Helen of Troy Limited — Form 10-Q Summary
Business Context and Reporting Period
This quarterly report covers the three and nine months ended November 30, 2018, Helen of Troy’s fiscal 2019 third quarter and year-to-date period. The company is a global designer, importer, marketer and distributor of consumer products through three continuing segments: Housewares, Health & Home, and Beauty. The business is seasonal, with the third fiscal quarter historically producing its highest sales and operating income.
The Nutritional Supplements segment was divested in December 2017. Its results are presented as discontinued operations for all periods, so continuing-operations comparisons exclude that business.
Financial Results and Key Metrics
| Metric | Three months ended Nov. 30, 2018 | Prior-year period | Nine months ended Nov. 30, 2018 | Prior-year period |
|---|---|---|---|---|
| Net sales | $431.1 million | $420.8 million | $1,179.3 million | $1,091.3 million |
| Gross profit | $181.8 million | $178.1 million | $483.6 million | $453.2 million |
| Gross margin | 42.2% | 42.3% | 41.0% | 41.5% |
| Operating income | $61.3 million | $67.3 million | $155.3 million | $137.6 million |
| Operating margin | 14.2% | 16.0% | 13.2% | 12.6% |
| Income from continuing operations | $54.3 million | $58.6 million | $136.5 million | $120.5 million |
| Diluted EPS from continuing operations | $2.06 | $2.15 | $5.15 | $4.41 |
| Net income | $49.5 million | $(30.4) million | $131.3 million | $(15.6) million |
| Diluted total EPS | $1.88 | $(1.12) | $4.95 | $(0.57) |
Third-quarter adjusted operating income, a non-GAAP measure, declined 8.9% to $70.6 million, and adjusted operating margin declined to 16.4% from 18.4%. Adjusted income from continuing operations declined 7.1% to $63.2 million, while adjusted diluted EPS declined 4.0% to $2.40. For the nine-month period, adjusted operating income increased 8.5% to $185.7 million, adjusted operating margin increased to 15.8% from 15.7%, and adjusted diluted EPS increased 12.4% to $6.24.
- Segment sales, third quarter: Housewares $142.9 million, up 11.4%; Health & Home $187.9 million, down 0.7%; Beauty $100.3 million, down 3.0%.
- Segment sales, nine months: Housewares $397.7 million, up 16.3%; Health & Home $527.1 million, up 9.0%; Beauty $254.5 million, down 4.2%.
- Leadership Brands: Sales increased 4.9% to $343.4 million in the quarter and 12.7% to $943.2 million year to date.
- SG&A: The third-quarter ratio increased to 28.0% of sales from 26.1%, primarily from higher advertising, freight, share-based compensation and product-claim expense. The nine-month ratio decreased to 27.6% from 28.4%.
- Taxes: Effective tax rates were 6.9% for the quarter and 7.2% year to date, compared with 8.2% and 5.1%, respectively, in the prior-year periods.
Cash Flow, Balance Sheet, Debt and Liquidity
- Cash provided by operating activities was $104.3 million for the first nine months, including $109.5 million from continuing operations, compared with $107.6 million and $102.9 million, respectively, in the prior year.
- Investing activities used $21.0 million, including $22.2 million of capital and intangible-asset expenditures, compared with $19.8 million used in the prior year.
- Financing activities used $84.8 million. The company drew $462.4 million and repaid $411.4 million under its revolving credit facility and repurchased $137.1 million of common stock.
- Cash and cash equivalents were $19.1 million at November 30, 2018, compared with $20.7 million at February 28, 2018.
- Working capital was $338.0 million and the current ratio was 2.0 to 1. Accounts receivable were $339.1 million and inventory was $300.6 million, up from $275.6 million and $251.5 million, respectively, at fiscal year-end.
- Total debt was $339.7 million, including $317.4 million under the revolving credit agreement and $22.3 million under the MBFC Loan. The company had $670.6 million available under its $1.0 billion revolving facility, subject to borrowing-base and covenant restrictions.
- Debt-to-equity was 32.9%, compared with 43.3% at the comparable prior-year date. The company was in compliance with its debt covenants at November 30, 2018.
Material Changes Versus the Prior Comparable Period
- Quarterly sales grew modestly, driven principally by Housewares, Leadership Brands and online sales. Health & Home was broadly flat and Beauty declined.
- Quarterly profitability weakened despite higher sales. Tariffs, product and channel mix, advertising, freight and share-based compensation pressured margins; Health & Home adjusted operating income fell 23.7%.
- Nine-month results improved substantially, reflecting sales growth in Housewares and Health & Home, operating leverage, lower amortization and the absence of the prior-year Beauty impairment and Toys “R” Us bankruptcy charge.
- The prior-year discontinued-operations loss included significant non-cash impairment charges related to the divested Nutritional Supplements business. The current-year third-quarter discontinued-operations loss of $4.9 million included a $5.8 million pre-tax reduction in the estimated supplemental sale payment and a $0.5 million contingency charge.
- Share repurchases increased materially: $137.1 million during the first nine months versus $29.2 million in the prior-year period. Approximately $185.6 million remained authorized at November 30, 2018.
- The company adopted the new revenue-recognition standard retrospectively. The adoption did not materially affect revenue timing or consolidated results, but reclassified certain customer consideration from SG&A to net sales.
Outlook, Management Commentary, Risks and Unusual Items
Management did not provide a clear new numerical sales or EPS guidance range in the filing. Management expects Project Refuel to be completed by the first quarter of fiscal 2020, with total restructuring charges of approximately $5.0 million to $5.5 million and annualized profit improvements of approximately $8.0 million to $10.0 million. The company had incurred $4.5 million of cumulative restructuring costs and retained a restructuring liability of $0.8 million at November 30, 2018.
- Tariffs: Tariff increases began affecting cost of goods sold in the third quarter. Pricing actions were expected to become more effective in the fourth quarter of fiscal 2019 and first quarter of fiscal 2020, but management warned of possible short-term disruption to customer orders and retail consumption. Pricing had not been resolved with one key retailer in two product categories.
- Supply chain: Most products are sourced from manufacturers in China, Mexico and the United States, creating exposure to tariffs, trade restrictions, freight disruption, foreign exchange and supplier concentration.
- Demand and seasonality: Results depend on discretionary consumer spending, retail conditions, online-channel trends, weather and the severity of the cough/cold/flu season. Approximately 80% of third-quarter sales came from U.S. shipments.
- Discontinued-operation contingency: The estimated supplemental payment from the Nutritional Supplements divestiture was reduced to $10.8 million and remains payable on or before August 1, 2019, subject to the disclosed settlement terms.
- Litigation: The company settled the Exergen thermometer patent dispute for $15.0 million on May 31, 2018. Management stated that other ordinary-course legal matters are not expected to materially affect financial position, results or liquidity.
- Interest-rate and currency exposure: Debt carries floating rates, although an interest-rate swap effectively fixes rates on $100 million of revolving debt. Approximately 13% of sales were in foreign currencies, and the company uses currency derivatives for hedging.
- Tax matters: Accounting for all tax effects of the Tax Cuts and Jobs Act was not complete at the reporting date. The company also continues to contest a state tax assessment, which management considers unlikely to have a material adverse effect.
Investor Verification Checklist
- Verify whether tariff-related pricing actions offset higher product costs without materially reducing retail demand, particularly with the unresolved key retailer.
- Track Health & Home and Beauty sales, margins, inventory levels and channel trends, including China e-commerce and personal care.
- Reconcile GAAP results with management’s non-GAAP adjusted operating income and adjusted EPS, including excluded restructuring, amortization and share-based compensation.
- Monitor working-capital growth, especially the increases in receivables and inventory, and the resulting cash-conversion performance.
- Confirm debt balances, floating-rate exposure, covenant compliance and remaining borrowing capacity before relying on continued share repurchases or acquisitions.
- Review the final supplemental payment and any additional contingencies related to the divested Nutritional Supplements business.
- Assess the sustainability of unusually low effective tax rates and the unresolved Tax Act, state tax and uncertain-tax-position matters.