enr - anon thesis 10 30 2013.docx

7/27/2019 ENR - Anon Thesis 10 30 2013.docx

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CNM3D

ENR Write Up

October 30, 2013

Recommendation: Sell short

Current Price: $98.92

Target Price: $76

Bull Price: $115

Market Cap: $6.1B

Liquidity: 590k shares or $63MM per day

Description

Energizer Holdings (ENR) is a 2000 spin out of Ralston-Purina. The company has two divisions:

Household Products (primarily batteries) and Personal Care (primarily wet shave, along with femininecare, suntan lotion, wet wipes, etc.). In the fall of 2012, ENR announced a large corporate restructuring

with the aim of ~$150MM a year in permanent cost savings. On July 31st, 2013, ENR announced the

acquisition of JNJs feminine care division for $185MM.

Thesis

ENR is a low quality business. Batteries, which are ~45% of EBIT, are in secular decline and facing anexpanding promotional competitor (SPBs Rayovac). Wet shave, which is approximately 30 -40% of EBIT,

is lapping a major product launch and facing a larger, promotional competitor (PGs Gillette). In

response to persistent negative sales in batteries, ENR announced a large restructuring plan with

$150MM in project permanent savings. Despite the failure of ENRs similar 2011 restructuring plan,

analyst/bulls have factored a near complete success into their estimates.

Further, on ENRs Q3 call, management announced the loss of two key battery customers which

combined represent a 6% loss in sales on top of -2% industry trends, implying a tough Q4 down >10%

and 2014 battery sales down 6-8%. Despite this significant headwind, ENR guided 2014 EPS up mid-

single digits, which implies flat battery EBIT and makes 2014 estimates entirely dependent upon

restructuring success. Given ENRs past failed restructuring and aggressive 2014 guidance, I believe ENR

is likely to miss guidance and its present valuation does not adequately discount this risk. In addition,management has recently been consistent sellers after several years of little action.

Valuation

Target Case: If cost cuts fail to materialize, for 2014, I forecast 19% battery margins (inline with2012) with -6% sales growth and 50 bps of personal care (wet shave) EBIT margin expansion and

3% sales growth plus 20 cents in EPS from the JNJ acquisition, which yields ~$6.35 in EPS.

Applying a 12x multiple, ENRs average for past 5 years, yields $76 per share.

Q1 Q2 Q3 Q4E FY2013E FY2014E

CM Est. $2.20 $1.80 $1.57 $1.33 $6.90 $6.35

Street Est. $2.20 $1.80 $1.57 $1.37 $6.94 $7.37


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o Note: This is better organic personal care sales and EBIT growth than JNJ has seen since2009.

Downside Case: If I model 2014 battery margins at 25% (500bps higher than batteries previousall-time high margins) and with the same assumptions for personal care and JNJ acquisition, I

reach $7.65 in EPS. A 15x multiple yields $115.

Risks

Continued Multiple Expansion At 14x 2014 EPS estimates, ENR trades at a discount to theConsumer Staples group, which typically ranges from 16x-20x. While I believe a larger discount

is warranted given ENRs lack of topline growth, some bulls may disagree.

Non-GAAP Earnings Beats As ENR is the midst of a restructuring, there is a significantdifference between GAAP and Non-GAAP earnings. While I am suspicious of the validity of ENRs

restructuring charges, in the near term, ENR has a pass from the buyside to make up earnings

beats via Non-GAAP charges.

Takeout While I believe it is unlikely given the lack of interest at $65, ENR occasionally attractsspeculation as a takeover candidate. However, assuming a 7.5x EBITDA on batteries and a 10x

on the rest of the business would only yield $108 per share, ~10% upside from current levels. A12x multiple on the rest of business, aggressive given wet shave difficulties and low quality of

remaining brands, would yield $122. (Street 2014 estimates as EBITDA base.)

Change in Strategy by SPB (Rayovac) or PG (Gillette) If a major competitor were to changestrategies and the battery/wet shave category were to become less competitive, ENRs shares

would benefit.

Catalyst

Earnings Disappointments into 2014 As previously stated, I believe 2014 estimates are toohigh for ENR. On both the Q2 and Q3 releases/calls, management has talked down 2014

numbers, including explicitly guiding below the Street for 2014. As management has already

exited stock and will likely hit their 2013 bonus targets, I believe management will look to lower2014 EPS expectations on the Q4 call.

Q4 and 2014 Estimates

For Q4, ENR guided battery sales down greater than 10% (customer losses, product exits,industry declines) and implied slow Personal Care (wet shave, etc.) growth

o My estimates for Q4 are roughly inline on sales and slightly below on EPS As ENRs EPS guidance is Non-GAAP, not tracking FCF, and I do not trust

management, I put little weight on current EPS

During 2014, ENRs restructuring charges should dissipate and ENRs GAAPand Non-GAAP earnings will equate, hence I believe the market is focused on

2014 EPS For FY 2014, ENR provided initial guidance of mid-single digit (MSD) growth, or ~$7.35, which

roughly corresponds with $780MM in EBIT

o Note: Guidance does not include the JNJ acquisition, which will be discussed below Assuming Personal Care grows topline 3% with 50 bps margin expansion, significantly better

than achieved in last few years, implies $495MM in 2014 EBIT

Further assuming $180MM in Corporate Expense (flat y/y), implies ~$465MM in EBIT, roughlyflat y/y


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o However, on the Q3 call, ENR announced the loss of two key customers (Sams Club andFamily Dollar) which combined will negatively impact sales by 6% for the next four

quarters, Q4 2013 through Q3 2014, on top of the expected 2% or more industry

declines

o Assuming a 50% incremental margin on battery sales (likely conservative, explainedbelow), implies a $61MM-$82MM headwind to 2014 EBIT

o Compared to 2012 battery segment EBIT of $400MM and 2013 Non-GAAP EBIT of~$470MM, this is a very significant drag

Even with my conservative assumptions for Personal Care and incremental margin, ENRs 2014guidance still implies a complete success of the $150MM restructuring program plus an

additional $10-$25MM in savings

o Note: Street estimates for Battery EBIT are ~$465MM to $480MM, as most analysts areless bullish (i.e. conservative) in their Personal Care assumptions.

Given past failed restructurings, my conservative Personal Care assumptions, and incrementalbattery margins likely above 50%, I believe it is highly likely ENR will miss 2014 estimates

Note: On July 31st, ENR announced the acquisition of JNJs feminine care segment for $185MM,with limited disclosure beyond the price and total sales of $250MM. I assume 8x EBITDA, D&A at

2% of sales, and a 27% tax rate to get ~$18MM in Personal Care EBIT and ~$0.20 in EPS

accretion. The actual transaction price and synergies could be wildly different. This is just a

simple estimate.

Batteries

Batteries were ~45% of ENRs 2012 EBIT Global alkaline battery sales are in secular decline due to the shift towards electronic devices

with rechargeable batteries

o Walkmen have been replaced by iPods, Gameboys by iPads In the past 12 months, global alkaline battery volumes are dropped ~5%, which is on top of HSD

volume declines in the 12-24 month period

At the same time volumes decline, ENR faces continued pressure from both SPB (Rayovac) onthe low end and PG (Duracell) on the high end

o SPB has grown market share over the past several years There is virtually no difference between Rayovac and Energizer/Duracell

batteries in terms of performance and/or shelf life

A quick Google search will return dozens of scientific articles confirmingthis

When consumers traded down in the Great Recession, many discovered thatthere was no difference and did not trade up as the economy recovered

SPB has offered better vendor support and gross profit dollars for Rayovacbatteries, which has enabled SPB to gain shelf space at outlets such as WMT,

HD, LOW, etc.

2012 EBIT $400

Restructing Savings $150

2013 Incremental EBIT ($24)

2014 Incremental EBIT ($71)

Implied 2014 EBIT $455

Battery Segment ($'MMs)


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o PG has significantly outspent ENR in marketing and now has a leading market position inbatteries

PG spends ~16% of revenues in advertising and promotion while ENR spends~9%

Note: This difference in ad spend also affects ENRs other divisions,which will be discussed below

This significant difference in advertising and promotional support has lead toEnergizer market share losses as ENR is priced inline with Duracell despite lower

support

o Essentially, merchants need a Good, Better, Best strategy and Duracell is providing thead/marketing supporting for Best, Rayovac is providing the price for Good, and

Energizer is hanging somewhere in between and not investing in either price or ad

spend

Energizers poor position in a declining category implies a significant headwind to EBIT growtho Assuming 50% incremental margins, every 1% decline in batteries implies ~$10MM

headwind to EBIT

o ENRs overall gross margin is ~47%. As there are fixed costs in ENRs COGS line,batteries are historically modestly more capital intensive than Personal Care, and

batteries are seeing not just volume but price reductions, I believe 50% incremental

margins is a conservative estimate.

Restructuring Plans

In response to the challenging outlook for batteries, ENR announced a restructuring plan in Fall2012


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o ENR plans to reduce headcount by 10% and rationalize its battery manufacturingfootprint

Most of the cost cuts are SG&A, though ENR does not provide the requisitedetail to properly analyze how fixed vs. variable costs are accounted for in COGS

and SG&A

o While a sensible step for a declining business, ENRs guidance is exceptionally aggressiveo ENR expects $225MM in savings from the restructuring, with $150MM permanently

falling to the bottom line

This is an enormous number, as 2012 battery segment sales were $2.2B andEBIT was $400MM, implying a 680bp increase in operating margins and a 38%

increase to profits

Note: I am referring to ENRs Household Products segment when I refer to thebattery segment. Technically, this segment also includes portable lighting, but as

these products are a minor percentage of sales and profits, I refer to the

segment as batteries for simplicity.

Of note, this is not the first restructuring the battery segment has seeno In 2010, ENR announced a less aggressive $65MM-$85MM restructuring plan with

permanent savings of $35MMo Despite managements belief that the full cost savings were realized, battery segment

EBIT has declined from $451MM in 2010 to $411MM in 2011 and $400MM in 2012

Note: At the same time, revenues have fallen from $2,200MM to $2,088MM.If we are to believe that the full $35MM cost savings were realized, that

implies $85MM in EBIT deterioration over the past two years despite only

$112MM in revenue declines an ominous sign and significantly above my

50% incremental margin assumption.

Battery manufacturing is not a particularly capital intensive and does not require high effectiveutilization

o Battery segment operating margins have held between 18-20% operating margin overthe past several years

o Battery plants are basically large, automated lines operating in a normal environmentwithout need for excess heat/cooling, sterilization, etc. They are not manufacturing

facilities where idle time is particularly expensive and rationalizing capacity would imply

a significant margin benefit.

This is not a blast furnace heated to 3,000F or a semiconductor fab that mustbe constantly held in a clean room environment

o Most of ENRs battery plants are near fully depreciated, implying little chance for marginexpansion from lower capital intensity

Battery segment D&A has average 3.0%, 2.9%, and 2.6% in 2010, 2011, and2012

Capex has been running about half of battery segment D&A (was $58.3MM in2012 vs. D&A of $82.0MM)

o Importantly, ENR has been operating between 50%-80% utilized for the past few years


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If this really were a segment where 10% capacity rationalization would havetremendous margin benefit, economic logic would dictate that it should struggle

to achieve profitability in a sub 80% utilization scenario, yet ENR has held 18-

20% operating margins with no problem in this environment

Further, as with most manufacturing, I would expect per unit pricing to be a larger predictor offuture operating margin than effective utilization

o Here the trends are clearly negative, as continued pressure from PG and SPB keep a lidon pricing

o ENR actually tried to take pricing in 2012 and was thoroughly rebuked by retailers, whosimply awarded increased shelf space to Rayovac/Duracell

Bottom Line: While a positive and the right step, I do not believe ENRs restructuring will reach its targeted $150MM in permanent savings.

Personal Care/Wet Shave

ENRs other division is Personal Care, which accounted for ~55% of 2012 EBITo ENRs second largest product by EBIT is Wet Shave, which accounts for 30-40% of overall

EBIT and 2/3rds of Personal Care EBIT

o The other segments, such as sun care, feminine products, and infant care, dont reallymove the needle

In Personal Care, recent trends for ENR have been weako ENR originally guided Personal Care to MSD 2013 organic revenue growth

ENR has not had MSD personal care revenue growth since rebounding from therecession

ENR subsequently lowered FY guidance to LSD in Q2 and flat y/y as of Q3, withNielsen trends running below that

This is not a management team with a history of conservative guidanceo For 2014, Street estimates imply LSD revenue and EBIT growth

My estimates are actually slightly ahead of the Street to be conservative


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Despite wet shave ostensibly being a good long term business (Buffett was a big Gillette holder),I believe ENRs wet shave business is unlikely to see better than MSD EBIT growth in the

foreseeable future

o PG has a strategic plan to dominate/gain share in its key categories, such as wet shaveo Gillette had lost share to Schick following the Hydro launch so PG is simply pushing back

to regain what they lost, despite ENRs management complaints about an irrational

competitor

o PG didnt get traction pushing its higher end Fusion product, so instead is pus hing itslegacy Mach 3 as well as disposables

This is an unusual step for PG and represents a move down into categories thatwere typically ENRs turf

Simply put, I believe the present pressure in wet shave may not be as short lived as ENRmanagement hopes and the rest of Personal Care are small, low quality brands

Management Caliber/Stock Sales

Management has repeatedly been accused of self-enrichment and poor operational choiceso For instance, ENR previously paid management only on EPS growth regardless of how

that EPS growth was reached One time benefits and tax changes would suddenly boost Q4 earnings just

enough to meet required thresholds and/or numbers would be sandbagged if

management was far from target

o Operationally, management has been hit or miss It took management until 2011 to admit a secular problem in batteries, despite

two years of data and numerous market research indicating such

Management has repeatedly over promised and under delivered on guidance I.E. The successful 2011 cost restructuring, despite subsequent

negative EBIT growth

In the context of a tainted management reputation, I find the recent increase in insider sellingtroubling

o Prior to Fiscal 2013, CEO Klein had sold only twice since 2007 40,000 shares in 2009 and 50,000 shares in 2010, both related to options

exercise

His 2009 sale was within 2% of the 6 month high and ENR subsequently missednumbers the immediately following quarter and traded down ~20% from his

exit

His 2010 sale was 7% off the 6 month high, and the immediately following QENR missed sales estimates and shares traded down 15% from his sales

o In December 2012 and February 2013, CEO Klein sold 40,000 and 60,000 and shares at~$81 and $91, respectively, both related to options exercise

These sales represent about 20% of the CEOs net value at risk in ENRs stockand ~63% of his options at risk

The rest of his stock position is tied to partially/fully vested stockequivalents and other equity awards which may or may not be saleable

Of note, the December sale occurred exactly 4 days after the proxy was mailedo Other management have been sellers in the past 9 months


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The heads of both divisions, the CFO, and several members of the board,including the largest shareholder and former CEO Mulcahy, have all been sellers

after limited sales over the previous three years

Earnings Quality

ENRs current earnings improvement is largely non-GAAP and of low quality as it has yieldedlittle improvement thus far in CFFO

o Through Q3 2013, in Non-GAAP terms, ENR has generated a $74.1MM improvement inbattery EBIT, $109.1MM in GAAP restructuring charges which should yield a $34.9MM

tax shield vs. YTD cash restructuring payments of $29.7MM, and $12.2MM in lower

corporate expenses

o This is also in the context of managements plan to improve working capital efficiency,so I am comparing CFFO pre-working capital changes

o While I detect no large balance sheet anomaly and there are always timing differenceswith cash vs. accrual accounting, ENRs current Non-GAAP improvement has been

underwhelming from a cash perspective, which calls into question the validity of ENRs

cost savings

+ Battery Segment Gain $74.1

+ Personal Care Gain $2.7+ Lower Corporate Expense $12.2

EBIT Improvement $89.0

Taxes $25.8

Net Income Benefit $63.2

- Cash Restructuring Charges $29.7

+ Restructuring Tax Shield $34.9

Implied Pre-WC CFFO Benefit $68.4

Actual Change in Pre-WC CFFO $16.9

YTD Non-GAAP CFFO Change


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CNM3D Segment Breakdown

FY12 FY13E

($ mi ll ions) FY05 FY06 FY07 FY08 FY09 FY10 FY11 De c-11 Mar-12 Ju n-12 Se p-12 FY12 De c-12 Mar-13 Jun -13 Se p-13 E FY13E FY14E

TOTAL SALES

Household Products 2,376.3 2,474.3 2,109.5 2,199.7 2,196.0 633.7 450.3 450.6 553.1 2,087.7 638.2 443.3 462.0 497.8 2,041.3 1,913.7

Personal Care 1,694.1 1,856.7 1,890.3 2,048.6 2,449.7 564.4 651.5 673.5 590.1 2,479.5 554.3 652.6 649.5 596.0 2,452.4 2,526.0

TO TAL S ALES 4,070 .4 4,331.0 3,9 99.8 4,24 8.3 4,645.7 1,198.1 1,10 1.8 1,124.1 1,143.2 4,5 67.2 1,192 .5 1,095.9 1,1 11.5 1,093 .8 4,493.7 4,439.7

SALES GROWTH

Household Products 10.7% 4.1% -14.7% 4.3% -0.2% -5.2% 6.0% -11.5% -6.8% -4.9% 0.7% -1.6% 2.5% -10.0% -2.2% -6.2%

% local currency 8.6% 0.4% -8.9% 1.5% -2.4% -5.0% 6.8% -8.7% -3.7% -3.2% 0.8% -1.1% 3.7% -8.0% -1.3% -4.8%

% currency 2.1% 3.7% -5.8% 2.7% 2.3% -0.2% -0.8% -2.8% -3.1% -1.7% -0.1% -0.5% -1.2% -2.0% -0.9% -1.4%

Personal C are 9.6% 1.8% 8.4% 19.6% 11.0% 6.7% -7.1% -2.5% 1.2% -1.8% 0.2% -3.6% 1.0% -1.1% 3.0%

% local currency 5.7% 6.1% 6.0% 5.1% 1.4% 6.9% -5.1% 0.5% 0.6% -1.4% 1.3% -1.8% 3.0% 0.2% 3.0%

% currency 3.9% -4.3% 2.3% 14.4% 9.6% -0.2% -2.0% -3.0% 0.6% -0.4% -1.1% -1.8% -2.0% -1.3% 0.0%

TOTAL SALES 6.4% -7.6% 6.2% 9.4% 1.8% 6.4% -8.9% -4.6% -1.7% -0.5% -0.5% -1.1% -4.3% -1.6% -1.2%

% local currency -0.3% -2.5% 3.7% 1.2% -2.2% 6.8% -6.6% -1.5% -1.2% -0.3% 0.3% 0.5% -2.3% -0.5% -0.5%

% local currency including acquisition impact 1.0% -3.8% 1.0% -4.0% 1.7% 6.8% -6.6% -1.5% -2.2% -0.3% 0.3% 0.5% -2.3% -0.5% -0.5%

% currency 4.6% -5.2% 2.6% 4.3% 0.1% -0.4% -2.3% -3.1% -1.5% -0.2% -0.8% -1.6% -2.0% -1.2% -0.7%

% OF TOTAL SALES

Household Products 58.4% 57.1% 52.7% 51.8% 47.3% 52.9% 40.9% 40.1% 48.4% 45.7% 53.5% 40.5% 41.6% 45.5% 45.4% 43.1%

Personal Care 41.6% 42.9% 47.3% 48.2% 52.7% 47.1% 59.1% 59.9% 51.6% 54.3% 46.5% 59.5% 58.4% 54.5% 54.6% 56.9%

TO TAL S ALES 100 .0% 100.0% 1 00.0% 100 .0% 100.0% 100.0% 10 0.0 % 100.0% 100.0% 1 00.0% 100 .0% 100.0% 100.0% 100 .0% 100.0% 100.0%

FY12 FY13E

($ mi ll ions) FY05 FY06 FY07 FY08 FY09 FY10 FY11 De c-11 Mar-12 Ju n-12 Se p-12 FY12 De c-12 Mar-13 Jun -13 Se p-13 E FY13E FY14E

OPERATING PROFIT

Household Products 472 489 399 451 411 149 69 70 113 400 161 101 100 110 472 365

Personal Care 271 323 341 367 408 124 128 109 110 471 116 136 111 105 469 495

SEGMENT OPERATING PROFIT 744 812 740 818 819 272 197 179 222 871 277 237 211 215 941 860

Corporate -151 -98 -97 -112 -135 -42 -49 -38 -51 -182 -34 -43 -41 -60 -178 -178

TOTAL OPERATING PROFIT 593 714 643 706 684 230 148 141 171 689 243 195 170 155 763 683

% CHANGE

Household Products 3.6% -18.5% 13.2% -9.0% -8.9% 32.4% -13.1% -2.0% -2.5% 7.9% 45.9% 44.0% -2.1% 17.9% -22.6%

Personal Care 18.9% 5.8% 7.5% 11.4% 61.2% 4.1% -16.2% 40.4% 15.3% -5.9% 6.3% 1.7% -4.4% -0.5% 5.7%

SEGMENT OPERATING PRO FIT 9.2% -8.9% 1 0.5% 0.2% 13.5% 12.5% -15.0% 15.1% 6.3% 1.7% 20.2% 18.2% - 3.2% 8.0% -8.5%

Corporate -35.0% -1.0% 15.2% 20.9% 2 4. 7% 3 6. 5% 1 7. 4% 5 9. 9% 34.5% - 19 .6 % - 13 .6 % 7 .3 % 1 6. 3% -2.1% 0.0%

TO TAL O PERATING PRO FIT 20.4% - 9.9% 9.8% -3.1% 1 1.7% 10.5% -21.0% 6 .2% 0.8% 5.6% 31.4% 21.1% - 9.1% 1 0.7% -10.5%

OPERATING MARGIN

Household Products 19.9% 19.8% 18.9% 20.5% 18.7% 23.5% 15.3% 15.4% 20.4% 19.2% 25.2% 22.7% 21.7% 22.2% 23.1% 19.1%

Personal Care 16.0% 17.4% 18.0% 17.9% 16.7% 21.9% 19.7% 16.2% 18.6% 19.0% 21.0% 20.9% 17.1% 17.6% 19.1% 19.6%

TO TAL O PERATING PRO FIT 18.3% 1 8.7 % 1 8.5% 19.2% 17.6 % 2 2.7% 17.9% 15.9% 19 .4% 19.1% 23.2% 2 1.6% 19.0% 19.7% 2 0.9% 19 .4%

Corporate -3.7% -2.3% -2.4% -2.6% -2.9% -3.5% -4.5% -3.4% -4.5% -4.0% -2.9% -3.9% -3.7% -5.5% -4.0% -4.0%

TO TAL O PERATING PRO FIT 14.6% 1 6.5 % 1 6.1% 16.6% 14.7 % 1 9.2% 13.4% 12.5% 14 .9% 15.1% 20.4% 1 7.7% 15.3% 14.2% 1 7.0% 15 .4%


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CNM3D Income Statement

FY13E

($ millions) FY11 FY12 Dec-12 Mar-13 Jun-13 Sep-13 E FY13E FY14E

I ncome Statement:

Revenue 4,645.7 4,567.2 1,192.5 1,095.9 1,111.5 1,093.8 4,493.7 4,439.7

% change 9.4% -1.7% -0.5% -0.5% -1.1% -4.3% -1.6% -1.2%

Cost of goods sold 2,493.8 2,429.3 630.9 565.2 596.4 594.7 2,387.2 2,344.1

as a % of revenue 53.7% 53.2% 52.9% 51.6% 53.7% 54.4% 53.1% 52.8%

Change as % of revenue (bps) 121 (49) 2 (148) 70 50 (7) (32)

% change 11.9% -2.6% -0.4% -3.3% 0.2% -3.4% -1.7% -1.8%

Non-recurring char ge/(benefit) 0.0 0.0 - - - - 0.0 0.0

Gross Profit 2,151.9 2,137.9 561.6 530.7 515.1 499.1 2,106.5 2,095.6

Gross Profit, adjusted 2,151.9 2,137.9 561.6 530.7 515.1 499.1 2,106.5 2,095.6

as a % of revenue 46.3% 46.8% 47.1% 48.4% 46.3% 45.6% 46.9% 47.2%

Change as % of revenue (bps) (121) 49 (2) 148 (70) (50) 7 32

% change 6.6% -0.7% -0.5% 2.6% -2.6% -5.4% -1.5% -0.5%

SG&A 841.1 886.7 199.5 208.9 199.7 200.8 808.9 829.0

as a % of revenue 18.1% 19.4% 16.7% 19.1% 18.0% 18.4% 18.0% 18.7%

Change as % of revenue (bps) 31 131 (102) (179) (142) (145) (141) 67

% change 11.3% 5.4% -6.2% -9.1% -8.4% -11.3% -8.8% 2.5%

Advertising and Promotion Expense 524.0 449.5 94.8 102.5 121.0 113.9 432.2 482.9

as a % of revenue 11.3% 9.8% 7.9% 9.4% 10.9% 10.4% 9.6% 10.9%

Change as % of revenue (bps) 42 (144) (10) (78) (173) 170 (22) 126

% change 13.6% -14.2% -1.7% -8.2% -14.7% 14.3% -3.9% 11.7%

Research and Development 108.3 112.5 24.6 24.8 24.2 29.3 102.9 101.2

as a % of revenue 2.3% 2.5% 2.1% 2.3% 2.2% 2.7% 2.3% 2.3%

Change as % of revenue (bps) 5 13 (7) (25) (37) 0 (17) (1)

% change 11.5% 3.9% -3.9% -10.5% -15.4% -4.3% -8.6% -1.6%

Non-recurring char ge 77.1 (11.0 ) 12.6 44.7 - 57.3 0.0

Operating income 601.4 700.2 230.1 149.8 170.2 155.2 705.3 682.5

O perating income, Adjusted 678.5 689.2 242.7 194.5 170.2 155.2 762.6 682.5

as a % of revenue 14.6% 15.1% 20.4% 17.7% 15.3% 14.2% 17.0% 15.4%

Change as % of revenue (bps) (199) 49 116 432 281 (75) 188 (160)

% change -3.7% 1.6% 5.6% 31.4% 21.1% -9.1% 10.7% -10.5%

Interest expense, net 148.1 120.5 41.4 36.8 34.1 38.1 150.4 137.2

Pretax Income 453.3 579.7 188.7 113.0 136.1 117.1 554.9 545.3

Pretax Income, Adjusted 530.4 568.7 201.3 157.7 136.1 117.1 612.2 545.3

as a % of revenue 11.4% 12.5% 16.9% 14.4% 12.2% 10.7% 13.6% 12.3%

% change -7.2% 7.2% 0.3% 34.9% 27.3% (18.8%) 7.7% -10.9%

Taxes 144.8 156.5 58.9 28.1 19.2 32.8 139.0 158.2

Taxes, ex charges 165.5 160.9 63.6 44.1 36.8 32.8 177.3 158.2

Tax Rate 31.2% 28.3% 31.6% 28.0% 27.0% 28.0% 29.0% 29.0%

Net inco me 308.5 423. 2 129.8 84.9 116.9 84.3 415.9 387. 2

Net income, Adjusted 364.9 407.8 137.7 113.6 99.3 84.3 434.9 387.2

Operating EPS:

Basic EPS $5.24 $6.28 $2.23 $1.83 $1.59 $1.35 $7.00 $6.27

% change -7.1% 19.8% 7.4% 48.1% 33.5% (24.1%) 11.4% -10.4%

Diluted EPS $5.19 $6.20 $2.20 $1.80 $1.57 $1.33 $6.90 $6.35

% change -7.3% 19.5% 7.2% 48.2% 33.3% (24.3%) 11.2% -7.9%

Basic shares outstanding 69.6 64.9 61.8 62.1 62.3 62.3 62.1 61.7

% change -0.6% -6.8% -6.6% -5.0% -4.3% -0.8% -4.3% -0.6%

Diluted shares outstanding 70.3 65.7 62.6 63.0 63.3 63.3 63.1 62.7

% change -0.3% -6.5% -6.4% -5.1% -4.1% -0.6% -4.0% -0.5%

enr - anon thesis 10 30 2013.docx

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