Business context and reporting period
Edgewell Personal Care Company (formerly Energizer Holdings, Inc.) filed this Form 10-K for the fiscal year ended September 30, 2015. The filing is annual, not a standalone fourth-quarter report; it also provides unaudited quarterly results. On July 1, 2015, Edgewell completed the tax-free spin-off of its Household Products business, which became New Energizer. Edgewell retained personal care operations across Wet Shave, Sun and Skin Care, Feminine Care, and All Other. Prior-period income statement and segment data were recast for continuing operations, but prior-year balance sheets and cash flows were not adjusted for the spin-off.
Key financial metrics
Amounts are U.S. dollars in millions, except per-share data and percentages.
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $2,421.2 | $2,612.2 |
| Gross profit / gross margin | $1,183.8 / 48.9% | $1,289.9 / 49.4% |
| Continuing-operations earnings (loss) | $(296.1); diluted EPS $(4.78) | $117.7; diluted EPS $1.88 |
| Adjusted continuing-operations net earnings / diluted EPS (non-GAAP) | $175.2 / $2.80 | $172.5 / $2.76 |
| Net earnings (loss), including discontinued operations | $(275.3) | $356.1 |
| Operating cash flow | $148.8 | $572.0 |
| Cash and cash equivalents at year-end | $712.1 | $1,129.0 |
| Total borrowings | $1,721.5 | $2,288.4 |
| Working capital | $969.8 | $1,155.9 |
Adjusted earnings and EPS are non-GAAP measures; management’s reconciliation excludes specified items, including spin and restructuring costs, impairment, Venezuela deconsolidation, industrial-business sale charges, and early debt-retirement costs. FY2015 reported results also include only nine months of Household Products activity in cash flows and discontinued-operations results through the spin-off date; comparisons therefore require care.
FY2015 net sales fell 7.3% reported and 2.5% organically. Currency reduced sales by $137.3; organic weakness reflected increased promotions, international go-to-market changes, and spin-related transition issues. Gross margin declined 50 basis points; excluding currency effects, it rose 50 basis points. Segment sales and profit were: Wet Shave $1,441.3 and $308.7; Sun and Skin Care $403.6 and $71.5; Feminine Care $398.2 and $48.7; All Other $178.1 and $24.6. Wet Shave was the largest segment and had the sharpest profit decline.
Material changes versus the prior period
- Continuing-operations net sales declined $191.0, while adjusted continuing-operations earnings increased 2% and adjusted diluted EPS rose from $2.76 to $2.80.
- Reported continuing-operations loss included a $318.2 non-cash impairment of Playtex, Wet Ones, and Skintimate brand names; a $79.3 continuing-operations Venezuela deconsolidation charge; $142.0 in spin costs; $28.3 in spin restructuring charges; $32.7 in industrial-business sale charges; and $59.6 in early debt-retirement costs.
- Operating cash flow fell $423.2. Management attributed the decline primarily to separation-related cash expenditures and debt restructuring, as well as one fewer quarter of Household Products cash flows.
- Debt was refinanced and restructured for the separation. Year-end borrowings included $600.0 of 4.7% notes due 2021, $499.1 of 4.7% notes due 2022, $269.9 under a Netherlands facility, and $335.0 under a revolving facility.
Outlook, management commentary, risks and contingencies
- Management expected $10.0–$12.0 of additional spin costs in FY2016, primarily in the first half. For the ongoing 2013 restructuring, it estimated $40.0–$45.0 of Edgewell costs in FY2016 and $5.0–$10.0 in FY2017, with further savings expected in FY2016–FY2018. These are estimates, not guarantees.
- FY2016 capital expenditures were forecast at $65.0–$85.0, expected to be funded primarily from operating cash flow. The filing reports $99.4 of FY2015 capital expenditures in the cash flow discussion; the segment capital-expenditure table presents a different measure/total, so investors should check the underlying note.
- At September 30, 2015, $257.0 remained available under the $600.0 revolving facility after borrowings and letters of credit. The company reported compliance with debt covenants. Covenants include leverage and interest-coverage tests; breach could accelerate debt and trigger cross-defaults.
- Substantially all $712.1 of cash was held outside the U.S.; management intended to reinvest foreign earnings indefinitely. It estimated potential U.S. tax on full repatriation could exceed $174.0. Foreign cash access, currency volatility, and Venezuela exchange controls remain considerations.
- After paying $0.50 per share in each of the first three FY2015 quarters, the company paid no fourth-quarter dividend and said it did not expect to pay dividends for the foreseeable future. It repurchased 2.0 million shares for $175.2 during FY2015.
- Principal risks include the costs and dis-synergies of operating as a standalone company, ability to realize restructuring savings, foreign exchange and international distribution changes, intense competition and declining men’s shaving-system demand, Wal-Mart concentration (about 24% of continuing-operations sales), debt and pension funding, brand performance, and tax, environmental, product-liability, cyber, and separation-related exposures.
- The company deconsolidated its Venezuelan subsidiaries on March 31, 2015 because currency controls prevented exchangeability and restricted access to earnings; results after that date exclude their operations. The industrial blade business was sold in September 2015.
- Subsequent to year-end, Edgewell announced relocation of certain Solingen, Germany positions to the Czech Republic, affecting about 130 personnel, with estimated costs of $17.0, primarily in FY2016.
- Management and the independent auditor concluded internal control over financial reporting was effective at September 30, 2015. The company said pending legal matters were not reasonably likely to be material based on information then available; environmental remediation liabilities were accrued at $14.2.
Important facts for investors to verify
- How standalone costs, international go-to-market changes, and restructuring savings affect sales, margins, and cash flow after the spin-off.
- Whether FY2016 restructuring and spin-cost estimates, capital spending plans, and projected savings are achieved.
- The sustainability of brand cash-flow forecasts following the $318.2 impairment, and the sensitivity of remaining intangible values to assumptions.
- Debt maturities, covenant headroom, variable-rate exposure, and the availability and practical accessibility of cash held overseas.
- Continuing tax-free treatment of the spin-off, indemnity obligations between Edgewell and New Energizer, and the completion of transition-service arrangements.
- Cash-flow comparability: FY2015 and prior-year cash flows include different periods of the spun-off business, and prior-year balance sheets were not recast.