Edgewell Personal Care Company — Q2 FY2018 Form 10-Q
Reporting period: Three and six months ended March 31, 2018. Amounts are in millions except per-share data. The quarter is the company’s fiscal second quarter.
Business context
Edgewell sells personal care products across Wet Shave, Sun and Skin Care, Feminine Care, and All Other. During the period, it acquired luxury men’s skincare company Jack Black and sold its Playtex household gloves business.
Financial results and liquidity
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Net sales | $608.1 | $611.0 | $1,076.4 | $1,096.0 |
| Gross profit | $302.1 | $309.6 | $502.4 | $537.6 |
| Gross margin | 49.7% | 50.7% | 46.7% | 49.0% |
| Net earnings | $65.1 | $65.7 | $71.8 | $99.2 |
| Diluted EPS | $1.20 | $1.14 | $1.31 | $1.72 |
| Operating cash flow | Not presented separately | Not presented separately | $73.4 | $15.1 |
Q2 pretax earnings were $85.8 versus $89.5; six-month pretax earnings were $118.9 versus $134.4. Six-month capital expenditures were $27.6, implying free cash flow of $45.8 (operating cash flow less capital expenditures). Adjusted net earnings were $70.9 for Q2 and $82.2 for the first half, compared with $69.6 and $108.0, respectively; adjusted diluted EPS was $1.31 and $1.50, versus $1.21 and $1.87. These are non-GAAP measures.
At March 31, cash was $243.6, current assets $1,004.4, and current liabilities $551.9. Long-term debt was $1,404.1 and notes payable $21.6; management reported total borrowings of $1,425.7, down from $1,544.8 at September 30, 2017. The U.S. revolving facility had $123.0 drawn and $594.0 available, after letters of credit. The company was in compliance with debt covenants. Six-month financing cash outflow was $249.7, including $124.4 of share repurchases.
Changes versus prior comparable periods
- Q2 sales decreased 0.5%; organic sales fell 3.4%, while currency added 3.1 percentage points. North American organic sales declined 7%, partly offset by 4% growth in international markets.
- First-half sales decreased 1.8%; organic sales declined 4.2%. Wet Shave, Feminine Care, and Infant Care were weaker, partly offset by Sun and Skin Care growth.
- Gross margin fell 100 basis points in Q2 and 240 basis points year to date. Management cited lower volumes, unfavorable promotions and returns, and higher product costs.
- Q2 net earnings were nearly flat, while diluted EPS increased, supported in part by a lower share count. First-half reported earnings were reduced by the Tax Act charge; adjusted earnings and EPS also declined year over year.
- Segment performance was mixed: first-half Wet Shave profit fell 14.3%, Sun and Skin Care profit fell 17.2%, Feminine Care profit rose 52.5% from a low prior-year base, and All Other profit fell 21.3%.
- Operating cash flow improved from $15.1 to $73.4, primarily due to working-capital changes. Cash declined $259.3 during the half, including the Jack Black acquisition, share repurchases, and debt repayments.
Outlook, management commentary, and risks
- Management expects fiscal 2018 adjusted effective tax rate of 22%–24%, subject to the geographic mix of earnings. It expects fiscal 2018 free cash flow to exceed 100% of GAAP net earnings.
- Zero Based Spending savings are expected to be $25–$30 in fiscal 2018, with savings reinvested in marketing and growth initiatives. Project Fuel is expected to generate approximately $225 in gross savings through fiscal 2021. Estimated one-time pretax charges are $120–$130 and implementation capital investment is $60–$70 through fiscal 2021; fiscal 2018 restructuring charges and capital expenditures are estimated at approximately $40 and $16.
- The majority of Project Fuel costs and savings are expected in fiscal 2019–2021. Execution risks include disruption to customers or operations, retention and morale challenges, and failure to realize savings on schedule.
- The $90.3 Jack Black acquisition was completed March 1 and funded with operating cash. Purchase accounting remains preliminary; goodwill and intangible allocations and related tax impacts were not finalized. Integration costs were $2.6 in Q2.
- The Tax Act produced a provisional $17.4 net transition charge for the first half, comprising a $96.7 estimated transition tax partly offset by a $79.3 deferred-tax remeasurement benefit. Estimates may change during the measurement period.
- Other notable risks include intense competition and category declines, raw-material and currency exposure, seasonality, substantial indebtedness, and potential goodwill or intangible impairment. Management reported no impairment trigger in Q2 despite a stock-price decline. Pending legal matters were not considered reasonably likely to be material based on information available.
- The company has not declared dividends since fiscal 2015 and does not currently intend to pay them in the foreseeable future.
Important facts for investors to verify
- Whether organic sales trends, particularly in North American Wet Shave, Feminine Care, and infant products, stabilize or worsen.
- Whether gross-margin pressure from promotions, returns, volume, and input costs persists.
- Project Fuel’s realized savings, cash costs, capital requirements, and effects on service levels and growth investment.
- Final Jack Black purchase-price allocation, acquired-asset useful lives, and contribution to sales and profit.
- Final Tax Act accounting and cash-tax consequences, alongside the company’s leverage, facility availability, and free-cash-flow delivery.