Edgewell Personal Care Company — Q1 FY2023 Form 10-Q
Reporting period: Three months ended December 31, 2022; comparisons are with the three months ended December 31, 2021. Edgewell sells wet shave, sun and skin care, and feminine care products across more than 50 countries.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Net sales | $469.1 million | $463.3 million |
| Gross profit / margin | $189.0 million / 40.3% | $189.9 million / 41.0% |
| Operating income / margin | $31.3 million / 6.7% | $31.8 million / 6.9% |
| Net earnings | $11.9 million | $11.2 million |
| Diluted EPS | $0.23 | $0.20 |
| Adjusted net earnings / diluted EPS | $16.0 million / $0.31 | $23.2 million / $0.42 |
| Operating cash flow | $(86.3) million | $(79.0) million |
Reported sales rose 1.3%. Organic sales increased 3.0%, including 4.5% growth from pricing, while currency reduced sales by $20.2 million (4.3%). Adjusted gross margin fell 150 basis points: commodity and transportation costs reduced it by 500 basis points, partly offset by productivity savings of 240 basis points and pricing and promotion benefits of 250 basis points. Adjusted net earnings declined despite higher sales, reflecting margin pressure and higher SG&A and interest costs.
Segment sales and profit were mixed. Wet Shave sales declined 3.8% to $275.3 million and segment profit fell 31.3% to $35.4 million, reflecting lower organic sales, costs, currency and brand investment. Sun and Skin Care sales rose 7.7% to $112.9 million and profit increased to $13.1 million from $3.7 million, supported by international Sun Care growth, pricing and stronger gross profit. Feminine Care sales rose 11.7% to $80.9 million and profit increased 40.5% to $11.8 million, aided by pricing and improved product availability.
Balance sheet, debt and liquidity
- Cash was $184.1 million at December 31, 2022, versus $188.7 million at September 30, 2022. Current assets were $1,007.5 million and current liabilities $501.3 million.
- Total borrowings were $1,530.2 million, up from $1,424.0 million at September 30, including $280.2 million of variable-rate debt. Long-term debt carrying value was $1,492.0 million; the revolver balance was $255.0 million, with $164.1 million available after letters of credit.
- Operating cash use increased to $86.3 million, primarily due to a larger working-capital build. Inventory rose to $540.2 million from $449.3 million. Investing cash use was $11.2 million, versus $312.7 million in the prior-year quarter, which included the Billie acquisition. Financing provided $82.9 million; net cash decreased $4.6 million.
- Debt includes $750 million of 5.500% notes due 2028, $500 million of 4.125% notes due 2029, and revolver borrowings; the revolver matures in 2025. The company reported compliance with debt covenants and believes cash, operating cash flows and available borrowing capacity will meet needs for at least 12 months.
Changes, outlook and risks
- Interest expense associated with debt increased to $19.9 million from $17.3 million, attributed to higher interest rates and higher revolver borrowings. Other income was $5.0 million versus $1.7 million, primarily reflecting favorable currency-hedge settlements, partly offset by higher pension expense.
- Management expects approximately $18 million of FY2023 restructuring charges for operating-model changes intended to simplify the organization and improve manufacturing and supply-chain efficiency; $2.8 million was incurred in the quarter.
- No specific sales or earnings forecast is provided in the supplied filing text. Management notes Sun Care seasonality, typically bringing higher sales and cash generation in the second and third fiscal quarters.
- Risks discussed include inflation and transportation costs, foreign-currency exposure, variable interest rates, working-capital needs, and supply-chain, labor and distribution disruptions. Management said COVID-19 had not materially disrupted operations or liquidity to date, but future effects were uncertain. A 1 percentage-point rise in rates on variable-rate debt would increase annual interest expense by approximately $2.8 million.
- After quarter-end, the company amended its revolving credit facility to transition from LIBOR to SOFR and said it did not expect a material interest-expense effect. Approval to wind up the Canadian defined-benefit pension plan is expected to result in an approximately $8 million non-cash settlement expense.
- Other notable items: the company repurchased $15.0 million of shares and paid $8.3 million in dividends during the quarter. The quarterly dividend was $0.15 per share. Foreign-currency translation contributed $48.0 million to other comprehensive income.
Key facts for investors to verify
- Whether organic sales growth and pricing can continue, particularly given Wet Shave declines and the differing regional Sun Care trends.
- Whether gross-margin pressure, elevated inventory and working-capital cash use improve in subsequent quarters.
- Debt levels, revolver availability, interest-rate exposure and the company’s ability to maintain covenant compliance.
- The timing and total cost of the restructuring, and the eventual accounting impact of the Canadian pension-plan wind-up.
- Adjusted results are non-GAAP measures; review the filing’s reconciliations and excluded costs when comparing performance.