HELEN OF TROY LTD quarterly report, Q1 FY2014

Helen of Troy Limited — Form 10-Q Summary

Business context and reporting period

Helen of Troy designs, imports, markets and distributes consumer products through three segments: Housewares, Healthcare/Home Environment and Personal Care. The filing reports the three months ended May 31, 2013, the first quarter of fiscal 2014, compared with the three months ended May 31, 2012. The financial statements are unaudited and amounts are in thousands of U.S. dollars unless otherwise noted.

Key financial metrics

Metric	Q1 FY2014	Q1 FY2013	Change
Net sales	$304.5 million	$300.2 million	Up 1.4%
Gross profit	$120.2 million	$121.1 million	Down 0.8%
Gross margin	39.5%	40.4%	Down 0.9 percentage points
SG&A	$87.5 million	$90.0 million	Down 2.8%
Operating income	$20.6 million	$31.1 million	Down 33.8%
Operating margin	6.8%	10.4%	Down 3.6 percentage points
Net income	$14.4 million	$23.5 million	Down 38.7%
Diluted EPS	$0.45	$0.74	Down $0.29
Operating cash flow	$46.8 million	$9.0 million	Up $37.8 million

Excluding the $12.05 million non-cash impairment charge, management reported non-GAAP net income of $26.4 million and diluted EPS of $0.82, compared with $23.5 million and $0.74, respectively, in the prior-year quarter. These measures are not GAAP measures.

Housewares revenue increased 5.4% to $63.5 million; operating income increased 10.5% to $12.5 million.
Healthcare/Home Environment revenue increased 2.6% to $125.6 million; operating income decreased 18.2% to $6.5 million.
Personal Care revenue decreased 1.8% to $115.4 million; operating income decreased 86.2% to $1.6 million, including the impairment charge.
Cash and cash equivalents were $12.1 million at May 31, 2013, compared with $12.8 million at February 28, 2013.
Current assets were $539.5 million and current liabilities were $270.9 million, producing working capital of $268.7 million and a current ratio of 2.0 to 1.
Inventory increased to $288.4 million from $280.9 million at fiscal year-end; inventory turnover was 2.7 times versus 2.9 times in the comparable prior-year measure.

Debt, liquidity and capital allocation

Total debt was approximately $224.8 million, comprising $38.0 million drawn on the revolving credit facility and $186.8 million of long-term debt, including current maturities.
The $250.0 million revolving facility had $211.7 million available at May 31, 2013, after borrowings and letters of credit.
Debt decreased from approximately $257.0 million at February 28, 2013, primarily through repayment of $72.4 million of revolver borrowings, partly offset by $11.8 million of new debt for the Mississippi distribution facility.
Operating activities generated $46.8 million; investing activities used $17.0 million, including distribution-facility and other capital expenditures; financing activities used $30.5 million.
The company repurchased 33,862 shares in the open market for $1.3 million and retired additional shares through equity award net settlements.
Debt agreements required compliance with leverage, interest coverage and net worth covenants. The company stated that it was in compliance at May 31, 2013.
Management stated that operating cash flow and available financing were expected to fund foreseeable liquidity needs, including the $75.0 million Senior Notes maturity in June 2014, $20.0 million annual principal payments beginning January 2014, and MBFC Loan principal payments beginning March 2014.

Material changes versus the prior comparable period

Revenue grew modestly, entirely from organic growth because the last acquisition occurred more than twelve months earlier.
Gross margin contracted because of higher promotional costs, foreign-exchange effects and product-cost inflation, particularly from China-related sourcing.
SG&A improved to 28.7% of sales from 30.0%, reflecting lower freight, advertising and transition-service costs, a litigation settlement gain and favorable currency effects; higher incentive compensation partially offset the improvement.
The company recorded a $12.05 million non-cash impairment charge, after-tax impact of approximately $12.03 million, for certain Personal Care trademarks. No impairment was recorded in the prior-year quarter.
Operating cash flow improved substantially due primarily to favorable working-capital timing, including collections and accounts payable changes.
Personal Care faced weaker domestic retail demand, competitive launches, retailer inventory rationalization and elevated out-of-stock conditions. Healthcare/Home Environment was affected by a cool North American spring and lower Latin American fan sales.

Guidance, outlook, risks and unusual items

Management expected the fiscal 2014 effective tax rate to range from 18.0% to 20.0%, versus 19.0% in the reported quarter and 15.7% in the prior-year quarter. No specific revenue or earnings guidance was provided in the filing.
Management cited cautious consumer spending, economic and geopolitical uncertainty, Eurozone weakness, changing tax and healthcare legislation, and volatility in supplier and product costs.
Key operating risks include dependence on foreign manufacturers and Chinese sourcing, freight and distribution disruptions, construction or transition delays at the new Olive Branch facility, retail customer concentration, foreign-currency movements, product demand uncertainty and potential future impairment of goodwill or intangible assets.
The company had $237.0 million of open purchase orders, $29.6 million of capital spending commitments, $83.2 million of minimum royalty payments and $15.7 million of liabilities for uncertain tax positions excluded from the contractual-obligations table because payment timing was not reliably estimable.
Performance-based compensation for the CEO could materially affect future SG&A and net income if specified fiscal 2014 and 2015 performance targets are achieved.
Routine legal claims were disclosed; management did not expect them to have a material adverse effect on financial position, results or liquidity.
Disclosure controls and procedures were assessed as effective, and no material change in internal control over financial reporting was identified.

Important facts for investors to verify

Whether Personal Care sales and profitability recover after the reported competitive and retailer-related pressures.
Whether the $12.05 million trademark impairment signals additional impairment risk in the Personal Care segment.
The company’s ability to refinance or repay the $75.0 million Senior Notes due June 2014 and meet other near-term debt obligations.
Progress, cost and operational readiness of the 1.3 million-square-foot Olive Branch distribution facility.
Inventory levels, turnover and potential markdown or obsolescence exposure, particularly in weaker product categories.
The sustainability of operating cash flow after working-capital timing benefits and during continued capital investment.
Effects of foreign exchange, China-related product-cost inflation, promotional spending and retailer demand on gross margins.
Actual effective tax rates and performance-based CEO compensation expense relative to the filing’s estimates.