Business Context and Reporting Period
Helen of Troy Limited is a Bermuda-based global designer, importer, and distributor of consumer products. Its three segments are Personal Care, Housewares, and Healthcare/Home Environment. The Healthcare/Home Environment segment consists primarily of Kaz, acquired on December 31, 2010 for approximately $271.5 million.
This unaudited Form 10-Q covers the three- and six-month periods ended August 31, 2011, compared with the periods ended August 31, 2010. Amounts are in thousands of U.S. dollars except per-share data.
Financial Highlights
| Metric | Three Months Ended August 31, 2011 | Year-over-Year Change | Six Months Ended August 31, 2011 | Year-over-Year Change |
|---|---|---|---|---|
| Net sales | $277.4 million | 58.7% | $548.9 million | 63.9% |
| Gross profit | $112.3 million | 39.9% | $222.2 million | 45.5% |
| Gross margin | 40.5% | Down 5.4 points | 40.5% | Down 5.1 points |
| Operating income | $30.3 million | 9.7% | $61.0 million | 21.1% |
| Operating margin | 10.9% | Down from 15.8% | 11.1% | Down from 15.0% |
| Net income | $23.6 million | 0.5% | $48.2 million | 15.1% |
| Diluted EPS | $0.74 | Down from $0.75 | $1.52 | Up from $1.34 |
SG&A was $81.9 million for the quarter and $161.2 million for the six-month period. SG&A declined as a percentage of sales to 29.5% and 29.4%, respectively, from 30.1% and 30.4%.
Six-month operating cash flow was $29.3 million, compared with $11.8 million in the prior-year period. Investing activities used $2.4 million, while financing activities used $28.9 million. Cash and cash equivalents were $25.1 million at August 31, 2011, compared with $27.2 million at February 28, 2011.
At August 31, 2011, current assets were $528.3 million and current liabilities were $341.6 million, producing working capital of $186.7 million and a current ratio of 1.5 to 1. Receivables were $200.6 million and inventory was $257.6 million.
Revenue and Segment Performance
- Personal Care: Sales decreased 3.2% for the quarter to $115.3 million but increased 2.9% for the six months to $238.0 million. Quarterly operating income declined 24.3% to $11.2 million, principally because of higher advertising expense and lower sales. Six-month operating income increased 9.5% to $31.0 million.
- Housewares: Sales increased 14.6% for the quarter to $63.8 million and 12.7% for the six months to $116.8 million. Growth was supported by OXO baby and toddler products, expanded distribution, and early seasonal promotional shipments. Quarterly operating income declined 7.3% to $12.0 million because of promotional closeouts and higher product costs.
- Healthcare/Home Environment: Kaz contributed $98.3 million of quarterly sales and $194.1 million of six-month sales, with operating income of $7.2 million and $7.2 million, respectively. On a pro forma basis, segment sales decreased 0.8% for the quarter and increased 3.0% for the six months versus the prior-year Kaz operations.
Material Changes Versus the Prior Comparable Period
- Reported sales growth was primarily acquisition-driven: Kaz contributed 56.2 percentage points of quarterly growth and 57.9 percentage points of six-month growth. Core business contributed 2.5 and 4.0 percentage points, respectively.
- Gross margin contracted because Kaz operates at a lower margin than the other segments. Additional pressure came from Housewares promotional closeouts, product-cost inflation, and increased Personal Care coupon programs.
- Interest expense increased to $3.3 million for the quarter and $6.7 million for the six months, from $2.1 million and $4.3 million, largely because of acquisition-related debt.
- No impairment charge was recorded in the current six-month period; the prior-year period included a $0.5 million non-cash intangible impairment charge.
- Debt increased materially following the Kaz acquisition. Total debt at August 31, 2011 was $283.0 million, consisting of $105.0 million under the revolving facility, $3.0 million of current maturities, and $175.0 million of noncurrent debt.
- Inventory increased $40.4 million from February 28, 2011, reflecting the seasonal build for the heavy shipping period. The debt-to-equity ratio was 39.0%, compared with 20.9% in the prior comparable measurement.
Guidance, Outlook, Risks, and Unusual Items
Management did not provide a specific consolidated revenue or earnings forecast in the filing. It expects Housewares annual sales growth to stabilize around the mid- to high-single-digit range in fiscal 2012 and expects a significant portion of Kaz’s operating income to occur in the last two fiscal quarters because of seasonality.
Management remained cautious because of weak consumer sentiment, potential economic deterioration, volatile capital markets, sovereign-debt concerns, currency volatility, higher raw-material and transportation costs, and continued dependence on foreign manufacturing, particularly in China. The company also identified risks from integrating Kaz and upgrading its enterprise resource planning system, including possible supply disruptions, order cancellations, late-delivery chargebacks, and lost product placement.
The company had $105.0 million drawn under its $150.0 million revolving credit facility and $44.7 million of stated borrowing availability at August 31, 2011. Debt agreements imposed leverage, interest-coverage, net-worth, dividend, share-repurchase, and additional-borrowing restrictions. The company reported compliance with all debt covenants and estimated that additional debt capacity was limited to approximately $193.7 million from all sources, including the revolving facility.
The company held $18.2 million of auction rate securities. On September 15, 2011, it entered into a tentative agreement to sell its remaining portfolio for approximately 96% of par, or $18.1 million, with settlement expected in the third fiscal quarter. The transaction resulted in a $0.76 million pre-tax nonoperating unrealized loss recognized in the current period.
Kaz-related U.S. tax years remain under IRS examination. The company received an additional proposed adjustment for Kaz’s fiscal 2007 tax year but does not expect the matter to have a material impact. Routine litigation is not expected to materially affect financial position, results, or liquidity.
Important Facts for Investors to Verify
- Whether Kaz delivers the expected seasonal second-half revenue, margin, synergy, and operating-income contribution.
- Whether consolidated gross margin stabilizes after the acquisition-related dilution and pressure from product, freight, raw-material, and promotional costs.
- Operating cash conversion and working-capital requirements, particularly the elevated inventory balance and seasonal receivables.
- Revolving-credit utilization, covenant headroom, interest-rate exposure, and the timing of future debt maturities.
- Completion and proceeds of the auction rate securities sale and any remaining liquidity risk.
- Progress and costs associated with Kaz integration and the ERP system upgrade.
- Developments in Kaz’s IRS examinations and the potential impact of tax-law or tax-authority changes.
- The sustainability of Housewares growth and the recovery of Personal Care quarterly sales and profitability.