Edgewell Personal Care Company — Q1 FY2016 Form 10-Q
Reporting period: Three months ended December 31, 2015; unaudited. Edgewell manufactures personal care products across Wet Shave, Sun and Skin Care, Feminine Care, and All Other. The Household Products business was spun off on July 1, 2015 and is reported as discontinued operations. Prior-year earnings include that business, and prior-year cash flows were not recast, limiting comparability.
Financial results and liquidity
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Net sales | $495.1 million | $537.1 million |
| Gross profit / gross margin | $227.5 million / 46.0% | $256.8 million / 47.8% |
| Continuing-operations earnings | $23.7 million | $19.9 million |
| Diluted continuing-operations EPS | $0.39 | $0.32 |
| Adjusted continuing-operations earnings / diluted EPS (non-GAAP) | $41.0 million / $0.68 | $38.7 million / $0.62 |
| Operating cash flow | $(58.7) million | $(32.0) million |
| Capital expenditures | $14.5 million | $15.3 million |
Reported net sales fell 7.9%, while organic sales rose 0.5%. Sales were reduced by currency ($24.5 million), Venezuela deconsolidation ($9.6 million) and the industrial blade business sale ($10.7 million). Gross margin declined 180 basis points, including 90 basis points of currency impact; higher product costs accounted for the remainder.
GAAP earnings from continuing operations increased, but adjusted earnings also rose, primarily reflecting lower SG&A and interest expense, partly offset by lower sales and gross margin. The prior-year quarter included $85.2 million of earnings from discontinued operations; consequently, prior-year total net earnings of $105.1 million are not comparable with current-quarter net earnings of $23.7 million.
At December 31, 2015, cash was $694.2 million, total debt including notes payable was $1,858.6 million, and shareholders’ equity was $1,796.5 million. Cash was down $17.9 million from September 30. Current assets were $1,464.0 million and current liabilities $511.2 million. Substantially all cash was held outside the United States. Management said it expected positive operating cash flow for FY2016, but negative operating cash flow in Q2 due to pension funding.
Material changes and segment performance
- Wet Shave: Sales $316.3 million, down 7.3% reported but up 1.1% organically. Segment profit fell 26.1% to $66.8 million; higher product costs and SG&A weighed on results.
- Sun and Skin Care: Sales $53.5 million, down 1.5% reported and up 4.4% organically. Segment profit declined 54.0% to $1.7 million, reflecting currency, higher product costs and lower production volumes; the business is seasonal.
- Feminine Care: Sales $92.5 million, down 3.4% reported and 2.3% organically. Segment profit rose 15.8% to $17.6 million, supported by restructuring savings and lower advertising and promotion spending.
- All Other: Sales $32.8 million, down 28.1% reported, mainly due to the industrial blade sale; organic sales declined 2.4%. Segment profit increased 5.8% to $7.2 million.
Lower SG&A included a reduction in Separation costs. Interest expense declined $10.1 million to $17.7 million, attributed to lower average debt and borrowing rates following refinancing. The effective tax rate was 22.8%, versus a 4.2% benefit in the prior-year quarter; adjusted effective tax rates were 27.7% in both periods.
Operating cash outflow reflected seasonality, including Sun Care working capital needs. Cash used in operations was less negative than the prior-year comparison might suggest on a continuing-business basis because the prior-year cash-flow statement still included Household Products. Financing provided $63.7 million, including a net increase in borrowings and $78.9 million of share repurchases. No dividend was paid in the quarter.
Outlook, risks and unusual items
- Management forecast a FY2016 adjusted effective tax rate of 30%–32%, dependent on the geographic mix of earnings. No full-year sales or EPS guidance is stated in the supplied filing text.
- For the 2013 Restructuring, the company expected $21.5–$26.5 million of additional costs for the remainder of FY2016 and $5–$10 million in FY2017. It cited approximately $12 million of incremental savings expected in the rest of FY2016 and another $40–$50 million in FY2017–FY2018. Project-to-date costs were approximately $124.1 million and savings approximately $116.5 million.
- Additional Separation costs of approximately $2.5–$4.5 million were expected by the end of FY2016. Management did not expect significant additional Spin restructuring charges.
- Borrowings included $742.2 million of variable-rate debt. The filing estimates that a one-percentage-point increase in applicable rates would raise annual interest expense by approximately $7.4 million. U.S. and Netherlands revolving facilities had $115.0 million and €25.9 million of remaining availability, respectively.
- The company reported compliance in all material respects with debt covenants. Its stated risks include foreign exchange exposure, substantial indebtedness and covenants, separation and restructuring execution, competition and customer concentration, pension obligations, product liability, tax contingencies, and operational or IT disruption. Venezuela’s exchange restrictions led to deconsolidation; its results have not been included since March 31, 2015.
- Pending legal matters were described as not reasonably likely to be material based on information available, after considering established accruals. The filing does not quantify a reasonably possible aggregate loss.
- Goodwill was $1,416.6 million and other intangible assets were $1,402.3 million. Following $318.2 million of prior-year brand impairments, management noted that certain brand carrying values remain sensitive to forecast cash flows and discount-rate assumptions.
Important facts for investors to verify
- Whether organic sales and profit trends persist after separating currency, Venezuela, divestiture, and go-to-market effects.
- Whether product-cost inflation and lower gross margin, particularly in Wet Shave and Sun and Skin Care, improve as restructuring and cost actions progress.
- Whether the stated restructuring savings are achieved and whether additional costs remain within the company’s estimates.
- Cash generation, working-capital seasonality, pension funding needs, and the availability and location of cash balances.
- Debt levels, variable-rate exposure, facility availability, and the effect of interest-rate changes.
- Assumptions behind non-GAAP adjusted earnings and the expected tax rate, and the sensitivity of impaired brand assets to future forecasts.