Edgewell Personal Care Company — Q1 Fiscal 2018 Form 10-Q
Reporting period: Three months ended December 31, 2017; comparative period is the three months ended December 31, 2016. Amounts are in U.S. dollars and millions, except per-share data. The unaudited filing covers Edgewell’s wet shave, sun and skin care, feminine care, and other businesses.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 | Change / context |
|---|---|---|---|
| Net sales | $468.3 | $485.0 | Down 3.4%; organic sales down 5.2% |
| Gross profit / margin | $200.3 / 42.8% | $228.0 / 47.0% | Margin down 420 basis points |
| Net earnings | $6.7 | $33.5 | Includes $16.2 net Tax Act charge and $15.9 pretax gloves-sale gain |
| Diluted EPS | $0.12 | $0.58 | Adjusted diluted EPS was $0.20 versus $0.66 |
| Operating cash flow | $(21.0) | $(51.9) | Cash used in both periods; improvement primarily reflected working-capital changes |
- Gross profit fell with lower volume, unfavorable mix, increased promotions and higher product costs, including manufacturing, footprint, commodity and currency costs.
- Segment sales and profit: Wet Shave sales were $294.1 and segment profit $54.7 (prior-year $306.2 and $72.0); Sun and Skin Care sales were $59.1 and segment loss $(6.1) (prior-year $57.6 and profit $0.8); Feminine Care sales were $82.6 and profit $5.0 (prior-year $89.1 and $8.3); All Other sales were $32.5 and profit $7.2 (prior-year $32.1 and $6.9).
- Cash from investing activities was $9.5, including $19.0 proceeds from the Playtex gloves sale; capital expenditures were $11.6. Financing activities provided $34.5, including net additional borrowings, partly offset by $115.2 of share repurchases.
Balance sheet, debt and liquidity
- At December 31, 2017, cash and cash equivalents were $529.9; current assets were $1,180.6 and current liabilities $445.4.
- Long-term debt was $1,678.7 and notes payable were $21.1, for total borrowings of $1,699.8; reported total borrowings were $1,544.8 at September 30, 2017. Cash was substantially located outside the United States.
- U.S. revolving-credit-facility borrowings were $398.0, with $319.0 available after $8.0 of letters of credit. The company reported compliance with debt covenants.
- Variable-rate borrowings totaled approximately $603.8. Management estimated a one-percentage-point rate increase would add about $6.0 to annual interest expense.
Material changes, outlook and commentary
- Organic sales declines in Wet Shave and Feminine Care drove the company-wide decrease; Sun and Skin Care organic sales grew 2.6%, while All Other was flat. Reported sales included a 2.0% currency benefit, 0.5% benefit from Bulldog, and 0.7% reduction from the gloves divestiture.
- Management expects full-year fiscal 2018 net sales to be flat to up 1%, including about 2% currency benefit and a 0.5% reduction from the gloves sale, net of acquisitions; organic sales are expected to decline about 1%. Wet Shave organic sales are expected to be relatively flat, Sun and Skin Care to grow in the mid- to low-single digits, and Feminine Care sales to continue declining for most of the year.
- Management expects an adjusted effective tax rate of 22%–24% and fiscal 2018 free cash flow above 100% of GAAP net earnings. The first-quarter adjusted effective tax rate was 34.1%, versus 26.3% a year earlier. The Tax Act’s estimated transition tax and deferred-tax remeasurement produced a provisional net charge of $16.2; estimates may change during the permitted measurement period.
- The Zero Based Spending initiative is expected to deliver $25–$30 in fiscal 2018 net cost savings, principally funding growth investments and marketing. The company is expanding the initiative to identify further savings.
- Edgewell sold its Playtex gloves business for $19.0, recognizing a $15.9 pretax gain. In January 2018, the board authorized repurchases of up to 10 million shares; the company said it did not expect to declare dividends in the foreseeable future.
- On January 15, 2018, the company agreed to acquire men’s skincare company Jack Black, expected to close in fiscal Q2 and funded from operating cash. The CFO’s departure was announced in December; a permanent replacement search was underway.
Risks and unusual items
- The quarter’s reported earnings were materially affected by the Tax Act charge and gloves-sale gain; adjusted figures are non-GAAP measures.
- Management noted that a prolonged share-price decline could trigger an interim goodwill or intangible-asset impairment analysis. Competitive pressure and prior market-share losses had led to significant Playtex and Edge brand impairments in fiscal 2017.
- Disclosed risks include competition and customer or distribution losses, raw-material and production costs, foreign-exchange exposure, seasonality, substantial indebtedness and covenant constraints, tax uncertainty, execution of savings and acquisitions, and potential disruption or product-liability claims.
- Legal matters are ongoing; management said currently known proceedings are not reasonably likely to be material, taking recorded accruals into account. Environmental spending was not expected to have a material effect.
Important facts for investors to verify
- Whether the expected stabilization in Wet Shave and growth in Sun and Skin Care can offset continued Feminine Care weakness and support the full-year sales outlook.
- Whether gross-margin pressure, promotional spending and manufacturing costs improve, and whether the stated $25–$30 savings are achieved.
- The final Tax Act impact, cash taxes and repatriation plans, and whether the adjusted tax-rate outlook remains achievable.
- Debt and liquidity after share repurchases and the planned Jack Black acquisition, including the use of repatriated cash and the company’s free-cash-flow performance.
- Whether the stock-price decline or continued brand and competitive pressures lead to goodwill or intangible-asset impairment.