Business context and reporting period
Edgewell Personal Care Company’s Form 10-K covers the fiscal year ended September 30, 2019, with fiscal fourth-quarter results also disclosed. The company sells personal care products in Wet Shave, Sun and Skin Care, Feminine Care, and All Other segments, with operations in more than 50 countries.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $2,141.0 million | $2,234.4 million |
| Gross profit / margin | $966.6 million / 45.1% | $1,032.9 million / 46.2% |
| Net earnings (loss) | $(372.2) million | $103.3 million |
| Diluted EPS | $(6.88) | $1.90 |
| Operating cash flow | $190.6 million | $259.4 million |
| Capital expenditures | $58.0 million | $62.0 million |
- Fiscal 2019 adjusted net earnings were $188.8 million and adjusted diluted EPS was $3.48, versus $191.6 million and $3.52 in fiscal 2018. These are non-GAAP measures that exclude specified items.
- Working capital was $384.8 million, cash and equivalents were $341.6 million, and total borrowings were $1,231.4 million at year-end. Substantially all cash was held outside the U.S.
- The U.S. revolving facility had $117.0 million drawn and $600.0 million available. The company reported compliance with debt covenants; it expected to refinance the facility before its June 2020 maturity.
- Interest expense was $62.6 million. The company reported total assets of $3,420.9 million and shareholders’ equity of $1,303.5 million.
- Fiscal Q4 sales were $528.0 million and net earnings were $40.7 million, according to the unaudited quarterly schedule.
Material changes versus the prior year
- Reported sales declined 4.2%; organic sales declined 3.4%. North American organic sales fell 5.9%, while international organic sales grew 0.4%.
- Wet Shave sales declined 6.0% to $1,250.1 million, with weaker price mix and volumes; segment profit fell 7.1% to $246.5 million.
- Sun and Skin Care sales increased 2.2% to $459.8 million, including acquisition contribution; segment profit was flat at $79.9 million. Feminine Care sales fell 6.5% to $308.1 million, while segment profit rose 29.8% to $48.3 million on lower advertising and overhead. All Other sales fell 1.7% to $123.0 million and segment profit fell 37.4% to $12.2 million.
- Operating cash flow decreased by $68.8 million, primarily reflecting working-capital investment, including higher inventory and lower accounts-payable days.
- GAAP results included $570.0 million of non-cash impairment charges, versus $24.4 million in 2018. Impairments included goodwill in Wet Shave ($369.0 million), Infant Care ($37.0 million) and Skin Care ($2.0 million), and trade names Wet Ones ($87.0 million) and Diaper Genie ($75.0 million).
Outlook, management commentary, risks and unusual items
- Project Fuel delivered approximately $122 million of gross savings in fiscal 2019, with cumulative savings of approximately $137 million. Management targeted $225–$240 million in annual gross savings by the end of fiscal 2021. Estimated restructuring charges were $130–$140 million and related capital investment $60–$70 million through fiscal 2021.
- Fiscal 2020 capital expenditures were expected to be $70–$80 million. The company expected approximately $4 million of additional fiscal 2020 R&D costs related to proposed FDA sunscreen rules; timing and amount could change with the final rule.
- The proposed Harry’s merger valued Harry’s at $1.37 billion and was expected to close by the end of calendar Q1 2020, subject to conditions and regulatory clearances. Financing commitments included up to $425 million revolving, $575 million term A and $600 million term B facilities. Management warned that debt would increase significantly if the transaction closed.
- In October 2019, Edgewell agreed to sell its Infant and Pet Care business for $122.5 million; closing was expected in fiscal Q1 2020.
- The company corrected previously issued fiscal 2019 third-quarter impairment figures: impairment expense increased by $21.0 million, and net loss increased by $19.3 million after tax. Management said the interim statements were not materially misstated; operating cash flow was unaffected.
- Key risks include intense competition and pricing pressure, customer concentration (Wal-Mart represented about 23% of sales), execution of the Harry’s transaction and integration, leverage and refinancing, raw-material costs, seasonal/weather-sensitive Sun Care sales, foreign exchange exposure, product quality and safety, and further impairment risk. The Feminine Care reporting unit’s fair value was only 5% above carrying value.
- Environmental remediation accruals were $10.9 million; management did not expect environmental spending to materially affect results, but outcomes and costs remain uncertain. Ordinary-course legal proceedings were not considered reasonably likely to be material based on information then available.
Important facts for investors to verify
- Whether the Harry’s transaction closed, its final financing, resulting leverage and realized integration benefits.
- Whether Project Fuel reaches its savings targets and how restructuring costs and capital investment compare with plan.
- Sales, margins and market position in Wet Shave and Feminine Care, and the performance of the Sun and Skin Care brands.
- Cash generation and working-capital trends, availability of overseas cash, and refinancing of the revolving facility.
- Subsequent impairment tests, especially for Feminine Care and other goodwill or brand assets, and the assumptions supporting valuation.
- Completion and proceeds of the Infant and Pet Care sale, and any continuing liabilities or transition effects.