Edgewell Personal Care Company — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2018. Amounts are in millions of dollars except per-share data. The filing was signed August 7, 2018.
Business context and results
Edgewell sells personal-care products in Wet Shave, Sun and Skin Care, Feminine Care, and All Other. The quarter included the March 1 acquisition of luxury men’s skincare company Jack Black; the Playtex gloves business had been sold in October 2017.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $620.6 | $637.5 | $1,697.0 | $1,733.5 |
| Gross profit | $302.7 | $322.1 | $805.1 | $859.7 |
| Gross margin | 48.8% | 50.5% | 47.4% | 49.6% |
| Net earnings | $12.1 | $54.9 | $83.9 | $154.1 |
| Diluted EPS | $0.22 | $0.95 | $1.54 | $2.67 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $193.3 | $135.0 |
Q3 sales declined 2.7%; organic sales fell 4.9% after excluding currency, acquisitions and the gloves divestiture. Nine-month sales declined 2.1%, with organic sales down 4.4%. Management attributed weaker sales mainly to Wet Shave competition and category declines, Feminine Care volume weakness, and lower North American Sun Care sales. Currency and acquisitions partly offset these declines.
Q3 GAAP earnings included a $24.4 non-cash goodwill impairment, restructuring and Jack Black costs. Adjusted net earnings, a non-GAAP measure, were $49.2 versus $63.7; adjusted diluted EPS was $0.91 versus $1.11. Nine-month adjusted net earnings were $131.4 versus $171.7, and adjusted diluted EPS was $2.41 versus $2.98. Management cited lower gross margin and sales volumes as key drivers of the adjusted earnings decline. Gross margin pressure reflected unfavorable volume and cost mix, higher input costs, Sun Care promotions and returns.
Cash, debt and liquidity
- Cash and cash equivalents were $218.5 at June 30, 2018, down from $502.9 at September 30, 2017.
- Nine-month operating cash flow was $193.3; capital expenditures were $41.8, implying free cash flow of $151.5 under the company’s definition. Management expected fiscal 2018 free cash flow to exceed 100% of GAAP net earnings.
- Total borrowings were $1,305.9, including $20.9 of international notes payable; this compared with $1,549.4 at September 30, 2017. The filing reports $1,281.4 of long-term debt including current maturities, of which $184.9 was current.
- No U.S. revolving-facility borrowings were outstanding; $717.0 remained available after $8.0 of letters of credit. The company said it complied with debt covenants.
- Cash used in financing was $371.4, including $124.4 of share repurchases. Investing used $108.3, including the $90.2 Jack Black acquisition, partly offset by $19.0 proceeds from the gloves sale.
Material changes, outlook and risks
- Infant Care goodwill impairment: a sustained decline in market capitalization triggered an interim impairment review and a $24.4 charge. Skin Care and Feminine Care reporting-unit fair values were only 104% and 106% of carrying values, respectively; Wet Ones’ indefinite-lived intangible value was 103% of carrying value. Further impairment remained possible, and the company planned to continue its review in the fourth quarter.
- Project Fuel: the company estimated $225 of annual gross savings by fiscal 2021. It expected $120–$130 of one-time pre-tax charges and $60–$70 of capital investment through fiscal 2021; most charges were expected by the end of fiscal 2019. Fiscal 2018 Project Fuel restructuring charges and capital expenditures were estimated at approximately $50 and $3, respectively. Savings and timing are not assured.
- Management expected an adjusted effective tax rate of 23%–25% for fiscal 2018, dependent on earnings mix by jurisdiction. Tax Act impacts remained provisional: the nine-month net transition-related charge was $17.4, and proposed Treasury regulations had not yet been evaluated.
- Key disclosed risks include intense competition, input-cost inflation, foreign-exchange exposure, seasonality, execution risks from cost savings and acquisitions, substantial indebtedness, and possible further goodwill or intangible impairment. The company reported ordinary-course legal matters and said related liabilities were not reasonably likely to be material based on information then available.
- No material changes to contractual obligations were reported. Debt repayments were scheduled at $185 in fiscal 2019, $600 in fiscal 2021 and $500 in fiscal 2022. The company said it did not expect to pay dividends in the foreseeable future.
Investor verification priorities
- Track organic sales, volume, pricing and segment profitability, especially Wet Shave, Sun Care and Feminine Care trends.
- Review the fourth-quarter impairment assessment and the headroom for Skin Care, Feminine Care and Wet Ones.
- Compare Project Fuel’s realized savings, restructuring charges and capital spending with management’s targets and timing.
- Monitor cash generation, debt maturities, revolver availability and the effect of share repurchases on liquidity.
- Confirm final Tax Act measurements and the resulting effective tax rate, cash taxes and transition-tax payments.