Edgewell Personal Care Company — Form 10-Q Summary
Reporting period: Second quarter and six months ended March 31, 2017. Financial amounts are in millions except per-share data. Edgewell sells wet shave, sun and skin care, feminine care, and infant care products. Its fiscal year ends September 30.
Financial performance
| Metric | Three months ended March 31, 2017 | Prior-year quarter | Six months ended March 31, 2017 | Prior-year period |
|---|---|---|---|---|
| Net sales | $611.0 | $611.2 | $1,096.0 | $1,106.3 |
| Gross profit | $309.6 | $311.1 | $537.6 | $538.6 |
| Gross margin | 50.7% | 50.9% | 49.1% | 48.7% |
| Net earnings | $65.7 | $66.1 | $99.2 | $89.8 |
| Diluted EPS | $1.14 | $1.10 | $1.72 | $1.49 |
| Operating cash flow | Six-month period: $(0.4) | Prior-year six-month period: $(72.6) |
Quarterly reported sales were essentially flat; organic sales grew 0.1% after excluding Bulldog and currency effects. Six-month reported sales fell 0.9%, and organic sales declined 0.9%. Adjusted, non-GAAP net earnings were $69.6 for the quarter versus $70.5, and $108.0 for six months versus $111.5. Adjusted diluted EPS was $1.21 versus $1.17 for the quarter and $1.87 versus $1.85 for six months.
Segments and material period changes
- Sun and Skin Care: Sales rose 13.7% in the quarter and 11.9% for six months; segment profit increased 29.8% and 26.4%, respectively. Organic growth reflected strong sun-care performance; Bulldog contributed following its October 2016 acquisition.
- Wet Shave: Sales declined 3.1% in both periods. Quarterly profit fell 5.8%; six-month profit increased 0.5%. Management cited volume pressure in men's systems, shaving gels and creams, competitive pressure, and Japan shipment timing.
- Feminine Care: Sales fell 9.2% in the quarter and 6.4% for six months. Segment profit dropped 84.8% and 64.8%, respectively, amid distribution and volume declines and costs from moving manufacturing from Montreal to Dover, Delaware.
- All Other: Quarterly sales increased 2.7%, while segment profit decreased 3.8%. Six-month sales increased 0.3% and profit decreased 3.9%.
Six-month gross margin improved 40 basis points, mainly on pricing and lower promotion, but the quarter's margin declined 20 basis points as manufacturing-transition costs offset benefits. SG&A was higher as a share of quarterly sales (17.0% versus 16.3%); management attributed spending to zero-based budgeting projects and investment in China and e-commerce. Quarterly advertising and promotion expense decreased, but six-month spending increased.
Cash, debt and liquidity
- Cash and equivalents were $402.9 at March 31, 2017, down from $738.9 at September 30, 2016. Cash declined $336.0 over the six months.
- Total borrowings were $1,629.5, including $19.7 of notes payable, versus $1,844.5 at September 30. Long-term debt on the balance sheet was $1,609.8; there were no current maturities reported.
- The company had $330.0 outstanding on its U.S. revolving facility and $386.9 of availability after letters of credit. The facility commitment was increased by $75.0 to $725.0; the amendment also permits receivables sales facilities up to $150.0.
- Investing cash outflow was $58.5, including the $34.0 Bulldog acquisition and $30.4 of capital expenditures. Financing cash outflow was $267.3, principally reflecting repayment of the Netherlands facility and other net debt repayments, as well as $58.5 of share repurchases.
- Management said substantially all cash was held outside the U.S., generally available for ordinary operations, and intended to reinvest foreign earnings indefinitely because repatriation could have adverse tax consequences. The company reported compliance in all material respects with debt covenants.
Outlook, commentary and risks
- Management expected positive operating cash flow for fiscal 2017 and an effective tax rate of 26%–27%.
- Fiscal 2017 restructuring costs were estimated at $25–$28. Expected savings were $20–$25 for fiscal 2017 and a further $20–$25 combined for fiscal 2018 and 2019. The Montreal-to-Dover transition delay raised costs and shifted some expected savings to fiscal 2019; the full-year estimate includes a non-cash real-estate disposition charge.
- Bulldog was acquired for £27.8 million ($34.0 million net of cash acquired), financed with available foreign cash. Its purchase-price allocation remained preliminary at quarter-end.
- Currency movements, including Brexit-related sterling volatility, may affect reported results. $514.6 of debt carried variable rates; management estimated a one-percentage-point rate increase would add about $5.1 to annual interest expense.
- Other stated risks include intense competition, brand and product performance, customer and channel changes, operational disruption, indebtedness and covenants, restructuring execution, acquisitions, pensions, regulation, tax contingencies, and product liability. The company said pending legal matters were not reasonably likely to be material, based on information then available.
- Skintimate had prior-year impairment charges and was converted to a definite-lived asset in fiscal 2017. Playtex and Wet Ones brand values were also described as sensitive to forecast cash flows and discount-rate assumptions.
- The company had not declared dividends since fiscal 2015 and did not intend to declare them in the foreseeable future. It repurchased 0.8 million shares for $58.5 during the six months. Management appointed a COO effective April 4 and announced the CMO’s departure effective July 31, 2017.
Important facts for investors to verify
- Whether Sun and Skin Care growth can offset persistent Wet Shave and Feminine Care sales and profit pressure.
- Actual costs, timing, and realized savings from the Feminine Care manufacturing transition and the broader restructuring plan.
- Working-capital and operating-cash-flow trends: six-month operating cash flow was slightly negative despite management’s full-year positive-cash-flow expectation.
- Debt levels, variable-rate exposure, foreign-cash accessibility, and continued compliance with credit covenants.
- Final Bulldog purchase accounting and integration performance, and the assumptions supporting goodwill and intangible-asset valuations.
- Exposure to foreign exchange, competitive pressure, and any material developments in legal, tax, pension, or environmental contingencies.