Edgewell Personal Care Company — Q3 FY2017 Form 10-Q
Reporting period: Three and nine months ended June 30, 2017. Financial figures are in millions of U.S. dollars except per-share data. Edgewell sells personal care products through Wet Shave, Sun and Skin Care, Feminine Care, and All Other segments. The quarter includes Bulldog Skincare, acquired October 31, 2016.
Financial performance
| Metric | Q3 FY2017 | Q3 FY2016 | Nine months FY2017 | Nine months FY2016 |
|---|---|---|---|---|
| Net sales | $637.5 | $645.1 | $1,733.5 | $1,751.4 |
| Gross profit / margin | $322.1 / 50.5% | $311.2 / 48.2% | $859.7 / 49.6% | $849.8 / 48.5% |
| Net earnings | $54.9 | $36.7 | $154.1 | $126.5 |
| Diluted EPS | $0.95 | $0.61 | $2.67 | $2.11 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $119.4 | $4.1 |
Q3 sales declined 1.2%; organic sales declined 0.6% after a 0.6% contribution from Bulldog and a 1.2% currency headwind. Nine-month sales fell 1.0%, with organic sales down 0.8%. Q3 gross margin improved 230 basis points; the nine-month margin improved 110 basis points. Management attributed the margin gains principally to operational efficiencies, lower commodity and product costs, and favorable mix and pricing, partly offset by volume declines.
Q3 GAAP net earnings rose 49.6% year over year. Adjusted net earnings, a non-GAAP measure, increased 62.5% to $63.7, and adjusted diluted EPS was $1.11 versus $0.66. For nine months, adjusted net earnings increased 13.9% to $171.7 and adjusted diluted EPS was $2.98 versus $2.52. Adjusted results exclude specified restructuring, separation and other items and related taxes; they are not GAAP measures.
Segments and key changes
- Wet Shave: Q3 sales were $358.5, down 1.7% reported and essentially flat organically; nine-month sales were $1,007.3, down 2.6% reported and 1.5% organically. Segment profit rose to $59.8 in Q3 and $205.0 for nine months, helped by cost efficiencies and lower advertising in the quarter. Management cited competitive pressure in shaving gels and creams, weaker women’s systems, and temporary European supply issues.
- Sun and Skin Care: Q3 sales rose 6.5% to $161.1, including Bulldog; organic sales grew 4.9%. Nine-month sales rose 9.5% to $369.3, with 7.3% organic growth. Segment profit increased to $42.4 in Q3 and $94.1 for nine months. Growth was led by Banana Boat and Hawaiian Tropic; Bulldog contributed to reported growth.
- Feminine Care: Q3 sales fell 11.0% to $86.4, primarily from volume declines, distribution losses, competition, and category softness. Nine-month sales fell 8.0% to $258.7. Segment profit was $7.6 in Q3, but down 50.7% to $17.5 for nine months, reflecting lower volume and Montreal-to-Dover manufacturing transition costs.
- All Other: Q3 sales declined 1.9% to $31.5; nine-month sales were nearly flat at $98.2. Segment profit increased 9.8% to $6.7 in Q3 and was flat at $21.3 for nine months.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $119.4, compared with $4.1 in the prior-year period. Management said the comparison mainly reflects a $100.5 international pension contribution in FY2016 and higher current-year earnings, partly offset by increased deferred compensation payments.
- Capital expenditures were $45.4; cash flow after capital expenditures was approximately $74.0. Investing cash outflow was $73.5, including $34.0 for Bulldog. Financing cash outflow was $334.6, principally reflecting repayment of the Netherlands facility and other net debt repayments, as well as $94.6 of share repurchases. Cash declined $284.0 to $454.9.
- At June 30, total borrowings were $1,597.8, including $17.7 of notes payable; cash was $454.9, implying net borrowings of approximately $1,142.9. Long-term debt was $1,580.1, with no current maturities reported. The company had $300.0 drawn on its U.S. revolver and $417.0 of availability after $8.0 of letters of credit. Current assets were $1,236.0 and current liabilities $544.3.
- Variable-rate debt was $484.7. Management estimated a one-percentage-point rate increase would raise annual interest expense by approximately $4.8. The company reported compliance in all material respects with its debt covenants. Substantially all cash was held outside the U.S.; management intends to reinvest foreign subsidiary earnings indefinitely, noting possible tax consequences or regulatory restrictions on repatriation.
Outlook, commentary and risks
- The filing gives no full-year sales or earnings guidance. Management expected the FY2017 effective tax rate to be 24%–25%; adjusted tax rates depend on earnings mix by jurisdiction.
- FY2017 restructuring costs were expected to total $28–$30. Management forecast approximately $20–$25 of restructuring savings in FY2017 and a further $20–$25 combined in FY2018 and FY2019. Higher Wet Shave footprint costs and delayed Feminine Care manufacturing transition mean some savings are expected in FY2019. Year-to-date restructuring charges were $25.6; project-to-date charges were $165.4.
- Risks highlighted include competition and brand performance, foreign-currency movements and Brexit uncertainty, supply-chain disruption, substantial indebtedness and covenants, restructuring execution, customer concentration and changing sales channels, pension obligations, acquisitions and integration, product liability, cybersecurity, regulation, and tax contingencies. Management said pending legal matters were not reasonably likely to be material based on information available; the filing reported no material change to previously disclosed risk factors.
- Skintimate had prior-year impairment charges and continued competitive pressure; it was reclassified as a finite-lived intangible asset with a 20-year life beginning October 1, 2016. Playtex and Wet Ones brand values were also described as sensitive to future cash-flow assumptions and discount rates.
- Disclosure controls were concluded effective as of June 30, 2017, with no material change in internal control reported for the quarter.
Important facts for investors to verify
- Whether the margin and adjusted-earnings improvement persists despite declining organic sales and the sharp nine-month Feminine Care profit decline.
- Progress on the Montreal-to-Dover transition, European Wet Shave supply issues, restructuring costs, and the timing and delivery of projected savings.
- Bulldog’s ongoing contribution to Sun and Skin Care growth and profitability, distinct from acquisition and currency effects.
- Cash availability and repatriation constraints, debt repayment and refinancing requirements, revolver capacity, and exposure to variable interest rates and currencies.
- Future performance and impairment assumptions for Skintimate, Playtex, and Wet Ones, and developments in legal, tax, pension, and Brexit-related exposures.