Helen of Troy Limited — Form 10-Q Summary
Business context and reporting period
Helen of Troy is a Bermuda-based global designer, importer, marketer and distributor of branded consumer products across four segments: Housewares, Health & Home, Nutritional Supplements, and Beauty. The filing covers the three months ended May 31, 2017, the first quarter of fiscal 2018, compared with the three months ended May 31, 2016. The business is seasonal, with historically higher sales and operating income in the fiscal third quarter.
Key financial metrics
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Net sales | $359.6 million | $347.9 million | +3.4% |
| Gross profit | $156.4 million | $152.4 million | +2.6% |
| Gross margin | 43.5% | 43.8% | Down 0.3 points |
| SG&A | $123.7 million | $122.1 million | +1.3% |
| Asset impairment charges | $36.0 million | $7.4 million | +$28.6 million |
| Operating income (loss) | $(3.2) million | $22.9 million | Declined $26.1 million |
| Net income | $5.9 million | $19.0 million | Down 69.2% |
| Diluted EPS | $0.22 | $0.68 | Down $0.46 |
| Operating cash flow | $41.7 million | $41.7 million | Essentially unchanged |
Adjusted operating income, a non-GAAP measure excluding specified items, was $42.6 million, or 11.9% of sales, versus $44.6 million, or 12.8%, in the prior-year quarter. Adjusted income was $37.4 million and adjusted diluted EPS was $1.37, compared with $35.9 million and $1.27, respectively.
At May 31, 2017, cash and cash equivalents were $16.5 million, working capital was $260.3 million, and the current ratio was 1.9:1. Inventory was $312.0 million and receivables were $207.8 million.
Total debt was approximately $453.8 million, including $414.3 million outstanding under the revolving credit facility. The facility had $584.2 million of borrowing availability, subject to approximately $1.5 million of outstanding letters of credit. Debt covenants effectively limited additional borrowing to approximately $309.8 million, and the company reported compliance with its covenants.
Segment performance and material changes
- Housewares: Sales increased 16.3% to $98.4 million, aided by Hydro Flask, OXO, online sales, new products and expanded international distribution. Operating income increased to $18.1 million from $15.5 million.
- Health & Home: Sales increased 2.7% to $150.3 million. Operating income rose to $14.6 million from $9.6 million, reflecting lower royalty, legal, compensation and distribution costs, partly offset by weather-related category weakness and foreign exchange.
- Nutritional Supplements: Sales declined 12.0% to $31.6 million, primarily because of lower auto-delivery revenue during an order-management and customer-relationship-management system transition. The segment recorded a $32.0 million non-cash impairment charge and an operating loss of $34.6 million, compared with a $5.3 million loss.
- Beauty: Sales declined 2.2% to $79.3 million due mainly to personal-care category pressure and foreign exchange. Operating income declined to a $1.3 million loss from $3.1 million of income, including a $4.0 million non-cash impairment charge.
Foreign currency movements reduced reported sales by approximately $2.2 million. Gross margin was pressured by higher promotional spending and unfavorable currency effects, while the SG&A ratio improved to 34.4% from 35.1% due to lower share-based compensation, royalties, freight and the absence of the prior-year patent litigation charge.
Cash flow, financing and capital allocation
- Operating activities generated $41.7 million of cash.
- Investing activities used $13.0 million, primarily for capital and intangible asset expenditures.
- Financing activities used $35.3 million, including $157.6 million of revolving-credit repayments, $5.7 million of long-term debt repayment, and $6.8 million of tax payments related to cashless share settlements.
- The company authorized up to $400 million of common-stock repurchases over three years. As of May 31, 2017, approximately $394.3 million remained available. During the quarter, 70,707 shares were repurchased through net settlements of equity awards for $6.8 million; the filing also reports 70,707 shares purchased under the public authorization.
Outlook, risks and unusual items
Management continued to evaluate strategic alternatives for Nutritional Supplements, including a potential divestiture, e-commerce investments, restructuring, realignment and operational consolidation. Management stated that these actions may produce additional material charges or losses, particularly if a divestiture becomes probable and updated impairment testing is required. The filing does not provide a clear numerical earnings or revenue outlook.
The $36.0 million first-quarter impairment charge consisted of $32.0 million for Nutritional Supplements trademarks and goodwill and $4.0 million for a Beauty brand. The charges were non-cash but materially reduced GAAP operating income and EPS.
Other relevant risks include continued weakness in Nutritional Supplements, discretionary consumer spending and retail traffic, online-channel execution, mild cough/cold/flu seasons, foreign exchange volatility, dependence on foreign suppliers and manufacturing, shipping and distribution disruptions, product liability and recall exposure, patent and other litigation, interest-rate exposure on floating-rate debt, tax uncertainties, information-security risks and potential further impairment of goodwill or intangible assets.
The company is appealing an Exergen thermometer patent judgment related to two forehead thermometer models. It previously recorded approximately $17.8 million of related charges and accrued an additional $1.5 million of pre-judgment compensation. Management believes other legal matters are not expected to have a material adverse effect, but the patent matter remains a contingency.
Management stated that operating cash flow and available financing sources should be sufficient for foreseeable liquidity needs. Contractual obligations totaled approximately $882.9 million, including debt, interest, purchase orders, royalties, advertising, leases and other commitments.
Important facts for investors to verify
- Whether the Nutritional Supplements strategic review results in a divestiture, restructuring or additional impairment charges.
- Whether Nutritional Supplements revenue and auto-delivery activity recover following the systems transition.
- The sustainability of adjusted operating performance after excluding impairment, amortization and share-based compensation charges.
- Inventory growth, promotional levels and margin trends, particularly in Health & Home and Beauty.
- Compliance with debt covenants, floating-rate exposure and the refinancing or repayment of the $20 million Senior Notes due January 2018.
- The status and potential financial impact of the Exergen patent appeal and other legal proceedings.
- The effect of the $400 million repurchase authorization on liquidity, leverage and future share count.
- Potential additional impairment risk, given the substantial goodwill and intangible asset balances and management’s use of assumptions about future cash flows and strategic alternatives.