Edgewell Personal Care Company — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2016, ended March 31, 2016. Edgewell sells personal-care products across Wet Shave, Sun and Skin Care, Feminine Care, and All Other. Its Household Products business was spun off on July 1, 2015; prior-period earnings statements present that business as discontinued operations, but prior-period cash flows were not adjusted for the separation.
Financial performance and position
| Metric | Three months ended Mar. 31, 2016 | Six months ended Mar. 31, 2016 |
|---|---|---|
| Net sales | $611.2 million, down 6.1% | $1,106.3 million, down 6.8% |
| Organic net sales | Down 0.7% | Down 0.1% |
| Gross profit / margin | $311.1 million / 50.9%; margin down 40 bps | $538.6 million / 48.7%; margin down 100 bps |
| Continuing-operations earnings | $66.1 million; diluted EPS $1.10 | $89.8 million; diluted EPS $1.49 |
| Adjusted continuing-operations earnings and diluted EPS (non-GAAP) | $70.5 million / $1.17 | $111.5 million / $1.85 |
| Operating cash flow | Not provided for the quarter in the filing excerpt | $(72.6) million, versus $79.8 million provided in prior year |
Quarterly segment sales and profit were: Wet Shave $353.4 million and $77.7 million; Sun and Skin Care $132.5 million and $39.2 million; Feminine Care $91.6 million and $10.5 million; All Other $33.7 million and $8.0 million. Feminine Care was the main organic sales and profit pressure; Sun and Skin Care sales and quarterly profit improved.
At March 31, cash and equivalents were $660.5 million, current assets $1,515.5 million, and current liabilities $601.4 million. Total borrowings were $1,860.4 million, including $744.3 million at variable rates; long-term debt was $1,843.4 million. Cash declined $51.6 million from fiscal year-end. The company reported compliance in all material respects with debt covenants.
Changes versus prior comparable periods
- Reported sales fell, while organic sales were close to flat: management attributed the difference principally to currency, Venezuela deconsolidation, the industrial blade business sale, and international go-to-market changes. Excluding estimated go-to-market effects, organic sales increased 1.0% in Q2 and 1.9% for the six months.
- Reported continuing-operations earnings improved from a Q2 loss of $54.6 million and six-month loss of $34.7 million in 2015. The comparison is significantly affected by the prior-year $79.3 million Venezuela deconsolidation charge in continuing operations and substantially higher prior-year separation costs. Adjusted earnings increased 1.0% for Q2 and 2.8% for the six months.
- Segment profit totaled $135.4 million in Q2 versus $165.1 million; six-month segment profit was $228.7 million versus $281.3 million. Wet Shave and Feminine Care contributed most to the declines.
- Operating cash flow shifted to use of $72.6 million, primarily reflecting a discretionary $100.5 million pension contribution. Cash used for investing was $34.5 million; financing provided $49.8 million.
Outlook, management commentary, and risks
- Management expects positive operating cash flow for full-year fiscal 2016 and no further discretionary pension contributions in the remainder of the year. The filing does not provide a full-year sales or earnings forecast.
- Management expects an adjusted effective tax rate of 29%–31% for fiscal 2016, depending on the mix of earnings across jurisdictions.
- For the 2013 restructuring, management expects fiscal 2016 costs of $40–$45 million and fiscal 2017 costs of $5–$10 million. It expects $15 million of savings in fiscal 2016 and a further $40–$50 million in fiscal 2017 and 2018 combined. Project-to-date costs were $124.7 million and savings approximately $121 million. Fiscal 2016 separation costs were estimated at $10–$12 million; significant additional Spin restructuring charges were not expected.
- On April 26, 2016, after quarter-end, the company amended its credit agreement, increasing revolving availability by $50 million to $650 million and adding a $185 million term loan, which it borrowed that day to repay existing indebtedness. The loan matures in three years and carries a floating rate.
- Key exposures include foreign-currency movements, variable-rate debt, international go-to-market changes, competition and product innovation, restructuring execution and savings, pension funding, customer concentration, and the company’s substantial indebtedness. The filing notes that certain brand intangibles remain sensitive to forecast and discount-rate assumptions after prior-year impairments.
- Legal proceedings arise in the ordinary course; management says pending matters are not reasonably likely to be material, taking recorded accruals into account. No material risk-factor changes from the prior 10-K were reported. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether organic sales trends and management’s estimated go-to-market impacts are supported by underlying volume, pricing, and market-share data, especially in Feminine Care and Wet Shave.
- Whether restructuring costs translate into the stated savings, and whether those savings offset weaker segment profit and higher product costs.
- The sustainability of earnings and cash generation after separating recurring performance from non-GAAP adjustments and prior-year Venezuela and Spin-related items.
- Liquidity and refinancing capacity, including the location of cash largely outside the U.S., variable-rate exposure, and the use and terms of the post-quarter-end term loan.
- The effect of the $100.5 million pension contribution on future funding obligations, pension expense, and cash flow.
- Progress against fiscal 2016 operating cash-flow and adjusted tax-rate expectations, and any material changes in legal, tax, currency, or brand-impairment exposures.