Business Context and Reporting Period
Helen of Troy Limited is a Bermuda-domiciled consumer products company operating through Housewares, Health & Home, and Beauty segments. The filing is an unaudited Form 10-Q for the quarter and six months ended August 31, 2021, representing the second quarter and first half of fiscal 2022. The business is seasonal, with historically highest sales and operating income in the third fiscal quarter.
During the quarter, the company completed the sale of its North America Personal Care business for $44.7 million in cash and continued to classify its Latin America and Caribbean Personal Care assets as held for sale.
Key Financial Metrics
| Metric | Three Months Ended August 31, 2021 | Year-over-Year Change | Six Months Ended August 31, 2021 | Year-over-Year Change |
|---|---|---|---|---|
| Net sales revenue | $475.2 million | Down 10.5% | $1,016.5 million | Up 6.8% |
| Gross profit | $210.6 million | Down 8.6% | $431.2 million | Up 5.3% |
| Gross margin | 44.3% | Up 0.9 points | 42.4% | Down 0.6 points |
| Operating income | $67.3 million | Down 32.2% | $132.1 million | Down 15.4% |
| Operating margin | 14.2% | Down 4.5 points | 13.0% | Down 3.4 points |
| Net income | $51.3 million | Down 41.2% | $108.3 million | Down 26.6% |
| Diluted EPS | $2.11 | Down 38.5% | $4.42 | Down 23.9% |
| Adjusted operating income | $81.4 million | Down 25.0% | $176.3 million | Down 1.8% |
| Adjusted diluted EPS | $2.65 | Down 29.7% | $6.14 | Down 2.5% |
Segment Performance
- Housewares: Revenue increased 6.6% in the quarter and 19.4% year to date to $215.2 million and $408.9 million, respectively. Six-month operating income increased 0.6% to $69.1 million, but margin declined to 16.9% from 20.0%.
- Health & Home: Revenue decreased 33.1% in the quarter and 16.0% year to date to $141.5 million and $345.6 million. Six-month operating income fell to $16.0 million from $65.3 million, primarily because of the EPA-related stop shipments and compliance costs.
- Beauty: Revenue increased 0.8% in the quarter and 32.5% year to date to $118.5 million and $262.0 million. Six-month operating income increased 110.7% to $47.0 million, with margin improving to 17.9% from 11.3%.
Cash Flow, Balance Sheet, Debt, and Liquidity
- Operating activities used $58.3 million of cash in the first six months, compared with $186.3 million provided in the prior-year period. The decline reflected higher working-capital requirements, lower cash earnings, incentive compensation payments, and tax withholding settlements.
- Investing activities provided $24.0 million, including $44.7 million of proceeds from the Personal Care divestiture and $3.2 million from property sales, offset by $24.0 million of capital and intangible asset expenditures.
- Capital expenditures included investments in land and initial construction of a new 2 million-square-foot Housewares distribution center.
- Financing activities provided $21.0 million. The company repurchased $110.2 million of common stock during the first six months, including $95.5 million of open-market repurchases.
- Cash and cash equivalents were $31.8 million at August 31, 2021, versus $45.1 million at February 28, 2021. Working capital was $491.5 million and the current ratio was 1.8 to 1.
- Total long-term debt, including current maturities and net of financing fees, was $472.2 million, versus $343.6 million at fiscal year-end. The revolving credit facility had a $459.0 million principal balance, $34.2 million of outstanding letters of credit, and $756.8 million of borrowing availability.
- The company was in compliance with all debt covenants. The ending debt-to-equity ratio increased to 37.2% from 22.9% in the comparable period.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue declined because Health & Home sales were disrupted by the EPA packaging-compliance matter and because the North America Personal Care business was sold. Housewares growth and relatively stable Beauty revenue only partially offset the decline.
- Health & Home revenue declined $70.0 million in the quarter and $65.8 million year to date. The segment incurred $16.1 million of EPA compliance costs in the first half, including a $13.1 million first-quarter packaging write-off and $3.0 million of second-quarter costs.
- Freight, distribution, labor, and other supply-chain costs increased. Global container shortages, port congestion, higher freight rates, raw-material constraints, and labor shortages pressured profitability.
- Consolidated SG&A increased 9.1% in the quarter and 18.0% year to date, driven in part by higher distribution, personnel, share-based compensation, and EPA-related costs.
- The effective tax rate increased to 19.8% from 9.6% in the quarter and to 14.0% from 1.6% year to date. The comparison was affected by jurisdictional earnings mix and the $9.4 million CARES Act-related tax benefit recognized in the prior-year period.
- The company authorized a new $500 million share-repurchase program effective August 25, 2021, replacing the former authorization. No amount had been used under the new authorization as of August 31, 2021.
Guidance, Outlook, Risks, and Unusual Items
- The filing does not provide a clear numerical full-year revenue or earnings guidance figure. Management expects fiscal 2022 consolidated and Health & Home revenue, gross profit, and operating income to be materially and adversely affected by the EPA stop shipments and repackaging process.
- Water-filtration shipments began recovering during the second quarter, and management reported a return to more normalized shipping activity in September 2021. Air-filtration shipments began in limited quantities at the end of August, with normalized activity expected by the end of the third quarter, subject to execution of the repackaging plan.
- Management expects additional EPA-related costs, which may include freight, storage, vendor charges, and legal fees. Potential customer returns, increased discounts and allowances, and retailer distribution losses could further reduce revenue.
- The company stated that it was not aware of any EPA fines or penalties at the filing date, but could not assure that none would be imposed.
- Project Refuel is expected to be completed during fiscal 2022. Total restructuring charges are expected to be approximately $10.3 million, of which $9.6 million had been incurred through the second quarter. The plan targets annualized profit improvements of approximately $10.5 million to $12.5 million.
- Other principal risks include COVID-19 developments, supply-chain disruption and inflation, dependence on third-party manufacturers concentrated in Asia, tariffs on Chinese imports, foreign-currency volatility, regulatory and product-certification requirements, customer concentration, cybersecurity, seasonal demand, and access to capital.
- Management expects the transition of its Macau subsidiary to a 12% statutory corporate tax rate to increase the overall annual effective tax rate by approximately 1.5 to 2.0 percentage points beginning in fiscal 2022.
- Disclosure controls and procedures were concluded to be effective as of August 31, 2021, and no material change in internal control over financial reporting was identified.
Important Facts for Investors to Verify
- Progress toward normalized Health & Home shipments and the resulting impact on fiscal 2022 revenue and margins.
- The amount and timing of additional EPA compliance, repackaging, freight, storage, vendor, legal, return, and discount costs.
- Whether EPA fines, penalties, product withdrawals, or additional regulatory requirements arise.
- Inventory levels, working-capital conversion, and the sustainability of negative operating cash flow in the first half.
- Debt repayment, borrowing availability, covenant headroom, and the effect of continued share repurchases on leverage and liquidity.
- Execution and cost progression of the new distribution center and the remaining Project Refuel actions.
- Segment trends excluding the favorable prior-year COVID comparison effects, the Personal Care divestiture, and other unusual items.