Edgewell Personal Care Company — Q1 FY2020 Form 10-Q
Business context and period: The filing covers the three months ended December 31, 2019, compared with the three months ended December 31, 2018. Edgewell sells personal care products across Wet Shave, Sun and Skin Care, and Feminine Care. It completed the sale of its Infant and Pet Care business in December 2019; that business had comprised the All Other segment.
Key financial results
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Net sales | $454.0 million | $457.1 million |
| Gross profit / gross margin | $193.1 million / 42.5% | $193.5 million / 42.3% |
| Net earnings (loss) | $22.4 million | $(0.4) million |
| Diluted EPS | $0.41 | $(0.01) |
| Adjusted net earnings / adjusted diluted EPS (non-GAAP) | $29.9 million / $0.55 | $20.2 million / $0.37 |
| Cash from operating activities | $(46.9) million | $(46.4) million |
| Capital expenditures | $7.6 million | $9.4 million |
Reported sales declined 0.7%; organic sales were flat after excluding currency and the divestiture. Gross margin expanded 20 basis points. SG&A rose to $95.0 million from $87.3 million, while advertising and promotion fell to $41.1 million from $51.6 million. Interest expense declined to $14.3 million from $16.0 million. The reported earnings comparison also reflects lower restructuring charges, acquisition-planning costs, and the divestiture gain.
Segment performance
- Wet Shave: Sales of $277.0 million, down 3.7%; segment profit of $52.9 million, down 3.8%. Management cited declines in men’s systems and disposables, lower volumes, and unfavorable price mix.
- Sun and Skin Care: Sales of $75.1 million, up 12.6%; segment profit was $0.1 million versus a $0.6 million loss. Growth reflected higher volumes and favorable mix; the segment is seasonal, with higher sales and profit typically in the second and third fiscal quarters.
- Feminine Care: Sales of $75.1 million, up 0.6%; segment profit rose to $13.1 million from $7.5 million.
- All Other: Sales of $26.8 million and segment profit of $3.1 million, reflecting operations only through the December sale.
Financial position and liquidity
- At December 31, 2019, cash and cash equivalents were $251.8 million, total assets $3,303.2 million, and shareholders’ equity $1,348.1 million.
- Total borrowings were $1,117.0 million, including $1,100.0 million of senior notes and $17.0 million of international notes payable. Long-term debt carrying value was $1,098.1 million; there were no borrowings under the U.S. revolving facility.
- The company had $717.6 million available under its revolving facility after letters of credit. The facility matures in June 2020; $600.0 million of senior notes mature in May 2021. Management expected to refinance both before maturity.
- Cash declined $89.8 million during the quarter. Investing activities provided $89.7 million, primarily reflecting $95.8 million of sale proceeds; financing activities used $135.9 million, including repayment of $117.0 million on the revolving facility. Operating cash use was attributed in part to the business’s seasonal first-quarter pattern.
- Management stated that cash, operating cash flows, and available facility borrowings should cover requirements for at least the next 12 months. The company reported compliance with debt covenants.
Material changes, outlook, and risks
- Infant and Pet Care divestiture: Completed December 17, 2019, for stated consideration of $122.5 million, including transition-services consideration. The company recorded a $5.2 million gain. It reported $95.8 million of sale proceeds in investing cash flows and a remaining sale-price receivable at quarter-end.
- Project Fuel: Generated approximately $15 million of savings in the quarter, bringing cumulative savings to $152 million. Management expects total annual gross savings of $225–$240 million by the end of FY2021. Estimated one-time pre-tax charges are $130–$140 million, with $60–$70 million of additional capital investment through FY2021.
- Tax outlook: Management expected the FY2020 adjusted effective tax rate to be 20%–22%, subject to the geographic mix of earnings. The reported quarterly effective rate was 24.4%.
- Harry’s transaction: On February 9, 2020, after the FTC sued to block the proposed combination, Edgewell terminated the merger agreement. Harry’s indicated it intends to pursue litigation; Edgewell stated it believes the litigation has no merit. The company incurred $6.2 million of acquisition and integration planning costs in the quarter.
- Other risks and contingencies: Foreign-currency movements can affect reported earnings. Management noted that certain reporting units’ fair values were close to carrying values after prior-year impairments, so significant operating deterioration could lead to further impairment. Pension contributions of $10.4 million were expected for FY2020, of which $1.3 million had been contributed in the quarter.
- The filing provides no specific full-year sales or earnings guidance in the supplied text beyond the tax-rate and Project Fuel expectations.
Important facts for investors to verify
- Whether Wet Shave declines persist and Sun and Skin Care growth continues, accounting for its seasonal pattern.
- Progress toward Project Fuel’s savings target, including related charges and required investment.
- Completion and terms of refinancing the June 2020 revolving facility and May 2021 notes.
- Cash generation through the seasonal cycle and the effects of working capital and receivables sales.
- Resolution and potential financial consequences of the Harry’s litigation, and whether further acquisition-related costs arise.
- Whether impairment indicators emerge for goodwill or indefinite-lived brands, and how currency and tax-rate assumptions develop.