Edgewell Personal Care Company — Q3 FY2020 Form 10-Q
Reporting period: Three and nine months ended June 30, 2020. Amounts are in millions of dollars, except per-share data. Edgewell sells wet shave, sun and skin care, and feminine care products internationally. Its Infant and Pet Care business was sold in December 2019.
Financial performance
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Net sales | $483.9 | $609.2 | $1,460.9 | $1,613.0 |
| Gross profit | $222.7 | $292.2 | $658.8 | $736.6 |
| Gross margin | 46.0% | 48.0% | 45.1% | 45.7% |
| GAAP net earnings (loss) | $4.7 | $(460.7) | $46.6 | $(412.9) |
| GAAP diluted EPS | $0.09 | $(8.51) | $0.86 | $(7.63) |
| Adjusted net earnings (non-GAAP) | $35.9 | $60.5 | $116.2 | $142.2 |
| Adjusted diluted EPS (non-GAAP) | $0.66 | $1.11 | $2.13 | $2.62 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $118.6 | $98.2 |
Q3 reported sales fell 20.6%; organic sales declined 14.7% after excluding the divestiture and currency effects. Nine-month sales fell 9.4%, with organic sales down 4.7%. Q3 gross margin declined 200 basis points year over year, or 130 basis points excluding specified pandemic, restructuring and reformulation costs. Nine-month margin was down 60 basis points.
- Segment results, Q3: Wet Shave sales were $278.0 and segment profit $44.6; Sun and Skin Care sales were $136.9 and profit $23.5; Feminine Care sales were $69.0 and profit $12.0. Sales and profit declined across all three segments year over year.
- Cash and liquidity: Cash was $511.9 at June 30, 2020, versus $341.6 at September 30, 2019. Current assets were $1,151.5 and current liabilities $484.4. Nine-month investing cash flow was $71.3, including $95.8 of proceeds from the business sale; capital expenditures were $26.9. Free cash flow, calculated as operating cash flow less capital expenditures, was $91.7.
- Debt: Gross borrowings were $1,268.4, including $18.4 of variable-rate international borrowings. Edgewell issued $750 of 5.5% notes due 2028 and used part of the proceeds to retire $600 of 4.7% notes due 2021, incurring $26.2 in early-retirement costs. The $500 of 4.7% notes due 2022 remained outstanding. The new $425 secured revolver had $416.3 available, net of letters of credit; no borrowings were outstanding under it at quarter-end.
Material changes and unusual items
- COVID-19-related travel restrictions and reduced outdoor activity sharply weakened Sun Care demand; lower Wet Shave demand also weighed on sales. Increased demand for Wet Ones partly offset these declines. Management estimated Q3 organic sales would have been flat to slightly down absent COVID-19, but cautioned that this estimate is uncertain.
- Q3 included $3.9 of incremental pandemic costs. Advertising and promotion spending fell $24.3 in the quarter, partly offsetting lower sales. Management attributed the gross-margin decline to unfavorable category mix, partly offset by Sun Care pricing and favorable commodity costs.
- Q3 GAAP results included $26.2 of debt-retirement expense and $10.4 of restructuring and related costs. Nine-month results also included $32.0 of acquisition and integration planning costs and a $4.1 gain on the Infant and Pet Care sale. The prior-year comparative includes a revised $570.0 impairment charge; the filing says the correction did not affect prior-year operating cash flow.
- Project Fuel had generated $194 of cumulative savings through June 30. Edgewell targets $225–$240 of total annual gross savings by fiscal 2021 and expects total one-time pre-tax charges of $130–$140 through that year; cumulative charges were $126 at quarter-end.
Outlook, risks and contingencies
No specific near-term sales or earnings guidance is provided. Management said cash on hand, operating cash flow, note proceeds and revolver availability should cover expected needs for at least 12 months, and stated that COVID-19 had not materially affected liquidity to date. It also expects to refinance the $500 of notes due in 2022 before maturity. The company was in compliance with debt covenants at June 30, 2020.
Key uncertainties include the duration and severity of COVID-19, changing consumer demand, customer payment and credit conditions, possible supplier or operating disruptions, and foreign-currency and commodity volatility. Management warned prolonged pandemic effects could contribute to future goodwill or intangible-asset impairment, although it found no interim impairment trigger in Q3. On August 1, 2020, Edgewell agreed to acquire men’s grooming company Cremo for approximately $235 in cash, subject to customary closing conditions and regulatory clearance; closing was expected by the end of fiscal Q1 2021.
Investor verification priorities
- Track whether Sun Care, Wet Shave and Feminine Care demand and margins recover, and whether Wet Ones growth persists.
- Verify realization of Project Fuel’s remaining savings, associated charges and reinvestment plans.
- Assess debt-service and refinancing capacity, including the 2022 notes, and the financing of the proposed Cremo acquisition.
- Monitor cash conversion, receivables and customer credit risk, inventory, and the effects of the accounts-receivable sale facility.
- Review subsequent impairment testing and pandemic-related changes to business, supply chain, and liquidity risks.
- Distinguish GAAP results from management’s non-GAAP adjusted measures and note that the 2019 comparison was revised for an impairment-calculation error.