EDGEWELL PERSONAL CARE Co quarterly report, Q3 FY2015

Business context and reporting period

Edgewell Personal Care Company’s Form 10-Q covers the quarter and nine months ended June 30, 2015. The results include both Personal Care and Household Products; their separation was completed on July 1, 2015, after quarter-end. The filing cautions that these combined historical results are not indicative of Edgewell’s future standalone results. After the separation, Edgewell retained Personal Care and began reporting four segments.

Financial results and liquidity

Quarterly reported sales fell mainly due to unfavorable currency translation (6.2 percentage points) and the change in Venezuela results (1.3 points); organic sales increased 0.2%. Year-to-date organic sales declined 1.4%. Adjusted diluted EPS declined 19.9% in the quarter and 4.4% year to date. Management cited increased advertising and promotion, unfavorable currency and, year to date, a higher effective tax rate; restructuring savings partly offset these pressures.

At June 30, cash and equivalents were $1,090.1 million; current assets were $2,771.4 million and current liabilities $1,039.2 million. Total borrowings were $2,535.0 million, including $836.0 million at variable rates; committed debt facilities totaled $3,265.3 million. The company reported $452.4 million available under its $600 million revolving facility. Long-term debt was $2,508.0 million. Cash decreased $38.9 million over the nine-month period, including a $61.4 million adverse foreign-exchange effect. Capital expenditures were $72.4 million.

Material changes versus prior comparable periods

• Quarterly sales were down from $1,130.0 million; quarterly net earnings of $64.5 million became a $72.5 million loss. Year-to-date net earnings of $270.9 million became a $55.9 million loss.
• Quarterly segment sales and profit declined year over year: Personal Care sales were $672.8 million and segment profit $95.3 million; Household Products sales were $374.3 million and segment profit $68.6 million. Reported segment profit was pressured by currency and Venezuela; management said underlying operations benefited from restructuring savings and lower commodity costs.
• Gross margin increased 80 basis points year to date to 48.0%, primarily from restructuring savings and lower commodity costs, but fell 50 basis points in the quarter to 47.2%.
• Operating cash flow fell to $23.7 million from $378.7 million, reflecting lower earnings, separation and restructuring cash spending, and working-capital changes, including higher receivables, inventory and income taxes receivable.
• Debt was substantially refinanced around the separation. The company prepaid $820 million of private placement notes and recorded $61.4 million of early-retirement costs; New Energizer’s new debt proceeds were transferred to Edgewell to repay the temporary bridge facility.

Outlook, commentary, risks and unusual items

• The July 1 separation distributed all New Energizer shares to Edgewell shareholders. The companies entered into agreements covering separation, taxes, employees, transition services and intellectual property. Edgewell expects to transfer at least $300 million of cash to New Energizer, with its estimate above that amount, and anticipates further working-capital, tax and employee-benefit settlements whose amounts and timing were not yet known.
• No full-year earnings guidance is provided. Management estimated fiscal 2015 normal-operation capital expenditures of $90–$100 million, excluding separation-related spending, and expected both businesses to reach a normalized SG&A run rate by the end of fiscal 2016.
• Expected additional Edgewell Spin and related restructuring costs were $30–$35 million through fiscal 2016. The 2013 restructuring program was expected to require a further $40–$50 million through fiscal 2017; the industrial blade exit was expected to involve $10–$15 million of additional charges through fiscal 2016.
• Unusual charges included the $144.5 million Venezuela deconsolidation charge, with no related tax benefit; $251.9 million of Spin and Spin-restructuring costs year to date; $21.9 million of industrial blade impairment charges; and $61.4 million of debt-retirement costs. Venezuela’s currency controls restricted access to cash and led the company to deconsolidate its subsidiaries effective March 31, 2015.
• Management identified foreign exchange, competitive and category pressures, product launches, restructuring execution, separation costs, commodity prices, variable-rate debt, cyberattacks and possible goodwill or intangible impairment as risks. Goodwill allocation and impairment testing following the separation remained in process for completion in fiscal Q4; the filing noted that prior testing of Playtex and Wet Ones brand values had shown fair values relatively close to carrying amounts.
• The company said it was in compliance with debt covenants at June 30, 2015. It considered pending legal proceedings not reasonably likely to be material, taking recorded accruals into account. Disclosure controls were assessed as effective.

Important facts for investors to verify

• Post-separation Edgewell results, including standalone costs, segment performance and cash flows; this quarter’s statements still include Household Products.
• The final cash, debt, tax and employee-benefit allocations and settlements between Edgewell and New Energizer.
• Whether operating cash flow recovers from the year-to-date decline and how working-capital needs and planned capital expenditures develop.
• Completion and outcome of post-separation goodwill and intangible-asset impairment testing.
• Actual remaining separation, restructuring and industrial-exit costs, and whether anticipated savings and standalone cost targets are achieved.
• Exposure to foreign-exchange movements, Venezuela restrictions, variable interest rates and debt covenant requirements.