Edgewell Personal Care Company (NYSE: EPC) — FY2021 Form 10-K
Reporting period: Fiscal year ended September 30, 2021. The filing also reports fourth-quarter results. Unless noted otherwise, amounts are in millions of U.S. dollars.
Business context
Edgewell makes and markets personal care products in Wet Shave, Sun and Skin Care, and Feminine Care. Its portfolio includes Schick, Banana Boat, Hawaiian Tropic, Playtex, Bulldog, Jack Black and Cremo. The company completed its acquisition of Cremo in September 2020; its Infant and Pet Care business was sold in December 2019.
Financial performance and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales | $2,087.3 | $1,949.7 |
| Gross profit / gross margin | $950.1 / 45.5% | $880.9 / 45.2% |
| Operating income / operating margin | $238.8 / 11.4% | $176.0 / 9.0% |
| Net earnings | $117.0 | $67.6 |
| Diluted EPS | $2.12 | $1.24 |
| Operating cash flow | $229.0 | $232.6 |
| Capital expenditures | $56.8 | $47.7 |
| Cash and cash equivalents at year-end | $479.2 | $364.7 |
| Working capital at year-end | $598.9 | $473.1 |
| Long-term debt, carrying value | $1,234.2 | $1,237.9 |
Reported sales rose 7.1%; organic sales increased 3.7%, excluding currency and acquisition/divestiture effects. Adjusted net earnings were $166.7, or $3.02 per diluted share, versus $148.8 and $2.73 in FY2020; these are non-GAAP measures. Annual earnings included $30.1 of restructuring charges, $26.1 of debt-retirement costs, and $8.4 of acquisition and integration costs.
Fourth-quarter sales were $543.2, versus $488.8 in Q4 FY2020; net earnings were $44.1 versus $21.0, and diluted EPS was $0.80 versus $0.38.
By segment, FY2021 sales were $1,215.9 for Wet Shave, $585.3 for Sun and Skin Care, and $286.1 for Feminine Care. Sun and Skin Care growth reflected a recovery in sun care and the Cremo acquisition. Feminine Care sales declined 4.2%, with lower volumes, lost distribution and prior-year pantry loading cited as factors.
Total borrowings were $1,276.5 at year-end, including $26.5 of variable-rate borrowings. The company issued $500 of 4.125% notes due 2029 and used proceeds plus cash to repay $500 of 4.70% notes due 2022. It reported compliance with its revolving credit facility covenants. Operating, investing and financing cash flows were $229.0, $(48.7) and $(65.4), respectively.
Material changes and management commentary
- Sales and earnings improved from FY2020, which had been affected by pandemic-related declines in some categories. Management attributed earnings improvement to higher sales and noted increased advertising and promotion investment.
- Project Fuel delivered approximately $68 of gross savings in FY2021 and approximately $280 cumulatively. Cumulative restructuring charges were $163.7.
- Gross margin improved by 30 basis points; management cited Project Fuel savings and favorable pricing/promotion, partly offset by higher commodity and labor costs. Freight and material cost pressures also affected segment results.
- Management said COVID-19 had not materially disrupted manufacturing or significantly affected liquidity to date, but supply-chain, procurement-cost and labor uncertainties remained.
Outlook, risks and contingencies
- For FY2022, management expected capital expenditures of $60–$70, primarily for facility maintenance and productivity, product development and IT enhancements. It also expected approximately $17 of one-time charges from commercial-organization changes announced in September 2021.
- The company stated that cash, operating cash flow and available borrowing capacity were expected to meet requirements for at least the next 12 months. It planned approximately $300 of share repurchases over the next three fiscal years, subject to conditions.
- Key risks include inflation and raw-material, freight and labor costs; intense competition and retailer pricing pressure; dependence on Walmart, which generated approximately 21% of FY2021 sales; seasonal sun care demand and weather; COVID-19 and supply-chain disruption; foreign exchange exposure; product quality, safety and regulatory matters; and substantial indebtedness.
- Environmental remediation is ongoing at certain current and former sites and third-party disposal locations; accrued environmental costs were $11.8. Management did not consider pending legal proceedings reasonably likely to be material based on information available, while noting outcomes cannot be predicted with certainty.
- No goodwill or indefinite-lived intangible impairment was recorded in FY2021. The Skin Care reporting-unit goodwill assessment was identified by the auditor as a critical audit matter because of judgment involved in projected margins and discount rates.
Important facts for investors to verify
- Whether the sales recovery and improved earnings persist after adjusting for Cremo, currency effects, and pandemic-related comparisons.
- How successfully the company offsets ongoing commodity, freight, labor and other inflationary costs through pricing and productivity.
- Feminine Care’s sales, distribution and segment-profit trends, and the performance of Cremo and other grooming brands.
- Debt-service capacity, covenant headroom and planned repurchases relative to cash generation, dividends and capital needs.
- Assumptions behind Skin Care goodwill valuations and the potential financial effects of environmental remediation or other contingencies.