Edgewell Personal Care Company — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended March 31, 2019. Amounts are in millions of dollars except per-share data. Edgewell sells personal care products across Wet Shave, Sun and Skin Care, Feminine Care, and All Other segments.
Financial performance
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Net sales | $546.7 | $608.1 | $1,003.8 | $1,076.4 |
| Gross profit | $250.9 | $301.1 | $444.4 | $500.4 |
| Gross margin | 45.9% | 49.5% | 44.3% | 46.5% |
| Net earnings | $48.2 | $65.1 | $47.8 | $71.8 |
| Diluted EPS | $0.89 | $1.20 | $0.88 | $1.31 |
| Operating cash flow | Not separately presented for the quarter | $(31.9) | $61.6 |
- Q2 reported sales fell 10.1%; organic sales declined 8.9%, excluding currency and Jack Black acquisition effects. First-half reported sales fell 6.7%, and organic sales declined 6.5%.
- Q2 segment sales were lower in Wet Shave ($294.4 versus $345.2), Sun and Skin Care ($145.2 versus $152.3), and Feminine Care ($74.6 versus $80.3); All Other grew to $32.5 from $30.3.
- Q2 gross margin declined 360 basis points. Management attributed the decrease mainly to lower volumes, unfavorable price mix in Wet Shave and Feminine Care, and unfavorable Wet Shave cost mix.
- Q2 SG&A was $98.1 versus $104.3, while advertising and promotion expense fell to $47.9 from $75.6. Management said lower advertising reflected fewer launches and promotional slots and spending discipline.
Balance sheet, debt and liquidity
- At March 31, 2019, cash was $244.6, total assets $3,988.5, and shareholders’ equity $1,782.1. Current assets were $1,021.8 and current liabilities $508.6.
- Total borrowings were $1,328.9, including $215.0 under the U.S. revolving facility and $13.9 of international notes payable. Cash less total borrowings implies approximate net debt of $1,084.3.
- After letters of credit, $501.5 remained available under the U.S. revolving facility. The company prepaid its $185.0 term loan in February, funding the repayment with revolving-facility borrowings. It reported compliance with debt covenants.
- First-half capital expenditures were $22.9, including $12.9 for Project Fuel. Cash declined $21.8 to $244.6 during the six months. The company attributed the operating cash outflow largely to seasonal inventory build, Easter timing, and payment timing.
Changes, outlook and material items
- Adjusted Q2 net earnings were $61.5 and adjusted diluted EPS $1.13, versus $70.9 and $1.31 a year earlier. First-half adjusted net earnings were $81.7 versus $82.2; adjusted diluted EPS was $1.50 in both periods. These are non-GAAP measures; reported results include restructuring and other specified items.
- Project Fuel generated approximately $29 of savings in Q2 and $54 in the first half, with cumulative savings of approximately $70. Edgewell expects $225–$240 of annual gross savings by fiscal 2021, with estimated one-time pre-tax charges of $130–$140 and capital investment of $60–$70 through fiscal 2021.
- Management expects fiscal 2019 free cash flow to exceed 100% of GAAP net earnings and expects the adjusted effective tax rate to be 23.5%–25.5%. It said existing cash, operating cash flows, and available borrowing capacity should cover requirements for at least the next 12 months.
- In February 2019, the company began evaluating strategic alternatives for its Feminine Care and Infant Care businesses, including possible sale; no transaction is assured. Related advisory costs were $1.0 in the first half.
- After quarter-end, on May 8, 2019, Edgewell agreed to acquire Harry’s, Inc. for approximately $1.37 billion in cash and stock, subject to adjustment and customary conditions, with closing expected by the end of calendar Q1 2020. Financing commitments included up to $1.6 billion in secured term loans and a $400 million revolving facility.
- Other notable items include $33.9 of first-half restructuring charges, $4.7 of first-half Tax Act transition tax expense, and expected additional Sun Care reformulation costs during the rest of fiscal 2019. Sun Care sales and cash flows are seasonal; currency movements, retailer competition, customer returns, and input costs are relevant risks.
Important facts for investors to verify
- Whether sales declines and gross-margin pressure persist, particularly in Wet Shave, North American Sun and Skin Care, and Feminine Care.
- Whether planned Project Fuel savings are realized, and how restructuring costs and capital spending compare with estimates.
- How seasonal working-capital needs affect second-half operating cash flow and the full-year free-cash-flow outlook.
- The strategic outcome for Feminine and Infant Care, and the financing, regulatory clearance, closing conditions, and leverage implications of the proposed Harry’s acquisition.
- Debt maturities, revolving-facility availability, covenant compliance, and exposure to variable interest rates and foreign currency. Management estimated a one-percentage-point rate increase would add approximately $2.3 of annual interest expense.