Document
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 10-Q
_______________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
Or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                         to
Commission File Number: 001-36837
____________________________________________________________________________________________________________
enrlogoa06.jpg
ENERGIZER HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Missouri
36-4802442
(State or other jurisdiction of
(I. R. S. Employer
incorporation or organization)
Identification No.)
 
533 Maryville University Drive
 
St. Louis, Missouri
63141
(Address of principal executive offices)
(Zip Code)
 
 
(314) 985-2000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
 
Accelerated filer
o
 
 
 
 
 
Non-accelerated filer
o
 
Smaller reporting company
o
 
 
 
 
 
(Do not check if smaller reporting company)   
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x
Indicate the number of shares of Energizer Holdings, Inc. common stock, $.01 par value, outstanding as of the close of business on July 30, 2018: 59,769,793.

1


INDEX
 
Page
PART I — FINANCIAL INFORMATION
 
 
 
Item 1. Financial Statements (Unaudited)
 
 
 
Consolidated Statements of Earnings and Comprehensive Income (Condensed) for the Quarter and Nine Months Ended June 30, 2018 and 2017
 
 
Consolidated Balance Sheets (Condensed) as of June 30, 2018 and September 30, 2017
 
 
Consolidated Statements of Cash Flows (Condensed) for the Nine Months Ended June 30, 2018 and 2017
              
 
Notes to Consolidated (Condensed) Financial Statements
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
 
Item 4. Controls and Procedures
 
 
PART II — OTHER INFORMATION
 
 
 
Item 1. Legal Proceedings
 
 
Item 1A. Risk Factors
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
 
Item 6. Exhibits
 
 
EXHIBIT INDEX
 
 
SIGNATURES






2



ENERGIZER HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(Condensed)
(In millions, except per share data - Unaudited)  
 
For the Quarter Ended June 30,
 
For the Nine Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net sales
$
392.8

 
$
372.0

 
$
1,340.5

 
$
1,290.6

Cost of products sold
216.7

 
214.0

 
717.6

 
693.1

Gross profit
176.1

 
158.0

 
622.9

 
597.5

 
 
 
 
 
 
 
 
Selling, general and administrative expense
111.9

 
86.3

 
315.3

 
263.4

Advertising and sales promotion expense
22.9

 
20.2

 
81.1

 
71.1

Research and development expense
5.2

 
5.1

 
15.9

 
16.0

Amortization of intangible assets
2.8

 
2.8

 
8.4

 
8.4

Spin restructuring

 

 

 
(3.8
)
Gain on sale of real estate
(4.6
)
 
(1.7
)
 
(4.6
)
 
(16.9
)
Interest expense
17.7

 
13.3

 
47.6

 
39.7

Other items, net
(11.3
)
 
1.5

 
(9.1
)
 
(4.3
)
Earnings before income taxes
31.5

 
30.5

 
168.3

 
223.9

Income tax provision
7.7

 
5.6

 
76.3

 
56.5

Net earnings
$
23.8

 
$
24.9

 
$
92.0

 
$
167.4

 
 
 
 
 
 
 
 
Basic net earnings per share
$
0.40

 
$
0.40

 
$
1.54

 
$
2.71

Diluted net earnings per share
$
0.39

 
$
0.40

 
$
1.50

 
$
2.67

 
 
 
 
 
 
 
 
Weighted average shares of common stock - Basic
59.7

 
61.8

 
59.9

 
61.8

Weighted average shares of common stock - Diluted
61.4

 
62.8

 
61.4

 
62.8

 
 
 
 
 
 
 
 
Dividends per common share
$
0.29

 
$
0.275

 
$
0.87

 
$
0.825

 
 
 
 
 
 
 
 
Statements of Comprehensive Income:
 
 
 
 
 
 
 
Net earnings
$
23.8

 
$
24.9

 
$
92.0

 
$
167.4

Other comprehensive income/(loss), net of tax expense/(benefit)
 
 
 
 
 
 
 
Foreign currency translation adjustments
(31.5
)
 
11.9

 
(14.9
)
 
(4.5
)
Pension activity, net of tax of $0.4 and $1.2, for the quarter and nine months ended June 30, 2018, respectively, and $0.6 and $1.9 for the quarter and nine months ended June 30, 2017, respectively.
3.0

 
(0.5
)
 
4.8

 
3.9

Deferred gain/(loss) on hedging activity, net of tax of $2.1 and $4.7 for the quarter and nine months ended June 30, 2018, respectively, and ($1.2) and $1.9 for the quarter and nine months ended June 30, 2017, respectively.
6.7

 
(4.7
)
 
13.0

 
1.4

Total comprehensive income
$
2.0

 
$
31.6

 
$
94.9

 
$
168.2


The above financial statements should be read in conjunction with the Notes To Consolidated (Condensed) Financial Statements (Unaudited).


3


ENERGIZER HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Condensed)
(In millions - Unaudited)
 
Assets
June 30,
2018
 
September 30,
2017
Current assets
 
 
 
Cash and cash equivalents
$
510.9

 
$
378.0

Trade receivables, less allowance for doubtful accounts of $4.9 and $5.8, respectively
165.6

 
230.2

Inventories
307.8

 
317.1

Other current assets
106.6

 
94.9

Total current assets
1,090.9

 
1,020.2

Property, plant and equipment, net
166.9

 
176.5

Goodwill
229.8

 
230.0

Other intangible assets, net
214.4

 
223.8

Deferred tax asset
33.8

 
47.7

Other assets
69.0

 
125.4

Total assets
$
1,804.8

 
$
1,823.6

 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
Current liabilities
 
 
 
Current maturities of long-term debt
$
4.0

 
$
4.0

Notes payable
174.6

 
104.1

Accounts payable
194.4

 
219.3

Other current liabilities
226.3

 
254.6

Total current liabilities
599.3

 
582.0

Long-term debt
976.7

 
978.5

Other liabilities
181.0

 
178.0

Total liabilities
1,757.0

 
1,738.5

Shareholders' equity
 
 
 
Common stock
0.6

 
0.6

Additional paid-in capital
224.4

 
196.7

Retained earnings
196.4

 
198.7

Treasury stock
(117.7
)
 
(72.1
)
Accumulated other comprehensive loss
(255.9
)
 
(238.8
)
Total shareholders' equity
47.8

 
85.1

Total liabilities and shareholders' equity
$
1,804.8

 
$
1,823.6


The above financial statements should be read in conjunction with the Notes To Consolidated (Condensed) Financial Statements (Unaudited).



4


ENERGIZER HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Condensed)
(In millions - Unaudited)
 
 
For the Nine Months Ended June 30,
 
2018
 
2017
Cash Flow from Operating Activities
 
 
 
Net earnings
$
92.0

 
$
167.4

Non-cash restructuring costs

 
(2.5
)
Depreciation and amortization
33.8

 
38.3

Deferred income taxes
11.1

 
2.1

Share-based compensation expense
21.0

 
17.8

Gain on sale of real estate
(4.6
)
 
(16.9
)
Mandatory transition tax
28.2

 

Non-cash items included in income, net
(2.1
)
 
5.8

Other, net
(7.8
)
 
(19.6
)
Changes in current assets and liabilities used in operations
16.4

 
(46.8
)
Net cash from operating activities
188.0

 
145.6

 
 
 

Cash Flow from Investing Activities
 
 
 
Capital expenditures
(17.2
)
 
(17.5
)
Proceeds from sale of assets
6.1

 
27.2

Net cash (used by)/from investing activities
(11.1
)
 
9.7

 
 
 
 
Cash Flow from Financing Activities
 
 
 
Payments on debt with maturities greater than 90 days
(3.0
)
 
(3.0
)
Net increase in debt with original maturities of 90 days or less
70.6

 
40.7

Debt issuance costs
(1.4
)
 
(0.8
)
Dividends paid
(52.3
)
 
(52.1
)
Common stock purchased
(50.0
)
 
(9.3
)
Taxes paid for withheld share-based payments
(1.8
)
 
(8.2
)
Net cash used by financing activities
(37.9
)
 
(32.7
)
 
 
 
 
Effect of exchange rate changes on cash
(6.1
)
 
(5.5
)
 
 
 
 
Net increase in cash and cash equivalents
132.9

 
117.1

Cash and cash equivalents, beginning of period
378.0

 
287.3

Cash and cash equivalents, end of period
$
510.9

 
$
404.4


The above financial statements should be read in conjunction with the Notes To Consolidated (Condensed) Financial Statements (Unaudited).



5

ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)



(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 distributer of household batteries, specialty batteries and portable lights under the Energizer® and Eveready® brand names. Energizer offers batteries using lithium, alkaline, carbon zinc, nickel metal hydride, zinc air and silver oxide constructions. On July 1, 2016, Energizer expanded its offering of brands with an acquisition of a leading designer and marketer of automotive fragrance and appearance products. The Company's brands now include Refresh Your Car!®, California Scents®, Driven®, Bahama & Co.®, LEXOL® and Eagle One®. Subsequent to the end of the quarter, on July 2, 2018, the Company acquired Nu Finish® and Scratch Doctor® to add to its automotive appearance offerings as well.

Basis of Presentation - The accompanying unaudited Consolidated Condensed 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.

The accompanying unaudited Consolidated Condensed Financial Statements have been prepared in accordance with Article 10 of Regulation S-X and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The year-end condensed Consolidated Balance Sheet was derived from the audited financial statements included in Energizer's Report on Form 10-K, but does not include all disclosures required by U.S. GAAP. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair statement of our operations, financial position and cash flows
have been included. Certain reclassifications have been made to the prior year financial statements to conform to the current presentation. Operating results for any quarter are not necessarily indicative of the results for any other quarter or for the full year. These statements should be read in conjunction with the financial statements and notes thereto for Energizer for the year ended September 30, 2017 included in the Annual Report on Form 10-K dated November 14, 2017.

Recently Adopted Accounting Pronouncements - During the quarter ended March 31, 2018, the Company early adopted ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02). This update allows for the reclassification of stranded tax effects resulting from the Tax Cuts and Jobs Act (the Act) from accumulated other comprehensive income (AOCI) to retained earnings. The amount of the reclassification is calculated as the difference between the historical and newly enacted tax rates on deferred taxes originally recorded through AOCI. The Company reclassified $20.0 of stranded tax from AOCI to Retained earnings in the second quarter. Tax effects unrelated to the Act are released from AOCI using either the specific identification approach or the portfolio approach based on the nature of the underlying item.

During the quarter ended December 31, 2017, the Company adopted ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This update requires the service component of the net periodic pension cost to be reported in the same income statement line item as similar compensation costs, while all other pension cost components should be reported separately from the service cost component on the income statement. The adoption of this update resulted in $1.7 and $5.1 of non-compensation related pension benefit in Other items, net in the quarter and nine months ended June 30, 2018, respectively, and a reclassification of $3.1 and $9.3 of pension benefit out of Selling, general and administrative expense and into Other items, net for the quarter and nine months ended June 30, 2017. All non-compensation related pension costs will be recorded in Other items, net going forward.

During the quarter ended December 31, 2017, the Company adopted ASU 2015-11, Inventory (Topic 330), which aligns the measurement of inventory under GAAP more closely with International Financial Reporting Standards. Under the new guidance, an entity that measures inventory using the first-in, first-out or average cost should measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The impact of adoption was immaterial.

During the quarter ended December 31, 2017, the Company early adopted ASU 2016-16, Intra-entity Transfers of Assets Other Than Inventory. This update requires tax expense to be recognized from the sale of intra-entity assets, other than inventory, when the transfer occurs, even though the effects of the transaction are eliminated in consolidation. Under the previous guidance, the tax effects of transfers would have been deferred until the

6

ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)


transferred asset was sold or otherwise recovered through use. Upon adoption, any deferred charge previously established upon the intra-company transfer is recorded as a cumulative effect adjustment to retained earnings. During the quarter ended December 31, 2017, a deferred charge of $59.2 was removed from Other assets and recorded as an adjustment to retained earnings. Any future tax impacts will be recognized as incurred.

During the quarter ended December 31, 2017, the Company early adopted ASU 2017-01, Clarifying the Definition of a Business. This update creates a more practical definition and guidelines to determine whether a set of assets and activities is a business. This simplifies the decision making process of determining whether a purchase constitutes a business combination or an acquisition of assets and the Company will apply this definition for future acquisitions.
During the quarter ended December 31, 2017, the Company early adopted ASU 2017-04, Simplifying the Test for Goodwill Impairment. This update eliminates the need to assign the fair value of a reporting unit to each of its assets and liabilities when quantifying an impairment charge. The impairment charge is now determined based on the comparison of the fair value of a reporting unit to its carrying amount. The Company will apply the new guidance when completing its goodwill testing procedures in the current year.
Recently Issued Accounting Pronouncements - On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which provides a single comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries and across capital markets. On August 12, 2015, the FASB issued a one-year deferral of the effective date. This update is effective for Energizer beginning October 1, 2018 and will be adopted on a modified retrospective basis. The Company has substantially completed its assessment of the new guidance against its current accounting policies and procedures, through activities that included analysis of standard sales transactions and terms, coordination and discussion with our commercial teams and reviewing contracts with customers. Based on its assessment, the new guidance will not have a material impact on the Company’s consolidated financial position, results of operations or cash flows. The Company is still assessing the overall impact on the Company’s disclosures and controls.
On February 25, 2016, the FASB issued ASU 2016-02, Leases. This update aligns the measurement of leases under GAAP more closely with International Financial Reporting Standards by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in this update will be effective for Energizer beginning October 1, 2019 with early adoption permitted. Energizer is in the process of evaluating the impact the guidance will have on its financial statements.
On August 26, 2016, the FASB issued ASU 2016-15, Statement of Cash Flows- Classification of Certain Cash Receipts and Cash Payments, which is intended to reduce diversity in practice in how certain transactions are classified in the statements of cash flows. This update will be effective for Energizer beginning October 1, 2018. The Company is currently assessing the impact the revised guidance will have on our current classification on the Statement of Cash Flows.
On August 28, 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities. This update intends to simplify hedge accounting and decrease complexity for both the preparation and understanding of hedging disclosures in the financial statements. This update is effective for the Company beginning October 1, 2019 with early adoption permitted. The Company is currently assessing the impact the revised guidance will have on its accounting practices and financial statements.

7

ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)


(2) Spin Costs

On July 1, 2015, Energizer completed its legal separation from Edgewell Personal Care Company (Edgewell) via a tax free spin-off (the spin-off or spin). The Company incurred costs associated with the evaluation, planning and execution of the spin transaction. For the quarter and nine months ended June 30, 2018, the Company recorded no activity related to spin.

During the nine months ended June 30, 2017, the Company recorded income of $3.8 in spin restructuring which included $2.5 of income in the second quarter reflecting the true up of previously accrued contract termination costs related to the fiscal 2016 right-sizing of the corporate headquarters and the first quarter sale of a facility in North America that was previously closed as a part of the spin for a gain of $1.3. The total costs incurred or allocated to Energizer for the spin were $197.6, inclusive of the costs of early debt retirement recorded in fiscal 2015. We do not expect any additional costs related to spin.

The following table represents the spin restructuring accrual activity and ending accrual balance as of June 30, 2017 recorded in Other current liabilities on the Consolidated Condensed Balance Sheet. There were no liabilities outstanding at September 30, 2017 or June 30, 2018.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Utilized
 
 
 
October 1, 2016
 
Charge to Income
 
Cash
 
June 30, 2017
Severance and termination related costs
 
$
2.8

 
$

 
$
(2.1
)
 
$
0.7

Contract termination costs
 
3.6

 
(2.5
)
 
(1.1
)
 

Net gain on asset sales
 


(1.3
)

1.3



Total
 
$
6.4

 
$
(3.8
)
 
$
(1.9
)
 
$
0.7


(3) Acquisitions

On January 15, 2018, the Company entered into a definitive acquisition agreement with Spectrum Brands Holdings, Inc. to acquire its global battery, lighting, and portable power business (Spectrum acquisition) for a purchase price of $2,000.0 in cash, subject to certain purchase price adjustments. Energizer will fund this acquisition through the net proceeds from the issuance of new senior notes maturing in 2026, term loans and cash on hand. In addition, Energizer intends to maintain its existing senior notes, maturing in 2025. Refer to Note 9, Debt, for additional discussion on the new senior notes associated with this acquisition which were issued and placed into escrow on July 6, 2018. The closing of this transaction is subject to various conditions and regulatory approvals, but is expected to close by the end of calendar year 2018.

The Company is also committed to pay a $100.0 termination fee to Spectrum if the transaction does not close by July 15, 2019, and all conditions precedent to the Company’s obligation to consummate the acquisition have otherwise been satisfied except for one or more of the regulatory approval conditions specified in the acquisition agreement. Success fees of $11.0 are due to the financial adviser, subject to the closing of the transaction. In addition, $2.0 was paid in January 2018 to the financial adviser for services rendered on the transaction.

The Company incurred $25.8 and $50.9 of pre-tax acquisition and integration costs in the quarter and nine months ended June 30, 2018, respectively. Included in the quarter and nine month pre-tax acquisition and integration costs were $3.4 and $6.3, respectively, of debt commitment fees related to the Spectrum acquisition that were recorded in Interest expense. The remaining pre-tax acquisition and integration costs were recorded in SG&A and primarily related to legal, consulting and advisory fees to assist with obtaining regulatory approval around the globe and to plan for the closing and integration of the Spectrum acquisition.

The Company also recorded a gain in Other items, net of $9.9 on foreign currency contracts which were entered into in June 2018 and locked in the U.S. dollar (USD) value of the Euro notes related to the Spectrum acquisition. These contracts were terminated when the funds were placed into escrow on July 6, 2018. The Company also incurred $0.5 and $6.0 of tax withholding costs in the quarter and nine months ending June 30, 2018, related to anticipated cash movement to fund the acquisition.

8

ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)



Subsequent to the end of the quarter, on July 2, 2018, the Company acquired all of Reed-Union Corporation's automotive appearance business, including Nu Finish Car Polish and Nu Finish Scratch Doctor brands. The acquisition purchase price of $37.7, subject to working capital adjustments, was funded through a combination of cash on hand and committed debt facilities.

(4) Income Taxes    

The nine month effective tax rate was 45.3% as compared to 25.2% for the prior year comparative period. The provision includes the impact of the new U.S. tax legislation discussed below and $0.5 and $6.0 of tax withholding costs incurred in the quarter and nine months, respectively, related to anticipated cash movement to fund the Spectrum acquisition.

In addition, on December 22, 2017, H.R. 1, formally known as the Tax Cuts and Jobs Act (the Act) was enacted into law. The Act provides for numerous significant tax law changes and modifications with varying effective dates, which include reducing the corporate income tax rate from 35% to 21%, creating a territorial tax system (with a mandatory transition tax on previously deferred foreign earnings) and allowing for immediate capital expensing of certain qualified property. As a fiscal year end taxpayer, certain provisions of the Act began to impact us in our fiscal first quarter ended December 31, 2017, while other provisions will impact us beginning in fiscal year 2019. The corporate tax rate reduction is effective for Energizer as of January 1, 2018 and, accordingly, will reduce our current fiscal year federal statutory rate to a blended rate of approximately 24.5% for fiscal year 2018.

The changes included in the Act are broad and complex. The final transition impacts of the Act may differ from our current estimates, possibly materially, due to, among other things, changes in interpretations of the Act, any legislative action to address questions that arise because of the Act, any changes in accounting standards for income taxes or related interpretations in response to the Act, or any updates or changes to estimates the Company has utilized to calculate the transition impacts, including impacts from changes to current year earnings estimates and foreign exchange rates of foreign subsidiaries. The Securities and Exchange Commission has issued rules that would allow for a measurement period of up to one year after the enactment date of the Act to finalize the recording of the related tax impacts.

As a result of the reduction of the Federal corporate income tax rate, we have remeasured certain deferred tax assets and liabilities at the rate which they are expected to reverse in the future. We are still analyzing certain aspects of the Act, including the future impacts of the Global Intangible Low-Taxed Income provision, and refining our calculations, which could potentially affect the remeasurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of our deferred tax balance was tax expense of approximately $0.6.

The mandatory transition tax is based on our total post-1986 earnings and profits (E&P) that we previously deferred from U.S. income taxes. We recorded a provisional amount for our mandatory transition tax liability, resulting in an increase in income tax expense of approximately $30. We have not yet completed our calculation of the total post-1986 E&P for these foreign subsidiaries. Further, the mandatory transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets.

(5) Share-Based Payments

Total compensation cost for Energizer’s share-based compensation arrangements was $7.0 and $21.0 for the quarter and nine months ended June 30, 2018, respectively, and $5.9 and $17.8 for the quarter and nine months ended June 30, 2017, respectively, and was recorded in SG&A expense.

Restricted Stock Equivalents (RSE)—(in whole dollars and total shares)

In November 2017, the Company granted RSE awards to a group of key employees of approximately 100,000 shares that vest ratably over four years and granted RSE awards to a group of key executives of approximately 68,000 shares that vest on the third anniversary of the date of grant. In addition, the Company granted approximately 238,000 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

9

ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)


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 476,000 shares. The closing stock price on the date of the grant used to determine the award fair value was $44.20.

In November 2016, the Company granted RSE awards to a group of key employees of approximately 92,000 shares that vest ratably over four years and granted RSE awards to a group of key executives of approximately 73,000 shares that vest on the third anniversary of the date of the grant. In addition, the Company granted approximately 249,000 performance shares to a group of key employees and key executives that will vest subject to meeting targeted 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 498,000 shares. The closing stock price on the date of the grant used to determine the award fair value was $43.84.

In November 2015, the Company granted RSE awards to a group of key employees of approximately 106,000 shares that vest ratably over four years and granted RSE awards to a group of key executives of approximately 87,000 shares that vest on the third anniversary of the date of the grant. In addition, the Company granted approximately 290,000 performance shares to a group of key employees and key executives that will vest subject to meeting targeted 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 580,000 shares. The closing stock price on the date of the grant used to determine the award fair value was $37.34.

(6) Earnings per share

Basic 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 earnings per share calculation, adjusted for the dilutive effect of restricted stock equivalents, performance share awards and deferred compensation equity plans.

The following table sets forth the computation of basic and diluted earnings per share for the quarter and nine months ended
June 30, 2018 and 2017:
(in millions, except per share data)
 
 
 
 
 
 
 
 
For the Quarter Ended June 30,
 
For the Nine Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net earnings
$
23.8

 
$
24.9

 
$
92.0

 
$
167.4

Basic average shares outstanding
59.7

 
61.8

 
59.9

 
61.8

Effect of dilutive restricted stock equivalents
0.5

 
0.5

 
0.4

 
0.5

Effect of dilutive performance shares
1.0

 
0.5

 
0.9

 
0.5

Effect of stock based deferred compensation plan
0.2

 

 
0.2

 

Diluted average shares outstanding
61.4

 
62.8

 
61.4

 
62.8

Basic earnings per common share
$
0.40

 
$
0.40

 
$
1.54

 
$
2.71

Diluted earnings per common share
$
0.39

 
$
0.40

 
$
1.50

 
$
2.67


For the quarter and nine months ended June 30, 2018 and 2017, all restricted stock equivalents and performance shares were dilutive and included in the diluted net earnings per share calculations. During the quarter, a portion of the Company's unfunded deferred compensation plan was modified to be paid out in shares rather than cash payment. As a result of the modification, $11.9 was reclassified from a liability based plan to an equity compensation plan. This modification resulted in approximately 200,000 additional dilutive shares for the quarter and nine months ended June 30, 2018.


10

ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)


(7) Segments

Operations for Energizer are managed via two major geographic reportable segments: Americas and International. Prior to January 1, 2018, the International segment was reported as two separate geographic reportable segments: Europe, Middle East and Africa (EMEA) and Asia Pacific. The Company changed its reporting structure to reflect how the Company is managing the operations as well as what the chief operating decision maker is reviewing to make organizational decisions about resource allocation. The prior period segment information has been recast to reflect the current reportable segment structure of the Company.

Segment performance is evaluated based on segment operating profit, exclusive of general corporate expenses, share-based compensation costs, costs associated with restructuring initiatives, acquisition and integration activities, amortization costs, business realignment activities, research & development costs, gain on sale of real estate and other items determined to be corporate in nature. Financial items, such as interest income and expense, are managed on a global basis at the corporate level. The exclusion of substantially all acquisition, integration, restructuring and realignment costs from segment results reflects management’s view on how it evaluates segment performance.

Energizer’s operating model includes a combination of standalone and shared business functions between the geographic segments, varying by country and region of the world. Shared functions include, but are not limited to, IT, procurement and finance. 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.


11

ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)


Segment sales and profitability for the quarter and nine months ended June 30, 2018 and 2017, respectively, are presented below:
 
For the Quarter Ended June 30,
 
For the Nine Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net Sales
 
 
 
 
 
 
 
Americas
$
241.3

 
$
228.6

 
$
838.5

 
$
812.2

International
151.5

 
143.4

 
502.0

 
478.4

Total net sales
$
392.8

 
$
372.0

 
$
1,340.5

 
$
1,290.6

Segment Profit
 
 
 
 
 
 
 
Americas
$
60.4

 
$
53.6

 
$
239.2

 
$
237.2

International
32.6

 
25.7

 
115.9

 
109.8

Total segment profit
93.0

 
79.3

 
355.1

 
347.0

    General corporate and other expenses (1) (2)
(24.7
)
 
(19.4
)
 
(71.0
)
 
(66.1
)
    Global marketing expense
(4.6
)
 
(5.0
)
 
(13.0
)
 
(12.0
)
    Research and development expense
(5.2
)
 
(5.1
)
 
(15.9
)
 
(16.0
)
    Amortization of intangible assets
(2.8
)
 
(2.8
)
 
(8.4
)
 
(8.4
)
    Acquisition and integration costs (3)
(22.4
)
 
(6.7
)
 
(44.6
)
 
(9.2
)
Spin restructuring

 

 

 
3.8

Gain on sale of real estate
4.6

 
1.7

 
4.6

 
16.9

Acquisition debt commitment fee (4)
(3.4
)
 

 
(6.3
)
 

Gain on acquisition foreign currency contracts (5)
9.9

 

 
9.9

 

Interest expense (4)
(14.3
)
 
(13.3
)
 
(41.3
)
 
(39.7
)
Other items, net (2) (5) (6)
1.4

 
1.8

 
(0.8
)
 
7.6

Total earnings before income taxes
$
31.5

 
$
30.5

 
$
168.3

 
$
223.9


(1) Included in SG&A in the unaudited Consolidated Condensed Statement of Earnings and Comprehensive Income.
(2) As a result of the adoption of ASU 2017-07 in the first quarter of 2018, a $3.1 and $9.3 benefit was reclassified from SG&A to Other items, net for the quarter and nine months ended June 30, 2017, respectively.
(3) The quarter and nine months ended June 30, 2017 included $0.9 and $1.1, respectively, recorded in Cost of products sold and $3.3 recorded in Other items, net. All other costs were included in SG&A.
(4) Acquisition debt commitment fee represents the amortization of financing commitment fees related to the Spectrum acquisition which are recorded in Interest expense on the unaudited Consolidated Statement of Earnings.
(5) Gain on acquisition foreign currency contracts was recorded in Other items, net on the unaudited Consolidated Statement of Earnings. These contracts, which were entered into in June 2018, locked in the USD value of the future Euro Notes related to the Spectrum Acquisition and were terminated when the funds from the Euro Notes offering were placed into escrow on July 6, 2018.
(6) The amounts for the quarter and the nine months ended June 30, 2017 on the Consolidated Statement of Earnings included $3.3 million of acquisition and integration costs which have been reclassified for purposes of the reconciliation above.

Supplemental product information is presented below for revenues from external customers:
 
For the Quarter Ended June 30,
 
For the Nine Months Ended June 30,
Net Sales
2018
 
2017
 
2018
 
2017
Batteries
$
350.1

 
$
325.8

 
$
1,204.9

 
$
1,138.8

Other
42.7

 
46.2

 
135.6

 
151.8

Total net sales
$
392.8

 
$
372.0

 
$
1,340.5

 
$
1,290.6



12

ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)


Corporate assets shown in the following table include all financial instruments, deferred tax assets and deferred charges that are managed outside of operating segments. Total assets by segment are presented below:
 
June 30, 2018
 
September 30, 2017
Americas
$
466.1

 
$
533.9

International
794.5

 
698.2

Total segment assets
$
1,260.6

 
$
1,232.1

Corporate
100.0

 
137.7

Goodwill and other intangible assets
444.2

 
453.8

Total assets
$
1,804.8

 
$
1,823.6


(8) Goodwill and intangible assets

Goodwill and intangible assets deemed to have an indefinite life are not amortized, but are evaluated annually for impairment as part of our annual business planning cycle in the fourth fiscal quarter, or when indicators of a potential impairment are present.

The following table sets forth goodwill by segment as of October 1, 2017 and June 30, 2018:
 
Americas
 
International
 
Total
Balance at October 1, 2017
$
213.8

 
$
16.2

 
$
230.0

Cumulative translation adjustment
(0.2
)
 

 
(0.2
)
Balance at June 30, 2018
$
213.6

 
$
16.2

 
$
229.8


Energizer had indefinite-lived intangible assets of $77.3 at June 30, 2018 and $78.3 at September 30, 2017. Changes in indefinite-lived intangible assets are due to changes in foreign currency translation.

Total amortizable intangible assets at June 30, 2018 are as follows:
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Trademarks
$
40.1

 
$
5.4

 
$
34.7

Customer relationships
84.4

 
11.7

 
72.7

Patents
34.5

 
5.1

 
29.4

Non-compete
0.5

 
0.2

 
0.3

Total intangible assets at June 30, 2018
$
159.5

 
$
22.4

 
$
137.1


Total amortizable intangible assets at September 30, 2017 were as follows:
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Trademarks
$
40.1

 
$
3.4

 
$
36.7

Customer relationships
84.4

 
7.3

 
77.1

Patents
34.5

 
3.2

 
31.3

Non-compete
0.5

 
0.1

 
0.4

Total intangible assets at September 30, 2017
$
159.5

 
$
14.0

 
$
145.5



13

ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)


(9) Debt

The detail of long-term debt was as follows:
 
June 30, 2018
 
September 30, 2017
Senior Secured Term Loan B Facility, net of discount due 2022
$
389.0

 
$
392.0

5.50% Senior Notes due 2025
600.0

 
600.0

Total long-term debt, including current maturities
989.0

 
992.0

Less current portion
(4.0
)
 
(4.0
)
Less unamortized debt discount and debt issuance fees
(8.3
)
 
(9.5
)
Total long-term debt
$
976.7

 
$
978.5


The Company's $600.0 of 5.50% Senior Notes due 2025 (2025 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 2025 Notes in December and June. The 2025 Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis by each of the Company's domestic restricted subsidiaries that is a borrower or guarantor under the Revolving Facility and Term Loan.

The Company has a credit agreement which provides for a five-year $350.0 senior secured revolving credit facility (Revolving Facility) which matures in June 2020 and a seven-year $400.0 senior secured term loan B facility (Term Loan) which is due in June 2022. Borrowings under the Revolving Facility will bear interest at LIBOR or the Base Rate (as defined) plus the applicable margin based on total Company leverage. As of June 30, 2018, the Company had $165.0 of outstanding borrowings under the Revolving Facility and had $6.7 of outstanding letters of credit. Taking into account outstanding letters of credit, $178.3 remains available as of June 30, 2018. As of June 30, 2018 and September 30, 2017, our weighted average interest rate on short-term borrowings was 4.15% and 2.98%, respectively.

The $400.0 Term Loan was issued at a $1.0 discount which is amortized with a corresponding charge to interest expense over the remaining life of the loan. The original interest rate was LIBOR subject to a 75 basis points floor, plus 250 basis points. In March 2017, the Company completed the repricing of its Term Loan reducing the interest to LIBOR plus 200 basis points and eliminating the 75 basis points floor. The loans and commitments under the Term Loan require quarterly principal payments at a rate of 0.25%, or $1.0, of the original principal balance.

Obligations under the Revolving Facility and Term Loan are jointly and severally guaranteed by certain of its existing and future direct and indirectly wholly-owned U.S. subsidiaries. There is a first priority perfected lien on substantially all of the assets and property of the Company and guarantors and proceeds therefrom excluding certain excluded assets. No other terms were changed as result of the Term Loan repricing.

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%.

The notes payable balance was $174.6 at June 30, 2018 and $104.1 at September 30, 2017. The June 30, 2018 balance was comprised of $165.0 outstanding borrowings on the Revolving Facility as well as $9.6 of other borrowings, including those from foreign affiliates. The September 30, 2017 balance was comprised of $95.0 outstanding borrowings on the Revolving facility as well as $9.1 of other borrowings, including those from foreign affiliates.

On June 21, 2018, the Company finalized the pricing of two senior note offerings due in 2026 of $500.0 at 6.375% (USD Notes) and €650.0 at 4.625% (Euro Notes and collectively with the USD Notes, the 2026 Notes), which were issued by wholly-owned subsidiaries. The 2026 Notes priced at 100% of the principal amount and the offering closed subsequent to the quarter on July 6, 2018, with the funds held in escrow until certain conditions are met.  Interest on the 2026 Notes began to accrue in July 2018.


14

ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)


If the escrow conditions (which include conditions relating to the completion of the Spectrum acquisition) are not satisfied on or prior to July 15, 2019 or in certain other circumstances, the 2026 Notes will be redeemed at a price equal to 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the date of redemption.
The 2026 Notes will be jointly and severally guaranteed on an unsecured basis by the Company's domestic restricted subsidiaries that guarantee indebtedness of the Company under its expected new revolving credit facility and the Euro Notes will also be guaranteed by the Company.

In connection with the closing of the Spectrum acquisition, the Company expects to enter into a new senior secured first lien credit agreement, which would include a new 5-year $400 undrawn revolving credit facility and also provide for $1,200 of borrowings under a $200 3-year term loan A facility and $1,000 7-year term loan B facility. The borrowings are expected to 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 based on total Company leverage. The new credit agreement is expected to contain customary affirmative and restrictive covenants. The new term loans began to accrue financing fees in July 2018.

Energizer intends to use the net proceeds from the offerings of the 2026 Notes, together with borrowings under the new term loans, to fund the previously announced Spectrum acquisition, to repay the debt outstanding under its existing credit agreement, and to pay related fees, costs and expenses.

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 debt 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 June 30, 2018, the Company was, and expects to remain, in compliance with the provisions and covenants associated with its debt agreements.

Aggregate maturities of long-term debt, including current maturities, at June 30, 2018 were as follows: $4.0 in one year, $4.0 in two years, $4.0 in three years, $4.0 in four years, $373.0 in five years and $600.0 thereafter.

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.

(10) 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. The U.S. plan was frozen in fiscal year 2015.

15



The Company’s net periodic pension (benefit)/cost for these plans are as follows:
 
For the Quarter Ended June 30,
 
U.S.
 
International
 
2018
 
2017
 
2018
 
2017
Service Cost
$

 
$

 
$
0.1

 
$
0.4

Interest Cost
4.7

 
4.6

 
1.1

 
0.8

Expected return on plan assets
(7.5
)
 
(8.6
)
 
(1.6
)
 
(2.0
)
Amortization of unrecognized net losses
1.1

 
1.2

 
0.5

 
0.9

Net periodic (benefit)/cost
$
(1.7
)
 
$
(2.8
)
 
$
0.1

 
$
0.1

 
For the Nine Months Ended June 30,
 
U.S.
 
International
 
2018
 
2017
 
2018
 
2017
Service Cost
$

 
$

 
$
0.4

 
$
1.2

Interest Cost
14.1

 
13.7

 
3.2

 
2.5

Expected return on plan assets
(22.6
)
 
(25.8
)
 
(4.8
)
 
(6.0
)
Amortization of unrecognized net losses
3.3

 
3.6

 
1.6

 
2.7

Settlement charge
0.1

 

 

 

Net periodic (benefit)/cost
$
(5.1
)
 
$
(8.5
)
 
$
0.4

 
$
0.4


The Company adopted ASU 2017-07 in the quarter ended December 31, 2017. The service cost component of the net periodic (benefit)/cost above is recorded in Selling, general and administrative expense on the Consolidated Statement of Earnings and Comprehensive Income, while the remaining components are recorded to Other items, net. The prior year amounts have been reclassified to provide comparable presentation in line with the guidance.

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 above.

(11) Shareholder's Equity

In July 2015, the Company's Board of Directors approved an authorization for the Company to acquire up to 7.5 million shares of its common stock. During the nine months ended June 30, 2018, the Company repurchased 1,126,379 shares for $50.0, at an average price of $44.41 per share, under this authorization. There were no shares repurchased during the third quarter of fiscal 2018. Future share repurchases, if any, will be determined by the Company based on its evaluation of the market conditions, capital allocation objectives, legal and regulatory requirements and other factors.

On November 13, 2017, the Board of Directors declared a dividend for the first quarter of fiscal 2018 of $0.29 per share of common stock. The dividend was paid on December 14, 2017, to all shareholders of record as of November 30, 2017 and totaled $17.3.

On January 29, 2018, the Board of Directors declared a dividend for the second quarter of 2018 of $0.29 per share of common stock. The dividend was paid on March 13, 2018, to all shareholders of record as of February 20, 2018 and totaled $17.3.

On April 30, 2018, the Board of Directors declared a dividend for the third quarter of 2018 or $0.29 per share of common stock. The dividend was paid on June 13, 2018, to all shareholders of record as of May 21, 2018 and totaled $17.3.


16

ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)


In addition, dividend payments of $0.4 were made in fiscal 2018 related to restricted stock awards that vested during November 2017.

Subsequent to the end of the fiscal quarter, on July 27, 2018, the Board of Directors declared a dividend for the fourth quarter of 2018 of $0.29 per share of common stock, payable on September 12, 2018, to all shareholders of record as of the close of business August 16, 2018.

(12) 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.

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.

In the ordinary course of business, the Company may enter 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 June 30, 2018 and September 30, 2017, as well as the Company's objectives and strategies for holding these derivative instruments.

Commodity Price Risk—Energizer uses raw materials that are subject to price volatility. The Company has used, and may in the future use, hedging instruments to reduce exposure to variability in cash flows associated with future purchases of certain materials and commodities. At June 30, 2018 and September 30, 2017, there were no open derivative or hedging instruments for future purchases of raw materials or 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 June 30, 2018, Energizer had variable rate debt outstanding with an original principal balance of $400.0 under the Term Loan. 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 will fix the variable benchmark component (LIBOR) on additional

17

ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)


variable rate debt at an interest rate of 2.47%. At the effective date, the swap will have a notional value of $400.0. Beginning April 1, 2019, the notional amount decreases $50.0 each quarter until its termination date of December 31, 2020.

These hedging instruments are considered cash flow hedges for accounting purposes. At June 30, 2018 and September 30, 2017, Energizer recorded an unrecognized pre-tax gain and unrecognized pre-tax loss of $6.2 and $1.3, respectively, on these interest rate swap contracts, both of which were included in Accumulated other comprehensive loss on the Consolidated Balance Sheet.

Cash Flow Hedges - The Company has entered into a series of forward currency contracts to hedge the cash flow uncertainty of forecasted inventory purchases due to short term currency fluctuations. Energizer’s foreign affiliates, which have the largest exposure 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 June 30, 2018 and September 30, 2017, Energizer had an unrealized pre-tax gain of $4.1 and loss of $5.8, respectively, on these forward currency contracts accounted for as cash flow hedges included in Accumulated other comprehensive loss on the unaudited Condensed Consolidated Balance Sheets. Assuming foreign exchange rates versus the U.S. dollar remain at June 30, 2018 levels, over the next 12 months, $4.0 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 year 2020. There were 64 open foreign currency contracts at June 30, 2018, with a total notional value of approximately $143.

Derivatives not Designated in Hedging Relationships - 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 are expected to be offset by corresponding exchange losses or gains on the underlying exposures; and as such are not subject to significant market risk. There were 11 open foreign currency derivative contracts which are not designated as cash flow hedges at June 30, 2018, with a total notional value of approximately $858.

At June 30, 2018, included in the above, were two foreign currency derivative contracts with a notional value of $774 which locked in the USD value of future Euro Notes related to the Spectrum acquisition. These contracts were entered into in June 2018 and terminated on July 6, 2018 when the funds from the Euro Notes offering were placed into escrow. At June 30, 2018, these contracts had a gain of $9.9 recorded in Other items, net.

18

ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)


The following table provides the Company's estimated fair values as of June 30, 2018 and September 30, 2017, and the amounts of gains and losses on derivative instruments classified as cash flow hedges for the quarter and nine months ended June 30, 2018 and 2017, respectively:
 
 
At June 30, 2018
 
For the Quarter Ended June 30, 2018
 
For the Nine Months Ended June 30, 2018
Derivatives designated as Cash Flow Hedging Relationships
 
Estimated Fair Value
 Asset
 (1) (2)
 
Gain Recognized in OCI (3)
 
Loss Reclassified From OCI into Income
(Effective Portion) (4) (5)
 
Gain Recognized in OCI (3)
 
Loss Reclassified From OCI into Income (Effective Portion) (4) (5)
Foreign currency contracts
 
$
4.1

 
$
5.6

 
$
(0.8
)
 
$
4.8

 
$
(5.1
)
Interest rate contracts
 
6.2

 
2.2

 
(0.2
)
 
6.7

 
(1.0
)
Total
 
$
10.3

 
$
7.8

 
$
(1.0
)
 
$
11.5

 
$
(6.1
)
 
 
 
 
 
 
 
 
 
 
 
 
 
At September 30, 2017
 
For the Quarter Ended June 30, 2017
 
For the Nine Months Ended June 30, 2017
Derivatives designated as Cash Flow Hedging Relationships
 
Estimated Fair Value
Liability (1) (2)
 
Loss Recognized in OCI (3)
 
Gain/(Loss) Reclassified From OCI into Income
(Effective Portion) (4) (5)
 
(Loss)/Gain Recognized in OCI (3)
 
Gain/(Loss) Reclassified From OCI into Income (Effective Portion) (4) (5)
Foreign currency contracts
 
$
(5.8
)
 
$
(4.8
)
 
$
0.4

 
$
(1.6
)
 
$
1.6

Interest rate contracts
 
(1.3
)
 
(1.2
)
 
(0.5
)
 
4.6

 
(1.9
)
Total
 
$
(7.1
)
 
$
(6.0
)
 
$
(0.1
)
 
$
3.0

 
$
(0.3
)
(1) All derivative assets are presented in Other current assets or Other assets.
(2) All derivative liabilities are presented in Other current liabilities or Other liabilities.
(3) OCI is defined as other comprehensive income.
(4) Gain/(loss) reclassified to Income was recorded as follows: Foreign currency contracts in Other items, net and interest rate contracts in Interest expense.
(5) 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 June 30, 2018 and September 30, 2017 and the gains and losses on derivative instruments not classified as cash flow hedges for the quarter and nine months ended June 30, 2018 and 2017, respectively:
 
 
At June 30, 2018
 
For the Quarter Ended June 30, 2018
 
For the Nine Months Ended June 30, 2018
 
 
Estimated Fair Value Asset (1)
 
Gain Recognized in Income (1) (2)
 
Gain Recognized in Income (1) (2)
Foreign currency contracts
 
$
9.5

 
$
8.7

 
$
10.0

 
 
 
 
 
 
 
 
 
At September 30, 2017
 
For the Quarter Ended June 30, 2017
 
For the Nine Months Ended June 30, 2017
 
 
Estimated Fair Value Asset
 
Loss Recognized in Income (2)
 
Loss Recognized in Income (2)
Foreign currency contracts
 
$
0.9

 
$
(0.2
)
 
$
(1.5
)
(1) Includes the foreign currency contracts, which were entered into in June 2018, to lock in the USD value of future Euro Notes related to the Spectrum acquisition. These contracts were terminated when the funds from the Euro Notes offering were placed into escrow on July 6, 2018.
(2) Gain/(loss) recognized in Income was recorded as foreign currency in Other items, net.


19

ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)


Energizer has the following recognized financial assets 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 June 30, 2018
 
At September 30, 2017
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
 
$
14.9

 
$
(0.4
)
 
$
14.5

 
$
1.1

 
$

 
$
1.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Offsetting of derivative liabilities
 
 
 
 
At June 30, 2018
 
At September 30, 2017
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
 
$
(0.9
)
 
$

 
$
(0.9
)
 
$
(6.4
)
 
$
0.4

 
$
(6.0
)

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 June 30, 2018 and September 30, 2017 that are measured on a recurring basis during the period, segregated by level within the fair value hierarchy:
 
Level 2
Assets/(Liabilities) at estimated fair value:
June 30,
2018
 
September 30,
2017
Deferred Compensation
$
(28.5
)
 
$
(41.0
)
Derivatives - Foreign Currency Contracts
13.6

 
(4.9
)
Derivatives - Interest Rate Contracts
6.2

 
(1.3
)
Exit lease liability

 
(0.3
)
Net Liabilities at estimated fair value
$
(8.7
)
 
$
(47.5
)


20

ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)


Energizer had no Level 1 financial assets or liabilities, other than pension plan assets, and no Level 3 financial assets or liabilities at June 30, 2018 and at September 30, 2017.

Due to the nature of cash and cash equivalents, carrying amounts on the balance sheets approximate estimated fair value. The estimated fair value of cash and cash equivalents has been determined based on level 1 and level 2 inputs, respectively.

At June 30, 2018, 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. During the quarter, a portion of the Company's unfunded deferred compensation plan was modified to be paid out in shares rather than cash payment. As a result of the modification, $11.9 was reclassified from a liability based plan to an equity compensation plan.

The estimated fair value of foreign currency contracts and interest rate swap 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. The estimated fair value of the exit lease liability was determined based on the discounted cash flows of the remaining lease rentals reduced by estimated sublease rentals that could be reasonably obtained for the property.

At June 30, 2018 and September 30, 2017, the fair market value of fixed rate long-term debt was $596.0 and $615.7, respectively, compared to its carrying value of $600.0. 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.

(13) 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
 
Hedging Activity
 
Interest Rate Contracts
 
Total
Balance at September 30, 2017
$
(93.1
)
 
$
(139.4
)
 
$
(4.5
)
 
$
(1.8
)
 
$
(238.8
)
OCI before reclassifications
(14.9
)
 
1.1

 
3.6

 
4.7

 
(5.5
)
Reclassifications to earnings

 
3.7

 
4.0

 
0.7

 
8.4

Reclassifications to retained earnings (1)

 
(19.9
)
 

 
(0.1
)
 
(20.0
)
Balance at June 30, 2018
$
(108.0
)

$
(154.5
)

$
3.1


$
3.5


$
(255.9
)
(1) Refer to Note 1- Description of Business and Basis of Presentation for additional information on our adoption of ASU 2018-02.

21

ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)


The following table presents the reclassifications out of AOCI to earnings:
 
For the Quarter Ended June 30,
 
For the Nine Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
 
Details of AOCI Components
Amount Reclassified
from AOCI (1)
 
Amount Reclassified
from AOCI (1)
Affected Line Item in the Combined Statements of Earnings
Gains and losses on cash flow hedges
 
 
 
 
 
 
Foreign exchange contracts
$
(0.8
)
 
$
0.4

 
$
(5.1
)
 
$
1.6

Other items, net
Interest rate contracts
(0.2
)
 
(0.5
)
 
(1.0
)
 
(1.9
)
Interest expense
 
(1.0
)
 
(0.1
)
 
(6.1
)
 
(0.3
)
Earnings before income taxes
 
0.2

 
0.2

 
1.4

 
0.5

Income tax provision
 
$
(0.8
)
 
$
0.1

 
$
(4.7
)
 
$
0.2

Net earnings
Amortization of defined benefit pension items
 
 
 
 
 
Actuarial loss
(1.6
)
 
(2.1
)
 
(4.9
)
 
(6.2
)
(2)
Settlement loss

 

 
(0.1
)
 

(2)
 
(1.6
)
 
(2.1
)
 
(5.0
)
 
(6.2
)
Earnings before income taxes
 
0.5

 
0.6

 
1.3

 
1.9

Income tax provision
 
$
(1.1
)
 
$
(1.5
)
 
$
(3.7
)
 
$
(4.3
)
Net earnings
Total reclassifications to earnings
$
(1.9
)
 
$
(1.4
)
 
$
(8.4
)
 
$
(4.1
)
Net earnings
(1) Amounts in parentheses indicate debits to Consolidated Statement of Earnings.
(2) This AOCI component is included in the computation of net periodic pension (benefit)/cost (see Note 10, Pension Plans, for further details).


22

ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)


(14) Supplemental Financial Statement Information

 
June 30, 2018
 
September 30, 2017
Inventories
 
 
 
Raw materials and supplies
$
44.5

 
$
36.6

Work in process
96.1

 
84.8

Finished products
167.2

 
195.7

Total inventories
$
307.8

 
$
317.1

Other Current Assets
 
 
 
Miscellaneous receivables
$
8.3

 
$
13.7

Prepaid expenses
53.8

 
52.7

Value added tax collectible from customers
19.3

 
23.4

Other
25.2

 
5.1

Total other current assets
$
106.6

 
$
94.9

Property, Plant and Equipment
 
 
 
Land
$
4.6

 
$
4.6

Buildings
110.9

 
122.4

Machinery and equipment
691.8

 
697.9

Construction in progress
16.0

 
19.4

Total gross property
823.3

 
844.3

Accumulated depreciation
(656.4
)
 
(667.8
)
Total property, plant and equipment, net
$
166.9

 
$
176.5

Other Current Liabilities
 
 
 
Accrued advertising, sales promotion and allowances
$
11.6

 
$
21.8

Accrued trade allowances
37.4

 
51.1

Accrued salaries, vacations and incentive compensation
41.8

 
54.4

Income taxes payable
30.0

 
21.6

Other
105.5

 
105.7

Total other current liabilities
$
226.3

 
$
254.6

Other Liabilities
 
 
 
Pensions and other retirement benefits
$
73.1

 
$
87.7

Deferred compensation
28.5

 
41.0

Mandatory transition tax
25.8

 

Other non-current liabilities
53.6

 
49.3

Total other liabilities
$
181.0

 
$
178.0



23

ENERGIZER HOLDINGS, INC.
NOTES TO CONSOLIDATED (CONDENSED) FINANCIAL STATEMENTS
(In millions - Unaudited)


(15) Legal proceedings/contingencies and other obligations

Legal proceedings/contingencies - 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 and other legal proceedings 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, when taking into account established accruals for estimated liabilities.

Other obligations - 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 June 30, 2018, the Company had approximately $72 of purchase obligations.


24


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is meant to provide investors with information that management believes helpful in reviewing Energizer’s historical-basis results of operations, operating segment results, and liquidity and capital resources. Statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) that are not historical may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You should read the following MD&A in conjunction with the Consolidated Financial Statements (unaudited) and corresponding notes included herein. 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 “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017 for a discussion of the uncertainties, risks and assumptions associated with these statements as well as in Item 1A. Risk Factors of this Form 10-Q.

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

Non-GAAP Financial Measures
The Company reports its financial results in accordance with accounting principles generally accepted in the U.S. ("GAAP"). However, management believes that certain non-GAAP financial measures provide users with additional meaningful comparisons to the corresponding historical or future period. These non-GAAP financial measures exclude items that are not reflective of the Company's on-going operating performance, such as acquisition and integration costs and related items, costs related to the spin, gain on sale of real estate and the one-time impact of the new U.S. tax legislation. In addition, these measures help investors to see year over year comparability when excluding currency fluctuations, acquisition activity as well as other company initiatives that are not on-going. We believe these non-GAAP financial measures are an enhancement to assist investors in understanding our business and in performing analysis consistent with financial models developed by research analysts. Investors should consider non-GAAP measures in addition to, not as a substitute for, or superior to, the comparable GAAP measures. In addition, these non-GAAP measures may not be the same as similar measures used by other companies due to possible differences in method and in the items being adjusted.

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

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

Adjusted Earnings Before Income Taxes, Adjusted Net Earnings and Adjusted Diluted Earnings Per Share (EPS). These measures exclude the impact of the costs related to acquisition and integration, the spin-off, gain on sale of real estate and the one-time impact of the new U.S. income tax legislation.

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

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.
Adjusted Selling, General & Administrative (SG&A) as a percent of sales. Detail for adjusted SG&A as a percent of sales are also supplemental non-GAAP measures. These measures exclude the impact of costs related to acquisition and integration.

25



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 Energizer. 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," "will," "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 that any of our expectations, estimates or projections will be achieved. The forward-looking statements included in this document are only made as of the date of this document and we disclaim any obligation to publicly update any forward-looking statement to reflect subsequent events or circumstances. Numerous factors could cause our actual results and events to differ materially from those expressed or implied by forward-looking statements, including, without limitation:

market and economic conditions;
market trends in the categories in which we compete;
our ability to close the proposed Spectrum acquisition of the global battery, lighting, and portable power business (the “Business”), which may be delayed or may not close at all due to the failure to obtain required regulatory approvals, or satisfy other closing conditions;
our ability to obtain financing for the Spectrum acquisition on favorable terms;
our ability to acquire and integrate businesses, and to realize the projected results of acquisitions, including our ability to promptly and effectively integrate the Business after the Spectrum acquisition has closed, and our ability to obtain expected cost savings, synergies and other anticipated benefits of the Spectrum acquisition within the expected timeframe;
the impact of the pending Spectrum acquisition on the respective business operations;
the success of new products and the ability to continually develop and market new products;
our ability to attract, retain and improve distribution with key customers;
our ability to continue planned advertising and other promotional spending;
our ability to timely execute strategic initiatives, including restructurings, and international go-to-market changes in a manner that will positively impact our financial condition and results of operations and does not disrupt our business operations;
the impact of strategic initiatives, including restructurings, on our relationships with employees, customers and vendors;
our ability to maintain and improve market share in the categories in which we operate despite heightened competitive pressure;
our ability to improve operations and realize cost savings;
the impact of foreign currency exchange rates and currency controls, as well as offsetting hedges, including the impact of the United Kingdom's referendum vote and announced intention to exit the European Union;
the impact of raw materials and other commodity costs;
the impact of legislative changes or regulatory determinations or changes by federal, state and local, and foreign authorities, including customs and tariff determinations, as well as the impact of potential changes to tax laws, policies and regulations;
costs and reputational damage associated with cyber-attacks or information security breaches or other events;
the impact of advertising and product liability claims and other litigation; and
compliance with debt covenants and maintenance of credit ratings as well as the impact of interest and principal repayment of our existing and any future debt.

In addition, other risks and uncertainties not presently known to us or that we consider immaterial could affect the accuracy of any such forward-looking statements. The list of factors above is illustrative, but by no means exhaustive. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. Additional risks and uncertainties include those detailed from time to time in our publicly filed documents, including those described under the heading “Risk Factors” in our Form 10-K filed with the Securities and Exchange Commission on November 14, 2017 as well as in Item 1A. Risk Factors of this Form 10-Q.


26


Acquisitions

On January 15, 2018, the Company entered into a definitive acquisition agreement with Spectrum Brands Holdings, Inc. to acquire its global battery, lighting, and portable power business (Spectrum acquisition) for a purchase price of $2,000.0 in cash, subject to certain purchase price adjustments. Energizer will fund this acquisition through the net proceeds from the issuance of new senior notes maturing in 2026, term loans and cash on hand. In addition, Energizer intends to maintain its existing senior notes, maturing in 2025. Refer to Note 9, Debt, for additional discussion on the new senior notes associated with this acquisition which were issued and placed into escrow on July 6, 2018. The closing of this transaction is subject to various conditions and regulatory approvals, but is expected to close by the end of calendar year 2018.

The Company is also committed to pay a $100.0 termination fee to Spectrum if the transaction does not close by July 15, 2019, and all conditions precedent to the Company’s obligation to consummate the acquisition have otherwise been satisfied except for one or more of the regulatory approval conditions specified in the acquisition agreement. Success fees of $11.0 are due to the financial adviser, subject to the closing of the transaction. In addition, $2.0 was paid in January 2018 to the financial adviser for services rendered on the transaction.

The Company incurred $25.8 and $50.9 of pre-tax acquisition and integration costs in the quarter and nine months ended June 30, 2018, respectively. Included in the quarter and nine month pre-tax acquisition and integration costs were $3.4 and $6.3, respectively, of debt commitment fees related to the Spectrum acquisition that were recorded in Interest expense. The remaining pre-tax acquisition and integration costs were recorded in SG&A and primarily related to legal, consulting and advisory fees to assist with obtaining regulatory approval around the globe and to plan for the closing and integration of the Spectrum acquisition.

The Company also recorded a gain in Other items, net of $9.9 on foreign currency contracts which were entered into in June 2018 and locked in the U.S. dollar (USD) value of the Euro Notes related to the Spectrum acquisition. The contracts were terminated when the funds from the Euro Notes offering were placed into escrow on July 6, 2018. The Company also incurred $0.5 and $6.0 of acquisition tax withholding costs in the quarter and nine months ending June 30, 2018, related to anticipated cash movement to fund the acquisition.

Subsequent to the end of the quarter, on July 2, 2018, the Company acquired all of Reed-Union Corporation's automotive appearance business, including Nu Finish Car Polish and Nu Finish Scratch Doctor brands. The acquisition purchase price of $37.7, subject to working capital adjustments, was funded through a combination of cash on hand and committed debt facilities.



27


Highlights / Operating Results

Financial Results (in millions, except per share data)

Energizer reported third fiscal quarter net earnings of $23.8, or $0.39 per diluted share. This compares to net earnings of $24.9, or $0.40 per diluted share, in the prior year third fiscal quarter. Adjusted net earnings per diluted share were $0.54 for the third fiscal quarter as compared to $0.43 in the prior year quarter, an increase of 25.6%.
Energizer reported net earnings of $92.0, or $1.50 per diluted share, for the nine months ended June 30, 2018. This compares to net income of $167.4, or $2.67 per diluted share in the prior year comparative period. Adjusted net earnings per diluted share of for the nine months ended June 30, 2018 were $2.55 as compared to $2.44 for the nine months ended June 30, 2017.

28


Earnings before income taxes, Net earnings and Diluted EPS for the time periods presented were impacted by certain items related to acquisition and integration costs, gain on sale of real estate, spin restructuring costs and the one-time impact of the new U.S. tax legislation as described in the tables below. The impact of these items are provided below as a reconciliation of Earning before income taxes, Net earnings and Diluted EPS to adjusted Earnings before income taxes, adjusted Net earnings and adjusted Diluted EPS, which are non-GAAP measures. See disclosure on non-GAAP measures above.
 
 
For the Quarters Ended June 30,
(in millions, except per share data)
 
Earnings Before Income Taxes
 
Net Earnings
 
Diluted EPS
 
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Reported - GAAP
 
$
31.5

 
$
30.5

 
$
23.8

 
$
24.9

 
$
0.39

 
$
0.40

Impacts: Expense (Income)
 
 
 
 
 
 
 
 
 
 
 
 
  Acquisition and integration costs (1)
 
25.8

 
6.7

 
20.2

 
3.1

 
0.33

 
0.05

  Acquisition withholding tax (2)
 

 

 
0.5

 

 
0.01

 

Gain on acquisition foreign currency contracts
 
(9.9
)
 

 
(7.2
)
 

 
(0.12
)
 

  Gain on sale of real estate
 
(4.6
)
 
(1.7
)
 
(3.5
)
 
(1.3
)
 
(0.06
)
 
(0.02
)
  One-time impact of the new U.S. tax legislation
 

 

 
(0.6
)
 

 
(0.01
)
 

     Adjusted - Non-GAAP (3)
 
$
42.8

 
$
35.5

 
$
33.2

 
$
26.7

 
$
0.54

 
$
0.43

Weighted average shares - Diluted
 


 


 


 


 
61.4

 
62.8

 
 
For the Nine Months Ended June 30,
(in millions, except per share data)
 
Earnings Before Income Taxes
 
Net Earnings
 
Diluted EPS
 
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Reported - GAAP
 
$
168.3

 
$
223.9

 
$
92.0

 
$
167.4

 
$
1.50

 
$
2.67

Impacts: Expense (Income)
 
 
 
 
 
 
 
 
 
 
 
 
  Spin restructuring
 

 
(3.8
)
 

 
(2.4
)
 

 
(0.04
)
  Acquisition and integration costs (1)
 
50.9

 
9.2

 
38.4

 
4.7

 
0.63

 
0.07

  Acquisition withholding tax (2)
 

 

 
6.0

 

 
0.10

 

Gain on acquisition foreign currency contracts
 
(9.9
)
 

 
(7.2
)
 

 
(0.12
)
 

  Gain on sale of real estate
 
(4.6
)
 
(16.9
)
 
(3.5
)
 
(16.5
)
 
(0.06
)
 
(0.26
)
  One-time impact of the new U.S. tax legislation
 

 

 
30.6

 

 
0.50

 

     Adjusted - Non-GAAP (4)
 
$
204.7

 
$
212.4

 
$
156.3

 
$
153.2

 
$
2.55

 
$
2.44

Weighted average shares - Diluted
 
 
 
 
 
 
 
 
 
61.4

 
62.8

(1) The quarter and nine months ended June 30, 2018 includes $3.4 and $6.3, respectively, of Spectrum acquisition debt commitment fees recorded to interest expense. The quarter and nine months ended June 30, 2017, includes $0.9 and $1.1, respectively, recorded to COGS and $3.3 of expense recorded in Other items, net from our 2016 auto care acquisition. All other acquisition and integration costs were recorded in SG&A.
(2) This represents the $0.5 and $6.0 of tax withholding expense related to anticipated cash movement to fund the Spectrum acquisition for the three and nine months ended June 30, 2018, respectively.
(3) The effective tax rate for the quarters ended June 30, 2018 and 2017 for the Adjusted - Non-GAAP Net Earnings and Diluted EPS was 22.4% and 24.8%, respectively, as calculated utilizing the statutory rate for where the costs were incurred. The net tax impact associated with the non-GAAP adjustments highlighted in the table was expense of $1.9 and $3.2, respectively, for the quarters ended June 30, 2018 and 2017.
(4) The effective tax rate for the nine months ended June 30, 2018 and 2017 for the Adjusted - Non-GAAP Net Earnings and Diluted EPS was 23.6% and 27.9%, respectively, as calculated utilizing the statutory rate for where the costs were incurred. The net tax impact associated with the non-GAAP adjustments highlighted in the table was a benefit of $27.9 and expense of $2.7, respectively, for the nine months ended June 30, 2018 and 2017.

29


Highlights
Total Net Sales (In millions - Unaudited)
 
 
 
 
Quarter Ended June 30, 2018
 
 
 
 
Total Net Sales
 
Q3
 
% Chg
 
Nine Months
 
% Chg
Net sales - FY '17
 
$
372.0

 
 
 
$
1,290.6

 
 
Organic
 
19.7

 
5.3
%
 
32.2

 
2.5
%
Impact of currency
 
1.1

 
0.3
%
 
17.7

 
1.4
%
Net sales - FY '18
 
$
392.8

 
5.6
%
 
$
1,340.5

 
3.9
%
See non-GAAP measure disclosures above.

Net sales were $392.8 for the third quarter of 2018, an increase of $20.8 as compared to the prior year quarter driven by the following items:

Organic net sales were up 5.3% in the third fiscal quarter due to the following items:

Distribution gains across both segments and increased volumes at existing customers, primarily in North America, contributed 3.5% to the organic increase;

Favorable pricing across several markets increased net sales by 1.3%;

Benefits from our portfolio optimization contributed 0.8% to the organic sales increase; and

Partially offsetting the increase was the May 2017 divestiture of the non-core promotional sales business acquired with the 2016 auto care acquisition, which negatively impacted net sales by 0.3%. This is the final quarter that the divestiture will provide a negative year over year comparative.

Favorable currency impacts were $1.1, or 0.3%.

Net sales for the nine months ended June 30, 2018 were $1,340.5, an increase of $49.9 as compared to the prior year comparative period driven by the following items:

Organic sales increased 2.5% primarily driven by:

Favorable pricing across several markets increased net sales by 2.0%;

Distribution gains across both segments and increased volumes at existing customers, primarily in North America, contributed 0.6% to the organic increase;

Investments made for our portfolio optimization in the back half of fiscal 2017 benefited our top-line in fiscal 2018 accounting for 0.8% of the organic sales increase; and

Partially offsetting the increase was lapping of storm volume from prior year of 0.3% and the May 2017 divestiture of the non-core promotional sales business acquired with the 2016 auto care acquisition negatively impacted net sales by 0.6%.


Gross margin percentage for the third fiscal quarter of 2018 was 44.8% and was up 230 basis points compared to prior year. Excluding prior year acquisition and integration costs of $0.9, gross margin increased 210 basis points versus the prior year primarily due to the benefit of lapping our prior year investment related to our portfolio optimization. The impact of favorable product mix and foreign currency also contributed to the increase.

Gross margin percentage for the nine months ended June 30, 2018 was up 20 basis points. Excluding prior year acquisition and integration costs of $1.1, gross margin increased 10 basis points driven by the benefit of lapping our

30


prior year investment related to our portfolio optimization and favorable foreign currency, offset by less favorable overhead absorption and investments made in continuous improvement initiatives in the first half of the current fiscal year.

Advertising and sales promotion expense (A&P) was $22.9, or 5.8% of net sales, in the third fiscal quarter of 2018, as compared to $20.2, or 5.4% of net sales, in the prior fiscal quarter 2017. A&P was $81.1, or 6.0% of net sales, for the nine months ended June 30, 2018, as compared to $71.1, or 5.5% of net sales, in the prior year comparative period. The increase versus the quarter and nine month comparative periods was due to more normalized spending throughout fiscal 2018 while spending in fiscal 2017 was heavily weighted in the fourth quarter in support of our portfolio optimization and the launch of our improved Energizer Max offering.

Selling, general, and administrative expense (SG&A) was $111.9 in the third fiscal quarter of 2018, or 28.5% of net sales, as compared to $86.3, or 23.2% of net sales, in the prior period. Included in the third fiscal quarter of 2018 and 2017 results were acquisition and integration costs of $22.4 and $2.5, respectively. Excluding acquisition and integration costs, SG&A was $89.5, or 22.8% of net sales, as compared to $83.8, or 22.5% of net sales, in the prior year. The increase of $5.7 versus the prior year was primarily due to the timing of benefit costs and an adjustment to international customs costs.
SG&A was $315.3 for the nine months ended June 30, 2018, or 23.5% of net sales, as compared to $263.4, or 20.4% of net sales, in the prior year comparative period. Included in the nine months ended June 30, 2018 and 2017 results were acquisition and integration costs of $44.6 and $4.8, respectively. Excluding the acquisition and integration costs, SG&A was $270.7, an increase of $12.1 over the prior year SG&A of $258.6. The increase was due to current year investments in our continuous improvement initiatives to simplify, streamline and reduce costs of our business processes in addition to the timing of benefit costs. SG&A, excluding acquisition and integration costs, were 20.2% of net sales compared to 20.0% in the prior year, or essentially flat.
Research and Development (R&D) was flat at $5.2, or 1.3% of net sales, for the quarter ended June 30, 2018, as compared to $5.1, or 1.4% of net sales, in the prior year comparative period. For the nine months ended June 30, 2018, R&D was $15.9, or 1.2% of net sales, as compared to $16.0, or 1.2% of net sales in the prior year comparative period.
Interest expense was $17.7 for the third fiscal quarter of 2018, compared to $13.3 for the prior year comparative period. Interest expense was $47.6 for the nine months ended June 30, 2018, and $39.7 for the prior year comparative period. The fiscal quarter and nine months ended June 30, 2018 expense included $3.4 and $6.3, respectively, of debt commitment fees related to the Spectrum acquisition. Excluding the debt commitment fees, the current year interest expense increased $1.0 and $1.6 for the quarter and nine months ended June 30, 2018, respectively, driven by increased borrowings and increased rates on our variable debt outstanding.
Other items, net was income of $11.3 for the third fiscal quarter of 2018 compared to expense of $1.5 for the prior year third quarter. The current year income primarily reflects a $9.9 gain on foreign currency contracts. The contracts, which were entered into in June 2018, locked in the USD value of the Euro Notes related to the Spectrum acquisition and were terminated subsequent to the third fiscal quarter when the funds from the Euro Notes offering were placed into escrow on July 6, 2018. Also included in Other items, net are the impact of interest income, non-compensation related pension benefits and net revaluation gains on nonfunctional currency balance sheet exposures, slightly offset by hedge contract losses. The prior fiscal quarter expense of $1.5 includes a loss of $3.3 from the sale of a non-core promotional sales business acquired with the 2016 auto care acquisition. The remaining income primarily reflects the net impact of non-compensation related pension benefits, interest income and hedging contract gains partially offset by the net revaluation losses on nonfunctional currency balance sheet exposures.

Other items, net was income of $9.1 for the nine months ended June 30, 2018 and income of $4.3 for the prior year comparative period. The nine months ended June 30, 2018 results primarily reflect the $9.9 gain on foreign currency contracts mentioned above. In addition, the nine month results include net revaluation losses on nonfunctional currency balance sheet exposures and hedge contract losses offset by the impact of interest income and non-compensation related pension benefits. The prior period income of $4.3 reflects the net impact of non-compensation related pension benefits and interest income partially offset by net hedging contract losses and a loss of $3.3 from the sale of a non-core promotional sales business acquired with the 2016 auto care acquisition.

The effective tax rate was 45.3% as compared to 25.2% for the prior year comparative period. The current year rate includes a $30.6 million charge for the one-time impact of the new U.S. tax legislation passed in December

31


2017, as well as the impact of tax withholding expense of $6.0 related to anticipated cash movement to fund the Spectrum acquisition. Excluding the impact of our Non-GAAP adjustments, the year to date tax rate was 23.6% as compared to 27.9% in the prior year. The decrease in the rate is driven by the U.S. tax legislation and takes into account the new statutory U.S. rate that is now effective for fiscal year 2018.

Spin Costs

There were no costs associated with the spin transaction recorded in fiscal 2018 as the project has been completed. For the nine months ended June 30, 2017, the Company recorded income of $3.8 in spin restructuring which included $2.5 of income in the second quarter reflecting the true up of previously accrued contract termination costs related to the fiscal 2016 right-sizing of the corporate headquarters and the first quarter sale of a facility in North America that was previously closed as a part of the spin for a gain of $1.3. The total costs incurred or allocated to Energizer for the spin were $197.6, inclusive of the costs of early debt retirement recorded in fiscal 2015. We do not expect any additional costs related to spin.

Segment Results

Operations for Energizer are managed via two major geographic reportable segments: Americas and International. Prior to January 1, 2018, the International segment was reported as two separate geographic reportable segments: Europe, Middle East and Africa (EMEA) and Asia Pacific. The Company changed its reporting structure to reflect how the Company is managing the operations as well as what the chief operating decision maker is reviewing to make organizational decisions about resource allocation. The prior period segment information has been recast to reflect the current reportable segment structure of the Company.

Segment performance is evaluated based on segment operating profit, exclusive of general corporate expenses, share-based compensation costs, costs associated with restructuring initiatives, acquisition and integration activities, amortization costs, business realignment activities, research & development costs, gain on sale of real estate and other items determined to be corporate in nature. Financial items, such as interest income and expense, are managed on a global basis at the corporate level. The exclusion of substantially all acquisition, integration, restructuring and realignment costs from segment results reflects management’s view on how it evaluates segment performance.

Energizer’s operating model includes a combination of standalone and shared business functions between the geographic segments, varying by country and region of the world. Shared functions include, but are not limited to, IT, procurement and finance. 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. This structure is the basis for Energizer's reportable operating segments information, as included in the tables in Note 7, Segments, to the unaudited Consolidated Condensed Financial Statements for the periods ended June 30, 2018.


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Segment sales and Segment profit analysis for the quarter and nine months ended June 30, 2018 are presented below.

Net Sales (In millions)
Quarter and Nine Months Ended June 30, 2018
 
Quarter Ended June 30, 2018
 
Nine Months Ended June 30, 2018
 
$ Change
% Chg
 
$ Change
% Chg

Americas
 
 
 
 
 
Net sales - FY '17
$
228.6

 
 
$
812.2

 
Organic
15.4

6.7
 %
 
28.9

3.6
 %
Impact of currency
(2.7
)
(1.1
)%
 
(2.6
)
(0.4
)%
Net Sales - FY '18
$
241.3

5.6
 %
 
$
838.5

3.2
 %
 
 
 
 
 
 
International
 
 
 
 
 
Net sales - FY '17
$
143.4

 
 
$
478.4

 
Organic
4.3

3.0
 %
 
3.3

0.7
 %
Impact of currency
3.8

2.6
 %
 
20.3

4.2
 %
Net Sales - FY '18
$
151.5

5.6
 %
 
$
502.0

4.9
 %
 
 
 
 
 
 
Total Net Sales
 
 
 
 
 
Net sales - FY '17
$
372.0

 
 
$
1,290.6

 
Organic
19.7

5.3
 %
 
32.2

2.5
 %
Impact of currency
1.1

0.3
 %
 
17.7

1.4
 %
Net Sales - FY '18
$
392.8

5.6
 %
 
$
1,340.5

3.9
 %

Results for the Quarter Ended June 30, 2018

Americas reported a net sales increase of 5.6% which was negatively impacted by foreign currency of $2.7, or 1.1%. Organic net sales increased 6.7% due primarily to distribution gains, increased volumes, favorable pricing and the favorable net impact from our portfolio optimization. These amounts were partially offset by the May 2017 divestiture of the non-core promotional sales business acquired with the 2016 auto care acquisition.

International reported net sales increased 5.6% positively impacted by foreign currency of $3.8, or 2.6%. Organic net sales increased 3.0% benefiting from distribution gains, pricing actions in several markets and improved product mix.

Results for the Nine Months Ended June 30, 2018

Americas reported net sales improved 3.2%, which was negatively impacted by foreign currency of $2.6, or 0.4%. Organic net sales increased 3.6% due primarily to distribution gains, increased volumes, favorable pricing and the favorable net impact of our portfolio optimization. These amounts were partially offset by retailer merchandising changes, lapping of storm volume and the May 2017 divestiture of the non-core promotional sales business acquired with the 2016 auto care acquisition.

International reported net sales improved 4.9%. This growth was driven by the positive impact of foreign currency of $20.3, or 4.2%. Organic net sales increased 0.7% as a result of distribution gains, pricing actions taken in several markets and improved product mix. These increases were partially offset by the first quarter impact of timing on holiday orders which shifted into the fourth quarter of fiscal 2017.


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Segment Profit (In millions)
Quarter and Nine Months Ended June 30, 2018
 
Quarter Ended June 30, 2018
 
Nine Months Ended June 30, 2018
 
$ Change
% Chg
 
$ Change
% Chg
Americas
 
 
 
 
 
Segment Profit - FY '17
$
53.6

 
 
$
237.2

 
Organic
8.9

16.6
 %
 
4.2

1.8
 %
Impact of currency
(2.1
)
(3.9
)%
 
(2.2
)
(1.0
)%
Segment Profit - FY '18
$
60.4

12.7
 %
 
$
239.2

0.8
 %
 
 
 
 
 
 
International
 
 
 
 
 
Segment Profit - FY '17
$
25.7

 
 
$
109.8

 
Organic
4.0

15.6
 %
 
(7.5
)
(6.8
)%
Impact of currency
2.9

11.2
 %
 
13.6

12.4
 %
Segment Profit - FY '18
$
32.6

26.8
 %
 
$
115.9

5.6
 %
 
 
 
 
 
 
Total Segment Profit