Helen of Troy Limited — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended August 31, 2018. Results reflect continuing operations in the Housewares, Health & Home, and Beauty segments. The Nutritional Supplements segment was divested on December 20, 2017 and is presented as discontinued operations.
Business Context
Helen of Troy designs, sources, markets, and distributes branded consumer products, including OXO, Honeywell, Braun, PUR, Hydro Flask, Vicks, and Hot Tools. The business is seasonal, with historically higher sales and operating income in the fiscal third quarter. Approximately 79% of second-quarter sales and 77% of year-to-date sales were from U.S. shipments. Online-related sales represented approximately 15% of second-quarter sales and 16% of year-to-date sales.
Key Financial Metrics
| Metric | Three months ended August 31, 2018 | Three months ended August 31, 2017 | Six months ended August 31, 2018 | Six months ended August 31, 2017 |
|---|---|---|---|---|
| Net sales | $393.5 million | $344.9 million | $748.2 million | $670.4 million |
| Gross profit | $155.2 million | $143.5 million | $301.7 million | $275.0 million |
| Gross margin | 39.4% | 41.6% | 40.3% | 41.0% |
| Operating income | $50.7 million | $39.7 million | $94.0 million | $70.3 million |
| Operating margin | 12.9% | 11.5% | 12.6% | 10.5% |
| Income from continuing operations | $44.0 million | $34.6 million | $82.2 million | $61.9 million |
| Diluted EPS from continuing operations | $1.66 | $1.26 | $3.09 | $2.26 |
| Net income | $44.0 million | $8.9 million | $81.8 million | $14.8 million |
| Diluted EPS | $1.66 | $0.33 | $3.07 | $0.54 |
Non-GAAP performance: Adjusted operating income increased 16.7% to $59.6 million in the quarter, with adjusted operating margin of 15.1%, compared with 14.8% in the prior-year quarter. For the six-month period, adjusted operating income increased 22.9% to $115.1 million, and adjusted operating margin increased to 15.4% from 14.0%. Adjusted diluted EPS from continuing operations was $1.98 for the quarter and $3.85 year to date. These measures exclude specified restructuring, impairment, litigation-related, amortization, and share-based compensation items and are not GAAP measures.
Segment Results
- Housewares: Second-quarter sales increased 19.4% to $137.5 million; six-month sales increased 19.2% to $254.8 million. Six-month operating income was $50.5 million, or 19.8% of segment sales.
- Health & Home: Second-quarter sales increased 20.3% to $175.8 million; six-month sales increased 15.2% to $339.2 million. Six-month operating income was $33.3 million, or 9.8% of segment sales.
- Beauty: Second-quarter sales declined 4.2% to $80.3 million; six-month sales declined 5.0% to $154.2 million. Six-month operating income was $10.2 million, or 6.6% of segment sales, while adjusted operating income declined 5.5% to $15.3 million.
- Leadership Brands: Sales increased 20.5% to $319.0 million in the quarter and 17.7% to $599.8 million year to date.
Cash Flow, Liquidity, and Debt
- Cash provided by operating activities was $36.9 million for the six months, including $37.3 million from continuing operations, compared with $50.0 million and $59.4 million, respectively, in the prior-year period.
- Operating cash flow was reduced by increased receivables and a $15.0 million patent-litigation settlement payment. Receivables were $313.6 million and inventory was $284.8 million at August 31, 2018.
- Investing activities used $13.1 million, including $13.1 million of capital and intangible asset expenditures.
- Financing activities used $24.7 million, including $37.1 million of open-market share repurchases, $1.9 million of debt repayment, and net activity under the revolving credit facility.
- Cash and cash equivalents were $19.9 million at August 31, 2018, compared with $20.7 million at February 28, 2018. Working capital was $338.4 million and the current ratio was 2.1:1.
- Total long-term debt was $301.1 million, including $278.7 million under the credit agreement and $22.3 million under the MBFC Loan. The revolving facility had a $1.0 billion commitment, $709.0 million of stated borrowing availability, and $9.0 million of outstanding letters of credit.
- The company was in compliance with its debt covenants. Debt agreements effectively limited additional borrowing to $584.5 million, or $709.0 million if a qualified acquisition is consummated.
Material Changes Versus the Prior Comparable Period
- Sales increased 14.1% in the quarter and 11.6% year to date, led by Housewares and Health & Home and by Leadership Brands.
- Gross margin declined 220 basis points in the quarter and 70 basis points year to date, primarily because of product and channel mix and a higher proportion of direct-import shipments.
- Operating margin improved despite lower gross margin, reflecting operating leverage, distribution and logistics efficiencies, lower amortization, and the absence of the prior-year Toys “R” Us bankruptcy charge.
- Interest expense declined 26.6% in the quarter and 27.2% year to date because of lower average debt, partly offset by higher interest rates.
- Prior-year results included a $4.0 million Beauty impairment charge, a $3.6 million Toys “R” Us bankruptcy charge, and substantial discontinued-operation losses. These items materially affect year-over-year net income and EPS comparisons.
- Share repurchases totaled $37.1 million for the six months, covering 407,025 open-market shares at an average price of $91.07. Approximately $285.8 million remained under the authorization at August 31, 2018.
Outlook, Commentary, Risks, and Unusual Items
- Project Refuel: The restructuring program targets annualized profit improvements of approximately $8.0 million to $10.0 million. Completion is expected by the first quarter of fiscal 2020, with total restructuring charges estimated at approximately $4.4 million to $5.5 million. Charges were $2.6 million in the first six months, and the remaining liability was $1.6 million.
- Discontinued-operation consideration: The Nutritional Supplements divestiture included a $46.0 million cash payment and a supplemental payment with a target value of $25.0 million, payable on or before August 1, 2019. The final amount remained under discussion and could require a material adjustment in discontinued operations.
- Patent litigation: The company paid $15.0 million on May 31, 2018 to settle the Exergen thermometer patent dispute; the liability had been accrued in prior periods.
- Tariffs and sourcing: Most products are sourced from manufacturers in China, Mexico, and the United States. The company warned that additional tariffs on Chinese imports or retaliatory measures could materially affect results, pricing, costs, and operations.
- Other operating risks: Key risks include consumer spending and retail trends, customer concentration, foreign exchange, seasonal weather and cough/cold/flu demand, supply-chain and distribution disruptions, product liability, information security, impairment of goodwill and intangibles, and tax disputes.
- Tax matters: The company’s effective tax rates were 8.3% for the quarter and 7.3% year to date, compared with 4.1% and 1.9% in the prior-year periods. Prior-year rates benefited from favorable uncertain-tax-position resolutions; accounting for certain Tax Cuts and Jobs Act effects remained incomplete.
- Accounting adoption: Revenue recognition under ASC 606 was adopted retrospectively with no material impact on timing or amount of revenue. The company was evaluating the future effects of lease, hedging, cloud-computing, defined-benefit, and fair-value disclosure standards.
Important Facts for Investors to Verify
- Whether Beauty sales and adjusted profitability stabilize following brand and product rationalization and Project Refuel actions.
- The magnitude and timing of any tariff effects, including the company’s ability to offset higher costs through pricing, sourcing, or other mitigation.
- The final supplemental payment amount related to the Nutritional Supplements divestiture and any resulting discontinued-operation adjustment.
- Whether working-capital investment, particularly receivables and inventory, converts into operating cash flow as seasonal sales develop.
- Compliance with leverage and interest-coverage covenants while share repurchases, acquisitions, and seasonal borrowing continue.
- The comparability of GAAP and adjusted results given restructuring charges, share-based compensation, amortization, prior-year impairment and litigation charges, discontinued operations, and unusual tax benefits.