Edgewell Personal Care Company — Q2 FY2023 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2023. Amounts are in millions except per-share data. Edgewell sells products across Wet Shave, Sun and Skin Care, and Feminine Care.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Net sales | $598.4 | $547.7 | $1,067.5 | $1,011.0 |
| Gross profit / margin | $241.7 / 40.4% | $230.1 / 42.0% | $430.7 / 40.3% | $420.0 / 41.5% |
| Operating income | $56.2 | $41.7 | $87.5 | $73.5 |
| Net earnings | $19.0 | $23.2 | $30.9 | $34.4 |
| Diluted EPS | $0.37 | $0.43 | $0.60 | $0.63 |
- Q2 sales rose 9.3%; organic sales increased 11.4%, with growth attributed in roughly equal parts to pricing and volume. Currency reduced reported sales by $11.8. First-half reported sales rose 5.6%; organic sales rose 7.6%, while currency reduced sales by $32.0 and the Billie acquisition added $12.0.
- Q2 GAAP operating margin was 9.4% versus 7.6% a year earlier. Adjusted operating margin was 10.4% versus 8.5%. The filing reports adjusted Q2 net earnings of $29.0 and adjusted diluted EPS of $0.56, compared with $27.0 and $0.50, respectively, in the prior-year quarter.
- For the first half, adjusted net earnings were $45.0 versus $50.2 and adjusted diluted EPS was $0.87 versus $0.92. Management cited higher input costs, foreign currency and interest costs despite higher sales.
- Q2 segment sales: Wet Shave $308.6 (+1.2% reported; +4.6% organic); Sun and Skin Care $209.7 (+14.4%; +15.0% organic); Feminine Care $80.1 (+34.9%; +35.4% organic). Feminine Care growth reflected higher pricing and improved product availability.
Cash flow, liquidity and debt
- First-half operating cash flow was $1.9, versus cash used of $39.9 in the prior-year period; management attributed the improvement to lower working-capital requirements. Capital expenditures were $18.8. Cash declined $33.5 to $155.2.
- At March 31, 2023, total borrowings were $1,447.5, including $195.2 at variable rates; cash was $155.2. Long-term debt on the balance sheet was $1,413.6, with $21.5 of notes payable. The revolving credit facility had $176.0 drawn and $243.1 available after letters of credit.
- Current assets were $1,009.2 and current liabilities $569.0. Inventories rose to $540.5 from $449.3 at September 30, 2022.
- Management said cash, operating cash flow and revolving-credit availability should cover needs for at least the next 12 months; the company reported compliance with debt covenants. A 1 percentage-point rate increase would raise annual interest expense by approximately $2.0, based on the disclosed variable-rate exposure.
Changes, outlook and risks
- Q2 gross margin declined 160 basis points year over year. Management said adjusted gross margin was down 170 basis points: inflation of about 550 basis points was largely offset by productivity savings and pricing/promotion benefits. For the first half, adjusted gross margin declined 160 basis points.
- Interest expense rose to $20.7 in Q2 from $18.0 and to $40.6 for the first half from $35.3, reflecting higher rates and higher revolving-credit borrowings. The effective tax rate also increased, to 26.9% for Q2 and 27.0% for the first half, primarily because of an unfavorable mix of earnings in higher-tax jurisdictions.
- The company expects approximately $19 of restructuring charges in FY2023 for operating-model redesign, simplification, and manufacturing and supply-chain efficiency. It recorded $6.0 in the first half.
- A $7.2 loss from settling and winding up the Canadian defined-benefit pension plan was recorded in Q2 and the first half. The filing also identifies foreign-currency exposure, inflation and commodity costs, variable-rate debt, seasonality in Sun Care, and potential market and operational disruptions as risks. Management reported no material COVID-related operational disruption to date.
- The filing provides no specific full-year sales or earnings guidance. The company declared a quarterly dividend of $0.15 per share in May 2023. It repurchased $30.0 of shares during the first half.
- Legal proceedings arise in the ordinary course of business; management said any resulting liability is not reasonably likely to be material, considering established accruals.
Important facts for investors to verify
- Whether organic sales growth, pricing and volume trends persist, particularly in Sun and Skin Care and Feminine Care, and whether Wet Shave stabilizes.
- Whether productivity, pricing and promotion management can offset continuing inflation and protect gross margins.
- Cash conversion and working-capital needs, especially given the inventory increase and low first-half operating cash flow.
- Debt, variable-rate exposure, refinancing requirements and available revolver capacity; also the effects of currency movements on sales and earnings.
- The realization and timing of restructuring benefits and costs, and the treatment of adjustments in management’s non-GAAP measures.
Adjusted and organic measures are non-GAAP; the filing provides reconciliations and cautions that these measures supplement, not replace, GAAP results.