Edgewell Personal Care Company — Q1 FY2022 Form 10-Q
Reporting period: Three months ended December 31, 2021, compared with the three months ended December 31, 2020. Amounts are in millions except per-share data. Edgewell sells personal care products across Wet Shave, Sun and Skin Care, and Feminine Care.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net sales | $463.3 | $451.1 | +2.7% |
| Gross profit / margin | $189.9 / 41.0% | $193.3 / 42.9% | Margin down 190 bps |
| Operating income / margin | $31.8 / 6.9% | $41.6 / 9.2% | Down $9.8 |
| Net earnings | $11.2 | $17.7 | Down $6.5 |
| Diluted EPS | $0.20 | $0.32 | Down $0.12 |
| Operating cash flow | $(79.0) | $(82.5) | Less cash used |
| Capital expenditures | $9.4 | $10.2 | Down $0.8 |
- Organic sales increased 2.5%, reflecting higher volume and pricing; Billie added $6.8, while currency reduced sales by $5.9. Management reported higher costs for materials, labor, warehousing and distribution, and increased advertising and promotion.
- Adjusted, non-GAAP net earnings were $23.2 versus $23.3, and adjusted diluted EPS was $0.42 versus $0.43. Adjusted gross margin was 41.8%, down 140 basis points. These measures exclude specified restructuring, acquisition, tax-settlement, and Sun Care costs.
- Segment sales/profit: Wet Shave $286.1/$51.5; Sun and Skin Care $104.8/$3.7; Feminine Care $72.4/$8.4. Sun and Skin Care profit fell amid inflation and higher advertising; Wet Shave profit reflected Billie-related timing effects.
- Cash declined by $239.4 to $239.8. Investing used $312.7, primarily the $308.8 Billie acquisition; financing provided $155.5, including a $198.0 revolver draw. Operating cash use was principally associated with working-capital movements.
- Total borrowings were $1,475.4, including $225.4 at variable rates; long-term debt on the balance sheet was $1,432.7. The company reported $220.7 available under its revolving credit facility, net of outstanding letters of credit, and compliance with debt covenants.
Material changes and notable items
- Edgewell acquired Billie on November 29, 2021, for $308.8 net of cash acquired. Billie contributed $8.9 in post-acquisition sales and a $1.1 pretax loss. The preliminary purchase-price allocation included $181.0 of goodwill and $136.0 of intangible assets; goodwill is not tax-deductible.
- Reported results included $6.0 of acquisition and integration costs, $3.4 related to estimated settlement of prior-year German VAT audits, and $3.3 of Sun Care reformulation costs associated with recall and destruction of certain products.
- Management expects approximately $17 of one-time fiscal 2022 charges for operating-model redesign actions; $2.2 was incurred in the quarter.
- Inventory increased to $407.5 from $345.7 at September 30, 2021, while cash decreased from $479.2. Long-term debt increased from $1,234.2, primarily following the revolver borrowing for Billie.
Outlook, risks, and management commentary
The filing provides no numerical full-year sales or earnings guidance. Management expects positive operating cash flow over time and believes cash, operating cash generation, and revolver availability will cover anticipated needs for at least 12 months. Cash generation is seasonal, with Sun Care sales and cash typically higher in the second and third fiscal quarters.
- Management cited ongoing supply-chain challenges affecting labor, procurement, and distribution, with potential for higher costs and employee retention or hiring pressures. The full timing and severity of COVID-19-related impacts could not be estimated.
- Foreign-currency exposure can affect reported earnings. A 1% increase in rates on variable-rate debt would increase annual interest expense by approximately $2.0, according to the filing.
- Sun Care is seasonal. Wet Ones sales fell 41% as the company lapped unusually high pandemic-related sales in the prior-year quarter.
- Billie’s purchase-price allocation remains preliminary, and integration benefits, including potential cost savings and cross-selling, are not reflected in the pro forma results.
- The company reported no material manufacturing or distribution disruptions to date and said COVID-19 had not significantly affected liquidity, cash flows, or capital resources as of the filing.
Important facts for investors to verify
- Whether price and volume gains can offset inflation, supply-chain costs, and elevated advertising spending, and whether margins recover.
- Billie’s integration progress, actual contribution to sales and earnings, and final purchase-price allocation.
- The outcome and cash impact of the estimated German VAT audit settlement and the Sun Care product recall and destruction costs.
- Working-capital trends, seasonal cash generation, revolver utilization, and the company’s ability to meet debt obligations.
- Execution and total cost of the operating-model redesign, against the approximately $17 fiscal 2022 charge expectation.