Edgewell Personal Care Company — Q3 FY2016 Form 10-Q
Reporting period: Three and nine months ended June 30, 2016. Amounts are in millions except per-share data. Edgewell sells wet shave, sun and skin care, feminine care, and infant care products. The Household Products business was spun off on July 1, 2015 and is reported as discontinued operations.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Net sales, 2016 / 2015 | $645.1 / $672.9 | $1,751.4 / $1,861.1 |
| Gross profit, 2016 / 2015 | $311.2 / $323.4 | $849.8 / $914.5 |
| Gross margin, 2016 / 2015 | 48.2% / 48.1% | 48.5% / 49.1% |
| Continuing-operations earnings (loss), 2016 / 2015 | $36.7 / $(67.7) | $126.5 / $(102.4) |
| Diluted continuing-operations EPS, 2016 / 2015 | $0.61 / $(1.09) | $2.11 / $(1.65) |
| Operating cash flow, 2016 / 2015 | Not provided for the quarter | $4.1 / $23.7 |
- Q3 reported sales fell 4.1%; organic sales declined 2.2%. Excluding estimated $10.0 of adverse international go-to-market impacts, underlying sales declined 0.7%.
- Nine-month reported sales fell 5.9%; organic sales declined 0.9%. Excluding estimated $34.0 of go-to-market impacts, underlying sales increased 0.9%.
- Q3 adjusted continuing-operations earnings were $39.2 and adjusted diluted EPS $0.66, versus $27.2 and $0.43 a year earlier. Nine-month adjusted earnings were $150.7 and adjusted diluted EPS $2.52, versus $135.7 and $2.17. These are non-GAAP measures and exclude specified items.
- Q3 SG&A was $104.8 versus $165.4, reflecting substantially lower Separation costs; excluding those costs, it was $102.0 versus $113.0. Advertising and promotion expense declined to $122.5 from $142.3. Debt interest expense declined to $18.3 from $27.5.
- Segment results were mixed: Q3 Wet Shave sales/profit were $364.6/$45.5, Sun and Skin Care $151.3/$34.3, Feminine Care $97.1/$7.4, and All Other $32.1/$6.1. Feminine Care sales declined 6.7%; Sun and Skin Care profit rose 33.0%.
Liquidity, debt and capital
- At June 30, 2016, cash was $691.5, current assets $1,508.4, and current liabilities $896.5. Substantially all cash was held outside the U.S.; management intends to reinvest foreign-subsidiary earnings indefinitely.
- Total borrowings were $1,874.7, including $758.5 at variable rates, compared with $1,721.5 at September 30, 2015. Long-term debt included $278.5 due within one year. The company reported compliance with material debt covenants.
- The U.S. revolving facility had $346.8 available after borrowings and letters of credit; the Netherlands facility had no further availability and matures in June 2017. The $185.0 term loan borrowed in April 2016 matures in three years.
- Nine-month cash decreased $20.6 to $691.5. Investing used $50.9, including $50.9 of capital expenditures; financing provided $24.7. Operating cash flow was reduced by a $100.5 discretionary international pension contribution. Management expected positive operating cash flow in Q4 and for full-year FY2016.
- The company repurchased 1.4 million shares for $114.5 during the first nine months. It paid no dividends in FY2016 to date and said it did not currently intend to pay dividends in the foreseeable future.
Changes, outlook and material items
- GAAP earnings improved sharply versus 2015, but comparisons are affected by prior-year Separation and restructuring costs, a $79.3 Venezuela deconsolidation charge in continuing operations, $59.6 of early debt-retirement costs, and Industrial sale charges. Prior-year results also include discontinued-operation results; prior-year cash flows were not recast for the spin-off.
- Management forecast a 21%–23% FY2016 reported effective tax rate and a 24%–26% adjusted rate, dependent in part on the geographic mix of earnings. The Q3 effective rate was a benefit of 7.6%, including $8.7 of favorable prior-year provision adjustments.
- Management expected FY2016 restructuring costs of $35–$40 and FY2017 costs of $10–$15; it targeted $15 of FY2016 savings and a further $40–$50 of savings in FY2017–FY2018 combined. No additional Separation or Spin restructuring costs were expected.
- Brexit-related currency volatility was identified as a risk. UK operations represented 3.4% of nine-month sales; the company hedges part of its pound exposure and said future effects depend partly on trade, regulatory and other negotiations.
- Other risks include foreign exchange and international go-to-market changes, substantial indebtedness and variable-rate exposure, competitive pressure (including declining/flat men’s shaving systems), customer concentration, supply or IT disruptions, pension funding, tax contingencies, and execution of restructuring and growth plans. A 1% rise in applicable rates was estimated to increase annual interest expense by about $7.6.
- Annual impairment testing of goodwill and indefinite-lived intangibles was underway for completion in Q4 FY2016. Certain brand names had been impaired in FY2015 and remain sensitive to forecast cash flows and valuation assumptions.
- The filing disclosed a prior-period deferred-tax classification misstatement, concluded it was not material, and revised presentation. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
- Legal proceedings were described as ordinary-course matters; management did not consider potential liability, net of accruals, reasonably likely to be material. The filing reported no material changes to the risk factors in the FY2015 Form 10-K.
Important facts for investors to verify
- Whether revenue and profit trends persist after separating the impact of go-to-market changes, currency, the Industrial sale, and prior-year one-time costs.
- Whether Feminine Care declines and Wet Shave profit pressure improve, and whether Sun and Skin Care gains can be sustained.
- Whether the company delivers forecast operating cash flow and restructuring savings while funding pension obligations and planned capital spending.
- Debt repayment and refinancing capacity, particularly the $278.5 Netherlands facility maturity in FY2017, available U.S. revolver capacity, and variable-rate exposure.
- Results of the FY2016 impairment review, the tax-rate outcome, and any material developments in legal, tax, foreign-exchange or Brexit-related exposures.