Edgewell Personal Care Company — FY2018 Form 10-K
Reporting period: Fiscal year ended September 30, 2018; quarterly figures are identified as Q4 where relevant. Amounts are in U.S. dollars and millions unless stated otherwise.
Business context
Edgewell makes and markets personal care products in Wet Shave, Sun and Skin Care, Feminine Care, and All Other. Its portfolio includes Schick, Banana Boat, Hawaiian Tropic, Playtex, Bulldog and Jack Black. The company operates in more than 50 countries. Walmart accounted for approximately 23% of FY2018 net sales.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $2,234.4 | $2,298.4 |
| Gross profit / gross margin | $1,036.8 / 46.4% | $1,130.6 / 49.2% |
| Net earnings, GAAP | $103.3 | $5.7 |
| Diluted EPS, GAAP | $1.90 | $0.10 |
| Adjusted net earnings / adjusted diluted EPS | $191.6 / $3.52 | $228.4 / $3.97 |
| Operating cash flow | $264.7 | $313.6 |
| Cash and cash equivalents at year-end | $266.4 | $502.9 |
| Total borrowings at year-end | $1,296.9 | $1,544.8 |
| Working capital at year-end | $234.2 | $661.8 |
FY2018 capital expenditures were $62.0. The company had $710.0 available under its revolving credit facility and reported compliance with its debt covenants. Approximately $185.0 of debt was current at year-end; management said it had the ability and intent to refinance the term loan before maturity. Substantially all cash was held outside the U.S.
Q4 FY2018 net sales were $537.4, gross profit was $231.7, and net earnings were $19.4. Q4 FY2017 net earnings included substantial impairment charges and were a loss of $148.4.
Changes versus the prior year
- Reported sales declined 2.8%; organic sales fell 4.5%, as Wet Shave and Feminine Care declines outweighed Sun and Skin Care growth. Currency and acquisitions partly offset the organic decline.
- Gross margin declined 280 basis points to 46.4%. Excluding the Sun Care reformulation and Jack Black acquisition and integration costs, management reported a 160-basis-point decline, citing unfavorable price mix, promotions, lower volumes, returns and remnant-product sales.
- Adjusted net earnings fell 16.1%, to $191.6, and adjusted diluted EPS declined to $3.52 from $3.97. Lower gross margin was the main earnings pressure; lower advertising and promotion expense partly offset it.
- Operating cash flow decreased $48.9, partly because the prior year benefited from accelerated collections under the accounts receivable facility. Borrowings declined from $1,544.8 to $1,296.9; cash also fell by $236.5.
- Segment sales and profit were mixed: Wet Shave sales were $1,330.1 and segment profit $269.1; Sun and Skin Care sales were $449.7 and profit $80.7; Feminine Care sales were $329.5 and profit $38.0; All Other sales were $125.1 and profit $19.8.
Outlook, commentary, risks and unusual items
- Project Fuel: Launched in February 2018, the enterprise-wide savings and restructuring program is expected to generate $225–$240 of annual gross savings by FY2021. Estimated one-time pre-tax charges were revised to $130–$140, with $60–$70 of additional capital investment through FY2021. Management expects most costs and savings during FY2019–FY2021. FY2019 capital expenditures are forecast at $85–$95.
- Unusual FY2018 items: $25.3 charge for Sun Care inventory write-offs and formula changes ahead of anticipated REACH-related supply changes; $24.4 non-cash Infant Care goodwill impairment; $39.9 restructuring and related costs; $5.4 pension settlement expense; $5.2 Jack Black acquisition and integration costs; and a $15.3 pre-tax gain on the Playtex gloves sale.
- Tax: The reported effective tax rate was 36.9%. The Tax Act produced a net $21.3 charge, including a $98.9 transition-tax estimate partly offset by a $77.6 deferred-tax remeasurement benefit. Tax Act amounts remained provisional at year-end.
- Key risks: Intense competition and pricing pressure, distribution losses, dependence on major retailers, execution of e-commerce and cost-savings plans, raw-material costs and tariffs, foreign exchange, seasonal Sun Care demand and returns, product quality and regulation, and leverage. Walmart concentration is notable; sun care returns are estimate-sensitive, with a year-end reserve of $58.6.
- Assets and contingencies: The filing identifies goodwill and brand valuations as sensitive to forecasts and discount rates; Skin Care and Feminine Care goodwill had limited valuation headroom. Environmental remediation accruals were $10.3; management did not expect environmental costs or pending legal matters to be material based on information available.
- The company does not expect to pay dividends in the foreseeable future. It repurchased $124.4 of shares in FY2018. In October 2018, it announced plans to close its Nazareth, Israel production facility as part of Project Fuel, with production transfers expected to take 12–18 months.
Important facts for investors to verify
- Whether organic sales stabilize, particularly in Wet Shave and Feminine Care, and whether Sun and Skin Care can restore profitability.
- Progress against Project Fuel savings, restructuring charges and capital-investment estimates.
- Debt refinancing and repayment plans for the $185.0 current maturity, alongside cash availability and the geographic location of cash.
- Whether Sun Care returns, remnant inventory and reformulation changes affect future sales and margins.
- Potential further impairment of goodwill or brands, especially in lower-headroom reporting units and the Wet Ones trade name.
- Finalization of provisional Tax Act accounting and any material changes to tax exposures.