HELEN OF TROY LTD annual report, FY2015

Helen of Troy Limited: Fiscal 2015 Form 10-K Summary

Business context and reporting period

Helen of Troy Limited is a global consumer-products company with four segments: Housewares, Healthcare/Home Environment, Nutritional Supplements and Personal Care. The filing covers the fiscal year ended February 28, 2015. Although the request references 2014 Q4, the filing is an annual report for fiscal 2015 and includes fourth-quarter results for the quarter ended February 28, 2015.

The Nutritional Supplements segment was added through the June 30, 2014 acquisition of Healthy Directions and contributed eight months of results. Approximately 79% of fiscal 2015 sales came from the United States. Major brands include OXO, Vicks, Braun, Honeywell, PUR, Revlon and Healthy Directions brands.

Key financial metrics

Metric	Fiscal 2015	Fiscal 2014	Change
Net sales	$1,445.1 million	$1,317.2 million	+9.7%
Gross profit	$599.6 million	$516.7 million	+16.0%
Gross margin	41.5%	39.2%	+2.3 percentage points
Operating income	$161.7 million	$117.1 million	+38.1%
Operating margin	11.2%	8.9%	+2.3 percentage points
Net income	$131.2 million	$86.2 million	+52.1%
Diluted EPS	$4.52	$2.66	+69.9%
Cash from operating activities	$178.6 million	$154.2 million	+15.8%

Adjusted operating margin increased to 14.2% from 13.9%, while adjusted diluted EPS increased to $5.84 from $4.50. These non-GAAP measures exclude items such as impairment charges, acquisition costs, amortization and share-based compensation.

Housewares sales increased 7.9% to $296.3 million; operating income increased 16.8% to $59.4 million.
Healthcare/Home Environment sales increased 8.0% to $613.3 million; operating income increased 144.8% to $50.8 million.
Nutritional Supplements generated $100.4 million of sales and $9.5 million of operating income during its eight months of inclusion.
Personal Care sales declined 8.3% to $435.2 million; operating income declined 7.7% to $42.0 million.
Internet-based customer sales grew approximately 60% and represented 9.4% of consolidated sales, compared with 6.4% in fiscal 2014.

Cash flow, liquidity and capital structure

Operating cash flow was $178.6 million. Investing activities used $202.5 million, primarily reflecting the $195.9 million Healthy Directions acquisition. Financing activities used $33.9 million.
Cash and cash equivalents declined to $12.3 million from $70.0 million. Working capital increased to $302.9 million from $286.1 million, and the current ratio improved to 2.2:1 from 1.9:1.
Total debt was approximately $433.2 million at February 28, 2015, including $337.5 million drawn under the revolving credit facility, $35.7 million under the Mississippi Business Finance Corporation loan and $60.0 million of 3.90% Senior Notes. Long-term debt excluding current maturities was $411.3 million.
The amended credit agreement increased the unsecured revolving commitment from $570 million to $650 million, extended maturity to January 2020 and reduced certain borrowing costs. Available borrowing capacity was $311.7 million, net of outstanding borrowings and letters of credit.
Debt-to-equity increased to 47.9% from 18.7%, primarily because debt funded the acquisition and share repurchases. The company reported compliance with its debt covenants.
The company repurchased 4.17 million shares for approximately $278.4 million, reducing weighted-average diluted shares to 29.0 million from 32.4 million. No cash dividends have been paid since inception.

Material changes versus the prior comparable period

Sales growth was driven primarily by $100.4 million of Healthy Directions revenue, with core-business growth of $27.6 million. Foreign exchange reduced reported sales by approximately $7.5 million.
Gross margin benefited from the higher-margin direct-to-consumer Nutritional Supplements business; core-business gross margin was approximately flat.
Operating results benefited from the absence of $18.2 million of pre-tax CEO succession costs recorded in fiscal 2014 and from a $7.0 million pre-tax Honeywell licensing gain.
Fiscal 2015 included a $9.0 million non-cash impairment charge on certain Personal Care trademarks, compared with $12.05 million in fiscal 2014.
Interest expense rose to $15.0 million from $10.2 million because of increased borrowings for the acquisition and share repurchases.
The effective tax rate declined to 10.9% from 19.5%, reflecting the geographic mix of earnings, tax audit and uncertain-tax-position resolutions, valuation allowance changes and other discrete items. Management expected a fiscal 2016 effective tax rate of 14% to 16%.
Fourth-quarter fiscal 2015 sales were $377.7 million and net income was $40.6 million, compared with fourth-quarter fiscal 2014 sales of $312.5 million and net income of $11.0 million. Fiscal 2015 fourth-quarter results contained no non-routine transactions.

Guidance, outlook, risks and unusual items

Management expected improving U.S. retail conditions to support fiscal 2016, citing lower gasoline prices, low interest rates and improving employment. International markets, particularly Europe and Latin America, were viewed as more tentative. The company planned continued investment in innovation, advertising, organizational capabilities, distribution and internet channels.

Management expected to launch OXO small kitchen appliances and bakeware in the second half of fiscal 2016 and to expand Revlon-branded Personal Care appliances in Western Europe.
The company planned to transition Nutritional Supplements distribution from a third-party facility to Southaven, Mississippi, during mid-fiscal 2016, creating potential order-processing and shipment-disruption risks.
Material risks include dependence on large retailers, foreign manufacturers and licensed brands; retail pricing pressure; foreign-exchange volatility; raw-material, labor and freight costs; weather sensitivity; distribution concentration in northern Mississippi; elevated leverage and floating-rate debt; information-system disruptions; product liability and regulatory risks for supplements; tax audits; and potential goodwill or intangible-asset impairment.
Approximately 63% of consolidated gross sales volume shipped from the company’s two northern Mississippi distribution facilities. Wal-Mart represented approximately 18% of fiscal 2015 sales, Target approximately 9%, and the top five customers approximately 41%.
Contractual obligations totaled $839.7 million, including debt, interest, purchase orders, royalties, advertising, leases and capital commitments. Uncertain tax positions of $10.3 million were excluded because payment timing could not be reliably estimated.
On March 31, 2015, after year-end, the company acquired the Vicks VapoSteam U.S. liquid inhalant business and related VapoPad license rights for approximately $42.75 million, financed under the credit agreement. The acquired business had approximately $10 million of calendar 2014 revenue.

Most important facts for investors to verify

Whether Healthy Directions delivers sustainable organic growth and margin improvement once fully integrated, including the effect of future corporate-cost allocations.
Whether Personal Care sales stabilize after continued competitive pressure, lost distribution, lower volumes and the $9.0 million trademark impairment.
Debt paydown capacity, covenant headroom, floating-rate exposure and the effect of the $42.75 million post-year-end Vicks acquisition.
The sustainability of fiscal 2015 earnings after excluding the Honeywell gain, lower CEO succession costs, favorable tax items, impairment charges and acquisition-related expenses.
Execution of the Nutritional Supplements distribution transition and the company’s ability to manage concentrated distribution and foreign-supply risks.
Potential future impairment of goodwill and intangible assets, particularly given the substantial $948.2 million balance and the company’s reliance on revenue and profitability projections.
Results of ongoing U.S. and Hungary tax audits and any changes in the $10.3 million reserve for uncertain tax positions.