EDGEWELL PERSONAL CARE Co: Form 10-Q for the period ended Dec 31, 2022

(Amounts in millions, except per share data, unaudited)

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited Condensed Consolidated Financial Statements and the accompanying notes included in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K filed with the SEC on November 16, 2022 (the “2022 Annual Report”). The following discussion may contain forward-looking statements that reflect our plans, estimates, and beliefs and involve risks, uncertainties, and assumptions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed within “Forward-Looking Statements” below and in Item 1A. Risk Factors and “Forward-Looking Statements” included within our 2022 Annual Report.

Forward-Looking Statements

This document contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of Edgewell Personal Care Company or any of our businesses (the “Company”). Forward-looking statements generally can be identified by the use of words or phrases such as “believe,” “expect,” “expectation,” “anticipate,” “may,” “could,” “intend,” “estimate,” “plan,” “target,” “predict,” “likely,” “will,” “should,” “forecast,” “outlook,” “strategy,” or other similar words or phrases. These statements are not based on historical facts, but instead reflect our expectations, estimates or projections concerning future results or events, including, without limitation, the future earnings and performance of Edgewell Personal Care Company or any of our businesses, and the integration of the Billie, Inc. (“Billie”) acquisition and expected benefits from this transaction, including growth opportunities and cost savings. Many factors outside our control could affect the realization of these estimates. These statements are not guarantees of performance and are inherently subject to known and unknown risks, uncertainties and assumptions that are difficult to predict and could cause our actual results to differ materially from those indicated by those statements. We cannot assure you that any of our expectations, estimates or projections will be achieved. The forward-looking statements included in this report are only made as of the date of this report, and we disclaim any obligation to publicly update any forward-looking statement to reflect subsequent events or circumstances, except as required by law. You should not place undue reliance on these statements.

In addition, other risks and uncertainties not presently known to us or that we presently consider immaterial could significantly affect the forward-looking statements. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. Risks and uncertainties include those detailed from time to time in our publicly filed documents, including in Item 1A. Risk Factors of Part I of our 2022 Annual Report.

Non-GAAP Financial Measures

While we report financial results in accordance with GAAP, this discussion also includes non-GAAP measures. These non-GAAP measures are referred to as “adjusted” or “organic” and exclude items such as restructuring costs, acquisition and integration costs, and other non-standard items. Reconciliations of non-GAAP measures are included within this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This non-GAAP information is provided as a supplement to, not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. We use this non-GAAP information internally to make operating decisions and believe it is helpful to investors because it allows more meaningful period-to-period comparisons of ongoing operating results. Given certain significant events, including the acquisition of Billie, we view the use of non-GAAP measures that take into account the impact of these unique events as particularly valuable in understanding our underlying operational results and providing insights into future performance. The information can also be used to perform trend analysis and to better identify operating trends that may otherwise be masked or distorted by the types of items that are excluded. This non-GAAP information is also a component in determining management’s incentive compensation. Finally, we believe this information provides more transparency.

The following provides additional detail on our non-GAAP measures:

• We analyze net sales and segment profit on an organic basis to better measure the comparability of results between periods. Organic net sales and organic segment profit exclude the impact of changes in foreign currency translation and the impact of the Billie acquisition.
• Organic net sales will be unfavorably impacted in October and November of fiscal 2023 by the Billie acquisition as sales that were previously reported as third party sales to Billie are now included as inter-company sales.
• Segment profit will be impacted by fluctuations in translation and transactional foreign currency. The impact of currency was applied to segments using management’s best estimate.
• Additionally, we utilize “adjusted” non-GAAP measures including gross profit, SG&A, operating income, income taxes, net earnings, and diluted earnings per share internally to make operating decisions. The following items are excluded when analyzing non-GAAP measures: restructuring and related costs, acquisition and integration costs, Sun Care reformulation charges, and other non-standard items.

All comparisons are with the same period in the prior year, unless otherwise noted.

Industry and Market Data

Unless we indicate otherwise, we base the information contained or incorporated by reference herein, concerning our industry on our general knowledge and expectations. Our market position, market share, and industry market size are estimates based on internal and external data from various industry analyses, our internal research and adjustments, and assumptions that we believe to be reasonable. We have not independently verified data from industry analyses and cannot guarantee its accuracy or completeness. In addition, we believe that industry, market size, market position and market share data within our industry provides general guidance but is inherently imprecise and has not been verified by any independent source. Further, our estimates and assumptions involve risks and uncertainties and are subject to change based on various factors, including those discussed in Item 1A. Risk Factors in Part I of our 2022 Annual Report. These and other factors could cause results to differ materially from those expressed in the estimates and assumptions. You are cautioned not to place undue reliance on this data.

Retail sales for purposes of market size, market position and market share information are based on retail sales in U.S. dollars.

Trademarks and Trade Names

We own or have rights to use trademarks and trade names that we use in conjunction with the operation of our business, which appear throughout this Quarterly Report on Form 10-Q. We may also refer to brand names, trademarks, service marks and trade names of other companies and organizations, which are the property of their respective owners.

Impact of the COVID-19 Pandemic

Throughout the novel coronavirus 2019 (“COVID-19”) pandemic, we have taken and continue to take significant measures to protect our employees and businesses, while remaining in compliance with local and national guidelines.

We have implemented additional health and safety measures at all of our manufacturing and office locations to ensure the health and wellbeing of our employees. To date, we have not experienced any material operational disruptions across our manufacturing or distribution facilities.

The prolonged COVID-19 pandemic environment has resulted in increased supply chain challenges across labor management, raw material procurement and product distribution. The continued duration and severity of COVID-19 pandemic may cause further disruptions related to our key suppliers, increase procurement and distribution costs and impact our ability to hire and retain employees, which may result in higher labor costs going forward. However, the impact, timing and severity of potential disruptions cannot be reasonably estimated at this time.

Significant Events

Acquisitions

On November 29, 2021, the Company completed the acquisition of Billie, a leading U.S. based consumer brand company that offers a broad portfolio of personal care products for women, for a purchase price of $309.4, net of cash acquired. We purchased Billie utilizing a combination of cash on hand and drawing on our U.S. revolving credit facility due 2025 between the Company and Bank of America, N.A., as administrative agent, and lenders parties thereto (“Revolving Credit Facility”). As a result, Billie became a wholly owned subsidiary of the Company. Refer to Note 2 of Notes to Condensed Consolidated Financial Statements for further discussion.

Executive Summary

The following is a summary of key results for the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022. Net earnings and earnings per share (“EPS”) for the periods presented were impacted by restructuring and related costs, acquisition and integration costs, Sun Care reformulation costs, and other non-standard items, as described in the table below. The impact of these items on reported net earnings and EPS are provided as a reconciliation of net earnings and EPS to adjusted net earnings and adjusted diluted EPS, both of which are non-GAAP measures.

First Quarter of Fiscal 2023

• Net sales in the first quarter of fiscal 2023 increased 1.3% to $469.1. Organic net sales increased 3.0% compared to the prior year quarter, with strong Sun Care and Women’s Shave performance in International markets, and Men’s Shave and Feminine Care in North America.
• Net earnings in the first quarter of fiscal 2023 were $11.9 compared to $11.2 in the prior year quarter. On an adjusted basis, net earnings for the first quarter of fiscal 2023 were $16.0 compared to $23.2 in the prior year quarter. Adjusted earnings declined compared to the prior year quarter despite higher net sales, due to lower gross margins from inflationary pressures and foreign currency, and higher SG&A and interest costs.
• Net earnings per diluted share during the first quarter of fiscal 2023 were $0.23 compared to $0.20 in the prior year quarter. On an adjusted basis, net earnings per diluted share during the first quarter of fiscal 2023 were $0.31 compared to $0.42 in the prior year quarter.

(1) EBIT is defined as Earnings before Income taxes.

Operating Results

The following table presents changes in net sales for the first quarter fiscal of 2023, as compared to the corresponding period in fiscal 2022, and provides a reconciliation of organic net sales to reported amounts.

Net Sales

For the first quarter of fiscal 2023, net sales were $469.1, an increase of 1.3%, including a $12.0 or 2.6% net impact from the acquisition of Billie and a $20.2 or 4.3% negative impact from currency movements. Organic net sales increased 3.0%, with 5.8% growth in International markets driven by Sun Care and Women’s Shave, and 1.2% growth in North America markets driven by Men’s Shave and Feminine Care. Overall, net sales growth increased 4.5% from higher pricing.

For further discussion regarding net sales, including a summary of reported versus organic changes, see “Segment Results.”

Gross Profit

Gross profit was $189.0 during the first quarter of fiscal 2023, including a $14.4 unfavorable impact from currency, compared to $189.9 in the prior year quarter. Gross margin as a percent of net sales for the first quarter of fiscal 2023 was 40.3% compared to 41.0% in the prior year quarter. Adjusted gross margin decreased 150-basis points as a 500-basis point impact from higher commodity and transportation related costs, was offset by 240-basis points of productivity savings and 250-basis points benefit from higher pricing and promotion management.

Selling, General and Administrative Expense

SG&A was $95.7 in the first quarter of fiscal 2023, or 20.4% of net sales, compared to $96.9 in the prior year quarter, or 20.9% of net sales. Adjusted SG&A as a percent of net sales was 19.9%, an increase of 90-basis points, as improved leverage, the benefits of operating efficiency programs and favorable currency was more than offset by the impact of the Billie acquisition, including amortization, and higher compensation expense.

Advertising and Sales Promotion Expense

For the first quarter of fiscal 2023, advertising and promotion (“A&P”) was $45.9, down $0.3 compared to the prior year quarter of $46.2. A&P as a percent of net sales was 9.8%, as compared to 10.0% in the prior year quarter. Excluding the favorable impact of currency translation, A&P would have increased $1.7 and 0.2% as a percent of net sales as compared to the prior year.

Research and Development Expense

Research and development expense (“R&D”) for the first quarter of fiscal 2023 was $13.4, compared to $12.8 in the prior year quarter. As a percent of net sales, R&D was 2.9% in the first quarter of fiscal 2023 compared to 2.8% in the prior year quarter.

Interest Expense Associated with Debt

Interest expense associated with debt for the first quarter of fiscal 2023 was $19.9, compared to $17.3 in the prior year quarter. The increase in interest expense was the result of higher interest rates and a higher overall debt balance on the Company’s Revolving Credit Facility.

Other income, net

Other income, net was income of $5.0 in the first quarter of fiscal 2022, compared to $1.7 in the prior year quarter. The increase in income was primarily driven by $5.3 in favorable foreign currency hedge settlements, partially offset by $1.8 in higher pension expense.

Income Tax Provision

The effective tax rate for the first three months of fiscal 2023 was 27.1%, compared to 30.9% in the prior year period. The fiscal 2022 effective tax rate reflects the unfavorable impact related to the Acquisition. On an adjusted basis, the effective tax rate was 26.4% and 25.3% for the first quarter of fiscal 2023 and fiscal 2022, respectively.

Operating Model Redesign

In fiscal 2023, the Company is continuing to strengthen its operating model, simplify the organization and improve manufacturing and supply chain efficiency. As a result of these actions, we expect to incur charges of approximately $18. We incurred $2.8 during the first quarter of fiscal 2023, primarily related to employee severance and benefit costs.

Segment Results

The following tables present changes in segment net sales and segment profit for the first quarter of fiscal 2023, compared to the corresponding period in fiscal 2022, and provide a reconciliation of organic segment net sales and organic segment profit to reported amounts. For a reconciliation of segment profit to Earnings before income taxes, refer to Note 15 of Notes to Condensed Consolidated Financial Statements.

Our operating model includes some shared business functions across segments, including product warehousing and distribution, transaction processing functions and, in most cases, a combined sales force and management teams. We apply a fully allocated cost basis in which shared business functions are allocated between segments.

Wet Shave

Wet Shave net sales for the first quarter of fiscal 2023 decreased $10.8 or 3.8%. Organic net sales decreased $5.3, or 1.9%, primarily driven by unit declines. Organic net sales in International markets decreased 0.7%, as growth in Europe and Latin America was more than offset by declines in Japan, which cycled last year’s Men’s Hydro brand re-launch. North America organic net sales decreased 3.2%, as growth in Men’s Systems, Disposables and Shave Preps, was more than offset by lower Women’s Systems sales.

Wet Shave segment profit for the first quarter of fiscal 2023 was $35.4, down $16.1, or 31.3%. The decline in segment profit was reflective of lower organic net sales, higher cost of goods sold, negative impact of foreign currency and increased brand investment.

Sun and Skin Care

Sun and Skin Care net sales for the first quarter of fiscal 2023 increased 7.7%. Organic net sales increased $10.6, or 10.1% primarily driven by 68% Sun Care growth in International markets, led by Oceania and Latin America. North America Sun Care organic net sales decreased 6.5%. Additionally, Grooming organic net sales increased 4.3% and Wet Ones organic net sales decreased 2.5%.

Segment profit for the first quarter of fiscal 2023 was $13.1, an increase of $9.4. The increase in segment profit was driven largely by higher sales and stronger gross profit, in part as a result of increased pricing.

Feminine Care

Feminine Care net sales for the first quarter of fiscal 2023 increased $8.5, or 11.7%. The increase in net sales was driven by higher pricing and improved product availability.

Feminine Care segment profit for the first quarter of fiscal 2023 was $11.8, an increase of $3.4, or 40.5%, largely driven by higher sales and gross profit which was partially offset by increased A&P support.

General Corporate and Other Expenses

For the first quarter of fiscal 2023, corporate expenses were $15.9, or 3.4% of net sales, compared to $10.8, or 2.3% of net sales. For the first quarter of fiscal 2023, the increase in corporate expense was primarily due to higher benefit and legal costs.

Liquidity and Capital Resources

At December 31, 2022, a portion of our cash balances was located outside the U.S. Given our extensive international operations, a significant portion of our cash is denominated in foreign currencies. Refer to Note 14 of Notes to Condensed Consolidated Financial Statements for a discussion of the primary currencies to which the Company is exposed. We manage our worldwide cash requirements by reviewing available funds among the many subsidiaries through which we conduct business and the cost effectiveness with which those funds can be accessed. We generally repatriate a portion of current year earnings from select non-U.S. subsidiaries only if the economic cost of the repatriation is not considered material.

Our cash is deposited with multiple counterparties which consist of major financial institutions. We consistently monitor positions with, and credit ratings of, counterparties both internally and by using outside ratings agencies.

Our total borrowings were $1,530.2 at December 31, 2022, including $280.2 tied to variable interest rates. Our total borrowings at September 30, 2022 were $1,424.0. We had outstanding borrowings of $255.0 under the Revolving Credit Facility at December 31, 2022. Taking into account outstanding letters of credit of $5.9, as of December 31, 2022, $164.1 was available under the Revolving Credit Facility. We had outstanding international borrowings, recorded in Notes payable, of $25.2 and $19.0 as of December 31, 2022 and September 30, 2022, respectively.

On February 6, 2023, we amended our Revolving Credit Facility to transition from using the London Interbank Offered Rate (“LIBOR”) to the Secured Overnight Financing Rate (“SOFR”) as LIBOR will no longer be available December 31, 2024.

Historically, we have generated, and expect to continue to generate, positive cash flows from operations. Our cash flows are affected by the seasonality of our Sun Care products, typically resulting in higher net sales and increased cash generated in the second and third quarter of each fiscal year. We believe our cash on hand, cash flows from operations and borrowing capacity under our Revolving Credit Facility will be sufficient to satisfy our future working capital requirements, interest payments, R&D activities, capital expenditures, and other financing requirements for at least the next 12 months. We will continue to monitor our cash flows, spending and liquidity needs.

To date, the COVID-19 pandemic has not had a significant impact on our liquidity or capital resources. However, the COVID-19 pandemic has led to disruption and volatility in the global capital markets which could impact our capital resources and liquidity in the future. For further information, please refer to Item 1A. Risk Factors in Part I of our 2022 Annual Report.

Short-term financing needs primarily consist of working capital requirements and interest payments on our long-term debt. Long-term financing needs will depend largely on potential growth opportunities, including acquisition activity and repayment or refinancing of our long-term debt obligations. Our long-term liquidity may be influenced by our ability to borrow additional funds, renegotiate existing debt, and raise equity under terms that are favorable to us. We may, from time-to-time, seek to repurchase shares of our common stock. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.

As of December 31, 2022, we were in compliance with the provisions and covenants associated with our debt agreements.

Cash Flows

A summary of our cash flow activities is provided in the following table:

Operating Activities

Cash flow used by operating activities was $86.3 during the first three months of fiscal 2023, compared to $79.0 during the prior year period. The decrease in cash flows versus the same period in the prior year was driven by a larger net working capital build.

Investing Activities

Cash flow used by investing activities was $11.2 during the first three months of fiscal 2023, compared to $312.7 used during the prior year period. Capital expenditures were $11.3 during the first three months of fiscal 2023, compared to $9.4 in the prior year period. We completed the acquisition of Billie for $308.8, net of cash acquired, in the prior year period. Additionally, we collected $5.0 of proceeds from the sale of the Infant and Pet Care business in the prior year period.

Financing Activities

Net cash from financing activities was $82.9 during the first three months of fiscal 2023, compared to $155.5 in the prior year period. During the first three months of fiscal 2023, we had net borrowings of $100.0 under our Revolving Credit Facility, compared to $198.0 in the prior year period. We repurchased $15.0 of our common stock under our 2018 Board authorization to repurchase our common stock (the “Repurchase Plan”) compared to $24.5 in the prior year period. Dividend payments totaled $8.3 in the first three months of fiscal 2023, compared to $8.5 in the prior year period. We had financing outflows for employee equity awards held for taxes totaling $8.1 in the first three months of fiscal 2023, compared to $9.7 in the prior year period.

Share Repurchases

During the first three months of fiscal 2023, we repurchased 0.4 shares of our common stock for $15.0. We have 6.1 shares remaining under the Repurchase Plan as of December 31, 2022. Future share repurchases, if any, would be made in the open market, privately negotiated transactions or otherwise, in such amounts and at such times as we deem appropriate based upon prevailing market conditions, business needs and other factors.

Dividends

On November 3, 2022, the Board declared a quarterly cash dividend of $0.15 per common share for the fourth fiscal quarter. The dividend was paid on January 4, 2023 to shareholders of record as of the close of business on November 29, 2022.

On February 3, 2023, the Board declared a quarterly cash dividend of $0.15 per common share for the first fiscal quarter. The dividend will be payable on April 5, 2023 to stockholders of record as of the close of business on March 8, 2023.

Dividends declared during the three months ended December 31, 2022 totaled $8.0. Payments made for dividends during the three months ended December 31, 2022 totaled $8.3.

Commitments and Contingencies

Contractual Obligations

At December 31, 2022, we had outstanding borrowings of $255.0 under the Revolving Credit Facility. As of December 31, 2022, future minimum repayments of debt were: $255.0 in fiscal 2025, $750.0 in fiscal 2028 and $500.0 in fiscal 2029.

There have been no other material changes in our contractual obligations since the presentation in our 2022 Annual Report.

Critical Accounting Policies

Our critical accounting policies and estimates are fully described in our 2022 Annual Report. The preparation of these financial statements requires us to make estimates and assumptions. These estimates and assumptions can be subjective and complex, and consequently, actual results could differ from those estimates. There have been no significant changes to our critical accounting policies and estimates since September 30, 2022.

(Amounts in millions)

The market risk inherent in our financial instruments and positions represents the potential loss arising from adverse changes in currency rates, commodity prices, and interest rates. At times, we enter into contractual arrangements (derivatives) to reduce these exposures. For further information on our foreign currency derivative instruments, refer to Note 14 of Notes to Condensed Consolidated Financial Statements. As of December 31, 2022, there were no open derivative or hedging instruments for future purchases of raw materials or commodities. Our exposure to interest rate risk relates primarily to our variable-rate debt instruments, which currently bear interest based on LIBOR plus margin. As of December 31, 2022, our outstanding variable-rate debt included $280.2 related to our Revolving Credit Facility and international, variable-rate notes payable. Assuming a one-percent increase in the applicable interest rates, annual interest expense on these variable-rate debt instruments would increase approximately $2.8.

There have been no material changes in our assessment of market risk sensitivity since our presentation of Quantitative and Qualitative Disclosures About Market Risk in our 2022 Annual Report.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Exchange Act, is recorded, processed, summarized and reported within the specified time periods, and that such information is accumulated and communicated to management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation of our CEO and CFO, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2022. Based on that evaluation, our CEO and CFO concluded that, as of that date, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended December 31, 2022 that have materially affected, or are likely to materially affect, our internal control over financial reporting.