Edgewell Personal Care Company — Q1 FY2017 Form 10-Q
Reporting period: Three months ended December 31, 2016; comparisons are with the three months ended December 31, 2015 unless noted. Amounts are in millions, except per-share data.
Business context
Edgewell makes and markets personal-care products across Wet Shave, Sun and Skin Care, Feminine Care, and All Other. Its portfolio includes Schick, Banana Boat, Playtex, and other brands. The quarter included Bulldog Skincare results following its October 31, 2016 acquisition.
Financial results and liquidity
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Net sales | $485.0 | $495.1 |
| Gross profit / margin | $228.0 / 47.0% | $227.5 / 46.0% |
| Net earnings | $33.5 | $23.7 |
| Diluted EPS | $0.58 | $0.39 |
| Adjusted net earnings / diluted EPS (non-GAAP) | $38.4 / $0.66 | $41.0 / $0.68 |
| Operating cash flow | $(59.0) | $(58.7) |
| Capital expenditures | $13.7 | $14.5 |
- Reported net sales declined 2.0%; organic sales declined 2.1%, with Bulldog adding 0.6% and currency reducing sales 0.5%.
- Gross margin improved 100 basis points, reflecting lower material costs, restructuring savings, and favorable transactional currency effects, partly offset by Feminine Care manufacturing-transition costs.
- Cash and cash equivalents were $418.5 at December 31, down from $738.9 at September 30, 2016. The quarter’s $320.4 cash decrease reflected debt repayments, share repurchases, acquisition spending, operating outflows, and currency effects.
- Total borrowings were $1,698.8, including $18.3 of notes payable, versus $1,844.5 at September 30. Long-term debt was $1,680.5; $585.6 of debt bore variable interest rates. The company had $240.9 available under its U.S. revolver after borrowings and letters of credit.
Material changes and segment performance
- Wet Shave sales fell 3.2% to $306.2; segment profit rose 7.8% to $72.0. North American systems and disposables grew, while international sales and shaving gels and creams declined.
- Sun and Skin Care sales rose 7.7% to $57.6, including Bulldog; segment profit fell to $0.8 from $1.7, partly due to increased advertising investment.
- Feminine Care sales declined 3.7% to $89.1; segment profit fell 52.8% to $8.3. Lower volumes, higher advertising, and manufacturing-transition costs weighed on results.
- All Other sales declined 2.1% to $32.1 and segment profit declined 4.2% to $6.9.
- Reported earnings increased partly because restructuring charges were lower ($6.9 versus $18.5) and prior-year spin-off costs of $7.5 did not recur. Adjusted net earnings declined 6.3%, reflecting lower organic sales and higher advertising and promotion spending.
Outlook, risks, and unusual items
- Management expects positive operating cash flow for full-year FY2017. It expects a FY2017 effective tax rate of 27%–28%; the adjusted rate depends on the mix of earnings by tax jurisdiction.
- FY2017 restructuring costs are expected to total $20–$25, with savings of approximately $20–$25 in FY2017 and a further $20–$25 in FY2018 and FY2019 combined. The Montreal-to-Dover Feminine Care manufacturing transition is two to three months behind schedule; some savings are now expected in FY2019, and transition costs are expected to pressure profitability for the next two quarters.
- Bulldog was acquired for £27.8 ($34.0) net of cash acquired and funded with foreign cash. Purchase accounting remained preliminary; final fair-value determinations were expected by Q3 FY2017.
- Foreign-currency exposure, competition, brand performance, customer and distribution losses, restructuring execution, and substantial indebtedness are identified risks. A 1% rise in applicable rates would increase annual interest expense on variable-rate debt by approximately $5.9. Brexit-related currency and operating effects remained uncertain.
- Legal proceedings arise in the ordinary course; management said any resulting liability was not reasonably likely to be material based on information then available. The filing reports no material change to previously disclosed risk factors.
- Other notable items: foreign-currency translation drove a $38.7 loss in other comprehensive income; the company repurchased $58.0 of shares; no dividend was currently intended for the foreseeable future. The Skintimate brand was converted to a 20-year definite-lived intangible after prior impairment charges and continued competitive pressure.
Most important facts for investors to verify
- Whether organic sales and Feminine Care volumes stabilize, and whether Wet Shave gains persist.
- Whether the delayed Montreal-to-Dover transition is completed on the revised schedule and delivers projected savings without prolonged margin pressure.
- Whether full-year positive operating cash flow and restructuring cost and savings expectations are achieved.
- Final Bulldog purchase-price allocation, including acquired intangible values and useful lives.
- Debt, variable-rate exposure, available revolver capacity, and the location and accessibility of cash held outside the U.S.
- How advertising investment, currency movements, competition, and brand impairment sensitivities affect adjusted and reported results.