Edgewell Personal Care Company — FY2017 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended September 30, 2017; references to Q4 are to the fourth fiscal quarter, not a separate quarterly filing. Edgewell sells personal care products across Wet Shave, Sun and Skin Care, Feminine Care, and All Other. The figures below are in U.S. dollars, millions unless stated otherwise. Household Products had been separated into New Energizer in July 2015; 2017 results reflect continuing operations.
Key financial results
| Metric | FY2017 | FY2016 | Change / context |
|---|---|---|---|
| Net sales | $2,298.4 | $2,362.0 | Down 2.7% reported; organic sales down 2.8%. |
| Gross profit / margin | $1,130.6 / 49.2% | $1,159.9 / 49.1% | Gross profit declined with lower sales volume; margin increased 10 basis points. |
| Net earnings from continuing operations | $5.7 | $178.7 | FY2017 included $319.0 of non-cash intangible impairment charges. |
| Diluted EPS from continuing operations | $0.10 | $2.99 | Adjusted diluted EPS was $3.97 versus $3.57. |
| Adjusted net earnings | $228.4 | $213.3 | Non-GAAP; increased 7.1%. |
| Operating cash flow | $296.2 | $176.4 | Improved in part because FY2016 included $100.5 of discretionary international pension funding. |
| Capital expenditures | $69.0 | $69.5 | FY2018 expected range: $50–$60. |
| Cash and cash equivalents | $502.9 | $738.9 | Substantially all FY2017 cash was held outside the U.S. |
| Debt | $1,544.8 total borrowings | $1,844.5 total borrowings | Includes $1,525.4 long-term debt and $19.4 notes payable at FY2017 year-end. |
| Working capital | $661.8 | $583.8 | Current assets were $1,186.2 and current liabilities $524.4. |
Sales and segment trends
- Wet Shave: Sales fell 3.5% to $1,375.3; organic sales declined 2.7%, amid North American competitive activity, pricing and promotional pressure, and volume declines. Segment profit rose 1.6% to $294.9, helped by efficiencies, lower commodity costs and lower advertising spend.
- Sun and Skin Care: Sales increased 6.1% to $440.4, including Bulldog acquisition contribution; organic sales rose 3.2%. Segment profit increased 10.4% to $98.8.
- Feminine Care: Sales declined 9.6% to $351.6, with organic sales down 9.7% amid distribution losses and competition. Segment profit fell 26.1% to $28.9, also affected by manufacturing transition costs.
- All Other: Sales decreased 1.0% to $131.1; segment profit declined 6.3% to $26.6.
Material changes and unusual items
- The $319.0 non-cash impairment charge comprised $312.0 for the Playtex brand and $7.0 for Edge. The company attributed the Playtex impairment principally to competitive pressure, share and sales declines, product discontinuations, lower projected cash flows and higher unit costs. Both brands were converted to definite-lived assets with 20-year useful lives.
- FY2017 fourth-quarter net loss was $148.4, or diluted loss per share of $2.61; the filing attributes the quarter’s results in part to the $319.0 impairment charge. Full-year net earnings from continuing operations remained $5.7.
- The Bulldog skincare acquisition closed October 31, 2016, for $34.0 net of cash acquired and was funded with foreign cash.
- On October 26, 2017, Edgewell completed the sale of its Playtex Gloves business for $19.0 and recorded a $16.0 pre-tax gain. This occurred after fiscal year-end.
- The company repurchased 2.2 million shares for $165.4 during FY2017. It paid no regular cash dividends and said it did not expect to pay dividends for the foreseeable future.
Liquidity, debt and outlook
At September 30, 2017, $472.0 remained available under the U.S. revolving credit facility after borrowings and letters of credit. The company was in compliance with its debt covenants. Its debt agreements include leverage and interest-coverage tests, and a breach could permit lenders to accelerate debt. Variable-rate borrowings totaled $429.7; a 1 percentage-point rate increase was estimated to raise annual interest expense by approximately $4.3.
The filing provides no specific FY2018 revenue or earnings guidance. Management expected FY2018 capital expenditures of $50–$60, mainly for manufacturing maintenance, new products and IT improvements, and estimated minimum pension contributions of $9.6. Management emphasized innovation, sales and profit growth, cost savings, and working-capital management. Restructuring charges were $30.3 in FY2017; the company said it did not expect additional costs under the existing restructuring plan, although some savings were delayed by manufacturing-transition timing and higher Wet Shave footprint costs.
Risks, contingencies and investor verification
- Competition, retailer pricing pressure and distribution losses are significant concerns, particularly in Wet Shave and Feminine Care. Walmart represented about 23% of FY2017 net sales, and sales generally were not protected by minimum-purchase agreements.
- Brand valuation remains sensitive to future performance: Wet Ones fair value was only about 110% of carrying value, and the company cited sensitivity to cash-flow forecasts and discount rates. Goodwill testing identified no impairment, but Feminine Care and Skin Care reporting-unit fair values were relatively close to carrying values.
- Seasonal sun-care sales and returns depend on weather, retailer inventory and competitive activity. The year-end sun-care returns reserve was $53.3; each 1 percentage-point change in the returns rate would have affected reported sales by about $3.0 and operating income by about $2.8.
- Foreign exchange, Brexit-related uncertainty, international cash access and tax exposure could affect results. The company estimated a potential U.S. tax liability in excess of $279.6 if all indefinitely reinvested foreign earnings were repatriated.
- Environmental remediation and ordinary-course legal matters are disclosed. Accrued environmental costs were $11.9; management said pending legal matters were not reasonably likely to be material, considering established accruals.
- Verify: the drivers and sustainability of the adjusted earnings increase; whether Wet Shave and Feminine Care sales stabilize; execution and savings from the Feminine Care manufacturing transition; the assumptions behind the Playtex, Edge and Wet Ones valuations; cash availability given its overseas concentration and receivables-sale facility; and the effects of the Playtex Gloves sale and continued share repurchases.