Helen of Troy Limited — Fiscal 2014 Second-Quarter Form 10-Q
Reporting period: Three and six months ended August 31, 2013, compared with the corresponding 2012 periods. The company designs, sources, markets and distributes consumer products through Housewares, Healthcare/Home Environment and Personal Care segments. Amounts are in thousands of U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | Three months ended Aug. 31, 2013 | Year-over-year change | Six months ended Aug. 31, 2013 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $319.4 million | 11.1% | $623.9 million | 6.2% |
| Gross profit | $123.3 million | 5.3% | $243.4 million | 2.2% |
| Gross margin | 38.6% | Down 2.1 points | 39.0% | Down 1.5 points |
| Operating income | $30.4 million | Down 1.6% | $51.0 million | Down 17.8% |
| Operating margin | 9.5% | Down 1.2 points | 8.2% | Down 2.3 points |
| Net income | $23.3 million | Up 1.5% | $37.7 million | Down 18.8% |
| Diluted EPS | $0.72 | Flat | $1.17 | Down from $1.46 |
| Operating cash flow | Not separately provided | — | $57.1 million | Up from $10.8 million |
- SG&A was $92.9 million in the quarter and $180.4 million year to date; as a percentage of sales, it declined to 29.1% and 28.9%, respectively, from 30.0% in both comparable periods.
- Interest expense declined to $2.2 million for the quarter and $5.1 million year to date, primarily because of lower debt levels.
- Cash and cash equivalents were $10.1 million at August 31, 2013, versus $12.8 million at February 28, 2013. Working capital was $227.2 million and the current ratio was 1.6 to 1.
- Inventory was $306.9 million, up from $280.9 million at fiscal year-end, reflecting seasonal preparation for back-to-school and holiday demand.
- Total debt was approximately $225.6 million, consisting of $23.5 million drawn under the revolving facility and $204.1 million of long-term debt, including current maturities. Debt-to-equity was 23.5%, compared with 39.4% in the prior comparable disclosure.
- The $250.0 million revolving facility had $226.2 million of borrowing availability at August 31, 2013, after outstanding borrowings and letters of credit.
Material changes versus the prior comparable period
- Sales growth was led by Healthcare/Home Environment, up 20.4% in the quarter and 11.1% year to date. Housewares increased 8.7% and 7.1%, while Personal Care increased 3.4% and 0.7%.
- All reported sales growth was organic; the most recent acquisition occurred on December 30, 2011.
- Gross margin declined because of higher promotional costs, foreign-exchange effects, product-cost inflation and the lower-margin mix of Healthcare/Home Environment products.
- Six-month operating income included a $12.05 million non-cash impairment charge, or $12.03 million after tax, related to certain Personal Care trademarks. Excluding the charge, six-month net income was $49.7 million and diluted EPS was $1.54, compared with $46.4 million and $1.46 in the prior year.
- Segment operating income increased 14.0% year to date in Housewares but declined 22.6% in Healthcare/Home Environment and 44.3% in Personal Care.
- Operating cash flow improved substantially, while investing cash use increased to $34.6 million, primarily for the new distribution facility. Financing cash use was $25.3 million after substantial revolving-debt repayments.
Guidance, outlook, risks and unusual items
- Management remained cautious about consumer demand, citing discretionary spending, guarded retailer expectations for the holiday season, economic uncertainty and geopolitical and policy risks.
- The company expected its full-year fiscal 2014 effective tax rate to range from 17.0% to 19.0%.
- A new 1.3 million-square-foot Olive Branch, Mississippi distribution facility began shipments in September 2013. The project was described as on schedule and on budget; the Healthcare/Home Environment transition was substantially complete, while Personal Care distribution was expected to transition after peak season in early fiscal 2015.
- Management believed operating cash flow and available financing would meet foreseeable liquidity needs, including $20.0 million annual principal payments beginning January 2014, MBFC Loan principal payments beginning March 2014 and repayment of $75.0 million of Senior Notes in June 2014.
- Debt agreements include leverage, interest-coverage and net-worth covenants, cross-default provisions and restrictions on additional debt, investments, asset sales, share repurchases and dividends. The company reported compliance at August 31, 2013.
- Key risks include foreign sourcing and China cost inflation, foreign-currency volatility, retail weakness, customer concentration, distribution-center transition risks, product demand uncertainty, future impairment charges, debt leverage, information systems and security risks, tax disputes and legal or regulatory changes.
- The company had $15.9 million of liabilities for uncertain tax positions whose payment timing could not be reliably estimated. Routine legal claims were not expected to have a material adverse effect.
- A $75.0 million interest-rate swap effectively fixed the related June 2014 Senior Notes at 6.01%. Foreign-currency contracts and interest-rate hedges had a net current asset fair value of $0.14 million and an interest-rate-swap liability of $3.01 million at period end.
Most important facts for investors to verify
- Whether margin pressure from promotional spending, product costs, foreign exchange and segment mix persists.
- The timing and funding of the $75.0 million Senior Notes maturity in June 2014 and other near-term debt payments.
- Execution of the Olive Branch distribution-center transition and the effect on service levels, freight costs and operating efficiency.
- The sustainability of Personal Care performance and whether additional trademark or goodwill impairments become necessary.
- Actual consumer demand, retailer inventory behavior and holiday-season results following management’s cautious outlook.
- Future incentive compensation expense under the CEO’s performance-based arrangements, which management stated could materially affect SG&A and net income.
- Compliance with debt covenants and the availability of the revolving credit facility.