Helen of Troy Limited — Form 10-K Summary
Business context and reporting period
Helen of Troy is a Bermuda-based global consumer products company operating through four segments: Housewares, Health & Home, Nutritional Supplements, and Beauty. Products are marketed in approximately 75 countries under owned and licensed brands, including OXO, Hydro Flask, PUR, Vicks, Braun, Hot Tools, and Revlon.
The filing covers the fiscal year ended February 28, 2017. The requested “2016 Q4” corresponds to the fourth fiscal quarter ended February 28, 2017, for which the filing reports quarterly revenue of $376.7 million and net income of $35.7 million. Fiscal 2017 included approximately eleven and a half months of Hydro Flask results.
Financial performance and key metrics
| Metric | Fiscal 2017 | Fiscal 2016 | Change |
|---|---|---|---|
| Net sales | $1,537.2 million | $1,545.7 million | (0.5%) |
| Gross profit | $675.5 million | $636.0 million | 6.2% |
| Gross margin | 43.9% | 41.1% | +2.8 pts |
| Operating income | $164.3 million | $130.6 million | 25.8% |
| Operating margin | 10.7% | 8.5% | +2.2 pts |
| Net income | $140.7 million | $101.2 million | 39.0% |
| Diluted EPS | $5.04 | $3.52 | 43.2% |
| Operating cash flow | $228.5 million | $186.5 million | 22.5% |
Adjusted operating income, a non-GAAP measure, increased 2.4% to $222.0 million, and adjusted operating margin rose to 14.4% from 14.0%. Adjusted income increased 4.6% to $187.9 million, while adjusted diluted EPS increased 7.7% to $6.73.
Segment sales were: Housewares $418.1 million, up 34.6% primarily from Hydro Flask; Health & Home $632.8 million, down 1.6%; Nutritional Supplements $130.5 million, down 14.7%; and Beauty $355.8 million, down 19.0%. The United States generated 80.8% of sales. Online and direct-to-consumer sales represented approximately 13% of consolidated sales and grew more than 30%.
Fiscal year-end cash and cash equivalents were $23.1 million, compared with $225.8 million in the prior year. Working capital was $266.7 million, down from $487.5 million primarily because $210 million of cash held at fiscal 2016 year-end funded the Hydro Flask acquisition. Current assets were $556.1 million and current liabilities were $289.4 million, producing a 1.9:1 current ratio.
Total debt was approximately $485.6 million, including $440.7 million outstanding under the revolving credit facility, $20.0 million of 3.9% Senior Notes, and approximately $29.9 million under the MBFC Loan. The revolving facility had a $1.0 billion commitment, $557.8 million of borrowing availability, and a maturity of December 2021. The company was in compliance with its debt covenants.
Investing activities used $229.9 million, including $209.3 million for Hydro Flask and $20.6 million for capital and intangible asset expenditures. Financing activities used $201.4 million, including $75.0 million of common stock repurchases. The company had $83.4 million remaining under its repurchase authorization and has not paid cash dividends.
Material changes versus the prior comparable period
- Revenue was essentially flat overall despite $107.7 million of acquisition-related growth, because core sales declined $85.3 million, foreign currency reduced sales by approximately $9.7 million, and Venezuelan remeasurement reduced sales by $21.2 million.
- Gross margin improved due to favorable product mix, product rationalization, lower product costs, Hydro Flask accretion, and the absence of the $9.1 million Venezuelan inventory impairment recorded in fiscal 2016.
- Operating income and GAAP earnings improved substantially, aided by lower unusual charges than in fiscal 2016, including lower patent litigation and no comparable CEO succession or Venezuelan remeasurement charges.
- Housewares benefited from Hydro Flask, online growth, product introductions, and cost savings. Health & Home was pressured by weak cough/cold/flu demand and lower replenishment orders.
- Nutritional Supplements experienced declining legacy offline and print-subscription revenue, resulting in an operating loss of $7.9 million versus operating income of $11.4 million in fiscal 2016.
- Beauty sales declined due to rationalization of lower-margin business, soft brick-and-mortar retail demand, retailer inventory reductions, foreign exchange, and Venezuelan remeasurement.
- The company acquired Hydro Flask for approximately $209.3 million and recorded $12.4 million of non-cash impairment charges, including $9.5 million related to a Nutritional Supplements brand asset.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide a clear quantitative fiscal 2018 revenue or earnings guidance range. Management expects the weak 2016–2017 cough/cold/flu season to pressure initial fiscal 2018 replenishment because of elevated retail inventories. Management is evaluating strategic alternatives for Nutritional Supplements, including reorganization, e-commerce investment, restructuring, consolidation, and potential divestiture. Further impairment or other charges are reasonably possible if segment cash-flow forecasts deteriorate.
Key risks include retailer concentration and bargaining power, reliance on third-party manufacturers in the Far East, supply-chain and distribution-center concentration, foreign currency and interest-rate exposure, changing consumer shopping patterns, licensed-trademark requirements, product liability and regulatory risks, cyber and ERP-system disruptions, tax disputes, and impairment of goodwill or indefinite-lived intangible assets.
Wal-Mart accounted for approximately 15% of fiscal 2017 sales, while the top five customers accounted for approximately 43%. Approximately 67% of finished goods purchased were manufactured by Far East vendors, and approximately 66% of consolidated gross sales volume shipped through the company’s two northern Mississippi distribution facilities.
Unusual items included $12.4 million of asset impairment charges, a $1.5 million patent litigation charge, and Venezuelan currency remeasurement effects. The company continued to appeal the thermometer patent judgment involving Exergen. Management stated that ordinary-course legal proceedings were not expected to materially affect financial position, results, or liquidity.
Most important facts for investors to verify
- Whether Hydro Flask can sustain growth and margin accretion after the acquisition contribution normalizes.
- Whether Nutritional Supplements can reverse its revenue decline and avoid additional impairment, restructuring, or divestiture charges.
- Fiscal 2018 demand trends following the weak cough/cold/flu season and elevated retailer inventories.
- Debt reduction, refinancing of the $20 million Senior Notes due January 2018, and compliance with leverage and interest-coverage covenants.
- Cash generation after acquisition spending, share repurchases, working-capital needs, and potential future acquisitions.
- Exposure to foreign exchange, particularly the Chinese Renminbi, British Pound, Mexican Peso, Canadian Dollar, and Venezuelan currency conditions.
- Customer concentration, retailer inventory rationalization, e-commerce growth, and the company’s ability to protect shelf space and pricing.
- Future impairment testing assumptions for goodwill, trademarks, and other intangible assets, which totaled $1.12 billion at fiscal year-end.
- Resolution and potential financial consequences of the Exergen thermometer patent litigation and other product-liability or regulatory matters.