Helen of Troy Limited: Q1 Fiscal 2019 Form 10-Q Summary
Business context and reporting period
Helen of Troy is a global designer, importer, marketer and distributor of branded consumer products across Housewares, Health & Home, and Beauty. The unaudited quarter ended May 31, 2018 is the company’s first quarter of fiscal 2019. The Nutritional Supplements segment was divested on December 20, 2017, and is reported as discontinued operations for all periods presented.
Key financial metrics
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Net sales | $354.7 million | $325.5 million | +9.0% |
| Gross profit / margin | $146.6 million / 41.3% | $131.6 million / 40.4% | Margin +0.9 pts |
| Operating income / margin | $43.3 million / 12.2% | $30.6 million / 9.4% | +41.7% |
| Income from continuing operations | $38.2 million | $27.3 million | +39.8% |
| Diluted EPS from continuing operations | $1.43 | $1.00 | +43.0% |
| Net income | $37.8 million | $5.9 million | +544.0% |
| Operating cash flow | $28.5 million total; $28.9 million continuing operations | $41.7 million total; $39.8 million continuing operations | Declined |
| Capital expenditures | $4.2 million | $4.1 million | Comparable |
Adjusted operating income increased 30.4% to $55.5 million, and adjusted operating margin increased to 15.6% from 13.1%. Adjusted diluted EPS from continuing operations increased 32.6% to $1.87 from $1.41. These are non-GAAP measures and exclude restructuring charges, amortization, and non-cash share-based compensation, among other items.
- Housewares sales increased 18.9% to $117.3 million; operating margin was 18.9%.
- Health & Home sales increased 10.2% to $163.4 million; operating margin was 12.0%.
- Beauty sales decreased 5.8% to $73.9 million; operating margin improved to 2.0% from negative 2.0%.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $16.9 million at May 31, 2018, compared with $20.7 million at February 28, 2018.
- Working capital was $285.1 million and the current ratio was 2.1:1.
- Total debt was approximately $300.1 million, including $281.3 million outstanding under the revolving credit facility and approximately $22.4 million under the MBFC Loan.
- The company had $711.6 million of borrowing availability under its $1.0 billion unsecured revolving credit facility, subject to letters of credit and covenants.
- The company was in compliance with its debt covenants. The facility matures in December 2021; the MBFC Loan has scheduled payments through March 2023.
- Financing activities used $28.2 million, including $37.1 million of open-market share repurchases and $1.9 million of debt repayment.
Material changes versus the prior comparable period
- Sales growth was driven by $25.7 million of core business growth and a $3.5 million favorable foreign-exchange impact. Online sales represented approximately 16% of consolidated sales and grew approximately 30% year over year.
- Gross margin benefited from product mix, Leadership Brand growth and foreign exchange, partly offset by channel mix and increased promotions.
- SG&A as a percentage of sales declined to 28.6% from 29.8%, reflecting distribution and logistics efficiencies, lower legal, amortization and advertising costs, and operating leverage. Higher personnel and share-based compensation expense partially offset these benefits.
- Operating income benefited from the absence of the $4.0 million Beauty asset impairment charge recorded in Q1 FY2018, partly offset by $1.7 million of Q1 FY2019 restructuring charges.
- Net income comparisons were significantly affected by discontinued operations: the prior-year period included a $21.4 million after-tax loss, including $19.6 million of after-tax impairment charges, from Nutritional Supplements.
- Operating cash flow from continuing operations decreased to $28.9 million from $39.8 million, primarily due to the $15.0 million thermometer litigation settlement and timing of accounts payable.
Outlook, commentary, risks and unusual items
- Project Refuel was expanded to include supply-chain realignment. Management targets annualized profit improvements of approximately $8.0 million to $10.0 million, expects completion by Q1 FY2020, and estimates total restructuring charges of approximately $4.0 million to $5.5 million. Q1 charges were $1.7 million, with $1.3 million of remaining restructuring liability at May 31, 2018.
- The company expects cash flow from operations and credit-facility availability to fund working capital and capital expenditures. No specific full-year revenue or earnings guidance is provided in the filing text.
- Business is seasonal, with historically highest sales and operating income in the third fiscal quarter. Health & Home results are sensitive to winter weather and cough, cold and flu incidence.
- Key risks include discretionary consumer spending, dependence on major retailers, online-channel and distribution execution, foreign-currency movements, foreign manufacturing and supply-chain disruption, raw-material and freight costs, product liability and recalls, intellectual-property litigation, impairment of goodwill and intangible assets, and tax disputes.
- The company settled Exergen thermometer patent litigation on May 31, 2018, for $15.0 million. The amount had been accrued in prior periods, but reduced current-period operating cash flow.
- The company had not completed all accounting for the Tax Cuts and Jobs Act as of May 31, 2018 and continued to apply SEC Staff Accounting Bulletin No. 118. A state tax assessment remains under administrative protest; management believes a material adverse outcome is unlikely.
- Foreign-exchange exposure affected approximately 14% of sales, and Q1 foreign-exchange gains and losses, including hedging impacts, produced a $1.6 million net loss in SG&A.
Important facts for investors to verify
- Whether Beauty sales and profitability improve following brand rationalization and Project Refuel actions.
- Whether the targeted $8.0 million to $10.0 million of annualized restructuring-related profit improvement is achieved.
- Cash conversion, inventory levels and working-capital needs, particularly given the decline in operating cash flow.
- Revolving debt balances, floating-rate exposure, covenant headroom and the effect of future share repurchases on liquidity.
- The final tax treatment of the Tax Cuts and Jobs Act and the outcome of the pending state tax assessment.
- Foreign-exchange, supply-chain, retail-channel and seasonal-weather effects on future sales and margins.
- The assumptions and exclusions underlying management’s non-GAAP adjusted operating income, margin and EPS measures.