Business context and reporting period
Edgewell Personal Care Company filed this Form 10-K for the fiscal year ended September 30, 2020. The company sells wet shave, sun and skin care, and feminine care products globally. Fiscal 2020 includes the December 2019 sale of its Infant and Pet Care business and the September 2020 acquisition of men’s grooming brand Cremo.
The filing also reports unaudited fourth-quarter results; fiscal 2020 Q4 is the quarter ended September 30, 2020. Unless noted otherwise, financial figures below are in millions of dollars.
Financial performance and key metrics
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Net sales | $1,949.7 | $2,141.0 |
| Gross profit / margin | $880.9 / 45.2% | $966.6 / 45.1% |
| GAAP net earnings (loss) | $67.6 | $(372.2) |
| Diluted EPS | $1.24 | $(6.88) |
| Adjusted net earnings (non-GAAP) | $148.8 | $188.8 |
| Adjusted diluted EPS (non-GAAP) | $2.73 | $3.48 |
| Operating cash flow | $232.6 | $190.6 |
| Capital expenditures | $47.7 | $58.0 |
Reported sales fell 8.9%; organic sales, excluding currency, acquisitions and dispositions, fell 4.4%. Management estimated COVID-19 reduced sales by approximately $102; excluding that estimated impact, organic sales increased 0.5%. GAAP earnings rebounded from 2019’s substantial impairment-driven loss, but adjusted earnings declined 21.2%, primarily due to lower sales and higher SG&A.
Gross margin increased 10 basis points to 45.2%. SG&A rose to $408.8, or 21.0% of sales, from $372.0, or 17.4%; advertising and sales promotion expense fell to $216.2 from $250.9. Interest expense was $61.2, plus $26.2 in costs for early retirement of debt.
Cash and cash equivalents were $364.7 at September 30, 2020, versus $341.6 a year earlier; working capital was $473.1. Total borrowings were $1,271.1, including $1,250.0 of long-term debt and $21.1 of short-term notes payable. The company had $416.3 available under its $425 revolving credit facility, net of letters of credit. It reported compliance with debt covenants.
Segment results: Wet Shave sales were $1,162.3 and segment profit $206.2; Sun and Skin Care sales were $462.0 and profit $69.1; Feminine Care sales were $298.6 and profit $52.3. Wet Shave sales and profit declined 7.0% and 16.3%, respectively; Sun and Skin Care sales were nearly flat, but profit declined 14.0%; Feminine Care sales fell 3.1%, while profit increased 8.3%.
Unaudited Q4 sales were $488.8, gross profit $222.1, net earnings $21.0, and diluted EPS $0.38. In Q4 2019, these were $528.0, $230.0, $40.7, and $0.75, respectively.
Material changes versus the prior comparable period
- Organic sales declined, principally from lower Wet Shave and Sun Care demand during the pandemic; increased Wet Ones demand and growth in men’s grooming partly offset declines.
- Management attributed the Sun Care downturn to reduced travel and outdoor activity. Wet Ones sales grew more than 60% in North America.
- Operating cash flow improved by $42.0, with working-capital improvements, while investing cash outflow rose, mainly due to the $233.6 Cremo acquisition.
- Edgewell issued $750.0 of 5.50% notes due 2028 and used part of the proceeds to retire $600.0 of 4.70% notes due 2021. The remaining $500.0 of 4.70% notes are due in May 2022; the company expects to refinance them.
- The Infant and Pet Care business was sold for $122.5, with $107.5 of proceeds received by year-end and a $4.1 gain recorded. Cremo was acquired for $233.6 in an all-cash transaction; its purchase-price allocation remained preliminary.
Outlook, commentary, risks and unusual items
- Outlook: Management expected Project Fuel to generate total annual gross savings of $265–$275 by the end of FY 2021. Cumulative gross savings were approximately $212 through FY 2020. Estimated one-time restructuring charges were $160–$165, with $133.6 incurred; planned related capital investment was $70–$80, with $58.1 incurred. FY 2021 capital expenditures were projected at $60–$70.
- Management said available cash, operating cash flows, note proceeds and revolving-credit availability were expected to cover requirements for at least 12 months. It cautioned that the ongoing pandemic’s effects on demand, customers, supply chains, currencies and commodities remained uncertain.
- COVID-19 reduced Sun Care demand, while Wet Ones benefited from increased hygiene demand. The company reported $4.3 of net incremental pandemic-related charges and no material manufacturing or distribution disruption to date.
- Key risks include intense competition and retailer pricing pressure, Walmart’s 22% share of FY 2020 sales, seasonal Sun Care exposure, raw-material and currency volatility, e-commerce execution, debt and refinancing, and the pandemic’s uncertain duration and impact.
- No goodwill or indefinite-lived intangible impairment was identified in FY 2020. However, Wet Shave and Skin Care goodwill and the Banana Boat trade name had less than 10% valuation headroom; modest adverse assumption changes would reduce that headroom further. FY 2019 included $570.0 of impairment charges.
- Environmental remediation accruals were $11.6. The company described pending legal proceedings as not reasonably likely to be material, considering recorded accruals. The independent auditor issued unqualified opinions on the financial statements and internal controls; Cremo was excluded from the internal-control assessment because it was recently acquired.
Important facts for investors to verify
- Whether the pandemic-related sales estimate and recovery assumptions prove accurate, particularly for Wet Shave and Sun Care.
- Whether Project Fuel delivers its remaining targeted savings on schedule and without disrupting sales or operations.
- Progress refinancing the $500.0 notes due May 2022, covenant headroom, and the company’s capacity to service its debt.
- Whether Wet Shave, Skin Care and Banana Boat valuations retain adequate headroom as forecasts and market conditions change.
- Final Cremo purchase accounting and subsequent contribution to sales, earnings and cash flow; also monitor customer concentration, bad-debt exposure and Sun Care returns.