Edgewell Personal Care Company — Q1 FY2021 Form 10-Q
Reporting period: Three months ended December 31, 2020, compared with the three months ended December 31, 2019, unless otherwise noted. Amounts are in millions except per-share data. Edgewell sells wet shave, sun and skin care, and feminine care products. It completed the sale of its Infant and Pet Care business in December 2019 and acquired Cremo in September 2020.
Financial results and liquidity
- Sales: $451.1, down 0.6% from $454.0. Organic sales were flat; reported results included a 5.9% reduction from the divested business, offset by Cremo (+3.7%) and currency (+1.6%).
- Profit and margins: Gross profit was $193.3 versus $193.1; gross margin was 42.9% versus 42.5%. Operating income rose to $41.6 from $37.1, with operating margin of 9.2% versus 8.2%. Net earnings fell to $17.7 from $22.4; diluted EPS was $0.32 versus $0.41. Adjusted net earnings were $23.3 and adjusted diluted EPS was $0.43, versus $29.9 and $0.55, respectively.
- Costs and interest: Interest expense increased to $17.4 from $14.3, primarily reflecting higher average debt and the 2028 notes. The effective tax rate was 29.7%, compared with 24.4%.
- Cash flow: Operating cash use was $82.5 versus $46.9, primarily due to working-capital changes, including higher inventory, collection timing, and accrued-liability payments. Capital expenditures were $10.2 versus $7.6. Cash declined $83.9 during the quarter to $280.8.
- Balance sheet and debt: Current assets were $933.4 and current liabilities $428.9. Total borrowings were $1,274.1, including $24.1 of variable-rate international borrowings; cash was $280.8. Long-term debt included $500 of 4.7% notes due in 2022 and $750 of 5.5% notes due in 2028. The company said it expected to refinance the 2022 notes before maturity and was in compliance with debt covenants.
- Capital returns: Edgewell repurchased 250,000 shares for $9.2 under its authorization and declared a $0.15-per-share dividend, payable in January 2021. A further $0.15-per-share dividend was declared in February.
Changes versus the prior period
- Organic sales were flat overall, but performance differed by segment: Wet Shave organic sales declined 1.5%; Sun and Skin Care grew 14.0%; Feminine Care declined 8.4%. The divested Infant and Pet Care business contributed $26.8 of prior-year sales and none in the current quarter.
- Sun and Skin Care sales benefited from Cremo and strong demand for Wet Ones and men’s grooming products; Sun Care sales declined 23%, which management attributed largely to COVID-19 impacts. Feminine Care faced category declines, competition, and Walmart distribution losses.
- Reported operating income improved, but adjusted operating income was $49.0 versus $51.6, and adjusted net earnings declined 22.1%. Prior-year results included a $5.2 gain on the divestiture; current-year results included acquisition and restructuring costs.
- Gross margin improved year over year. Management cited Project Fuel savings, acquisition/divestiture effects, and lower material costs, partly offset by unfavorable product mix and pricing.
Outlook, commentary and risks
- Management gave no specific full-year revenue or earnings guidance in the provided filing text. It stated that cash on hand, operating cash flow, and borrowing capacity were expected to cover requirements for at least the next 12 months.
- Project Fuel is expected to generate $265–$275 of total annual gross savings by the end of fiscal 2021. The company reported approximately $16 of savings in the quarter and $228 cumulatively; expected one-time pretax charges through fiscal 2021 were approximately $160–$165, with $138.0 incurred cumulatively.
- COVID-19 reduced demand in Wet Shave and Sun Care, while increasing demand for Wet Ones. Management also cited higher operating costs, supply-chain challenges, customer-payment uncertainty, and volatility in foreign exchange and commodity prices. It said there had been no material manufacturing or distribution disruption to date.
- Other notable risks include foreign-currency exposure, competitive and distribution pressures, and potential future goodwill or intangible-asset impairment if prolonged pandemic effects change consumer behavior or valuation assumptions. No interim impairment trigger was identified this quarter.
- Operating cash use, seasonal working-capital needs, the 2022 debt maturity, and the company’s reliance on refinancing and borrowing capacity merit attention. Management noted that Sun Care seasonality generally supports higher sales and cash generation in the second and third fiscal quarters.
Key facts for investors to verify
- Whether organic sales stabilize or improve, particularly in Wet Shave and Feminine Care, and whether Sun Care recovers as pandemic-related restrictions change.
- Whether Project Fuel achieves its fiscal 2021 savings target and whether savings translate into improved adjusted profitability and cash flow.
- Whether working capital reverses sufficiently to improve operating cash flow, and how much liquidity is available under the revolving credit facility.
- Plans and market terms for refinancing the $500 million of 4.7% notes due in May 2022, alongside debt-service costs and covenant compliance.
- How COVID-19, foreign exchange, input costs, competitive pressures, and customer distribution changes affect results and impairment risk.