Rayovac reports "record" quarter and fiscal year; notes debt reduction progress

By Paul Deckelman

New York, Nov. 11 - Rayovac Corp. announced what it termed "record" results for the fiscal fourth quarter and 2004 fiscal year on Thursday, noting the positive impact its acquisition of Remington Products Co. LLC and several other subsequently acquired companies had on both its top and bottom lines.

The Atlanta-based maker of flashlight batteries and, through Remington, electric shavers and other electric personal-care products, also boasted of the progress that it made in cutting its debt, helped by what chairman and chief executive officer David A. Jones called "strong" cash flow.

On a conference call with analysts following the release of the company's results, Jones noted that Rayovac generated $18 million of cash flow from operations in the fiscal fourth quarter ended Sept. 30 and $76 million for the fiscal year, "well ahead of our expectations."

This, he said, had allowed the company to pay down its senior credit facility by $133 million during the year.

Cash flow $100 million in '05

Looking ahead - with the company anticipating cash flow of about $100 million in fiscal 2005 - Jones declared that "we will continue to use our strong free cash flow to prudently invest in the high-return areas of our business and to decrease our leverage over time."

In answer to an analyst's question during the call, he said that it was unlikely that Rayovac would use its cash to buy back its stock this upcoming year, preferring to instead use it to pay down debt and invest in the business.

Debt cut to $830 million

Company president and chief operating officer Kent J. Hussey told the conference call that Rayovac had brought its total debt load down to $830 million by the end of the fiscal year, versus $943 million as of Sept. 30, 2003.

The debt reduction was mostly due to the company's use of its strong cash flow during the fourth quarter to accelerate its senior credit facility payment. It also retired $56 million principal amount of Remington subordinated notes, which it had assumed when it acquired Remington, a transaction that closed in fiscal 2003.

Those debt reductions were partially offset by $62 million in additional borrowings and debt assumption connected with Rayovac's acquisition earlier this year of 85% of China-based battery maker Ningbo Baowang Battery Co., which closed on March 31, and its purchase of Brazil-based battery manufacturer Microlite SA, which closed on May 28, as well as $13 million in unfavorable foreign exchange impact on the company's euro-denominated debt.

4Q interest cost rises

Hussey said that fourth-quarter interest expense was $16.7 million, up $7.6 million from a year earlier despite the debt paydown. The increase was due to the higher debt levels associated with the acquisitions.

Hussey said that at year's end, Rayovac had a debt-to-earnings leverage ratio of 4.1-to-1; had it not acquired Ningbo and Microlite and had it instead applied the cash that it spent on them to further debt paydowns, the ratio would have been 3.8-to-1, "in line with our target goal of lowering leverage to less than 4 times." Even so, he noted, Moody's Investors Service recently raised its outlook on the company to "positive" from "stable," recognizing its strong cash flow and its success in integrating the lucrative, high-margin Remington business into the company's operations.

Overall, Rayovac had fourth-quarter net sales of $377 million, a 50% rise from the year-ago quarter's $252.0 million, and had fourth-quarter net income of $18.2 million, or 52 cents a share, up from $12.9 million, or39 cents a share, a year ago.

Remington drives profit gain

Primary drivers of the profit increase were the Remington acquisition, improved battery sales, favorable foreign exchange rates and the impact of restructuring and cost improvement initiatives - the latter were successful enough that they "more than offset" increased raw-materials costs, Jones said - a situation that he anticipates continuing through 2003.

For the full fiscal year, Rayovac had net sales of $1.417 billion, a 54% increase from the previous year's $922.1 million. Full-year net income was $55.8 million, or $1.61 per share, compared with $15.5 million, or 48 cents per share, in fiscal 2003. The $40.3 million profit increase was again primarily attributable to the Remington acquisition and increased battery sales as well as the reduction in restructuring charges.

Rayovac EPS seen $2.10-$2.15

Looking ahead, Rayovac said that it was raising its expectations for fiscal 2005 earnings per share to a range of $2.10 to $2.15, an increase of 15% to 17% over the company's fiscal 2004 pro forma results ($1.83 per share, a 44% improvement over 2003 pro forma EPS of $1.27). Fiscal 2005 net sales are expected to come in around $1.5 billion.

Clearly, the major catalyst for the improved results has been Remington, whose shavers, hair driers and other electric personal-care products produce much higher profit margins for the company than its humble, relatively low-tech batteries, even though Rayovac is one of the largest battery manufacturers in the world, and is the number-three battery company in the United States, behind The Gillette Co.'s Duracell unit and Energizer Holdings Inc., the former Eveready Battery. It anticipates bringing its margins in the battery sphere up by bringing costs down as it ramps up production at its lower-cost alkaline battery factory in China, acquired in the Ningbo deal, and its lower-cost traditional zinc-carbon battery factory in Brazil that it got when it bought Microlite. It also operates battery factories in Wisconsin and in Europe.

The company anticipates increased sales for Remington, particularly in the approaching holiday season, from its latest product - a combination all-in-one portable hair drier and hair straightener, a product which Jones enthused was "revolutionary."

Interestingly, several analysts on the call asked whether Rayovac profited from the hurricanes which tore through the southeastern United States during the quarter, sending people in Florida and nearby states scrambling for flashlights, portable radios - and batteries to operate them.

The answer: not really. Jones said that "the hurricanes were actually a drag on margins, not a contributor."

He explained that "while it's nice to get a $7 [million] or $8 million bump up in revenue" from sales of batteries and flashlights in the affected areas, the fact is that given the low-margin nature of batteries and the costs of filling increased orders from retailers in hurricane country and getting the batteries there in time to do any good, "at the end of the day, you don't make a lot of money off it."

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