Edgewell Personal Care Company: FY2016 Form 10-K
Reporting period: Fiscal year ended September 30, 2016. Edgewell is a standalone personal-care company following the July 2015 separation of its Household Products business, now New Energizer. It reports Wet Shave, Sun and Skin Care, Feminine Care, and All Other segments. The requested Q4 period is the fourth quarter of this fiscal year.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $2,362.0 million | $2,421.2 million |
| Gross profit / margin | $1,159.9 million / 49.1% | $1,183.8 million / 48.9% |
| Continuing-operations net earnings (loss), GAAP | $178.7 million | $(296.1) million |
| Diluted continuing-operations EPS, GAAP | $2.99 | $(4.78) |
| Adjusted continuing-operations net earnings, non-GAAP | $213.3 million | $175.2 million |
| Adjusted diluted EPS, non-GAAP | $3.57 | $2.80 |
| Cash from operating activities | $176.4 million | $148.8 million |
| Capital expenditures | $69.5 million | $99.4 million |
- Reported sales fell 2.4%; organic sales increased 1.4%, excluding currency, Venezuela, and industrial-business impacts. Management estimated international go-to-market changes reduced sales by $34 million; underlying sales, after this estimated impact, increased 2.8%.
- Gross margin rose 20 basis points. Gross profit dollars declined, mainly due to lower sales and higher product costs.
- FY2016 results included $38.8 million of restructuring and related costs, $12.0 million of separation costs, and a $6.5 million non-cash Skintimate impairment. The prior-year GAAP loss reflected much larger unusual charges, including a $318.2 million impairment, $79.3 million Venezuela deconsolidation charge, $142.0 million of separation costs, and $59.6 million of early debt-retirement costs. Adjusted figures are non-GAAP measures and exclude specified items.
- Cash and cash equivalents were $738.9 million at year-end, substantially all held outside the U.S. Working capital was $583.8 million versus $969.8 million; the filing notes adoption of a new deferred-tax balance-sheet presentation, which affects current-asset comparability.
- Total borrowings were $1,844.5 million, including $731.3 million at variable rates. Long-term debt, including current maturities, was reported as $1,826.0 million. The company had $376.8 million available under its U.S. revolving facility and was in material compliance with debt covenants.
- Cash flow from operations improved year over year, helped by lower separation-related cash spending, but included a $100.5 million discretionary pension contribution. The company repurchased 2.5 million shares for $196.6 million and paid no regular cash dividends.
Fourth-quarter snapshot
FY2016 Q4 net sales were $610.6 million, gross profit was $310.1 million, net earnings were $52.2 million, and diluted EPS was $0.88. The quarter included the $6.5 million non-cash Skintimate impairment.
Material changes and segment trends
- Wet Shave sales were $1,425.8 million, down 1.1% reported but up 1.8% organically. Segment profit declined 6.0% to $290.2 million, with lower volume and higher SG&A partly offset by favorable price mix and lower advertising and promotion spending.
- Sun and Skin Care sales rose 2.8% to $414.9 million; organic sales increased 4.6%. Segment profit increased 25.2% to $89.5 million, supported by higher sales and lower advertising and promotion spending.
- Feminine Care sales declined 2.3% to $388.9 million. Segment profit fell 19.7% to $39.1 million, reflecting lower sales, production-consolidation startup costs, and higher SG&A.
- All Other sales declined 25.7% to $132.4 million, largely due to the prior sale of the industrial business. Excluding that sale and currency effects, organic sales fell 1.2%; segment profit increased 15.4% to $28.4 million.
- International sales were approximately 41% of consolidated sales. Wal-Mart represented approximately 25% of sales, creating significant customer concentration.
Outlook, commentary, risks, and unusual items
- Management expected fiscal 2017 capital expenditures of $65 million to $75 million, funded primarily from operating cash flow. It forecast $15 million to $20 million of restructuring costs in FY2017 and approximately $45 million to $50 million of additional restructuring savings across FY2017 and FY2018 combined. These are plans and estimates, not earnings guidance.
- The company launched a Zero Based Spend initiative to identify savings for reinvestment and margin improvement. Management said it did not expect further separation-related costs.
- On October 31, 2016, after year-end, Edgewell completed its approximately $34 million acquisition of U.K.-based Bulldog Skincare, funded with foreign cash.
- Key risks include intense competition and pricing pressure, reliance on major retailers, foreign-exchange exposure, seasonal sun-care demand and weather, raw-material and supply disruption, substantial debt and covenant constraints, pension funding needs, restructuring execution, and potential further impairment of brands. The company also identified uncertainty related to Brexit and the tax and indemnity risks associated with the Household Products separation.
- The company reported $14.0 million of accrued environmental costs, including $7.0 million expected to be spent in FY2017. Management did not consider pending legal proceedings reasonably likely to be material, taking recorded accruals into account.
Important facts for investors to verify
- Whether organic sales growth and the estimated $34 million go-to-market impact translate into durable underlying growth, particularly in Wet Shave and Feminine Care.
- Whether planned restructuring savings are achieved on schedule and offset ongoing costs and reduced advertising spending.
- Cash generation, debt reduction, variable-rate exposure, covenant headroom, and access to cash held overseas.
- Performance and carrying values of Skintimate, Playtex, and Wet Ones, whose valuations are sensitive to forecast cash flows and discount-rate assumptions.
- Customer concentration, seasonal sun-care returns, pension funding requirements, and the potential consequences of separation-related tax and indemnity obligations.
- Integration and performance of Bulldog Skincare, acquired after the fiscal year-end.