Edgewell Personal Care Company — Q2 FY2020 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2020. Amounts are in millions except per-share data. The quarter was affected by the COVID-19 pandemic and the December 2019 sale of the Infant and Pet Care business.
Financial performance
- Quarter revenue: Net sales were $523.0, down 4.3% year over year. Organic sales rose 2.4%, but the company said growth would have been flat excluding COVID-related demand. For the six months, sales were $977.0, down 2.7%; organic sales increased 1.3%.
- Profit and margins: Q2 gross profit was $243.0 versus $250.9, while gross margin improved to 46.5% from 45.9%. Net earnings were $19.5 versus $48.2, and diluted EPS was $0.36 versus $0.89. Adjusted net earnings, a non-GAAP measure, were $50.4 versus $61.5; adjusted diluted EPS was $0.92 versus $1.13. Six-month net earnings were $41.9 versus $47.8; adjusted net earnings were $80.3 versus $81.7, and adjusted diluted EPS was $1.47 versus $1.50.
- Segment trends: Q2 Wet Shave sales declined 4.7% and segment profit fell 20.1%. Sun and Skin Care sales rose 7.9% and profit rose 8.8%; Feminine Care sales rose 13.9% and profit rose 33.5%. Growth in Wet Ones and Feminine Care products was partly attributed to pandemic-related demand and consumer stockpiling.
- Cash flow: Six-month operating cash flow was $17.2, compared with cash use of $31.9 a year earlier. Capital expenditures were $16.8, implying free cash flow of approximately $0.4 under the company’s stated definition. Investing cash flow was $81.1, including $95.8 of proceeds from the business sale. Financing cash use was $130.5, including $117.0 of revolving-facility repayments. Cash ended at $308.8, down from $341.6 at September 30, 2019.
- Debt and liquidity: Total borrowings were $1,117.7 at March 31, including $17.7 of variable-rate international borrowings; long-term debt was $1,098.3. The $600 senior notes mature in 2021 and $500 notes in 2022. On April 3, after quarter-end, the company replaced its prior facility with a $425 secured revolving credit facility; $410.2 was available on that date. Management said existing cash, operating cash flow and facility availability were expected to cover requirements for at least 12 months. The company reported compliance with debt covenants.
Material changes and unusual items
- The Infant and Pet Care business was sold on December 17, 2019, for $122.5, including transition-service consideration. The company reported $95.8 of sale proceeds in investing cash flow during the six-month period and a $4.1 gain.
- Q2 SG&A included $25.5 of acquisition and integration planning costs, primarily related to the terminated Harry’s acquisition. Management did not expect significant further Harry’s-related costs during the remainder of FY2020.
- Project Fuel restructuring and related costs were $20.4 for the six months. The initiative had generated approximately $170 of cumulative savings to date; management targeted $225–$240 of total annual gross savings by the end of FY2021 and expected total one-time pre-tax charges of approximately $130–$140 through FY2021.
- Other expense was $10.9 in Q2 versus income of $2.7 a year earlier, largely reflecting currency devaluations and remeasurement losses. Six-month debt interest expense declined to $28.2 from $32.4.
Outlook, commentary and risks
- Management expected continued strong Wet Ones demand but anticipated near-term weakness in Sun Care from stay-at-home measures and reduced travel or outdoor activity. It did not provide a quantified full-year earnings or sales forecast in the provided filing text.
- The company reported no significant manufacturing or distribution disruption to date and no current difficulty obtaining key ingredients, but warned that prolonged COVID-19 could disrupt suppliers, operations, demand, customer payments and cash flows. Customer payment-pattern changes and extended-term requests contributed to higher bad-debt expense.
- Foreign-exchange and commodity volatility increased. A significant share of sales is outside the U.S., exposing reported results to currency movements.
- COVID-19 could affect goodwill and indefinite-lived intangible-asset valuations. No interim impairment analysis was triggered in the quarter, but the company noted that a prolonged downturn or changed valuation assumptions could lead to future impairment. Certain reporting units had limited valuation headroom following prior-year impairment charges.
- Seasonality normally supports higher Sun Care sales and cash generation in the second and third fiscal quarters; management cautioned that pandemic restrictions may weaken this pattern. The filing also notes $10.4 of expected minimum pension contributions for FY2020, of which $2.7 had been contributed in the first six months.
Most important facts for investors to verify
- Whether COVID-related Wet Ones and Feminine Care demand persists or reverses, and whether Sun Care weakness offsets it.
- Progress in Wet Shave, where sales and segment profit declined, and the effect of overhead reallocations after the divestiture.
- Cash conversion, receivables and bad-debt trends, and actual availability and covenant terms under the replacement revolver.
- Plans to refinance or repay the 2021 and 2022 senior notes, and the effect of foreign-exchange volatility on earnings.
- Project Fuel savings and costs versus targets, acquisition-related spending, and any new goodwill or intangible-asset impairment indicators.