Edgewell Personal Care Company — Q1 FY2019 Form 10-Q
Business context and period. Edgewell sells personal-care products across Wet Shave, Sun and Skin Care, Feminine Care, and All Other. This unaudited report covers the three months ended December 31, 2018; comparisons are with the three months ended December 31, 2017.
Key financial metrics
| Metric | Q1 FY2019 | Prior year |
|---|---|---|
| Net sales | $457.1 million | $468.3 million |
| Gross profit / margin | $193.5 million / 42.3% | $199.3 million / 42.6% |
| Net earnings (loss) | $(0.4) million | $6.7 million |
| Diluted EPS | $(0.01) | $0.12 |
| Operating cash flow | $(46.4) million | $(24.1) million |
| Capital expenditures | $9.4 million | $11.6 million |
| Cash and cash equivalents at period-end | $239.9 million | $266.4 million at September 30, 2018 |
| Total borrowings | $1,334.1 million | $1,300.2 million at September 30, 2018 |
Reported net sales declined 2.4%; organic sales, excluding acquisition, divestiture, and currency effects, declined 3.5%. GAAP gross margin fell 30 basis points. Adjusted net earnings, a non-GAAP measure, were $20.2 million, or $0.37 per diluted share, versus $11.3 million, or $0.20, a year earlier.
Period-end current assets were $899.6 million and current liabilities $615.0 million. The company had $39.0 million drawn on its U.S. revolving facility and $677.4 million of availability at December 31. On February 6, 2019, it borrowed $185 million under that facility to repay and retire its $185 million term loan; reported facility availability then was approximately $468 million.
Changes and business drivers
- Sales declines were concentrated in Feminine Care (down 9.6%), All Other (down 13.8%), and Wet Shave (down 2.2%). Sun and Skin Care sales rose 12.9%, mainly reflecting the Jack Black acquisition; organic sales in that segment declined 3.9%.
- Segment profit improved in Wet Shave to $55.0 million from $53.7 million, Sun and Skin Care’s loss narrowed to $0.6 million from $6.2 million, and Feminine Care profit rose to $7.5 million from $4.8 million. All Other profit fell to $1.2 million from $7.1 million.
- SG&A decreased to $87.3 million from $97.9 million, while advertising and promotion rose to $51.6 million from $49.0 million. Lower overhead helped adjusted results; lower volume and unfavorable mix weighed on sales and gross margin.
- Reported results include $18.5 million of restructuring and related costs, a $0.9 million investor-settlement expense, $0.5 million of Jack Black acquisition and integration costs, and $0.1 million of Sun Care reformulation costs. The prior-year quarter included a $15.9 million gain on the Playtex gloves sale.
Outlook, commentary, and risks
- Project Fuel is expected to produce $225–$240 million in annual gross savings by the end of FY2021. Management estimates $130–$140 million of one-time pre-tax charges and $60–$70 million of capital investment through FY2021. Q1 savings were $24.8 million, bringing cumulative savings to $40.2 million; Q1 restructuring charges were $18.5 million and related capital expenditures were $5.3 million.
- Management expects the FY2019 adjusted effective tax rate to be 23.5%–25.5%, dependent on earnings mix by tax jurisdiction. It also expects FY2019 free cash flow to exceed 100% of GAAP net earnings. The filing provides no specific sales or EPS guidance.
- Management notes that Q1 is typically the lowest operating-cash-flow quarter because of Sun Care seasonality. Cash use reflected inventory build for the coming season, processing prior-season returns, and payment timing. Sun Care reformulation-related supply constraints affected some markets; additional related charges were expected over the next two quarters.
- Risks highlighted include currency movements, competitive pressure and distribution losses in North American Wet Shave, seasonal Sun Care returns and demand, and execution of restructuring and supply-chain changes. A 1 percentage-point increase in applicable interest rates was estimated to raise annual interest expense by approximately $2.3 million. The company reported compliance with debt covenants at December 31, 2018.
Important facts for investors to verify
- Reconcile GAAP loss and EPS with adjusted earnings and EPS, including the unusually high 105.7% reported effective tax rate and its disclosed tax and restructuring effects.
- Assess whether Project Fuel savings materialize on schedule and offset its remaining restructuring costs and capital investment.
- Track organic sales, especially Feminine Care and All Other, and whether Wet Shave’s North American competitive and pricing pressures persist.
- Monitor cash generation and seasonal inventory and returns, alongside revolver usage after the term-loan refinancing and the resulting debt maturities.
- Evaluate Sun Care reformulation supply constraints and the assumptions underlying the returns reserve, which was $31.3 million at December 31, 2018.