Helen of Troy Limited — Form 10-K Summary
Reporting period: Fiscal year ended February 29, 2020, with fourth-quarter results for the quarter ended February 29, 2020. The filing was signed April 29, 2020. Helen of Troy is a global consumer-products company operating in Housewares, Health & Home, and Beauty.
Business context and strategy
- Key brands include OXO, Honeywell, Braun, PUR, Hydro Flask, Vicks, Hot Tools, and Drybar.
- Fiscal 2020 began Phase II of the company’s transformation strategy, emphasizing organic growth, margin expansion, Leadership Brands, international expansion, acquisitions, and operating efficiency.
- The company completed the $255.9 million cash acquisition of Drybar Products on January 23, 2020, contributing approximately five weeks of results and $6.0 million of fiscal 2020 sales.
- The company committed to divest certain mass-market personal-care assets, including brands such as Pert, Brut, Sure, and Infusium. Assets totaling $44.8 million were classified as held for sale, with the divestiture expected in fiscal 2021.
Fiscal 2020 financial performance
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Net sales | $1.707 billion | $1.564 billion | Up 9.2% |
| Gross profit | $734.5 million | $641.1 million | Up 14.6% |
| Gross margin | 43.0% | 41.0% | Up 2.0 points |
| Operating income | $178.3 million | $199.4 million | Down 10.6% |
| Operating margin | 10.4% | 12.7% | Down 2.3 points |
| Income from continuing operations | $152.3 million | $174.2 million | Down 12.6% |
| Diluted EPS from continuing operations | $6.02 | $6.62 | Down 9.1% |
| Net income | $152.3 million | $168.5 million | Down 9.6% |
| Adjusted operating income | $269.3 million | $239.2 million | Up 12.6% |
| Adjusted diluted EPS | $9.30 | $8.06 | Up 15.4% |
Reported profitability was reduced primarily by $41.0 million of non-cash impairment charges, $3.3 million of restructuring charges, and $2.5 million of acquisition-related expenses. The impairment charge, principally related to Personal Care goodwill and intangible assets, reduced income from continuing operations by approximately $36.4 million after tax.
Segment results
| Segment | Fiscal 2020 sales | Year-over-year change | Operating income | Operating margin |
|---|---|---|---|---|
| Housewares | $641.0 million | Up 22.4% | $123.1 million | 19.2% |
| Health & Home | $685.4 million | Down 1.4% | $68.2 million | 9.9% |
| Beauty | $381.1 million | Up 10.4% | $(13.1) million | (3.4)% |
- Housewares growth was driven by brick-and-mortar point-of-sale gains, online sales, and new products.
- Health & Home declined because of distribution changes, lower international sales, and unfavorable foreign exchange; demand for thermometers increased late in the fourth quarter.
- Beauty benefited from appliances, online sales, international growth, and Drybar, but Personal Care weakness and impairment charges caused a reported operating loss.
- Leadership Brand sales increased 9.4% to $1.360 billion.
Cash flow, liquidity, and debt
- Cash provided by operating activities from continuing operations was $271.3 million, compared with $200.6 million in fiscal 2019.
- Capital and intangible-asset expenditures were $17.8 million. Investing activities used $273.6 million, primarily because of the Drybar acquisition.
- Cash and cash equivalents were $24.5 million at February 29, 2020, compared with $11.9 million a year earlier.
- Working capital was $343.9 million; the current ratio was 2.0 to 1.0.
- Total debt was approximately $339.3 million, including $318.9 million under the revolving credit agreement and $20.5 million under the MBFC Loan. The debt-to-equity ratio was 29.2%.
- At February 29, 2020, the company had $671.0 million available under its $1.0 billion revolving facility, net of outstanding letters of credit.
- On March 13, 2020, the revolving commitment was increased to $1.25 billion and maturity was extended to March 13, 2025. On March 24, 2020, the company borrowed approximately $200 million as a precautionary liquidity measure; reported cash then rose to approximately $393.0 million and remaining availability was approximately $536.4 million.
Material changes and unusual items
- Gross margin expanded because of product and channel mix, a greater Housewares contribution, tariff-exclusion refunds, and lower direct-import shipments, partly offset by tariffs, freight, and foreign exchange.
- SG&A increased to 30.0% of sales from 28.0%, driven by performance-based compensation, advertising, freight and distribution costs, and amortization.
- Project Refuel generated $3.3 million of fiscal 2020 restructuring charges. Management expects the plan to be completed in fiscal 2021 and total charges to approximate $9.5 million.
- The company adopted the new lease standard, recording approximately $37.1 million of operating lease assets and $47.2 million of lease liabilities at March 1, 2019, without a material income-statement or cash-flow effect.
- No cash dividends have been paid since inception. The company repurchased 77,272 shares for $10.2 million through share settlements; approximately $393.0 million remained available under the repurchase authorization at year-end.
Outlook, risks, and contingencies
- Management expected COVID-19 to materially adversely affect fiscal 2021 through store closures, lower traffic, changing consumer demand, supply-chain disruptions, manufacturing interruptions, and potential impairment charges. Demand was favorable for thermometers, humidification, water purification, air purification, and certain OXO products, but weaker for discretionary and brick-and-mortar-dependent products.
- To preserve cash, the company implemented salary and board-compensation reductions, hiring and merit-increase suspensions, furloughs, marketing and product-development reductions, travel restrictions, and reductions in noncritical consulting and capital spending.
- Approximately 79% of fiscal 2020 sales were generated from U.S. shipments, while approximately 76% of finished goods were purchased from Far East manufacturers. This creates exposure to retail conditions, China-related supply disruptions, tariffs, freight costs, and foreign exchange.
- The two largest customers represented approximately 32% of fiscal 2020 sales, and the top five represented approximately 50%; customer concentration and retailer bargaining power are significant risks.
- Goodwill and other intangible assets totaled approximately $1.041 billion at year-end, including $739.9 million of goodwill and $195.6 million of indefinite-lived intangibles. Future changes in assumptions, COVID-19 effects, or the Personal Care divestiture could result in additional impairment charges.
- Other risks include floating-rate debt, foreign exchange exposure, licensed trademarks, product liability and recalls, regulatory changes, cybersecurity, tax matters, and the planned divestiture of Personal Care assets.
- Management reported that legal matters were not expected to have a material adverse effect, and the company was in compliance with its debt covenants at February 29, 2020.
Investor verification items
- Verify the actual fiscal 2021 effects of COVID-19 on sales, margins, inventory, receivables, supply availability, and impairment testing.
- Assess whether Drybar achieves expected growth and synergies relative to its $255.9 million acquisition cost and associated goodwill.
- Monitor completion, proceeds, and operating impact of the Personal Care divestiture.
- Reconcile reported GAAP results with management’s non-GAAP measures, particularly the $41.0 million impairment charge and other exclusions from adjusted EPS.
- Track debt utilization, covenant headroom, interest expense, and liquidity following the March 2020 borrowing and credit-facility amendment.
- Evaluate customer concentration, Far East sourcing, tariff exposure, foreign exchange effects, and the company’s ability to protect gross margins.
- Review Macau tax-regime changes expected after calendar year 2020 and their potential effect on the effective tax rate.