | | | | | | | | | | | |
| | Shares | | Weighted-Average
Grant Date Estimated Fair Value per Share |
| Nonvested RSE at October 1, 2021 | | 2.0 | | | $ | 46.44 | |
| Granted | | 1.2 | | | $ | 44.31 | |
| Vested | | (0.3) | | | $ | 51.26 | |
| Cancelled | | (0.4) | | | $ | 54.99 | |
| Nonvested RSE at September 30, 2022 | | 2.5 | | | $ | 43.64 | |
As of September 30, 2022, there was an estimated $27.7 of total unrecognized compensation costs related to the outstanding RSE awards, which will be recognized over a weighted-average period of 1.2 years. The weighted average estimated fair value
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
for RSE awards granted was $52.5, $37.1, and $36.8 for September 30, 2022, 2021 and 2020, respectively. The estimated fair value of RSE awards that vested was $12.1, $21.7, and $34.0 in fiscal 2022, 2021 and 2020, respectively.
Subsequent to year-end, in November 2022, the Company granted RSE awards to a group of key employees of approximately 391,000 shares that vest ratably over four years and granted RSE awards to a group of key executives of approximately 147,000 shares that vest on the third anniversary of the date of grant. In addition, the Company granted approximately 344,000 performance shares to a group of key executives that will vest subject to meeting certain performance metrics over the three year performance period. The maximum award payout of approximately 688,000 shares. The closing stock price on the date of the grant used to determine the award fair value was $29.23.
(9) Earnings per share
Basic (loss)/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 (loss)/earnings per share calculation, adjusted for the dilutive effect of restricted stock equivalents, performance shares, deferred compensation equity plan and Mandatory Convertible Preferred Stock (MCPS).
During the second quarter of fiscal year 2022, the MCPS were converted to approximately 4.7 million shares of Common stock. For the twelve months ended September 30, 2022, the issued common shares are included in the basic weighted average common shares outstanding for the period subsequent to the conversion, and included in the diluted calculation prior to their conversion using the if-converted method and are only included if the conversion would be further dilutive to the calculation. The Company's MCPS were considered anti-dilutive for all periods and excluded for the calculations of diluted (loss)/earnings.
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
The following table sets forth the computation of basic and diluted (loss)/earnings per share for the years ended September 30, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
| | | | | |
| For the Years Ended September 30, |
| (in millions, except per share data) | 2022 | | 2021 | | 2020 |
| Basic earnings (loss) / earnings per share | | | | | |
| Net (loss) / earnings from continuing operations | $ | (231.5) | | | $ | 160.9 | | | $ | 46.8 | |
| Mandatory preferred stock dividends | (4.0) | | | (16.2) | | | (16.2) | |
| Net (loss) / earnings from continuing operations attributable to common shareholders | (235.5) | | | 144.7 | | | 30.6 | |
| Net loss from discontinued operations, net of tax | — | | | — | | | (140.1) | |
| Net (loss) / earnings attributable to common shareholders | $ | (235.5) | | | $ | 144.7 | | | $ | (109.5) | |
| | | | | |
| Weighted average common shares outstanding - basic | 69.9 | | | 68.2 | | | 68.8 | |
| | | | | |
| Basic net (loss) / earnings per common share from continuing operations | $ | (3.37) | | | $ | 2.12 | | | $ | 0.44 | |
| Basic net loss per common share from discontinued operations | — | | | — | | | (2.03) | |
| Basic net (loss) / earnings per common share | $ | (3.37) | | | $ | 2.12 | | | $ | (1.59) | |
| | | | | |
| Diluted (loss) / earnings per share | | | | | |
| Net (loss) / earnings attributable to common shareholders | $ | (235.5) | | | $ | 144.7 | | | $ | (109.5) | |
| | | | | |
| Weighted average common shares outstanding - basic | 69.9 | | | 68.2 | | | 68.8 | |
| Effect of dilutive restricted stock equivalents | — | | | 0.2 | | | 0.2 | |
| Effect of dilutive performance shares | — | | | 0.2 | | | 0.4 | |
| Effect of stock based deferred compensation plan | — | | | 0.1 | | | 0.1 | |
| Weighted average common shares outstanding - diluted | 69.9 | | | 68.7 | | | 69.5 | |
| | | | | |
| Diluted (loss) / earnings per common share from continuing operations | $ | (3.37) | | | $ | 2.11 | | | $ | 0.44 | |
| Diluted loss per common share from discontinued operations | — | | | — | | | (2.02) | |
| Diluted net (loss) / earnings per common share | $ | (3.37) | | | $ | 2.11 | | | $ | (1.58) | |
For the year ended September 30, 2022, the Company was in a net loss position and all of the 0.8 million of outstanding RSE, 1.7 million of performance shares and 0.1 million deferred compensation awards were excluded from the diluted weighted average shares outstanding calculation as their inclusion would be anti-dilutive.
For the years ended September 30, 2021 and 2020, there were 0.1 million and 0.2 million restricted stock equivalents that were anti-dilutive and not included in the diluted net earnings per share calculations, respectively. Performance based restricted stock equivalents of 1.3 million and 1.1 million were excluded for the years ended September 30, 2021 and 2020, respectively, as the performance targets for those shares had not been achieved as of the end of the current period.
(10) Segments
As of October 1, 2021, the Company changed its reportable operating segments from two geographical segments, previously Americas and International, to two product groupings, Battery & Lights and Auto Care. This change came with the completion of the Battery and Auto Care Acquisition integrations in fiscal 2022. The Company changed its reporting structure to better reflect what the chief operating decision maker is reviewing to make organizational decisions and resource allocations. The Company has recast the information for the fiscal years ended September 30, 2021 and 2020 to align with this presentation.
Segment performance is evaluated based on segment operating profit, exclusive of general corporate expenses (including share-based compensation costs), amortization of intangibles, impairment of goodwill and intangible assets, acquisition and
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
integration activities, including restructuring charges, acquisition earn out, the costs of the flooding of our manufacturing facility in Brazil, the costs of exiting the Russian market, and other items determined to be corporate in nature. Financial items, such as interest income and expense, gain on finance lease termination and loss on extinguishment of debt are managed on a global basis at the corporate level. The exclusion of acquisition and integration costs from segment results reflects management’s view on how it evaluates segment performance. The Company also excludes amortization of intangibles and impairment of goodwill and intangible assets from segments as these are non-cash items related to the original purchase of the intangibles and not utilized to evaluate current segment performance.
Energizer’s operating model includes a combination of standalone and shared business functions between the product segments, varying by country and region of the world. Shared functions include the sales and marketing functions, as well as human resources, IT and finance shared service costs. Energizer applies a fully allocated cost basis, in which shared business functions are allocated between segments. Such allocations are estimates, and do not represent the costs of such services if performed on a standalone basis.
Segment sales and profitability for the fiscal years ended September 30, 2022, 2021 and 2020 are presented below:
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended September 30, |
| Net Sales | | 2022 | | 2021 | | 2020 |
| Batteries & Lights | | $ | 2,427.3 | | | $ | 2,402.8 | | | $ | 2,223.5 | |
| Auto Care | | 622.8 | | | 618.7 | | | 521.3 | |
| Total net sales | | $ | 3,050.1 | | | $ | 3,021.5 | | | $ | 2,744.8 | |
| Segment Profit | | | | | | |
| Batteries & Lights | | 553.6 | | | 553.6 | | | 512.6 | |
| Auto Care | | 46.5 | | | 98.2 | | | 79.4 | |
| Total segment profit | | $ | 600.1 | | | $ | 651.8 | | | $ | 592.0 | |
| General corporate and other expenses (1) | | (101.6) | | | (96.0) | | | (103.8) | |
| Amortization of intangible assets | | (61.1) | | | (61.2) | | | (56.5) | |
| Impairment of goodwill & intangible assets | | (541.9) | | | — | | | — | |
| Acquisition and integration costs (2) | | (16.5) | | | (68.9) | | | (68.0) | |
| Acquisition earn out (3) | | (1.1) | | | (3.4) | | | — | |
| Loss on extinguishment of debt | | — | | | (103.3) | | | (94.9) | |
| Interest expense | | (158.4) | | | (161.8) | | | (195.0) | |
| Project Momentum Restructuring costs (1) | | (0.9) | | | — | | | — | |
| Exit of Russian market (4) | | (14.6) | | | — | | | — | |
| Gain on finance lease termination (5) | | 4.5 | | | — | | | — | |
| Brazil flood damage, net of insurance proceeds (6) | | (9.7) | | | — | | | — | |
| Other items, net (7) | | (4.3) | | | (3.0) | | | (6.1) | |
| Total (loss)/earnings before income taxes | | $ | (305.5) | | | $ | 154.2 | | | $ | 67.7 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
(1) Recorded in SG&A on the Consolidated (Condensed) Statement of Earnings.
(2) Acquisition and integration costs were included in the following lines in the Consolidated Statement of Earnings and Comprehensive Income:
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended September 30, |
| Acquisition and Integration Costs | | 2022 | | 2021 | | 2020 |
| Cost of products sold | | $ | 6.0 | | | $ | 33.7 | | | $ | 32.0 | |
| SG&A | | 9.4 | | | 40.0 | | | 38.8 | |
| Research and development | | 1.1 | | | 1.1 | | | 1.3 | |
| Other items, net | | — | | | (5.9) | | | (4.1) | |
| Total Acquisition and Integration Costs | | $ | 16.5 | | | $ | 68.9 | | | $ | 68.0 | |
(3) This represents the estimated earn out achieved through September 30, 2022 and 2021 under the incentive agreements entered into with the Formulations Acquisition and is recorded in SG&A on the Consolidated Statement of Earnings.
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
(4) These are the costs associated with the Company's exit of the Russian market during fiscal 2022. Exiting the Russian market resulted in Cost of products sold of $1.3 related to the impairment of inventory in Russia and shipping costs to get inventory to other markets, impairment of other assets and severance recorded in SG&A of $5.8 and currency impacts recorded in Other items, net of $7.5 on the Consolidated Statement of Earnings and Comprehensive Income.
(5) This represents the termination of a finance lease in fiscal year 2022 associated with a facility that was exited as a part of the Company's 2019 Restructuring program. The gain was recorded in Other items, net in the Consolidated Statement of Earnings and Comprehensive Income.
(6) These are the costs associated with the May 2022 flooding of our Brazilian manufacturing facility, which were recorded in Cost of products sold on the Consolidated (Condensed) Statement of Earnings, net of expected insurance proceeds. The majority is related to write off of damaged inventory.
(7) Other items, net on the Consolidated Statements of Earnings and Comprehensive Income included costs associated with the exit of the Russian market of $7.5 and a $4.5 gain on the termination of a finance lease in the twelve months ended September 30, 2022 and an acquisition and integration gain of $5.9 and $4.1, respectively, for the twelve months ended September 30, 2021 and 2020, which have been reclassified from Other items, net on the reconciliation above.
Corporate assets shown in the following table include cash, all financial instruments, pension assets, amounts indemnified by Spectrum per the purchase agreements and tax asset balances that are managed outside of operating segments. The asset balances as of September 30, 2021 have been recast to align with our new reportable segments.
| | | | | | | | | | | | | | |
| | September 30, |
| Total Assets | | 2022 | | 2021 |
| Batteries & Lights | | $ | 1,366.0 | | | $ | 1,302.7 | |
| Auto Care | | 453.7 | | | 367.8 | |
| Total segment assets | | $ | 1,819.7 | | | $ | 1,670.5 | |
| Corporate | | 453.5 | | | 411.9 | |
| Goodwill and other intangible assets, net | | 2,298.9 | | | 2,925.1 | |
| Total assets | | $ | 4,572.1 | | | $ | 5,007.5 | |
| | | | | | | | | | | | | | |
| | September 30, |
| Long-Lived Assets | | 2022 | | 2021 |
| United States | | $ | 497.7 | | | $ | 423.4 | |
| Singapore | | 62.1 | | | 66.6 | |
| United Kingdom | | 52.6 | | | 72.4 | |
| Other International | | 70.8 | | | 80.5 | |
| Total long-lived assets excluding goodwill and intangibles | | $ | 683.2 | | | $ | 642.9 | |
Capital expenditures and depreciation and amortization by segment for the years ended September 30 are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended September 30, |
| Capital Expenditures | | 2022 | | 2021 | | 2020 |
| Batteries & Lights | | $ | 65.8 | | | $ | 57.3 | | | $ | 59.3 | |
| Auto Care | | 12.0 | | | 7.6 | | | 6.0 | |
| Total segment capital expenditures | | $ | 77.8 | | | $ | 64.9 | | | $ | 65.3 | |
| Depreciation and Amortization | | | | | | |
| Batteries & Lights | | $ | 50.6 | | | $ | 49.0 | | | $ | 46.3 | |
| Auto Care | | 9.9 | | | 8.3 | | | 9.1 | |
| Total segment depreciation and amortization | | 60.5 | | | 57.3 | | | 55.4 | |
| Amortization of intangible assets | | 61.1 | | | 61.2 | | | 56.5 | |
| Total depreciation and amortization | | $ | 121.6 | | | $ | 118.5 | | | $ | 111.9 | |
Geographic segment information for the years ended September 30 are as follows:
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended September 30, |
| Net Sales to Customers | | 2022 | | 2021 | | 2020 |
| United States | | $ | 1,799.5 | | | $ | 1,788.3 | | | $ | 1,641.9 | |
| International | | 1,250.6 | | | 1,233.2 | | | 1,102.9 | |
| Total net sales | | $ | 3,050.1 | | | $ | 3,021.5 | | | $ | 2,744.8 | |
(11) Leases
The Company determines whether an arrangement contains a lease at the inception of the contract by determining if the contract conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. Energizer's portfolio of leases contains certain real estate, equipment, vehicles and office equipment leases. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Additionally, the Company's leases do not contain material residual value guarantees or material restrictive covenants.
Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The Company does not account for lease components separately from non-lease components. The discount rate used to calculate present value for both operating and financing leases is Energizer's incremental borrowing rate based on information available at the commencement date, or if available, the rate implicit in the lease. The incremental borrowing rate used is determined based on fully secured borrowings at the time of lease commencement. Many of these agreements contain options to renew or terminate the lease. For calculating lease liabilities, the Company includes these options within the lease term when it is reasonably certain that the Company will execute such options. Some of the leases include variable payments, which primarily are tied to asset usage or sales rather than an index or rate. As such, these variable payments are not included in the calculation of the Company's lease assets and liabilities.
As of September 30, 2022 and 2021 the amounts for leases included on our Consolidated Balance Sheet include:
| | | | | | | | | | | |
| Balance Sheet Location | September 30, 2022 | | September 30, 2021 |
| Operating Leases: | | | |
| Operating lease asset | $ | 100.1 | | | $ | 112.3 | |
| | | |
| Operating lease liabilities - current | 15.8 | | | 15.5 | |
| Operating lease liabilities | 88.2 | | | 102.3 | |
| Total Operating Lease Liabilities | $ | 104.0 | | | $ | 117.8 | |
| | | |
| Weighted-average remaining lease term (in years) | 15.2 | | 16.3 |
| Weighted-average discount rate | 4.0 | % | | 4.1 | % |
| | | |
| Finance Leases: | | | |
| Property, plant and equipment, net | $ | 32.6 | | | $ | 37.2 | |
| | | |
| Current portion of finance leases | 0.4 | | | 2.3 | |
| Long-term debt | 31.9 | | | 42.0 | |
| Total Finance Lease Liabilities | $ | 32.3 | | | $ | 44.3 | |
| | | |
| Weighted Average remaining lease term (in years) | 23.5 | | 19.8 |
| Weighted-average discount rate | 6.7 | % | | 6.7 | % |
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
In April 2022, the Company entered into a termination agreement with the landlord of our finance lease in Dixon, IL. The Company terminated the lease agreement, which went into 2028, reducing our finance lease obligations by $9.8. The termination agreement required the Company to pay a termination fee of $4.0, as well as decommissioning costs and brokerage fees. Since the Company has already vacated the facility as a part of the 2019 restructuring program, most assets associated with the location have already been fully depreciated. The termination of this lease resulted in a gain of $4.5 recognized in Other items, net during fiscal 2022.
The following table presents the components of lease expense: | | | | | | | | | | | | | | | | | |
| For the Years Ended September 30, |
| 2022 | | 2021 | | 2020 |
| Operating lease costs | $ | 19.7 | | | $ | 20.3 | | | $ | 20.4 | |
| Finance lease costs: | | | | | |
| Amortization of assets | 2.5 | | | 3.2 | | | 3.2 | |
| Interest on lease liabilities | 2.5 | | | 2.9 | | | 3.0 | |
| Variable lease costs | 1.3 | | | 3.6 | | | 3.9 | |
| Total lease costs | $ | 26.0 | | | $ | 30.0 | | | $ | 30.5 | |
Supplemental cash and non-cash information related to leases:
| | | | | | | | | | | | | | | | | |
| For the Years Ended September 30, |
| 2022 | | 2021 | | 2020 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
| Operating cash flows from operating leases | $ | 20.4 | | | $ | 18.9 | | | $ | 19.3 | |
| Operating cash flows from finance leases | 2.5 | | | 2.9 | | | 2.9 | |
| Financing cash flows from finance leases (1) | 5.0 | | | 1.6 | | | 1.4 | |
| Non-cash increase in lease assets and lease liabilities: | | | | | |
| Operating leases (2) (3) | $ | 6.4 | | | $ | 5.3 | | | $ | 88.4 | |
| | | | | |
(1) Financing cash flows from finance leases in fiscal year 2022 includes the $4.0 termination fee for the Dixon, IL finance lease termination discussed above.
(2) The fiscal 2022 and 2021 increase in operating lease assets and liabilities includes normal lease renewals and immaterial lease modifications occurring through the normal course of business. Fiscal year 2020 activity includes a material embedded lease agreement which resulted in operating lease asset and lease liabilities of approximately $34, the renewal of the North America headquarters lease, which resulted in a material lease modification and additional operating lease assets and lease liabilities of approximately $17, and the lease commencement for the Company's new battery distribution and packaging center in North America, which resulted in approximately $36 of additional operating lease related assets and lease liabilities.
(3) The fiscal 2020 non-cash increase in operating lease assets and liabilities does not include the lease assets and lease liabilities recorded due to the ASC 842 implementation on October 1, 2019.
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
Minimum lease payments under operating and finance leases with non-cancellable terms in excess of one year as of September 30, 2022 are as follows:
| | | | | | | | | | | |
| Operating Leases | | Finance Leases |
| 2023 | $ | 19.4 | | | $ | 2.5 | |
| 2024 | 17.8 | | | 2.4 | |
| 2025 | 16.3 | | | 2.5 | |
| 2026 | 11.4 | | | 2.5 | |
| 2027 | 7.9 | | | 2.6 | |
| Thereafter | 73.4 | | | 56.1 | |
| Total lease payments | 146.2 | | | 68.6 | |
| | | |
| Less: Imputed interest | (42.2) | | | (36.3) | |
| Present value of lease liabilities | $ | 104.0 | | | $ | 32.3 | |
(12) Goodwill and intangible assets
The Company's goodwill balance as of October 1, 2021 has been recast to align with our new reportable segments. The following table sets forth goodwill by segment and represents the change in the carrying amount of goodwill at September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Batteries & Lights | | Auto Care | | Total | |
| Balance at October 1, 2021 | | $ | 900.3 | | | $ | 153.5 | | | $ | 1,053.8 | | |
| Formulations acquisition | | — | | | (1.0) | | | (1.0) | | |
| Non-cash impairment | | — | | | (17.4) | | | (17.4) | | |
| Cumulative translation adjustment | | (31.4) | | | (0.9) | | | (32.3) | | |
| Balance at September 30, 2022 | | $ | 868.9 | | | $ | 134.2 | | | $ | 1,003.1 | | |
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
Goodwill Annual Impairment Analysis
Goodwill and intangible assets deemed to have an indefinite life are not amortized, but are reviewed annually for impairment of value or when indicators of a potential impairment are present. As part of our business planning cycle, we performed our annual goodwill impairment testing for our reporting units in the fourth quarter of fiscal 2022. During our annual impairment assessment we identified a non-cash impairment within the Auto Care International reporting unit of $17.4. This non-cash impairment was primarily driven by significant sustained currency headwinds in the fourth quarter of fiscal 2022, which are expected to continue into fiscal 2023 and are included within the cash flow models, declines in the Auto Care category projections late in the fourth quarter of fiscal 2022, and an increased discount rate. There is no remaining goodwill allocated to this reporting unit after the non-cash impairment. This fair value measurement fell within Level 3 of the fair value hierarchy, see Note Note 17, Financial Instruments and Risk Management.
The Battery & Lights reporting units estimated fair value exceeded their carrying values by more than 100%.The estimated fair value of the Auto Care North America reporting unit, which has a total of $134.2 of goodwill, exceeded its carrying value by 12%. As part of the annual goodwill impairment analysis, the Company estimated the fair value of each reporting unit under the income approach utilizing a discounted cash flow model which incorporates significant estimates and assumptions, including future cash flows driven by revenue and gross margin projections and discount rates reflecting the risk inherent in future cash flows. The Company uses the three-year strategic plan, the annual budget plan for fiscal 2023, and long-term category projections, to determine forecasted cash flows and operating data for the discounted cash flow model. Specifically, revenue growth assumptions are based on historical trends and management’s expectations for future growth by category. Gross margin rate assumptions are based on historical trends and management's cost cutting strategies. The discount rates are based on a weighted-average cost of capital utilizing industry market data of similar companies.
Changes in the assumptions used to estimate the fair value of the Company's goodwill reporting units could result in impairment charges in future periods, which could be material. Additionally, certain factors have the potential to create variances in the estimated fair values of our indefinite-lived intangible assets, which also could result in material impairment charges. These factors include (i) failure to achieve forecasted revenue growth rates, (ii) failure to achieve cost cutting and margin improvement initiatives the Company is implementing, or (iii) increases in the discount rate.
For the years ended September 30, 2021 and 2020, the Company completed the annual assessments and no impairments were identified.
Indefinite-lived Intangible Asset Annual Impairment Analysis
We completed impairment testing on indefinite-lived intangible assets other than goodwill, which are trademarks/brand names used in our various battery, auto care and lighting product categories. During our annual impairment assessment we identified non-cash impairments of the Armor All, STP, and Rayovac trade names of $370.4, $26.3, and $127.8, respectively. For Armor All and STP, the non-cash impairments were primarily due to declines in their respective Auto Care category projections late in the fourth quarter of fiscal 2022, significant increases in input costs, and a higher discount rate. The Rayovac non-cash impairment was primarily caused by significant sustained currency headwinds in the fourth quarter of fiscal 2022, which are expected to continue into fiscal 2023 and are included within the cash flow models, a decrease in the branded sales forecast, increases in input costs, and a higher discount rate.
The quantitative estimated fair values were determined using the multi-period excess earnings method, which requires significant assumptions for each brand, including estimates related to revenue growth rates, gross margin rates, operating expenses (SG&A, R&D, and A&P) and discount rates. The projections for our Armor All, STP and Rayovac fair value models are generated using the company’s three-year strategic plan, the Company's annual budget plan for fiscal 2023, and long-term category projections, to determine forecasted cash flows and operating data. Specifically, revenue growth assumptions are based on historical trends and management’s expectations for future growth by brand and category. Gross margin rate assumptions are based on historical trends and management's cost cutting strategies. Operating expenses are based on historical trends and management's annual budget plan for fiscal 2023, as well as long-term operating and advertising strategies. The discount rates used in the trade name fair value estimates ranged between 9.5% and 10.0%, and are based on a weighted-average cost of capital utilizing industry market data of similar companies. The new carrying values for Armor All, STP, and Rayovac trade names are $228.5, $76.4, and $422.2, respectively. These fair value measurement fell within Level 3 of the fair value hierarchy, see Note 17, Financial Instruments and Risk Management.
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
Changes in the assumptions used to estimate the fair value of the Company's indefinite-lived intangible assets could result in impairment charges in future periods, which could be material. Additionally, certain factors have the potential to create variances in the estimated fair values of our indefinite-lived intangible assets, which also could result in material impairment charges. These factors include (i) failure to achieve forecasted revenue growth rates, (ii) failure to achieve cost cutting and margin improvement initiatives the Company is implementing, (iii) failure to meet forecasted operating expenses, or (iv) increases in the discount rate.
STP is within the fuel and oil additives category and due to the current expectation for an increased percentage of electric vehicles in the car parc over the long term, the Company has converted the STP trade name into a definite-life intangible asset with a 25 year useful life. This conversion will result in additional pre-tax amortization expense of approximately $3.0 in fiscal 2023.
Finally, in the fourth quarter of fiscal 2022, a qualitative analysis was performed over the Energizer, Eveready and Varta trade names and no impairments were identified. These indefinite lived intangible assets have a combined carrying value of $111.8.
For the years ended September 30, 2021 and 2020, the Company completed the annual assessments and no impairments were identified.
Total intangible assets at September 30, 2022 are as follows:
| | | | | | | | | | | | | | | | | |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Trademarks and trade names | $ | 141.8 | | | $ | (21.4) | | | $ | 120.4 | |
| Customer Relationships | 393.5 | | | (112.6) | | | 280.9 | |
| Patents | 33.4 | | | (15.7) | | | 17.7 | |
| Proprietary technology | 172.5 | | | (81.5) | | | 91.0 | |
| Proprietary formulas | 29.2 | | | (6.3) | | | 22.9 | |
| Vendor relationships | 6.9 | | | (6.5) | | | 0.4 | |
| Total amortizable intangible assets | $ | 777.3 | | | $ | (244.0) | | | $ | 533.3 | |
| Trademarks and trade names - indefinite lived | 762.5 | | | — | | | 762.5 | |
| Total Other intangible assets, net | $ | 1,539.8 | | | $ | (244.0) | | | $ | 1,295.8 | |
During the fiscal year ended at September 30, 2022, the Company purchased auto care appearance trade names and formulas in Latin America through an asset acquisition for $14.7. Approximately $7 was assigned as the value to trade name and formula intangibles acquired, respectively. The weighed average useful life for both acquired intangibles is 10 years.
Total intangible assets at September 30, 2021 are as follows:
| | | | | | | | | | | | | | | | | |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Trademarks and trade names | $ | 59.5 | | | $ | (17.8) | | | $ | 41.7 | |
| Customer Relationships | 395.0 | | | (87.1) | | | 307.9 | |
| Patents | 34.5 | | | (13.5) | | | 21.0 | |
| Proprietary technology | 172.5 | | | (59.6) | | | 112.9 | |
| Proprietary formulas | 21.9 | | | (3.0) | | | 18.9 | |
| Non-compete | 0.5 | | | (0.5) | | | — | |
| Vendor relationships | 8.0 | | | (4.8) | | | $ | 3.2 | |
| Total amortizable intangible assets | $ | 691.9 | | | $ | (186.3) | | | $ | 505.6 | |
| Trademarks and trade names - indefinite lived | 1,365.7 | | | — | | | 1,365.7 | |
| Total Other intangible assets, net | $ | 2,057.6 | | | $ | (186.3) | | | $ | 1,871.3 | |
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
Amortizable intangible assets, with a weighted average remaining life of 11.4 years, are amortized on a straight-line basis over expected lives of 3 to 25 years. Amortization expense for intangible assets totaled $61.1, $61.2, and $56.5 for the twelve months ended September 30, 2022, 2021 and 2020, respectively.
Estimated amortization expense for amortizable intangible assets at September 30, 2022 are as follows:
| | | | | |
| Estimated amortization expense |
| 2023 | $ | 59.7 | |
| 2024 | 58.1 | |
| 2025 | 58.0 | |
| 2026 | 53.2 | |
| 2027 | 51.6 | |
| Thereafter | 252.7 | |
| Estimated future amortization expense | $ | 533.3 | |
(13) Debt
The detail of long-term debt was as follows:
| | | | | | | | | | | |
| September 30, |
| 2022 | | 2021 |
| Senior Secured Term Loan Facility due 2027 | $ | 1,182.0 | | | $ | 1,194.0 | |
6.500% Senior Notes due 2027 | 300.0 | | | — | |
4.750% Senior Notes due 2028 | 600.0 | | | 600.0 | |
4.375% Senior Notes due 2029 | 800.0 | | | 800.0 | |
3.50% Senior Notes due 2029 (Euro Notes of €650.0)(1) | 637.1 | | | 752.7 | |
| Finance lease obligations | 32.3 | | | 44.3 | |
| Total long-term debt, including current maturities | $ | 3,551.4 | | | $ | 3,391.0 | |
| Less current portion | (12.4) | | | (14.3) | |
| Less unamortized debt premium and debt issuance fees | (39.6) | | | (43.3) | |
| Total long-term debt | $ | 3,499.4 | | | $ | 3,333.4 | |
(1) Changes in the USD balance of the Euro denominated 3.50% Senior Notes due in 2029 is due to movements in the currency rate year-over-year.
Credit Agreement - On December 22, 2020, the Company entered into a Credit Agreement (2020 Credit Agreement) which provided for a 5-year $400 revolving credit facility (2020 Revolving Facility) and a $550.0 Term Loan due December 2027. The $550.0 of proceeds were used to pay down the remaining balances on the Term Loan A facility due in 2022, Term Loan B facility due in 2025 and the amounts outstanding on the existing Revolving Credit Facility from 2018 (2018 Revolving Facility). The pay down of the Term Loan A and B facilities were deemed to be extinguishments and the Company wrote-off $5.7 of deferred financing fees during the first fiscal quarter of 2021.
On January 7, 2021, the Company amended the 2020 Credit Agreement and borrowed an incremental $650.0 on the Term Loan. The Company utilized the proceeds to fund the redemption of the Company’s outstanding $600.0 7.750% Senior Notes due 2027 at a redemption price equal to 110.965% of the aggregate principal amount. As a result, the Company paid a redemption premium of $66.6 during the second fiscal quarter of 2021. The Company also wrote off deferred financings fees associated with this transaction resulting in a total loss on extinguishment recognized in the second fiscal quarter of 2021 of $70.0.
On December 31, 2021, the Company amended the Credit Agreement to increase the 2020 Revolving Facility to $500.0.
The 2020 Revolving Facility replaced the previously outstanding 2018 Revolving Facility. Borrowings under the 2020 Revolving Facility bear interest at a rate per annum equal to, at the option of the Company, LIBOR or the Base Rate (as defined) plus the applicable margin. Borrowings under the Term Loan require quarterly principal payments at a rate of 0.25%
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
of the original principal balance, or $3.0. The Term Loan bears interest at a rate per annum equal to, at the option of the Company, LIBOR or Base Rate (as defined) plus the applicable margin. The 2020 Credit Agreement also contains customary affirmative and restrictive covenants.
In December 2019, the Company amended the 2018 Revolving Facility and refinanced $365.0 of term loan debt, which resulted in a Loss on extinguishment of $4.2 during fiscal 2020.
As of September 30, 2022, the Company had no outstanding borrowings under the 2020 Revolving Facility and $8.0 of outstanding letters of credit. Taking into account outstanding letters of credit, $492.0 remained available as of September 30, 2022. As of September 30, 2022 and September 30, 2021, our weighted average interest rate on short-term borrowings was 4.7% and 2.5%, respectively.
Senior Notes - Fiscal 2022 Activity - On March 8, 2022 the Company completed a bond offering for $300.0 Senior Notes due in 2027 at 6.500% (2027 Notes). The proceeds from the offering were used to repay a portion of the indebtedness outstanding under the 2020 Revolving Facility and to pay fees and expenses related to the offering. Interest is payable semi-annually in June and December.
Senior Notes - Fiscal 2021 Activity - On September 30, 2020, the Company completed a bond offering for $800.0 Senior Notes due in 2029 at 4.375% (2029 Notes). On October 16, 2020, the Company used the proceeds from the sale of the 2029 Notes to fund the redemption of all the $750.0 Senior Notes due in 2026 at 6.375% (2026 Notes). The Company paid a redemption premium of $55.9 in the first fiscal quarter of 2021 related to this redemption, and the transaction resulted in a Loss on extinguishment of debt of $68.6, which was recorded on the date of the transaction in fiscal 2020.
On June 23, 2021, the Company completed a bond offering for €650 Senior Notes due in 2029 at 3.50% (2029 EUR Notes). The proceeds from the offering, combined with cash on hand, were used to satisfy its outstanding legal obligation on the €650 Senior Notes due in 2026 at 4.625% (2026 EUR Notes). The Company used approximately $45.9 of cash on hand to fund the redemption costs, accrued interest and fees associated with the redemption of the 2026 EUR Notes and issuance of the 2029 EUR Notes. The Company paid a redemption premium of $18.6 during the third quarter of fiscal 2021. The Company also wrote off deferred financing and interest and fees associated with the 2026 EUR Notes resulting in a total loss on extinguishment recognized in the third quarter of fiscal 2021 of $27.6.
Senior Notes - Fiscal 2020 Activity - On July 1, 2020, the Company completed a bond offering for $600.0 Senior Notes due in 2028 at 4.750% (2028 Notes). The Company utilized proceeds to refinance outstanding 5.50% Senior Notes due 2025 (2025 Notes). The Company paid a total call premium for tendered and called notes of $18.3. The transaction resulted in a Loss on extinguishment of debt of $22.1.
The 2027 Notes, 2028 Notes, 2029 Notes and 2029 EUR Notes were sold to qualified institutional buyers and will not be registered under federal or applicable state securities laws. Interest is payable semi annually on the 2028 Notes and 2029 EUR Notes in June and December and on the 2029 Notes in March and September. The 2027 Notes, 2028 Notes, 2029 Notes and 2029 EUR Notes are jointly and severally guaranteed on an unsecured basis by certain of the Company's domestic restricted subsidiaries that guarantee indebtedness of the Company under its 2020 Credit Agreement.
Debt issuance fees paid related to the term loan refinancing and Senior Note offerings were $7.6, $29.0, and $26.5 during the twelve months ended September 30, 2022, 2021, and 2020, respectively. The Company wrote-off a total of $18.1 and $20.7 of debt issuance fees as a result of the extinguishment activity during fiscal year 2021 and 2020, respectively.
Interest Rate Swaps - In March 2017, the Company entered into an interest rate swap agreement with one major financial institution that fixed the variable benchmark component (LIBOR) on $200.0 of Energizer's variable rate debt through June 2022 at an interest rate of 2.03%. In February 2018, the Company entered into a forward starting interest rate swap with an effective date of October 1, 2018, with one major financial institution that fixed the variable benchmark component (LIBOR) on additional variable rate debt at an interest rate of 2.47%. At the effective date, the swap had a notional value of $400.0. Beginning April 1, 2019, the notional amount decreases $50.0 each quarter, and continued to decrease until its termination date of December 31, 2020.
In conjunction with the term loan refinance in December 2020, the Company terminated both of these interest rate swaps and entered into a new interest rate swap with the effective date of December 22, 2020, that fixed the variable benchmark component (LIBOR) at an interest rate of 0.95% on variable rate debt of $550.0. On January 22, 2021 the notional value
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
increased to $700.0 and will stay at that value through December 22, 2024. The notional value will decrease by $100.0 on December 2024 and by $100.0 each year thereafter until its termination date on December 22, 2027.
Notes Payable - The notes payable balance was $6.4 at September 30, 2022 and $105.0 at September 30, 2021. The 2022 balance is comprised other borrowings, including those from foreign affiliates. The 2021 balance was comprised of outstanding borrowings on the 2020 Revolving Facility.
Debt Covenants - The agreements governing the Company's debt contain certain customary representations and warranties, affirmative, negative and financial covenants, and provisions relating to events of default. If the Company fails to comply with these covenants or with other requirements of these agreements, the lenders may have the right to accelerate the maturity of the debt. Acceleration under one of these facilities would trigger cross defaults to other borrowings. As of September 30, 2022, the Company was in compliance with the provisions and covenants associated with its debt agreements.
The counterparties to long-term committed borrowings consist of a number of major financial institutions. The Company consistently monitors positions with, and credit ratings of, counterparties both internally and by using outside ratings agencies.
Finance Lease Obligations - In fiscal year 2022, the Company entered into a termination agreement with the landlord of our finance lease in Dixon, IL. The Company terminated the lease agreement, which went into 2028, reducing our finance lease obligations by $9.8. The termination agreement required the Company to pay a termination fee of $4.0, as well as decommissioning costs and brokerage fees. Since the Company has already vacated the facility as a part of the 2019 restructuring program, most assets associated with the location have already been fully depreciated. The termination of this lease resulted in a gain of $4.5 recognized in Other items, net during fiscal 2022.
Debt Maturities - Aggregate maturities of long-term debt as of September 30, 2022 were as follows:
| | | | | | | |
| Long-term debt | | |
| 2023 | $ | 12.0 | | | |
| 2024 | 12.0 | | | |
| 2025 | 12.0 | | | |
| 2026 | 12.0 | | | |
| 2027 | 12.0 | | | |
| Thereafter | 3,459.1 | | | |
| Total long-term debt payments due | $ | 3,519.1 | | | |
| | | |
| | | |
| | | |
(14) Pension Plans
The Company has several defined benefit pension plans covering many of its employees in the U.S. and certain employees in other countries. The plans provide retirement benefits based on various factors including years of service and in certain circumstances, earnings. Most plans are now frozen to new entrants and for additional service.
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 in the following tables.
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
The following tables present the benefit obligation, plan assets and funded status of the plans:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, |
| | | U.S. | | International |
| | | 2022 | | 2021 | | 2022 | | 2021 |
| Change in Projected Benefit Obligation | | | | | | | | |
| Benefit obligation at beginning of year | | $ | 507.4 | | | $ | 541.1 | | | $ | 143.1 | | | $ | 148.4 | |
| Service cost | | — | | | — | | | 0.6 | | | 0.7 | |
| Interest cost | | 12.7 | | | 13.0 | | | 1.8 | | | 1.6 | |
| | | | | | | | |
| Actuarial gain | | (99.1) | | | (8.2) | | | (40.2) | | | (4.5) | |
| Benefits paid | | (37.6) | | | (38.0) | | | (5.7) | | | (5.5) | |
| | | | | | | | |
| | | | | | | | |
| Plan settlements | | — | | | (0.5) | | | (0.6) | | | — | |
| | | | | | | | |
| | | | | | | | |
| Foreign currency exchange rate changes | | — | | | — | | | (14.2) | | | 2.4 | |
| Projected Benefit Obligation at end of year | | $ | 383.4 | | | $ | 507.4 | | | $ | 84.8 | | | $ | 143.1 | |
| Change in Plan Assets | | | | | | | | |
| Estimated fair value of plan assets at beginning of year | | $ | 490.1 | | | $ | 491.7 | | | $ | 133.1 | | | $ | 124.5 | |
| Actual return on plan assets | | (98.0) | | | 34.0 | | | (35.6) | | | 8.5 | |
| Company contributions | | 2.4 | | | 2.9 | | | 0.6 | | | 2.5 | |
| | | | | | | | |
| Plan settlements | | — | | | (0.5) | | | (0.6) | | | — | |
| Benefits paid | | (37.6) | | | (38.0) | | | (5.7) | | | (5.5) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Foreign currency exchange rate changes | | — | | | — | | | (13.5) | | | 3.1 | |
| Estimated fair value of plan assets at end of year | | $ | 356.9 | | | $ | 490.1 | | | $ | 78.3 | | | $ | 133.1 | |
| Funded status at end of year | | $ | (26.5) | | | $ | (17.3) | | | $ | (6.5) | | | $ | (10.0) | |
The following table presents the amounts recognized in the Consolidated Balance Sheets and Consolidated Statements of Shareholders’ Equity:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, |
| | | U.S. | | International |
| Amounts Recognized in the Consolidated Balance Sheets | | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | |
| Noncurrent assets | | $ | — | | | $ | 12.8 | | | $ | 8.7 | | | $ | 17.2 | |
| Current liabilities | | (2.4) | | | (2.7) | | | (0.6) | | | (0.6) | |
| Noncurrent liabilities | | (24.1) | | | (27.4) | | | (14.6) | | | (26.6) | |
| Net amount recognized | | $ | (26.5) | | | $ | (17.3) | | | $ | (6.5) | | | $ | (10.0) | |
| Amounts Recognized in Accumulated Other Comprehensive Loss | | | | | | | | |
| Net loss, pre tax | | $ | (157.0) | | | $ | (141.6) | | | $ | (26.0) | | | $ | (32.5) | |
| | | | | | | | |
Pre-tax changes recognized in other comprehensive loss for the year ended September 30, 2022 are as follows:
| | | | | | | | | | | | | | |
| Changes in plan assets and benefit obligations recognized in other comprehensive (loss)/income | | U.S. | | International |
| | | | |
| Net (loss)/gain arising during the year | | $ | (21.8) | | | $ | 1.4 | |
| Effect of exchange rates | | — | | | 4.1 | |
| Amounts recognized as a component of net periodic benefit cost | | | | |
| Amortization or settlement recognition of net gain/(loss) | | 6.4 | | | 1.0 | |
| Total (loss)/gain recognized in other comprehensive loss | | $ | (15.4) | | | $ | 6.5 | |
Energizer expects to contribute $2.4 to its U.S. plans and $0.6 to its International plans in fiscal 2023.
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
Energizer’s expected future benefit payments for the plans are as follows:
| | | | | | | | | | | | | | |
| | | | |
| For The Years Ending September 30, | | U.S. | | International |
| 2023 | | $ | 36.5 | | | $ | 4.7 | |
| 2024 | | 37.4 | | | 4.7 | |
| 2025 | | 37.7 | | | 4.7 | |
| 2026 | | 35.5 | | | 4.7 | |
| 2027 | | 35.0 | | | 4.8 | |
| 2028 to 2032 | | 148.9 | | | 24.7 | |
The accumulated benefit obligation for the U.S. plans was $383.4 and $507.4 and for the foreign plans was $83.9 and $141.0 at September 30, 2022 and 2021, respectively. The following table shows the plans with an accumulated benefit obligation in excess of plan assets at the dates indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, |
| | U.S. | | International |
| | | 2022 | | 2021 | | 2022 | | 2021 |
| Projected benefit obligation | | $ | 383.4 | | | $ | 30.1 | | | $ | 46.1 | | | $ | 68.9 | |
| Accumulated benefit obligation | | 383.4 | | | 30.1 | | | 45.2 | | | 66.7 | |
| Estimated fair value of plan assets | | 356.9 | | | — | | | 30.9 | | | 41.6 | |
Pension plan assets in the U.S. plan represent approximately 82% of assets in all of the Company's defined benefit pension plans. Investment policy for the U.S. plan includes a mandate to diversify assets and invest in a variety of assets classes to achieve that goal. The U.S. plan's assets are currently invested in several funds representing most standard equity and debt security classes. The broad target allocations are approximately: (a) equities, including U.S. and foreign: 30%, and (b) debt securities, including U.S. bonds: 70%. Actual allocations at September 30, 2022 approximated these targets. The U.S. plan held no shares of Company common stock at September 30, 2022. Investment objectives are similar for non-U.S. pension arrangements, subject to local requirements.
The following table presents plan pension expense:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended September 30, |
| | | U.S. | | International |
| | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| Service cost | | $ | — | | | $ | — | | | $ | — | | | $ | 0.6 | | | $ | 0.7 | | | $ | 0.8 | |
| Interest cost | | 12.7 | | | 13.0 | | | 15.9 | | | 1.8 | | | 1.6 | | | 1.5 | |
| Expected return on plan assets | | (22.8) | | | (22.4) | | | (24.3) | | | (3.2) | | | (3.2) | | | (3.6) | |
| Recognized net actuarial loss | | 6.4 | | | 7.4 | | | 6.5 | | | 0.8 | | | 1.5 | | | 1.5 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Settlement loss recognized on other pension plans | | — | | | 0.2 | | | — | | | 0.2 | | | — | | | 0.5 | |
| Net periodic (benefit)/expense | | $ | (3.7) | | | $ | (1.8) | | | $ | (1.9) | | | $ | 0.2 | | | $ | 0.6 | | | $ | 0.7 | |
The service cost component of the net periodic (benefit)/expense above is recorded in Selling, general and administrative expense (SG&A) on the Consolidated Statement of Earnings and Comprehensive Income, while the remaining components are recorded to Other items, net.
Amounts expected to be amortized from accumulated other comprehensive loss into net period benefit cost during the year ending September 30, 2023 are net actuarial losses of $2.2 for the U.S. Plan and $0.7 for the International plans.
The following table presents assumptions, which reflect weighted averages for the component plans, used in determining the above information:
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, |
| | | U.S. | | International |
| | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| Plan obligations: | | | | | | | | | | | | |
| Discount rate | | 5.6 | % | | 2.6 | % | | 2.5 | % | | 4.0 | % | | 1.3 | % | | 1.0 | % |
| Compensation increase rate | | — | | | — | | | — | | | 2.4 | % | | 2.2 | % | | 2.1 | % |
| Net periodic benefit cost: | | | | | | | | | | | | |
| Discount rate | | 2.6 | % | | 2.5 | % | | 3.1 | % | | 1.3 | % | | 1.0 | % | | 1.0 | % |
| Expected long-term rate of return on plan assets | | 5.2 | % | | 5.1 | % | | 5.6 | % | | 2.6 | % | | 2.6 | % | | 2.8 | % |
| Compensation increase rate | | — | | | — | | | — | | | 2.2 | % | | 2.1 | % | | 2.1 | % |
The following tables set forth the estimated fair value of Energizer’s plan assets as of September 30, 2022 and 2021 segregated by level within the estimated fair value hierarchy. Refer to Note 17, Financial Instruments and Risk Management, for further discussion on the estimated fair value hierarchy and estimated fair value principles.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ASSETS AT ESTIMATED FAIR VALUE | | At September 30, 2022 |
| | U.S. Pension
Plan Assets | | International Pension
Plan Assets |
| | Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total |
| EQUITY | | | | | | | | | | | | |
| U.S. Equity | | $ | 32.5 | | | $ | — | | | $ | 32.5 | | | $ | — | | | $ | — | | | $ | — | |
| International Equity | | 1.2 | | | — | | | 1.2 | | | — | | | 7.4 | | | 7.4 | |
| DEBT | | | | | | | | | | | | |
| U.S. Government | | — | | | 241.4 | | | 241.4 | | | — | | | — | | | — | |
| Other Government | | — | | | — | | | — | | | — | | | 16.0 | | | 16.0 | |
| | | | | | | | | | | | |
| CASH & CASH EQUIVALENTS | | — | | | 15.0 | | | 15.0 | | | — | | | 3.5 | | | 3.5 | |
| OTHER | | — | | | — | | | — | | | — | | | 7.0 | | | 7.0 | |
| | | | | | | | | | | | |
Assets Measured at Net Asset Value | | | | | | | | | | | | |
U.S. Equity | | | | | | 34.0 | | | | | | | — | |
International Equity | | | | | | 32.8 | | | | | | | 10.2 | |
| | | | | | | | | | | | |
Corporate | | | | | | — | | | | | | | 20.0 | |
| Other | | | | | | — | | | | | | | 14.2 |
TOTAL | | $ | 33.7 | | | $ | 256.4 | | | $ | 356.9 | | | $ | — | | | $ | 33.9 | | | $ | 78.3 | |
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At September 30, 2021 |
| | U.S. Pension
Plan Assets | | International Pension
Plan Assets |
| | Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total |
| EQUITY | | | | | | | | | | | | |
| U.S. Equity | | $ | 60.0 | | | $ | — | | | $ | 60.0 | | | $ | — | | | $ | — | | | $ | — | |
| International Equity | | 3.4 | | | — | | | 3.4 | | | — | | | 9.9 | | | 9.9 | |
| DEBT | | | | | | | | | | | | |
| U.S. Government | | — | | | 292.8 | | | 292.8 | | | — | | | — | | | — | |
| Other Government | | — | | | — | | | — | | | — | | | 22.5 | | | 22.5 | |
| | | | | | | | | | | | |
| CASH & CASH EQUIVALENTS | | — | | | 3.5 | | | 3.5 | | | — | | | 2.6 | | | 2.6 | |
| OTHER | | — | | | — | | | — | | | — | | | 7.0 | | | 7.0 | |
| | | | | | | | | | | | |
Assets measured at Net Asset Value | | | | | | | | | | | | |
U.S. Equity | | | | | | 76.8 | | | | | | | — | |
International Equity | | | | | | 53.6 | | | | | | | 28.3 | |
| | | | | | | | | | | | |
| Corporate | | | | | | — | | | | | | | 41.3 | |
| Other | | | | | | — | | | | | | | 21.5 | |
| | | | | | | | | | | | |
TOTAL | | $ | 63.4 | | | $ | 296.3 | | | $ | 490.1 | | | $ | — | | | $ | 42.0 | | | $ | 133.1 | |
There were no Level 3 pension assets at September 30, 2022 and 2021.
The investment objective for plan assets is to satisfy the current and future pension benefit obligations. The investment philosophy is to achieve this objective through diversification of the retirement plan assets. The goal is to earn a suitable return with an appropriate level of risk while maintaining adequate liquidity to distribute benefit payments. The diversified asset allocation includes equity positions, as well as fixed income investments. The increased volatility associated with equities is offset with higher expected returns, while the long duration fixed income investments help dampen the volatility of the overall portfolio. Risk exposure is controlled by re-balancing the retirement plan assets back to target allocations, as needed. Investment firms managing retirement plan assets carry out investment policy within their stated guidelines. Investment performance is monitored against benchmark indices, which reflect the policy and target allocation of the retirement plan assets.
(15) Defined Contribution Plan
The Company sponsors defined contribution plans globally, which extends participation eligibility to the vast majority of employees. In the U.S., the Company matches 100% of participant’s before tax or Roth contributions up to 6% of eligible compensation. Amounts charged to expense for the U.S. plan during fiscal 2022, 2021 and 2020 were $10.4, $10.3, and $9.6, respectively, and are reflected in SG&A and Cost of products sold in the Consolidated Statements of Earnings and Comprehensive Income.
(16) Shareholders' Equity
The Company's articles of incorporation authorized 300 million shares of common stock and 10 million shares of preferred stock, each with a par value of $0.01 per share. As of September 30, 2022 and 2021, the Company had 77,074,245 and 72,386,840, respectively, of common stock issued. During fiscal 2022, all outstanding shares of the Company's 7.50% Series A Mandatory Convertible Preferred Stock (MCPS) automatically converted into shares of the Company's common stock, par value $0.01 per share, at a rate of 2.1739 shares of the Company's common stock for each share of preferred stock. This resulted in the issuance of approximately 4.7 million shares of common stock.
As of September 30, 2022, the Company had approximately 2.5 million shares reserved for issuance under the Equity Incentive Plan and approximately 75,700 shares reserved for issuance under the deferred compensation plan.
On November 12, 2020, the Board of Directors approved a new share repurchase program for up to 7.5 million shares of its common stock, replacing the prior authorization from July 2015. During fiscal 2021, the Company entered into a $75.0
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
accelerated share repurchase (ASR) program. Under the terms of the agreement, approximately 1.5 million shares were delivered in fiscal 2021 and an additional approximately 0.5 million shares were delivered upon termination of the agreement on November 18, 2021. The total number of shares delivered was based on the volume-weighted average stock prices (VWAP) of the Company’s common stock during the ASR period of $38.30. The Company paid the full amount of the ASR in fiscal 2021 and recorded $60.0 of treasury stock representing the approximately 1.5 million shares delivered in fiscal 2021 and the remaining $15.0 was recorded as Additional paid in capital. With the delivery of the additional shares in the first quarter of fiscal 2022, the $15.0 was reclassified to treasury stock on the Consolidated Balance Sheet.
In addition to the ASR program, the Company has repurchased 500,000 shares for $21.3, at an average price of $42.61 per share, and 980,000 shares for $45.0, at an average price of $45.93 per share, during the twelve months ended 2021 and 2020, respectively.
As of September 30, 2022, the Company had approximately 5.0 million shares still authorized under this authorization. Future share repurchases, if any, would be made on the open market and the timing and the amount of any purchases will be determined by the Company based on its evaluation of the market conditions, capital allocation objectives, legal and regulatory requirements and other factors.
For the twelve months ended September 30, 2022, total dividends declared to shareholders were $85.5 and $84.9 was paid. For the twelve months ended September 30, 2021, total dividends declared to shareholders were $82.6 and $83.9 was paid. For the twelve months ended September 30, 2020, total dividends declared to shareholders were $84.0 and $85.4 was paid. The dividends paid included amounts on restricted shares that vested in the period.
Subsequent to the fiscal year end, on November 7, 2022, the Board of Directors declared a dividend for the first quarter of fiscal 2023 of $0.30 per share of common stock, payable on December 16, 2022, to all shareholders of record as of the close of business on November 28, 2022.
Series A Mandatory Convertible Preferred Stock - In January 2019, the Company issued 2,156,250 shares of Series A (MCPS), with a par value of $0.01 per share and liquidation preference of $100.00 per share. On January 15, 2022, all outstanding shares of the Company's 7.50% Series A MCPS automatically converted into shares of the Company's common stock. There were 2,156,250 preferred shares issued and outstanding as of September 30, 2021.
Dividends on the MCPS were payable on a cumulative basis at an annual rate of 7.50% of the liquidation preference of $100.00 per share of MCPS and paid in cash. The Company paid a cash dividend of $1.875 per share of MCPS on October 15, 2021 which had been declared in fiscal 2021. On November 15, 2021, the Board of Directors declared a cash dividend of $1.875 per share of MCPS to all shareholders of record as of the close of January 1, 2022, which was paid on January 15, 2022. No dividends were paid after January 2022.
(17) Financial Instruments and Risk Management
The market risk inherent in the Company's operations creates potential earnings volatility arising from changes in currency rates, interest rates and commodity prices. The Company's policy allows derivatives to be used only for identifiable exposures and, therefore, the Company does not enter into hedges for trading or speculative purposes where the sole objective is to generate profits.
Concentration of Credit Risk – The counterparties to derivative contracts consist of a number of major financial institutions and are generally institutions with which the Company maintains lines of credit. The Company does not enter into derivative contracts through brokers nor does it trade derivative contracts on any other exchange or over-the-counter markets. Risk of currency positions and mark-to-market valuation of positions are strictly monitored at all times.
The Company continually monitors positions with, and credit ratings of, counterparties both internally and by using outside rating agencies. While nonperformance by these counterparties exposes Energizer to potential credit losses, such losses are not anticipated.
The Company sells to a large number of customers primarily in the retail trade, including those in mass merchandising, drugstore, supermarket and other channels of distribution throughout the world. Wal-Mart Stores, Inc. accounted for 12.9%, 13.7%, and 14.1% of total net sales in fiscal 2022, 2021 and 2020, respectively, primarily in North America. The Company performs ongoing evaluations of its customers’ financial condition and creditworthiness, but does not generally require
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
collateral. While the competitiveness of the retail industry presents an inherent uncertainty, the Company does not believe a significant risk of loss from a concentration of credit risk exists with respect to accounts receivable.
In the ordinary course of business, the Company enters into contractual arrangements (derivatives) to reduce its exposure to commodity price and foreign currency risks. The section below outlines the types of derivatives that existed at September 30, 2022 and 2021, as well as the Company's objectives and strategies for holding these derivative instruments.
Commodity Price Risk – The Company uses raw materials that are subject to price volatility. At times, the Company uses hedging instruments to reduce exposure to variability in cash flows associated with future purchases of certain materials and commodities.
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 economic or competitive environment. Conversely, a strengthening in currencies relative to the U.S. dollar can improve margins. The primary currencies to which Energizer is exposed include the Euro, the British pound, the Canadian dollar and the Australian dollar. However, the Company also has significant exposures in many other currencies which, in the aggregate, may have a material impact on the Company's operations.
Additionally, Energizer’s foreign subsidiaries enter into internal and external transactions that create nonfunctional currency balance sheet positions at the foreign subsidiary level. These exposures are generally the result of intercompany purchases, intercompany loans and, to a lesser extent, external purchases, and are revalued in the foreign subsidiary’s local currency at the end of each period. Changes in the value of the non-functional currency balance sheet positions in relation to the foreign subsidiary’s local currency results in a transaction gain or loss recorded in Other items, net on the Consolidated Statements of Earnings and Comprehensive Income. The primary currency to which Energizer’s foreign subsidiaries are exposed is the U.S. dollar.
Interest Rate Risk – Energizer has interest rate risk with respect to interest expense on variable rate debt. At September 30, 2022, Energizer had variable rate debt outstanding with a principal balance of $1,188.4 under the 2020 Term Loans and international borrowings. There were no outstanding borrowings on the 2020 Revolving Credit Facility at September 30, 2022.
In December 2020, the Company entered into an interest rate swap (2020 interest rate swap) with an effective date of December 22, 2020, that fixed the variable benchmark component (LIBOR) at an interest rate of 0.95% on variable debt of $550.0. The notional value increased to $700.0 on January 22, 2021 and will stay at that value through December 22, 2024. The notional value will decrease by $100.0 on December 22, 2024 and by $100.0 each year thereafter until its termination date on December 22, 2027. The notional value of the swap was $700.0 as September 30, 2022.
Derivatives Designated as Cash Flow Hedging Relationships – The Company has entered into a series of forward currency contracts to hedge the cash flow uncertainty of forecasted payment of inventory purchases due to short term currency fluctuations. Energizer’s primary foreign affiliates, which are exposed to U.S. dollar purchases, have the Euro, the British pound, the Canadian dollar and the Australian dollar as their local currencies. These foreign currencies represent a significant portion of Energizer's foreign currency exposure. At September 30, 2022 and 2021, Energizer had unrealized pre-tax gains of $16.3 and $5.0, respectively, included in Accumulated other comprehensive loss on the Consolidated Balance Sheets. Assuming foreign exchange rates versus the U.S. dollar remain at September 30, 2022 levels, over the next twelve months, $15.7 of the pre-tax gain included in Accumulated other comprehensive loss is expected to be recognized in earnings. Contract maturities for these hedges extend into fiscal 2024. There were 62 open foreign currency contracts at September 30, 2022, with a total notional value of approximately $176.
The Company has a hedging program on zinc purchases. The contracts were determined to be cash flow hedges and qualify for cash flow hedge accounting. The contract maturities for these hedges extend into fiscal 2024. There were 10 open contracts at September 30, 2022, with a total notional value of approximately $38. The unrealized pre-tax loss on the zinc contracts was $6.1 at September 30, 2022 and the unrealized pre-tax gain recorded on zinc contracts was $4.7 at 2021. These were included in Accumulated other comprehensive loss on the Consolidated Balance Sheet.
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
At September 30, 2022 and 2021, Energizer recorded an unrealized pre-tax gain of $86.4 and $11.7, respectively, on the 2020 Interest rate swap agreement contracts, which was included in Accumulated other comprehensive loss on the Consolidated Balance Sheet.
Previously the Company had another interest rate swap that was terminated early in December 2020 and resulted in a $5.6 loss, which was recorded in accumulated other comprehensive loss on the Consolidated Balance Sheet. This loss was amortized into interest expense over the remainder of the interest payments associated with the Term Loan through June 2022, the original ending date of the interest rate swap.
Derivatives not Designated in Hedging Relationships - In addition, Energizer enters into foreign currency derivative contracts which are not designated as cash flow hedges for accounting purposes to hedge existing balance sheet exposures. Any gains or losses on these contracts would be offset by corresponding exchange losses or gains on the underlying exposures; thus are not subject to significant market risk. There were 10 open foreign currency derivative contracts which are not designated as cash flow hedges at September 30, 2022, with a total notional value of approximately $122.
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
The following table provides the Company's estimated fair values as of September 30, 2022 and 2021, and the amounts of gains and losses on derivative instruments classified as cash flow hedges as of and for the twelve months ended September 30, 2022 and 2021, respectively:
| | | | | | | | | | | | | | | | | | | | | | |
| | At September 30, 2022 | | For the Year Ended September 30, 2022 | | |
| Derivatives designated as Cash Flow Hedging Relationships | | Estimated Fair Value Asset / (Liability) (1) | | Gain / (Loss) Recognized in OCI (2) | | Gain / (Loss) Reclassified
From OCI into Income (Effective Portion) (3) (4) | | |
| Foreign currency contracts | | $ | 16.3 | | | $ | 20.9 | | | $ | 9.6 | | | |
| Interest rate swaps | | 86.4 | | | 75.2 | | | (2.5) | | | |
| Zinc contracts | | (6.1) | | | (1.4) | | | 9.4 | | | |
| Total | | $ | 96.6 | | | $ | 94.7 | | | $ | 16.5 | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | At September 30, 2021 | | For the Year Ended September 30, 2021 |
| Derivatives designated as Cash Flow Hedging Relationships | | Estimated Fair Value Asset (1) | | (Loss) / Gain Recognized in OCI (2) | | (Loss) / Gain Reclassified
From OCI into Income (Effective Portion) (3) (4) |
| Foreign currency contracts | | $ | 5.0 | | | $ | (0.5) | | | $ | (10.4) | |
| Interest rate swaps | | 11.7 | | | 9.9 | | | (6.7) | |
| Zinc contracts | | 4.7 | | | 4.5 | | | 4.2 | |
| Total | | $ | 21.4 | | | $ | 13.9 | | | $ | (12.9) | |
(1) All derivative assets are presented in Other current assets or Other assets. All derivative liabilities are presented in Other current liabilities or Other liabilities.
(2) OCI is defined as other comprehensive income.
(3) Gain/(Loss) reclassified to Income was recorded as follows: Foreign currency contracts in Cost of products sold, interest rate contracts in Interest expense, and commodity contracts in Cost of products sold.
(4) Each of these hedging relationships has derivative instruments with a high correlation to the underlying exposure being hedged and has been deemed highly effective in offsetting the underlying risk.
The following table provides estimated fair values as of September 30, 2022 and 2021, and the gains/(losses) on derivative instruments not classified as cash flow hedges as of and for the twelve months ended September 30, 2022 and 2021, respectively.
| | | | | | | | | | | | | | |
| | At September 30, 2022 | | For the Year Ended September 30, 2022 |
| Derivatives not designated as Cash Flow Hedging Relationships | | Estimated Fair Value Liability (1) | | Gain Recognized in Income (2) |
| | | | |
| Foreign currency contracts | | $ | (0.6) | | | $ | 6.6 | |
| | | | |
| | | | | | | | | | | | | | |
| | | At September 30, 2021 | | For the Year Ended September 30, 2021 |
| Derivatives not designated as Cash Flow Hedging Relationships | | Estimated Fair Value Liability (1) | | Loss Recognized in Income (2) |
| | | | |
| Foreign currency contracts | | $ | — | | | $ | (0.7) | |
| | | | |
(1) All derivative liabilities are presented in Other current liabilities or Other liabilities and derivative assets are presented in Other current assets or Other assets.
(2) Gain / (Loss) recognized on the Consolidated Statement of Earnings and Comprehensive Income and was recorded in Other items, net.
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
Energizer has the following recognized financial assets and financial liabilities resulting from those transactions that meet the scope of the disclosure requirements as necessitated by applicable accounting guidance for balance sheet offsetting:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Offsetting of derivative assets |
| | | | | | | | | | | | | | |
| | | | At September 30, 2022 | | At September 30, 2021 |
| Description | | Balance Sheet location | | Gross amounts of recognized assets | | Gross amounts offset in the Balance Sheet | | Net amounts of assets presented in the Balance Sheet | | Gross amounts of recognized assets | | Gross amounts offset in the Balance Sheet | | Net amounts of assets presented in the Balance Sheet |
| Foreign Currency Contracts | | Other Current Assets, Other Assets | | $ | 18.0 | | | $ | — | | | $ | 18.0 | | | $ | 5.8 | | | $ | (0.6) | | | $ | 5.2 | |
| | | | | | | | | | | | | | |
| Offsetting of derivative liabilities |
| | | | | | | | | | | | | | |
| | | | At September 30, 2022 | | At September 30, 2021 |
| Description | | Balance Sheet location | | Gross amounts of recognized liabilities | | Gross amounts offset in the Balance Sheet | | Net amounts of liabilities presented in the Balance Sheet | | Gross amounts of recognized liabilities | | Gross amounts offset in the Balance Sheet | | Net amounts of liabilities presented in the Balance Sheet |
| Foreign Currency Contracts | | Other Current Liabilities, Other Liabilities | | $ | (2.3) | | | $ | — | | | $ | (2.3) | | | $ | (0.8) | | | $ | 0.6 | | | $ | (0.2) | |
Fair Value Hierarchy – Accounting guidance on fair value measurements for certain financial assets and liabilities requires that assets and liabilities carried at fair value be classified 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.
Under the fair value accounting guidance 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 September 30, 2022 and 2021 that are measured on a recurring basis during the period, segregated by level within the fair value hierarchy: | | | | | | | | | | | | | | |
| | | Level 2 |
| | | September 30, |
| | | 2022 | | 2021 |
| (Liabilities)/Assets at estimated fair value: | | | | |
| Deferred Compensation | | $ | (24.6) | | | $ | (25.1) | |
| | | | |
| Derivatives - Foreign Currency contracts | | 16.3 | | | 5.0 | |
| Derivatives - Foreign Currency contracts (non-hedge) | | (0.6) | | | — | |
| Derivatives - Interest Rate Swaps | | 86.4 | | | 11.7 | |
| Derivatives - Zinc contracts | | (6.1) | | | $ | 4.7 | |
| Net Assets/(Liabilities) at estimated fair value | | $ | 71.4 | | | $ | (3.7) | |
Energizer had no level 1 financial assets or liabilities, other than pension plan assets, and no level 3 financial assets or liabilities at September 30, 2022 and 2021. The Company does measure certain assets and liabilities, such as Goodwill and Other intangibles, at fair value on a non-recurring basis using level 3 inputs. During the fiscal year ended September 30, 2022, the Company recorded goodwill and indefinite-lived intangible asset impairment charges of $541.9. These losses were recorded as Impairment of goodwill and intangible assets in the Consolidated Statement of Earnings. Refer to Note 12 Goodwill and Intangible Assets for additional information. There were no level 3 fair value measurement losses recognized during the years ended September 30, 2021 or 2020.
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
Due to the nature of cash and cash equivalents and restricted cash, carrying amounts on the balance sheets approximate estimated fair value. The estimated fair value of cash was determined based on level 1 inputs and cash equivalents and restricted cash are determined based on level 2 inputs.
At September 30, 2022 and 2021, the estimated fair value of the Company's unfunded deferred compensation liability is determined based upon the quoted market prices of investment options that are offered under the plan. The estimated fair value of foreign currency contracts, interest rate swap and zinc contracts, as described above, 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.
At September 30, 2022 and 2021, the fair market value of fixed rate long-term debt was $1,795.7 and $2,156.1, respectively, compared to its carrying value of $2,337.1 and $2,152.7, respectively. The estimated fair value of the long-term debt is estimated using yields obtained from independent pricing sources for similar types of borrowing arrangements. The estimated fair value of fixed rate long-term debt has been determined based on level 2 inputs.
(18) Other Commitments and Contingencies
In the ordinary course of business, the Company also enters into supply and service contracts. These contracts can include either volume commitments or fixed expiration dates, termination provisions and other standard contractual considerations. At September 30, 2022, the Company had approximately $21.5 of purchase obligations.
(19) Accumulated Other Comprehensive (Loss)/Income
The following table presents the changes in accumulated other comprehensive (loss)/income (AOCI), net of tax by component:
| | | | | | | | | | | | | | | | | | | | |
| Foreign Currency Translation Adjustments | Pension Activity | Zinc Contracts | Foreign Currency Contracts | Interest Rate Swap | Total |
| Balance at September 30, 2019 | $ | (124.0) | | $ | (173.3) | | $ | 0.2 | | $ | 3.1 | | $ | (4.3) | | (298.3) | |
| OCI before reclassifications | (32.7) | | 0.3 | | 2.9 | | (4.7) | | (5.1) | | (39.3) | |
| Reclassifications to earnings | — | | 6.5 | | 1.2 | | (2.5) | | 3.3 | | 8.5 | |
| Activity related to discontinued operations | 19.3 | | 3.0 | | (0.9) | | — | | — | | 21.4 | |
| Balance at September 30, 2020 | $ | (137.4) | | $ | (163.5) | | $ | 3.4 | | $ | (4.1) | | $ | (6.1) | | $ | (307.7) | |
| OCI before reclassifications | 27.6 | | 22.0 | | 3.4 | | (0.2) | | 7.6 | | 60.4 | |
| Reclassifications to earnings | — | | 7.1 | | (3.2) | | 7.9 | | 5.1 | | 16.9 | |
| Balance at September 30, 2021 | $ | (109.8) | | $ | (134.4) | | $ | 3.6 | | $ | 3.6 | | $ | 6.6 | | $ | (230.4) | |
| OCI before reclassifications | 32.1 | | (11.8) | | (1.0) | | 15.2 | | 57.3 | | 91.8 | |
| Reclassifications to earnings | — | | 5.7 | | (7.2) | | (7.1) | | 1.9 | | (6.7) | |
| | | | | | |
| Balance at September 30, 2022 | $ | (77.7) | | $ | (140.5) | | $ | (4.6) | | $ | 11.7 | | $ | 65.8 | | $ | (145.3) | |
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
The following table presents the reclassifications from AOCI:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| For the Years Ended September 30, | | |
| Amount Reclassified from AOCI | 2022 | | 2021 | | 2020 | | Affected Line Item in the Consolidated Statements of Earnings |
| Gains and losses on cash flow hedges | | | | | | | |
| Foreign exchange contracts | $ | (9.6) | | | $ | 10.4 | | | $ | (3.3) | | | Cost of products sold |
| Interest rate swaps | 2.5 | | | 6.7 | | | 4.3 | | | Interest expense |
| Zinc contracts | (9.4) | | | (4.2) | | | 1.6 | | | Cost of products sold |
| (16.5) | | | 12.9 | | | 2.6 | | | Loss / (Earnings) before income taxes |
| 4.1 | | | (3.1) | | | (0.6) | | | Income tax (benefit) / provision |
| $ | (12.4) | | | $ | 9.8 | | | $ | 2.0 | | | |
| Amortization of defined benefit pension items | | | | | | |
| Actuarial losses | $ | 7.2 | | | $ | 8.9 | | | $ | 8.0 | | | (1) |
| | | | | | | |
| | | | | | | |
| Settlement losses on other plans | 0.2 | | | 0.2 | | | 0.5 | | | (1) |
| 7.4 | | | 9.1 | | | 8.5 | | | Loss before income taxes |
| (1.7) | | | (2.0) | | | (2.0) | | | Income tax benefit |
| $ | 5.7 | | | $ | 7.1 | | | $ | 6.5 | | | |
| | | | | | |
| | | | | | | |
| Total reclassifications for the period | $ | (6.7) | | | $ | 16.9 | | | $ | 8.5 | | | |
Amounts in parentheses indicate credits to Consolidated Statements of Earnings.
(1) These AOCI components are included in the computation of net periodic benefit cost (see Note 14, Pension Plans, for further details) and recorded in Other items, net.
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
(20) Supplemental Financial Statement Information
The components of certain income statement accounts are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended September 30, |
| Other items, net | | 2022 | | 2021 | | 2020 |
Interest income | | $ | (1.0) | | | $ | (0.7) | | | $ | (0.6) | |
| | | | | | |
Foreign currency exchange loss | | 7.8 | | | 5.5 | | | 8.7 | |
| Pension benefit other than service costs (1) | | (4.1) | | | (1.9) | | | (1.7) | |
| | | | | | |
| Exit of Russian Market (2) | | 7.5 | | | — | | | — | |
| Gain on finance lease termination (3) | | (4.5) | | | — | | | — | |
| Acquisition foreign currency gains (4) | | — | | | — | | | 2.2 | |
| Pre-acquisition insurance proceeds (4) | | — | | | — | | | (4.9) | |
| | | | | | |
| Gain on sale of assets (4) | | — | | | (3.3) | | | (1.0) | |
| Transition services agreement income (4) | | — | | | — | | | (0.9) | |
Other | | 1.6 | | | (2.5) | | | 0.2 | |
Total Other items, net | | $ | 7.3 | | | $ | (2.9) | | | $ | 2.0 | |
(1) See Note 14, Pension Plans, for additional information on this item.
(2) Exiting the Russian market in the second quarter of fiscal 2022 resulted in currency impacts recorded in Other items, net of $7.5.
(3) See Note 11, Leases, for additional information on this item.
(4) See Note 4, Acquisitions, for additional information on these items.
The components of certain balance sheet accounts are as follows:
| | | | | | | | | | | | | | |
| | September 30, |
| Inventories | | 2022 | | 2021 |
| Raw materials and supplies | | $ | 115.9 | | | $ | 118.8 | |
| Work in process | | 201.6 | | | 206.3 | |
| Finished products | | 454.1 | | | 403.2 | |
| Total inventories | | $ | 771.6 | | | $ | 728.3 | |
| Other Current Assets | | | | |
| Miscellaneous receivables | | $ | 23.8 | | | $ | 21.4 | |
| Due from Spectrum | | 6.1 | | | 16.3 | |
| Prepaid expenses | | 90.9 | | | 98.3 | |
| Value added tax collectible from customers | | 27.7 | | | 28.3 | |
| Other | | 42.9 | | | 15.1 | |
| Total other current assets | | $ | 191.4 | | | $ | 179.4 | |
| Property, plant and equipment | | | | |
| Land | | $ | 14.4 | | | $ | 14.4 | |
| Buildings | | 120.7 | | | 121.4 | |
| Machinery and equipment | | 828.2 | | | 822.9 | |
| Construction in progress | | 50.1 | | | 62.4 | |
| Finance leases | | 39.0 | | | 52.7 | |
| Total gross property | | 1,052.4 | | | 1,073.8 | |
| Accumulated depreciation | | (690.3) | | | (690.9) | |
| Total property, plant and equipment, net | | $ | 362.1 | | | $ | 382.9 | |
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ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
| | | | | | | | | | | | | | |
| | September 30, |
| | | 2022 | | 2021 |
| Other Current Liabilities | | | | |
| Accrued advertising, sales promotion and allowances | | $ | 13.4 | | | $ | 19.5 | |
| Accrued trade promotions | | 57.7 | | | 57.3 | |
| Accrued Freight and warehousing | | 37.2 | | | 26.8 | |
| Accrued salaries, vacations and incentive compensation | | 60.6 | | | 65.4 | |
| | | | |
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| Accrued interest expense | | 20.5 | | | 16.5 | |
| | | | |
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| Restructuring reserve | | 1.7 | | | 5.7 | |
| Income taxes payable | | 36.7 | | | 30.3 | |
| Other | | 106.1 | | | 135.3 | |
| Total other current liabilities | | $ | 333.9 | | | $ | 356.8 | |
| Other Liabilities | | | | |
| Pensions and other retirement benefits | | $ | 49.3 | | | $ | 66.2 | |
| Deferred compensation | | 19.8 | | | 25.1 | |
| Mandatory transition tax | | 16.7 | | | 16.7 | |
| Other non-current liabilities | | 52.3 | | | 70.4 | |
| Total other liabilities | | $ | 138.1 | | | $ | 178.4 | |
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| | For the Years Ended September 30, |
| Allowance for Doubtful Accounts | | 2022 | | 2021 | | 2020 |
| Balance at beginning of year | | $ | 2.9 | | | $ | 2.8 | | | $ | 3.8 | |
| Provision charged to expense, net of reversals | | (0.4) | | | 1.2 | | | 1.8 | |
| Write-offs, less recoveries, translation, other | | 0.4 | | | (1.1) | | | (2.8) | |
| Balance at end of year | | $ | 2.9 | | | $ | 2.9 | | | $ | 2.8 | |
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| | For the Years Ended September 30, |
| Income Tax Valuation Allowance | | 2022 | | 2021 | | 2020 |
| Balance at beginning of year | | $ | 15.1 | | | $ | 13.1 | | | $ | 11.9 | |
| Provision charged to expense, net of reversals | | 2.3 | | | 1.8 | | | 3.1 | |
| Reversal of provision charged to expense | | (3.8) | | | (2.1) | | | (0.2) | |
| Translation, other | | (2.0) | | | 2.3 | | | (1.7) | |
| Balance at end of year | | $ | 11.6 | | | $ | 15.1 | | | $ | 13.1 | |
The components of certain cash flow statement components are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended September 30, |
| Certain items from Operating Cash Flow Activities | | 2022 | | 2021 | | 2020 |
| Interest paid | | $ | 142.6 | | | $ | 172.7 | | | $ | 196.0 | |
| Income taxes paid, net | | 54.5 | | | 65.0 | | | 46.7 | |
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
(21) Related Party Transactions
On January 28, 2019, the Company completed the Auto Care Acquisition from Spectrum, which included stock consideration of 5.3 million shares of Energizer common stock. In accordance with the terms of our Shareholder Agreement with Spectrum, Spectrum had the right to sell such shares on or after January 28, 2020, including through one or more registered secondary offerings. At September 30, 2020, Spectrum owned 1.7 million shares, or 2.5% of the Company's outstanding common shares. During the second quarter of fiscal 2021, Spectrum sold the remainder of their shares, and as such at September 30, 2021 they are no longer considered to be a related party.
The transactions between Spectrum and Energizer prior to when Spectrum sold their remaining shares during fiscal 2021 were immaterial. The transactions discussed below cover the time period in which Spectrum was a related party of Energizer Holdings, Inc. in fiscal 2020.
Following the completion of the Battery and Auto Care Acquisitions, the Company and Spectrum entered into transition service agreements (TSA) and reverse TSA. Under the agreements, Energizer and Spectrum provided each other certain specified back office support services on a transitional basis, including among other things, payroll and other human resource services, information systems as well as accounting support.
The charges for the transition services are generally intended to allow the providing company to fully recover the allocated direct costs of providing the services, plus all out-of-pocket costs and expenses, and including a nominal profit. As of September 30, 2020, the Company had exited the majority of the TSA and reverse TSA, and during the first quarter of fiscal 2021, the Company was out of all agreements.
During the twelve months ended September 30, 2020, the Company paid $2.3 to Spectrum related to rent for office space at their Middleton, Wisconsin headquarters.
For the twelve months ended September 30, 2020, the Company incurred expense of $8.4 in SG&A and $0.4 in Cost of products sold. The Company also recorded income of $0.9 in Other items, net related to the reverse transaction services agreements provided for the twelve months ended September 30, 2020.
The Company also entered into a supply agreement with Spectrum, ancillary to the Auto Care Acquisition that became effective upon the consummation of the acquisition. The supply agreement resulted in expense to the Company of $17.8 for the twelve months ended September 30, 2020.
In discontinued operations, the Company recorded income of $3.8 for reverse TSA, and recorded expense of $0.3 for the twelve months ended September 30, 2020.
(22) Environmental and Regulatory
Government Regulation and Environmental Matters – The operations of Energizer are subject to various federal, state, foreign and local laws and regulations intended to protect the public health and the environment. These regulations relate primarily to worker safety, air and water quality, underground fuel storage tanks and waste handling, collection, recycling and disposal. In connection with some sites, Energizer has been identified as a “potentially responsible party” (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act and may be required to share in the cost of cleanup with respect to certain federal “Superfund” sites. Energizer may also be required to share in the cost of cleanup with respect to state-designated sites or other sites outside of the U.S.
Accrued environmental costs at September 30, 2022 were $15.4, of which $5.3 is expected to be spent during fiscal 2023. It is difficult to quantify with certainty the cost of environmental matters, particularly remediation and future capital expenditures for environmental control equipment. Environmental spending estimates could be modified as a result of changes in legal requirements or the enforcement or interpretation of existing requirements.
Legal Proceedings – The Company and its affiliates are subject to a number of legal proceedings in various jurisdictions arising out of its operations. 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. The Company and its affiliates are a party to legal proceedings and claims that arise during the ordinary course of business. The Company reviews its legal proceedings and claims, regulatory reviews and inspections on an ongoing basis and
ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)
follows appropriate accounting guidance when making accrual and disclosure decisions. The Company establishes accruals for those contingencies where the incurrence of a loss is probable and can be reasonably estimated, and discloses the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for our financial statements to not be misleading. The Company does not record liabilities when the likelihood that the liability has been incurred is probable, but the amount cannot be reasonably estimated. Based upon present information, the Company believes that its liability, if any, arising from such pending legal proceedings, asserted legal claims and known potential legal claims which are likely to be asserted, is not reasonably likely to be material to the Company's financial position, results of operations, or cash flows, taking into account established accruals for estimated liabilities.