EDGEWELL PERSONAL CARE Co quarterly report, Q1 FY2019

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

MetricQ1 FY2019Prior 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.