Edgewell Personal Care Company — Q3 FY2019 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2019. Unaudited results are compared with the periods ended June 30, 2018. Edgewell sells personal care products across Wet Shave, Sun and Skin Care, Feminine Care, and All Other.
Financial results and key metrics
| Metric | Q3 FY2019 | First nine months FY2019 |
|---|---|---|
| Net sales | $609.2 million, down 1.8%; organic sales down 0.3% | $1,613.0 million, down 4.9%; organic sales down 4.3% |
| Gross profit / margin | $292.2 million / 48.0%, versus 48.6% | $736.6 million / 45.7%, versus 47.3% |
| GAAP net income (loss) | $(441.4) million, versus $12.1 million | $(393.6) million, versus $83.9 million |
| GAAP diluted EPS | $(8.16), versus $0.22 | $(7.27), versus $1.54 |
| Adjusted net earnings and diluted EPS (non-GAAP) | $60.5 million; $1.11, versus $49.2 million; $0.91 | $142.2 million; $2.62, versus $131.4 million; $2.41 |
Q3 adjusted earnings improved mainly from lower advertising and promotion and overhead spending, partly offset by lower gross margin. Nine-month adjusted earnings rose for similar cost reductions despite lower sales and margin. These adjusted measures exclude specified items and should not be viewed as substitutes for GAAP results.
- Cash flow: Nine-month operating cash flow was $98.2 million, down from $181.5 million. Capital expenditures were $38.7 million; investing cash outflow was $26.9 million and financing cash outflow was $57.5 million. Cash increased $12.6 million to $279.0 million.
- Debt and liquidity: Total borrowings were $1,237.6 million, including $125.0 million under the U.S. revolver and $12.6 million of international borrowings. Cash was $279.0 million; reported current assets were $1,035.6 million and current liabilities $678.6 million. Revolver availability was $591.5 million, after letters of credit. The company said it expected to refinance the revolver before its June 2020 maturity and was compliant with debt covenants.
- Other: Interest expense was $15.6 million for Q3 and $48.0 million for the nine months, down year over year. The nine-month effective tax rate was 4.1%; adjusted effective tax rate was 24.4%.
Changes versus prior comparable periods
- Sales weakened: Q3 organic declines in Wet Shave and Feminine Care were partly offset by Sun and Skin Care growth. Nine-month organic sales fell across all segments, particularly Wet Shave and Feminine Care.
- Gross margin contracted by 60 basis points in Q3 and 160 basis points year to date. Management cited pricing and trade investment, higher energy and maintenance costs, and lower volume-related absorption.
- Segment results were mixed for the nine months: Wet Shave profit fell to $164.8 million from $177.6 million; Sun and Skin Care rose to $82.1 million from $76.3 million; Feminine Care rose to $36.7 million from $25.7 million; All Other declined to $10.8 million from $16.8 million.
- Operating cash flow declined, principally from working-capital changes, including inventory builds for Sun Care reformulation and Brexit preparations, and payment timing.
Outlook, management commentary, and notable items
- Impairments: A $549.0 million non-cash charge followed a decline in the company’s share price and interim valuation review. It included $358.0 million of Wet Shave goodwill, $29.0 million of Infant Care goodwill, and $87.0 million and $75.0 million for the Wet Ones and Diaper Genie trade names. Management planned further impairment review in Q4. Skin Care and Feminine Care reporting-unit fair values were only 102% and 105% of carrying values; adverse discount-rate or forecast changes could cause additional impairment.
- Harry’s transaction: Edgewell agreed to acquire Harry’s in a cash-and-stock transaction valuing it at $1.37 billion; approximately 79% was expected to be paid in cash and 21% in Edgewell shares. Closing was expected by the end of Q1 2020 calendar year, subject to customary conditions and regulatory clearance. Financing was planned through cash, new debt, and equity.
- Project Fuel: The company expected $225–$240 million of total annual gross savings by the end of FY2021, with savings intended to support growth investment, offset cost pressures, and improve profitability and cash flow. Estimated one-time pretax charges were $130–$140 million, plus $60–$70 million of capital investment. Through June 30, cumulative restructuring charges were $82.7 million and cumulative savings were approximately $100 million.
- Other outlook: Adjusted FY2019 effective tax rate was expected to be 23.5%–25.5%, dependent on geographic earnings mix. Additional Sun Care reformulation charges were expected during the rest of FY2019. The filing does not provide a clear consolidated revenue or EPS forecast.
- Strategic review and risks: Edgewell elected to retain Feminine Care after reviewing alternatives, citing improving trends and outlook, but continued to explore alternatives for Infant Care. Foreign exchange exposure, competition and retailer distribution losses, seasonal Sun Care returns and weather, input-cost inflation, and the Harry’s financing and closing conditions are relevant risks. Substantially all cash was held outside the U.S.
Investor facts to verify
- Whether the Harry’s transaction closes on schedule and on the stated financing and dilution terms.
- Whether Wet Shave, Infant Care, Wet Ones, or Diaper Genie face further impairment in the Q4 review.
- Whether Project Fuel delivers its targeted savings without impairing brand support or growth.
- Whether weaker organic sales, gross margins, and operating cash flow stabilize, including the effects of competition, pricing, Sun Care returns, and inventory normalization.
- Whether the company refinances the $125.0 million revolver before maturity and maintains adequate liquidity and covenant compliance.